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, 2005
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 [ ].
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ]; No [ ]
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of February 28, 2005 was 45,666,824.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
SGD HOLDINGS, LTD. AND SUBSIDIARIES
FORM 10-QSB INDEX
PAGE NO.
Part I. Unaudited Financial Information
Item 1. Condensed Consolidated Balance Sheet -
January 31, 2005 3
Condensed Consolidated Statements of Operations -
Three Months Ended January 31, 2005 and 2004 4
Condensed Consolidated Statements of Operations -
Six Months Ended January 31, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended January 31, 2005 and 2004 6
Notes to Condensed Consolidated Financial Statements 7-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-24
Item 3. Controls and Procedures 25
Part II. Other Information 26-30
2
SGD HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JANUARY 31, 2005
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents $ 669,131
Trade accounts receivable, net of allowance of $61,752 1,564,932
Inventory 3,248,503
Due from related parties 20,711
Prepaid expenses and other assets 279,426
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Total current assets 5,782,703
Property and equipment, net 261,584
Goodwill, net 1,796,768
Marketable equity securities 7,100
Deferred income taxes 163,700
Other assets 31,300
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Total assets $ 8,043,155
==================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable and current installments of long-term debt $ 1,380,585
Notes payable - related parties 1,350,488
Accounts payable 1,002,146
Accrued expenses 1,189,448
Deferred income taxes payable 53,100
Due to related parties 237,794
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Total current liabilities 5,213,561
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Long-term debt, less current installments 198,245
Minority interest -
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Total liabilities 5,411,806
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Commitments and contingencies
Stockholders' equity:
Common stock, $.0001 par value; 200,000,000 shares authorized;
45,666,824 shares issued and outstanding 4,567
Additional paid-in capital 9,920,635
Accumulated deficit (7,015,103)
Accumulated other comprehensive loss (278,750)
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Total stockholders' equity 2,631,349
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Total liabilities and stockholders' equity $ 8,043,155
==================
See accompanying notes to condensed consolidated financial statements.
3
SGD HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
2005 2004
------------ ------------
Sales and revenues $ 4,582,585 $ 4,209,979
Cost of sales 3,356,653 3,125,049
------------ ------------
Gross profit 1,225,932 1,084,930
Selling, general and administrative expense 941,092 878,731
------------ ------------
Earnings from operations 284,840 206,199
Other income (expense):
Unrealized gain (loss) on marketable securities -- 19,540
Loss on sale of securities -- (22,033)
Interest expense (10,895) (13,374)
Interest expense - related parties (26,507) (46,850)
Gold consignment fee (51,336) (35,441)
Interest and other income 204 12,090
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Total other income (expense) (88,534) (86,068)
------------ ------------
Net earnings before income taxes 196,306 120,131
Income tax expense 66,600 42,600
------------ ------------
Net earnings $ 129,706 $ 77,531
============ ============
Basic and diluted net earnings per share $ 0.00 $ 0.00
============ ============
Weighted average shares outstanding (thousands) 45,666.8 36,486.5
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See accompanying notes to condensed consolidated financial statements.
4
SGD HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 2005 AND 2004
(UNAUDITED)
2005 2004
------------ ------------
Sales and revenues $ 8,475,035 $ 7,754,707
Cost of sales 6,248,320 5,844,700
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Gross profit 2,226,715 1,910,007
Selling, general and administrative expense 1,823,051 1,653,381
------------ ------------
Earnings from operations 403,664 256,626
Other income (expense):
Unrealized gain (loss) on marketable securities -- 39,210
Loss on sale of marketable securities -- (22,033)
Interest expense (27,038) (25,481)
Interest expense - related parties (53,015) (92,200)
Gold consignment fee (89,521) (70,802)
Interest and other income 1,224 14,975
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Total other income (expense) (168,350) (156,331)
------------ ------------
Net earnings before income taxes 235,314 100,295
Income tax expense 80,000 36,700
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Net earnings $ 155,314 $ 63,595
============ ============
Basic and diluted net earnings per share $ 0.00 $ 0.00
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Weighted average shares outstanding (thousands) 45,666.8 36,376.3
============ ============
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, 2005 AND 2004
(UNAUDITED)
2005 2004
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Cash flows provided (used) by operating activities:
Net earnings $ 155,314 $ 63,595
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Depreciation and amortization 37,770 37,999
Deferred income taxes 80,000 36,700
Unrealized (gain) loss on marketable securities -- (39,210)
Proceeds from sale of marketable securities -- 11,547
Loss on sale of marketable securities -- 22,033
Changes in assets and liabilities:
Accounts receivable (412,271) (307,372)
Inventory (796,040) (461,491)
Other assets (79,800) 31,937
Accounts payable and accrued expenses 497,362 940,416
------------ ------------
Net cash used by operating activities (517,665) 336,154
Cash flows used by investing activities:
Capital expenditures (6,548) (57,763)
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Net cash used by investing activities (6,548) (57,763)
Cash flows provided by financing activities:
Amounts due related parties 17,569 --
Loan proceeds 500,000 --
Repayment of long-term debt and notes payable (19,369) --
------------ ------------
Net cash provided by financing activities 498,200 --
Net increase (decrease) in cash and cash equivalents (26,013) 278,391
Cash and cash equivalents, beginning of period 695,144 898,828
------------ ------------
Cash and cash equivalents, end of period $ 669,131 $ 1,177,219
============ ============
See accompanying notes to condensed consolidated financial statements.
6
SGD HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of SGD Holdings, Ltd.
("SGD") and its wholly owned subsidiaries HMS Jewelry Company, Inc. ("HMS");
Tandori, Inc. ("Tandori"); and Con-Tex Silver Imports, Inc. ("Silver"); Jewelry
Solutions & Commerce, Inc. ("Jewelry") the 100% subsidiary of HMS; Gem Pak, Inc.
("Gem Pak"), the 80% subsidiary of HMS and Rings N' Things, LLC ("Rings") the
80% subsidiary of Jewelry (collectively referred to as the "Company"). All
material intercompany accounts and transactions have been eliminated.
BANKRUPTCY
On January 20, 2005, SGD ("Debtor") filed a voluntary petition for relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court")(Case No.
05-10182). The Debtor will continue to manage its properties as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code.
In February 2005, a motion was filed to transfer venue of the case from the
District of Delaware to the Northern District of Texas, Fort Worth Division. The
motion to transfer venue was granted and a new case number has been assigned
(Case No. 05-42392-rfn11).
The Company expects to file a plan of reorganization within two weeks.
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.
7
Silver was incorporated on September 12, 1994, in Texas. HMS was incorporated on
October 12, 2000, in Texas. Tandori was incorporated on November 9, 1998, in
Nevada. Jewelry was incorporated on February 3, 1999, in Delaware. Gem Pak was
incorporated on May 24, 2002, in Texas. Rings was incorporated September 2,
2003, in Nevada.
On June 10, 1999, SGD acquired all of the issued and outstanding common stock of
Silver and Jewelry. For accounting purposes, the acquisitions were treated as
the acquisition of Silver and Jewelry by SGD with Silver as the acquiror
(reverse acquisition). The historical financial statements prior to June 10,
1999, are those of Silver.
Effective October 1, 2000, SGD completed the acquisition of HMS Jewelry Co.,
Ltd., a Texas limited partnership and HMS Operating Company, a Texas corporation
and transferred the assets acquired and liabilities assumed into HMS Jewelry
Company, Inc. For accounting purposes, the acquisition was treated as a
purchase.
Effective September 1, 2001, SGD completed the acquisition of Tandori, Inc. in a
transaction treated as a purchase for accounting purposes.
Jewelry formed Rings and commenced operation of two retail jewelry stores during
October and November 2003. Jewelry also opened two directly owned jewelry stores
during November and December 2003. The two stores operated by Rings were closed
prior to July 2004.
Effective April 1, 2004, HMS completed the acquisition of 80% of Gem Pak in a
transaction treated as a purchase for accounting purposes. SGD issued 100,000
shares of its common stock for 80% of Gem Pak's common stock. Gem Pak sells
packaging and display materials to the same customer base as HMS.
DISCONTINUED OPERATIONS
The operations of Silver and Tandori were discontinued at the end of July 2003.
NATURE OF BUSINESS
SGD is a holding company principally engaged in acquiring and developing jewelry
businesses. HMS is primarily involved in the wholesale gold jewelry business.
Gem Pak sells packaging and display materials, principally to retail jewelry
stores. Jewelry currently operates two retail jewelry stores.
STOCK OPTION PLANS
The Company accounts for stock-based awards to employees using the intrinsic
value method described in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the accompanying
consolidated financial statements for stock-based awards to employees when the
exercise price of the award is equal to or greater than the quoted market price
of the stock on the date of the grant.
8
SFAS 123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
123" require disclosures as if the Company had applied the fair value method to
employee awards rather than the intrinsic value method. The fair value of
stock-based awards to employees is calculated through the use of option pricing
models, which were developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. No awards were granted during the three and six months ended January 31,
2005 or 2004. Accordingly, since there is no difference, no disclosure is
required of the fair value method as compared to the intrinsic value method.
Options and warrants issued to non-employees are accounted for under SFAS 123,
"Accounting for Stock Based Compensation." For the options and warrants issued
to non-employees, the fair value of each award is calculated using the
Black-Scholes Model in accordance with SFAS 123.
2. MARKETABLE INVESTMENT SECURITIES
The following summarizes the Company's investment in securities at January 31,
2005:
Available-for-sale securities:
Cost $ 429,550
Unrealized loss (422,450)
------------------
Fair value $ 7,100
=================
The Company included in operations $19,540 and $39,210 in unrealized gains
during the three and six months ended January 31, 2004, respectively, and had no
activity during the current fiscal year periods, since all trading securities
were sold during fiscal 2004.
On July 20, 2001, the Company completed the acquisition of 355,000 shares of the
common stock of USN Corporation (formerly Premier Concepts, Inc.) ("USN") in
exchange for 965,000 shares of its common stock. The Company used the July 31,
2001 closing market price as quoted on the Nasdaq Stock Market to value the
transaction.
The shares of common stock of USN are "restricted securities" under Rule 144. As
a result of the approval of USN's bankruptcy plan, the Company's investment
represents less than 1% of the outstanding stock of USN at January 31, 2005. The
Company has classified its investment in USN as available-for-sale securities as
a result of the Company's intention to hold the securities indefinitely pursuant
to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
9
Unrealized gains and losses based on fluctuations in the market value of
available-for-sale securities are included in other comprehensive income as an
adjustment to equity. The following unrealized losses have been recorded in
stockholders' equity as accumulated other comprehensive income (loss).
Cumulative
----------
Unrealized loss $ 422,450
Deferred income taxes 143,700
-----------------
Other comprehensive loss $ 278,750
=================
Due to the limited market for USN common stock, it is likely that only limited
quantities of the stock will be able to be sold in the open market. As a result
of these restrictions and the probable limited trading volume, the Company
believes the fair value of the investment might be less than the recorded value
required by SFAS No. 115 and that there can be no assurance the Company will
realize the recorded value of its investment in USN. On October 10, 2003, USN
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. On
December 13, 2004, the plan of reorganization was approved as filed.
3. INVENTORIES
Inventories at January 31, 2005, consist of:
Inventory, principally gold jewelry $ 6,713,552
Less consigned gold (3,465,049)
-----------------
Net inventories $ 3,248,503
=================
At January 31, 2005, inventories excluded 8,208.1 ounces of gold on consignment.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at January 31, 2005:
Office and computer equipment $ 173,768
Furniture and fixtures 202,214
Software 113,225
Leasehold improvements 32,837
-----------------
522,044
Less accumulated depreciation (260,460)
-----------------
$ 261,584
=================
10
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt at January 31, 2005, consists of the following:
Note payable to a bank with monthly payments of $3,799,
plus interest at prime, 5.25% at January 31, 2005; balance
due June 30, 2010; collateralized by assets owned by an
individual who is also a personal guarantor $ 243,830
Line of credit payable to the gold lender; due on demand
with interest at prime plus 3/4%; (see note 7) 500,000
Note payable to a company; due July 31, 2004; interest
payable monthly at 5.8% (a) 835,000
---------------
Total notes payable and long-term debt 1,578,830
Notes payable and current installments of long-term debt 1,380,585
---------------
Long-term debt, less current installments $ 198,245
===============
(a) Convertible into common stock at the lesser of $.015 per share or
the market price, limited to 9.9% of the total outstanding shares of
the Company at the time of conversion. All of the issued and
outstanding common stock of HMS is collateral on the note, in second
position behind the collateral position of the note due the president
of HMS and the note is guaranteed by G. David Gordon. In the event of
default on any of the loans secured by the HMS common stock, the lender
has the option to purchase HMS for $5,000,000. On January 28, 2004, the
Company issued 250,000 shares of its common stock as a loan extension
fee and issued 1,210,746 shares of its common stock for $12,107 in
accrued interest.
6. NOTES PAYABLE DUE RELATED PARTIES
Notes payable due related parties consists of the following at January 31, 2005:
Note payable to the president of HMS, due on July 31,
2004; interest payable monthly at 8%; collateralized
by the common stock of HMS; guaranteed by G. David
Gordon; convertible into common stock of the Company
at $.01 per share, limited to 9.9% of the total
outstanding shares of the Company at the time; with
anti-dilution rights $ 1,250,000
11
Note payable to G. David Gordon, a shareholder and the
brother of a Director of the Company; due on July 31, 2005
with interest payable monthly at 6%; collateralized by the
common stock of HMS in third position behind the other
notes above; all principal and accrued interest
convertible into common stock of the Company at $.01 per
share at any time after July 31, 2005; and all shares
have anti-dilution rights 100,488
---------------
Total notes payable due related parties $ 1,350,488
===============
7. GOLD CONSIGNMENT AND LINE OF CREDIT AGREEMENT
HMS has a gold consignment agreement with a gold lender. Under the terms of the
agreement, HMS is entitled to lease the lesser of an aggregate amount of 13,200
ounces, or an aggregate consigned gold value not to exceed $4,950,000, less any
balance outstanding on its $1,500,000 line of credit. Title to such consigned
gold remains with the gold lender until HMS purchases the gold. However, during
the period of consignment, the entire risk of loss, damage or destruction of the
gold is borne by HMS. The purchase price per ounce is based on the daily Second
London Gold Fix. HMS pays the gold consignor a consignment fee based upon the
dollar value of gold ounces outstanding, as defined in the agreement. At January
31, 2005, HMS had 8,208.1 ounces of gold on consignment with a market value of
$3,465,049, which was valued at the daily Second London Gold Fix, $422.15 per
ounce at January 31, 2005, and charged 4.25%.
Consigned gold is not included in inventory, and there is no related liability
recorded. As a result of these consignment arrangements, HMS is able to shift a
substantial portion of the risk of market fluctuations in the price of gold to
the gold lender, since HMS does not purchase gold from the gold lender until
receipt of a purchase order from, or shipment of jewelry to, its customers.
The gold lender has also provided a line of credit to HMS in the amount of
$1,500,000 that is due on demand, including interest at the lender's prime rate
plus 3/4%. HMS has an advance in the amount of $500,000 on this line of credit
at January 31, 2005. The balance on the line of credit reached a high of
$800,000 at December 31, 2004. The balance was repaid in full by February 28,
2005. On March 11, 2005, the gold lender notified HMS that no additional
advances would be made under this line of credit until further notice.
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. HMS is in violation
of certain financial covenants and SGD's bankruptcy filing caused another
violation. Accordingly, on March 11, 2005, HMS received notice from its gold
lender that in addition to not making any further advances on its line of
credit, the gold lender may make immediate demand for either return of the
consigned gold or repayment of the obligation and may cease making discretional
consignments at any time the gold lender deems appropriate. The gold lender has
elected to impose the default rate of interest (the existing rate plus 4%)
effective March 1, 2005.
12
The gold lender has agreed to consider a proposal from HMS for a short term
forbearance period in order to afford HMS an opportunity to refinance its
obligation to the gold lender. HMS is currently providing additional information
to the gold lender to assist in negotiating a forbearance period. There can be
no assurance that the gold lender will agree to short term forbearance. There
can be no assurance that HMS will be able to find a substitute gold lender,
whether they receive the short term forbearance or not.
Management of the Company has had meetings with an alternative lending
institution and believe it is possible that an acceptable refinancing may be
approved within sixty days.
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 G. David Gordon and the
corporate guarantee of SGD.
8. RELATED PARTY TRANSACTIONS
HMS leases its facility from HMS Leasing Company, LLC, at the rate of $8,075 per
month pursuant to a lease agreement that expires on October 31, 2010. This
amounted to $24,225 in rent expense during each of the three month periods ended
January 31, 2005 and 2004 and amounted to $48,450 during each of the six month
periods ended January 31, 2005 and 2004. 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 $482,996 at January 31,
2005.
See Note 6 for details of the $1,350,488 in note obligations to related parties.
At January 31, 2005, amounts due from related parties include the following:
USN Corporation $ 13,124
President of HMS 7,587
---------------
Total $ 20,711
===============
At January 31, 2005, the Company had made net advances of $7,587 to the
president of HMS, including companies owned by him.
The Company has net receivables from USN at January 31, 2005, of $13,124. The
Chief Executive Officer of USN is a Director and acting CEO of the Company. On
October 10, 2003, USN 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. USN's Bankruptcy Plan was approved as filed on December 13, 2004,
and the Company's ownership in USN is now less than 1%.
13
At January 31, 2005, amounts due to related parties include the following:
G. David Gordon $ 143,798
Terry Washburn 27,132
BJB Services, Inc. 66,438
President of Gem Pak 426
-----------------
Total $ 237,794
=================
At January 31, 2005, the Company owed G. David Gordon, the former CEO of HMS, a
shareholder and the brother of a Director, $143,798 in addition to a $100,488
note obligation. The $143,798 includes accrued compensation in the amount of
$75,000 which is payable in SGD common stock.
Terry Washburn, President of SGD and a stockholder, was owed $27,132 at January
31, 2005, which is primarily for accrued compensation. Mr. Washburn was issued
1,500,000 shares of SGD common stock during fiscal 2004, in exchange for $15,000
which was due him.
BJB Services, Inc., a shareholder, and another company controlled by the
principal of BJB were owed $66,438 at January 31, 2005, for financial services
rendered. BJB was issued 3,500,000 shares of SGD common stock during fiscal
2004, in exchange for $35,000 which SGD owed BJB.
The President and 20% owner of Gem Pak was owed $426 at January 31, 2005.
9. COMMITMENTS AND CONTINGENCIES
Rent expense amounted to $51,347 and $64,886 during the three months ended
January 31, 2005 and 2004, respectively; and amounted to $106,484 and $91,736
during the six months ended January 31, 2005, respectively. Minimum rental
commitments under all non-cancelable leases with an initial term in excess of
one year are payable as follows: six month balance of 2005 - $90,495; 2006 -
$184,505; 2007 - $153,761; 2008 - $100,357; 2009 - $96,900 and thereafter -
$121,125.
HMS is a guarantor of the loan obligation of HMS Leasing Company, LLC on the
facility, which has a balance of $482,996 at January 31, 2005.
From time to time during their normal course of operations, the Company
maintained cash balances in a financial institution which exceeded the insurance
limits of the Federal Deposit Insurance Corporation.
14
10. LEGAL MATTERS
BANKRUPTCY
On January 20, 2005, SGD ("Debtor") filed a voluntary petition for relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court")(Case No.
05-10182). The Debtor will continue to manage its properties as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code.
In February 2005, a motion was filed to transfer venue of the case from the
District of Delaware to the Northern District of Texas, Fort Worth Division. The
motion to transfer venue was granted and a new case number has been assigned
(Case No. 05-42392-rfn11).
The Company expects to file a plan of reorganization within the next two weeks.
OTHER MATTERS
On December 13, 2002, SGD filed a petition against James G. "Greg" Gordon
("Gordon") in the 342nd District Court, Tarrant County, Texas alleging breach of
fiduciary duty, conversion of corporate funds and misappropriation of corporate
funds. SGD alleged that Gordon, who was President of SGD from June 10, 1999,
until November 25, 2002, wrongfully and without authority or approval,
transferred approximately $2.7 million from two separate SGD bank accounts into
an account or accounts held by Silver. Thereafter, Gordon utilized a portion of
SGD's funds for his and his family's personal use and enjoyment, his personal
financial gain and for unauthorized transactions on Silver's behalf. SGD was
seeking to recover its damages, which were in excess of $2.7 million, costs of
court and pre-judgment interest as allowed by law. SGD dismissed its claim
against Gordon as it determined the cost would exceed any benefit and the funds
it saved could be used to pay creditors of the Company; however the Company
still maintains the right to re-file the lawsuit against Gordon.
On January 3, 2003, James G. Gordon and Lisa K. Gordon ("Plaintiffs") filed a
petition in the District Court of Montgomery County, Texas, Cause No.
03-01-00006-CV against SGD Holdings, Ltd., G. David Gordon and David Covey. G.
David Gordon is the brother of James G. Gordon and David Covey was president of
Tandori, a wholly owned and currently inactive subsidiary of SGD. Plaintiffs, in
their claim asserted against SGD, are seeking to declare the one for six stock
split, which occurred in September 1999, void. If declared void, they claim they
would presently own 75,000,000 shares of SGD common stock instead of 11,250,000
shares of SGD common stock as currently reported by the Company. In October
2004, James Gordon was able to obtain a temporary restraining order in this
action which prevents SGD from raising any additional equity capital until the
trial is completed. Trial in the matter has been completed and briefs were filed
March 7, 2005. The Company is awaiting the ruling from the judge. Management of
the Company does not expect to incur any significant liability; however, there
are a number of unresolved issues which could result in liability to the
Company.
On April 23, 2003, SGD's wholly owned subsidiary, Silver filed a Voluntary
Petition for Reorganization under Chapter 11 of Title 11 of the United States
Code in the United States Bankruptcy Court for the Northern District of Texas,
Fort Worth Division, Case No. 03-43783-DML-11. The reorganization filing was
necessitated as a result of James G. Gordon, a Director and former President of
SGD, locking Silver employees out of the office and warehouse premises which he
owned and leased to Silver, which prevented Silver from operating. The Voluntary
Petition for Reorganization under Chapter 11 was converted to Chapter 7 on
September 23, 2003.
15
On May 2, 2003, Lakewood Development Corporation ("Lakewood") filed a petition
in the District Court of Tarrant County, Texas, Cause No. 96 198685 03 against
SGD Holdings, Ltd. and James G. Gordon, former President of SGD. Lakewood, in
its claim asserted against SGD and Gordon, alleged fraud in stock transactions
under Section 27.01 of the Texas Business and Commerce Code, violations of the
anti-fraud provisions of the Texas Securities Act and common law fraud. In
addition, Lakewood is alleging breach of fiduciary duty against Gordon. Lakewood
is seeking restitution of the $7,817,500 which it invested in common stock based
upon representations made by Gordon, together with damages, expenses and
interest. Presently, Company counsel is negotiating a settlement with Lakewood.
The Company accrued $1,000,000 as an estimate of the cost of the settlement at
July 31, 2004.
On December 31, 2003, Richard Singer and Robert Bertsch, on behalf of the
Company, filed suit against James G. Gordon, a director of the Company, for his
breach of fiduciary duty as a result of his unilateral actions to prevent the
Company from exercising its option to acquire the building which HMS currently
leases. The parties have yet to begin any substantial discovery and, therefore,
the Company and its attorneys are not in a position to assess the merits of this
action.
11. GOING CONCERN
At January 31, 2005, the Company's working capital was $569,142 as compared to
$184,360 at July 31, 2004, and $2,198,989 at July 31, 2003. The Company had a
net loss of $3,572,310 for fiscal 2004 which included a charge for goodwill
impairment of $1,988,426 and a charge of $1,000,000 for an estimate of the
Lakewood litigation settlement (see note 10). Accordingly, the Company still
incurred a loss of $583,884 in addition to the charges above. The Company has
two notes payable, in the amount of $1,250,000 and $835,000, which are currently
past due, and because of the temporary restraining order granted to James G.
Gordon the Company is unable to raise any equity capital. Trial for the
litigation with James G. Gordon has been completed and the Company is awaiting
the decision of the judge (see note 10). In addition, the Company is in
violation of restrictive covenants related to its gold consignment agreement,
and HMS has received notice from its gold lender that in addition to not making
any further advances on its line of credit, the gold lender may make immediate
demand for either return of the consigned gold or repayment of the obligation
and may cease making discretional consignments at any time the gold lender deems
appropriate. The gold lender has agreed to consider a proposal from HMS for a
short term forbearance period in order to afford HMS an opportunity to refinance
its obligation to the gold lender (see note 7). The Company filed a voluntary
petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware on
January 20, 2005 (see note 10). Although the Company had net earnings of
$155,314 during the six months ended January 31, 2005, the Company does not have
sufficient cash flows to meet its obligations currently due within the next 12
months. These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
16
If the Company is (i) unable to grow its business or improve its operating cash
flows as expected, (ii) unsuccessful in extending a substantial portion of the
debt repayments currently past due, (iii) unsuccessful in its litigation with
James G. Gordon, (iv) unable to raise additional funds through private placement
sales of its common stock, or (v) unable to satisfy the covenants of the gold
consignment agreement or find a new gold lender, then the Company may be unable
to continue as a going concern. There can be no assurance that additional
financing will be available when needed or, if available, that it will be on
terms favorable to the Company and its stockholders. If the Company is not
successful in generating sufficient cash flows from operations, or in raising
additional capital when required in sufficient amounts and on terms acceptable
to the Company, these failures would have a material adverse effect on the
Company's business, results of operations and financial condition. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the Company's current shareholders would be diluted. These
consolidated financial statements do not include any adjustments that may result
from the outcome of these uncertainties.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From time to time, the Company may publish forward-looking statements
relative to such matters as anticipated financial performance, business
prospects, technological developments and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. All statements other than statements of
historical fact included in this section or elsewhere in this report are,
or may be deemed to be, forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange
Act of 1934. Important factors that could cause actual results to differ
materially from those discussed in such forward-looking statements include:
1. General economic factors including, but not limited to, changes in
interest rates, trends in disposable income; 2. Information and
technological advances; 3. Cost of products sold; 4. Competition; 5. Legal
issues; and 6. Success of marketing, advertising and promotional campaigns.
The continuing operations of the Company consist primarily of the wholesale
operations of HMS.
BANKRUPTCY
On January 20, 2005, SGD ("Debtor") filed a voluntary petition for relief
under Chapter 11 of Title 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court")(Case No. 05-10182). The Debtor will continue to manage
its properties as "debtors-in-possession" under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code.
In February 2005, a motion was filed to transfer venue of the case from the
District of Delaware to the Northern District of Texas, Fort Worth
Division. The motion to transfer venue was granted and a new case number
has been assigned (Case No. 05-42392-rfn11).
The Company expects to file a plan of reorganization within two weeks.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2005, the Company's working capital was $569,142 as compared
to $184,360 at July 31, 2004, and $2,198,989 at July 31, 2003. The Company
had a net loss of $3,572,310 for fiscal 2004 which included a charge for
goodwill impairment of $1,988,426 and a charge of $1,000,000 for an
estimate of the Lakewood litigation settlement (see note 10). Accordingly,
the Company still incurred a loss of $583,884 in addition to the charges
above. The Company has two notes payable, in the amount of $1,250,000 and
$835,000, which are currently past due, and because of the temporary
restraining order granted to James G. Gordon the Company is unable to raise
any equity capital. Trial for the litigation with James G. Gordon has been
completed and the Company is awaiting the decision of the judge (see note
10). In addition, the Company is in violation of restrictive covenants
related to its gold consignment agreement, and HMS has received notice from
its gold lender that in addition to not making any further advances on its
18
line of credit, the gold lender may make immediate demand for either return
of the consigned gold or repayment of the obligation and may cease making
discretional consignments at any time the gold lender deems appropriate.
The gold lender has agreed to consider a proposal from HMS for a short term
forbearance period in order to afford HMS an opportunity to refinance its
obligation to the gold lender (see note 7). The Company filed a voluntary
petition for relief under Chapter 11 of Title 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware on January 20, 2005 (see note 10). Although the Company had net
earnings of $155,314 during the six months ended January 31, 2005, the
Company does not have sufficient cash flows to meet its obligations
currently due within the next 12 months. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
If the Company is (i) unable to grow its business or improve its operating
cash flows as expected, (ii) unsuccessful in extending a substantial
portion of the debt repayments currently past due, (iii) unsuccessful in
its litigation with James G. Gordon, (iv) unable to raise additional funds
through private placement sales of its common stock, or (v) unable to
satisfy the covenants of the gold consignment agreement or find a new gold
lender, then the Company may be unable to continue as a going concern.
There can be no assurance that additional financing will be available when
needed or, if available, that it will be on terms favorable to the Company
and its stockholders. If the Company is not successful in generating
sufficient cash flows from operations, or in raising additional capital
when required in sufficient amounts and on terms acceptable to the Company,
these failures would have a material adverse effect on the Company's
business, results of operations and financial condition. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of the Company's current shareholders would be diluted. These
consolidated financial statements do not include any adjustments that may
result from the outcome of these uncertainties.
The Company refinanced an obligation of Gem Pak with a balance of $243,830
at January 31, 2005, which had been due on December 10, 2004. The new
agreement requires monthly principal payments of $3,799 plus interest at
prime (5.25% at January 31, 2005) with the balance due June 30, 2010.
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 $27,000 during the six months ended January
31, 2005, until these issues can be resolved. The Company anticipates that
it will be able to raise additional funds, as necessary, to fund these
lawsuits.
The Company acquired property and equipment in the amount of $6,548 during
the six-month period ended January 31, 2005 and is currently budgeting an
additional $30,000 for capital expenditures for the remainder of fiscal
2005. The Company plans to use cash and existing credit sources for the
acquisitions.
19
HMS relies on a gold consignment program, short-term borrowings and
internally generated funds to finance its inventories and accounts
receivable. HMS fills most of its gold supply needs through a gold
consignment arrangement with a gold lender. Under the terms of that
arrangement, HMS is entitled to lease the lesser of an aggregate of 13,200
ounces of fine gold or an aggregate consigned gold value not to exceed
$4,950,000, reduced by any outstanding balance on its $1,500,000 line of
credit. The consigned gold is secured by substantially all property of HMS,
including its cash, accounts receivable, inventory and machinery and
equipment, the corporate guaranty of SGD and the individual guaranty of G.
David Gordon. 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, 2005, HMS held 8,208.1 ounces of gold on consignment
with a market value of $3,465,049.
Consigned gold is not included in inventory, and there is no related
liability recorded. As a result of these consignment arrangements, HMS is
able to shift a substantial portion of the risk of market fluctuations in
the price of gold to the gold lender, since HMS does not purchase gold from
the gold lender until receipt of a purchase order from, or shipment of
jewelry to, its customers.
The gold lender has also provided a line of credit to HMS in the amount of
$1,500,000 that is due on demand, including interest at the lender's prime
rate plus 3/4%. HMS has an advance in the amount of $500,000 on this line
of credit at January 31, 2005. The balance on the line of credit reached a
high of $800,000 at December 31, 2004. The balance was repaid in full by
February 28, 2005. On March 11, 2005, the gold lender notified HMS that no
additional advances would be made under this line of credit until further
notice.
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.
HMS is in violation of certain financial covenants and SGD's bankruptcy
filing caused another violation. Accordingly, on March 11, 2005, HMS
received notice from its gold lender that in addition to not making any
further advances on its line of credit, the gold lender may make immediate
demand for either return of the consigned gold or repayment of the
obligation and may cease making discretional consignments at any time the
gold lender deems appropriate. The gold lender has elected to impose the
default rate of interest (the existing rate plus 4%) effective March 1,
2005.
The gold lender has agreed to consider a proposal from HMS for a short term
forbearance period in order to afford HMS an opportunity to refinance its
obligation to the gold lender. HMS is currently providing additional
information to the gold lender to assist in negotiating a forbearance
period. There can be no assurance that the gold lender will agree to short
term forbearance. There can be no assurance that HMS will be able to find a
substitute gold lender, whether they receive the short term forbearance or
not.
Management of the Company has had meetings with an alternative lending
institution and believe it is possible that an acceptable refinancing may
be approved within sixty days.
20
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2005 AND 2004
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, 2005
and 2004:
2005 2004
---- ----
Sales and revenues $ 4,582,585 $ 4,209,979
Cost of sales 3,356,653 3,125,049
------------- --------------
Gross profit $ 1,225,932 $ 1,084,930
============= ==============
Total sales increased $372,606 (8.9%) during the three-month period ended
January 31, 2005, as compared to the same prior year period. The increase
consists of a decrease of $6,829 in retail sales by the jewelry stores, and
increase of $260,056 in Gem Pak sales and an increase of $119,379 in
wholesale gold sales. Gem Pak distributed its new catalog during April 2004
and HMS distributed its catalog during May and June 2004. Jewelry store
sales consisted of two stores for three months in fiscal 2005; and three
stores for two months and one store for three months in fiscal 2004.
The Second London Gold Fix was $422.15 per ounce on January 31, 2005 and
$425.55 per ounce on October 31, 2004, the beginning of the current year
quarter. The Second London Gold Fix was $399.75 per ounce on January 31,
2004 and $386.25 per ounce on October 31, 2003. Sales volumes were down
during the current quarter, countering the approximate 6% average increase
in gold price. The decline in volume sold is attributed to lower consumer
spending for higher cost items and customers going out of business and was
mitigated by the release of the new catalog during the prior period.
Gross profit has increased to 26.8% during the current year period from
25.8% during the same prior year period. The 1.0% improvement is primarily
from the higher gross profit realized from new operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The following summarizes the
Company's selling, general and administrative expenses ("SGA") for the
three-month periods ended January 31, 2005 and 2004:
2005 2004
---- ----
HMS $ 619,222 $ 677,160
Jewelry and Rings 86,052 135,546
Gem Pak 159,195 -
Corporate and other 76,623 66,025
------------- --------------
Total $ 941,092 $ 878,731
============= ==============
21
HMS's SGA for the quarter ended January 31, 2005 decreased 8.6% from the
year earlier period. Jewelry and Rings commenced operations during the
middle of the prior year quarter and the SGA associated with their retail
operations covers the full quarter in the current year period for two
stores as compared to three stores which were open two months and one store
which was open three months in the prior year period. Gem Pak was acquired
effective April 1, 2004. Accordingly, it has SGA only in the current year
period. Corporate SGA increased $10,598 during the quarter ended January
31, 2005 as compared to the year earlier period. The current year corporate
SGA includes higher legal costs of $16,000 which are partially offset by
lower accounting costs of $3,000 and lower other costs of approximately
$3,000.
INTEREST EXPENSE - Related party interest expense decreased from $46,850 to
$26,507 during the quarter ended January 31, 2005, as compared to the year
earlier period. Interest expense decreased $2,479 during the quarter ended
January 31, 2005, as compared to the year earlier period. The decrease in
related party interest expense is primarily due to the prior year amount
including amortization of loan and guaranty fees in the amount of $18,750.
GOLD CONSIGNMENT FEE - The gold consignment fee increased $15,895 during
the three month period ended January 31, 2005, as compared to the prior
year period. The increase is due to having higher dollar balances on the
gold consignment facility as a result of the increased gold prices. At
January 31, 2005, HMS had 8,208.1 ounces of gold on consignment with a
related consignment obligation of $3,465,049 ($422.15 per ounce) as
compared to 6,833.4 ounces of gold on consignment with a related
consignment obligation of $2,731,652 ($399.75 per ounce) at January 31,
2004.
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 had been classified as trading securities. The Company sold these
securities prior to the beginning of the current fiscal year.
INCOME TAXES - The Company recorded an income tax provision of $66,600
during the three month period ended January 31, 2005, and a provision for
income taxes in the amount of $42,600 during the three month period ended
January 31, 2004.
22
SIX MONTHS ENDED JANUARY 31, 2005 AND 2004
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, 2005 and
2004:
2005 2004
---- ----
Sales and revenues $ 8,475,035 $ 7,754,707
Cost of sales 6,248,320 5,844,700
--------------- ----------------
Gross profit $ 2,226,715 $ 1,910,007
=============== ================
Total sales increased $720,328 (9.3%) during the six-month period ended
January 31, 2005, as compared to the same prior year period. The increase
consists of $97,448 in retail sales by the jewelry stores, $530,198 in Gem
Pak sales and $92,682 in wholesale gold sales. Gem Pak distributed its new
catalog during April 2004 and HMS distributed its catalog during May and
June 2004. Jewelry store sales consisted of two stores for six months
during fiscal 2005 and two stores for three months and two stores for two
months in fiscal 2004.
The Second London Gold Fix was $422.15 per ounce on January 31, 2005 and
$391.40 per ounce on July 31, 2004, the beginning of the current year
period. The Second London Gold Fix was $399.75 per ounce on January 31,
2004 and $354.75 per ounce on July 31, 2003. Sales volumes were down during
the current period, countering the approximate 8% average increase in gold
price. The decline in volume sold is attributed to lower consumer spending
for higher cost items and customers going out of business and was mitigated
by the release of the new catalog during the prior quarter.
Gross profit has increased to 26.3% during the current year period from
24.6% during the same prior year period. The 1.7% improvement is primarily
from the higher gross profit realized from new operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The following summarizes the
Company's SGA for the six-month periods ended January 31, 2005 and 2004:
2005 2004
---- ----
HMS $ 1,229,682 $ 1,294,464
Jewelry and Rings 165,741 163,409
Gem Pak 288,479 -
Corporate and other 139,149 195,508
------------- --------------
Total $ 1,823,051 $ 1,653,381
============= ==============
HMS's SGA for the period ended January 31, 2005 decreased 5.0% from the
year earlier period. Jewelry and Rings commenced operations during the
middle of the prior year period and the SGA associated with their retail
operations covers the full period in the current year for two stores as
compared to two stores for three months and two stores for two months in
the prior year period. Gem Pak was acquired effective April 1, 2004.
Accordingly, it has SGA only in the current year period. Corporate SGA
decreased $56,359 during the period ended January 31, 2005 as compared to
the year earlier period. The prior year corporate SGA includes higher legal
costs of $22,000 and higher officer compensation costs of $24,000.
23
INTEREST EXPENSE - Related party interest expense decreased from $92,200 to
$53,015 during the period ended January 31, 2005, as compared to the year
earlier period. Interest expense increased $1,557 during the period ended
January 31, 2005, as compared to the year earlier period. The decrease in
related party interest expense is primarily due to the prior year amount
including amortization of loan and guaranty fees in the amount of $39,000.
GOLD CONSIGNMENT FEE - The gold consignment fee increased $18,719 during
the six month period ended January 31, 2005, as compared to the prior year
period. The increase is due to having higher dollar balances on the gold
consignment facility as a result of the increased gold prices. The gold
consignment was $3,465,049 at January 31, 2005, as compared to $2,731,652
at January 31, 2004.
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
had been classified as trading securities. The Company sold these
securities prior to the beginning of the current fiscal year.
INCOME TAXES - The Company recorded an income tax provision of $80,000
during the six month period ended January 31, 2005, and a provision for
income taxes in the amount of $36,700 during the six month period ended
January 31, 2004.
24
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, 2005, 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.
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BANKRUPTCY
On January 20, 2005, SGD ("Debtor") filed a voluntary petition for relief
under Chapter 11 of Title 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court")(Case No. 05-10182). The Debtor will continue to manage
its properties as "debtors-in-possession" under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code.
In February 2005, a motion was filed to transfer venue of the case from the
District of Delaware to the Northern District of Texas, Fort Worth
Division. The motion to transfer venue was granted and a new case number
has been assigned (Case No. 05-42392-rfn11).
The Company expects to file a plan of reorganization within two weeks.
OTHER MATTERS
On December 13, 2002, SGD filed a petition against James G. "Greg" Gordon
("Gordon") in the 342nd District Court, Tarrant County, Texas alleging
breach of fiduciary duty, conversion of corporate funds and
misappropriation of corporate funds. SGD alleged that Gordon, who was
President of SGD from June 10, 1999, until November 25, 2002, wrongfully
and without authority or approval, transferred approximately $2.7 million
from two separate SGD bank accounts into an account or accounts held by
Silver. Thereafter, Gordon utilized a portion of SGD's funds for his and
his family's personal use and enjoyment, his personal financial gain and
for unauthorized transactions on Silver's behalf. SGD was seeking to
recover its damages, which were in excess of $2.7 million, costs of court
and pre-judgment interest as allowed by law. SGD dismissed its claim
against Gordon as it determined the cost would exceed any benefit and the
funds it saved could be used to pay creditors of the Company; however the
Company still maintains the right to re-file the lawsuit against Gordon.
On January 3, 2003, James G. Gordon and Lisa K. Gordon ("Plaintiffs") filed
a petition in the District Court of Montgomery County, Texas, Cause No.
03-01-00006-CV against SGD Holdings, Ltd., G. David Gordon and David Covey.
G. David Gordon is the brother of James G. Gordon and David Covey was
president of Tandori, a wholly owned and currently inactive subsidiary of
SGD. Plaintiffs, in their claim asserted against SGD, are seeking to
declare the one for six stock split, which occurred in September 1999,
void. If declared void, they claim they would presently own 75,000,000
shares of SGD common stock instead of 11,250,000 shares of SGD common stock
as currently reported by the Company. In October 2004, James Gordon was
able to obtain a temporary restraining order in this action which prevents
SGD from raising any additional equity capital until the trial is
completed. Trial in the matter has been completed and briefs were filed
March 7, 2005. The Company is awaiting the ruling from the judge.
Management of the Company does not expect to incur any significant
liability; however, there are a number of unresolved issues which could
result in liability to the Company.
26
On April 23, 2003, SGD's wholly owned subsidiary, Silver filed a Voluntary
Petition for Reorganization under Chapter 11 of Title 11 of the United
States Code in the United States Bankruptcy Court for the Northern District
of Texas, Fort Worth Division, Case No. 03-43783-DML-11. The reorganization
filing was necessitated as a result of James G. Gordon, a Director and
former President of SGD, locking Silver employees out of the office and
warehouse premises which he owned and leased to Silver, which prevented
Silver from operating. The Voluntary Petition for Reorganization under
Chapter 11 was converted to Chapter 7 on September 23, 2003.
On May 2, 2003, Lakewood Development Corporation ("Lakewood") filed a
petition in the District Court of Tarrant County, Texas, Cause No. 96
198685 03 against SGD Holdings, Ltd. and James G. Gordon, former President
of SGD. Lakewood, in its claim asserted against SGD and Gordon, alleged
fraud in stock transactions under Section 27.01 of the Texas Business and
Commerce Code, violations of the anti-fraud provisions of the Texas
Securities Act and common law fraud. In addition, Lakewood is alleging
breach of fiduciary duty against Gordon. Lakewood is seeking restitution of
the $7,817,500 which it invested in common stock based upon representations
made by Gordon, together with damages, expenses and interest. Presently,
Company counsel is negotiating a settlement with Lakewood. The Company
accrued $1,000,000 as an estimate of the cost of the settlement at July 31,
2004.
On December 31, 2003, Richard Singer and Robert Bertsch, on behalf of the
Company, filed suit against James G. Gordon, a director of the Company, for
his breach of fiduciary duty as a result of his unilateral actions to
prevent the Company from exercising its option to acquire the building
which HMS currently leases. The parties have yet to begin any substantial
discovery and, therefore, the Company and its attorneys are not in a
position to assess the merits of this action.
ITEM 5. OTHER INFORMATION
Although the Company does not currently employ a Chief Financial Officer,
Terry Washburn, President and Acting CEO, is also the principal accounting
officer.
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SGD HOLDINGS, LTD.
Date: March 15, 2005 By: /s/ Terry Washburn
-------------------------------------
Terry Washburn, President, Acting CEO
and Principal Accounting Officer
28