U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarter Ended: APRIL 30, 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 May 31, 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 -
April 30, 2005 3
Condensed Consolidated Statements of Operations -
Three Months Ended April 30, 2005 and 2004 4
Condensed Consolidated Statements of Operations -
Nine Months Ended April 30, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended April 30, 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
APRIL 30, 2005
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents $ 418,837
Trade accounts receivable, net of allowance of $61,752 1,185,889
Inventory 2,940,072
Prepaid expenses and other assets 213,334
------------
Total current assets 4,758,132
Property and equipment, net 269,860
Other assets 210,985
------------
Total assets $ 5,238,977
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities not subject to compromise:
Current liabilities:
Current installments of long-term debt $ 45,585
Accounts payable 864,985
Accrued expenses and other liabilities 206,325
------------
Total current liabilities 1,116,895
------------
Liabilities subject to compromise 3,600,422
Long-term debt, less current installments 186,848
Minority interest --
------------
Total liabilities 4,904,165
------------
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 (9,311,640)
Accumulated other comprehensive loss (278,750)
------------
Total stockholders' equity 334,812
------------
Total liabilities and stockholders' equity $ 5,238,977
============
See accompanying notes to condensed consolidated financial statements.
3
SGD HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
Sales and revenues $ 2,552,622 $ 2,576,881
Cost of sales 1,922,548 1,905,723
------------ ------------
Gross profit 630,074 671,158
Selling, general and administrative expense 930,657 815,507
------------ ------------
Loss from operations (300,583) (144,349)
Other income (expense):
Unrealized gain on marketable securities -- 45,857
Loss on sale of marketable securities -- (47,750)
Goodwill impairment (1,796,768) --
Interest expense (17,558) (14,055)
Interest expense - related parties (26,507) (27,257)
Gold consignment fee (65,046) (31,629)
Interest and other income 67,398 (558)
------------ ------------
Total other expense (1,838,481) (75,392)
------------ ------------
Net loss before income taxes and reorganization items (2,139,064) (219,741)
Reorganization items 149,353 --
Income tax expense (benefit) 8,100 (71,100)
------------ ------------
Net loss before minority interest (2,296,517) (148,641)
Minority interest -- 200
------------ ------------
Net loss $(2,296,517) $ (148,441)
============ ============
Basic and diluted net loss per share $ (0.05) $ (0.00)
============ ============
Weighted average shares outstanding (thousands) 45,666.8 43,337.9
============ ============
See accompanying notes to condensed consolidated financial statements.
4
SGD HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
Sales and revenues $ 11,027,657 $ 10,331,588
Cost of sales 8,170,868 7,741,380
------------- -------------
Gross profit 2,856,789 2,590,208
Selling, general and administrative expense 2,753,707 2,468,888
------------- -------------
Earnings from operations 103,082 121,320
Other income (expense):
Unrealized gain on marketable securities -- 85,067
Loss on sale of marketable securities -- (69,783)
Goodwill impairment (1,796,768) --
Interest expense (44,595) (39,536)
Interest expense - related parties (79,522) (119,457)
Gold consignment fee (154,567) (102,431)
Interest and other income 68,622 5,373
------------- -------------
Total other expense (2,006,830) (240,767)
------------- -------------
Net loss before income taxes and reorganization items (1,903,748) (119,447)
Reorganization items 149,353 --
Income tax expense (benefit) 88,100 (34,400)
------------- -------------
Net loss before minority interest (2,141,201) (85,047)
Minority interest -- 200
------------- -------------
Net loss $ (2,141,201) $ (84,847)
============= =============
Basic and diluted net loss per share $ (0.05) $ (0.00)
============= =============
Weighted average shares outstanding (thousands) 45,666.8 38,663.0
============= =============
See accompanying notes to condensed consolidated financial statements.
5
SGD HOLDINGS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
Cash flows provided (used) by operating activities:
Net loss before reorganization items $(1,991,848) $ (84,847)
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Depreciation and amortization 55,741 57,520
Deferred income taxes 88,100 (34,400)
Unrealized gain on marketable securities -- (85,067)
Proceeds from sale of marketable securities -- 23,797
Loss on sale of marketable securities -- 69,783
Minority interest -- (200)
Goodwill impairment 1,796,768 --
Changes in assets and liabilities:
Accounts receivable 4,326 (77,139)
Inventory (487,609) 114,964
Other assets (46,043) 178,815
Accounts payable and accrued expenses 504,609 340,200
Cash flows used by reorganization items (149,353) --
------------ ------------
Net cash provided (used) by operating activities (225,309) 503,426
Cash flows used by investing activities:
Capital expenditures (32,045) (82,014)
Cash received in excess of cash paid for Gem Pak -- 6,214
------------ ------------
Net cash used by investing activities (32,045) (75,800)
Cash flows used by financing activities:
Amounts due related parties 11,812 100,736
Proceeds from sale of common stock -- 36,000
Loans made to Gem Pak before acquisition -- (148,477)
Repayment of long-term debt and notes payable (30,765) (8,049)
------------ ------------
Net cash used by financing activities (18,953) (19,790)
Net increase (decrease) in cash and cash equivalents (276,307) 407,836
Cash and cash equivalents, beginning of period 695,144 898,828
------------ ------------
Cash and cash equivalents, end of period $ 418,837 $ 1,306,664
============ ============
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.
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, 2004, which
is included in the Company's Form 10-KSB dated July 31, 2004 and filed November
19, 2004. 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.
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 continued 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, until June 2,
2005, when a Chapter 11 Trustee ("Trustee") was appointed.
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 on March 4, 2005, and a new case number was
assigned (Case No. 05-42392-rfn11).
7
ORGANIZATION
SGD was incorporated on May 22, 1996, in Delaware as Transun International
Airways, Inc. and until June 1999, was a development stage company with plans to
establish itself as an air transport company providing non-scheduled air service
(charter flights) for tour operators, charter brokers, cruise line casinos,
theme parks and theme attractions. Transun International Airways, Inc. changed
its name to Goldonline International, Inc. on June 10, 1999. Goldonline
International, Inc. changed its name to SGD Holdings, Ltd. on January 24, 2001.
On April 20, 2000, pursuant to an agreement and plan of reorganization dated
April 11, 2000, SGD acquired 100% of the issued and outstanding common stock of
Benton Ventures, Inc. ("Benton"), a Delaware corporation, in exchange for
1,200,000 newly issued common shares of SGD. On April 25, 2000, the Board of
Directors of SGD elected to merge Benton into SGD pursuant to Section 253 of
Delaware's General Corporate Laws. As a result of the merger, SGD became the
surviving company and assumed the reporting responsibilities under successor
issuer status as more fully detailed in Section 12(g)(3) of The Securities
Exchange Act of 1934. Benton was a dormant company and its assets and
liabilities were insignificant.
Silver was incorporated on September 12, 1994, in Texas. HMS was incorporated on
October 12, 2000, in Texas. Tandori was incorporated on November 9, 1998, in
Nevada. Jewelry was incorporated on February 3, 1999, in Delaware. Gem Pak was
incorporated on May 24, 2002, in Texas. Rings was incorporated September 2,
2003, in Nevada.
On June 10, 1999, SGD acquired all of the issued and outstanding common stock of
Silver and Jewelry. For accounting purposes, the acquisitions were treated as
the acquisition of Silver and Jewelry by SGD with Silver as the acquiror
(reverse acquisition). The historical financial statements prior to June 10,
1999, are those of Silver.
Effective October 1, 2000, SGD completed the acquisition of HMS Jewelry Co.,
Ltd., a Texas limited partnership and HMS Operating Company, a Texas corporation
and transferred the assets acquired and liabilities assumed into HMS Jewelry
Company, Inc. For accounting purposes, the acquisition was treated as a
purchase.
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.
8
NATURE OF BUSINESS
SGD is a holding company principally engaged in acquiring and developing jewelry
businesses. HMS is primarily involved in the wholesale gold jewelry business.
Gem Pak sells packaging and display materials, principally to retail jewelry
stores. Jewelry currently operates two retail jewelry stores.
STOCK OPTION PLANS
The Company accounts for stock-based awards to employees using the intrinsic
value method described in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the accompanying
consolidated financial statements for stock-based awards to employees when the
exercise price of the award is equal to or greater than the quoted market price
of the stock on the date of the grant.
SFAS 123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
123" require disclosures as if the Company had applied the fair value method to
employee awards rather than the intrinsic value method. The fair value of
stock-based awards to employees is calculated through the use of option pricing
models, which were developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. No awards were granted during the three and nine months ended April 30,
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. BANKRUPTCY
On January 20, 2005, SGD 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 (Case No. 05-10182). The Debtor continued 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, until June 2, 2005, when a Chapter 11 Trustee was appointed.
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 on March 4, 2005, and a new case number was
assigned (Case No. 05-42392-rfn11).
Under Chapter 11, certain claims against the Debtor in existence prior to the
filing of the petition for relief under the federal bankruptcy laws are stayed
while the Debtor continues business operations as Debtor-in-possession. These
claims are reflected in the April 30, 2005, balance sheet as "liabilities
subject to compromise." Additional claims (liabilities subject to compromise)
9
may arise subsequent to the filing date resulting from rejection of executory
contracts, including leases, and from the determination by the court (or agreed
to by parties in interest) of allowed claims for contingencies and other
disputed amounts. Claims secured against the Debtor's assets ("secured claims")
also are stayed, although the holders of such claims have the right to move the
court for relief from the stay. Secured claims are secured by liens on the
Debtor's investment in HMS.
Liabilities subject to compromise consist of:
Secured notes payable $ 2,185,488
Accounts payable 137,743
Accrual for Landmark settlement 1,000,000
Accrued interest 84,752
Due to related parties 192,439
------------------
Total $ 3,600,422
==================
Components of reorganization items on the statements of operations include
professional fees of $148,915 and other items of $438 in both the three and nine
month periods ended April 30, 2005.
Secured notes payable at April 30, 2005, consist of:
Note payable to a company; due July 31, 2004; interest payable
monthly at 5.8% (a) $ 835,000
Note payable to the president of HMS, due on July 31, 2004; interest
payable monthly at 8%; collateralized by the common stock of HMS;
guaranteed by G. David Gordon; convertible into common stock of the
Company at $.01 per share, limited to 9.9% of the total outstanding
shares of the Company at the time; with anti-dilution rights 1,250,000
Note payable to G. David Gordon, 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 $ 2,185,488
================
(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
10
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.
3. INVENTORIES
Inventories at April 30, 2005, consist of:
Inventory, principally gold jewelry $ 6,649,753
Less consigned gold (3,709,681)
------------------
Net inventories $ 2,940,072
==================
At April 30, 2005, inventories excluded 8,514.3 ounces of gold on consignment.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at April 30, 2005:
Office and computer equipment $ 234,599
Furniture and fixtures 146,457
Software 131,663
Leasehold improvements 34,822
----------------
547,541
Less accumulated depreciation (277,681)
----------------
$ 269,860
================
5. GOODWILL
Goodwill, which represents the cost in excess of fair value of net assets
acquired is subject to an impairment test on an annual basis, or when there is
reason to believe that the value has been diminished or impaired. (See note 7).
The fair value of the Company's identified reporting units was estimated using
the expected present value of corresponding future cash flows from the sale of
HMS and subsidiaries. The Company completed the valuation of HMS, its reporting
unit that included goodwill, and concluded that an impairment charge of the
remaining balance of $1,796,768 was warranted.
11
6. LONG-TERM DEBT
Long-term debt at April 30, 2005, consists of the following:
Note payable to a bank with monthly payments of $3,799, plus interest
at prime, 5.75% at April 30, 2005; balance due June 30, 2010;
collateralized by assets owned by an individual who is also a
personal guarantor $ 232,433
Current installments of long-term debt 45,585
----------------
Long-term debt, less current installments $ 186,848
================
7. GOLD CONSIGNMENT AND LINE OF CREDIT AGREEMENT
HMS had a gold consignment agreement with a gold lender. Under the terms of the
agreement, HMS was 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 remained with the gold lender until HMS purchased the gold. However, during
the period of consignment, the entire risk of loss, damage or destruction of the
gold was borne by HMS. The purchase price per ounce was based on the daily
Second London Gold Fix. HMS paid the gold consignor a consignment fee based upon
the dollar value of gold ounces outstanding, as defined in the agreement. At
April 30, 2005, HMS had 8,514.3 ounces of gold on consignment with a market
value of $3,709,681, which was valued at the daily Second London Gold Fix,
$435.70 per ounce at April 30, 2005, and charged 8.25%.
Consigned gold is not included in inventory, and there is no related liability
recorded. As a result of these consignment arrangements, HMS was able to shift a
substantial portion of the risk of market fluctuations in the price of gold to
the gold lender, since HMS did not purchase gold from the gold lender until
receipt of a purchase order from, or shipment of jewelry to, its customers.
The gold lender also provided a line of credit to HMS in the amount of
$1,500,000 that was due on demand, including interest at the lender's prime rate
plus 3/4%. The balance on the line of credit reached a high of $800,000 at
December 31, 2004, which 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 contained restrictive covenants relating to maximum
usage, net worth, working capital and other financial ratios and the agreement
required HMS to own a specific amount of gold at all times. HMS was 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
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.
On April 21, 2005, the Company was notified by its gold lender to either return
the consigned gold or purchase the gold by paying the balance of the consignment
obligation by May 11, 2005. HMS and the Company, through the Bankruptcy Court,
delayed the payoff until July 8, 2005, when the purchaser of HMS paid the gold
lender. See note 12.
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
April 30, 2005 and 2004 and amounted to $72,675 during each of the nine month
periods ended April 30, 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 $474,371 at April 30, 2005.
At April 30, 2005, amounts due from related parties, which is included in
prepaid expenses and other assets on the condensed consolidated balance sheet,
include the following:
USN Corporation ("USN") $ 7,267
President of HMS 7,587
-----------------
Total $ 14,854
=================
At April 30, 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 April 30, 2005, of $7,267. 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 April 30, 2005, amounts due to related parties include the following:
Liabilities Subject
Total to Compromise
G. David Gordon $ 138,285 $ 100,369
Terry Washburn 27,132 27,132
BJB Services, Inc. 67,938 64,938
President of Gem Pak 426 -
------------------ ------------------
Total $ 233,781 $ 192,439
================== ==================
The remaining $41,342 of liabilities not subject to compromise is included in
accrued expenses and other liabilities on the condensed consolidated balance
sheet.
At April 30, 2005, the Company owed G. David Gordon, the former CEO of HMS, a
shareholder and the brother of a Director, $138,285 in addition to a $100,488
note obligation. The $138,285 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 April
30, 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 at that time.
BJB Services, Inc., a shareholder, and another company controlled by the
principal of BJB were owed $67,938 at April 30, 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 at that time.
The President and 20% owner of Gem Pak was owed $426 at April 30, 2005.
9. COMMITMENTS AND CONTINGENCIES
Rent expense amounted to $43,771 and $47,084 during the three months ended April
30, 2005 and 2004, respectively; and amounted to $150,255 and $107,770 during
the nine months ended April 30, 2005, respectively. Minimum rental commitments
under all non-cancelable leases with an initial term in excess of one year are
payable as follows: three month balance of 2005 - $45,248; 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 $474,371 at April 30, 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 - STAYED AS TO THE COMPANY AS A RESULT OF THE BANKRUPTCY
FILING
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 prevented SGD from raising any additional equity capital until the
trial was completed. Trial in the matter has been completed and briefs were
filed March 7, 2005. David Covey was released from the case and the judge ruled
that G. David Gordon had no liability to the Plaintiffs.
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. The Company accrued $1,000,000 as an estimate of the cost of the
settlement at July 31, 2004, which amount is include in liabilities subject to
compromise in the condensed consolidated balance sheet.
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.
15
11. GOING CONCERN
At April 30, 2005, the Company's working capital was $40,815 as compared to
$184,360 at July 31, 2004, and $2,198,989 at July 31, 2003. The Company realized
a net loss of $2,141,201 for the nine month period ended April 30, 2005, which
included a charge for goodwill impairment of $1,796,768. The Company also 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 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 has made demand for
either return of the consigned gold or repayment of the obligation. The gold
lender was paid by the purchaser of HMS on July 8, 2005, see note 12. 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 2). The Company does not have
sufficient cash flows to meet its obligations currently due within the next 12
months and the Company has sold its only operating subsidiary. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern.
After the sale of HMS, as discussed in note 12, SGD will revert to a shell
company with no operations. If SGD is unable to reorganize and formulate a plan
to exit bankruptcy after the sale of its operating subsidiary, then the Company
may be unable to continue as a going concern. These condensed consolidated
financial statements do not include any adjustments that may result from the
outcome of these uncertainties.
16
12. SUBSEQUENT EVENT
On June 17, 2005, the Trustee filed a Motion for Authority to sell stock under
Section 363(b), which provides in part, that a trustee may sell property of the
estate outside of the ordinary course of business at the discretion of the
bankruptcy court. The decision to sell SGD's stock ownership of HMS and its
subsidiaries was due to the demand made by the gold lender of HMS to either pay
off the gold consignment or transfer sufficient gold to repay the obligation.
The Trustee determined that in the event the gold lender was successful in
obtaining the gold from HMS, the business operation of HMS would be crippled and
the value of the HMS stock would decline precipitously.
The terms of the sale include the purchaser paying up to $300,000 for
administrative claims; paying a $50,000 fee to the Trustee; assumption of all
obligations for and satisfaction of any and all claims against the Debtor
asserted under 11 U.S.C. Section 507(a)(4)(8) and (9); and paying the Trustee
$100,000 to be used to help satisfy any unsecured claims against the Debtors
estate. Based on the forgoing, the Company expects to record a loss of
approximately $1,500,000 in July 2005. The sale has not been formally approved
by the Bankruptcy Court.
The purchaser of HMS acquired the consigned gold on July 8, 2005 and paid the
balance due the gold lender.
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 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 (Case No. 05-10182).
The Debtor continued 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, until June 2, 2005, when a
Trustee was appointed.
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 on March 4, 2005, and a
new case number was assigned (Case No. 05-42392-rfn11).
On June 17, 2005, the Trustee filed a Motion for Authority to sell stock
under Section 363(b), which provides in part, that a trustee may sell
property of the estate outside of the ordinary course of business at the
discretion of the bankruptcy court. The decision to sell SGD's stock
ownership of HMS and its subsidiaries was due to the demand made by the
gold lender of HMS to either pay off the gold consignment or transfer
sufficient gold to repay the obligation. The Trustee determined that in the
event the gold lender was successful in obtaining the gold from HMS, the
business operation of HMS would be crippled and the value of the HMS stock
would decline precipitously.
The terms of the sale include the purchaser paying up to $300,000 for
administrative claims; paying a $50,000 fee to the Trustee; assumption of
all obligations for and satisfaction of any and all claims against the
Debtor asserted under 11 U.S.C. Section 507(a)(4)(8) and (9); and paying
the Trustee $100,000 to be used to help satisfy any unsecured claims
against the Debtors estate. Based on the forgoing, the Company expects to
record a loss of approximately $1,500,000 in July 2005. The sale has not
been formally approved by the Bankruptcy Court.
18
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2005, the Company's working capital was $40,815 as compared to
$184,360 at July 31, 2004, and $2,198,989 at July 31, 2003. The Company
realized a net loss of $2,141,201 for the nine month period ended April 30,
2005, which included a charge for goodwill impairment of $1,796,768. The
Company also 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 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 has made demand for either return of the
consigned gold or repayment of the obligation. The gold lender was paid by
the purchaser of HMS on July 8, 2005, see note 12. 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 2). The Company does not
have sufficient cash flows to meet its obligations currently due within the
next 12 months and the Company has sold its only operating subsidiary.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
After the sale of HMS, as discussed in note 12, SGD will revert to a shell
company with no operations. If SGD is unable to reorganize and formulate a
plan to exit bankruptcy after the sale of its operating subsidiary, then
the Company may be unable to continue as a going concern. These condensed
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 $232,433
at April 30, 2005, which had been due on December 10, 2004. The new
agreement requires monthly principal payments of $3,799 plus interest at
prime (5.75% at April 30, 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 nine months ended April
30, 2005, until these issues can be resolved. These matters have been
stayed as a result of the Company's bankruptcy filing.
HMS had a gold consignment agreement with a gold lender. Under the terms of
the agreement, HMS was 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 remained with the gold lender until HMS
purchased the gold. However, during the period of consignment, the entire
risk of loss, damage or destruction of the gold was borne by HMS. The
purchase price per ounce was based on the daily Second London Gold Fix. HMS
paid the gold consignor a consignment fee based upon the dollar value of
gold ounces outstanding, as defined in the agreement. At April 30, 2005,
HMS had 8,514.3 ounces of gold on consignment with a market value of
$3,709,681, which was valued at the daily Second London Gold Fix, $435.70
per ounce at April 30, 2005, and charged 8.25%.
19
Consigned gold is not included in inventory, and there is no related
liability recorded. As a result of these consignment arrangements, HMS was
able to shift a substantial portion of the risk of market fluctuations in
the price of gold to the gold lender, since HMS did not purchase gold from
the gold lender until receipt of a purchase order from, or shipment of
jewelry to, its customers.
The gold lender also provided a line of credit to HMS in the amount of
$1,500,000 that was due on demand, including interest at the lender's prime
rate plus 3/4%. The balance on the line of credit reached a high of
$800,000 at December 31, 2004, which 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 contained restrictive covenants relating to
maximum usage, net worth, working capital and other financial ratios and
the agreement required HMS to own a specific amount of gold at all times.
HMS was 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.
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.
On April 21, 2005, the Company was notified by its gold lender to either
return the consigned gold or purchase the gold by paying the balance of the
consignment obligation by May 11, 2005. HMS and the Company, through the
Bankruptcy Court, delayed the payoff until July 8, 2005, when the purchaser
of HMS paid the gold lender.
20
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 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 April 30, 2005 and
2004:
2005 2004
---- ----
Sales and revenues $ 2,552,622 $ 2,576,881
Cost of sales 1,922,548 1,905,723
--------------- ----------------
Gross profit $ 630,074 $ 671,158
=============== ================
Total sales decreased $24,259 (0.9%) during the three-month period ended
April 30, 2005, as compared to the same prior year period. The decrease
consists of a decrease of $25,832 in retail sales by the jewelry stores, an
increase of $122,437 in Gem Pak sales and a decrease of $120,864 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 three months in fiscal 2004.
The Second London Gold Fix was $435.70 per ounce on April 30, 2005 and
$422.15 per ounce on January 31, 2005, the beginning of the current year
quarter. The Second London Gold Fix was $388.50 per ounce on April 30, 2004
and $399.75 per ounce on January 31, 2004. Sales volumes were down during
the current quarter, countering the approximate 3% 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.
Gross profit has decreased to 24.7% during the current year period from
26.1% during the same prior year period. The 1.4% decrease is primarily
from the lower gross profit realized from the wholesale gold operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The following summarizes the
Company's selling, general and administrative expenses ("SGA") for the
three-month periods ended April, 30, 2005 and 2004:
2005 2004
---- ----
HMS $ 659,228 $ 617,835
Jewelry and Rings 72,976 122,745
Gem Pak 175,876 33,615
Corporate and other 171,930 41,312
-------------- ---------------
Total 1,080,010 815,507
Reorganization items included (149,353) -
-------------- ---------------
Net SGA $ 930,657 $ 815,507
============== ===============
21
HMS's SGA for the quarter ended April 30, 2005 increased 6.7% 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 in the prior year period. Gem Pak was acquired
effective April 1, 2004. Accordingly, it has SGA for three months in fiscal
2005 and only one month in fiscal 2004. Corporate SGA increased $130,618
during the quarter ended April 30, 2005 as compared to the year earlier
period. The current year corporate SGA includes higher legal costs as a
result of the bankruptcy filing and costs associated with the agreement
with the gold lender.
GOODWILL IMPAIRMENT - As a result of demands made by the HMS gold lender
and the subsequent sale of HMS and its subsidiaries, the Company considered
the goodwill assigned to HMS and its subsidiaries fully impaired on April
30, 2005.
INTEREST EXPENSE - Related party interest expense decreased from $27,257 to
$26,507 during the quarter ended April 30, 2005, as compared to the year
earlier period. Interest expense increased $3,503 during the quarter ended
April 30, 2005, as compared to the year earlier period.
GOLD CONSIGNMENT FEE - The gold consignment fee increased $33,417 during
the three month period ended April 30, 2005, as compared to the prior year
period. The increase is due to the increase in the rate by the gold lender
effective March 1, 2005. At April 30, 2005, HMS had 8,514.3 ounces of gold
on consignment with a related consignment obligation of $3,709,681 ($435.70
per ounce) as compared to 7,873.1 ounces of gold on consignment with a
related consignment obligation of $3,058,699 ($388.50 per ounce) at April
30, 2004.
UNREALIZED GAIN ON MARKETABLE SECURITIES - The Company recognized an
unrealized gain in the amount of $45,857 during the three month period
ended April 30, 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 $8,100
during the three month period ended April 30, 2005, and a credit for income
taxes in the amount of $71,100 during the three month period ended April
30, 2004. The provision in the current period arose when the Company
elected to reserve the majority of its deferred tax assets which were
associated with the future benefit of net operating losses.
22
NINE MONTHS ENDED APRIL 30, 2005 AND 2004
SALES AND COST OF SALES - The Company's sales and cost of sales may be
summarized as follows for the nine-month periods ended April 30, 2005 and
2004:
2005 2004
---- ----
Sales and revenues $ 11,027,657 $ 10,331,588
Cost of sales 8,170,868 7,741,380
------------------ ------------------
Gross profit $ 2,856,789 $ 2,590,208
================== ==================
Total sales increased $696,069 (6.7%) during the nine-month period ended
April 30, 2005, as compared to the same prior year period. The increase
consists of $71,616 in retail sales by the jewelry stores, $652,635 in Gem
Pak sales and a decrease of $172,414 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 nine months during fiscal 2005 and two stores for five months,
one store for three months and one store for eight months in fiscal 2004.
The Second London Gold Fix was $435.70 per ounce on April 30, 2005 and
$391.40 per ounce on July 31, 2004, the beginning of the current year
period. The Second London Gold Fix was $388.50 per ounce on April 30, 2004
and $354.75 per ounce on July 31, 2003. Sales volumes were down during the
current period, countering the approximate 11% 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.
Gross profit has increased to 25.9% during the current year period from
25.1% during the same prior year period. The 0.8% improvement is primarily
from the higher gross profit realized from Gem Pak's operations, which are
included for nine months in fiscal 2005 and only one month in fiscal 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The following summarizes the
Company's SGA for the nine-month periods ended April 30, 2005 and 2004:
2005 2004
---- ----
HMS $ 1,884,281 $ 1,912,299
Jewelry and Rings 238,717 286,154
Gem Pak 468,984 33,615
Corporate and other 311,078 236,820
-------------- ---------------
Total 2,903,060 2,468,888
Reorganization items included (149,353) -
-------------- ---------------
Net SGA $ 2,753,707 $ 2,468,888
============== ===============
23
HMS's SGA for the period ended April 30, 2005 decreased 1.5% 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 five months, one store for three months and one store for
eight months in the prior year period. Gem Pak was acquired effective April
1, 2004. Accordingly, it has SGA for nine months during the current fiscal
year and only one month in fiscal 2004. Corporate SGA increased $74,258
during the period ended April 30, 2005 as compared to the year earlier
period. The current year corporate SGA includes higher legal costs of
$98,000 and lower officer compensation costs of $24,000. The higher legal
and professional costs are primarily due to the bankruptcy filing and the
gold lender dispute.
GOODWILL IMPAIRMENT - As a result of demands made by the HMS gold lender
and the subsequent sale of HMS and its subsidiaries, the Company considered
the goodwill assigned to HMS and its subsidiaries fully impaired on April
30, 2005.
INTEREST EXPENSE - Related party interest expense decreased from $119,457
to $79,522 during the period ended April 30, 2005, as compared to the year
earlier period. Interest expense increased $5,059 during the period ended
April 30, 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 $52,136 during
the nine month period ended April 30, 2005, as compared to the prior year
period. The increase is due to the increase in the rate by the gold lender
on March 1, 1005 and to having higher dollar balances on the gold
consignment facility as a result of the increased gold prices. The gold
consignment was $3,709,681 at April 30, 2005, as compared to $3,058,699 at
April 30, 2004.
UNREALIZED GAIN ON MARKETABLE SECURITIES - The Company recognized an
unrealized gain in the amount of $85,067 during the nine month period ended
April 30, 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 $88,100
during the nine month period ended April 30, 2005, and a credit for income
taxes in the amount of $34,400 during the nine month period ended April 30,
2004. The provision in the current period arose when the Company elected to
reserve the majority of its deferred tax assets which were associated with
the future benefit of net operating losses.
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
April 30, 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 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 (Case No. 05-10182).
The Debtor continued 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, until June 2, 2005, when a
Trustee was appointed.
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 on March 4, 2005, and a
new case number was assigned (Case No. 05-42392-rfn11).
OTHER MATTERS - STAYED AS TO THE COMPANY AS A RESULT OF THE BANKRUPTCY
FILING
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 prevented
SGD from raising any additional equity capital until the trial was
completed. Trial in the matter has been completed and briefs were filed
March 7, 2005. David Covey was released from the case and the judge ruled
that G. David Gordon had no liability to the Plaintiffs.
26
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. The Company
accrued $1,000,000 as an estimate of the cost of the settlement at July 31,
2004, which amount is include in liabilities subject to compromise in the
condensed consolidated balance sheet.
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: July 12, 2005 By: /s/ Terry Washburn
----------------------------
Terry Washburn, President, Acting CEO
and Principal Accounting Officer
28