10QSB 1 sgd_10q-013104.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: JANUARY 31, 2004 Commission File Number: 0-29671 SGD HOLDINGS, LTD. (Exact name of small business issuer as specified in its charter) DELAWARE 13-3986493 (State of Incorporation) (IRS Employer ID No) 4385 SUNBELT DRIVE, ADDISON, TEXAS 75001 (Address of principal executive office) (972) 248-0266 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. The number of shares outstanding of registrant's common stock, par value $.0001 per share, as of January 31, 2004 was 43,026,823. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]. SGD HOLDINGS, LTD. AND SUBSIDIARIES Form 10-QSB Index Page No. Part I. Unaudited Financial Information Item 1. Condensed Consolidated Balance Sheet - January 31, 2004 3 Condensed Consolidated Statements of Operations - Three Months Ended January 31, 2004 and 2003 4 Condensed Consolidated Statements of Operations - Six Months Ended January 31, 2004 and 2003 5 Condensed Consolidated Statements of Cash Flows - Six Months Ended January 31, 2004 and 2003 6 Notes to Condensed Consolidated Financial Statements - Six Months Ended January 31, 2004 and 2003 7-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-21 Item 3. Controls and Procedures 21 Part II. Other Information 22-26 2 SGD HOLDINGS, LTD. AND SUBSIDIARIES Condensed Consolidated Balance Sheet January 31, 2004 (Unaudited) ASSETS: Current assets: Cash and cash equivalents $ 1,177,219 Trade accounts receivable, net of allowance of $61,752 1,471,060 Marketable equity securities 14,143 Inventory 2,662,311 Due from related parties 59,804 Deferred income taxes 164,500 Prepaid expenses and other assets 319,097 ------------ Total current assets 5,868,134 Property and equipment, net 249,303 Goodwill, net 3,490,612 Marketable equity securities 10,650 Other assets 27,800 ------------ Total assets $ 9,646,499 ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Note payable $ 835,000 Notes payable - related parties 1,350,488 Accounts payable 1,180,305 Accrued expenses 23,718 Due to related parties 174,000 ------------ Total current liabilities 3,563,511 Deferred income taxes payable 11,800 ------------ Total liabilities 3,575,311 ------------ Commitments and contingencies Stockholders' equity: Common stock, $.0001 par value; 200,000,000 shares authorized; 43,026,823 shares issued and outstanding 4,303 Additional paid-in capital 9,877,799 Accumulated deficit (3,534,514) Accumulated other comprehensive loss (276,400) ------------ Total stockholders' equity 6,071,188 ------------ Total liabilities and stockholders' equity $ 9,646,499 ============ See accompanying notes to condensed consolidated financial statements. 3 SGD HOLDINGS, LTD. AND SUBSIDIARIES Condensed Consolidated Statements of Operations Three Months Ended January 31, 2004 and 2003 (Unaudited)
2004 2003 Sales and revenues $ 4,209,979 $ 4,648,559 Cost of sales 3,125,049 3,452,521 ------------ ------------ Gross profit 1,084,930 1,196,038 Selling, general and administrative expense 878,731 818,066 ------------ ------------ Earnings from operations 206,199 377,972 Other income (expense): Unrealized gain (loss) on marketable securities 19,540 (1,093) Loss on sale of marketable securities (22,033) -- Interest expense (13,374) (25,438) Interest expense - related parties (46,850) (26,000) Gold consignment fee (35,441) (52,095) Interest and other income (expense) 12,090 (876) ------------ ------------ Total other income (expense) (86,068) (105,502) ------------ ------------ Earnings from continuing operations before income taxes 120,131 272,470 Income tax expense 42,600 93,300 ------------ ------------ Earnings from continuing operations 77,531 179,170 ------------ ------------ Discontinued operations: Loss from operation of discontinued operations -- (310,794) Income tax benefit -- (103,900) ------------ ------------ Loss on discontinued operations -- (206,894) ------------ ------------ Net earnings (loss) $ 77,531 $ (27,724) ============ ============ Basic and diluted earnings (loss) per share: Continuing operations $ 0.00 $ 0.01 Discontinued operations -- (0.01) ------------ ------------ Net earnings (loss) per share $ 0.00 $ (0.00) ============ ============ Weighted average shares outstanding (thousands) 36,486.5 28,722.6 ============ ============ See accompanying notes to condensed consolidated financial statements. 4
SGD HOLDINGS, LTD. AND SUBSIDIARIES Condensed Consolidated Statements of Operations Six Months Ended January 31, 2004 and 2003 (Unaudited)
2004 2003 Sales and revenues $ 7,754,707 $ 8,643,515 Cost of sales 5,844,700 6,458,819 ------------ ------------ Gross profit 1,910,007 2,184,696 Selling, general and administrative expense 1,653,381 1,475,300 ------------ ------------ Earnings from operations 256,626 709,396 Other income (expense): Unrealized gain (loss) on marketable securities 39,210 (5,464) Loss on sale of marketable securities (22,033) -- Interest expense (25,481) (51,060) Interest expense - related parties (92,200) (52,000) Gold consignment fee (70,802) (90,895) Interest and other income 14,975 1,238 ------------ ------------ Total other income (expense) (156,331) (198,181) ------------ ------------ Earnings from continuing operations before income taxes 100,295 511,215 Income tax expense 36,700 175,300 ------------ ------------ Earnings from continuing operations 63,595 335,915 ------------ ------------ Discontinued operations: Loss from operation of discontinued operations -- (556,605) Income tax benefit -- (187,600) ------------ ------------ Loss on discontinued operations -- (369,005) ------------ ------------ Net earnings (loss) $ 63,595 $ (33,090) ============ ============ Basic and diluted earnings (loss) per share: Continuing operations $ 0.00 $ 0.01 Discontinued operations -- (0.01) ------------ ------------ Net earnings (loss) per share $ 0.00 $ (0.00) ============ ============ Weighted average shares outstanding (thousands) 36,376.3 28,194.3 ============ ============ See accompanying notes to condensed consolidated financial statements. 5
SGD HOLDINGS, LTD. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Six Months Ended January 31, 2004 and 2003 (Unaudited)
2004 2003 Cash flows provided (used) by operating activities: Net earnings (loss) $ 63,595 $ (33,090) Loss from discontinued operations -- 369,005 ------------ ------------ Earnings from continuing operations 63,595 335,915 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 37,999 33,463 Deferred income taxes 36,700 175,300 Unrealized (gain) loss on marketable securities (39,210) 5,464 Proceeds from sale of marketable securities 11,547 -- Loss on sale of marketable securities 22,033 -- Common stock issued for services -- 50,000 Changes in assets and liabilities: Accounts receivable (307,372) (927,670) Inventory (461,491) (381,321) Other assets 31,937 40,998 Accounts payable and accrued expenses 940,416 294,527 ------------ ------------ Net cash provided (used) by continuing operations 336,154 (373,324) Net cash used in discontinued operations -- (291,341) ------------ ------------ Net cash provided (used) by operations 336,154 (664,665) ------------ ------------ Cash flows used by investing activities: Capital expenditures (57,763) (39,040) ------------ ------------ Net cash used by continuing operations (57,763) (39,040) Net cash used by discontinued operations -- (4,464) ------------ ------------ Net cash used by investing activities (57,763) (43,504) ------------ ------------ Cash flows provided by financing activities: Loan proceeds, related party -- 30,000 Funds transferred to discontinued operations -- (3,596) Repayment of long-term debt and notes payable -- (12,876) ------------ ------------ Net cash from continuing operations -- 13,528 Net cash from discontinued operations -- 295,806 ------------ ------------ Net cash provided by financing activities -- 309,334 ------------ ------------ Net increase (decrease) in cash and cash equivalents 278,391 (398,835) Cash and cash equivalents, beginning of period 898,828 1,156,355 ------------ ------------ Cash and cash equivalents, end of period $ 1,177,219 $ 757,520 ============ ============ See accompanying notes to condensed consolidated financial statements. 6
SGD HOLDINGS, LTD. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JANUARY 31, 2004 AND 2003 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION AND PRESENTATION The condensed consolidated financial statements include the accounts of SGD Holdings, Ltd. ("SGD") and its wholly owned subsidiaries HMS Jewelry Company, Inc. ("HMS"), Jewelry Solutions & Commerce, Inc. ("Jewelry"), Tandori, Inc. ("Tandori"), Con-Tex Silver Imports, Inc. ("Silver") and Rings N' Things, LLC ("Rings"), the 80% owned subsidiary of Jewelry, (collectively referred to as the "Company"). Tandori and Silver are inactive. All material intercompany accounts and transactions have been eliminated. (B) ORGANIZATION SGD was incorporated on May 22, 1996 in Delaware as Transun International Airways, Inc. and until June 1999 was a development stage company with plans to establish itself as an air transport company providing non-scheduled air service (charter flights) for tour operators, charter brokers, cruise line casinos, theme parks and theme attractions. Transun International Airways, Inc. changed its name to Goldonline International, Inc. on June 10, 1999. Goldonline International, Inc. changed its name to SGD Holdings, Ltd. on January 24, 2001. On April 20, 2000, pursuant to an agreement and plan of reorganization dated April 11, 2000, SGD acquired 100% of the issued and outstanding common stock of Benton Ventures, Inc. ("Benton"), a Delaware corporation, in exchange for 1,200,000 newly issued common shares of SGD. On April 25, 2000, the Board of Directors of SGD elected to merge Benton into SGD pursuant to Section 253 of Delaware's General Corporate Laws. As a result of the merger, SGD became the surviving company and assumed the reporting responsibilities under successor issuer status as more fully detailed in Section 12(g)(3) of The Securities Exchange Act of 1934. Benton was a dormant company and its assets and liabilities were insignificant. HMS was incorporated on October 12, 2000 in Texas. Tandori was incorporated on November 9, 1998 in Nevada. Jewelry was incorporated on February 3, 1999 in Delaware. Rings was incorporated on September 2, 2003 in Nevada. 7 On June 10, 1999, SGD acquired all of the issued and outstanding common stock of Con-Tex Silver Imports, Inc. ("Silver") and Jewelry. For accounting purposes, the acquisitions were treated as the acquisition of Silver and Jewelry by SGD with Silver as the acquiror (reverse acquisition). The historical financial amounts prior to June 10, 1999 is that of Silver. Effective October 1, 2000, SGD completed the acquisition of HMS Jewelry Co., Ltd., a Texas limited partnership, and HMS Operating Company, a Texas corporation, and transferred the assets acquired and liabilities assumed into HMS Jewelry Company, Inc. For accounting purposes, the acquisition was treated as a purchase. Effective September 1, 2001, SGD completed the acquisition of Tandori, Inc. in a transaction treated as a purchase for accounting purposes. (C) DISCONTINUED OPERATIONS The operations of Silver and Tandori were discontinued at the end of July 2003, see Note 2. (D) NATURE OF BUSINESS SGD is a holding company principally engaged in acquiring and developing jewelry businesses. HMS is primarily involved in the wholesale gold jewelry business. Jewelry is evaluating its e-commerce site and Jewelry and Rings are operating three small retail locations. (E) GENERAL The condensed consolidated financial statements included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation. These condensed consolidated financial statements have not been audited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. However, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report for the year ended July 31, 2003, which is included in the Company's Form 10-KSB dated July 31, 2003 and filed November 13, 2003. The financial data for the interim periods presented may not necessarily reflect the results to be anticipated for the complete year. Certain reclassifications of the amounts presented for the comparative period have been made to conform to the current presentation. 8 (F) STOCK OPTIONS AND WARRANTS The Company accounts for stock-based awards to employees using the intrinsic value method described in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Accordingly, no compensation expense has been recognized in the accompanying condensed consolidated financial statements for stock-based awards to employees when the exercise price of the award is equal to or greater than the quoted market price of the stock on the date of the grant. As of January 31, 2004, the Company had options outstanding to its three current directors and one former director, which vested on May 31, 2001, for 100,000 shares each. No options have been granted since that date. Accordingly, there is no pro forma disclosure for the current period. SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" require disclosures as if the Company had applied the fair value method to employee awards rather than the intrinsic value method. The fair value of stock-based awards to employees is calculated through the use of option pricing models, which were developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. 2. DISCONTINUED OPERATIONS (a) On April 23, 2003, Silver filed a Voluntary Petition for Reorganization under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division, Case No. 03-43783-DML-11. During the week ended July 25, 2003, management of the Company determined to cease operations of Silver. Accordingly, in SGD's next scheduled Board of Director's meeting, on August 7, 2003, the Board voted to convert the Chapter 11 case to Chapter 7 and all operations of Silver were immediately discontinued. The Voluntary Petition for Reorganization under Chapter 11 was converted to Chapter 7 on September 23, 2003. The operations of Silver have been included in discontinued operations for the periods presented. 9 Silver was involved in both the wholesale and retail jewelry business, principally silver, with retail locations in Texas. The wholesale operation of Silver consisted of sales directly from its headquarters in Conroe, Texas, sales from a Dallas location and sales from jewelry shows at locations throughout the south central United States. Silver had sales of $560,391 and $1,119,211 during the three-month and six-month periods ended January 31, 2003, respectively. (b) On July 17, 2003, the Company received an offer to acquire the assets and business of Tandori, effective July 31, 2003, in exchange for assumption of liabilities, excluding payroll taxes. In addition, the buyer agreed to pay SGD up to 50% of any profits the buyer might make from the sale of Tandori's assets, up to $1,000,000, if the buyer should sell the assets to a third party within three years of the acquisition. The Company subsequently approved the offer and the operations have been included in discontinued operations for the periods presented. The purchaser was G. David Gordon and the former President of Tandori. Tandori operated under the LifeStyle Technologies(TM) name as a full service home technology integration company providing complete installation and equipment for structured wiring, home audio, home theater, home security, PC networking, central vacuum, accent lighting and other current technology applications. Tandori had sales of $787,479 and $1,886,622 during the three-month and six-month periods ended January 31, 2003, respectively. 3. RELATED PARTY TRANSACTIONS HMS leases its facility from HMS Leasing Company, LLC, at the rate of $8,075 per month pursuant to a lease agreement that expires on October 31, 2010. This obligation amounted to $48,450 during the six-month periods ended January 31, 2004 and 2003. HMS Leasing Company, LLC is owned by the president of HMS. HMS is a guarantor of the loan obligation of HMS Leasing Company, LLC on the facility, which has a balance of $519,000 at January 31, 2004. At January 31, 2004, the Company owed G. David Gordon, CEO of HMS, a shareholder and the brother of a Director, compensation in the amount of $150,000 at January 31, 2004, which is payable one-half in SGD common stock and one-half in cash. At January 31, 2004, the Company had made net advances of $9,254 to the president of HMS, including companies owned by him. See Note 7 for details of the $1,350,488 in note obligations to related parties. The Company has made net sales to Premier Concepts, Inc. ("Premier") of $64,221 during the six-month period ended January 31, 2003 and no sales during the current six-month period. The Company has net receivables from Premier at January 31, 2004 of $32,799. The Company owns 7.9% of the stock of Premier at January 31, 2004 and the Chief Executive Officer of Premier is the Acting CEO and a Director of the Company. On October 10, 2003 Premier filed a Voluntary Petition for Reorganization under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Central District of California, Los Angeles Division; Case No. LA 03-36445 BR. 10 Amounts due to related parties include $24,000 in accrued compensation due to Terry Washburn, Acting CEO of the Company. On January 28, 2004, the Company issued Mr. Washburn 1,500,000 common shares in exchange for $15,000 due him. On January 28, 2004, the Company issued 3,500,000 common shares to BJB Services, Inc., whose principal serves as controller for the Company, in exchange for $35,000 due for prior services. 4. MARKETABLE EQUITY SECURITIES The following summarizes the Company's investments in securities at January 31, 2004: Trading securities: Cost $ 60,000 Unrealized gain (loss) (45,857) ------------ Fair value $ 14,143 ============ Available-for-sale securities (Premier Concepts, Inc., a related party): Cost $ 429,550 Unrealized gain (loss) (418,900) ------------ Fair value $ 10,650 ============ The Company recognized an unrealized gain from trading securities in the amount of $19,540 and $39,210 during the three-month and six-month periods ended January 31, 2004, respectively. The Company recognized an unrealized loss from trading securities in the amount of $1,093 and $5,464 during the three-month and six-month periods ended January 31, 2003, respectively. Unrealized losses from available-for-sale securities, which are restricted under Rule 144 and which is included as a component of equity, as of January 31, 2004, were as follows: Unrealized losses $ (418,900) Deferred income taxes 142,500 ------------ Accumulated other comprehensive income (loss) $ (276,400) ============ 11 5. INVENTORIES AND GOLD CONSIGNMENT AGREEMENT Inventories at January 31, 2004 consist of: Inventory, principally gold jewelry $ 5,393,963 Less consigned gold (2,731,652) ------------ Net inventories $ 2,662,311 ============ HMS has a gold consignment agreement with a gold lender. Under the terms of the agreement, HMS is entitled to lease the lesser of an aggregate amount of 13,200 ounces, or an aggregate consigned gold value not to exceed $4,950,000 less any balance outstanding on its $1,500,000 line of credit. Title to such consigned gold remains with the gold lender until HMS purchases the gold. However, during the period of consignment, the entire risk of loss, damage or destruction of the gold is borne by HMS. The purchase price per ounce is based on the daily Second London Gold Fix. HMS pays the gold consignor a consignment fee based upon the dollar value of gold ounces outstanding, as defined in the agreement. At January 31, 2004, HMS had 6833.4 ounces of gold on consignment with a market value of $2,731,652 ($399.75 per ounce). Consigned gold is not included in inventory, and there is no related liability recorded. As a result of these consignment arrangements, HMS is able to shift a substantial portion of the risk of market fluctuations in the price of gold to the gold lender, since HMS does not purchase gold from the gold lender until receipt of a purchase order from, or shipment of jewelry to, its customers. The gold lender has also provided a line of credit to HMS in the amount of $1,500,000 that is due on demand, including interest at the lender's prime rate plus 3/4%. HMS does not have any advances on this line of credit at January 31, 2004. Payment for the consigned gold and the line of credit is secured by substantially all property of HMS including its cash, accounts receivable, inventory and equipment, the personal guaranty of the President of HMS, the personal guaranty of G. David Gordon and the corporate guaranty of SGD. The consignment agreement may be terminated by the gold lender upon 60 days notice. If the gold lender were to terminate its existing gold consignment agreement, HMS does not believe it would experience an interruption of its gold supply that would materially adversely affect its business. HMS believes that other consignors would be willing to enter into similar arrangements should its gold lender terminate its relationship with the company. The consignment agreement contains certain restrictive covenants relating to maximum usage, net worth, working capital, and other financial ratios, and the agreement requires HMS to own a specific amount of gold at all times. 12 HMS is currently negotiating with its gold lender to increase the size of the consignment facility and to modify certain terms and conditions of the current agreement. 6. NOTE PAYABLE The Company has a note payable to a company in the amount of $835,000 which has been extended to July 31, 2004. The extended note has interest payable monthly at 5.8% and is convertible into common stock at the lesser of $.015 per share or the market price, limited to 9.9% of the total outstanding shares of the Company at the time of conversion. All of the issued and outstanding common stock of HMS is collateral on the note, in second position behind the collateral position of the note due the president of HMS. In the event of default on any of the loans secured by the HMS common stock, the lender has the option to purchase HMS for $5,000,000. On January 28, 2004, the Company issued 250,000 shares of its common stock as a loan extension fee and issued 1,210,746 shares of its common stock for $12,107 in accrued interest. 7. NOTES PAYABLE DUE RELATED PARTIES Notes payable due related parties consists of the following at January 31, 2004: Note payable to the president of HMS, due on July 31, 2004; interest payable monthly at 8%; collateralized by the common stock of HMS; convertible into common stock of the Company at $.01 per share, limited to 9.9% of the total outstanding shares of the Company at the time; with anti-dilution rights $ 1,250,000 Note payable to G. David Gordon, CEO of HMS, a shareholder and the brother of a Director of the Company; due on July 31, 2004 with interest at 6% payable monthly; collateralized by the common stock of HMS in third position behind the other notes above; all principal and accrued interest convertible into common stock of the Company at $.01 per share; and all shares have anti-dilution rights 100,488 ------------ Total notes payable due related parties $ 1,350,488 ============ The Company issued the president of HMS 300,000 shares of its common stock as a loan extension fee on January 28, 2004. 13 8. SEGMENT INFORMATION The Company reports segments based upon the management approach, which designates the internal reporting that is used by management for making operating decisions and assessing performance. With the disposition of Silver and Tandori, continuing operations currently includes only one segment, the wholesale gold operations of HMS. 9. LEGAL MATTERS On December 13, 2002, SGD filed a petition against James G. "Greg" Gordon ("Gordon") in the 342nd District Court, Tarrant County, Texas alleging breach of fiduciary duty, conversion of corporate funds and misappropriation of corporate funds. SGD alleged that Gordon, who was President of SGD from June 10, 1999 until November 25, 2002, wrongfully and without authority or approval, transferred approximately $2.7 million from two separate SGD bank accounts into an account or accounts held by Silver. Thereafter, Gordon utilized a portion of SGD's funds for his and his family's personal use and enjoyment, his personal financial gain and for unauthorized transactions on Silver's behalf. SGD was seeking to recover its damages, which were in excess of $2.7 million, costs of court and pre-judgment interest, as allowed by law. SGD dismissed its claim against Gordon as it determined the cost would exceed any benefit and the funds it saved could be used to pay creditors of the Company; however the Company still maintains the right to re-file the lawsuit against Gordon. On January 3, 2003, James G. Gordon and Lisa K. Gordon ("Plaintiffs") filed a petition in the District Court of Montgomery County, Texas, Cause No. 03-01-00006-CV against SGD Holdings, Ltd., G. David Gordon and David Covey. G. David Gordon is the brother of James G. Gordon and David Covey is the former president of Tandori, Inc., a wholly owned subsidiary of SGD. Plaintiffs, in their claim asserted against SGD, are seeking to declare the one for six stock split, which occurred in September 1999, void. If declared void, they claim they would presently own 75,000,000 shares of SGD common stock instead of 11,250,000 shares of SGD common stock as currently reported by the Company. Presently Company Counsel has not had adequate time to assess the merits of Plaintiffs' claim and is therefore unable to determine a possible outcome or the extent of the Company's liability, if any. In March 2003, Con-Tex Silver Imports, Inc. filed a petition in the District Court of Galveston County, Texas, Cause No. 03CV0316 against Debbie King, the sister-in-law of James G. Gordon. Effective October 28, 2002, James G. Gordon, the former President of Silver entered into a transaction with his sister-in-law whereby he sold the assets of one of the retail locations of Silver for cash proceeds of $30,645. The Company recorded a loss on the transaction of $51,015. In its claim, Silver alleged conspiracy, unjust enrichment and that the sale of the retail location is void because of unconscionability. Additionally, Silver requested a return of profits received by Defendant. This action is currently stayed due to Silver filing a Voluntary Petition for Reorganization under Chapter 11 of Title 11 of the United States Code on April 23, 2003. The Voluntary Petition for Reorganization under Chapter 11 was converted to Chapter 7 on September 23, 2003. 14 On April 23, 2003, SGD's wholly owned subsidiary, Con-Tex Silver Imports, Inc. filed a Voluntary Petition for Reorganization under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division, Case No. 03-43783-DML-11 and on September 23, 2003 the Voluntary Petition was converted to Chapter 7. On May 2, 2003, Lakewood Development Corporation ("Lakewood"), a stockholder, filed a petition in the District Court of Tarrant County, Texas, Cause No. 96 198685 03 against SGD Holdings, Ltd. and James G. Gordon, former President of SGD. Lakewood, in its claim asserted against SGD and Gordon, alleged fraud in stock transactions under Section 27.01 of the Texas Business and Commerce Code, violations of the anti-fraud provisions of the Texas Securities Act and common law fraud. In addition, Lakewood is alleging breach of fiduciary duty against Gordon. Lakewood is seeking restitution of the $7,817,500 which it invested in common stock based upon representations made by Gordon, together with damages, expenses and interest. Presently, Company counsel has not had adequate time to assess the merits of Lakewood's claims and therefore is unable to determine a possible outcome or the extent of the Company's liability, if any. 10. COMMITMENTS In addition to the HMS lease discussed in Note 3, the Company has two non-cancelable operating leases. Future minimum lease payments amount to $65,058 for the balance of fiscal 2004, $88,116 for fiscal 2005 and $38,430 for fiscal 2006. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS From time to time, the Company may publish forward-looking statements relative to such matters as anticipated financial performance, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. All statements other than statements of historical fact included in this section or elsewhere in this report are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include: 1. General economic factors including, but not limited to, changes in interest rates, trends in disposable income; 2. Information and technological advances; 3. Cost of products sold; 4. Competition; 5. Legal issues; and 6. Success of marketing, advertising and promotional campaigns. The continuing operations of the Company consist primarily of the wholesale sales of HMS. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital increased from $2,198,988 at July 31, 2003 to $2,304,623 at January 31, 2004. The increase in working capital of $105,635 consists of an increase in current assets of $1,014,205 less an increase in current liabilities of $908,570. The major items of the increase in current assets consisted of an increase in accounts receivable of $307,371, an increase in inventory of $461,492 and an increase in cash of $278,391. The major increase in current liabilities was from an increase in accounts payable of $818,962. The increase in accounts receivable, inventory and accounts payable are primarily the result of seasonal increases due to holiday sales. The Company has a number of unresolved legal issues with one of its Directors, James G. Gordon and will continue to have high legal costs, which amounted to approximately $60,000 during the six months ended January 31, 2004, until these issues can be resolved. The Company anticipates that it will be able to raise additional funds, as necessary, to fund these lawsuits. The Company is currently budgeting $40,000 for capital expenditures for the remainder of fiscal 2004. The Company plans to use cash and existing credit sources for the acquisitions. HMS relies on a gold consignment program, short-term borrowings and internally generated funds to finance its inventories and accounts receivable. HMS fills most of its gold supply needs through a gold consignment arrangement with a gold lender. Under the terms of that arrangement, HMS is entitled to lease the lesser of an aggregate of 13,200 ounces of fine gold or an aggregate consigned gold value not to exceed $4,950,000, reduced by any outstanding balance on its $1,500,000 line of credit. The consigned gold is secured by substantially all property of HMS, including its cash, accounts receivable, inventory and machinery and equipment, the corporate guaranty of SGD and the individual guaranty's of Harry Schmidt, President of HMS, and G. David Gordon. HMS pays the gold lender a consignment fee based on the dollar value of ounces of gold outstanding under their agreement, which value is based on the daily Second London Gold Fix. HMS believes that its financing rate under the consignment arrangement is substantially similar to the financing rates charged to gold consignees similarly situated to HMS. As of January 31, 2004, HMS held 6,833.4 ounces of gold on consignment with a market value of $2,731,652. 16 The consignment agreement contains restrictive covenants relating to maximum usage, net worth, working capital and other financial ratios and the agreement requires HMS to own a specific amount of gold at all times. The consignment agreement may be terminated by the gold lender upon 60 days notice. If the gold lender were to terminate its existing gold consignment arrangement, HMS does not believe it would experience an interruption of its gold supply that would materially adversely affect its business. HMS believes that other consignors would be willing to enter into similar arrangements should its gold lender terminate its relationship with the company. Consigned gold is not included in inventory, and there is no related liability recorded. As a result of these consignment arrangements, HMS is able to shift a substantial portion of the risk of market fluctuations in the price of gold to the gold lender, since HMS does not purchase gold from the gold lender until receipt of a purchase order from, or shipment of jewelry to, its customers. While we believe our supply of gold is relatively secure, significant increases or rapid fluctuations in the cost of gold may impact the demand for our products. Fluctuations in the precious metals markets and credit may result in an interruption of our gold supply or the credit arrangements necessary to allow us to support our accounts receivable and continue the use of consigned gold. The gold lender has also provided a line of credit to HMS in the amount of $1,500,000 that is due on demand, including interest at the lender's prime rate plus 3/4%. HMS does not have any advances on this line of credit at January 31, 2004. 17 RESULTS OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 2004 AND 2003 SALES AND COST OF SALES - The Company's sales and cost of sales may be summarized as follows for the three-month periods ended January 31, 2004 and 2003: 2004 2003 Sales and revenues $ 4,209,979 $ 4,648,559 Cost of sales 3,125,049 3,452,521 ------------- ------------- Gross profit $ 1,084,930 $ 1,196,038 ============= ============= Total sales, principally gold sales, have decreased $438,580 (9.4%) during the three month period ended January 31, 2004, as compared to the same prior year period. The Second London Gold Fix was $399.75 per ounce on January 31, 2004 and $386.25 per ounce on October 31, 2003, the beginning of the current year quarter. The Second London Gold Fix was $367.50 per ounce on January 31, 2003 and $316.55 per ounce on October 31, 2002. Sales volumes were down substantially during the current quarter, more than countering the approximate 15% average increase in gold price. The decline in volume sold is attributed to lower consumer spending due to the general state of the economy. In addition, the Company is currently in the second year of its catalog and sales have generally been better during the initial year of a catalog. Gross profit has increased to 25.8% during the current year period from 25.7% during the same prior year period. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The following summarizes the Company's selling, general and administrative expenses ("SGA") for the three-month periods ended January 31, 2004 and 2003: 2004 2003 HMS $ 677,160 $ 698,987 Jewelry and Rings 135,546 1,176 Corporate and other 66,025 117,903 ------------- ------------- Total $ 878,731 $ 818,066 ============= ============= HMS's SGA for the quarter ended January 31, 2004 decreased 3.1% from the year earlier period. Jewelry and Rings SGA commenced during the current quarter and represents the SGA associated with their retail operations. Corporate SGA decreased $51,878 during the quarter ended January 31, 2004 as compared to the year earlier period. The prior year corporate SGA includes a $50,000 charge for a settlement with G. David Gordon. 18 INTEREST EXPENSE AND GOLD CONSIGNMENT FEE - Related party interest expense increased $20,850 to $46,850 during the quarter ended January 31, 2004, as compared to the year earlier period. Interest expense decreased $12,064 during the quarter ended January 31, 2004, as compared to the year earlier period. The increase in related party interest expense includes amortization of a guaranty fee in the amount of $18,750. The balance of the increase is due to the addition of $30,000 in additional related party debt in the current year. The decrease in other interest expense is primarily due to the prior year amount including $13,300 in amortization of loan fees. The gold consignment fee decreased $16,654 during the three month period ended January 31, 2004, as compared to the prior year period. The decrease is due to having lower balances on the gold consignment facility as a result of a reduction in the number of ounces of gold on consignment. At January 31, 2004 HMS had 6,833.4 ounces of gold on consignment with a related consignment obligation of $2,731,652 ($399.75 per ounce). At January 31, 2003 HMS had 11,907 ounces of gold on consignment with a related consignment obligation of $4,375,823 ($367.50 per ounce). Accordingly, the decrease is a result of the 43% decrease in the quantity of gold on consignment offset by the 9% increase in the price of gold. UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES - The Company recognized an unrealized gain in the amount of $19,540 during the three month period ended January 31, 2004, from its investment in marketable equity securities that have been classified as trading securities. During the three month period ended January 31, 2003 the Company recognized an unrealized loss of $1,093. INCOME TAXES - The Company recorded an income tax provision of $42,600 during the three month period ended January 31, 2004 and a provision for income taxes in the amount of $93,300 during the three month period ended January 31, 2003. DISCONTINUED OPERATIONS - The Company recognized a loss of $206,894, including an income tax benefit of $103,900, during the three months ended January 31, 2003 from its discontinued operations. 19 SIX MONTHS ENDED JANUARY 31, 2004 AND 2003 SALES AND COST OF SALES - The Company's sales and cost of sales may be summarized as follows for the six-month periods ended January 31, 2004 and 2003: 2004 2003 Sales and revenues $ 7,754,707 $ 8,643,515 Cost of sales 5,844,700 6,458,819 ------------- ------------- Gross profit $ 1,910,007 $ 2,184,696 ============= ============= Total sales, principally gold sales, have decreased $888,808 (10.3%) during the six-month period ended January 31, 2004, as compared to the same prior year period. The Second London Gold Fix was $399.75 per ounce on January 31, 2004 as compared to $354.75 per ounce on July 31, 2003, the beginning of the current year period. The Second London Gold Fix was $367.50 per ounce on January 31, 2003 as compared to $304.65 per ounce on July 31, 2002. Sales volumes were down substantially during the current year period, more than countering the approximate 12% average increase in gold price. The decline in volume sold is attributed to lower consumer spending due to the general state of the economy. In addition, the Company is currently in the second year of its catalog and sales have generally been better during the initial year of a catalog. Gross profit has declined to 24.6% during the current year period from 25.3% during the same prior year period. HMS has a fixed dollar amount of profit for each ounce of gold sold. Accordingly, with the gold value increasing, the gross profit percentage is a smaller percentage of sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The following summarizes the Company's selling, general and administrative expenses ("SGA") for the six-month periods ended January 31, 2004 and 2003: 2004 2003 HMS $ 1,294,464 $ 1,316,693 Jewelry and Rings 163,409 2,279 Corporate 195,508 156,328 ------------- ------------- Total $ 1,653,381 $ 1,475,300 ============= ============= HMS's SGA for the six-month period ended January 31, 2004 decreased 1.7% from the year earlier period. Jewelry and Rings SGA commenced during the current year period and represents the SGA associated with their retail operations. Corporate SGA increased $39,180 during the six-month period ended January 31, 2004 as compared to the year earlier period. The major components of the corporate SGA increase include an increase of approximately $37,000 in salaries and a reduction of $13,000 in professional fees. INTEREST EXPENSE AND GOLD CONSIGNMENT FEE - Related party interest expense increased $40,200 to $92,200 during the six-month period ended January 31, 2004, as compared to the year earlier period. Interest expense decreased $25,579 during the six month period ended January 31, 2004, as compared to the year earlier period. The increase in related party interest expense includes amortization of a guaranty fee in the amount of $37,500. The balance of the increase is due to the addition of $30,000 in additional related party debt in the current year. The decrease in other interest expense is primarily due to the prior year amount including $26,600 in amortization of loan fees. 20 The gold consignment fee decreased $20,093 during the six-month period ended January 31, 2004, as compared to the prior year period. The decrease is due to having lower balances on the gold consignment facility as a result of a reduction in the number of ounces of gold on consignment. At January 31, 2004 HMS had 6,833.4 ounces of gold on consignment with a related consignment obligation of $2,731,652 ($399.75 per ounce). At January 31, 2003 HMS had 11,907 ounces of gold on consignment with a related consignment obligation of $4,375,823 ($367.50 per ounce). Accordingly, the decrease is a result of the 43% decrease in the quantity of gold on consignment offset by the 9% increase in the price of gold. UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES - The Company recognized an unrealized gain in the amount of $39,210 during the six-month period ended January 31, 2004, from its investment in marketable equity securities that have been classified as trading securities. During the six-month period ended January 31, 2003 the Company recognized an unrealized loss of $5,464. INCOME TAXES - The Company recorded an income tax provision of $36,700 during the six-month period ended January 31, 2004 and a provision for income taxes in the amount of $175,300 during the six-month period ended January 31, 2003. DISCONTINUED OPERATIONS - The Company recognized a loss of $369,005, including an income tax benefit of $187,600, during the six-month period ended January 31, 2003 from its discontinued operations. ITEM 3. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that are filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision of and with the participation of management, including the principal executive officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of January 31, 2004, and, based on its evaluation, our principal executive officer has concluded that these controls and procedures are effective. (b) Changes in Internal Controls There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation described above, including any corrective actions with regard to significant deficiencies and material weaknesses. 21 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 13, 2002, SGD filed a petition against James G. "Greg" Gordon ("Gordon") in the 342nd District Court, Tarrant County, Texas alleging breach of fiduciary duty, conversion of corporate funds and misappropriation of corporate funds. SGD alleged that Gordon, who was President of SGD from June 10, 1999 until November 25, 2002, wrongfully and without authority or approval, transferred approximately $2.7 million from two separate SGD bank accounts into an account or accounts held by Silver. Thereafter, Gordon utilized a portion of SGD's funds for his and his family's personal use and enjoyment, his personal financial gain and for unauthorized transactions on Silver's behalf. SGD was seeking to recover its damages, which were in excess of $2.7 million, costs of court and pre-judgment interest, as allowed by law. SGD dismissed its claim against Gordon as it determined the cost would exceed any benefit and the funds it saved could be used to pay creditors of the Company; however the Company still maintains the right to re-file the lawsuit against Gordon. On January 3, 2003, James G. Gordon and Lisa K. Gordon ("Plaintiffs") filed a petition in the District Court of Montgomery County, Texas, Cause No. 03-01-00006-CV against SGD Holdings, Ltd., G. David Gordon and David Covey. G. David Gordon is the brother of James G. Gordon and David Covey is the former president of Tandori, Inc., a wholly owned subsidiary of SGD. Plaintiffs, in their claim asserted against SGD, are seeking to declare the one for six stock split, which occurred in September 1999, void. If declared void, they claim they would presently own 75,000,000 shares of SGD common stock instead of 11,250,000 shares of SGD common stock as currently reported by the Company. Presently Company Counsel has not had adequate time to assess the merits of Plaintiffs' claim and is therefore unable to determine a possible outcome or the extent of the Company's liability, if any. In March 2003, Con-Tex Silver Imports, Inc. filed a petition in the District Court of Galveston County, Texas, Cause No. 03CV0316 against Debbie King, the sister-in-law of James G. Gordon. Effective October 28, 2002, James G. Gordon, the former President of Silver entered into a transaction with his sister-in-law whereby he sold the assets of one of the retail locations of Silver for cash proceeds of $30,645. The Company recorded a loss on the transaction of $51,015. In its claim, Silver alleged conspiracy, unjust enrichment and that the sale of the retail location is void because of unconscionability. Additionally, Silver requested a return of profits received by Defendant. This action is currently stayed due to Silver filing a Voluntary Petition for Reorganization under Chapter 11 of Title 11 of the United States Code on April 23, 2003. The Voluntary Petition for Reorganization under Chapter 11 was converted to Chapter 7 on September 23, 2003. On April 23, 2003, SGD's wholly owned subsidiary, Con-Tex Silver Imports, Inc. filed a Voluntary Petition for Reorganization under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division, Case No. 03-43783-DML-11 and on September 23, 2003 the Voluntary Petition was converted to Chapter 7. 22 On May 2, 2003, Lakewood Development Corporation ("Lakewood"), a stockholder, filed a petition in the District Court of Tarrant County, Texas, Cause No. 96 198685 03 against SGD Holdings, Ltd. and James G. Gordon, former President of SGD. Lakewood, in its claim asserted against SGD and Gordon, alleged fraud in stock transactions under Section 27.01 of the Texas Business and Commerce Code, violations of the anti-fraud provisions of the Texas Securities Act and common law fraud. In addition, Lakewood is alleging breach of fiduciary duty against Gordon. Lakewood is seeking restitution of the $7,817,500 which it invested in common stock based upon representations made by Gordon, together with damages, expenses and interest. Presently, Company counsel has not had adequate time to assess the merits of Lakewood's claims and therefore is unable to determine a possible outcome or the extent of the Company's liability, if any. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On January 28, 2004, the Company issued 6,760,746 shares of its common stock in exchange for $50,000 in accounts payable, $12,107 in accrued interest and loan extension fees in the amount of $5,500. The small business issuer claimed exemption from registration based upon Section 4(2) of the Securities and Exchange Act of 1933. ITEM 5. OTHER INFORMATION Although the Company does not currently employ a Chief Financial Officer, Terry Washburn, President and Acting CEO, is also the principal accounting officer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 31 Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None. 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SGD HOLDINGS, LTD. Date: March 11, 2004 By: /s/ Terry Washburn ------------------------------------- Terry Washburn, President, Acting CEO and Principal Accounting Officer 24