<PAGE>
As filed with the Securities and Exchange Commission on July 1, 1998
Registration No. 333-6218
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
D.G. JEWELLERY OF CANADA LTD.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Ontario, Canada 3911 N/A
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1001 Petrolia Road
Toronto, Ontario M3J2X7
(416) 665-8844
(Address and telephone number of principal executive offices)
D.G. JEWELLERY OF CANADA LTD.
1001 Petrolia Road
Toronto, Ontario M3J2X7
(Address of principal place of business)
GARY DAVIS
Vice President
D.G. Jewellery of Canada Ltd.
1001 Petrolia Road
Toronto, Ontario M3J 2X7
(416) 665-8844
(Name, address, and telephone number of agent for service)
Copies to:
Arthur S. Marcus, Esq.
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
(212) 752-9700
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1993, check the following box. /x/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is filed as a post-effective amendment filed pursuant to 462(b)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. /X/ 333-6218
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Maximum Offering Aggregate
Title of Each Class Amount to Be Price Per Offering Amount of
of Securities to be Registered Registered(2) Shares(1) Price(1) Registration Fee
<S> <C> <C> <C> <C>
Common Stock, no par value .................. 1,265,000(3) 6.25 7,906,250 $ 2,332.34
Underwriters' Purchase Options .............. 110,000 .0001 11 --
Common Stock, no par value .................. 110,000(4) 9.90 1,089,000 321.26
Redeemable Common Stock Purchase Warrants.... 110,000(4)(4) .165 18,150 5.35
Common Stock, no par value .................. 110,000(4)(5) 10.31 1,134,100 334.56
Total........................................ $ 10,147,500 2993.51
Less Fee Previously Paid..................... 3,076.20
--------
Amount Due................................... ========
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) This Registration Statement also covers any additional shares of
Common Stock which may become issuable by virtue of the anti-dilutive
provisions of the Warrants and the Underwriters' Purchase Options. No
additional registration fee is included for these shares.
(3) Represents shares of Common Stock issuable upon exercise of the
Warrants.
(4) Reserved for issuance upon exercise of the Underwriters' Purchase
Options together with such indeterminate number of Warrants and/or
Common Stock as may be issuable pursuant to anti-dilution provisions
under the Underwriters' Purchase Options or the Warrants.
(5) Reserved for issuance upon exercise of the Warrants obtained upon
exercise of the Underwriters' Purchase Options.
<PAGE>
PRELIMINARY PROSPECTUS DATED JULY 1, 1998
SUBJECT TO COMPLETION
PROSPECTUS
----------
D.G. JEWELLERY OF CANADA LTD.
1,265,000 SHARES OF COMMON STOCK
ISSUABLE UPON THE EXERCISE OF REDEEMABLE WARRANTS
110,000 UNDERWRITER'S PURCHASE OPTIONS,
110,000 SHARES OF COMMON STOCK AND 110,000 REDEEMABLE WARRANTS
INCLUDED IN SUCH OPTIONS,
110,000 SHARES OF COMMON STOCK
ISSUABLE UPON THE EXERCISE OF REDEEMABLE WARRANTS
INCLUDED IN SUCH OPTIONS
This Prospectus relates to (i) the sale of up to 1,265,000 shares of common
stock, no par value (the "Common Stock"), of D.G. Jewellery of Canada Ltd. (the
"Company") which are reserved for issuance upon the exercise of redeemable
warrants, each warrant to purchase one share of Common Stock (each, a
"Warrant"), issued in connection with the Company's 1997 initial public offering
of securities (the "IPO"), (ii) 110,000 Underwriter's Purchase Options (the
"Underwriter's Warrants"), (iii) 110,000 shares of Common Stock issuable upon
exercise of the Underwriter's Warrants, (iv) 110,000 Warrants issuable upon
exercise of the Underwriter's Warrants and (v) 110,000 shares issuable upon
exercise of such Warrants.
Each Warrant entitles the registered holder thereof to purchase one share
of Common Stock at an exercise price of $6.25, subject to adjustment in certain
circumstances, for a period of three years commencing April 17, 1998. The
Warrants are redeemable by the Company at any time commencing April 17, 1998
upon notice of not less than 30 days, at a price of $.10 per Warrant, provided
that the closing bid quotation of the Common Stock on the Nasdaq Small-Cap
Market ("NASDAQ") has exceeded $9.38 per share (subject to adjustment) for a
period of 15 consecutive trading days during the period in which the Warrants
are exercisable. The holders of Warrants will have the right to exercise their
Warrants until the close of business on the date fixed for redemption. See
"Description of Securities."
On April 18, 1997, the Common Stock and the Warrants began trading on
NASDAQ under the symbols "DGJLF" and "DGJWF," respectively, and on the Boston
Stock Exchange ("BSE") under the symbols "DGJ" and "DGJW," respectively. On June
18, 1998, the closing sale price of the Common Stock and Warrants on NASDAQ was
$4 1/2 and $1 1/2, respectively. See "Certain Market Information."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVESTMENT THEREIN INVOLVES A
HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE
DISCUSSION UNDER "RISK FACTORS" (SEE PAGE 8) AND 'DILUTION' (SEE PAGE 17) .
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is July 1, 1998
1
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(Footnotes from front cover)
The Company intends to furnish its shareholders with annual reports
containing financial statements audited and reported upon by its independent
chartered accountants which are anticipated to be prepared in accordance with
generally accepted auditing standards in the United States of America. The
Company will also furnish shareholders with such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
THE OFFERING MATERIALS DO NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES PLACED HEREBY BY ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE AN
OFFERING OR A SOLICITATION.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
The Company's headquarters and largest manufacturing facility, the majority
of its officers and directors, its principal shareholder and its auditors are
residents of Canada and a significant portion of the Company's assets are or may
be located outside the United States. As a result, although service of process
may be effected upon the Company through its offices in the United States, it
may be difficult for investors to effect service of process within the United
States upon non-resident officers and directors, or to enforce against them
judgments obtained in the United States courts predicated upon the civil
liability provision of the Securities Act or state securities laws. The Company
has appointed Lawrence E. Jaffe, Esq., 777 Terrace Avenue, Hasbrouck Heights,
New Jersey 07604 as its agent to receive service of process in any action
against the Company in any federal court or court in the States of New Jersey,
New York or Florida arising out of the Offering or any purchase or sale of
securities in connection herewith. The Company believes that a judgment of a
United States court predicated solely upon civil liability under the Securities
Act would probably be enforceable in Canada if the United States court in which
the judgment was obtained had a basis for jurisdiction in the matter that was
recognized by a Canadian court for such purposes. However, there is substantial
doubt whether an action could be brought in Canada in the first instance on the
basis of liability predicated solely upon such laws. If investors have questions
with regard to these issues, they should seek the advice of their individual
counsel. The Company has also been informed by its Canadian legal counsel
Grubner, Krauss that, pursuant to the Currency Act (Canada), a judgment by a
court in any Province of Canada may only be awarded in Canadian currency.
Pursuant to the provision of the Courts of Justice Act (Ontario), however, a
court in the Province of Ontario shall give effect to the manner of conversion
to Canadian currency of an amount in a foreign currency, where such manner of
conversion is provided for in an obligation enforceable in Ontario.
2
<PAGE>
EXCHANGE RATE DATA
The Company maintains its books of account in Canadian dollars, but has
provided the financial data in this Prospectus in United States dollars with its
audit conducted in accordance with generally accepted auditing standards in the
United States of America. All references to dollar amounts in this Prospectus
are in United States dollars.
The following table sets forth, for the periods indicated, certain exchange
rates based on the noon buying rate in New York City for cable transfers in
Canadian dollars. Such rates are the number of United States dollars per one
Canadian dollar and are the inverse of rates quoted by the Federal Reserve Bank
of New York for Canadian dollars per US$1.00. The average exchange rate is based
on the average of the exchange rates on the last day of each month during such
periods. On June 19, 1998, the exchange rate was US$1.00 per Cdn$1.47.
YEAR ENDED DECEMBER 31, 1994 1995 1996 1997
- -----------------------------------------------------------------------------
RATE AT END OF PERIOD $ 0.7143 $ 0.7353 $ 0.7299 $ 0.6991
AVERAGE RATE DURING PERIOD 0.7299 0.7299 0.7353 0.7223
HIGH 0.7092 0.7009 0.7212 0.6945
LOW 0.7642 0.7533 0.7526 0.7493
3
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by reference
to the more detailed information, financial statements and notes appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Except as otherwise indicated, all per share
information in this Prospectus reflects the recapitalization of the Company
through issuance of 3,900,000 shares of Common Stock pursuant to a 39,000-for-1
share split effected on December 16, 1996 and the redemption and cancellation of
all the outstanding class B special shares of the Company on April 17, 1997. The
per Share information does not give effect to the exercise of (i) the Warrants,
(ii) the Underwriters' Options, and (iii) other outstanding options and option
plans.
THE COMPANY
GENERAL
The Company is primarily engaged in the design, manufacture, merchandising
and distribution of stone-set jewelry for department stores, mass merchants,
catalogue showrooms, television shopping networks and other high volume
retailers and major discounters. The Company is also seeking to take advantage
of non-traditional wholesale distribution outlets such as Internet wholesale
advertising services, liquidation operations, and consumer product rental
companies.
The Company's manufacturing and wholesale distribution business is divided
into three divisions. The Company has operated in Canada under the DG name
(these operations shall be hereinafter referred to as the "DG Division") for 29
years. The DG Division's principal product is rings, which account for
approximately 90% of the DG Division's sales based on both dollars and units.
The DG Division also produces pendants and earrings. The jewelry produced by the
DG Division is made of gold or silver and most contain one or more precious,
semi-precious or synthetic stones. The stones include diamonds, pearls, gems,
cubic zirconia and other synthetic stones. The average wholesale price of the DG
Division products are approximately $150.00 and retail prices for the D.G.
Division's better selling products range from $30.00 to $600.00.
In November 1997, the Company acquired its Diamonair division
("Diamonair"). Diamonair assembles and wholesales a product line which consists
of earrings, rings, bracelets and necklaces. The products are primarily gold
jewelry set with cubic zirconia stones. The average wholesale price of the
Diamonair products are approximately $100.00 and retail prices for the
Diamonair's better selling products range from $50.00 to $500.00. Approximately
30% of Diamonair's products are manufactured partly or entirely by the DG
Division and the Company intends to seek to expand this percentage.
In February 1998, the Company acquired its Aviv division ("Aviv"). Aviv is
a manufacturer and wholesaler of bridal jewelry. Its products are primarily gold
ring set with diamonds or gem-stones. The average wholesale price of its jewelry
is approximately $700 and retail prices for Aviv's better selling products range
from $500.00 to $1,500.00. Certain Aviv products retail for as much as
$10,000.00.
The Company believes it has established itself as a low-cost, high-volume
and quality manufacturer in the value priced jewelry market. Its primary
competitive advantages particularly for its DG Division, is its innovative
manufacturing method (the "D.G. Manufacturing Process") which allows for
substantially reduced costs per unit, provides substantial capacity and better
quality, and requires minimal skilled labor. See "Business--Manufacturing." The
Company's merchandising strategy also involves the design of products that it
believes will continually appeal to the mass market. The Company also assists
its customers in creatively merchandising its jewelry to encourage impulse
purchases.
Growth has been achieved by providing its customers with quality and
services and in recent years, through the D.G. Manufacturing Process, which
enables the Company to provide its customers with value priced, stone-set mass
appeal jewelry at lower cost than many of its competitors. The Company maintains
long-standing relationships with Canadian customers such as Reed's Jewellers,
The Twain Group and The Shopping Channel. In the last two years the Company
4
<PAGE>
has also focused on the much larger American market. The DG Division established
a United States sales office in Tampa, Florida and currently sells products to
customers such as Wal-Mart, Fred Meyer Inc., Value Vision International Inc.,
Suarez Corporation, which is a direct mail order company, and others, including
Zales Corporation ("Zales"), the largest jewelry retailer in the United States.
The Company has also utilized strategic acquisitions to increase its presence in
the United States. Diamonair's customers include Finlay Fine Jewelry Corp.
("Finlay"), which operates leased fine jewelry departments in department stores
for retailers such as May Department Stores and Federated Department Stores.
Aviv sells to Zales and Finlay, as well as many independent jewelers in the
United States. In 1997, approximately 63% of sales were in the United States, as
compared to 17% in 1995.
Manufacturing for the DG Division's product line and many of the Diamonair
products occurs at the Company's facility in Toronto, Canada. The D.G.
Manufacturing Process is a unique lost-wax/cast-in-place manufacturing process
which enables the Company to produce high volume, quality jewelry, particularly
multi-stone rings. The Company presently produces an average weekly volume of
1,500 to 1,800 rings at the Toronto facility. Management believes the Toronto
facilities have the capacity to produce approximately 15,000 multi-stone rings
per week. This special manufacturing process has positioned the Company as a
major competitor in this product line, having become a low-cost producer of
quality rings for the value priced jewelry market. See "Business -
Manufacturing."
Currently, manufacturing and other operations for the Aviv product line are
accomplished at the Company's facility in Houston, Texas. The Company entered
into a sublease agreement for this factory in connection with the acquisition of
Aviv. This four year old facility produces an average weekly volume of 800 rings
and Management believes its Texas facilities have the capacity to produce
approximately 4,500 rings per week.
The Company's merchandising strategy is to provide quality, value priced
products and to display the Company's products in varied retail environments.
The Company maintains a broad base of customers and concentrates on four major
jewelry market segments: (i) department stores such as Sears Roebuck, J.C.
Penney and Saks Fifth Avenue (the Company's products are also sold in Federated
Department Stores and May Department Stores through Finlay); (ii) specialty
markets, such as television shopping networks and jewelry retail outlets; (iii)
jewelry chain stores such as Zales, Gordons, Freidmans and others; and (iv) mass
merchandisers such as Wal-Mart. See "Business-Marketing" and 'Business -
Customers."
The Company has model makers and designers who design jewelry based on
industry trends, consumer tastes, or in some cases, based upon customer's
requests. However, the Company primarily seeks to produce products with enduring
styles. This eliminates the use of faddish styles and reduces risks associated
with fashion jewelry that may not receive customer acceptance and result in
increased and stagnant inventory. This also reduces designer personnel and
costs. See "Business Product and Design."
In connection with the acquisition of Aviv, the Company acquired a retail
store located at the Aviv factory in Texas. This store, called the New York Gold
and Diamond Exchange, sells Aviv products as well as products purchased from
other jewelry manufacturers. The Company is increasing the amount of its
products, particularly DG Division and Diamonair products, in such store.
The Company also intends to use strategic partnerships and joint ventures
to create additional revenue for the Company and to create opportunities for the
sale of the Company's products. Currently, the Company is in negotiation with
Time Group USA, Inc. ("Time") to acquire 50.1% of Time. Time primarily will
provide repair and engraving services for watches and other jewelry. See
"Business - Time Group USA, Inc." The Company is also in negotiation with
Silverman Jeweler's Consultants Inc. to establish an inventory liquidation
service company in Canada. Management believes that this joint venture will
create opportunities to sell the Company's products when packaged with inventory
that is being sold through these liquidations. See "Business - Silverman Retail
Solutions Inc."
The Company's executive offices are located at 1001 Petrolia Road, Toronto,
Ontario M3J 2X7, telephone (416) 665- 8844. The Company maintains a sales office
in Tampa, Florida. Aviv operates from Houston, Texas and Diamonair operates from
Cedar Knolls, New Jersey.
5
<PAGE>
THE OFFERING
Securities Offered.. 1,265,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants and 220,000 shares of Common
Stock reserved for issuance upon exercise of the
Underwriter's Options and the Warrants included therein.
See "Description of Securities."
Common Stock Outstanding:
Prior to the Offering.... 5,165,000(1) shares of Common Stock
After the Offering....... 6,650,000(2) shares of Common Stock
Warrants Outstanding Prior to the
Offering................ 1,265,0000
Exercise Price........... $6.25 per share, subject to adjustment in
certain circumstance. See "Description of
Securities-- Warrants."
Expiration Date.......... April 16, 2002
Redemption............... Redeemable by the Company at any time commencing on
April 17, 1998 and prior to their expiration, at a
price of $.10 per Warrant, upon not less than 30
days' prior written notice to the holders of
Warrants, provided that the closing bid price per
share of the Common Stock on Nasdaq, or the last
sale price per share if listed on the Nasdaq
National Market or a national exchange, has been at
least 150% (initially $9.38 per share) of the then
effective exercise price of the Warrants for a
period of 15 consecutive trading days ending on the
fifth day prior to the date on which the Company
gives notice of redemption. See "Description of
Securities-- Warrants."
Use of Proceeds........... The Company will not receive proceeds
directly from this offering but will receive
proceeds upon the exercise of the Warrants, the
Underwriter's Warrants and the Warrants contained
therein. If all of such securities are exercised,
the Company will receive total proceeds of
$9,682,750. The Company intends to use such proceeds
for working capital and general corporate purposes.
See "Use of Proceeds."
Risk Factors.............. Investment in the Shares involve a high
degree of risk and immediate substantial dilution to
investors. See "Risk Factors" and "Dilution."
Trading Symbols:
Nasdaq
Common Stock............... DGJLF
Warrants................... DGJWF
Boston Stock Exchange
Common Stock............... DGJ
Warrants................... DGJW
(1) Does not include 500,000 shares of Common Stock provided for issuance
under the Company's 1996 Stock Option Plan. See "Executive
Compensation--Options, Warrants or Rights."
(2) Assumes exercise of the Warrants, the Underwriter's Options, and the
Warrants included therein.
6
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SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the more
detailed consolidated financial statements and notes thereto appearing elsewhere
in this Prospectus. The Company maintains its books and records in Canadian
Dollars, but has reconciled such financial data to United States dollars (see
'Exchange Rate Data') and has prepared its consolidated financial statements
contained in this Prospectus in accordance with generally accepted auditing
standards in the United States. See "Report of Independent Auditors" and
"Consolidated Financial Statements." All information should be read in
conjunction with the consolidated financial statements of the Company and the
notes contained elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31
----------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------
Revenue ............ $ 13,942 $ 14,182 $ 22,128
Gross Profit ....... 2,821 2,807 6,450
Net Income ......... 478 457 1,045
Net Income Per Share 0.12 0.11 0.22
December 31
-----------
Balance Sheet Data: 1995 1996 1997
------- ------- --------
Working capital .... $ 4,637 $ 3,317 $ 10,235
Total assets ....... 13,103 16,773 33,922
Long-term debt ..... 2,693 1,081 2,865
Total liabilities .. 10,402 13,610 23,327
Shareholders' equity 2,701 3,163 10,595
- --------------
(1) The Company changed its fiscal year in January 1995 from January 31, to
a calendar year. Therefore, the fiscal year ended December 31, 1995
includes only eleven (11) months rather than a full fiscal year.
(2) The information in this table has been retroactively restated to
reflect a 39,000-for-1 share stock split in the Company's Shares
effected in December, 1996. See "Capitalization."
7
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
BEFORE MAKING AN INVESTMENT IN THE COMPANY, PROSPECTIVE PURCHASERS OF THE COMMON
STOCK AND WARRANTS OFFERED HEREIN SHOULD GIVE CAREFUL CONSIDERATION TO THE
FOLLOWING RISK FACTORS AFFECTING THE BUSINESS OF THE COMPANY AND ITS SECURITIES,
TOGETHER WITH OTHER INFORMATION IN THIS PROSPECTUS.
RISK FACTORS RELATING TO THE BUSINESS OF THE COMPANY
1. Competition.
The manufacture and distribution of jewelry is a highly
competitive industry. The Company competes with major domestic and international
companies with substantially greater financial, technical, marketing resources
and personnel than the Company. While the Company believes that the D.G.
Manufacturing Process provides it with a competitive edge in certain markets,
the Company has not sought a patent on the process since it does not want to
divulge its proprietary secrets. There can be no assurance that other jewelry
manufacturers will not similarly develop low-cost, high-volume production
capability or better processes or develop other competitive advantages over the
Company, thereby providing greater competition for the Company and materially
effecting its business prospects. See "Business--Competition."
2. Lack of Patent Protection for Manufacturing Process.
Management believes one of its significant competitive
advantages is the D.G. Manufacturing Process which utilizes the
lost-wax/cast-in-place method allowing it to use unskilled labor with minimal
training to set as many as 8,000 stones per day, per stone setter, at a
significantly lower cost than its competitors. Although the general concepts of
such high volume production are known in the industry, to the Company's
knowledge no one else has been able to develop and perfect the unique
applications that the Company has to accomplish such high volume production of
stone-set jewelry. The Company has not applied for a patent for its application
and modifications of the basic processes, since it did not want to disclose its
unique developments and applications. Furthermore, there can be no assurance
that the process would qualify for patents, or to the extent of the
enforceability of any patent that would be granted. See "Business--Patents and
Trademarks." The ability of others to build upon the basic processes and develop
similar, if not better applications to the high volume, lost-wax manufacturing
process, could have an adverse competitive impact. See "Business--Competition"
and "Business-Manufacturing."
3. Uncertainty of Expansion Strategy.
The Company's business strategy is designed to expand its
sales of stone-set jewelry, in particular, rings, in Canada and in the United
States by taking advantage of the D.G. Manufacturing Process and promoting the
Company's popular designs. The Company's ability to implement its plans will
depend primarily on the ability to expand its penetration in the United States
and the availability of qualified and cost effective sales personnel. There are
no firm agreements for employment of additional marketing personnel, and there
is no assurance that any of the expansion factors will be satisfied or that the
Company will be able to establish additional favorable relationships for
merchandising of its jewelry in the United States. There is no certainty,
assuming it could hire the appropriate marketing personnel and ultimately
establish additional merchandising relationships in the United States, when such
events might occur or to what extent. See "Business--Business Strategy."
Prior to the acquisition of Aviv, the Company had not engaged
directly in retail operations. The Company has never engaged in the inventory
liquidation business or in the operation of retail outlets for jewelry and watch
repair. However, the Company has hired experienced personnel or entered into
joint ventures with experienced operators of such businesses. Nonetheless, the
prospects for each of the New York Gold and Diamond Exchange, the Silverman
Retail Solutions joint venture and the Time operation must be considered in
light of the risks, expenses
8
<PAGE>
and difficulties frequently encountered by small businesses in highly
competitive industries.
4. Availability and Cost of Precious Metals and Precious and
Semi-Precious Stones.
The jewelry industry in general is affected by fluctuations in
the prices of precious metals and precious and semi-precious stones. The
availability and prices of gold, diamonds and other precious metals and precious
and semi-precious stones may be influenced by cartels, political instability in
exporting countries and inflation. Shortages of these materials or sharp changes
in their prices could have a material adverse effect on the Company's results of
operations or financial condition.
Approximately 90% of the Company's products are made of gold,
which the Company obtains from commodity dealers, banks and gold refiners in
U.S. dollars at market prices on a cash basis. Changes in the market price of
gold could require the Company to reduce the carrying value of the gold owned by
it and recognize a charge against earnings, which could be substantial, in the
period in which the change in market value occurs. The Company does not engage
in hedging transactions to protect against this potential risk. See the
Consolidated Financial Statements and notes attached thereto.
Prices for the Company's products generally are determined by
reference to the current market price of gold. Consequently, the Company's sales
could be affected by significant increases, decreases or volatility in the price
of gold. While the Company believes that its sales have not suffered materially
during the periods of rising or declining gold prices, there can be no
assurance, if the price of gold were to move substantially above or
substantially below current price levels and remain as such for a prolonged
period of time, that such increase or decrease would not have an adverse effect
on the Company's results of operations. In addition, the Company's results of
operations may be adversely affected during periods of extreme volatility in the
price of gold since many customers may elect to defer purchases until the price
of gold has become relatively stable.
5. Dependence on Major Customers.
For the year ended December 31, 1997, three major customers
accounted for 42% of sales. Finlay accounted for 19% of sales, Silvermans
Jewelers Consultants, Inc. accounted for 14% of sales and Wal-Mart accounted for
9% of sales. For the year ended December 31, 1996, the Company's two largest
customers were Wal-Mart (21% of sales) and Zellers Inc. of Canada ("Zellers")
(11% of sales). The loss of any of the these customers or a significant
reduction in their orders would have a materially adverse effect on the Company.
Except for Zellers, the Company believes that its relationship with its
customers is good. Zellers, who had purchased rings pursuant to a contract with
the Company, has stopped purchasing products from the Company and is in
litigation with the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Legal Proceedings." No
assurance can be given that such customers will continue to use the Company for
the design and manufacture of their jewelry requirements. See
"Business--Customers."
6. Dependence on Key Executives.
The operations of the Company have depended to a great extent
on the management efforts of Jack Berkovits, Chairman, CEO and President of the
Company and Gadi Beer, Vice President of Sales and Marketing for Aviv. Mr.
Berkovits has a three year employment agreement with the Company which became
effective on April 14, 1997. The Company and Mr. Beer entered into a one year
employment agreement on February 10, 1998. The loss of these individuals would
have a materially adverse affect upon the Company. The Company maintains
approximately $840,000 of "key-man" life insurance on Mr. Berkovits. One policy
in the amount of $700,000 has been pledged to secure the Company's line of
credit to The Bank of Nova Scotia. See "Management."
7. Secured Loans-Existence of Liens on Significant Portion of
Assets.
All of the Company's assets have been pledged as collateral to
secure its indebtedness to The Bank
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<PAGE>
of Nova Scotia, a Canadian bank, for its line of credit and equipment financing
provided to the Company. In the event the Company defaults on payment of its
obligations, including the making of required payments of principal and
interest, the Company's indebtedness could be declared immediately due and
payable and, in certain cases, the Company's assets could be foreclosed upon.
The aforementioned pledging of the assets and assignments of insurance to secure
outstanding indebtedness makes such assets unavailable to secure additional debt
financing, which most likely will adversely affect the Company's ability to
borrow in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
8. Material Factors Relating to the Operations of the Business.
As a manufacturer and merchandiser of stone-set jewelry, the
Company's existing and future operations are and will be influenced by several
factors including technological developments in the mass production of jewelry,
the ability of the Company to efficiently meet the design and production
requirements of its customers, and the market acceptance of its customers'
jewelry. Further factors impacting the success of the Company's operations are
increases in expenses associated with continued sales growth, the ability of the
Company to control costs, management's ability to evaluate the public's taste
and new orders to target satisfactory profit margins, the capacity of the
Company to develop and manage the introduction of new designed products, and
competition. Quality control is also essential to the Company's operations,
since customers demand compliance with design and product specifications and
consistency of production. There can be no assurance that the revenue growth
will be sustained on a quarterly or annual basis. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
9. Seasonality.
Retail sales of jewelry are greater in the fourth quarter of
the calendar year which includes the holiday selling season. According to the
World Gold Council, fourth quarter retail jewelry sales in 1995 were between 44%
and 46% of the retail dollars and unit sales, respectively, and the month of
December was a significant part of those sales. It has been management's
experience that the Company's and its customers' purchases are seasonally
sensitive causing a significant portion of the Company's sales to be
concentrated in the fall in anticipation of the holiday season.
10. General Economic Conditions.
Retail jewelry sales are sensitive to fluctuations in the
economic cycle. Unfavorable general economic conditions have an adverse effect
on consumer spending, and therefore on the Company's business. Management
believes its growth and products are less sensitive to economic downturns due to
its mass manufacturing capabilities, merchandising, and low-cost products which
are more impulse purchase items. There can be no assurance that unfavorable
general economic conditions or a downturn in consumer confidence could in the
future have an adverse effect on consumer spending preferences and, therefore,
on the Company's business.
11. Broad Discretion as to Use of Proceeds.
The proceeds received by the Company upon exercise of the
Warrants, the Underwriter's Warrants and the Warrants included therein, if any,
will be used for working capital and general corporate purposes. The Company's
management will have complete discretion in determining the use of such proceeds
and shareholders may not be provided advanced information on such plans,
facilities or procedures, and will not be permitted to approve or disapprove
such transactions. See "Use of Proceeds."
12. Exemptions Under the Exchange Act for a Foreign Private Issuer.
The Company is a foreign private issuer within the meaning of
rules promulgated under the Exchange Act. As such, it is exempt from certain
provision applicable to United States companies with securities registered under
the Exchange Act, including: (1) the rules under the Exchange Act requiring the
filing with the Commission
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<PAGE>
of quarterly reports on Form 10-Q or current reports on Form 8-K; (2) the
sections of the Exchange Act regulating the solicitation of proxies, consents or
authorizations with respect to a security registered under the Exchange Act; and
(3) the sections of the Exchange Act requiring insiders to file public reports
of their share ownership and trading activities and establishing insider
liability for profits realized from any 'short-swing' trading transaction (i.e.,
a purchase and sale, or a sale and purchase, of the issuer's equity securities
within a period of less than six months). Because of these exemptions, investors
in the Company are not afforded the same protections or information generally
available to investors in public companies organized in the United States. See
"Enforceability of Civil Liabilities Against Foreign Persons."
RISK FACTORS RELATING TO THE SECURITIES AND THE OFFERING
1. Control by Current Security Holders.
As of the date of this Prospectus, Jack Berkovits, Chairman,
President and Chief Executive Officer of the Company, beneficially owns, in the
aggregate, approximately 52.4% of the outstanding Common Stock (assuming no
exercise of the Warrants, the Underwriter's Warrants or the Warrants included
therein or of options or warrants held by persons other than Mr. Berkovits).
Accordingly, he is in a position to cause an increase in the authorized capital
or cause the dilution, merger or sale of assets of the Company, cause directors
to be elected or removed and generally control the affairs of the Company.
Assuming that all of the Warrants, Underwriter's Warrants and Warrants included
therein are exercised, Mr. Berkovits will beneficially own, in the aggregate,
approximately 41.0% of the outstanding Common Stock (assuming no exercise of any
other options or warrants other than those held by such individuals). Although
he would not represent a majority of the voting securities of the Company, his
significant beneficial holdings would enable him to exercise substantial
influence over the Company. See "Principal Shareholders."
2. Potential Conflicts of Interest and Transactions with
Affiliates.
There have been transactions in the past and are ongoing
transactions between the Company and its Chairman, CEO and President, Jack
Berkovits and loans from the Company to certain employees, some of whom are
officers of the Company. In the future, all related party transactions will be
disclosed to the board, which will decide whether the transactions are in the
best interests of the Company and on terms no less favorable than could be
obtained from unaffiliated third parties. There exists the potential for
conflicts with the Company. There can be no assurance that any further conflicts
of interest will be resolved in favor of the Company. See "Management", "Certain
Transactions" and "Principal Shareholders."
3. Possible Delisting and Risks of Low Priced Stocks.
The Common Stock and Warrants are listed on Nasdaq SmallCap
Market. In order to maintain the listing, the Company must meet the following
criteria: (i) either at least $2,000,000 in net tangible assets, a $35,000,000
market capitalization or net income of at least $500,000 in two of the three
prior years, (ii) at least 500,000 shares in the public float valued at
$1,000,000 or more, (iii) a minimum Common Stock bid price of $1.00, (iv) at
least two active market makers, and (v) at least 300 shareholders of Common
Stock. If the Company is unable to satisfy Nasdaq's maintenance criteria, the
Common Stock and Warrants may be delisted from trading on Nasdaq. In such event,
trading in the Common Stock and Warrants would be conducted in the
over-the-counter market on the NASD's OTC Bulletin Board or in the National
Quotation Bureau's 'pink sheets.' As a consequence, an investor would most
likely find it more difficult to dispose of, or to obtain prompt and accurate
quotations as to the price of the Company's securities, and may be exposed to a
risk of a decline in the market price of the Common Stock and Warrants.
In addition, if the Company's securities are delisted from Nasdaq, and the
Company does not meet any other exceptions to the penny stock regulations,
trading in the Company's securities would be covered by Rule 15g-9 promulgated
under the Exchange Act for non-Nasdaq and non-exchange (national exchange)
listed securities. Under
11
<PAGE>
such rule, broker/dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale. Securities also are exempt from this
rule if the market or exercise price is at least $5.00 per share. See "Risk
Factors - Penny Stock Regulation."
If the Company's securities become subject to the regulations applicable to
penny stocks, in addition to the possible adverse affect on the market liquidity
for the Company's securities, the penny stock regulations could limit the
ability of broker/dealers to sell the Company's securities and thus the ability
of purchasers of the Company's securities to sell their securities in the
secondary market.
4. Penny Stock Regulation.
The Securities Enforcement and Penny Stock Reform Act of 1990
requires additional disclosure relating to the market for penny stocks in
connection with trades in any stock defined as a penny stock. Commission
regulations generally define a penny stock to be an equity security that has a
market or exercise price of less than $5.00 per share, subject to certain
exceptions. Such exceptions include any equity security listed on Nasdaq and any
equity security issued by an issuer that has net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three years.
Unless an exception is available, the regulations require the delivery, prior to
any transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. The penny stock rules
require a broker/dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker/dealer must also provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker/dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and broker/dealer and salesperson
compensation information must be given to the customer orally or in writing
prior to effecting the transaction and must be given in writing before or with
the customer's confirmation. In addition, the penny stock rules require that
prior to a transaction in a penny stock not otherwise exempt from such rules,
the broker/dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for securities
that become subject to the penny stock rules. If the Company's securities become
subject to the penny stock rules, the market liquidity for the Company's
securities could be severely affected, thus investors in this Offering may find
it more difficult to sell such securities.
5. Dividends Unlikely.
The holders of Common Stock are entitled to receive dividends
when, as and if declared by the board of directors out of funds legally
available therefor. The board does not intend to declare any cash dividends in
the foreseeable future and earnings, if any, will be used to finance the capital
requirements of the Company. See "Dividend Policy."
6. Outstanding Options and Warrants.
The Company has outstanding 1,265,000 Warrants exercisable at
$6.25 per share. Upon exercise of the Underwriter's Warrants, 110,000 shares of
stock and 110,000 Warrants shall be issued. The Company has a 1996 Stock Option
Plan pursuant to which 500,000 shares of Common Stock are provided for issuance.
All 500,000 options have been granted at an exercise price of $1.38. The Company
has proposed adopting a 1998 Stock Option Plan at its next annual meeting
pursuant to which 500,000 shares of Common Stock are provided for issuance. To
the extent that such options and Warrants are exercised, dilution to the
interests of the Company's shareholders may occur. Holders of options and
Warrants are likely to exercise them when, in all likelihood, the Company could
obtain additional capital on terms more favorable then those provided by the
options and Warrants. During the term of such securities the holders thereof are
given an opportunity to profit from a rise in the market price of the Company's
12
<PAGE>
Common Stock, with a resultant dilution of the interests outstanding, and they
may adversely affect the terms on which the Company could obtain additional
capital. Furthermore, the sale of Common Stock issuable to the holders of such
options and Warrants, or merely the potential of such sales, could have an
adverse effect on the market price of the Company's securities. See "Shares
Eligible For Future Sale."
7. Shares Available for Future Sale.
Upon consummation of this offering, the Company will have
6,650,000 (assuming issuance of an aggregate of 1,485,000 shares pursuant to the
exercise of the Warrants, the Underwriter's Warrants and the Warrants contained
therein), of which 3,540,000 will be freely tradeable without restriction of
registration under the Securities Act. All of the 3,110,000 remaining shares of
the Company's Common Stock are "restricted securities" as defined under Rule 144
of the Securities Act, including 2,540,000, held by Jack Berkovits, Chairman,
Chief Executive Officer and President of the Company. Mr. Berkovits is deemed an
"affiliate" (control person) of the Company as defined in Rule 144 promulgated
under the Securities Act, and may only sell his shares, which are not deemed
"restricted securities" as defined under Rule 144 of the Securities Act, absent
registration, in accordance with the provisions of Rule 144, exclusive of that
Rule's one-year holding period. Options granted under the 1996 Stock Option Plan
to employees, officers and directors of the Company, and the Common Stock
issuable upon exercise of said options, would be deemed 'restricted securities'
under Rule 144. Restricted securities may only be publicly sold pursuant to a
registration under the Securities Act, or pursuant to Rule 144 or some other
exemption that may be available from the registration requirements of the
Securities Act. Rule 144 entitles each person holding restricted securities for
a period of one-year, and affiliates who own non-restricted securities of the
Company, to sell every three months in ordinary brokerage transactions an amount
of shares which does not exceed the greater of 1% of the Common Stock
outstanding, or assuming the Common Stock is then traded on Nasdaq, the average
weekly trading volume during the four calendar weeks prior to said sale. Any
substantial sales pursuant to Rule 144, including the potential sale of Mr.
Berkovits' Common Stock, may have an adverse effect on the market price of the
Common Stock, and may hinder the Company's ability to arrange subsequent equity
or debt financing or affect the terms and time of such financing. See "Shares
Eligible for Future Sale."
The 3,110,000 shares which are deemed restricted securities are also
subject to lock-up agreements with Joseph Dillon & Co. Inc. ("Dillon") pursuant
to which these shareholders may not sell such shares without the consent of
Dillon prior to April 16, 1999. Although there is no present specific plan,
proposal, arrangement or understanding to waive the two year restrictive period,
the Dillon may give its consent to reduce the lock-up period. However, any such
waiver would be subject to the nature of the market for the Company's
securities, the price and volume of the trading, and the operations and
financial condition of the Company, Sales of those amounts of Common Stock may
have an adverse effect on the market price of the Common Stock. See "Shares
Eligible For Future Sale."
8. Immediate Dilution to New Investors.
Purchasers of the securities for this Offering will incur
immediate and substantial dilution in the net tangible book value of the Common
Stock. Dilution represents the difference between the price of the Common Stock
sold hereby and the net tangible book value per share of the Company after the
Offering. Additional dilution to future net tangible book value per share may
occur upon the exercise of the Warrants, the Warrants underlying the
Underwriters' Options and other options that might be outstanding or
subsequently granted to purchase Common Stock. Purchasers of the Shares offered
hereby will experience an immediate and substantial dilution in net tangible
book value per share of Common Stock of $3.20. See "Dilution."
9. Relationship of Underwriters to Trading; Possible
Limitations on Market Making Activities.
FinAtlantic and Dillon, the underwriters to the Company's
initial public offering (the "Underwriters"), act in a brokerage capacity with
respect to the purchase or sale of the Common Stock and the Warrants in the
over-the-counter market. The Underwriters have the right to act as the Company's
exclusive agents in connection with any further solicitation of holders of
Warrants to exercise their Warrants. The Underwriters and any other soliciting
13
<PAGE>
broker/dealer may be prohibited from engaging in any market making activities or
solicited brokerage activities with regard to the Company's securities during
the periods prescribed by Regulation M of the Securities Exchange Act of 1934
until the later of the termination of such solicitation activity or the
termination of any right the Underwriters may have to receive a fee for the
solicitation of Warrants. As a result, the Underwriters and other soliciting
broker/dealers may be unable to continue to make a market for the Company's
securities during certain periods while the Warrants are exercisable. Such a
limitation, while in effect, could impair the liquidity and market price of the
Company's securities.
10. Potential Adverse Effect of Redemption of Warrants.
Under certain conditions, the Warrants may be redeemed by the
Company, prior to their expiration, at a redemption price of $.10 per Warrant,
upon not less than 30 days' prior written notice to the holders of such
Warrants. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, to sell the Warrants at the then current market price when
they might otherwise wish to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. If and during such time that the Company
does not maintain an effective registration statement or other qualification
covering the Common Stock issuable upon exercise of the Warrants, then the
Warrant holder will be unable to exercise the Warrant should the Warrants then
be called for redemption by the Company. See "Description of
Securities--Warrants."
11. Necessity of Continuing Post-Effective Amendments to the
Company's Registration Statement and State Blue Sky
Registration; Exercise of Warrants.
The Company will be unable to issue Common Stock to those
persons desiring to exercise their Warrants unless and until the Warrants and
the underlying Common Stock are qualified for sale in jurisdictions in which
such purchasers reside or an exemption from such qualification exists in such
jurisdictions. There can be no assurance that the Company will be able to effect
any required qualification.
The Warrants will not be exercisable unless the Company
maintains a current registration statement on file with the Commission through
post-effective amendments to the Registration Statement containing this
Prospectus or through another separate registration statement. Although the
Company has agreed to file appropriate post-effective amendments to the
registration statement containing this Prospectus or file another registration
statement, and to maintain a current registration statement on file with the
Commission relating to the Warrants that are offered hereby, there can be no
assurance that such will be accomplished or that the Warrants will continue to
be so registered. See "Description of Securities--Warrants."
12. Currency Fluctuations.
The Company's consolidated financial statements are prepared
in Canadian dollars and are converted into United States dollars. A portion of
the Company's revenues are derived from activities in the United States.
Fluctuations in exchange rates between the Canadian and United States dollars
may have a material adverse effect on the Company's results of operations. The
impact of future exchange rate fluctuations on the Company's results of
operations cannot be accurately predicted. To date, the Company has not sought
to hedge the risks associated with fluctuation in exchange rates and does not
have a policy relating to hedging. There can be no assurance that any hedging
techniques that might be implemented by the Company in the future would be
successful or that the Company's results of operations will not be materially
adversely affected by exchange rate fluctuations.
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<PAGE>
USE OF PROCEEDS
The proceeds received by the Company upon exercise of the Warrants, the
Underwriter's Warrants and the Warrants included therein, net of expenses of the
offering (other than solicitation fees, if any, to be paid to the Underwriter in
connection with the exercise of Warrants), will be $9,682,750, assuming that all
of such Warrants, Underwriter's Warrants and Warrants included therein are
exercised. There can be no assurance as to the number of Warrants, if any, or
Underwriter's Warrants or Warrants included therein, if any, which will be
exercised. Management anticipates that the net proceeds of this offering, if
any, will be allocated to working capital and general corporate purposes. In
addition, management of the Company anticipates that, upon receipt of the net
proceeds of this offering, a portion of such proceeds will be used to repay any
amounts then outstanding under the Company's revolving line of credit agreement
with Bank of Nova Scotia. As of June 1, 1998, the Company has an aggregate
principal amount of $16.2 million outstanding under this line of credit. See
"Management's Discussion and Analysis of Results of Operation and Financial
Condition."
The proceeds allocated to working capital and general corporate purposes
will be applied, to the extent necessary, to the Company's current operations.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to reflect the exercise of the Warrants
offered hereby and the estimated net proceeds therefrom. The information
provided below should be read in conjunction with the other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Actual As Adjusted
Long-term debt, less current maturities(1)
<S> <C> <C>
Shareholders' equity: Common Stock, no par value, $ 6,700,827 $ 16,383,577
unlimited shares authorized; 5,165,000 issued and
outstanding(2); and 6,650,000(1) issued and outstanding as
adjusted(3)...............................................
Foreign currency transaction adjustment................... (359,434) (359,434)
Retained earnings......................................... 4,253,260 4,253,260
--------- ---------
Total Shareholders' equity 10,594,653 20,277,403
Total capitalization...................................... 13,459,650 23,142,400
</TABLE>
- -------------
(1) The Company's assets are pledged to secure this indebtedness. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 8 to "Notes to Consolidated Financial
Statements."
(2) Does not include 500,000 shares of Common Stock provided for issuance
under the 1996 Stock Option Plan. See "Management--Options, Warrants or
Rights."
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<PAGE>
DIVIDEND POLICY
The Company does not anticipate that it will pay dividends in the
foreseeable future. The board of directors intends to retain all earnings, if
any, for use in the business. Future dividend policy will depend on the
Company's earnings, capital requirements, financial condition and similar
relevant factors.
DILUTION
As of December 31, 1997, the net tangible book value of the Company's
Common Stock was $10,594,653 or $2.05 per share(1). "Net tangible book value per
share" represent the amount of total tangible assets less total liabilities,
divided by the number of shares of Common Stock outstanding. Without taking into
account any changes in net tangible book value after December 31, 1997, other
than to give effect to the sale of the Shares and Warrants offered hereby and
the receipt of the net proceeds of this Offering, the pro forma net tangible
book value of the Company as of December 31, 1997 would have been $20,277,403 or
$3.05 per Share. Consequently, there will be an immediate increase in net
tangible book value of $1.00 per share to the existing shareholders and an
immediate substantial dilution (i.e. the difference between the offering price
of $6.25 and the pro forma net tangible book value per share after the Offering)
of $3.20 per share to new investors purchasing the Shares offered hereby.
The following table illustrates as of December 31, 1997, this per share
dilution:
Public offering price per Share........................................$ 6.25
Net tangible book value before Offering(1).................$ 2.05
Increase per Share attributable to new investors............ 1.00
----
Pro forma net tangible book value per Share after Offering(1)........... 3.05
----
Dilution per Share to new investors(1).................................$ 3.20
17
<PAGE>
CERTAIN MARKET INFORMATION
Since the initial public offering of the Company's ordinary shares on April
18, 1998, the Common Stock and Warrants have been traded on the NASDAQ SmallCap
Market ("NASDAQ") under the symbols DGJLF and DGJWF, respectively, and on the
Boston Stock Exchange under the symbols DGJ and DGJW. Prior to April 1997, there
was no market for the Company's shares. There is no non-United States trading
market for such securities and there is no limitation on non-Canadians owning
shares of the Company's Common Stock.
The following are the high and low sales prices reported for the Company's
shares as reported on NASDAQ/NMS during each quarter since such trading
commenced in April 18, 1997:
Quarter High Low
- -----------------------------------------------------------------------------
April 18, 1997-June 30, 1997 10 1/8 4 3/4
Third Quarter 1997 5 1 3/4
Fourth Quarter 1997 2 11/16 1 3/4
First Quarter 1998 3 5/8 1 3/4
April 1- June 5, 1998 5 3 1/2
As of June 1, 1998, there were 13 shareholders of record and approximately
700 beneficial owners of Common Stock.
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<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the more
detailed consolidated financial statements and notes thereto appearing elsewhere
in this Prospectus. The Company maintains its books and records in Canadian
Dollars, but has reconciled such financial data to United States dollars (see
'Exchange Rate Data') and has prepared its consolidated financial statements
contained in this Prospectus in accordance with generally accepted auditing
standards in the United States. See "Report of Independent Auditors" and
"Consolidated Financial Statements." All information should be read in
conjunction with the consolidated financial statements of the Company and the
notes contained elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31
----------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------
Revenue $ 13,942 $ 14,182 $ 22,128
Gross Profit 2,821 2,807 6,450
Net Income 478 457 1,045
Net Income Per Share 0.12 0.11 0.22
December 31
-----------
Balance Sheet Data: 1995 1996 1997
-------- -------- --------
Working capital ........ $ 4,637 $ 3,317 $ 10,235
Total assets ........... 13,103 16,773 33,922
Long-term debt ......... 2,693 1,081 2,865
Total liabilities ...... 10,402 13,610 23,327
Shareholders' equity.... 2,701 3,163 10,595
- --------------
(1) The Company changed its fiscal year in January 1995 from January 31, to
a calendar year. Therefore, the fiscal year ended December 31, 1995
includes only eleven (11) months rather than a full fiscal year.
(2) The information in this table has been retroactively restated to
reflect a 39,000-for-1 share stock split in the Company's Shares
effected in December, 1996. See 'Capitalization.'
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Prospectus that are not historical are
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including statements regarding the
Company's expectations, intentions, beliefs or strategies regarding the future.
Forward looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward looking statements included in this Prospectus are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward looking statements. Among the factors that could cause actual results to
differ materially are the factors detailed in the risks discussed in the "Risk
Factors" section included in this Prospectus at page 8.
The Company's future success as a manufacturer and distributor of
value-priced, stone-set jewelry will be influenced by several factors including
technological developments in the mass production of jewelry, the ability of the
Company to efficiently meet the design and production requirements of its
customers, and the market acceptance of its jewelry. Further factors impacting
the Company's operations are increases in expenses associated with continued
sales growth, the ability of the Company to control costs, management's ability
to evaluate the public's tastes and orders to target satisfactory profit
margins, the ability to develop and manage the introduction of new designed
products, and competition. Quality control is also essential to the Company's
success, since customers demand compliance with design and product
specifications and consistency of production.
The Company had an agreement with Diamante, a retail jeweler owned by a
former Vice President of the Company which provided the Company with the ability
to control that company and be entitled to 95% of Diamante's profits. That
agreement, which terminated as of February 7, 1997, resulted in Diamante's
financial statements being consolidated with the Company. The amount of profits
of Diamante that have been recorded in the consolidated financial statements
were approximately $8,000, $27,000, and $0 for the periods ended December 31,
1995, December 31, 1996 and December 31, 1997, respectively. The forfeiture of
the aggregate amount of profits of Diamante for the period since inception to
February 7, 1997 or approximately $35,000 was recorded in the financial
statements for the first quarter of 1997 as a compensation charge. Furthermore,
all sales to Diamante subsequent to February 7, 1997 have been recorded on a
cash basis. The Company's utilization of its high-volume manufacturing
techniques sometimes results in excess inventories. In the past, the Company
either sold these excess inventories in lots at prices which usually resulted in
losses of its investment in labor and overhead and without recovering its full
cost of stones, or it internally recycled the metal and most stones by
disassembling the product, re-melting the gold or silver and removing the
stones. This recycling resulted in additional incurred labor and overhead costs.
Once Diamante established its factory outlet stores, it provided the Company
with an opportunity to sell its excess inventories on more favorable terms. The
Company, by selling to Diamante then avoided the costs and losses that it had
incurred in the past and afforded it a more advantageous method of dealing with
its excess inventories. The Company is the primary supplier of product to
Diamante and the Company's account receivable from Diamante is fully secured by
all the assets of Diamante, which security interest has been pledged by the
Company to The Bank of Nova Scotia for the Company's financing facilities. The
Company performs certain administrative functions for Diamante. See "Certain
Transactions."
Generally, the Company does not provide products pursuant to long-term
contracts. The Company has an exclusive jewelry supply contract with Zellers,
Inc. of Canada ("Zellers") that, pursuant to its terms, is to terminate in
December 2001. Sales to Zeller's were $1.6 million in 1996 and $550,000 in 1997.
Currently, the Company is in litigation with Zellers and Zellers is not
purchasing any products from the Company. See "Legal Proceedings."
On November 21, 1997, the Company acquired substantially all of the assets
of the wholesale jewelry division of Litton Systems, Inc., which division had
operated under the trade name Diamonair, for approximately $5.8
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<PAGE>
million. The acquisition was accounted for using the purchase accounting method.
In accordance with the purchase accounting method, Diamonair's results have been
included in the Company's consolidated financial statements since the
acquisition date. See Note 1 to the Consolidated Financial Statements.
Sales of Diamonair products after the acquisition by the Company on a
non-consolidated, unaudited basis were approximately $3.8 million and the profit
margin was approximately 25%. Diamonair purchased products from approximately 20
suppliers. The Company believes that it can increase the profit margin on
Diamonair products by increasing the amount of Diamonair products manufactured
by the Company using the D.G. Manufacturing Process. The Company also intends to
increase sales of Diamonair products by introducing the Diamonair products into
the distribution lines used by the D.G. Division and the Aviv Divisions.
On February 10, 1998, the Company completed its acquisition of
substantially all of the assets of Aviv, Inc., by assuming approximately $4.3
million in debt. The effective date of the acquisition was June 1, 1997. The
acquisition was accounted for using the purchase accounting method. In
accordance with the purchase accounting method, Aviv's results have been
included within the Company's consolidated financial statement since the
effective date of the acquisition on June 1, 1997. See Note 1 to the
Consolidated Financial Statements.
Sales of Aviv products after the acquisition by the Company on a
non-consolidated, unaudited basis were approximately $7.3 million and the profit
margin was approximately 24%. Of Aviv's sales, approximately $700,000 were
attributable to the New York Gold and Diamond Exchange, a retail store at Aviv's
facilities in Houston, Texas. The Company does not anticipate that the cost of
many of the Aviv products will be reduced significantly by the D.G.
Manufacturing Process. Aviv's products generally are made with more expensive
metals and stones than the Company's other products. Therefore, savings in the
manufacturing process do not result in unit cost reductions that are material in
relation to the total price of the Aviv jewelry. The Company also intends to
increase sales of Aviv products by introducing the Aviv products to the
distribution lines used by the D.G. Division and Diamonair Division.
Currently, the Company is reviewing its administrative costs to determine
if there are areas where expenses could be reduced through further integration
and consolidation of the acquisitions. Although the Company expects to achieve
some level of consolidation, these potential cost reductions are limited in many
areas because (i) operating in the United States and Canada limits the
advantages of consolidating certain accounting and human resources functions and
(ii) Management believes that maintaining the existing Aviv and Diamonair sales
offices and manufacturing facilities will be beneficial for maintenance of those
divisions' existing customer relationships and will increase the Company's
opportunities in the United States.
Fluctuations in the Canadian dollar against other currencies, especially
the U.S. dollar, may have a material adverse effect on the Company's results of
operations. A substantial portion of the Company's sales and purchases are set
in U.S. dollars or are influenced by local currency against the U.S. dollar. To
date, the Company has not sought to hedge the risks associated with fluctuations
in exchange rates and does not a have a policy relating to hedging. See Note 2
to the Consolidated Financial Statements and "Exchange Rate Data."
Many computer systems and software products worldwide will not function
properly as the year 2000 approaches due to the common programming device of
using just the last two digits of a year in all dates. Currently, the Company is
reviewing its computer software and hardware to determine what changes will be
necessary to avoid this problem. The Company expects to implement any necessary
changes in Fiscal 1999. The Company does not believe that the costs of
implementing necessary changes to its computer systems will have a material
adverse effect on the Company.
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RESULTS OF OPERATIONS
Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996
Sales for the year ended December 31, 1997 ("Fiscal 1997") were $22.1
million, as compared to $14.2 million for the year ended December 31, 1996
("Fiscal 1996"). This $7.9 million, or 56%, increase was primarily due to the
addition of Aviv revenues of $7.3 million and Diamonair revenues of $3.8
million. Revenue from the D.G. Division decreased by $3.2 million due to a
change in the product and customer mix, which resulted in lower volumes or more
expensive, higher margin goods being sold in Fiscal 1997.
Cost of Sales increased to $15.7 million in Fiscal 1997 as compared to
$11.4 million in Fiscal 1996. This $4.3 million, or 38%, increase was primarily
due to the increase in sales. Gross margin (which is gross profit primarily
expressed as a percentage of sales) increased to 29% in Fiscal 1997 from 20% in
Fiscal 1996. Gross margin increased due to a change in the product and customer
mix discussed above.
Selling, general and administrative costs increased to $3.7 million in
Fiscal 1997 from $1.1 million in Fiscal 1996. This $2.6 million, or 236%,
increase is due to the increased expenses associated with operating from
multiple locations and being a public company. In particular, professional fees
increased by $750,000 due to costs associated with being a public entity and
transaction costs associated with the acquisitions. Executive salaries increased
by $417,000, partially due to the increase in executives required to operate in
three locations.
Interest and other expenses increased to $1.2 million in Fiscal 1997 from
$923,000 in fiscal 1996. Interest expense increased by $26,000 in Fiscal 1997 to
$822,000 as a result of increased borrowings, however the Company's weighted
average interest rate was reduced from 6.58% in Fiscal 1996 to 5.42% in Fiscal
1997. Other expenses increased primarily due to a $280,000 write down of
receivables from Zellers.
Due to increased income before taxes, the Company's taxes increased to
$541,000 from $296,000. However, the Company's effective tax rate was reduced to
34% from 39% due to the increase in the percentage of income from U.S.
operations, which has a lower tax rate than Canada.
As a result of the foregoing, net income increased to $1.0 million in
Fiscal 1997 from $457,000 in Fiscal 1996.
Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995 (11 Months)
The Company changed its fiscal year end in 1995 to December 31, from a
January 31 year-end in the previous year resulting in an 11 month fiscal year.
Sales for fiscal 1996 increased by 1.4% compared to fiscal 1995; however,
if January, 1996 is included in the 1995 fiscal year (in order to bring it to 12
months), then the sales actually decreased by 9.0%. This decrease was generated
by (i) the bankruptcy of a major Canadian customer; (ii) management's decision
to reduce the sales volume to low gross profit margin customers; and (iii) the
effect of the consolidation with Diamante. As a result, total sales dropped by
9.0% but gross profit as a percentage of sales increased to 22.7% in 1996 from
21.4% for the year ended Dec. 31, 1995. Gross profit has increased from the year
ended January 31, 1995 when gross profit was 15.5%.
The operating expenses for the current year increased to approximately
$12,265,000 from approximately $12,068,000 for the year ended December 31, 1995.
However, if the month of January, 1996 is added to bring the fiscal year to 12
months, then the total operating expenses actually decreased by approximately
$1,234,000. This decrease is mostly the result of reduction of operating costs
due to a reduction in sales.
Financial expenses and other income decreased to approximately $858,000
from $956,000. If the month of
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January, 1996 is added to the 11 month fiscal year, then the decrease is
actually $178,000. This reduction is attributed mostly to the following: i)
decrease in interest expense of approximately $110,000 due to decreased interest
rates in 1996; ii) decrease in other expenses of approximately $25,000; iii) an
increase in shipping and handling charges of approximately $40,000.
Income before income taxes was $818,123 compared to $743,755, an increase
of $74,368. However, if the month of January, 1996 is added to the fiscal year
1995 the income increased by only approximately $2,000. The increased income,
despite a 9% decline in sales, is the result of the implementation of the
management's program to: (i) decrease sales to low gross profit margin
customers;(ii) optimization of the use of internal resources; (iii) reduction of
expenses through tighter internal controls.
The income tax expenses reflect the current tax rate for the company; the
taxes for the previous fiscal year were lowered by a loss carry forward which
was utilized in 1995. This resulted in decreased income after taxes.
LIQUIDITY AND CAPITAL RESOURCES
In April 1997, the Company completed an initial public offering in which it
sold 1,265,000 shares of Common Stock and 1,265,000 Warrants. The Company
realized net proceeds of $6.7 million from this offering. The Company may
realize additional proceeds from the exercise of the Warrants, although there
can be no assurance that such Warrants will be exercised.
The Company currently has an operating line of credit with The Bank of Nova
Scotia in the amount of $20.3 million subject to certain margin requirements.
See Note 8 to the Consolidated Financial Statements. The amount available to the
Company is equal to 75% to 80% of "eligible accounts receivable", as defined in
the Line of Credit Agreement, plus 50% of the inventory values up to a maximum
advance against inventory of approximately $9.7 million. The Company utilized
the credit line to borrow the $5.8 million and $4.3 million necessary for the
acquisitions of Diamonair and Aviv, respectively.
The Company's borrowings under the Line of Credit bear interest at Canadian
prime plus 1/2% which at June 1, 1998 amounted to 6.5%. Interest on any
borrowings is payable monthly. The Company is in full compliance with all of the
banking covenants (including the financial covenants and ratios) and is required
to report to its bankers on a monthly basis.
The Company's obligations under the revolving credit facility are secured
by a security interest on all the assets of the Company, guaranteed by Diamante,
a jewelry retail chain owned by a former Vice President of the Company and
further secured by a mortgage on the property owned by a limited partnership
controlled by Jack Berkovits and leased to the Company, which mortgage is
guaranteed by the Company. See "Business--Property" and "Certain Transactions."
At December 31, 1997, the Company owed $3.0 million to BankBoston, which
loan had been assumed pursuant to the Aviv acquisition. The Company utilized
proceeds from the Bank of Nova Scotia line of credit to repay this loan in
February 1998.
For the year ended December 31, 1997, the Company used cash from operating
activities of $11.2 million, primarily due to an increase of accounts receivable
of $8.3 million and an increase in inventory of $6.1 million.
The Company's accounts receivable net of allowances for doubtful accounts
as of December 31, 1997 was $17.2 million, or 78% of revenue for Fiscal 1997.
Accounts receivable is such a large percentage of sales because (i) accounts
receivable include a 7% goods and services tax and a 10% federal excise tax on
most Canadian sales, which taxes are not included in sales (ii) sales volume in
the fourth quarter was higher than the rest of the year due to the acquisitions
during the year of Aviv and Diamonair (iii) sales volume is generally higher in
the fourth quarter and some customers do not pay the Company for goods until
after the holiday selling season.
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The Company's inventory as of December 31, 1997 was $12.9 million, or 58%
of revenue for Fiscal 1997. Inventory is such a large percentage of sales
because the inventory reflects needs for all three divisions, while sales
reflects the Aviv and Diamonair divisions only after their acquisitions. The
increased inventory also reflected management's belief that sales will increase
in the first quarter of 1998 due to increased exposure on television shopping
networks.
At December 31, 1997, the Company had loans outstanding to its principal
shareholder, Jack Berkovits, of $2.0 million and such loans bear interest at 10%
per annum. In the event that any Warrants are exercised, the proceeds will be
applied to working capital, as well as a potential repayment of a portion of its
credit facility.
The Company anticipates that cash flow from operations, as well as
borrowings available under the Company's existing credit line will be sufficient
to satisfy the Company's credit needs for the next twelve months.
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BUSINESS
The Company is primarily engaged in the design, manufacture, merchandising and
distribution of stone-set jewelry for department stores, mass merchants,
catalogue showrooms, television shopping networks and other high volume
retailers and major discounters. The Company is also seeking to take advantage
of non-traditional wholesale distribution outlets such as Internet wholesale
advertising services, liquidation operations, and consumer product rental
companies.
The Company believes it has established itself as a low-cost, high-volume and
quality manufacturer in the value priced jewelry market. Its primary competitive
advantage, particularly for the DG Division, is its innovative manufacturing
methods (the "D.G. Manufacturing Process") which allows for substantially
reduced costs per unit, provides substantial capacity and better quality, and
requires minimal skilled labor. See "Business--Manufacturing." The Company's
merchandising strategy also involves the design of products that it believes
will continually appeal to the mass market. The Company also assists its
customers in creatively merchandising its jewelry to encourage impulse
purchases.
Growth has been achieved by providing its customers with quality and service and
in recent years, through the D.G. Manufacturing Process, which enables the
Company to provide its customers with value priced, stone-set, mass appeal
jewelry at lower cost than many of its competitors. The Company maintains
long-standing relationships with Canadian customers such as Reed's Jewellers,
the Twain Group and the Shopping Channel. In the last two years the Company has
also focused on the much larger American market. The DG Division established a
United States sales office in Tampa, Florida and currently sells products to
customers such as Wal-mart, Fred Meyer Inc., Value Vision International Inc.,
Suarez Corporation, which is a direct mail order company, and others, including
Zales Corporation ("Zales"), the largest jewelry retailer in the United States.
The Company has also utilized strategic acquisitions to increase its presence in
the United States. Diamonair's customers include Finlay Fine Jewelry Corp
("Finlay"), which operates leased fine jewelry departments in department stores
for retailers such as May Department Stores and Federated Department Stores.
Aviv sells to Zales and Finlay, as well as many independent jewelers in the
United States. In 1997, approximately 63% of the Company's sales were in the
United States, as compared to 17% in 1995.
INDUSTRY OVERVIEW
According to the United States Department of Commerce, national retail sales of
jewelry in the United States in 1997 were $42 billion. According to the World
Gold Council, U.S. retail sales of gold jewelry increased at a 3.7% annualized
growth rate since 1995 to $12.6 billion in 1997. Retail sales of jewelry in
Canada were $1.3 billion in 1997.
In the 1990's, department stores and jewelry chain stores have increased their
share of the retail jewelry market in the U.S. and Canada. In the U.S., sales by
department store and jewelry chain stores increased by 9.7% and 4.9%,
respectively, in 1997 to $2.6 billion and $3.3 billion, respectively. These
retail outlets usually purchase products from suppliers who can supply large
quantities and broad varieties of products at competitive prices. In contrast,
independent jewelry stores, who accounted for $2.8 billion in sales, tend to
purchase products from smaller manufacturers and often design and produce their
own jewelry in conjunction with private label manufacturers. Sales at discount
stores and catalog showrooms decreased by 7.1% in 1997 to $2.8 billion and
non-store retail (such as television shopping networks and catalogs) sales
increased 1.3% to $1.2 billion.
"Fine" jewelry is jewelry made primarily of precious metals such as gold, silver
or platinum. These metals are used in their pure form or mixed with other
metals. Gold can either be 24 karat, or be mixed with other metals. The term
'karat' refers to the gold content of alloyed gold, measured from a maximum of
24 karats (100% fine gold). Fine jewelry can be decorated with real or synthetic
stones. Synthetic stones, such as cubic zirconia, are generally significantly
less expensive than diamonds and gem stones. The price of a particular stone is
also influenced by its color, clarity and cut.
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BUSINESS STRATEGY
The Company believes that its business strategy will enable it to become a
leader in the value priced, stone-set jewelry market. The Company believes that
its business strategy will allow it to leverage the expertise and customer base
it has established in the Canadian market to increase sales in the much larger
markets of the United States. The Company also believes that it can increase
sales of its other products, including bridal jewelry, by integrating the
Company's divisions. The Company's primary business strategies are as follows:
Capitalize on the DG manufacturing processes
The DG Manufacturing Process allows the Company to produce mass quantities of
stone-set, value priced jewelry. The Company is able to offer quality products
to its customers at prices that are competitive with or lower than its
competitors offering similar goods while maintaining adequate profit margins.
Management believes that the DG Manufacturing Process produces goods that are
superior to comparably priced goods produced by competitors. The Company
believes that these advantages will allow for continued growth in market share
of value priced jewelry.
Integrate the Aviv and Diamonair Acquisitions
The Company completed both the Aviv and Diamonair acquisitions in the last eight
months. Although the DG Division manufactures products for Diamonair, the three
divisions' operations have not been fully integrated. The Company is reviewing
the Aviv and Diamonair product lines to determine how to manufacture more of
their product lines with the DG manufacturing process. The Company is also
looking into the feasibility of utilizing each division's distributions lines
and customers to promote and "cross-sell" the products of the other divisions.
The Company believes that this cross-promotion will increase the rate of
penetration of DG's products into the US markets.
Extend Customer Base and Utilize Non-traditional Distribution Lines
While the Company has developed a broad customer base, the Company targets its
marketing efforts towards large retailers, such as department stores, mass
merchandisers, television shopping networks, catalogue showrooms and other
discount stores, whose overall share of retail jewelry sales is expected to
increase. These customers typically require a high level of service, and the
Company seeks to build long-term relationships by making it convenient and
cost-effective for these customers to rely on the Company for essential services
such as product design, inventory control and delivery.
The Company is also seeking to sell its products through non-traditional
wholesale distribution outlets such as television shopping networks, internet
wholesale advertising services, liquidation operations and consumer product
rental companies. Management believes that the Company's products are ideal for
many of these non-traditional outlets, which usually feature moderate and lower
priced products.
Maintain a Broad Product Mix
The Company maintains a broad product mix so that it can meet the varying needs
of its customers, who range from discount stores such as Wal-Mart to department
stores such as Sak's Fifth Avenue. This also enables the Company to supply each
customer with a number of different styles of each product, which jewelry
retailers generally like to have in stock. The DG Division, Aviv and Diamonair
currently offer the Company's customers approximately 5,000, 4,000 and 600
styles of rings, respectively. The Company also offers its customers over 800
other products, primarily pendants and earrings.
The Company attempts to provide its customers with rings and other jewelry
products that incorporate traditional styles and designs. While the Company
regularly updates its product lines and offers new products, it seeks to avoid
designs incorporating fashion trends that are expected to have short life
cycles. This approach enables the Company and its customers to avoid
accumulating obsolete inventory. Additionally, the Company can create
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specially designed products in response to requests or pictures submitted by
customers. This variety and flexibility allows the Company to meet a wide
variety of its customers' jewelry needs.
Acquisitions and Joint Ventures
The Company has utilized the Aviv and Diamonair acquisitions to increase the
rate of the Company's penetration into the U.S. jewelry markets. Each
acquisition also broadened the Company's product line and increased the number
of customers that the Company works with, creating cross-selling opportunities.
Although it has no current plans or potential targets, the Company may make
additional acquisitions of manufacturers or distributors of complementary
jewelry products in the future if such potential targets offer strategic
opportunities for the Company as a whole.
The Company also intends to use strategic partnerships and joint ventures to
create additional revenue for the Company and to create opportunities for the
sale of the Company's products. Currently, the Company is in negotiations with
Time Group USA, Inc. ("Time") to acquire 50.1% of Time. Time primarily will
provide repair and engraving services for watches and other jewelry. See
"Business - Time Group, Inc." The Company is also in negotiation with Silverman
Jeweler's Consultants to establish an inventory liquidation services company in
Canada. See "Business - Silverman Retail Solutions, Inc."
MARKETING
The Company maintains sales offices at its Toronto headquarters, at the Aviv
manufacturing and office facility in Houston, Texas, at the Diamonair offices in
Cedar Knolls, New Jersey and in Tampa, Florida. The Company's sales staff
promote the Company's products to a wide range of customers via existing
relationships, trade shows and product presentations.
The Company seeks to provide value priced, quality products. Price and quality
are of particular importance in the jewelry market because, except at the
highest end of the market, advertising and brand name recognition are minimal.
The Company believes that the D.G. Manufacturing Process allows it to provide
its customers the DG Division products at prices that are competitive with or
lower than its competitors' products. Similarly, the incorporation of DG
Division products and manufacturing into Diamonair has allowed for competitive
pricing of that division's products. The Aviv products, which usually are made
of more expensive metals and contain more expensive stones, are also
competitively priced when compared with goods of similar quality. Marketing of
Aviv products are aided by Aviv's specialization in bridal jewelry, which allows
Aviv's sales people to focus their marketing efforts on certain market segments.
Often, retail stores are provided pre-arranged presentation trays. These trays
usually contain the Company's most popular styles in common sizes. The Company
believes that these trays make it convenient and cost effective for retail
stores to display and promote the Company's products. The Company believes that
retail store operators who utilize these pre-arranged presentation displays,
which may include point-of-purchase displays, will elicit impulse purchases of
the Company's products because the styles are familiar to customers and are
priced at attractive levels. Aviv also utilizes independent sales
representatives, who promote Aviv's products to smaller retail outlets
Management emphasizes maintaining and building upon the Company's relationships
with existing customers. The Company provides specialized support services to
its customers, including bar-coding and drop shipping to individual customer
locations as well as central distribution centers. Further, in order to fill
customer orders more quickly and effectively the Company has an Electronic Data
Interchange ("EDI") program pursuant to which the Company electronically
receives purchase orders from participating customers and electronically
transmits to the customers order acknowledgments, invoices and advance shipping
notices. The EDI link and other support options, in management's opinion,
assures an ongoing business relationship. The Company believes these specialized
services, which are particularly important in marketing to large retailers,
enhance the Company's ability to attract and retain customers.
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Although the Company's sales are generally non-refundable, the Company may
accept returns of certain items in order to maintain customer goodwill and as
part of promotional programs. Returns of products are not significant and
generally are made as part of stock balancing transactions in which the returned
products are replaced with products better suited to the customer's needs. The
Company has not experienced any difficulty in reselling returned merchandise.
In 1997, the Company began listing excess inventory on an Internet wholesale
commerce website. The Company intends to continue this practice because it
provides an inexpensive method for disposing of excess inventory on favorable
terms.
CUSTOMERS
The Company maintains a broad base of customers concentrated in four major
jewelry segments: (i) department stores such as Sears Roebuck, J.C. Penney and
Saks Fifth Avenue (the Company's products are also sold in certain Federated
Department Stores and May Department Stores through, Finlay Fine Jewelry Corp.,
an operator of jewelry boutiques within other department stores); (ii) specialty
markets, such as The Shopping Channel (Canada) and ValueVision; (iii) jewelry
chain stores such as Zales, Gordons, Friedmans and others and (iv) mass
merchandisers such as Wal-Mart. The Company generally does not sell pursuant to
any formal or long-term contracts.
For the year ended December 31, 1997, three major customers accounted for 42% of
sales. Finlay accounted for 19% of sales, Silverman Jewelers Consultants, Inc.
accounted for 14% of sales and Wal-Mart accounted for 9% sales. For the year
ended December 31, 1996, the Company's two largest customers were Wal-Mart (21%
of sales) and Zellers, Inc. (Canada)(11% of sales). The loss of any of the these
customers or a significant reduction in their orders would have a materially
adverse effect on the Company. Except for Zellers, the Company believes that its
relationship with its customers is good. Zellers, who had purchased rings
pursuant to a contract with the Company, has stopped purchasing products from
the Company and is in litigation with the Company. See "Management's Discussion
and Analysis" and "Legal Proceedings."
PRODUCT AND DESIGN
The Company seeks to provide its customers with a broad selection of jewelry
products that incorporate traditional styles and designs. The Company seeks to
avoid designs incorporating fashion trends which are expected to have short life
cycles. This approach enables the Company and its customers to avoid
accumulating obsolete inventory. Additionally, producing a greater quantity of a
particular product results in a more efficient manufacturing process.
However, the Company regularly updates its product lines and offers new
products. The Company maintains a staff of model makers/designers who develop
new designs based on research of the market and surveying stores, catalogues and
industry publications to determine current trends. Additionally, the Company can
create specially designed products in response to requests or pictures submitted
by customers. New product design prototypes are created, and after evaluation
the final product design is produced. Currently, the Company is perfecting its
computer aided design system which is quicker and more accurate then design by
humans.
A principal goal of the Company's design program is to maximize the perceived
value of the Company's products through design and manufacturing innovations
that enhance the appearance of the jewelry without causing corresponding
increases in product costs. This design approach assists the Company in
producing quality products reflecting general consumer tastes. The Company,
particularly the D.G. Division and Diamonair, seeks products, not as fashion
leaders or faddish styles, but of enduring styles that encourage moderately
priced impulse purchases.
Rings account for approximately 90% of the Company's sales by units sold and
dollar revenue. The D.G.
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Division currently offers approximately 5,000 styles of rings. The rings are
moderately priced and the average wholesale price of the rings is approximately
$150.00. The retail price of the D.G. Division's better selling products range
from $30.00 to $600.00, although some products can cost as much as $1,000. The
rings are made principally in 10 karat gold. The Company's products contain a
variety of stones classified as diamonds, precious (e.g., rubies, sapphires,
emeralds), semi-precious (e.g., garnet, topaz, amethyst, aquamarine, opal) or
synthetics (e.g., cubic zirconia, spinel). The use of stones increases average
unit sales price and results in greater margins. Additionally, the inclusion of
stones creates a greater margin flexibility to insulate the Company from
fluctuation in the value of gold. The D.G. Division manufactures a number of
rings with multiple stones because management believes the D.G. Manufacturing
Process allows the Company to produce multiple stone items at a lower cost than
the Company's competition.
Aviv offers approximately 4,000 rings, most of which are intended to be used as
wedding or engagement rings. Aviv's rings are made up of precious metals,
including 14 karat gold and platinum. The average wholesale price of the Aviv
products is $700.00. The retail price of Aviv's better selling products range
from between $500.00 and $1,500.00. Some of Aviv's diamond rings are sold for as
much as $5,000.
Diamonair offers approximately 600 rings, primarily adorned with cubic zirconia
stones. Although many of Diamonair's products are made of precious metals, the
Diamonair products are generally lower priced goods. The average wholesale price
of Diamonair's products is $100. The retail price of Diamonair's better selling
products range from $50 to $500. The Company is planning to introduce other
stones, which may include gem stones as well as other synthetic stones into the
Diamonair products.
The Company, through each of its three divisions, offers approximately 800
earrings and pendants. Many of these products are manufactured with the D.G.
Manufacturing Process, which allows the Company to produce these items at costs
which are competitive with or less than the Company's competitors. The Company
also designs earrings and pendants to match some of the Company's rings so that
the products can be sold as a set.
MANUFACTURING PROCESS
The D.G. Manufacturing Process is a special process for producing a high-volume
of low-cost multi-stone rings. The D.G. Manufacturing Process provides the
Company, with a current estimated manufacturing capacity of approximately 15,000
rings per week. This process is utilized at the Toronto facility for the DG
Division product line and certain Diamonair products. The Company believes that
it has a reputation for its expertise in the setting of stones and the Toronto
facility is presently producing an average of approximately 1,500 to 1,800 rings
per week. Management believes that its manufacturing capabilities distinguish it
from most of its competitors and enables it to produce very competitively
priced, quality and consistent products satisfying its customers' demands for
mass merchandising.
The D.G. Manufacturing Process combines modern technology, mechanization and
hand craftsmanship to produce fashionable and moderately priced jewelry. Its
manufacturing operations involve combining pure gold with other metals to
produce 10 and 14 karat gold, manufacturing cast jewelry, and finishing
operations such as cleaning, polishing, diamond-cut, engraving, plating and
other jewelry work. The Company utilizes the lost-wax/cast-in-place method of
jewelry manufacturing to produce high-quality gold rings, earrings, pendants and
bracelets. This is based on an investment casting process used in the jewelry
manufacturing industry. It entails creating wax duplicates of the items which
are encased in a plaster mold. The plaster is hardened in an oven while the heat
melts away the wax, leaving a hollow mold pre-set with stones in place. The mold
is injected with metal, in effect reverse-mounting the stones in the jewelry.
After the casting process, the jewelry undergoes a series of cleaning and
polishing stages before being labeled with the retailer's price tag and bar
codes and shipped. This process allows unskilled labor with virtually no
training to set as many as 8,000 stones per day per stone setter, at a cost of
approximately four cents per stone. This compares to the normal setting process
of a skilled setter, setting up to 150 stones per day, at a cost of up to $1.00
per stone or more. However, the percentage savings are far more significant when
the intrinsic values which make up the jewelry item are lower. This is so
because the greater the
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labor factor in the product's cost structure, the greater the percentage savings
when such labor factor is reduced.
Many of the D.G. Division's manufacturing personnel are paid on a piece-work
basis. Management believes this basis provides incentive to maximize
productivity while at the same time, it provides the Company accuracy in cost
accounting. The Company's strict quality control guidelines ensure that quality
is not sacrificed for productivity. The Company uses a bar-coded tracking system
for all inventory in process. When a job bag is transferred from one employee to
another, it is automatically electronically 'wanded' (UPC bar coded for number
of units, style, and other pertinent customer information) into that employee's
custody. This has the effect of assigning responsibility for the inventory. It
also causes the recipient employee to verify quality of the product prior to his
commencement of work, in effect, policing the prior person's work. If the
previous employee's work was substandard, the recipient will require that person
to take the extra time to correct the work. Otherwise, the recipient would have
to correct such product at no additional compensation and would further make the
recipient's work more difficult as well as delaying his production. Therefore,
the system is self policing.
Management believes that these significant savings will allow the Company to
produce jewelry that previously did not warrant large labor costs and
accordingly have not been produced by anyone else. Specifically, multi-stone
sterling silver products could now be mass produced to retail at prices geared
to mass merchandisers "customers" profiles. These products could now sell in a
range from $9.99 to $49.97 retail, and project a quality and perceived value of
several times that amount. Management believes the jewelry industry has avoided
producing this type of product since the sterling silver metal value and the
synthetic stone values did not warrant too much labor costs. The Company's lower
labor costs makes it possible to produce these products profitably.
Currently, manufacturing and other operations for the Aviv product line are
accomplished at the Company's facility in Texas. The lease to this factory was
assigned to the Company in connection with the acquisition of Aviv. This four
year old facility produces an average weekly volume of 800 rings and Aviv's
management believes its current facilities have the capacity to produce
approximately 4,500 rings per week.
Diamonair primarily purchases products from the D.G. Division and other
manufacturers in a finished condition. However, Diamonair does do some assembly,
repair and packaging of its products from its facility in Cedar Knolls, New
Jersey.
The manufacturing process in the jewelry industry results in great volumes of
gold scrap. The Company has strict controls to minimize waste. Management
believes that its manufacturing processes reduce the handling of the end jewelry
product and accordingly, the quantity of jewelry scrap is greatly reduced. The
scrap in the form of chips, filings, grindings and sweepings, are recovered by
the Company and sent to refiners to recover the gold. The Company's recovery
from refiners in 1996 and 1997 were 1,065 ounces or approximately $420,000, and
1,565 ounces or approximately $545,000, respectively.
SUPPLY
The Company purchases its gold from banks, gold refiners and commodity dealers.
Management believes this arrangement is sufficient to meet the Company's
requirements. Gold acquired for manufacture is at least .995 fine and is
combined with other metals to produce 10 or 14 karat gold. The term 'karat'
refers to the gold content of alloyed gold, measured from a maximum of 24 karats
(100% fine gold). Varying quantities of metals such as silver, copper, nickel
and zinc are combined with fine gold to produce 10 or 14 karat gold of different
colors. These alloys are in abundant supply and are readily available to the
Company. Other precious and semi-precious stones are available from many
suppliers in Canada and the United States.
The world's supply of diamonds comes primarily from De Beers Consolidated Mines,
Limited ('De Beers'), a South African company. The continued availability of
diamonds to the jewelry industry is dependent, to some degree, on a continual
supply from De Beers. While several other countries are major suppliers of
diamonds, in the event of an interruption of supply from South Africa, the
Jewelry industry, as a whole, could be adversely
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<PAGE>
affected, which could impact the supply of diamonds to the Company.
The Company does not presently engage in hedging activities with respect to
possible fluctuations in the prices of precious, semi-precious gemstones or
metals. The Company believes the risk of price fluctuations can be mitigated by
changes in the prices the Company charges its customers, which the Company has
historically done in response to such fluctuations. However, there can be no
assurance that a downward trend in the prices of stones or metals would not have
a material adverse impact on the valuation of the Company's inventories or that
an increase in prices would not make it more difficult or costly for the Company
to acquire inventory.
The Company purchases its supplies and raw materials from a variety of suppliers
and it does not believe the loss of any of the suppliers would have a material
effect on its business. Alternative sources of supply for raw materials for
production of jewelry are readily available.
The Company carefully inspects all materials sent and received from outside
suppliers, monitors the location and status of all inventory, and has strict
internal control procedures of all jewelry as it proceeds through the
manufacturing process. A complete physical inventory of gold, silver and
gemstones is taken at the Company's manufacturing and administrative facilities
on an annual basis. The Company employs an agency to provide a security staff
and has various security procedures in the hiring of personnel as well as
internal-security procedures regulating employee conduct.
INSURANCE
The Company maintains primary all-risk insurance, with limits in excess of the
Company's current inventory levels, to cover thefts and damage to inventory
located on the Company's premises. The Company also maintains insurance covering
thefts and damage to Company owned inventory located off-site. The amount of
coverage available under such policies is limited and may vary by location, but
generally is in excess of the value of the gold supplied by the Company. The
Company maintains fidelity insurance which provides coverage against theft or
embezzlement by employees of the Company. Additionally, the Company maintains
director's and officer's liability insurance in the amount of $5,000,000.
COMPETITION
The jewelry manufacturing industry is highly competitive, and the Company's
competitors include domestic and foreign jewelry manufacturers and wholesalers
and importers who may operate on a national, regional and local scale. The
primary competitive factors are price, design, quality, customer service and
established customer relationships.
The diverse distribution channels in which the Company markets its products
frequently involve different competitive factors. The ability to provide
specialized services is a particularly important competitive factor in its sales
to certain large retailers such as mass merchandisers, discount stores and
warehouse clubs. Product availability and the ability to offer consistent
product quality at competitive prices tend to be the key competitive factors to
the customer segments which the Company serves. Some of the Company's
competitors may specialize in sales to particular distribution channels and may
have relationships with customers in those distribution channels that make
competition by the Company more difficult. The Company believes that the recent
trend towards consolidation at the retail level in the jewelry industry will
increase the level of competition in the markets in which the Company competes.
In Canada, management believes it has two primary competitors, both larger than
the Company. A&A Jewelry of Scarborough, Ontario is the country's largest
jewelry manufacturer. It manufactures both casted ring products and stamped gold
earrings and pendants, and its sales are both in Canada and the United States.
Finecraft Industries Limited is the other major Canadian manufacturer, which
also imports from the Far East.
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In the United States, the market, although highly fragmented, does contain a
number of major competitors many of whom import much of their product from the
Far East and many of whom sell higher priced items. The United States
competitors include Town & Country Fine Jewelry Group, M. Fabrikant & Sons,
Inc., Samuel Aaron Inc., Simon Golub, PAJ, Inc., Nissko Jewellery Trading, World
Pacific Products, Andel, Andin International Inc., Oroamerica, Inc., Dalow
Industries and Michael Anthony Jewelers Inc.
PATENTS AND TRADEMARKS
The Company has received or applied for trademarks of certain product names and
for copyrights on approximately 200 Aviv product designs. These trademarks and
copyrights are not economically material to the Company.
The Company does not have, nor does it rely, on patents to establish or protect
its market position. The Company has not applied for patent protection of the
D.G. Manufacturing Processes to avoid disclosing its unique application,
modification and improvements relating to certain basic processes known in the
industry. Further, the Company cannot be assured that the process which it
believes is proprietary would qualify for a patent, and if a patent would be
granted, there is no assurance as to the extent of its enforceability. There can
be no assurance that competitors will not be able to imitate the Company's
manufacturing processes, which could have a material adverse effect on the
Company. See "Risk Factors - Lack of Patent Protection for Manufacturing
Process."
THE NEW YORK GOLD AND DIAMOND EXCHANGE.
As part of the acquisition of Aviv, the Company acquired the New York Gold and
Diamond Exchange ("NY Gold"), a retail store. NY Gold is located in a 1,500
square foot area of the Aviv facility in Houston, Texas. NY Gold sells the
products of Aviv and other manufacturers and offers the Company an excellent
opportunity to profitably dispose of excess inventory of Aviv products. The
Company intends to increase the amount of DG Division and Diamonair products
that it sells in the store.
TIME GROUP USA, INC.
The Company is currently in negotiations with the owners and management of Time
Group USA, Inc. ("Time") to acquire 50.1% of the issued and outstanding stock of
Time. Time is a development stage company that provides repair and engraving
services for watches and other jewelry. Currently, Time engages in limited
operations on five military bases. There can be no assurance that the Company
will successfully complete the agreement to acquire a controlling interest in
Time or that the Time operations will provide the Company with significant or
any revenue or net income.
SILVERMAN RETAIL SOLUTIONS, INC.
The Company is currently in negotiations with the owners and management of
Silverman Jeweler's Consultants, Inc. to form a joint venture, Silverman Retail
Solutions, Inc. ("SRS"), to engage in inventory liquidation services in Canada.
Silverman Jewelers Consultants has provided such services in the U.S. and
intends to utilize the Company's familiarity with the Canadian markets to expand
into Canada via SRS. SRS will purchase and resell, or act as a sales agent, to
sell excess inventory from entities in financial trouble or other entities who
need to dispose of large amounts of inventory quickly. SRS will sell a variety
of consumer products, including jewelry. Management believes that SRS' jewelry
sales will create opportunities to sell the Company's products when packaged
with inventory acquired through the liquidations. There can be no assurance that
the Company will successfully complete the agreement to form the SRS joint
venture or that the SRS operations will provide the Company with significant or
any revenue or net income.
EMPLOYEES
At May 31, 1998, the Company employed 200 persons on a full-time basis,
including approximately 165 engaged
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in manufacturing and distribution, 12 salespeople, 16 general and administrative
and seven executives, each of whom performs various other functions such as
sales and marketing.
The Company has no unions and believes its relationship with its employees is
good.
PROPERTY
The Company's executive and administrative offices and primary manufacturing and
marketing facilities are located in a newly-renovated 23,000 square foot
facility in Toronto, Ontario. This facility is leased from 1001 Petrolia Road
Limited Partnership, the general partner being 1013418 Ontario Inc. Jack
Berkovits, Chairman, CEO and President of the Company is the sole shareholder,
officer and director of that general partner. The lease is a 10 year net, net
lease and expires January 31, 2005. Annual lease payments are $100,605,
increasing each year by the greater of $.37 a square foot or the percentage
increase in the Consumer Price Index for the Municipality of Metropolitan
Toronto. Real estate taxes, utilities, maintenance and insurance cost the
Company approximately $95,060 for the year ended December 31, 1997. Management
is of the opinion that the terms of the lease are as favorable as could be
obtained from unaffiliated third parties. See "Certain Transactions."
The limited partnership owned by Mr. Berkovits originally obtained a $660,000
five year mortgage on the property from the Canadian Imperial Bank of Commerce
in 1993. At June 1, 1998, the mortgage was $618,689. The loan was interest free
for the first six months with the balance of the term at 5% per annum. The
Company is a guarantor of this mortgage. A second mortgage was obtained to
secure the Company's financing facilities with The Bank of Nova Scotia. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Certain Transactions" and Note 14 to "Notes to Consolidated
Financial Statements."
Effective as of June 1, 1997, the Company entered into a sublease for the 25,000
square foot manufacturing and office facility in Houston, Texas from which Aviv,
Inc. had operated prior to the Company's acquisition of Aviv. The sublease is to
terminate on the earliest of (i) May 30, 2003, (ii) four months after notice is
given by the Company, or (iii) upon termination of the primary lease on the
property. The primary lease is not due to terminate until March 2014, although
it is terminable by the landlord upon certain events, such as the failure of the
tenant to pay rent. The Company pays rent annual rent of $130,476. The Company
primarily uses the Houston facility for the manufacturing and storage of the
Aviv products, as well as sales, design and administrative offices. Also located
at the Houston Facility is the Company's retail store, which occupies
approximately 1,500 square feet.
Effective as of November 21, 1997, the Company entered into a sublease for the
7,880 square foot facility in Cedar Knolls, New Jersey that Litton Systems had
used to operate Diamonair prior to its acquisition by the Company. The Company
has the option, upon thirty days notice, to reduce the total area which it
occupies and receive a proportionate reduction in rent so long as the Company
occupies at least 5,000 square feet. The sublease terminates on November 20,
1998. The Company has the right to renew the lease for three successive one year
terms. The Company pays annual rent of $84,789. The Company uses the facility
for the assembly and storage of Diamonair products, as well as sales, design and
administrative offices.
The Company believes that its facilities are adequate for the Company's current
operating levels and presently foreseeable growth.
ENVIRONMENTAL COMPLIANCE
Certain of the manufacturing processes utilized by the Company require the use
of chemicals and other hazardous materials. The Company has an ongoing
compliance program to ensure that its manufacturing processes are in compliance
with environmental rules and regulations.
LEGAL PROCEEDINGS
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On May 29, 1997, Zellers, a department store chain, initiated an action against
the Company in the Ontario Court of Justice (General Division) alleging a breach
of contract for failure by the Company to credit certain returns to Zellers'
account and to provide Zellers with replacement merchandise. Zellers had been
purchasing rings from the Company pursuant to a contract which was to terminate
in December 2001. Zellers is seeking compensatory damages of $1,800,000,
punitive damages of $360,000 and counsel fees and court costs. The Company
intends to vigorously defend the action. The Company has also filed a
counterclaim for breach of the contract, for, among other claims, Zellers
failure to continue to purchase rings from the Company and the Company is
seeking damages in excess of $13,000,000. Although discovery has occurred, no
trial has commenced. The parties are currently attempting to negotiate a
settlement. There can be no assurance that a settlement will be reached or that
any resolution of this matter will not have a material adverse effect on the
Company.
The Company is not a party to any other material litigation nor are any such
proceedings pending or threatened.
SEASONALITY
Retail sales of jewelry are weighted to the fourth quarter. According to the
World Gold Council, retail sales by quarter have remained consistent over the
last three years with the fourth quarter accounting for approximately 44% of the
retail dollar sales and 46% of the retail unit sales in the jewelry industry. In
1995 the month of December accounted for 28% of the retail dollar sales and 31%
of the retail unit volumes. For manufacturers these sales patterns reflect a
business that tends to fall one-third in the first half of the year with the
remaining two-thirds in the second half of the year.
While the Company's sales are subject to seasonal fluctuations, this fluctuation
is mitigated to a degree by the early placement of orders by many of the
Company's customers, particularly for the Christmas holiday season. Further,
management believes that its sales and those of its customers are not as
seasonally affected as most competitor's sales because many of the Company's
products are lower priced goods designed for mass merchandising, which generate
year round impulse purchases.
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<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows. Mr.
Feiler and Mr. Bonsignore will be nominated to serve as directors at the
Company's next Annual Meeting:
Name Position
Since Age Position with the Company Held
- ----- --- ------------------------- ----
Samuel J. Berkovits.. 45 Chairman of the Board, CEO and 1979
President
Gary Davis........... 50 Vice President--Finance Chief Fin. 1987
Off., Controller
Treasurer 1996
Secretary 1997
Leonard Fasullo...... 56 Vice President--Production 1989
Charles Winston...... 40 Vice President--U.S. Operations 1996
Aaron Grubner........ 50 Director 1997
Joan A. Pajunen...... 55 Director 1997
Meyer Feiler......... 45 Director Nominee
Theodore Bonsignore.. 51 General Manager -
Diamonair, Director Nominee 1998
SAMUEL JACOB "JACK" BERKOVITS has served as President and a director of the
Company since 1979. He is a founding member of the Jeweller's Vigilance
Committee (Canadian Jeweler's Association) and is active in community affairs.
Mr. Berkovits became a member of the Canadian Institute of Chartered Accountants
in 1976. He practiced as an accountant in Montreal from 1972 to 1977 when he
joined the Company.
GARY DAVIS has served as Chief Financial Officer and Vice President -
Finance of the Company since 1987. Prior to that, Mr. Davis served for 12 years
as Chief Financial Officer at a Canadian company engaged in manufacturing
jewelry. Mr. Davis has been a certified general accountant since 1972.
LEONARD FASULLO has been Vice President - Production of the Company since
1989. Mr. Fasullo joined the Company as a manufacturing foreman in 1984.
CHARLES WINSTON has been Vice President - U.S. Operations of the Company
since March 1996. Mr. Winston was Vice President of national accounts at
Princess Pride Creations from March 1995 until March 1996, at B. D'Elia from
1994 until March 1995 and at World Wide Imports from 1991 until 1994.
THEODORE BONSIGNORE has served as General Manager of Diamonair since May,
1998. Mr. Bonsignore works for the Company an average of between fifteen to
twenty hours a week and also operates T.L. Bonsignore Management and Advisory
Services, a consulting firm specializing in the jewelry industry. From 1975 to
1997, Mr. Bonsignore was employed by Krementz & CO., a jewelry manufacturer,
serving as President since 1990. Mr. Bonsignore has been a director of the
Jewelers Board of Trade since 1990 and has served as Chairman of that Board
since 1998. Mr. Bonsignore is a certified public accountant. Mr. Bonsignore will
be nominated to serve as a director at the Company's annual meeting.
AARON GRUBNER is a lawyer admitted to practice before The Bar of the
Province of Ontario. He has been practicing law since 1973, primarily corporate
and commercial law in Toronto, Ontario. Mr. Grubner is a founding member of the
law firm of Grubner, Krauss and represents the Company with respect to corporate
and commercial matters.
JOAN A. PAJUNEN is managing director of Service Dimensions, Inc., an
international retail and service
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industry consulting firm with which she has been affiliated since 1985. She is a
member of the board of directors of Workbench, Inc., a major private United
States furniture retailer. Ms. Pajunen is an author and international speaker.
MEYER FEILER has been President of Carmen Incorporated, one of the largest
jewelry companies in Canada, since 1993. Mr. Feiler has worked at Carmen
Incorporated since 1979.
There is no family relationship between any of the above named officers or
directors.
The term of office for directors and officers is one year.
AUDIT AND COMPENSATION COMMITTEES
The Audit Committee consists of Messrs. Pajunen and Grubner. The
responsibilities of the audit committee include recommending to the board of
directors the firm of independent auditors to serve the Company, reviewing the
independent auditors reports, services and results of audit, and reviewing the
scope, results and adequacy of the Company's internal control procedures. The
Compensation Committee consists of Messrs. Pajunen, Grubner and Berkovits. The
Compensation Committee is expected to periodically review and evaluate officers'
compensation and will administer the Company's 1996 Stock Option Plan.
For a period of three years after the effective date of the Company's
Initial Public Offering on April 17, 1997, the Company has agreed to invite a
designee of Dillon to attend all meetings of the board of directors, but such
designee will not be entitled to vote or be compensated. To date, Dillon has not
designated a nominee.
It is not expected that any director or committee member will receive any
compensation for acting in such capacity. The Company will reimburse directors
and committee members for all ordinary and necessary expenses incurred in
attending any meeting of the board or any committee thereof.
EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth compensation paid by the
Company and its subsidiaries for the last three fiscal year for services in all
capacities for its CEO and any other officer who received a total annual salary
and bonus from the Company which exceeded $100,000.
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation for services rendered
in all capacities to the Company, for the fiscal years ended December, 1997,
December, 1996 and January 31, 1996 paid to the Company's Chief Executive
Officer, and the other most highly compensated executive officers (the "Named
Executive Officers") at the end of the above fiscal years whose total annual
salary plus bonus exceeded $100,000 per annum.
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<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
| | | ANNUAL | | RESTRICT | | OTHER |
| NAME AND | YEAR/ | COMPENSATI | | ED | OPTIONS | COMPENSA |
| PRINCIPAL | PERIOD | ---------- | | STOCK | / | -------- |
| POSITION | ENDED | ON | BONUS | AWARDS | SARS | TION |
| -------- | ----- | -- | ----- | ------ | --- | ---- |
|-------------------------|--------------|--------------------|----------------|--------------|-------------|-----------------|
| | | | | | | |
|<S> | <C> | <C> | <C> | <C> | <C> | <C> |
|Jack Berkovits, | 1997 | $ 197,242 | 187,798 | 0 | 377,500 | $ 12,000(1) |
|Chief Executive | 1996 | $ 147,061 | | 0 | 0 | $ 12,000(1) |
|Officer | 1995 | $ 146,600 | | 0 | 0 | $ 12,000(1) |
|and Chairman.......... | | | | | | |
|-------------------------|--------------|--------------------|----------------|--------------|-------------|-----------------|
|Gadi Beer, Vice | 1997(2) | $ 109,375 | | 0 | 0 | |
|President | 1996 | | | 0 | 0 | |
|of Sales and | 1995 | | | 0 | 0 | |
|Marketing | | | | | | |
|Aviv.................. | | | | | | |
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1. Represents auto allowance.
2. Mr. Beer's employment with the Company commenced on June 1,
1997, after the Company's acquisition of Aviv.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT CHANGE AND CHANGE-IN-CONTROL
ARRANGEMENTS
Jack Berkovits and the Company entered into a three year employment
agreement commencing April 17, 1997 for Mr. Berkovits to serve as Chief
Executive Officer and President at an annual salary of $250,000 with yearly
increases of no less than $10,000. Should Mr. Berkovits die during the term of
this agreement, his estate or designee shall receive, upon his death, two years
full salary. In the event of disability, Mr. Berkovits is to receive 70% of his
salary for the remainder of the term of the agreement. The agreement also
provides for the Company to maintain approximately $2,000,000 in key-man
insurance on the life of Mr. Berkovits. Currently, the Company is beneficiary of
two "key-man" term policies with a total death benefit of $840,000. The $700,000
policy has been assigned to secure the Company's financing facilities with The
Bank of Nova Scotia. The Company maintains a third policy with a death benefit
of $1.1 million for which Mr. Berkovits is the beneficiary.
Based upon any wrongful termination, which includes changes in control of
the Company through an acquiring person (any person who has acquired or
announces a tender offer or exchange for 25% of the Company), a sale of
substantially all of the assets or merger, acquisition of the Company or its
consolidation with another, or certain types of board changes, the Company shall
pay Mr. Berkovits a lump sum payment, based upon his then compensation,
including benefits and perquisites, from such termination. Such payment shall be
the balance of his compensation for the remainder of the term or compensation
for one year whichever is less; provided, if the payment is in excess of
$100,000, then such excess shall be payable in equal quarterly payments with
interest at the legal rate. The employment agreement also contains a one-year
non-competition provision within a 200 mile radius of the Company's primary
operation in Canada or anywhere in the United States.
The Company entered into an employment agreement with Gadi Beer, the
Vice-President of Sales and Marketing of Aviv for a term of one year terminating
on February 9, 1999. Mr. Beer earns an annual base salary of $120,000 and is
entitled to receive 0.8% of the total sales of Aviv. Mr. Beer has agreed to a
covenant not to compete with the Company for a period of three years from the
date of termination of the agreement. The agreement is renewable for additional
successive one year terms upon the consent of both parties.
No other officer has an employment contract with the Company.
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<PAGE>
CONSULTING AGREEMENTS
The Company has entered into a consulting agreement with Cimarron Capital
Corp. Ltd. ("Cimarron") whereby Cimarron will provide consulting services on
financing, acquisitions and other strategic matters. In consideration of such
services, the Company has granted Cimarron options to acquire 500,000 shares at
exercise prices ranging from $2.50 to $6.00.
COMPENSATION OF DIRECTORS
There are no standard arrangements for the payment of any fees to directors
of the Company for acting in such capacity. Directors are reimbursed for
expenses for attending meetings.
The Company has adopted a 1996 Stock Option Plan pursuant to which options
have been granted to officers, directors, consultants, key employees, advisors
and similar parties who provide their skills and expertise to the Company. See
"Options, Warrants or Rights" below.
OPTIONS, WARRANTS OR RIGHTS
In December 1996, the board of directors and shareholders adopted the 1996
D.G. Jewellery of Canada Ltd. Stock Option Plan (the "1996 Plan"), pursuant to
which 500,000 shares of Common Stock are provided for issuance.
The 1996 Plan is administered by the compensation committee or the board of
directors, who determine among other things, those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of Common Stock issuable upon the exercise of
the options and the option exercise price.
The 1996 Plan is for a period of ten years, expiring on December 15, 2006.
Options may be granted to officers, directors, consultants, key employees,
advisors and similar parties who provide their skills and expertise to the
Company. Options granted under the 1996 Plan may be exercisable for up to ten
years, may require vesting, and shall be at an exercise price all as determined
by the board. Options are non-transferable except by the laws of descent and
distribution or a change in control of the Company, as defined in the 1996 Plan.
Change in control includes (i) the sale of substantially all the assets of the
Company or its merger or consolidation with another, or (ii) a majority of the
board changes other than by election of shareholders pursuant to board
solicitation or by vacancies filled by the board caused by death or resignation,
or (iii) a person or group acquires 25% or makes a tender offer for 25% of the
Company's outstanding shares.
If a participant ceases affiliation with the Company by reason of death,
permanent disability or retirement at or after age 65, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other termination gives the participant three months to
exercise except for termination for cause which results in the option becoming
immediately null and void.
Options granted under the 1996 Plan, at the discretion of the compensation
committee or the board, may be exercised either with cash, Common Stock having a
fair market equal to the cash exercise price, the participant's personal
recourse note, or with an assignment to the Company of sufficient proceeds from
the sale of the Common Stock acquired upon exercise of the options with an
authorization to the broker or selling agent to pay that amount to the Company,
or any combination of the above.
The exercise price of an option may not be less than the fair market value
per share of Common Stock on the date the option is granted in order to receive
certain tax benefits under the Income Tax Act of Canada (the "ITA"). The
exercise price of all future options will be at least 85% of the fair market
value of the Common Stock on the date of grant of the options. A benefit equal
to the amount by which the fair market value of the shares at
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<PAGE>
the time the employee acquires them exceeds the total of the amount paid for the
shares or the amount paid for the right to acquire the shares shall be deemed to
be received by the employee in the year the shares are acquired pursuant to
paragraph 7 (1) of the ITA. Where the exercise price of the option is equal to
the fair market value of the shares at the time the option is granted, paragraph
110(1)(d) of the Act allows a deduction from income equal to one quarter of the
benefit as calculated above. If the exercise price of the option is less than
the fair market value at the time it is granted, no deduction under paragraph
110(1)(d) is permitted. Options granted to any non-employees, whether directors
or consultants or otherwise will confer a tax benefit in contemplation of the
person becoming a shareholder pursuant to subsection 15(1) of the ITA.
Options may not be transferred by an optionee other than by will or the
laws of descent and distribution, and, during the lifetime of an optionee, the
option will be exercisable only by the optionee.
Options under the 1996 Plan must be issued within ten years from the
effective date of the 1996 Plan.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the Company become available again for
issuance under the 1996 Plan.
The 1996 Plan may be terminated or amended at any time by the board of
directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 1996 Plan may not be
increased without the consent of the shareholders of the Company.
In February 1997, the Board granted 172,500 Options under the 1996 Plan
to 20 persons, including officers, directors and key employees. The Options are
exercisable at $4.50 per share for five years expiring February 9, 2002. On
August 22, 1997, the Compensation Committee lowered the exercise price to $1.38,
which was the Company's stock price on such date. On August 22, 1997, the
Company granted an additional 327,500 options exercisable at $1.38 per share for
five years expiring to Jack Berkovits. All options granted vest and become
issuable at the rate of 25% every six months so that the option are fully vested
and issuable two years from their issuance date. The table below reflects the
Options granted to the present officers and directors of the Company and the
percentage of Options owned by such persons.
EXPIRATI
-------- EXERCISE
OFFICER AND/OR DIRECTOR ON DATE OPTIONS PERCENT PRICE
----------------------- ---------- ------- ------- -----
Jack Berkovits............... (1) 377,500 75.5% $1.38
Gary Davis................... 02/09/02 15,000 3.0% $1.38
Drew Bricker................. 02/09/02 15,000 3.0% $1.38
Leonard Kasullo.............. 02/09/02 15,000 3.0% $1.38
Charles Winston.............. 02/09/02 7,500 1.5% $1.38
Aaron Grubner................ 02/09/02 10,000 2.0% $1.38
Joan A. Pajunen.............. 02/09/02 10,000 2.0% $1.38
- --------
(1) 327,500 of such options expire on August 21, 2002 and 50,000 expire on
February 9, 2002.
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<PAGE>
CERTAIN TRANSACTIONS
In February 1995 the Company entered into a 10 year lease consisting of
23,000 square feet for its executive offices and manufacturing operations in
North York, Ontario. The lease is with 1001 Petrolia Road Limited Partnership
("Petrolia L.P."), the general partner being 1013418 Ontario Inc. Jack
Berkovits, Chairman, CEO and President of the Company, is the sole owner,
officer and director of that general partner. Current rent is $100,605 and
increases each year by the greater of $.37 a square foot or the percentage
increase in the Consumer Price Index for the Municipality of Metropolitan
Toronto. Additionally, the Company is paying real estate taxes, utilities and
insurance aggregating $95,000 per year for this facility. See
"Business--Property." Management is of the opinion that the lease is on terms as
favorable as obtainable from unaffiliated third parties.
Petrolia L.P. through 1013418 Ontario, Inc., the general partner, owned
by Mr. Berkovits, has obtained a five year $660,000 mortgage on the property,
which at July 1, 1998 was in the principal amount of $618,689, with interest
at 5% per annum. The Company is a guarantor of this mortgage. See Note 10 to the
Consolidated Financial Statements.
Jack Berkovits loaned the Company monies from time to time for
operations and working capital which sums at April 30, 1998 aggregated
approximately $1.9 million and the weighted average interest rate was 10%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 10 to the Consolidated Financial Statements." In 1997, the
Company repaid $1.2 million of such loans, including payments to a third party,
Laurbrad Holdings Limited, who had loaned funds to Mr. Berkovits. Mr. Berkovits
loaned the funds to the Company on the same terms, which included a 20% annual
interest rate.
Diamante is a Canadian company operating under the name Oromart which
has five retail jewelry stores. Diamante is owned by a former Vice President of
the Company, Drew Bricker, who is also Diamante's President (since 1984). In
1986, when Mr. Bricker joined the Company as Vice President of Marketing (see
"Management"), Diamante became inactive. It reinitiated jewelry outlet stores in
1994. Pursuant to an agreement between the Company and Diamante, recently
rescinded, the Company acted as exclusive supplier of inventory to Diamante. In
1994 and 1995, the Company had advanced approximately $50,000 to Diamante to
initiate the Diamante stores including leasehold improvements all of which has
been repaid. The Company does not anticipate advancing any further funds to
Diamante. The inventory provided to Diamante, consists primarily of
manufacturing surplus, returns or refurbished jewelry, and on occasion gold
chains and watches purchased by the Company for resale to Diamante. The
inventory is secured by a registered security agreement covering the assets of
Diamante, which security agreement has been assigned to The Bank of Nova Scotia
which holds a substantial security interest in the assets of the Company.
Diamante has guaranteed the Company's bank financing and provided the bank with
a direct security interest in its assets. The Company consolidated, for
financial reporting purposes, with Diamante until February 7, 1997, the
termination date of the agreement with Diamante reflecting the Company's control
over that retail operation. The Company performs certain administrative
functions for Diamante. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Diamante leases each facility for its five stores, of which two leases
are guaranteed by the Company. Each of these two leases are terminable by
Diamante on 90 days written notice, and each is for five years, is a net, net
lease, with renewal options, one lease for a rental of approximately $17,000 per
year plus taxes, maintenance, insurance and utilities. The other guaranteed
lease calls for a rental of approximately $20,000 per year plus taxes,
maintenance, insurance and utilities.
All transactions between the Company, its officers, directors,
principal shareholders or affiliates are, in the opinion of management, except
for the interest rate charges on a portion of Mr. Berkovits' loans which are
above the market rate, on terms no less favorable to the Company then may be
obtained from unaffiliated third parties. All future transactions and loans
between itself and its officers, directors and 5% shareholders to be on terms no
less favorable than could be obtained from independent, unaffiliated parties and
will be approved by a majority of the independent, disinterested directors of
the Company.
40
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this Prospectus, the
names and beneficial ownership of the Company's Common Stock beneficially owned,
directly or indirectly, by (i) each person who is a director or executive
officer of the Company, (ii) all directors and executive officers of the Company
as a group, and (iii) all holders of 5% or more of the outstanding shares of
Common Stock of the Company, both before and after giving effect to this
Offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARE OWNERSHIP
AMOUNT AND PERCENTAGE OF SHARES
NATURE OF OUTSTANDING
BENEFICIAL
NAMES AND ADDRESS OF BENEFICIAL OWNERSHIP(2)
OWNER(1)
PRIOR TO FOLLOWING
THE THE
OFFERING OFFERING(3)
<S> <C> <C> <C>
Jack Berkovits............................ 2,811,250(4) 52.4% 41.0%
The Berkovits Family Trust................ 426,000 8.2% 6.4%
Sheba Berkovits........................... 816,000(5) 15.8% 12.3%
Gary Davis................................ 11,250(6) * *
Leonard Fasullo........................... 11,250(6) * *
Charles Winston........................... 5,625(6) * *
Aaron Grubner............................. 7,500(6) * *
5140 Yonge Street, Suite 1540
North York (Toronto) Ontario
M2N 6L7 Canada
Joan A. Pajunen........................... 7,500(6) * *
All directors and executive officers
as a group - 6 persons.................... 2,854,375 52.8% 41.4%
</TABLE>
* Less than one %.
(1) The address of each individual is 1001 Petrolia Road, Toronto, Ontario,
Canada M3J 2X7.
(2) Based upon information furnished to the Company by either the directors
and executive officers or obtained from the stock transfer books of the
Company. The Company is informed that these persons hold the sole
voting and dispositive power with respect to the Common Stock except as
noted herein. For purposes of computing 'beneficial ownership' and the
percentage of outstanding Common Stock held by each person or group of
persons named above as of the date of this Prospectus, any security
which such person or group of persons has the right to acquire within
60 days after such date is deemed to be outstanding for the purpose of
computing beneficial ownership and the percentage ownership of such
person or persons, but is not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person. As of the
date of this Prospectus, the Company had 5,165,000 shares of Common
Stock outstanding and an additional 500,000 shares of Common Stock
provided for issuance under the 1996 Plan.
41
<PAGE>
(3) Gives effect to an aggregate of 1,485,000 shares issuable upon exercise
of the Warrants, the Underwriter's Warrants and the Warrants contained
therein.
(4) Includes (i) 426,000 shares of Common Stock owned by the Berkovits
Family Trust of which Mr. Berkovits and his wife are co-trustees; (ii)
390,000 shares of Common Stock owned by his wife and (iii) 201,250
shares issuable upon options that are currently exercisable or
exercisable in the next sixty days. Does not include an aggregate of
390,000 shares of Common Stock owned by two of Mr. Berkovits' sons who
are independent of their father; and (ii)176,250 shares of Common Stock
underlying the Options which are not currently exercisable or
exercisable in the next sixty days.
(5) Includes 426,000 shares of Common Stock owned by the Berkovits Family
Trust of which Ms. Berkovits is a co-trustees. Ms. Berkovits is the
wife of Jack Berkovits.
(6) Consists of options which are currently exercisable or exercisable in
the next sixty days.
42
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The following description of the material terms of the Common Stock is
subject to the Ontario Business Corporation Act, 1982 ("BCA") and to the
provisions contained in the Company's articles of incorporation and by-laws, as
amended, copies of which have been filed as exhibits to the registration
statement of which this Prospectus is a part. See "Available Information."
COMMON STOCK
The Company is authorized to issue an unlimited number of shares of Common
Stock, no par value per share, of which as of the date of this Prospectus
6,650,000 shares of Common Stock are outstanding. All outstanding shares of
Common Stock are, and all shares of Common Stock to be outstanding upon
completion of this Offering will be validly authorized and issued, fully paid,
and non-assessable.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Holders of Common
Stock are entitled to receive ratably dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining, if any, after
payment of liabilities. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities.
Pursuant to the BCA, a shareholder of an Ontario Corporation has the right
to have the corporation pay the shareholder the fair market value for his shares
of the corporation in the event such shareholder dissents to certain actions
taken by the corporation such as amalgamation or the sale of all or
substantially all of the assets of the corporation and such shareholder follows
the procedures set forth in the BCA.
WARRANTS
The Warrants were issued pursuant to a Warrant Agreement between the
Company and American Stock Transfer & Trust Company (the "Transfer and Warrant
Agent"). Each Warrant entitles its holder to purchase, one share of Common Stock
at an exercise price of $6.25 per share, subject to adjustment in accordance
with the anti-dilution and other provisions referred to below. The Warrants are
exercisable from April 17, 1998 until April 16, 2002.
The Warrants may be redeemed by the Company at any time after April 17,
1998, at a redemption price of $.10 per Warrant, on not less than 30 days' prior
written notice to the holders of such Warrants, provided that the closing high
bid price of the Common Stock on Nasdaq, or the last sale price per share of the
Common Stock, if listed on the Nasdaq National Market or on a national exchange,
is at least 150% ($9.38 per share, subject to adjustment) of the exercise price
of the Warrants for a period of 15 consecutive trading days ending on the fifth
day prior to the date the notice of redemption is given. Holders of Warrants
shall have exercise rights until the close of the business day preceding the
date fixed for redemption. The exercise price of the Warrants should in no event
be regarded as an indication of any future market price of the securities
offered hereby.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the Warrants are subject to adjustment upon the occurrence
of certain events, including stock dividends, stock splits, combinations or
reclassification of the Common Stock. The Warrants do not confer upon holders
any voting or any other rights as shareholders of the Company.
43
<PAGE>
The Company will pay the Underwriters a fee of five percent of the exercise
price of each Warrant exercised, a portion of which fee may be allowed to the
dealer who solicited the exercise.
The Company is required to have a current registration statement on file
with the Commission and to effect appropriate qualifications under the laws and
regulations of the states in which the holders of Warrants reside in order to
comply with applicable laws in connection with the exercise of Warrants and the
sale of the Common Stock issued upon such exercise. The Company, therefore, will
be required to file post-effective amendments to its registration statement when
subsequent events require such amendments in order to continue the registration
of the Common Stock underlying the Warrants and to take appropriate action under
state securities laws. There can be no assurance that the Company will be able
to keep its registration statement current or to effect appropriate action under
applicable state securities laws. Its failure to do so may restrict the ability
of the Warrant holders to exercise the Warrants and resell or otherwise dispose
of the underlying Common Stock, whether pursuant to redemption of the Warrants
or otherwise.
TRANSFER AGENT
The transfer agent of the Company's Shares is American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005. American Stock Transfer
& Trust Company also acts as the Warrant agent for the Company's Warrants.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 5,165,000 shares of Common Stock outstanding.
Upon completion of this Offering, the Company will have 6,650,000 shares of
Common Stock outstanding, assuming exercise of the Warrants, the Underwriter's
Warrants and the Warrants contained therein. Of these Shares, the shares of
Common Stock offered hereby and 2,055,000 other shares will be freely tradable
without further registration under the Securities Act.
3,110,000 shares of the presently outstanding Common Stock are, and any
shares of Common Stock underlying the options granted under the 1996 Plan would
be "restricted securities" within the meaning of Rule 144 of the Securities Act
and, if held for at least one-year, would be eligible for sale in the public
market in reliance upon, and in accordance with, the provisions of Rule 144
following the expiration of such one-year period. Included among these shares
are 2,540,000 shares beneficially owned by Jack Berkovits, the Chairman, Chief
Executive Officer and President of the Company, who is deemed an "affiliate" o f
the Company. In general, under Rule 144 as currently in effect, a person or
persons whose shares are aggregated, including a person who may be deemed an
"affiliate" of the Company as that term is defined under the Securities Act,
would be entitled to sell within any three month period a number of shares
beneficially owned for at least one-year that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock, or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice, and the availability of current public information about
the Company. However, a person who is not deemed to have been an affiliate of
the Company during the 90 days preceding a sale by such person and who has
beneficially owned shares of Common Stock for at least two years may sell such
shares without regard to the volume, manner of sale, or notice requirements of
Rule 144.
The Company cannot predict the effect, if any, that the sales of shares of
Common Stock pursuant to Rule 144 or otherwise, or the availability of such
shares for sale, will, have on the market price prevailing from time to time.
Nevertheless, sales by Mr. Berkovits, or any other shareholder of a substantial
number of shares of Common Stock in the public market could materially adversely
affect prevailing market prices for the Common Stock.
Up to an aggregate of 500,000 shares of Common Stock may be purchased upon
the exercise of options which may be granted under the 1996 Plan of which
options to acquire all 500,000 shares of Common Stock have been granted to date
at an exercise price of $1.38. In addition up to 220,000 additional shares of
Common Stock may be purchased by Dillon prior to April 15, 2002 through the
exercise of the Underwriter's Warrants. Any and all shares of Common Stock
purchased upon the exercise of the Underwriter's Warrants may be freely
tradable, provided that the Company satisfies certain securities registration
and qualification requirements in accordance with the terms of the Underwriter's
Warrants.
The 3,110,000 shares which are deemed restricted securities are also
subject to lock-up agreements with pursuant to which these shareholders may not
sell such shares without the consent of Dillon prior to April 16, 1999. Although
there is no present specific plan, proposal, arrangement or understanding to
waive the two year restrictive period, Dillon may give its consent to reduce the
lock-up period. However, any such waiver would be subject to the nature of the
market for the Company's securities, the price and volume of the trading, and
the operations and financial condition of the Company.
The availability for sale of a substantial number of shares of Common Stock
acquired through the exercise of the Representative's Warrants or options that
have been and may be issued under the 1996 Plan could materially adversely
affect the prevailing market prices for the Common Stock. See "Risk Factors -
Shares Eligible for Future Sale."
45
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following describes the principal United States federal income tax
consequences of the purchase, ownership and disposition of the Common Stock and
the Warrants and upon the exercise, redemption or expiration of the Warrants by
a Warrant holder, that is a citizen or resident of the United States or a United
States domestic corporation or that otherwise will be subject to United States
federal income tax (a "U.S. Holder"). This summary is based on the United States
Internal Revenue Code of 1986, as amended (the "Code"), administrative
pronouncements, judicial decisions and existing and proposed Treasury
Regulations, changes to any of which subsequent to the date of this Prospectus
may affect the tax consequences described herein. This summary discusses only
the principal United States federal income tax consequences to those beneficial
owners holding the securities as capital assets within the meaning of Section
1221 of the Code and does not address the tax treatment of a beneficial owner
that owns 10% or more of the Common Stock. It is for general guidance only and
does not address the consequences applicable to certain specialized classes of
taxpayers such as certain financial institutions, insurance companies, dealers
in securities or foreign currencies, or United States persons whose functional
currency (as defined in Section 985 of the Code) is not the United States
dollar. Persons considering the purchase of these securities should consult
their tax advisors with regard to the application of the United States and other
income tax laws to their particular situations. In particular, a U.S. Holder
should consult his tax advisor with regard to the application of the United
States federal income tax laws to his situation.
COMMON STOCK
A U. S. Holder generally will realize, to the extent of the Company's
current and accumulated earnings and profits, foreign source ordinary income on
the receipt of cash dividends, if any, on the Common Stock equal to the United
States dollar value of such dividends determined by reference to the exchange
rate in effect on the day they are received by the U.S. Holder (with the value
of such dividends computed before any reduction for any Canadian withholding
tax). U.S. Holders should consult their own tax advisors regarding the treatment
of foreign currency gain or loss, if any, on any dividends received which are
converted into United States dollars on a date subsequent to receipt. Subject to
the requirements and limitations imposed by the Code, a U.S. Holder may elect to
claim a Canadian tax withheld or paid with respect to dividends on the Common
Stock as a foreign credit against the United States federal income tax liability
of such holder. Dividends on the Common Stock generally will constitute 'passive
income' or, in the case of certain U.S. Holders, 'financial services income' for
United States foreign tax credit purposes. U.S. Holders who do not elect to
claim any foreign tax credits may claim a deduction for Canadian income tax
withheld. Dividends paid on the Common Stock will not be eligible for the
dividends received deduction available in certain cases to United States
corporations.
Upon a sale or exchange of a share of Common Stock, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized on
such sale or exchange and the tax basis of such Common Stock. Any such gain or
loss will be capital gain or loss, and will be long term capital gain or loss if
at the time of the sale or exchange the Common Stock has been held for more than
one year.
WARRANTS
No gain or loss will be recognized by the holder of a Warrant upon the
exercise of the Warrant. The cost basis of the Common Stock acquired upon such
exercise will be the cost basis of the Warrant plus any additional amount paid
upon the exercise of the Warrant. Gain or loss will be recognized upon the
subsequent sale or exchange of the Common Stock acquired by the exercise of the
Warrant, measured by the difference between the amount realized upon the sale or
exchange and the cost basis of the Common Stock so acquired.
If a Warrant is not exercised, but is sold or exchanged (whether pursuant
to redemption or otherwise), gain or loss will be recognized upon such event,
measured by the difference between the amount realized by the holder of the
Warrant as a result of sale, exchange or redemption and the cost basis of the
Warrant.
46
<PAGE>
If a Warrant is not exercised and is allowed to expire, the Warrants will
be deemed to be sold or exchange on the date of expiration. In such event, the
holder of the Warrant will recognize a loss to the extent of the cost basis of
the Warrant.
Generally, any gain or loss recognized as a result of the foregoing will be
a capital gain or loss and will either be long-term or short-term depending upon
the period of time the Common Stock sold or exchanged or the Warrant sold,
exchanged, redeemed, or allowed to expire, as the case may be, was held. A
holding period of more than one year results in long-term capital gain or loss
treatment. If a Warrant is exercised, the holding period of the Common Stock so
acquired will not include the period during which the Warrant was held.
This summary is of general nature only and is not intended to be, and
should not be construed to be, legal or tax advice to any prospective investor
and no representation with respect to the tax consequences to any particular
investor is made.
INVESTMENT CANADA ACT
The Investment Canada Act is a Federal Canadian statute which regulates the
acquisition of control of existing Canadian businesses and the establishment of
new Canadian businesses by an entity that is a 'non-Canadian' as that term is
defined in the Investment Canada Act.
The Company believes that it is not currently a 'non-Canadian' for purposes
of the Investment Canada Act. If the Company were to become a 'non-Canadian' in
the future, acquisitions of control of Canadian businesses by the Company would
become subject to the Investment Canadian Act. Generally, the direct acquisition
by a 'non-Canadian' of an existing Canadian business with gross assets of
$5,000,000 or more is reviewable under the Investment Canada Act, with a
threshold of $168 million for 1996 for 'NAFTA investors', as defined under the
Investment Canada Act.
Indirect acquisitions of existing Canadian businesses (with gross assets
over certain threshold levels) as well as acquisitions of businesses related to
Canada's cultural heritage or national identity (regardless of the value of
assets involved) may also be reviewable under the Investment Canada Act. In
addition, acquisitions of control of existing investments to establish new,
unrelated businesses are not generally reviewable but do require that a notice
of the investment be given under the Investment Canada Act. An investment in a
new business that is related to the non-Canadian's existing business in Canada
is not notifiable under the Investment Canada Act unless such investment relates
to Canada's cultural heritage or national identity.
Investments which are reviewable under the Investment Canada Act are
reviewed by the Minister, designated as being responsible for the administration
of the Investment Canada Act. Reviewable investments may not be implemented
prior to the Minister determining that the investment is likely to be of 'net
benefit to Canada' based on the criteria set out in the Investment Canada Act.
LEGAL MATTERS
Certain legal matters relating to Canadian law, including the validity of
the issuance of the Common Stock and Warrants offered herein, will be passed
upon for the Company by Grubner, Krauss, Barristers & Solicitors, 5140 Yonge
Street, Suite 1540, North York, Canada M2N6L7. Aaron Grubner, a member of the
firm, is a director of the Company. See "Management." Certain legal matters in
connection with the Offering will be passed upon for the Company by its United
States counsel Gersten, Savage, Kaplowitz & Fredericks, LLP, 101 East 52nd
Street New York, NY 10022-6018.
47
<PAGE>
EXPERTS
The consolidated financial statements of the Company for year ended
December 31, 1997 and 1996, appearing in this Prospectus and registration
statement, have been audited by Schwartz Levitsky Feldman, chartered
accountants, as set forth in their report thereon appearing elsewhere herein and
in the registration statement, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The by-laws of the Company provide that the Company shall indemnify to the
fullest extent permitted by Canadian law directors and officers (and former
officers and directors) of the Company. Such indemnification includes all costs
and expenses and charges reasonably incurred in connection with the defense of
any civil, criminal or administrative action or proceeding to which such person
is made a party by reason of being or having been an officer or director of the
Company if such person was substantially successful on the merits in his or her
defense of the action and he or she acted honestly and in good faith with a view
to the best interests of the Company, and if a criminal or administrative action
that is enforced by a monetary penalty, such person had reasonable grounds to
believe his or her conduct was lawful.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
this Offering, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
and the Underwriters pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses,
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person or by the Underwriters in connection
with the securities being registered, the Company will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington D.C. 20549, a
registration statement on Form SB-2 under the Securities Act, with respect to
the Common Stock and Warrants offered hereby. This Prospectus does not contain
all the information set forth in the registration statement and the schedules
and exhibits thereto, For further information with respect to the Company and
such Common Stock and Warrants, reference is made to the registration statement
and the schedules and exhibits filed as a part thereof. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, if such contract or
document is filed as an exhibit, reference is made to the copy of such contract
or other document filed as an exhibit to the registration statement. The
registration statement, including schedules and exhibits thereto, may be
inspected without charge at the Commission's principal office, Public Reference
Room of the Securities and Exchange Commission, Room 1024, 450 Fifth Street,
Washington, D.C. 20549, and at the Commission's regional offices, Region 1,
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, NY 10048
and Region 3, Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. The Commission also maintains a Web
site that contains reports, proxy and information regarding registrants that
file electronically with the Commission at http:www.sec.gov. Copies of all or
any part thereof may be obtained from the Commission at its principal office in
Washington, D.C. after payment of fees prescribed by the Commission.
48
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
TABLE OF CONTENTS
Report of Independent Auditors 1
Consolidated Balance Sheet 2
Consolidated Statement of Income 3
Consolidated Statement of Cash Flows 4
Consolidated Statement of Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-18
<PAGE>
Schwartz Levitsky Feldman
CHARTERED ACCOUNTANTS
TORONTO, OTTAWA, MONTREAL
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
D.G. Jewellery of Canada Ltd.
We have audited the accompanying consolidated balance sheets of D.G.
Jewellery of Canada Ltd. (incorporated in Canada) and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of
income, cash flows and changes in stockholders' equity for the years
ended December 31, 1997 and 1996. These consolidated financial statements
are the responsibility of the company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of D.G.
Jewellery of Canada Ltd. and subsidiaries as of December 31, 1997 and
1996 and the results of their operations and their cash flows for the
years ended December 31, 1997 and 1996, in conformity with generally
accepted accounting principles in the United States of America.
[illegible Sig]
Toronto, Ontario
March 5, 1998 Chartered Accountants
1167 Caledonia Road
Toronto, Ontario M6A281
Tel: 416 785 5353
Fax: 436 785 5663
F-1
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Balance Sheet
As of December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
$ $
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Accounts receivable (notes 3, 8 and 10) 17,197,875 8,871,980
Inventory (notes 4, 8 and 10) 12,852,760 6,779,338
Cash surrender value of life insurance (note 5) 476,445 -
Prepaid expenses and sundry assets 169,696 67,267
---------- ----------
30,696,776 15,718,585
DEFERRED COSTS OF PUBLIC ISSUE - 131,777
PROPERTY, PLANT AND EQUIPMENT (notes 6, 8 and 10) 1,888,148 744,661
GOODWILL (note 7) 1,336,609 177,963
---------- ----------
33,921,533 16,772,986
========== ==========
</TABLE>
APPROVED ON BEHALF OF THE BOARD
_______________________Director
_______________________Director
F-2
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Balance Sheet
As of December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
$ $
LIABILITIES
CURRENT LIABILITIES
<S> <C> <C> <C>
Bank indebtedness (note 8) 12,120,832 8,321,794
Accounts payable and accrued expenses (note 9) 3,891,394 1,982,423
Income taxes payable 1,008,548 593,402
Current portion of loans payable (note 10) 3,441,109 1,195,936
Class B redeemable special stock (note 11) - 81,067
Other loan - 226,989
---------- ----------
20,461,883 12,401,611
LOANS PAYABLE (note 10) 2,864,997 1,080,838
DEFERRED INCOME TAXES (note 12) - 127,138
---------- ----------
23,326,880 13,609,587
---------- ----------
COMMITMENTS AND CONTINGENCIES (notes 16 and 17)
STOCKHOLDERS' EQUITY
COMMON STOCK (note 13) 6,700,827 84
CUMULATIVE TRANSLATION ADJUSTMENTS (359,434) (44,711)
RETAINED EARNINGS 4,253,260 3,208,026
---------- ----------
10,594,653 3,163,399
---------- ----------
33,921,533 16,772,986
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Statement of Income
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
$ $
Net sales 22,127,825 14,181,540
Cost of sales 15,677,870 11,374,603
---------- ----------
Gross profit 6,449,955 2,806,937
Operating expenses
Selling 1,188,308 588,809
General and administrative 2,463,242 541,456
---------- ----------
3,651,550 1,130,265
---------- ----------
Operating income 2,798,405 1,676,672
---------- ----------
Interest expenses 822,215 796,412
Other expenses 389,533 127,086
---------- ----------
1,211,748 923,498
---------- ----------
Income before income taxes 1,586,657 753,174
Provision for income taxes (note 12) 541,423 296,146
---------- ----------
Net income 1,045,234 457,028
========== ==========
Earnings per common share 0.22 0.11
========== ==========
Earnings per common share assuming dilution 0.22 0.11
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Statement of Cash Flows
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 1,045,234 457,028
------------ -----------
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Amortization 389,603 197,054
Increase in accounts receivable (8,325,895) (1,848,027)
Increase in inventory (6,073,422) (1,948,113)
Increase in cash surrender value
of life insurance (476,445) -
Increase in prepaid expenses
and sundry assets (102,429) (64,421)
Increase in accounts payable
and accrued expenses 1,908,971 1,186,529
Increase in income taxes payable 415,146 300,940
Decrease in deferred income taxes - (5,182)
------------ -----------
Total adjustments (12,264,471) (2,181,220)
------------ -----------
Net cash used in operating activities (11,219,237) (1,724,192)
------------ -----------
Cash flows from investing activities:
Purchases of property, plant and
equipment (1,491,736) (274,845)
Purchase of goodwill (1,200,000) -
Proceeds from disposal of property,
plant and equipment - 10,935
------------ -----------
Net cash used in investing activities (2,691,736) (263,910)
------------ -----------
Cash flows from financing activities:
Proceeds from/(repayment of)
loans payable 3,802,343 (303,488)
Issuance of capital stock 6,705,382 -
Deferred public issue costs - (131,777)
Redemption of capital stock (81,067) -
------------ -----------
Net cash provided by (used in) financing activities 10,426,658 (435,265)
------------ -----------
</TABLE>
F-5
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Statement of Cash Flows
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Effect of foreign currency exchange
rate changes (314,723) 20,966
----------- -----------
Net increase in bank indebtedness and
cash equivalents (3,799,038) (2,402,401)
Bank indebtedness and cash equivalents
- Beginning of year (8,321,794) (5,919,393)
----------- ----------
- End of year (12,120,832) (8,321,794)
=========== ==========
Interest paid 822,215 827,864
=========== ==========
Income taxes paid 43,000 -
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Statement of Stockholders' Equity
For the years ended December 31, 1997 and 1996
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
Common Issued and
Stock Outstanding Cumulative
Number of Common Retained Translation
Shares Warrants Amount Earnings Adjustments
$ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 3,900,000 - 84 2,750,998 (65,677)
Foreign currency translation - - - - 20,966
Net income for the year - - - 457,028 -
--------- --------- --------- --------- --------
Balance as of December 31, 1996 3,900,000 - 84 3,208,026 (44,711)
Common stock issued (note 13) 1,265,000 1,265,000 6,700,743 - -
Foreign currency translation - - - - (314,723)
Net income for the year - - - 1,045,234 -
--------- --------- --------- --------- --------
Balance as at December 31, 1997 5,165,000 1,265,000 6,700,827 4,253,260 (359,434)
========= ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
1. BASIS OF CONSOLIDATED FINANCIAL STATEMENTS PRESENTATION
These financial statements consolidate, using the purchase method,
the accounts of the company and its two wholly-owned subsidiaries,
Diamonair, Inc. and Aviv, Inc. All material intercompany accounts
have been eliminated. Consolidation commenced with the effective
dates of acquisition of the operations of the subsidiary companies.
The year ends of the subsidiaries are December 31. Acquisition of the
operations of the subsidiaries was effected by the purchase of the
assets and trade name of Diamonair, Inc. from a third party,
effective November 21, 1997, and by the purchase of the assets and
trade name of Aviv, Inc. from a third party, effective June 1, 1997.
The purchases were effected through the company's wholly-owned
subsidiaries, Diamonair, Inc. and Aviv, Inc. and the final documents
were signed on November 21, 1997 and February 10, 1998 respectively.
Total assets acquired and total liabilities assumed by D.G. Jewellery
of Canada Ltd. as a result of these acquisitions is as follows:
<TABLE>
<CAPTION>
Aviv, Inc. Diamonair, Inc.
---------- ---------------
$ $
<S> <C> <C> <C>
Total assets (exclusive of goodwill) 4,286,000 4,549,000
Goodwill - 1,200,000
</TABLE>
The total amount of consideration given by D.G. Jewellery of Canada
Ltd. as a result of these acquisitions is as follows:
<TABLE>
<CAPTION>
Aviv, Inc. Diamonair, Inc.
---------- ---------------
$ $
<S> <C> <C> <C>
Cash - 5,749,000
Accounts payable 988,500 -
Loans payable (as described in note 10) 3,297,500 -
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i) Principal Activities
The company was incorporated in Canada on October 18, 1979. The
company is principally engaged in the production and trading of
jewellery in Canada and the United States of America.
ii) Bank indebtedness and Cash Equivalents
Bank indebtedness and cash equivalents include cash on hand,
amounts due to banks, and any other highly liquid investments
purchased with a maturity of three months or less. The carrying
amount approximates fair value because of the short maturity of
those instruments.
F-8
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
iii) Other Financial Instruments
The carrying amount of the company's other financial instruments
approximates fair value because of the short maturity of these
instruments or the current nature of interest rates borne by
these instruments.
iv) Long-term Financial Instruments
The fair value of each of the company's long-term financial
assets and debt instruments is based on the amount of future
cash flows associated with each instrument discounted using an
estimate of what the company's current borrowing rate for
similar instruments of comparable maturity would be.
v) Accounts Receivable and Accounts Payable
In certain instances, the company's practice is to sell to and
purchase from the same entities. In such circumstances, on a
periodic basis, the payable is set-off against the receivable as
payment. Until such time as such a set-off occurs, the
respective receivable and payable amounts are reported on a
gross basis. At year end, amounts owing to the company from
customers who participate in this practice was approximately
$100,000 ($4.2 million as at December 31, 1996). Of this amount,
$35,000 ($1.5 million as at December 31, 1996) was owed to these
customers as at December 31, 1997.
vi) Inventory
Raw materials and work-in-process are valued at the lower of
cost (first-in, first-out basis) or market.
Finished goods are valued at the lower of cost or market. Cost
is calculated using selling price less normal gross margin.
vii) Depreciation
Depreciation is provided over the estimated useful lives of the
assets, principally using the declining balance method.
viii) Goodwill
Goodwill is the excess of cost over the value of tangible assets
acquired. It is amortized on the straight-line basis over 25 to
40 years.
ix) Sales
Sales represents the invoiced value of goods supplied to
customers. Sales are recognized upon delivery of goods and
passage of title to customers.
F-9
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
x) Income taxes
The company accounts for income tax under the provisions of
Statement of Financial Accounting Standards No. 109, which
requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial
statement bases of assets and liabilities.
xi) Accounting Changes
On January 1, 1996, the company adopted the provision of SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires
that long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995.
Adoption of SFAS No. 121 did not have a material impact on the
company's result of operations.
In December 1995, SFAS No. 123, Accounting for Stock-Based
Compensation, was issued. It introduced the use of a fair
value-based method of accounting f0r stock-based compensation.
It encourages, but does not require, companies to recognize
compensation expense for stock-based compensation to employees
based on the new fair value accounting rules. Companies that
choose not to adopt the new rules will continue to apply the
existing accounting rules contained in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees.
However, SFAS No. 123 requires companies that choose not to
adopt the new fair value accounting rules to disclose pro forma
net income and earnings per share under the new method. SFAS No.
123 is effective for financial statements for fiscal years
beginning after December 15, 1995. The company has adopted the
disclosure provisions of SFAS No. 123.
xii) Foreign Currency Translation
The translation of the financial statements from Canadian
dollars ("CDN $") into United States dollars is performed for
the convenience of the reader. Balance sheet accounts are
translated using closing exchange rates in effect at the balance
sheet date and income and expense accounts are translated using
an average exchange rate prevailing during each reporting
period. No representation is made that the Canadian dollar
amounts could have been, or could be, converted into United
States dollars at the rates on the respective dates and or at
any other certain rates. Adjustments resulting from the
translation are included in the cumulative translation
adjustments in stockholders' equity.
F-10
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
xiii) Net Income Per Weighted Average Common Stock
Net income per common stock is computed by dividing net income
for the year by the weighted average number of common stock
outstanding during the year.
xiv) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principals in the United States of
America requires management to make estimates and assumptions
that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Accounts receivable 17,690,675 8,972,747
Less: Allowance for doubtful accounts 492,800 100,767
---------- ---------
Accounts receivable, net 17,197,875 8,871,980
========== =========
</TABLE>
4. INVENTORY
Inventory comprised of the following:
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Raw materials 2,244,686 1,526,385
Work-in-process 590,778 248,792
Finished goods 10,017,296 5,004,161
---------- ---------
12,852,760 6,779,338
========== =========
</TABLE>
5. CASH SURRENDER VALUE OF LIFE INSURANCE
The cash surrender value of life insurance represents the value of
life insurance policies of the former directors of Aviv, Inc.
Subsequent to December 31, 1997, the majority of the policies were
redeemed for proceeds aggregating $393,285.
F-11
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Office equipment 327,565 165,569
Machinery and manufacturing equipment 1,025,183 268,561
Computer equipment and software 189,653 140,118
Automobile 6,000 -
Leasehold improvements 340,906 208,459
Waxes and moulds 1,466,264 1,081,129
--------- ---------
Cost 3,355,571 1,863,836
--------- ---------
Less: Accumulated amortization
Office equipment 130,512 110,960
Machinery and manufacturing equipment 265,913 169,440
Computer equipment and software 121,260 111,426
Automobile - -
Leasehold improvements 68,795 37,794
Waxes and moulds 880,943 689,555
--------- ---------
1,467,423 1,119,175
--------- ---------
Net 1,888,148 744,661
========= =========
</TABLE>
7. GOODWILL
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Cost 1,483,848 283,848
Less: Accumulated amortization 147,239 105,885
--------- ---------
Net 1,336,609 177,963
========= =========
</TABLE>
F-12
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
8. BANK INDEBTEDNESS
The bank loan bears interest at the bank's prime lending
rate plus 1/2% per annum (8.0% at December 31, 1997 and
5.25% at December 31, 1996) with interest payable monthly.
The weighted average interest rates incurred on the bank
loan were 5.42% and 6.58% per annum for the years ended
December 31, 1997 and December 31, 1996, respectively. As
security, the company has provided a general assignment of
accounts receivable, a general security agreement
constituting a first charge over all present and future
personal property of the company and an assignment of key
man life insurance of a director in the amount of $704,225
payable to the bank as of December 31, 1997 and $734,107 as
of December 31, 1996. The available line of credit under the
bank loan amounted to $16,549,000 as at December 31, 1997.
The company also provided to the bank an assignment of
accounts receivable, and a general security agreement
constituting a first charge over all present and future
property with UCC filings of security in the appropriate
jurisdictions of its subsidiary companies, as well as
hypothecation of all the shares of these subsidiaries. (See
note 1). Furthermore, an affiliated company (owned wholly by
the company's majority stockholders) has provided a general
security agreement constituting a first charge over its
present and future property and a corporate guarantee
secured by a collateral mortgage providing a second fixed
charge over its property. Furthermore, the company also
provided to the bank an assignment of all security taken by
the company from a related party, Diamante Fine Jewellery
Limited, over which it has effective control. Certain
stockholders have provided a postponement of their loans to
the company in an amount of $1,400,000.
The facility contains covenants specifying minimum and
maximum selected financial ratios. The agreement contains
restrictions on changes in ownership and line of business,
on further encumbrances of assets and on the guarantees and
other contingent liabilities.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Trade payables 3,240,877 1,582,701
Accrued expenses 650,517 399,722
--------- ---------
3,891,394 1,982,423
========= =========
</TABLE>
F-13
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
10. LOANS PAYABLE
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C> <C>
a) Loans from stockholders
Loans are secured by a general assignment of the
company's assets subject to the prior encumbrances
disclosed in note 8, $1,400,000 subordinated to the
company's banker and bear interest at 10% (9% for 1996) 1,965,148 1,080,838
b) Loan is provided by the company's banker, subject to
the encumbrances disclosed in note 8, bearing interest
at the prime lending rate of the company's bank plus 1%,
repayable in 36 equal monthly installments plus interest
with the final payment due in November 2000 1,369,327 -
c) Loan is provided by the bankers of Aviv, Inc., with no
specific terms of repayment. This loan was repaid in full
in February 1998 2,971,631 -
d) Repaid during the year - 1,195,936
--------- ---------
6,306,106 2,276,774
Less: Current portion 3,441,109 1,195,936
--------- ---------
2,864,997 1,080,838
========= =========
Aggregate maturities of loans payable are as follows:
1997 1996
$ $
Repayable during the following periods:
Within one year 3,441,109 1,195,936
Over one year but not exceeding two years 468,690 1,080,838
--------- ---------
3,909,799 2,276,774
========= =========
</TABLE>
The weighted average interest rates per annum incurred
were 9.5% for the year ended December 31, 1997 and
12.83% for the year ended December 31, 1996.
F-14
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
11. CLASS B REDEEMABLE SPECIAL STOCK
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Redeemable Special Stock
11,111 Class B special stock - 81,067
Less: Current portion - 81,067
======= =======
- -
======= =======
</TABLE>
These stock were redeemed during 1997.
12. INCOME TAXES
a) Significant components of provision for income taxes are:
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Current 541,423 301,328
Deferred - (5,182)
------- -------
541,423 296,146
======= =======
</TABLE>
b) Deferred income taxes represented the tax charges
derived primarily from temporary differences between
amortization of property, plant and equipment and
amortization of goodwill charged to operations and
amounts deducted from taxable income. As a consequence
of the issuance of common stock during the year, issue
expenses were incurred which are deductible for tax
purposes over five years. The deferred income taxes at
December 31, 1996 has been applied to the issue
expenses (note 13).
F-15
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
13. CAPITAL STOCK
a) D.G. Jewellery of Canada Ltd.
Authorized
An unlimited number of common stock
Issued
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
5,165,000 Common stock (3,900,000 in 1996) 6,587,602 84
1,265,000 Warrants 113,225 -
--------- --
6,700,827 84
========= ==
</TABLE>
b) All authorized classes of capital stock, other than common stock,
were eliminated during 1997.
c) During the year, the company issued 1,265,000 common shares and
1,265,000 warrants as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Proceeds received from issuance $7,716,500
Issue expenses (net of income taxes) 1,015,757
----------
Net proceeds $6,700,743
==========
</TABLE>
Net proceeds include the non-cash items of deferred costs of
public issue and deferred income tax recoveries.
d) As at December 31, 1997, the company had warrants outstanding to
purchase 1,265,000 shares of the common stock at $6.25 per
share. The warrants expire in 2001.
e) In December, 1996, the board of directors and stockholders
adopted the 1996 D.G. Jewellery of Canada Ltd. Stock Option Plan
(the "1996 Plan"), pursuant to which 500,000 shares of Common
Stock are provided for issuance. The 1996 Plan is administered
by the board of directors.
The 1996 Plan is for a period of ten years, expiring on December
15, 2006. Options may be granted to officers, directors,
consultants, key employees, advisors and similar parties who
provide their skills and expertise to the Company. Options
granted under the 1996 Plan may be exercisable for up to ten
years, may require vesting, and shall be at an exercise price
all as determined by the board.
The exercise price of an option may not be less than the fair
market value per share of Common Stock on the date the option is
granted in order to receive certain tax benefits under the
Income Tax Act of Canada (the "ITA"). The exercise price of all
future options will be at least 85% of the fair market value of
the Common Stock on the date of granting of the options.
F-16
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
13. CAPITAL STOCK (cont'd)
e) (cont'd)
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the Company become
available again for issuance under the 1996 Plan.
The 1996 Plan may be terminated or amended at any time by the
board of directors, except that the number of shares of Common
Stock reserved for issuance upon the exercise of options granted
under the 1996 Plan may not be increased without the consent of
the stockholders of the Company.
The Board has granted 172,500 Options to date under the 1996
Plan to 20 persons, including officers, directors and key
employees. The options are exercisable at $1.38 per share for
five years expiring February 9, 2002.
These options were not exercisable until August 20, 1997 at
which time they were able to be exercised up to 25% of the
amount of shares issueable under the Options, and an additional
25% each six month anniversary date thereafter.
None of these options have been exercised to date.
f) The underwriters for the issuance of the common shares in 1997
hold options to acquire 110,000 common shares at $9.90 and
110,000 warrants at 16.5(cent). This option expires in 2002.
14. Earnings Per Common Share
The company has adopted Statement No. 128, Earnings Per Share, which
requires presentation, in the consolidated statement of income, of
both basic and diluted earnings per share.
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Average common stock outstanding 4,743,333 3,900,000
Average common shares issuable 62,137 -
--------- ---------
Average common stock outstanding assuming dilution 4,805,470 3,900,000
========= =========
</TABLE>
The outstanding warrants and underwriters' options were not included
in the computation of earnings per common share assuming dilution
because the exercise prices were greater than the average market
price of the common shares.
F-17
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
15. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Rent paid to a company owned by stockholders 100,605 92,067
Interest paid to stockholders 217,724 293,578
</TABLE>
(See additional related party transactions disclosure in notes 10 and
17).
16. COMMITMENTS
The company has operating leases for leasehold improvements and
premises which extend through January 31, 2005. Rental and leasing
expenses for the year ended December 31, 1997 under these leases were
$169,500.
Future minimum rental payments as of December 31, 1997 under
agreements classified as operating leases with non-cancellable terms
in excess of one year, are as follows:
Payable during the following periods:
<TABLE>
<CAPTION>
<S> <C> <C>
Within one year $ 209,361
Over one year but not exceeding two years 215,185
Over two years but not exceeding three years 183,971
Over three years but not exceeding four years 125,158
Over four years but not exceeding five years 133,548
Thereafter 452,721
-------------
$ 1,319,944
=============
</TABLE>
17. CONTINGENCIES
The company is contingently liable under contested lawsuits amounting
to approximately $1,760,000. In the opinion of management there is no
merit for these claims and the company has filed counter claims. No
provision has been recorded in the accounts for possible losses or
gains. Should any expenditures be incurred by the company for the
resolution of these lawsuits, they will be charged to the operations
of the year in which such expenditures are incurred.
The company is contingently liable to a mortgage corporation for the
guarantee of a mortgage in the amount of approximately $575,000 given
to a party related to the major stockholders of the company.
F-18
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
18.SEGMENTED INFORMATION
a) Sales to Major Customers
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Sales to major customers $18,042,967 $ 2,659,931
Percentage of total sales 82% 19%
Accounts receivable due from major customers $14,446,215 $ 2,038,420
Percentage of total accounts receivable 84% 28%
Ongoing credit evaluations of each customer's financial
condition are performed and, generally, no collateral is
required. The company maintains reserves for potential credit
losses and such losses, in the aggregate, have not exceeded
management's expectations.
</TABLE>
b) Sales by Geographic Area
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Canada 7,848,152 10,991,826
United States of America 13,909,306 3,093,148
Other 325,478 -
----------- -----------
22,082,936 14,084,974
=========== ===========
</TABLE>
c) Net Income by Geographic Area
The company's accounting records do not readily provide
information on net income by geographic area. Management is of
the opinion that the proportion of net income based principally
on sales, presented below, would fairly present the results of
operations by geographic area.
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Canada 371,458 356,660
United States of America 658,371 100,368
Other 15,405 -
----------- -----------
1,045,234 457,028
=========== ===========
</TABLE>
F-19
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
18. SEGMENTED INFORMATION (cont'd)
d) Identifiable Assets by Geographic Area
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Canada 2,200,171 1,863,836
United States of America 1,155,400 -
----------- -----------
3,355,571 1,863,836
=========== ===========
e) Purchases From Major Suppliers
1997 1996
Purchases from major suppliers $ 6,928,865 $ 4,985,269
Percentage of total purchases 48% 45%
Accounts payable due to major suppliers $ 1,815,001 $ 663,705
Percentage of total suppliers 70% 26%
</TABLE>
F-20
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
19. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the statements of income:
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Amortization of property, plant and equipment 348,248 184,838
Amortization of goodwill 41,355 12,216
------- -------
389,603 197,054
======= =======
Operating lease rentals for
- rented premises 187,075 141,104
- leasehold improvements 68,893 75,363
------- -------
255,968 216,467
======= =======
Interest expense on
- bank indebtedness 604,490 529,856
- loans payable 217,725 293,578
- other - 4,430
------- -------
822,215 827,864
======= =======
</TABLE>
20. INVESTMENT TAX CREDITS
As of December 31, 1997 and December 31, 1996 the company has made
claims to Revenue Canada for research and research development
expenditures totalling $150,000. The related investment tax credits
refundable as December 31, 1997, which is approximately 35 cents per
dollar of expenditure, have not been recognized for accounting
purposes, and will be accounted for as reduction of the related
current or capital expenditure when they are approved by Revenue
Canada.
21. COMPARATIVE FIGURES
Certain figures in the December 31, 1996 consolidated financial
statements have been reclassified to conform with the basis of
presentation used in 1997.
F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The articles of incorporation and by-laws of the Company provide that the
Company shall indemnify directors and officers of the Company. The pertinent
section of Canadian law is set forth below in full. In addition, upon
effectiveness of this registration statement, management intends to obtain
officers and directors liability insurance.
See the second and third paragraphs of Item 28 below for information regarding
the position of the Securities and Exchange Commission (the 'Commission') with
respect to the effect of any indemnification for liabilities arising under the
Securities Act of 1933, as amended (the 'Securities Act').
Section 136 of the Canadian Business Corporation Act provides as follows:
136. (1) Indemnification of directors--A corporation may indemnify a
director or officer of the corporation, a former director or officer of
the corporation or a person who acts or acted at the corporation's
request as a director or officer of a body corporate of which the
corporation is or was a shareholder or creditor, and his or her heirs and
legal representatives, against all costs, charges and expenses, including
an amount paid to settle an action or satisfy a judgment, reasonably
incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she is made a party by
reason of being or having been a director or officer of such corporation
or body corporate, if,
(a) he or she acted honestly and in good faith with a view to the best
interests of the corporation; and
(b) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he or she has reasonable grounds for
believing that his or her conduct was lawful.
(2) Idem.--A corporation may, with the approval of the court, indemnify a
person referred to in subsection (1) in respect of an action by or behalf
of the corporation or body corporate to procure a judgment in its favour,
to which the person is made a party by reason of being or having been a
director or an officer of the corporation or body corporate, against all
costs, charges and expenses reasonably incurred by the person in
connection with such action if he or she fulfills the conditions set out
in clauses (1)(a) and (b).
(3) Idem.--Despite anything in this section, a person referred to in
subsection (1) is entitled to indemnity from the corporation in respect
of all costs, charges and expenses reasonably incurred by him in
connection with the defense of any civil, criminal or administrative
action or proceeding to which he or she is made a party by reason of
being or having been a director or officer of the corporation or body
corporate, if the person seeking indemnity;
(a) was substantially successful on the merits in his or her defense of
the action or proceeding; and
(b) fulfills the conditions set out in clauses (1) (a) and (b).
(4) Liability insurance--A corporation may purchase and maintain
insurance for the benefit of any person referred to in subsection (1)
against any liability incurred by the person,
(a) in his or her capacity as a director or officer of the corporation,
except where the liability relates to the person's failure to act
honestly and in good faith with a view to the best interests of the
corporation; or
II-1
<PAGE>
(b) in his or her capacity as a director or officer of another body
corporate where the person acts or acted in that capacity at the
corporation's request, except where the liability relates to the person's
failure to act honestly and in good faith with a view to the best
interests of the body corporate.
(5) Application to court--A corporation or a person referred to in
subsection (1) may apply to the court for an order approving an indemnity
under this section and the court may so order and make any further order
it thinks fit.
(6) Idem.--Upon application under subsection (5), the court may order
notice to be given to any interested person and such person is entitled
to appear and be heard in person or by counsel.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated costs and expenses to be
borne by the Company in connection with the Offering described in the
registration statement, other than underwriting commissions and
discounts.
Legal Fees and Expenses*........................................ 30,000
Accounting Fees and Expenses*................................... 10,000
Total*................................................... $ 40,000
* Estimated
Item 26. Recent Sales of Unregistered Securities
There have been no sales of unregistered securities of the Company in the
past three years.
Item 27. Exhibits
Exhibit
Number Description
------ -----------
1(a) Form of Underwriting Agreement between the Company and
the Underwriters+
(b) Form of Agreement Among Underwriters+
(c) Form of Selected Dealers Agreement+
3(a) Articles of Incorporation+
(b) By-laws of the Company+
4(a) Form of Common Stock Certificate of the Company+
(b) Form of Redeemable Common Stock Purchase Warrant+
(c) Form of Underwriters' Options+
(d) Form of Warrant Agreement between the Company, American
Stock Transfer & Trust Co. and Joseph Dillon & Company,
Inc.+
5(a) Opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP
II-2
<PAGE>
10(a) Lease between 1013418 Ontario Inc., In Trust and the
Company dated February 1, 1995+
(b) Operating Credit Line between the Company and The Bank
of Nova Scotia dated July 15, 1996+
(c) Security Agreement between the Company and The Bank of
Nova Scotia dated November 21, 1994+
(d) General Assignment by the Company to The Bank of Nova
Scotia dated November 21, 1994+
(e) Assignment of keyman life insurance by the Company to
The Bank of Nova Scotia dated November 29, 1994+
(f) Priority Agreement between the Company, The Bank of Nova
Scotia, Laurbrad Holdings Limited and Jack Berkovits
dated December 1, 1995+
(g) Priority Agreement between The Bank of Nova Scotia, Jack
Berkovits and Laurbrad Holdings Limited dated December
1, 1995+
(h) Priority Agreement between the Company, The Bank of Nova
Scotia and Jack Berkovits dated December 1, 1995+
(i) Pledge and Assignment of Security Interest held by the
Company in Diamante Fine Jewellery Limited and The Bank
of Nova Scotia dated December 1, 1995 including General
Security Agreement from Diamante Fine Jewellery Limited
to the Company dated May 11, 1995.+
(j) Guarantee of payment by 1013418 Ontario, Inc. to The
Bank of Nova Scotia dated November 21, 1994+
(k) Collateral Mortgage from 1013418 Ontario, Inc. to The
Bank of Nova Scotia dated November 30, 1994+
(l) Loan Agreement between the Company and Jack Berkovits
dated May 31, 1995+
(m) Promissory Note of the Company to Jack Berkovits dated
May 31, 1995+
(n) Security Agreement granted by the Company to Jack
Berkovits dated May 31, 1995+
(o) Loan Agreement between the Company, Jack Berkovits and
Laurbrad Holdings Limited dated November 30, 1995+
(p) Loan Agreement between the Company and Jack Berkovits
dated November 30, 1995+
(q) Promissory Note of the Company to Jack Berkovits dated
November 30, 1995+
(r) Guarantee by the Company of Diamante Fine Jewellery
Limited Cookstown Mall Lease dated March 24, 1995+
(s) Guarantee by the Company of Diamante Fine Jewellery
Limited St. Jacobs Lease dated July 14, 1993+
II-3
<PAGE>
(t) Promissory Note of the Company to Sherfam, Inc. dated
April 1, 1996+
(u) Equipment lease between the Company and The Bank of Nova
Scotia(three equipment leases substantially similar)
dated April 29, 1994+
(v) General Security Agreement from Diamante Fine Jewellery
Limited to The Bank of Nova Scotia dated August 4, 1995+
(w) Diamante Fine Jewellery Limited Guarantee of the
Company's Bank Financing dated August 1, 1995+
(x) Agreement between the Company and Diamante Fine
Jewellery Limited dated May 3, 1995+
(y) Agreement between Rent-A-Center and the Company dated
November 20, 1996, as clarified by letter dated December
13, 1996+
(a)(a) 1996 Stock Option Plan of the Company+
(a)(b) Form of Stock Option Certificate under 1996 Stock Option
Plan+
(a)(c) Form of Lock-Up Letter by Jack Berkovits, the Berkovits
Family Trust and Mr. Berkovits' two sons+
(a)(d) Employment Agreement between the Company and Jack
Berkovits dated December 20, 1996, as amended+
(a)(e) Recission Agreement between the Company and Diamante
Fine Jewellery Limited dated February 7, 1997+
(a)(f) Purchase and Sale Agreement between Diamonair, Inc. and
Litton Systems, Inc. dated November 21, 1997.++
(a)(g) Asset Purchase Agreement between the Company and Aviv,
Inc. dated February 10, 1998.++
(a)(h) Employment Agreement between the Company and Gadi Beer
dated February 10, 1998.++
23(a) Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP
(included on Page II-7)
(b) Consent of Grubner, Krauss (included in their opinion
filed as Exhibit 5(a))
(c) Consent of Schwartz Levitsky Feldman (included on Page
II-6)
24 Power of Attorney+
+ Documents previously filed with this Registration
Statement
++ Documents filed previously with the Company's form 20-F for the year
ended December 31, 1997
Item 28. Undertakings
II-4
<PAGE>
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which
individually or together, represent a fundamental change
in the information in the Registration Statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) That, for the purpose of determining any liability under
the Securities Act, treat each post-effective amendment
as a new registration statement of the securities
offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at
the end of the offering.
The Company hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
The Company hereby undertakes that:
(1) For determining any liability under the Securities Act, treat
the information omitted from the form prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Company under Rule
424(b)(1), or (4) or 497(n) under the Securities Act as part of
this Registration Statement as of the time the Commission
declared it effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and the offering of the securities as
that time as the initial bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of
the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing of Form SB-2 and has caused this Post-Effective
Amendment No. 5 to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Province of Ontario, Canada on
the 1st day of July, 1998.
D.G. JEWELLERY OF CANADA LTD.
By: /s/ Jack Berkovits
------------------
Jack Berkovits
Chairman of the Board of Directors
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ JACK BERKOVITS Chairman of the Board of July 1, 1998
- ------------------- Directors, Chief Executive
Jack Berkovitz Officer and President
/s/ GARY DAVIS Vice President--Finance, July 1, 1998
- ------------------- Chief FinancialOfficer,
Gary Davis Controller, Treasurer, Secretary
and Chief Accounting Officer
/s/ Aaron Grubner Director July 1, 1998
- ------------------
Aaron Grubner
* Director July 1, 1998
- ------------------
Joan A. Pajunen
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing of Form SB-2 and has caused this Post-Effective
Amendment No. 5 to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Province of Ontario, Canada on
the 2nd day of July, 1998.
D.G. JEWELLERY OF CANADA LTD.
By: /s/ Jack Berkovits
--------------------------------------
Jack Berkovits
Chairman of the Board of Directors
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Jack Berkovits Chairman of the Board of Directors, July 2, 1998
- ---------------- Chief Executive Officer and President
Jack Berkovits
/s/ Gary Davis Vice President--Finance, Chief Financial July 2, 1998
- ---------------- Officer, Controller, Treasurer,
Gary Davis Secretary and Chief Accounting Officer
/s/ Aaron Grubner Director July 2, 1998
- ----------------
Aaron Grubner
Director July 2, 1998
- ----------------
Joan A. Pajunen
II-7
<PAGE>
CONSENT OF CHARTERED ACCOUNTANTS
We consent to the reference to our firm under the captions 'Experts' and
'Selected Financial Data' and to the use of our report dated March 10, 1997,
together with additional dating of March 25, 1997 and April 4, 1997, in the
Registration Statement (Form SB-2) and related Prospectus of D.G. Jewellery of
Canada Ltd. for the registration of 1,100,000 shares of its common stock and
1,100,000 redeemable common stock purchase warrants.
SCHWARTZ LEVITSKY FELDMAN
June 22, 1998
Toronto, Ontario
II-8
<PAGE>
CONSENT OF COUNSEL
Gersten, Savage, Kaplowitz & Fredericks, LLP consents to the reference to him
under the caption "Legal Matters" in the Prospectus forming a part of the
Registration Statement. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Very truly yours
GERSTEN, SAVAGE, KAPLOWITZ & FREDERICKS, LLP
Dated: July 1, 1998
II-9
<PAGE>
CONSENT OF COUNSEL
Grubner Krauss consents to the reference to him under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours
GRUBNER KRAUSS
Dated: July 1, 1998
II-10
