U.S. SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended: April 30, 2003
Commission File Number: 0-29671
SGD HOLDINGS, LTD.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3986493
(State of Incorporation) (IRS Employer ID No)
3801 WILLIAM D TATE AVENUE, SUITE 100, GRAPEVINE, TEXAS 76051
(Address of principal executive office)
(817) 421-0057
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of April 30, 2003 was 36,266,077.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
1
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Form 10-QSB Index
Page No.
Part I. Unaudited Financial Information
Item 1. Condensed Consolidated Balance Sheet -
April 30, 2003 3
Condensed Consolidated Statements of Operations -
Three Months Ended April 30, 2003 and 2002 4
Condensed Consolidated Statements of Operations -
Nine Months Ended April 30, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended April 30, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements -
Nine Months Ended April 30, 2003 and 2002 7-18
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 19-26
Item 3. Controls and Procedures 26
Part II. Other Information 27-31
2
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
April 30, 2003
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents .................................... $ 776,593
Trade accounts receivable .................................... 1,890,187
Marketable equity securities ................................. 4,628
Inventory .................................................... 3,547,691
Due from related parties ..................................... 175,985
Deferred income taxes ........................................ 297,000
Prepaid expenses and other assets ............................ 491,107
------------
Total current assets ........................................ 7,183,191
Property and equipment, net ................................... 576,740
Goodwill and other intangibles ................................ 4,130,021
Marketable equity securities .................................. 49,700
Other assets .................................................. 109,292
------------
$ 12,048,944
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current installments of long-term debt and notes payable ..... $ 1,343,558
Notes payable - related parties .............................. 1,355,000
Accounts payable ............................................. 1,241,900
Accrued expenses ............................................. 123,917
Due to related parties ....................................... 38,637
------------
Total current liabilities ................................... 4,103,012
Long-term debt less current installments ...................... 124,301
Non-current note payable - related party ..................... 473,407
Commitments and contingencies
Stockholders' equity:
Common stock, $.0001 par value; 200,000,000 shares authorized;
36,266,077 shares issued and outstanding ................... 3,627
Additional paid-in capital ................................... 9,810,868
Accumulated deficit .......................................... (2,215,621)
Accumulated other comprehensive loss ......................... (250,650)
------------
Total stockholders' equity ................................. 7,348,224
------------
Total liabilities and stockholders' equity ............... $ 12,048,944
============
See accompanying notes to condensed consolidated financial statements.
3
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended April 30, 2003 and 2002
(Unaudited)
2003 2002
Sales and revenues ................................... $ 3,342,330 $ 3,424,456
Cost of sales ........................................ 2,707,576 2,330,820
----------- -----------
Gross profit ....................................... 634,754 1,093,636
Selling, general and administrative expense .......... 1,467,460 1,247,887
----------- -----------
Earnings (loss) from operations .................... (832,706) (154,251)
Other income (expense):
Unrealized gain (loss) on marketable securities .... (1,943) (23,104)
Interest expense ................................... (50,690) (1,921)
Interest expense - related parties ................. (66,600) (55,311)
Gold consignment fee ............................... (52,930) (26,812)
Interest and other income........................... 7,550 (930)
----------- -----------
Total other income (expense) ..................... (164,613) (108,078)
----------- -----------
Net earnings (loss) before income taxes .............. (997,319) (262,329)
Income tax expense (benefit) ......................... (54,800) (88,300)
----------- -----------
Net earnings (loss) .................................. $ (942,519) $ (174,029)
=========== ===========
Net earnings (loss) per share, basic and fully diluted $ (0.03) $ (0.01)
=========== ===========
Weighted average shares outstanding (thousands) ...... 32,912.1 27,691.1
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Nine Months Ended April 30, 2003 and 2002
(Unaudited)
2003 2002
Sales and revenues ................................... $ 14,991,677 $ 12,658,333
Cost of sales ........................................ 11,092,716 8,548,862
------------ ------------
Gross profit ....................................... 3,898,961 4,109,471
Selling, general and administrative expense .......... 4,498,402 3,852,521
------------ ------------
Earnings (loss) from operations .................... (599,441) 256,950
Other income (expense):
Unrealized gain (loss) on marketable securities (7,407) (249,017)
Loss on sale of assets ............................. (51,015) --
Interest expense ................................... (133,373) (18,339)
Interest expense - related parties ................. (118,600) (145,684)
Gold consignment fee ............................... (143,825) (89,809)
Interest and other income .......................... 10,952 40,146
------------ ------------
Total other income (expense) ..................... (443,268) (462,703)
------------ ------------
Net earnings (loss) before income taxes .............. (1,042,709) (205,753)
Income tax expense (benefit) ......................... (67,100) (66,200)
------------ ------------
Net earnings (loss) .................................. $ (975,609) $ (139,553)
============ ============
Net earnings (loss) per share, basic and fully diluted $ (0.03) $ (0.01)
============ ============
Weighted average shares outstanding (thousands) ...... 29,732.4 27,092.5
============ ============
See accompanying notes to condensed consolidated financial statements.
5
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended April 30, 2003 and 2002
(Unaudited)
2003 2002
Cash flows used in operating activities:
Net earnings (loss) ......................................... $ (975,609) $ (139,553)
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization ............................. 138,788 101,463
Deferred income taxes ..................................... (67,100) (66,200)
Unrealized (gain) loss on marketable securities ........... 7,407 249,017
Inventory write-down ...................................... 250,000 --
Proceeds from sale of marketable equity securities......... -- 175,000
Common stock issued for services .......................... 50,000 75,000
Deferred revenue realized................................. -- (31,295)
Changes in assets and liabilities:
Accounts receivable ..................................... (255,807) (716,800)
Inventory ............................................... (253,408) (330,620)
Other assets ............................................ 130,618 (64,952)
Accounts payable and accrued expenses ................... (16,691) 543,384
----------- -----------
Net cash used in operating activities ................. (991,802) (205,556)
----------- -----------
Cash flows used in investing activities:
Capital expenditures ...................................... (82,531) (211,392)
Acquisition of Tandori, Inc., net of cash acquired -- (449,650)
----------- -----------
Net cash used in investing activities ................. (82,531) (661,042)
----------- -----------
Cash flows provided by financing activities:
Proceeds from sale of common stock ........................ 200,000 --
Collection of notes receivable -- 500,000
Loan proceeds ............................................. 315,545 835,000
Repayment of long-term debt and notes payable ............. (32,764) (33,543)
Loan proceeds - related party ............................. 55,000 444,455
Repayment of related party notes -- (1,305,153)
Increase (decrease) in amount due related parties ......... (1,797) 15,270
----------- -----------
Net cash provided by financing activities ............. 535,984 456,029
----------- -----------
Net decrease in cash and cash equivalents ................... (538,349) (410,569)
Cash and cash equivalents, beginning of period .............. 1,314,942 2,399,898
----------- -----------
Cash and cash equivalents, end of period .................... $ 776,593 $ 1,989,329
=========== ===========
See accompanying notes to condensed consolidated financial statements.
6
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended April 30, 2003 and 2002
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SGD
Holdings, Ltd. ("SGD") and its wholly owned subsidiaries HMS
Jewelry Company, Inc. ("HMS"), Con-Tex Silver Imports, Inc.
("Silver"), Jewelry Solutions & Commerce,Inc. ("Jewelry") and
Tandori, Inc. ("Tandori") (collectively referred to as the
"Company"). All material intercompany accounts and transactions
have been eliminated.
(b) ORGANIZATION
SGD was incorporated May 22, 1996 in Delaware and until June 1999
was a development stage company with plans to establish itself as
an air transport company providing non-scheduled air service
(charter flights) for tour operators, charter brokers, cruise line
casinos, theme parks and theme attractions. Goldonline
International, Inc. (formerly Transun International Airways, Inc.)
changed its name to SGD Holdings, Ltd. on January 24, 2001.
Silver was incorporated September 12, 1994 in Texas. Jewelry was
incorporated on February 3, 1999 in Delaware. HMS was incorporated
on October 12, 2000 in Texas. Tandori was incorporated on November
9, 1998 in Nevada.
On June 10, 1999, SGD acquired all of the issued and outstanding
common stock of Silver and Jewelry. For accounting purposes, the
acquisitions were treated as the acquisition of Silver and Jewelry
by SGD with Silver as the acquiror (reverse acquisition). The
historical financial statements prior to June 10, 1999 are those
of Silver.
Effective October 1, 2000, the Company acquired HMS in a
transaction treated as a purchase for accounting purposes. The
results of operations of HMS are included in the consolidated
financial statements commencing October 1, 2000.
Effective September 1, 2001, the Company acquired Tandori in a
transaction treated as a purchase for accounting purposes. The
results of operations of Tandori are included in the consolidated
financial statements commencing September 1, 2001. On April 24,
2002, Tandori acquired the business and certain assets of A
Electric, an electrical contractor, which now operates as a
division of Tandori.
7
(c) NATURE OF BUSINESS
SGD is now a holding company principally engaged in acquiring and
developing jewelry related businesses.
HMS is a national jewelry wholesaler, specializing in 18K, 14K and
10K gold and platinum jewelry, with headquarters in Dallas, Texas.
HMS markets its products to a network of over 30,000 retail
jewelers, through a catalog and telephone ordering system and
through its B2B online catalog http://www.HMSgold.com.
Silver is a company involved in both the wholesale and retail
jewelry business, principally silver, with retail locations in
Texas. The wholesale operation of Silver consists of both sales
directly from its warehouse in Spring, Texas and a satellite
location in Dallas, Texas. Silver ceased its jewelry show
operations in February 2003. Silver's corporate headquarters is in
Grapevine, Texas.
Tandori installs and sells equipment under the LifeStyle
Technologies(TM) name in both commercial and residential buildings
for security, audio, video, lighting, and other current technology
applications. Effective April 24, 2002, with the addition of A
Electric, Tandori also operates as an electrical contractor.
Tandori has locations in Raleigh, NC, Spring, TX and just opened a
third location in Wilmington, NC.
Jewelry is currently inactive.
(D) GENERAL
The financial statements included in this report have been
prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission for interim reporting and
include all adjustments (consisting only of normal recurring
adjustments) that are, in the opinion of management, necessary for
a fair presentation. These financial statements have not been
audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations for interim reporting. The
Company believes that the disclosures contained herein are
adequate to make the information presented not misleading.
However, these financial statements should be read in conjunction
with the financial statements and notes thereto included in the
Company's Annual Report for the period ended July 31, 2002, which
is included in the Company's Form 10-KSB dated July 31, 2002 and
filed December 12, 2002. The financial data for the interim
periods presented may not necessarily reflect the results to be
anticipated for the complete year. Certain reclassifications of
the amounts presented for the comparative period have been made to
conform to the current presentation.
8
(E) 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 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 April 30, 2003, 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.
(F) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities". SFAS 146 requires that a liability be recognized on
the date on which the company had committed to an exit plan. In
fiscal 2003 the Company adopted this statement with no effect on
our financial position or results of operations.
In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147, "Acquisition of Certain Financial
Institutions." The adoption of SFAS 147 will not have any impact
on our financial position or results of operations.
In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends
FASB Statement No. 123, "Accounting for Stock-Based Compensation"
to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. The Company adopted the provisions of this statement
effective February 1, 2003 with no impact on our financial
position or results of operations.
9
Effective January 1, 2003, we adopted FASB Interpretation No.
("FIN") 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 elaborates on the disclosures that must be made by
a guarantor in its interim and annual financial statements about
its obligations under certain guarantees. It also clarifies that a
guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The adoption of this
interpretation did not have a material effect on our financial
position or results of operations. We have a guarantee under an
operating lease amounting to $38,000 as of April 30, 2003, for the
residual value of a vehicle at the end of its operating lease
period. Based upon our expectation that the value of the leased
asset at the end of the lease term will exceed the guaranteed
amount, no accruals have been recognized for this guarantee.
In January 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." FIN
46 requires a variable interest entity ("VIE") to be consolidated
by the primary beneficiary of the entity under certain
circumstances. FIN 46 is effective for all new VIE's created or
acquired after January 31, 2003. For VIE's created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after
June 15, 2003. The Company does not expect adoption of this
interpretation will have a material impact on its financial
position or results of operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This
Statement amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement is effective
for contracts entered into or modified after June 30, 2003 and is
to be applied prospectively. The Company adopted this Statement on
April 30, 2003 with no impact on its financial position or results
of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement
is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. It is to
be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before
the issuance date of the Statement and still existing at the
beginning of the interim period of adoption. Restatement is not
permitted. The Company does not expect the adoption of this
Statement to have an impact on its financial position or results
of operations.
10
2. RELATED PARTY TRANSACTIONS
Silver leased its corporate headquarters from James G. Gordon ("Gordon"), a
Director of the Company, at the rate of $2,200 per month through April 30,
2003. Gordon locked Silver out of the building during April 2003 and forced
Silver to file a voluntary petition under Chapter 11 of the Federal
Bankruptcy Act. The rental paid amounted to $19,800 during each of the
nine-month periods ended April 30, 2003 and 2002. Silver relocated from the
facility owned by Gordon on April 30, 2003.
Tandori sold product and services to Gordon in the amount of $12,310, of
which $2,506 remains unpaid at April 30, 2003. The Company has other claims
against Gordon which are discussed in Note 8.
HMS leases its facility from HMS Leasing Company, LLC, at the rate of
$8,075 per month pursuant to a lease agreement that expires on October 31,
2010. This amounted to $72,675 during the nine-month periods ended April
30, 2003 and 2002. HMS Leasing Company, LLC is owned by the president of
HMS.
HMS had advances to its president and companies controlled by him at April
30, 2003 in the amount of $22,254.
The Company has made net sales to Premier Concepts, Inc. ("Premier") of
$85,554 during the nine months ended April 30, 2003 and has receivables
from Premier of $151,225 at April 30, 2003. The Company owns 9.5% of the
common stock of Premier at April 30, 2003, which is included in
available-for-sale securities in Note 3. The Chief Executive Officer of
Premier is a Director of the Company and on November 25, 2002 became
President and Acting Chief Executive Officer of the Company.
During the quarter ended April 30, 2003 Silver consigned $17,789 of
inventory to Premier and Premier consigned $13,064 of inventory to Silver.
Related party interest expense amounted to $66,600 and $55,311 for the
three-month periods ended April 30, 2003 and 2002, respectively, and
amounted to $118,600 and $145,684 for the nine-month periods ended April
30, 2003 and 2002, respectively. Accrued interest payable to related
parties amounted to $38,637 at April 30, 2003. See Note 6 for details of
notes payable aggregating $1,828,407 which are due to related parties.
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 and has
filed suit to recover its loss. The action is currently stayed due to
Silver filing a Voluntary Petition for Reorganization under Chapter 11 of
Title 11 of the United States Code.
11
Amounts due from related parties at April 30, 2003 may be summarized as
follows:
Premier Concepts, Inc. ........ $151,225
Greg Gordon, Director ......... 2,506
Harry Schmidt, President of HMS 22,254
--------
$175,985
Amounts due to related parties at April 30, 2003, excluding notes payable
included in Note 6, of $38,637 is owed to G. David Gordon, the brother of
Director James G. Gordon.
The Company raised $200,000 in two private placement transactions through
sale of a total of 4,000,000 shares of its common stock during the three
months ended April 30, 2003 to existing shareholders of the Company.
3. MARKETABLE EQUITY SECURITIES
The following summarizes the Company's investments in securities at April
30, 2003:
Trading securities:
Cost ................. $ 93,581
Unrealized gain (loss) (88,953)
--------
Fair value ....... $ 4,628
========
Available-for-sale securities (Premier Concepts, Inc.):
Cost ................. $ 429,550
Unrealized gain (loss) (379,850)
---------
Fair value ....... $ 49,700
=========
The Company recognized an unrealized loss from trading securities in the
amount of $1,943 and $7,407 during the three and nine month periods ended
April 30, 2003, respectively. The Company recognized an unrealized loss
from trading securities in the amount of $23,104 and $249,017 during the
three month and nine month periods ended April 30, 2002.
Unrealized losses from available-for-sale securities included, as a
component of equity, as of April 30, 2003 were as follows:
Unrealized losses ........................... $(379,850)
Deferred income taxes ....................... 129,200
---------
Accumulated other comprehensive income (loss) $(250,650)
=========
12
4. INVENTORIES AND GOLD CONSIGNMENT AGREEMENT
Inventories at April 30, 2003 consist of:
Gold jewelry .................... $ 6,863,113
Silver and other jewelry ........ 911,436
Electronic equipment and supplies 125,636
-----------
7,900,185
Less consigned gold ............. (4,352,494)
-----------
Net inventories ............ $ 3,547,691
===========
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 April 30, 2003, HMS had
12,925 ounces of gold on consignment with a market value of $4,352,494
($336.75 per ounce).
The consignment agreement contains certain restrictive covenants
relating to maximum usage, net worth, working capital, and other
financial ratios, and the agreement requires HMS to own a specific
amount of gold at all times. The agreement also limits the amount
which HMS can pay to SGD and its related companies. At April 30, 2003
HMS had transactions and balances with SGD and its sister companies as
follows:
Expenses paid on behalf of SGD ................... $ 456,100
Product and services sold to sister companies .... 113,079
Loans and advances ............................... 114,046
---------
683,225
HMS share of consolidated income taxes, due to SGD (461,900)
Management fee due SGD ........................... (232,500)
---------
HMS over (under) allowable amount .............. $ (11,175)
=========
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%. At April 30, 2003, HMS did not have an
advance on this line of credit. The $551,000 balance on the line of
credit at January 31, 2003 was repaid during the current quarter.
13
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 G. David
Gordon, the brother of a Director of the Company, and the corporate
guaranty of SGD.
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.
5. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable at April 30, 2003 consists of the
following:
Note payable to bank with interest at 9% payable on demand or
January 1, 2003 if no demand is made; accrued interest payable
monthly; collateralized by all assets of Silver and guaranteed
by a Director of SGD (PAST DUE) .............................. $ 144,000
Note payable to bank with interest at prime + 1%; currently
5.25%; due on September 25, 2003; guaranteed by G. David
Gordon, a shareholder and the brother of a Director of SGD ... 300,000
Notes payable to companies in monthly installments;
collateralized with transportation equipment ................. 88,859
Note payable to company due July 30, 2003 with interest at
5.8% payable monthly; collateralized by stock of HMS;
guaranteed by G. David Gordon, the brother of a Director of
the Company 835,000
Note payable to an individual with interest at New York prime;
payable $20,000 plus interest annually 100,000
Current installments of long-term debt and notes payable .............. (1,343,558)
-----------
Long-term debt less current installments .............................. $ 124,301
============
14
6. NOTES PAYABLE DUE RELATED PARTIES
Notes payable due related parties at April 30, 2003 consist of the
following:
Notes payable to the president of HMS Jewelry Company, Inc.;
due August 1, 2003, with interest payable monthly at 8%;
collateralized by the stock of HMS Jewelry Company, Inc.;
convertible into common stock of the Company at $.05 per share
with anti-dilution rights .................................... $ 1,050,000
Notes payable to G. David Gordon, a shareholder and the
brother of a Director; due August 1, 2003, with interest
payable monthly at 8%; collateralized by the stock of HMS
Jewelry Company, Inc.; convertible into common stock of the
Company at $.05 per share with anti-dilution rights .......... 200,000
Notes payable to G. David Gordon, a shareholder and the
brother of a Director of the Company; due on August 1, 2004
with interest at 12%, unsecured .............................. 473,407
Note payable to G. David Gordon, a shareholder and the brother
of a Director of the Company; due on demand with interest at
8%; unsecured; convertible into common stock of the Company at
$.01 per share ............................................... 50,000
Notes payable to G. David Gordon, a shareholder and the
brother of a Director of the Company; due on demand with
interest at 8%; unsecured; convertible into common stock of
the Company at $.05 per share with anti-dilution rights ...... 55,000
Less current notes payable ................................... (1,355,000)
-----------
Non-current note payable .................................... $ 473,407
===========
15
During January 2003 SGD obtained the guaranty to cure the default of the
covenants on the note payable in the amount of $835,000. G. David Gordon,
the guarantor of the $835,000 loan, who is the brother of a Director of the
Company, received 500,000 shares of the common stock of the Company as a
guaranty fee. The shares have anti-dilution rights and the transaction was
valued at $.05 per share, the closing price of the common stock on January
29, 2003. The $25,000 will be amortized over the remaining term of the
loan.
In addition, 1,100,000 shares of the common stock of the Company were
issued as a fee to replace the $1,250,000 loan due to the President of HMS,
which was due October 15, 2002 with two new loans in the amounts of
$1,050,000 payable to the President of HMS and $200,000 payable to G. David
Gordon, who advanced the funds to repay this portion of the original note,
which are both due August 1, 2003. The shares have anti-dilutive rights and
the related $55,000 valuation (based upon the $.05 closing price of the
common stock on January 29, 2003) will be amortized over the remaining term
of the two new loans. The two new loans are also convertible into common
stock of the Company at $.05 per share with anti-dilutive rights.
The Company issued 1,500,000 common shares, with anti-dilution rights, in
March 2003 to G. David Gordon, the brother of a Director of the Company, in
exchange for his personal guaranty of the HMS gold consignment obligation
and the related working capital loan. The $75,000 fee, based upon the
closing price of the common stock, will be amortized over the twelve month
period of the guaranty.
16
7. SEGMENT INFORMATION
The Company reports segments based upon the management approach, which
designates the internal reporting that is used by management for making
operating decisions and assessing performance. For the nine-month period
ended April 30, 2003, the Company operated in the following segments
(amounts in thousands):
Corporate
Gold Silver LifeStyle and other Consolidated
Revenues:
External customers .. $ 10,908 $ 1,394 $ 2,690 $ -- $ 14,992
Intersegment ........ -- -- -- --
Earnings (loss)
from operations ..... 782 (651) (434) (296) (599)
Unrealized (loss) on
marketable securities -- -- -- (7) (7)
Other, net ............ (211) (66) (78) (82) (437)
Deferred income tax
(expense) benefit ... (196) 75 113 75 67
-------- -------- -------- -------- --------
Net earnings (loss) ... $ 375 $ (642) $ (399) $ (310) $ (976)
======== ======== ======== ======== ========
Assets ................ $ 8,620 $ 1,203 $ 1,542 $ 684 $ 12,049
======== ======== ======== ======== ========
For the nine-month period ended April 30, 2002, the Company operated in the
following segments (amounts in thousands):
Corporate
Gold Silver LifeStyle and other Consolidated
Revenues:
External customers .. $ 9,377 $ 2,111 $ 1,170 $ -- $ 12,658
Intersegment ........ $ 22 -- -- -- $ 22
Earnings (loss)
from operations ..... $ 1,004 $ (276) $ (201) $ (270) $ 257
Unrealized (loss) on
marketable securities -- -- -- (249) (249)
Other, net ............ (159) (17) (8) (30) (214)
Deferred income tax
(expense) benefit ... (289) 98 71 186 66
-------- -------- -------- -------- --------
Net earnings (loss) ... $ 556 $ (195) $ (138) $ (363) $ (140)
======== ======== ======== ======== ========
Assets ................ $ 8,387 $ 2,624 $ 1,360 $ 793 $ 13,164
======== ======== ======== ======== ========
17
The Gold segment represents the wholesale operations of HMS. The Silver
segment represents the wholesale and retail operations of Silver. The
LifeStyle segment represents the operations of Tandori.
Corporate assets consist primarily of marketable securities and prepaid
expenses.
8. LEGAL MATTERS
At a meeting of the Board of Directors of SGD on November 25, 2002, Terry
Washburn was appointed to replace James G. "Greg" Gordon ("Gordon") as
President of SGD. Subsequently, the SGD Board of Directors removed the
Silver Board of Directors and two of the SGD Directors were appointed to
the Board of Directors of Silver. At a meeting of the Board of Directors of
Silver, Gordon, his wife, Lisa Gordon and the General Manager of Sivler
were terminated. Terry Washburn was appointed as the new President of
Silver.
On December 13, 2002 SGD filed a petition against Gordon in the 342nd
District Court, Tarrant County, Texas alleging breach of fiduciary duty,
conversion of corporate funds and misappropriation of corporate funds. SGD
is alleging that Gordon, who was President of SGD from June 10, 1999 until
November 25, 2002, wrongfully and without authority or approval,
transferred approximately $2.7 million from two separate SGD bank accounts
into an account or accounts held by 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 is seeking to recover its damages, which were in excess of $2.7
million, costs of court and pre-judgment interest as allowed by law. 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.
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
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 instead of
11,250,000 shares of SGD as currently reported by the Company.
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.
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. 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.
18
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 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.
19
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased from $3,630,930 at July 31, 2002 to
$3,080,179 at April 30, 2003. The decrease in working capital of $550,751
consists of a decrease in current assets of $209,049 plus an increase in
current liabilities of $341,702. The major items of the decrease in current
assets consisted of an increase in accounts receivable of $255,807 and a
decrease in cash of $538,349. The major increase in current liabilities was
from a net increase in current installments of long-term debt and notes
payable of $317,716. The decline in working capital is primarily due to the
losses incurred during the current quarter.
The Company is currently budgeting $20,000 for capital expenditures for the
remainder of fiscal 2003 for miscellaneous computer and other equipment.
The Company plans to use cash for the acquisitions.
The Company raised $200,000 in two private placement transactions through
sale of a total of 4,000,000 shares of its common stock during the three
months ended April 30, 2003 to existing shareholders of the Company.
Silver is past due on one note payable to a bank in the amount of $144,000,
which they had planned to attempt to extend. As a result of actions taken
by James G. Gordon in locking Silver out of its warehouse facility, Silver
was forced to file a voluntary petition for reorganization under Chapter 11
in U.S. Bankruptcy Court.
During January 2003 SGD obtained the guaranty to cure the default of the
covenants on the note payable in the amount of $835,000. G. David Gordon,
the guarantor of the $835,000 loan, who is the brother of a Director of the
Company, received 500,000 shares of the common stock of the Company as a
guaranty fee. The shares have anti-dilution rights and the transaction was
valued at $.05 per share, the closing price of the common stock on January
29, 2003. The $25,000 will be amortized over the remaining term of the
loan.
20
In addition, 1,100,000 shares of the common stock of the Company were
issued as a fee to replace the $1,250,000 loan due to the President of HMS,
which was due October 15, 2002 with two new loans in the amounts of
$1,050,000 payable to the President of HMS and $200,000 payable to G. David
Gordon, who advanced the funds to repay this portion of the original note,
which are both due August 1, 2003. The shares have anti-dilutive rights and
the related $55,000 valuation (based upon the $.05 closing price of the
common stock on January 29, 2003) will be amortized over the remaining term
of the two new loans. The two new loans are also convertible into common
stock of the Company at $.05 per share with anti-dilutive rights.
The Company issued 1,500,000 common shares, with anti-dilution rights, in
March 2003 to G. David Gordon, the brother of a Director of the Company, in
exchange for his personal guaranty of the HMS gold consignment obligation
and the related working capital loan. The $75,000 fee, based upon the
closing price of the common stock, will be amortized over the twelve month
period of the guaranty.
RESULTS OF OPERATIONS
SALES AND COST OF SALES
THREE months ended APRIL 30, 2003 aND APRIL 30, 2002
The Company's sales may be summarized as follows for the three-month
periods ended April 30, 2003 and 2002:
2003 2002
Gold ...... $2,264,293 $2,333,266
Silver:
Wholesale 119,449 350,772
Retail .. 155,716 195,126
---------- ----------
275,165 545,898
Tandori ... 802,872 545,292
---------- ----------
$3,342,330 $ ,424,456
========== ==========
Total sales have decreased $82,126 (2.4%) during the three month period
ended April 30, 2003, as compared to the same prior year period.
Gold sales decreased $68,973 (3.0%) during the three months ended April 30,
2003 as compared to the year earlier period. The Second London Gold Fix was
$336.75 per ounce on April 30, 2003 as compared to $367.50 per ounce on
January 31, 2003, the beginning of the current year quarter. The Second
London Gold Fix was $308.20 per ounce on April 30, 2002 as compared to
$282.30 per ounce on January 31, 2002. Sales volumes were down
substantially during the current quarter, more than countering the
approximate 19% average increase in gold price. The decline in volume sold
is attributed to lower consumer spending due to the war in Iraq and the
general state of the economy.
21
Silver sales decreased $270,733 (49.6%) during the three months ended April
30, 2003 as compared to the year earlier period. Wholesale sales declined
$231,323 (65.9%) and retail sales declined $39,410 (20.2%) during the
period. All upper management of Silver was terminated during December 2002.
The Company ceased its show operations during the current quarter and has
reduced its emphasis on its unprofitable wholesale operations. During April
2003, James G. Gordon, a Director of the Company and the owner of the
building which Silver had been using for its principal corporate office and
the center of its wholesale operations locked Silver's employees out of the
premises. As a result of Gordon's actions, Silver filed a Voluntary
Petition for Reorganization under Chapter 11 of Title 11 of the United
States Code, and relocated its operations by April 30, 2003. Silver lost
substantial business as a result of the actions of Gordon and will evaluate
their claims against him.
Tandori sales increased $257,580 (47.2%) during the three months ended
April 30, 2003 as compared to the year earlier period. Sales include
$560,881 and $505,636 at the Raleigh, North Carolina location and $241,991
and $39,656 from the location in Spring, Texas during the three month
periods ended April 30, 2003 and 2002, respectively. The Spring location
added a new builder during the middle of February 2003 and expects to have
substantially higher sales during the next quarter.
NINE months ended APRIL 30, 2003 and APRIL 30, 2002
The Company's sales may be summarized as follows for the nine-month periods
ended April 30, 2003 and 2002:
2003 2002
Gold ............. $ 10,907,808 $ 9,399,072
Silver:
Wholesale ...... 810,661 1,404,258
Retail ......... 583,715 706,623
------------ ------------
1,394,376 2,110,881
Tandori .......... 2,689,493 1,170,080
------------ ------------
14,991,677 12,680,033
Intersegment sales -- (21,700)
------------ ------------
$ 14,991,677 $ 12,658,333
============ ============
Total sales have increased $2,333,344 (18.4%) during the nine-month period
ended April 30, 2003, as compared to the same prior year period.
22
Gold sales have increased $1,508,736 (16%) from the year earlier period.
The increase is attributed to the new catalog which was distributed during
the late spring and the higher gold prices. The Second London Gold Fix was
$336.75 on April 30, 2003, $367.50 on January 31, 2003, $316.55 on October
31, 2002 and $304.65 on July 31, 2002, an increase of 10.5% over the
period.
Silver sales decreased $716,505 (34%) during the nine months ended April
30, 2003 as compared to the same year earlier period. This amount included
$593,597 from wholesale sales and $122,908 from retail sales. The
continuing decline in sales contributed to the Company's decision to
terminate all upper management in December 2002. The Company closed its
jewelry show operations, has reduces its emphasis on wholesale operations
and is attempting to obtain new merchandise for its retail stores. The
additional costs associated with operating in bankruptcy will impact
Silver's ability to obtain sufficient new merchandise to improve sales.
Tandori sales increased $1,519,413 (130%) from the year earlier period. The
prior year period included only one location for eight months and one
location for its first three months, whereas the current year period
includes both locations for the full nine-month period. Sales from the
Raleigh, North Carolina location accounted for 73% of the total while the
new location in Spring, Texas, which became fully operational during
January 2002, accounted for the remainder. The weather resulted in the
Raleigh location missing about 20% of their work days during the second
quarter of the current year, which resulted in sales being lower that might
have been otherwise expected.
COST OF GOODS SOLD
During the nine months ended April 30, 2003, gold had a gross profit of
24.7%; Silver had a gross profit of 38.8%; and Tandori had a gross profit
of 24.6% for a combined gross profit of 26.0%. This compares to gross
profit of: Gold - 28.2%; Silver - 52.4%; Tandori - 30.8%; and combined -
32.5% for the prior year period. Gold's gross profit has declined primarily
due to the increase in gold price. Gold has a fixed amount of profit for
each ounce of gold sold; accordingly, with the gold value increasing the
gross profit percentage is a smaller percentage of sales. Silver's gross
profit would have been 56.7% except for an inventory reserve which was
recorded during the last quarter in the amount of $250,000. The higher
gross profit would be expected since retail sales are a higher percentage
of total sales, 41.9% in fiscal 2003 as compared to 33.5% in fiscal 2002.
The additional reserve was recorded to provide for additional expected
obsolescence of the inventory and to provide for potential missing
inventory when Con-Tex employees were locked out of the facility owned by
James G. Gordon. The decline in Tandori's gross profit percentage is in
part due to the addition of high voltage electrical services to their
Spring, Texas location. The high voltage electrical division has only
nominal costs which are not included in cost of sales and accordingly has a
lower gross profit margin.
23
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
THREE months ended APRIL 30, 2003 and aPRIL 30, 2002
The following table summarizes the Company's selling, general and
administrative expenses ("SGA") for the three-month periods ended April 30,
2003 and 2002:
2003 2002
Gold .............. $ 597,998 $ 526,292
Silver ............ 407,382 421,061
Tandori ........... 354,642 235,946
Corporate and other 107,438 64,588
---------- ----------
Total ........... $1,467,460 $1,247,887
========== ==========
Combined SGA for the quarter ended April 30, 2003 increased $219,573
(17.6%). Gold's SGA increased 13.6%, Silver's SGA decreased 3.2%, Tandori's
SGA increased 50.3% and corporate SGA increased 66.3%. Gold's SGA increase
is consistent with the year-to-date sales increase of 16%. Silver's SGA
decrease would have been approximately 14% below last year except for
$50,941 in legal and professional costs associated with lawsuits initiated
by James G. Gordon and the bankruptcy filing on April 23, 2003. The Tandori
increase is higher primarily due to having only one operating location
during most of the prior year period while operating two locations in the
current period. SGD's increase is also associated primarily with legal fees
in the James G. Gordon matters.
NINE months ended APRIL 30, 2003 and APRIL 30, 2002
The following table summarizes the Company's selling, general and
administrative expenses for the nine-month periods ended April 30, 2003 and
2002:
2003 2002
Gold .............. $1,914,691 $1,639,927
Silver ............ 1,191,981 1,381,019
Tandori ........... 1,095,687 561,008
Corporate and other 296,043 270,567
---------- ----------
Total ........... $4,498,402 $3,852,521
========== ==========
Gold's SGA increased $274,764 (17%) from the prior year period. The major
cost increases included salaries of $54,582; catalog costs of $86,767;
freight of $46,769; and commissions of $29,407. Advertising costs declined
$13,266. The increase in SGA is consistent with the sales increase.
24
Silver's SGA decreased $189,038 from the prior year period. The major
components of the decline were: payroll decrease of $158,242; commission
decrease of $57,562; rent increase of $24,446; and an increase in legal and
professional costs of $66,234.
Tandori's SGA increased $534,679 from the prior year period. The major
reason for the increase is operating one location during the prior year
period for only eight months and one location for three months as compared
to operating two locations for nine months during the current period.
Corporate SGA remained approximately the same as in the prior year and
consists primarily of insurance, accounting and audit costs and legal and
professional costs. The increase is associated with legal fees relating to
the James G. Gordon matters.
INTEREST EXPENSE AND GOLD CONSIGNMENT FEE - Interest expense increased
$48,769 and $115,034 during the three and nine month periods ended April
30, 2003, respectively, as compared to the prior year periods. Related
party interest expense increased $11,289 and decreased $27,084,
respectively, during the same periods. At April 30, 2003 there was
$1,828,407 in related party notes payable outstanding and $1,467,859 in
other notes payable outstanding. At April 30, 2002 there was $1,744,455 in
related party notes payable outstanding and $1,167,907 in other notes
payable outstanding. The increase in other notes payable resulted in an
increase in other interest expense. Amortization of loan fees for extension
of related party notes has caused the current quarter related party
interest to exceed the prior year amount. The renewals were done in January
2003; accordingly, the increase only impacted the current quarter.
The gold consignment fee increased $26,118 and $54,016 during the three and
nine month periods ended April 30, 2003, respectively, as compared to the
prior year periods. The increase is due to having higher balances on the
gold consignment facility as a result of increases in the gold price and
increases in the number of ounces of gold on consignment. At April 30, 2003
HMS had 12,925 ounces of gold on consignment with a related consignment
obligation of 4,352,494 ($336.75 per ounce). At April 30, 2002 HMS had
9,632 ounces of gold on consignment with a related consignment obligation
of $2,968,582 ($308.20 per ounce). Accordingly, the increase is a result of
the 34% increase in the quantity of gold on consignment coupled with the 9%
increase in the price of gold.
INTEREST AND OTHER INCOME - Interest and other income of the Company
decreased during the nine month period ended April 30, 2003 from the same
year earlier period. The decrease is attributed to the higher average
interest-bearing cash balances during the prior year period.
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES - The Company recognized an
unrealized loss in the amount of $1,943 and $7,407 during the three and
nine month periods ended April 30, 2003, respectively, from its investment
in marketable equity securities that have been classified as trading
securities. During the three and nine month periods ended April 30, 2002
the Company recognized a loss of $23,104 and $249,017, respectively.
LOSS ON SALE OF ASSETS - Effective October 28, 2002, James G. Gordon, the
former President of Con-Tex, entered into a transaction with his
sister-in-law whereby he sold the assets of one of the retail locations for
cash proceeds of $30,645. The Company recorded a loss on the transaction of
$51,015 and has filed suit to recover their loss. The action is currently
stayed due to Con-Tex filing a Voluntary Petition for Reorganization under
Chapter 11 of Title 11 of the United States Code.
25
INCOME TAXES - The Company recorded income tax benefits in the amounts of
$54,800 and $67,100 during the three and nine month periods ended April 30,
2003, respectively. The Company recorded income tax benefits in the amounts
of $88,300 and $66,200 during the three and nine month periods ended April
30, 2002, respectively. The Company has recorded a reserve against the
expected benefit from their net operating losses due to uncertainty of
realization.
Item 3. CONTROLS AND PROCEDURES
The Company has established and currently maintains controls and other
procedures designed to ensure that material information required to be
disclosed in its reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods
specified by the Securities and Exchange Commission. In conjunction with
the close of each fiscal quarter, the Company conducts an update and a
review and evaluation of the effectivenessof the Company's disclosure
controls and procedures. In the opinion of the Company's principal
executive officer, based upon an evaluation completed within 90 days prior
to the filing of this report, that the Company's disclosure controls and
procedures are sufficiently effective to ensure that any
materialinformation relating to the Company is recorded, processed,
summarized and reported to its principal officers to allow timely decisions
regarding required disclosures.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 13, 2002 SGD filed a petition against James G. "Greg" Gordon
("Gordon") in the 342nd District Court, Tarrant County, Texas alleging
breach of fiduciary duty, conversion of corporate funds and
misappropriation of corporate funds. SGD is alleging that Gordon, who was
President of SGD from June 10, 1999 until November 25, 2002, wrongfully and
without authority or approval, transferred approximately $2.7 million from
two separate SGD bank accounts into an account or accounts held by 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 is seeking to recover its
damages, which were in excess of $2.7 million, costs of court and
pre-judgment interest as allowed by law. 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.
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
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 instead of
11,250,000 shares of SGD as currently reported by the Company.
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.
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. 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.
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 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.
27
ITEM 2. CHANGES IN SECURITIES
During the three months ended April 30, 2003, the Company issued 1,500,000
shares of its $.0001 par value common stock in exchange for obtaining a
personal guaranty for a Company obligation. The issue was valued at $.05
per share, the closing stock price on the date of the agreement. The small
business issuer claimed exemption from registration based upon Section 4(2)
of the Securities and Exchange Act of 1933.
During the three months ended April 30, 2003, the Company sold 4,000,000
shares of its $.0001 par value common stock for $200,000 in cash in private
transactions. 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
(a) The Company does not currently employ a Chief Financial Officer.
(b) Richard T. Clark joined the Board of Directors on June 24, 2003,
filling a vacancy created in 2002 when William Dark resigned.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 99.1 Certificate Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
On May 8, 2003 the Company filed its Form 8-K to disclose that
on April 23, 2003, its wholly owned subsidiary, Con-Tex Silver
Imports, Inc. had 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 Con-Tex employees out of the office and
warehouse premises which he owned and leased to Con-Tex, which
prevented Con-Tex from operating.
28
On June 16, 2003 the Company filed its Form 8-K to disclose
that on June 10, 2003 they had dismissed their former
principal accountant, Stephen P. Higgins, CPA and engaged
Guest & Company, P.C., Certified Public Accountants, as its
principal accountants. The decision to change accountants was
approved by the Board of Directors. There were no
disagreements with the former accountants on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the
former accountants would have caused them to make reference in
connection with their report to the subject matter of the
disagreements.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SGD HOLDINGS, LTD.
Date: June 26, 2003 By: /s/ Terry Washburn
-----------------------
Terry Washburn, President, Acting CEO
and Principal Accounting Officer
29
CERTIFICATION
I, Terry Washburn, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SGD Holdings,
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as, and for the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant
is made known to me by others within the Company, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
June 26, 2003 /s/ Terry Washburn
-------------------
Terry Washburn
President and Acting CEO
30
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
Pursuant to and solely for purposes of, 18 U.S.C. Section 1350 (Section
906 of the Sarbanes-Oxley Act of 2002), the undersigned hereby
certifies in the capacity and on the date indicated below that:
1. The Quarterly Report of SGD Holdings, Ltd. (the
"Registrant") on Form 10-QSB for the period ended
April 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report")
fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the
Registrant.
Date: June 26, 2003 By: /s/Terry Washburn
-----------------
Terry Washburn
President and Acting CEO