U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended: October 31, 2003
Commission file number 0-29671
SGD HOLDINGS, LTD.
(Name of small business issuer in its charter)
DELAWARE 13-3986493
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4385 SUNBELT DRIVE, ADDISON, TEXAS 75001
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (972) 248-0266
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 registraint's common stock, par value $.0001
per share, as of November 30, 2003 was 36,266,077.
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, 2003 3
Condensed Consolidated Statements of Operations -
Three Months Ended October 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended October 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements -
Three Months Ended October 31, 2003 and 2002 6-14
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 15-18
Item 3. Controls and Procedures 18-19
Part II. Other Information 19-23
2
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
October 31, 2003
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents .................................... $ 584,050
Trade accounts receivable, net of allowance of $61,752 ....... 2,270,005
Marketable equity securities ................................. 28,184
Inventory .................................................... 2,589,577
Due from related parties ..................................... 61,184
Deferred income taxes ........................................ 207,100
Prepaid expenses and other assets ............................ 377,093
-----------
Total current assets ........................................ 6,117,193
Property and equipment, net ................................... 219,283
Goodwill, net ................................................. 3,490,612
Marketable equity securities .................................. 3,550
Other assets .................................................. 22,997
-----------
Total assets ............................................. $ 9,853,635
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable ................................................. $ 835,000
Notes payable - related parties .............................. 1,330,000
Accounts payable ............................................. 1,511,402
Accrued expenses ............................................. 82,096
Due to related parties ....................................... 164,388
-----------
Total current liabilities ................................... 3,922,886
Deferred income taxes payable ................................. 9,400
-----------
Total liabilities ........................................ 3,932,286
-----------
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 .......................................... (3,612,046)
Accumulated other comprehensive loss ......................... (281,100)
-----------
Total stockholders' equity ................................. 5,921,349
-----------
Total liabilities and stockholders' equity ............... $ 9,853,635
===========
See accompanying notes to condensed consolidated financial statements.
3
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended October 31, 2003 and 2002
(Unaudited)
2003 2002
Sales and revenues ........................................... $ 3,544,727 $ 3,994,956
Cost of sales ................................................ 2,719,651 3,006,297
----------- -----------
Gross profit ............................................... 825,076 988,659
Selling, general and administrative expense .................. 774,650 657,234
----------- -----------
Earnings from operations ................................... 50,426 331,425
Other income (expense):
Unrealized gain (loss) on marketable securities ............ 19,670 (4,371)
Interest expense ........................................... (12,107) (25,622)
Interest expense - related parties ......................... (45,350) (26,000)
Gold consignment fee ....................................... (35,361) (38,799)
Interest and other income .................................. 2,883 2,114
----------- -----------
Total other income (expense) ............................. (70,265) (92,678)
----------- -----------
Earnings (loss) from continuing operations before income taxes (19,839) 238,747
Income tax expense (benefit) ................................. (5,900) 82,000
----------- -----------
Earnings (loss) from continuing operations ................... (13,939) 156,747
----------- -----------
Discontinued operations:
Loss from operation of discontinued operations .............. -- (245,814)
Income tax benefit .......................................... -- (83,700)
----------- -----------
Loss on discontinued operations ......................... -- (162,114)
----------- -----------
Net loss ..................................................... $ (13,939) $ (5,367)
=========== ===========
Basic and diluted earnings (loss) per share:
Continuing operations ...................................... $ (0.00) $ 0.01
Discontinued operations .................................... -- (0.01)
----------- -----------
Net loss per share ...................................... $ (0.00) $ (0.00)
=========== ===========
Weighted average shares outstanding (thousands) .............. 36,266.1 28,166.1
=========== ===========
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, 2003 and 2002
(Unaudited)
2003 2002
Cash flows used in operating activities:
Net loss ................................................................ $ (13,939) $ (5,367)
Loss from discontinued operations ..................................... -- 162,114
----------- -----------
Earnings (loss) from continuing operations ......................... (13,939) 156,747
Adjustments to reconcile net earnings (loss) to net cash used inoperating
activities:
Depreciation and amortization ......................................... 18,372 16,502
Deferred income taxes ................................................. (5,900) 82,000
Unrealized (gain) loss on marketable securities ....................... (19,670) 4,371
Changes in assets and liabilities:
Accounts receivable ................................................. (1,106,316) (1,558,555)
Inventory ........................................................... (388,758) (747,411)
Other assets ........................................................ (58,398) 56,328
Accounts payable and accrued expenses ............................... 1,267,948 1,108,136
----------- -----------
Net cash used in continuing operations .................................. (306,661) (881,882)
Net cash used in discontinued operations .............................. -- (263,564)
----------- -----------
Net cash used in operations ........................................ (306,661) (1,145,446)
----------- -----------
Cash flows used in investing activities:
Capital expenditures .................................................. (8,117) (4,201)
----------- -----------
Net cash used in continuing operations .................................. (8,117) (4,201)
Net cash used in discontinued operations .............................. -- (5,373)
----------- -----------
Net cash used in investing activities .............................. (8,117) (9,574)
----------- -----------
Cash flows provided by financing activities:
Repayment of notes payable ............................................ -- (12,876)
----------- -----------
Net cash from continuing operations ..................................... -- (12,876)
Net cash from discontinued operations ................................. -- 285,523
-----------
Net cash provided by financing activities .......................... -- 272,647
----------- -----------
Net decrease in cash and cash equivalents ............................... (314,778) (882,373)
Cash and cash equivalents, beginning of period .......................... 898,828 1,156,355
----------- -----------
Cash and cash equivalents, end of period ................................ $ 584,050 $ 273,982
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended October 31, 2003 and 2002
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIes
(a) Principles of Consolidation AND PRESENTATION
The condensed consolidated financial statements include the
accounts of SGD Holdings, Ltd. ("SGD") and its wholly owned
subsidiaries HMS Jewelry Company, Inc. ("HMS"), Jewelry Solutions
& Commerce, Inc. ("Jewelry"), Tandori, Inc. ("Tandori"), Contex
Silver Imports, Inc.("Silver") which is inactive and Rings
N' Things, LLC ("Rings"), the 80% owned subsidiary of Jewelry,
(collectively referred to as the "Company"). All material
intercompany accounts and transactions have been eliminated.
(b) Organization
SGD was incorporated on May 22, 1996 in Delaware as Transun
International Airways, Inc. and until June 1999 was a
development stage company with plans to establish itself as an ai
transport company providing non-scheduled air service
(charter flights) for tour operators, charter brokers, cruise line
casinos, theme parks and theme attractions. Transun International
Airways, Inc. changed its name to Goldonline International, Inc.
on June 10, 1999. Goldonline International, Inc. changed its name
to SGD Holdings, Ltd. on January 24, 2001.
On April 20, 2000, pursuant to an agreement and plan of
reorganization dated April 11, 2000, SGD acquired 100% of the
issued and outstanding common stock of Benton Ventures, Inc.
("Benton"), a Delaware corporation, in exchange for 1,200,000
newly issued common shares of SGD. On April 25, 2000, the Board of
Directors of SGD elected to merge Benton into SGD pursuant to
Section 253 of Delaware's General Corporate Laws. As a result of
the merger, SGD became the surviving company and assumed the
reporting responsibilities under successor issuer status as more
fully detailed in Section 12(g)(3) of The Securities Exchange Act
of 1934. Benton was a dormant company and its assets and
liabilities were insignificant.
HMS was incorporated on October 12, 2000 in Texas. Tandori was
incorporated on November 9, 1998 in Nevada. Jewelry was
incorporated on February 3, 1999 in Delaware. Rings was
incorporated on September 2, 2003 in Nevada.
6
On June 10, 1999, SGD acquired all of the issued and outstanding
common stock of Con-Tex Silver Imports, Inc. ("Silver") and
Jewelry. For accounting purposes, the acquisitions were treated as
the acquisition of Silver and Jewelry by SGD with Silver as the
acquiror (reverse acquisition). The historical financial amounts
prior to June 10, 1999 is that of Silver.
Effective October 1, 2000, SGD completed the acquisition of HMS
Jewelry Co., Ltd., a Texas limited partnership, and HMS Operating
Company, a Texas corporation, and transferred the assets acquired
and liabilities assumed into HMS Jewelry Company, Inc. For
accounting purposes, the acquisition was treated as a purchase.
Effective September 1, 2001, SGD completed the acquisition of
Tandori, Inc. in a transaction treated as a purchase for
accounting purposes.
(c) Discontinued Operations
The operations of Silver and Tandori were discontinued at the end
of July 2003, see Note 2.
(d) Nature of Business
SGD is a holding company principally engaged in acquiring and
developing jewelry businesses. HMS is primarily involved in the
wholesale gold jewelry business. Jewelry is evaluating its
e-commerce site and Jewelry and Rings are considering other retail
options.
(e) General
The condensed consolidated financial statements included in this
report have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission for interim
reporting and include all adjustments (consisting only of normal
recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation. These condensed consolidated
financial statements have not been audited. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations for interim
reporting. The Company believes that the disclosures contained
herein are adequate to make the information presented not
7
misleading. However, these condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
Annual Report for the year ended July 31, 2003, which is included
in the Company's Form 10-KSB dated July 31, 2003 and filed
November 13, 2003. The financial data for the interim periods
presented may not necessarily reflect the results to be
anticipated for the complete year. Certain reclassifications of
the amounts presented for the comparative period have been made to
conform to the current presentation.
(f) Stock Options and Warrants
The Company accounts for stock-based awards to employees using the
intrinsic value method described in Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations. Accordingly, no compensation
expense has been recognized in the accompanying condensed
consolidated financial statements for stock-based awards to
employees when the exercise price of the award is equal to or
greater than the quoted market price of the stock on the date of
the grant.
As of October 31, 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.
(g) Recent accounting pronouncements
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. Adoption of this Statement did not have an impact on
the Company's financial position or results of operations.
8
2. DISCONTINUED OPERATIONS
(a) On April 23, 2003, Silver filed a Voluntary Petition for
Reorganization under Chapter 11 of Title 11 of the United States Code
in the United States Bankruptcy Court for the Northern District of
Texas, Fort Worth Division, Case No. 03-43783-DML-11.
During the week ended July 25, 2003, management of the Company
determined to cease operations of Silver. Accordingly, in SGD's next
scheduled Board of Director's meeting, on August 7, 2003, the Board
voted to convert the Chapter 11 case to Chapter 7 and all operations of
Silver were immediately discontinued. The Voluntary Petition for
Reorganization under Chapter 11 was converted to Chapter 7 on September
23, 2003. The operations of Silver have been included in discontinued
operations for the periods presented.
Silver was involved in both the wholesale and retail jewelry business,
principally silver, with retail locations in Texas. The wholesale
operation of Silver consisted of sales directly from its headquarters
in Conroe, Texas, sales from a Dallas location and sales from jewelry
shows at locations throughout the south central United States. Silver
had sales of $558,820 during the three months ended October 31, 2002.
(b) On July 17, 2003, the Company received an offer to acquire the
assets and business of Tandori, effective July 31, 2003, in exchange
for assumption of liabilities, excluding payroll taxes. In addition,
the buyer agreed to pay to SGD up to 50% of any profits the buyer might
make from the sale of Tandori's assets, up to $1,000,000, if the buyer
should sell the assets to a third party within three years of the
acquisition. The Company subsequently approved the offer and the
operations have been included in discontinued operations for the
periods presented. The purchaser was G. David Gordon and the President
of Tandori.
Tandori operated under the LifeStyle Technologies(TM) name as a full
service home technology integration company providing complete
installation and equipment for structured wiring, home audio, home
theater, home security, PC networking, central vacuum, accent lighting
and other current technology applications. Tandori had sales of
$1,099,143 during the three months ended October 31, 2002.
3. RELATED PARTY TRANSACTIONS
HMS leases its facility from HMS Leasing Company, LLC, at the rate of
$8,075 per month pursuant to a lease agreement that expires on October
31, 2010. This obligation amounted to $24,225 during the three-month
periods ended October 31, 2003 and 2002. 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 $527,233 at October 31, 2003.
9
At October 31, 2003, the Company owed G. David Gordon, CEO of HMS, a
shareholder and the brother of a Director, $18,888 in accrued interest.
In addition, G. David Gordon is owed compensation in the amount of
$112,500 at October 31, 2003, which is payable one-half in SGD common
stock and one-half in cash.
At October 31, 2003, the Company had made net advances of $921 to the
president of HMS, including companies owned by him.
See Note 7 for details of the $1,330,000 in note obligations to related
parties.
The Company has made net sales to Premier Concepts, Inc. ("Premier")
of $33,924 during the three-month period ended October 31, 2002 and no
sales during the current quarter. The Company has net receivables from
Premier at October 31, 2003 of $60,263. The Company owns 7.9% of the
stock of Premier at October 31, 2003 and the Chief Executive Officer of
Premieris the Acting CEO and a Director of the Company. On October 10,
2003 Premier filed a Voluntary Petition for Reorganization under
Chapter 11 of Title 11 of the United States Code in the United States
Bankruptcy Court for the Central District of California, Los Angeles
Division; Case No. LA 03-36445 BR.
Amounts due to related parties include $33,000 in accrued compensation
due to Terry Washburn, Acting CEO of the Company.
4. MARKETABLE EQUITY SECURITIES
The following summarizes the Company's investments in securities at
October 31, 2003: Trading securities:
Cost ................. $ 93,581
Unrealized gain (loss) (65,397)
--------
Fair value ....... $ 28,184
========
Available-for-sale securities (Premier Concepts, Inc., a related party):
Cost ................. $ 429,550
Unrealized gain (loss) (426,000)
---------
Fair value ....... $ 3,550
=========
The Company recognized an unrealized gain from trading securities in
the amount of $19,670 during the three month period ended October 31,
2003. The Company recognized an unrealized loss from trading securities
in the amount of $4,371 during the three month period ended October 31,
2002.
Unrealized losses from available-for-sale securities, which are
restricted under Rule 144 and which are included as a component of
equity, as of October 31, 2003, were as follows:
Unrealized losses ........................... $(426,000)
Deferred income taxes ....................... 144,900
---------
Accumulated other comprehensive income (loss) $(281,100)
=========
10
5. INVENTORIES AND GOLD CONSIGNMENT AGREEMENT
Inventories at October 31, 2003 consist of:
Inventory, principally gold jewelry $ 5,765,711
Less consigned gold ............... (3,176,134)
-----------
Net inventories .............. $ 2,589,577
===========
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, 2003, HMS had
8,223 ounces of gold on consignment with a market value of $3,176,134
($386.25 per ounce).
Consigned gold is not included in inventory, and there is no related
liability recorded. As a result of these consignment arrangements, HMS
is able to shift a substantial portion of the risk of market
fluctuations in the price of gold to the gold lender, since HMS does
not purchase gold from the gold lender until receipt of a purchase
order from, or shipment of jewelry to, its customers.
The gold lender has also provided a line of credit to HMS in the
amount of $1,500,000 that is due on demand, including interest at the
lender's prime rate plus 3/4%. HMS does not have any advances on this
line of credit at October 31, 2003.
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
President of HMS, the personal guaranty of G. David Gordon 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.
11
The consignment agreement contains certain restrictive covenants
relating to maximum usage, net worth, working capital, and other
financial ratios, and the agreement requires HMS to own a specific
amount of gold at all times.
HMS is currently negotiating with its gold lender to increase the size
of the consignment facility and to modify certain terms and conditions
of the current agreement.
6. NOTE PAYABLE
The Company has a note payable to a company in the amount of $835,000
which was due on July 31, 2003. The terms of the note include interest
at 5.8%, payable monthly and all of the issued and outstanding stock
of HMS is collateral on the note. Subject to ratification by the Board
of Directors, the Company will issue 250,000 shares of its common
stock with anti-dilution rights as a loan extension fee and 1,210,746
shares of its common stock with anti-dilution rights to pay the
accrued interest through July 31, 2003 to extend the note to July 31,
2004. The extended note will continue to have interest payable at 5.8%
and will be convertible into common stock at $.015 per share or the
market price, limited to 9.9% of the total outstanding shares of the
Company at the time. All of the issued and outstanding common stock of
HMS will continue to be collateral on the note, in second position
behind the collateral position of the president of HMS. In the event
of default on any of the loans secured by the HMS common stock, the
lender will have the option to purchase HMS for $5,000,000.
7. NOTES PAYABLE DUE RELATED PARTIES
Notes payable due related parties consists of the following at October
31, 2003:
Note payable to the president of HMS, due on August 1, 2003;
interest payable monthly at 8%; collateralized by the common
stock of HMS; convertible into common stock of the Company at
$.05 per share with anti-dilution rights (a) ................. $1,250,000
Note payable to G. David Gordon, a shareholder and the brother
of a Director of the Company; due on demand with interest at
6% payable monthly; unsecured (b) ............................ 30,000
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 (b) ........................................... 50,000
----------
Total notes payable due related parties .................... $1,330,000
==========
(a) Subject to ratification by the Board of Directors, the Company
will issue 300,000 shares of its common stock with anti-dilution
rights as a loan extension fee. The extended note will bear interest
at 8% per annum; will be due July 31, 2004; will be 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; and the HMS common stock will continue to be
collateral on the loan.
12
(b) Subject to ratification of the Board of Directors, the Company
will issue a combined note for $80,000 plus related accrued interest
to G. David Gordon. The extended note will bear interest at 6% per
annum; will be due July 31, 2004; will be secured by the common stock
of HMS, in third position behind the other notes above; all principal
and accrued interest is convertible into common stock of the Company
at $.01 per share; and all shares have anti-dilution rights.
8. SEGMENT INFORMATION
The Company reports segments based upon the management approach, which
designates the internal reporting that is used by management for making
operating decisions and assessing performance. With the disposition of
Silver and Tandori, continuing operations currently includes only one
segment, the wholesale gold operations of HMS.
9. LEGAL MATTERS
On December 13, 2002, SGD filed a petition against James G. "Greg"
Gordon ("Gordon") in the 342nd District Court, Tarrant County, Texas
alleging breach of fiduciary duty, conversion of corporate funds and
misappropriation of corporate funds. SGD alleged that Gordon, who was
President of SGD from June 10, 1999 until November 25, 2002, wrongfully
and without authority or approval, transferred approximately $2.7
million from two separate SGD bank accounts into an account or accounts
held by Silver. Thereafter, Gordon utilized a portion of SGD's funds
for his and his family's personal use and enjoyment, his personal
financial gain and for unauthorized transactions on Silver's behalf.
SGD was seeking to recover its damages, which were in excess of $2.7
million, costs of court and pre-judgment interest, as allowed by law.
SGD dismissed its claim against Gordon as it determined the cost would
exceed any benefit and the funds it saved could be used to pay
creditors of the Company; however the Company still maintains the right
to re-file the lawsuit against Gordon.
On January 3, 2003, James G. Gordon and Lisa K. Gordon ("Plaintiffs")
filed a petition in the District Court of Montgomery County, Texas,
Cause No. 03-01-00006-CV against SGD Holdings, Ltd., G. David Gordon
and David Covey. G. David Gordon is the brother of James G. Gordon and
David Covey is president of Tandori, Inc., a wholly owned subsidiary of
SGD. Plaintiffs, in their claim asserted against SGD, are seeking to
declare the one for six stock split, which occurred in September 1999,
void. If declared void, they claim they would presently own 75,000,000
shares of SGD common stock instead of 11,250,000 shares of SGD common
stock as currently reported by the Company. Presently Company Counsel
has not had adequate time to assess the merits of Plaintiffs' claim and
is therefore unable to determine a possible outcome or the extent of
the Company's liability, if any.
13
In March 2003, Con-Tex Silver Imports, Inc. filed a petition in the
District Court of Galveston County, Texas, Cause No. 03CV0316 against
Debbie King, the sister-in-law of James G. Gordon. Effective October
28, 2002, James G. Gordon, the former President of Silver entered into
a transaction with his sister-in-law whereby he sold the assets of one
of the retail locations of Silver for cash proceeds of $30,645. The
Company recorded a loss on the transaction of $51,015. In its claim,
Silver alleged conspiracy, unjust enrichment and that the sale of the
retail location is void because of unconscionability. Additionally,
Silver requested a return of profits received by Defendant. This action
is currently stayed due to Silver filing a Voluntary Petition for
Reorganization under Chapter 11 of Title 11 of the United States Code
on April 23, 2003. The Voluntary Petition for Reorganization under
Chapter 11 was converted to Chapter 7 on September 23, 2003.
On April 23, 2003, SGD's wholly owned subsidiary, Con-Tex Silver
Imports, Inc. filed a Voluntary Petition for Reorganization under
Chapter 11 of Title 11 of the United States Code in the United States
Bankruptcy Court for the Northern District of Texas, Fort Worth
Division, Case No. 03-43783-DML-11.
On May 2, 2003, Lakewood Development Corporation ("Lakewood"), a
stockholder, filed a petition in the District Court of Tarrant County,
Texas, Cause No. 96 198685 03 against SGD Holdings, Ltd. and James G.
Gordon, former President of SGD. Lakewood, in its claim asserted
against SGD and Gordon, alleged fraud in stock transactions under
Section 27.01 of the Texas Business and Commerce Code, violations of
the anti-fraud provisions of the Texas Securities Act and common law
fraud. In addition, Lakewood is alleging breach of fiduciary duty
against Gordon. Lakewood is seeking restitution of the $7,817,500 which
it invested in common stock based upon representations made by Gordon,
together with damages, expenses and interest. Presently, Company
counsel has not had adequate time to assess the merits of Lakewood's
claims and therefore is unable to determine a possible outcome or the
extent of the Company's liability, if any.
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 of the wholesale sales of
HMS.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased from $2,198,988 at July 31, 2003 to
$2,194,307 at October 31, 2003. The decrease in working capital of $4,681
consists of an increase in current assets of $1,263,264 less an increase in
current liabilities of $1,267,945. The major items of the increase in
current assets consisted of an increase in accounts receivable of
$1,106,316, an increase in inventory of $388,758 and a decrease in cash of
$314,778. The major increase in current liabilities was from an increase in
accounts payable of $1,150,059. The increase in accounts receivable and
accounts payable are seasonal increases due to pre-holiday sales.
The Company has a number of unresolved legal issues with one of its
Directors,James G. Gordon and will continue to have high legal costs, which
amounted to apporximately $70,000 during the quarter ended October 31,
2003, until these issues can be resolved. The Company anticipates that it
will be able to raise additional funds, as necessary, to fund these
lawsuits.
The Company is currently budgeting $90,000 for capital expenditures for the
remainder of fiscal 2003. The Company plans to use cash and existing credit
sources for the acquisitions.
HMS relies on a gold consignment program, short-term borrowings and
internally generated funds to finance its inventories and accounts
receivable. HMS fills most of its gold supply needs through a gold
consignment arrangement with a gold lender. Under the terms of that
arrangement, HMS is entitled to lease the lesser of an aggregate of 13,200
15
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 guarantees of
Harry Schmidt, President of HMS, and G. David Gordon. HMS pays the gold
lender a consignment fee based on the dollar value of ounces of gold
outstanding under their agreement, which value is based on the daily Second
London Gold Fix. HMS believes that its financing rate under the consignment
arrangement is substantially similar to the financing rates charged to gold
consignees similarly situated to HMS. As of October 31, 2003, HMS held
8,223 ounces of gold on consignment with a market value of $3,176,134.
The consignment agreement contains restrictive covenants relating to
maximum usage, net worth, working capital and other financial ratios and
the agreement requires HMS to own a specific amount of gold at all times.
The consignment agreement may be terminated by the gold lender upon 60 days
notice. If the gold lender were to terminate its existing gold consignment
arrangement, HMS does not believe it would experience an interruption of
its gold supply that would materially adversely affect its business. HMS
believes that other consignors would be willing to enter into similar
arrangements should its gold lender terminate its relationship with the
company.
Consigned gold is not included in inventory, and there is no related
liability recorded. As a result of these consignment arrangements, HMS is
able to shift a substantial portion of the risk of market fluctuations in
the price of gold to the gold lender, since HMS does not purchase gold from
the gold lender until receipt of a purchase order from, or shipment of
jewelry to, its customers.
While we believe our supply of gold is relatively secure, significant
increases or rapid fluctuations in the cost of gold may impact the demand
for our products. Fluctuations in the precious metals markets and credit
may result in an interruption of our gold supply or the credit arrangements
necessary to allow us to support our accounts receivable and continue the
use of consigned gold.
The gold lender has also provided a line of credit to HMS in the amount of
$1,500,000 that is due on demand, including interest at the lender's prime
rate plus 3/4%. HMS does not have any advances on this line of credit at
October 31, 2003.
RESULTS OF OPERATIONS
The Company's sales and cost of sales may be summarized as follows for the
three-month periods ended October 31, 2003 and 2002:
2003 2002
Sales and revenues $ 3,544,727 $ 3,994,956
Cost of sales .... 2,719,651 3,006,297
---------- ----------
Gross profit ..... $ 825,076 $ 988,659
========== ==========
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Total sales, principally gold sales, have decreased $450,229 (11.3%) during
the three month period ended October 31, 2003,as compared to the same prior
year period.
The Second London Gold Fix was $386.25 per ounce on October 31, 2003 as
compared to $354.75 per ounce on July 31, 2003, the beginning of the
current year quarter. The Second London Gold Fix was $316.55 per ounce on
October 31, 2002 as compared to $304.65 per ounce on July 31, 2002. Sales
volumes were down substantially during the current quarter, more than
countering the approximate 22% average increase in gold price. The decline
in volume sold is attributed to lower consumer spending due to the post-war
activity in Iraq and the general state of the economy. In addition, the
Company is currently in the second year of its catalog and sales have
generally been better during the initial year of a catalog.
Grossprofit has declined to 23.3% during the current year period from 24.7%
during the same prior year period. HMS has a fixed dollar amount of profit
for each ounce of gold sold. Accordingly, with the gold value increasing,
the gross profit percentage is a smaller percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE The following summarizes the
Company's selling, general and administrative expenses ("SGA") for the
three-month periods ended October 31, 2003 and 2002:
2003 2002
Gold .............. $ 617,304 $ 617,705
Corporate and other 157,346 39,529
-------- --------
Total ........... $ 774,650 $ 657,234
======== ========
Gold's SGA for the quarter ended October 31,2003 did not vary from the year
earlier period. Corporate and other SGA increased $117,817 during the
quarter ended October, 31, 2003 as compared to the year earlier period.
Approximately $50,000 of the increase is attributed to salaries and
$ 46,000 is primarily legal services related to the litigation with
James G. Gordon.
INTEREST EXPENSE AND GOLD CONSIGNMENT FEE - Related party interest expense
increased $19,350 to $43,350 during the quarter ended October 31, 2003, as
compared to the year earlier period. Interest expense decreased $13,515
during the quarter ended October 31, 2003, as compared to the year earlier
period. The increase in related party interest expense includes
amortization of a guaranty fee in the amount of $18,750. The balance of the
increase is due to the addition of $30,000 in additional related party debt
in the current year. The decrease in other interest expense is primarily
due to the prior year amount including $13,300 in amortization of loan
fees.
17
The gold consignment fee decreased $3,438 during the three month period
ended October 31, 2003, as compared to the prior year period.The decrease
is due to having lower balances on the gold consignment facility as a
result of a reduction in the number of ounces of gold on consignment. At
October 31,2003 HMS had 8,223 ounces of gold on consignment with a related
consignment obligation of 3,176,134 ($386.25 per ounce). At October 31,
2002 HMS had 11,857 ounces of gold on consignment with a related
consignment obligation of $3,753,333 ($316.55 per ounce). Accordingly, the
decrease is a result of the 31% decrease in the quantity of gold on
consignment offset by the 22% increase in the price of gold.
INTEREST AND OTHER INCOME - Interest and other income of the Company
increased during the three month period ended October 31,2003 from the same
year earlier period.
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 have been classified as trading securities. During the three month
period ended October 31, 2002 the Company recognized an unrealized loss of
$4,371.
INCOME TAXES - The Company recorded an income tax benefit of $5,900 during
the three month period ended October 31, 2003 and a provision for income
taxes in the amount of $82,000 during the three month period ended
October 31, 2002.
DISCONTINUED OPERATIONS - The Company recognized a loss of $162,114,
including an income tax benefit of $83,700, during the three months ended
October 31,2002 from its discontinued operations.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
reports that are filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
the reports that are filed under the Exchange Act is accumulated and
communicated to management, including the principal executive officer, as
appropriate to allow timely decisions regarding required disclosure. Under
the supervision of and with the participation of management, including the
principal executive officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures as of
October 31, 2003, and, based on its evaluation, our principal executive
officer has concluded that these controls and procedures are effective.
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(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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 13, 2002, SGD filed a petition against James G. "Greg" Gordon
("Gordon") in the 342nd District Court, Tarrant County, Texas alleging
breach of fiduciary duty, conversion of corporate funds and
misappropriation of corporate funds. SGD alleged that Gordon, who was
President of SGD from June 10, 1999 until November 25, 2002, wrongfully and
without authority or approval, transferred approximately $2.7 million from
two separate SGD bank accounts into an account or accounts held by Silver.
Thereafter, Gordon utilized a portion of SGD's funds for his and his
family's personal use and enjoyment, his personal financial gain and for
unauthorized transactions on Silver's behalf. SGD was seeking to recover
its damages, which were in excess of $2.7 million, costs of court and
pre-judgment interest, as allowed by law. SGD dismissed its claim against
Gordon as it determined the cost would exceed any benefit and the funds it
saved could be used to pay creditors of the Company; however the Company
still maintains the right to re-file the lawsuit against Gordon.
On January 3, 2003, James G. Gordon and Lisa K. Gordon ("Plaintiffs") filed
a petition in the District Court of Montgomery County, Texas, Cause No.
03-01-00006-CV against SGD Holdings, Ltd., G. David Gordon and David Covey.
G. David Gordon is the brother of James G. Gordon and David Covey is
president of Tandori, Inc., a wholly owned subsidiary of SGD. Plaintiffs,
in their claim asserted against SGD, are seeking to declare the one for six
stock split, which occurred in September 1999, void. If declared void, they
claim they would presently own 75,000,000 shares of SGD common stock
instead of 11,250,000 shares of SGD common stock as currently reported by
the Company. Presently Company Counsel has not had adequate time to assess
the merits of Plaintiffs' claim and is therefore unable to determine a
possible outcome or the extent of the Company's liability, if any.
In March 2003, Con-Tex Silver Imports, Inc. filed a petition in the
District Court of Galveston County, Texas, Cause No. 03CV0316 against
Debbie King, the sister-in-law of James G. Gordon. Effective October 28,
2002, James G. Gordon, the former President of Silver entered into a
transaction with his sister-in-law whereby he sold the assets of one of the
19
retail locations of Silver for cash proceeds of $30,645. The Company
recorded a loss on the transaction of $51,015. In its claim, Silver alleged
conspiracy, unjust enrichment and that the sale of the retail location is
void because of unconscionability. Additionally, Silver requested a return
of profits received by Defendant. This action is currently stayed due to
Silver filing a Voluntary Petition for Reorganization under Chapter 11 of
Title 11 of the United States Code on April 23, 2003. The Voluntary
Petition for Reorganization under Chapter 11 was converted to Chapter 7 on
September 23, 2003.
On April 23, 2003, SGD's wholly owned subsidiary, Con-Tex Silver Imports,
Inc. filed a Voluntary Petition for Reorganization under Chapter 11 of
Title 11 of the United States Code in the United States Bankruptcy Court
for the Northern District of Texas, Fort Worth Division, Case No.
03-43783-DML-11.
On May 2, 2003, Lakewood Development Corporation ("Lakewood"), a
stockholder, filed a petition in the District Court of Tarrant County,
Texas, Cause No. 96 198685 03 against SGD Holdings, Ltd. and James G.
Gordon, former President of SGD. Lakewood, in its claim asserted against
SGD and Gordon, alleged fraud in stock transactions under Section 27.01 of
the Texas Business and Commerce Code, violations of the anti-fraud
provisions of the Texas Securities Act and common law fraud. In addition,
Lakewood is alleging breach of fiduciary duty against Gordon. Lakewood is
seeking restitution of the $7,817,500 which it invested in common stock
based upon representations made by Gordon, together with damages, expenses
and interest. Presently, Company counsel has not had adequate time to
assess the merits of Lakewood's claims and therefore is unable to determine
a possible outcome or the extent of the Company's liability, if any.
ITEM 5. OTHER INFORMATION
Although the Company does not currently employ a Chief Financial Officer,
Terry Washburn, President and Acting CEO, is also the principal accouting
officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
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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 12, 2003 By: /s/ Terry Washburn
-----------------------------------
Terry Washburn, President, Acting CEO
and Principal Accounting Officer
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Exhibit 31
SGD HOLDINGS, LTD. FORM 10-QSB FOR THE QUARTER ENDED OCTOBER 31, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Terry Washburn, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SGD Holdings, Ltd.
(the registrant);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a 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 of, 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-15(e) and 15d-15(e)) for
the registrant and have;
a)designed such disclosure controls and procedures,or caused such disclosure
controls and procedures to be designed under my supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities,
particularly during the period in which this report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report my conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
, the period covered by this report based on such evaluation; and
c)disclosed in this report any change in the registrant's
internal controls over financial reporting that occurred
during the registrant's current fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and;
5. I have disclosed, based on my most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a)all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
/s/ Terry Washburn
------------------
Terry Washburn
President and Acting CEO
(and equivalent of CFO)
December 12, 2003
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Exhibit 32
SGD HOLDINGS, LTD. FORM 10-QSB FOR THE QUARTER ENDED OCTOBER 31, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Terry Washburn, certify that
1. I am the President and Acting chief executive officer of SGD Holdings, Ltd.
2. Attached to this certification is Form 10-QSB for the quarter ended October
31, 2003, a periodic report (the "periodic report") filed by the issuer
with the Securities Exchange Commission pursuant to Section 13(a) or 15(d)
of the Securities and Exchange Act of 1934 (the "Exchange Act"), which
contains financial statements.
3. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o The periodic report containing the financial statements fully
complies with the requirements of Section 13(a) or 15(d) of the Exchange
Act, and
o The information in the periodic report fairly presents, in all
material respects, the financial condition and results of
operations of the issuer for the periods presented.
December 12, 2003 /s/ Terry Washburn
--------------------------
Terry Washburn
President and Acting CEO
(and equivalent of CFO)
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by SGD Holdings, Ltd. and furnished
to the Securities and Exchange Commission or its staff upon request.
This certification will not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to the liability of that
section. This certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Securities Exchange Act
of 1934 even if the document with which it is submitted to the Securities and
Exchange Commission is so incorporated by reference.
23