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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
D.G. JEWELLERY OF CANADA LTD.
(Exact Name of Registrant as Specified in Its Charter)
Ontario, Canada
(State or Other Jurisdiction of Incorporation or Organization)
N/A
(I.R.S. Employer Identification No.)
1001 Petrolia Road, Toronto, Ontario M3J 2X7 Canada
(Address, including Zip Code, of Principal Executive Offices)
1996 Stock Option Plan and the 1998 Stock Option Plan
(Full Titles of the Plans)
Copies To:
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GARY DAVIS JAY M. KAPLOWITZ, ESQ.
Vice President ARTHUR S. MARCUS, ESQ.
D.G. JEWELLERY OF CANADA LTD. Gersten, Savage, Kaplowitz & Fredericks, LLP
1001 Petrolia Road 101 East 52nd Street
Toronto, Ontario M3J 2X7 Canada New York, New York 10022
(416) 665-8844 (212) 752-9700
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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
1933, check the following box [x]
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CALCULATION OF REGISTRATION FEE
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Title of Securities Amount Being Proposed Proposed Amount of
To Be Registered Registered(2) Maximum Maximum Registration Fee
Offering Price Per Aggregate
Security Offering Price
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Common Stock, no 1,000,000 $3.375 $3,375,000 $995.63
par value
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(1) The price is estimated in accordance with Rule 457(h)(i) under the
Securities Act of 1933, as amended, solely for the purpose of
calculating the registration fee. The closing price as reported on the
Nasdaq Stock Market on September 15, 1998 (within 5 days prior to the
filing of this Registration Statement).
(2) Pursuant to Rule 457(h), the maximum offering price was calculated
based upon the exercise price of the Options described herein.
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EXPLANATORY NOTE
This Registration Statement on Form S-8 relates to the registration of
an aggregate of 1,000,000 shares of Common Stock issuable upon the exercise of
options granted or eligible for grant under the Company's 1996 Stock Option Plan
and 1998 Stock Option Plan. Pursuant to General Instruction C of Form S-8, this
Registration Statement contains a Prospectus prepared in accordance with the
requirements of Part I of Form S-3 relating to the reoffering of up to 1,000,000
shares issuable upon exercise of stock options granted or to be granted under
the Plans by the holders of such options (the "Selling Stockholders").
PART I
INFORMATION REQUIRED IN THE SECTION 10(a) PROSPECTUS
Pursuant to the Note to Part I of the Form S-8, the information
required by Part I is not filed with the Securities and Exchange Commission.
The Company will provide without charge to each person to whom a copy
of a Section 10(a) Prospectus hereunder is delivered, upon the oral or written
request of such person, a copy of any document incorporated in this Registration
Statement by reference, except exhibits to such documents. Requests for such
information should be directed to D.G. Jewellery of Canada Ltd., 1001 Petrolia
Road, Toronto, Ontario Canada M3J 2X7, telephone number (416) 665-8844.
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PROSPECTUS
D.G. JEWELLERY OF CANADA LTD.
1,000,000 SHARES OF COMMON STOCK
No Par Value
This Prospectus relates to the issuance of 1,000,000 shares (the
"Shares") of the common stock $.0001 par value (the "Common Stock"), of D.G.
Jewellery of Canada Ltd. (the "Company") which may be issued upon exercise of
certain options (the "Option Shares"), as set forth herein, by employees,
directors and consultants to the Company pursuant to the Company's 1996 Stock
Option Plan and 1998 Stock Option Plan (the "Stock Option Plans") (the "Option
Shares" issuable upon exercise of such option shall hereinafter be alternatively
known as the "Securities"). All of the Securities are being issued pursuant to
the Stock Option Plan. The Company has been advised by the Selling Stockholders
that they may sell all or a portion of the Securities from time to time in the
over-the-counter market, in negotiated transactions, directly or through brokers
or otherwise, and that such Securities will be sold at market prices prevailing
at the time of such sales or at negotiated prices, and the Company will not
receive any proceeds from such sales. The Company may receive proceeds from any
exercise of options granted pursuant to the Stock Option Plans.
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.
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained or
incorporated by reference herein and if given or made, such information or
representation must not be relied upon as having been authorized by the Company.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy securities by anyone in any jurisdiction in which such offering may
not lawfully be made. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company or the information herein since the
date hereof. See "Risk Factors."
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The date of this Prospectus is September 21, 1998
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TABLE OF CONTENTS
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Page
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Available Information....................................................................................................3
Incorporation of Certain Documents by Reference..........................................................................4
The Company..............................................................................................................5
1996 Stock Option Plan...................................................................................................8
1998 Stock Option Plan..................................................................................................10
Risk Factors............................................................................................................17
Use of Proceeds.........................................................................................................24
Selling Stock Holders...................................................................................................25
Principal Shareholders..................................................................................................28
Description of Securities...............................................................................................30
Plan of Distribution....................................................................................................32
Indemnification of Officers and Directors...............................................................................33
Legal Matters ..........................................................................................................33
Experts ................................................................................................................33
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") as applied for foreign
issuers and in accordance therewith files reports and other information with the
Commission. Such reports, proxy statements, registration statements and other
information can be examined without charge at the public reference section
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and, upon payment of the fees pre scribed by the Commission, copies may be
obtained therefrom and at certain of the Commission's Regional Offices located
at 7 World Trade Center, New York, New York 10048; 5757 Wilshire Boulevard, Los
Angeles, California 90024; and 500 West Madison Street, Northeastern Atrium
Center, Suite 1400, Chicago, Illinois 60661-2511.
The Company's Common Stock is quoted on The Nasdaq SmallCap Market
("NASDAQ"). Reports, proxy statements, information statements, and other
information concerning the Company can be inspected at the office of the
National Association of Securities Dealers, Inc., located at 1735 K Street,
N.W., Washington, DC 20006.
This Prospectus is part of a registration statement on Form S-8 (the
"Registration Statement") under the Securities Act of 1933 (the "Securities
Act") which the Company has filed with the Commission for the registration of
the securities offered by this Prospectus. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company,
references is hereby made to such Registration Statement, exhibits and
schedules, which may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the fees prescribed by the Commission.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by D.G. Jewellery of Canada Ltd. (the
"Company") with the Commission are incorporated herein by reference:
(1) The Company's Annual Report on Form 20-F for the Year Ended
December 31, 1997.
(2) The Company's Post-Effective Registration Statement on Form
SB-2 (Registration No. 333-6218) dated July 1, 1998.
In addition to the foregoing, all documents subsequently filed by
the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934, prior to the filing of a post-effective amendment
indicating that all of the securities offered hereunder have been sold or
deregistering all securities then remaining unsold, shall be deemed to be
incorporated by reference in this Registration Statement and to be part hereof
from the date of filing of such documents.
Any statement contained in a document incorporated by reference in
this Registration Statement shall be deemed to be modified or superseded for
purposes of this Registration Statement to the extent that a statement contained
herein or in any subsequently filed document that is also incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Registration Statement. All information appearing
in this Registration Statement is qualified in its entirety by the information
and financial statements (including notes thereto) appearing in the documents
incorporated herein by reference, except to the extent set forth in the
immediately preceding statement.
The Company hereby undertakes to provide without charge to each
person to whom a copy of this Prospectus is delivered, upon the oral or written
request of such person, a copy of any document incorporated in this Registration
Statement by reference, except exhibits to such documents. Requests for such
information should be directed to D.G. Jewellery of Canada Ltd., 1001 Petrolia
Road, Toronto, Ontario, Canada M37 2X7, telephone number (416) 665-8844.
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THE COMPANY
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 rings 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 advantage, 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. 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 has
also focused on the much larger American market. The DG Division established a
United States sales office in Tampa,
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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.
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 Aviv's 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.
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.
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
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primarily will provide repair and engraving services for watches and other
jewelry. 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.
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.
LEGAL PROCEEDINGS
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. 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. The parties have negotiated and signed a settlement agreement dated
September 15, 1998, wherein both parties have agreed to discontinue the legal
proceedings without costs to the other party.
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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1996 STOCK OPTION PLAN
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 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
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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 to Samuel Jacob Berkovits an additional 327,500 options
exercisable at $1.38 per share for five years expiring August 21, 2002. 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.
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1998 STOCK OPTION PLAN
The Company's board of directors has approved the 1998 Stock Option
Plan (the "1998 Plan"), pursuant to which 500,000 shares of Common Stock will be
provided for issuance on terms similar to the 1996 Plan. The 1998 Plan was
approved by the Company's shareholders at the Company's Annual Meeting in July
1998. The purpose of the 1998 Option Plan is to grant directors, executive
officers, employees, consultants and others who provide significant services to
the Company a favorable opportunity to acquire Common Stock so that they have an
incentive to contribute to its success and remain in its employ. Under the 1998
Option Plan, the Company is authorized to issue options for a total of 500,000
shares of Common Stock.
Description of 1998 Stock Option Plan
All directors, executive officers, employees, consultants and other
persons who perform significant services for or on behalf of the Company are
eligible to participate in the 1998 Option Plan.
The Company currently has approximately 160 full-time employees.
The Company may grant under the 1998 Option Plan both incentive
stock options ("Incentive Stock Options") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and stock options
that do not qualify for incentive treatment under the Code ("Nonstatutory
Options") or the Income Tax Act of Canada.
The following summary of the 1998 Option Plan does not purport to
be complete and is qualified in its entirety by reference to the complete text
of the 1998 Option Plan which is filed as an exhibit hereto.
Administration.
The Plan shall be administered by the Board of Directors of the
Company (the "Board"), if each member is a "disinterested person" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
("Rule 16b-3"), or a committee (the "Committee") of two or more directors, the
majority whom are disinterested persons. Appointment of Committee members shall
be effective upon acceptance of appointment. Committee members may resign at any
time by delivering written notice to the Board. Vacancies in the Committee may
be filled by the Board. A majority of the members of the Committee shall
constitute a quorum for the purposes of the Plan. Provided a quorum is present,
the Committee may take action by affirmative vote or consent of a majority of
its members present at a meeting.
Subject to the express provisions of the Plan, the Committee shall
have the authority to construe and interpret the Plan and all Stock Option
Agreements (as defined in Section 3.4 of the 1998 Stock Option Plan) entered
into pursuant hereto and to define the terms used therein, to prescribe, adopt,
amend and rescind rules and regulations relating to the administration of the
Plan and to make all other determinations necessary or advisable for the
administration of the Plan; provided, however, that the Committee may delegate
nondiscretionary administrative duties to such employees of the Company as it
deems proper; and, provided, further, in its absolute discretion, the Board may
at any time and from time to time exercise any and all rights and duties of the
Committee under the Plan.
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Subject to the express limitations of the Plan, the Committee shall designate
the individuals from among the class of persons eligible to participate as
provided in Section 1.3 of the 1998 Stock Option Plan, who shall receive
options, whether an optionee will receive Incentive Stock Options or
Nonstatutory Options, or both, and the amount, price, restrictions and all other
terms and provisions of such options (which need not be identical).
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and the
Company's officers and directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No members of the Committee or Board
shall be personally liable for any action, determination or interpretation made
in good faith with respect to the Plan, and all members of the Committee shall
be fully protected by the Company in respect of any such action, determination
or interpretation.
Stock Subject to the Plan.
Subject to adjustment as provided in Section 3.5 of the 1998 Stock
Option Plan, the stock to be offered under the Plan shall be shares of
authorized but unissued Common Stock, including any shares repurchased under the
terms of the Plan or any Stock Option Agreement entered into pursuant hereto.
The cumulative aggregate number of shares of Common Stock to be issued under the
Plan shall not exceed 500,000, subject to adjustment as set forth in Section 3.5
of the 1998 Stock Option Plan.
If any option granted hereunder shall expire or terminate for any
reason without having been fully exercised, the unpurchased shares subject
thereto shall again be available for the purposes of the Plan. For purposes of
Section 1.4 of the 1998 Stock Option Plan, where the exercise price of options
is paid by means of the grantee's surrender of previously owned shares of Common
Stock, only the net number of additional shares issued and which remain
outstanding in connection with such exercise shall be deemed "issued" for
purposes of the Plan.
Option Price.
The exercise price of each incentive Stock option granted under the
Plan shall be determined by the Committee, but shall not be less than 100% of
the "Fair Market Value" (as defined below) of Common Stock on the date of grant.
If an Incentive Stock Option is granted to an employee who is a resident of the
United States and who at the time such option is granted owns (within the
meaning of section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of capital stock of the Company, the option exercise
price shall be at least 110% of the Fair Market Value of Common Stock on the
date of grant and the option by its terms shall not be exercisable after the
expiration of 5 years from the date such option is granted. The exercise price
of each Nonstatutory Option also shall be determined by the Committee, but shall
not be less than 85% of the Fair Market Value of Common Stock, as defined in
Section 2.1 of the Plan on the date of grant. The status of each option granted
under the Plan as either an Incentive Stock Option or a Nonstatutory Stock
Option shall be determined by the Committee at the time the Committee acts to
grant the option, and shall be clearly identified as such in the Stock Option
Agreement relating thereto.
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In the discretion of the Committee exercised at the time the option
is exercised, the exercise price of any option granted under the Plan shall be
paid in full in cash, by check or by the optionee's interest-bearing promissory
note (subject to any limitations of applicable state corporations law) delivered
at the time of exercise; provided, however, that subject to the timing
requirements of Section 2.7 of the 1998 Stock Option Plan, in the discretion of
the Committee and upon receipt of all regulatory approvals, the person
exercising the option may deliver as payment in whole or in part of such
exercise price certificates for Common Stock of the Company (duly endorsed or
with duly executed stock powers attached), which shall be valued at its Fair
Market Value on the day of exercise of the option, or other property deemed
appropriate by the Committee; and, provided further, the so-called cashless
exercises as permitted under applicable rules and regulations of the Securities
and Exchange Commission and the Federal Reserve Board shall be permitted in the
discretion of the Committee. Without limiting the Committee's discretion in this
regard, consecutive book entry stock-for-stock exercises of options (or
"pyramiding") also are permitted in the Committee's discretion.
Irrespective of the form of payment, the delivery of shares
pursuant to the exercise of an option shall be conditioned upon payment by the
optionee to the Company of amounts sufficient to enable the Company to pay all
federal, state, and local withholding taxes applicable, in the Company's
judgment, to the exercise. In the discretion of the Committee, such payment to
the Company may be effected through (i) the Company's withholding from the
number of shares of Common Stock that would otherwise be delivered to the
optionee by the Company on exercise of the option a number of shares of Common
Stock equal in value (as determined by the Fair Market Value of Common Stock on
the date of exercise) to the aggregate withholding taxes, (ii) payment by the
optionee to the Company of the aggregate withholding taxes in cash, (iii)
withholding by the Company from other amounts contemporaneously owed by the
Company to the optionee, or (iv) any combination of these three methods, as
determined by the Committee in its discretion.
Option Period.
(a) The Committee shall provide, in the terms of each Stock Option
Agreement, when the option subject to such agreement expires and becomes
unexercisable, but in no event will an Incentive Stock Option granted under the
Plan be exercisable after the expiration of ten years from the date it is
granted. Without limiting the generality of the foregoing, the Committee may
provide in the Stock Option Agreement that the option subject thereto expires 90
days following a Termination of Employment for any reason other than death or
disability or one year following a Termination of Employment for disability or
following an optionee's death.
(b) Outside Date for Exercise. Notwithstanding any provision of
this Section 2.2 of the 1998 Stock Option Plan, in no event shall any option
granted under the Plan be exercised after the expiration date of such option set
forth in the applicable Stock Option Agreement.
Exercise of Options.
Each option granted under the Plan shall become exercisable and the
total number of shares subject thereto shall be purchasable, in a lump sum or in
such installments, which need not be equal, as the Committee shall determine;
provided, however, that each option shall become exercisable in full no later
than ten years after such option is granted, and each option shall become
exercisable as to at least 10%
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of the shares of Common Stock covered thereby on each anniversary of the date
such option is granted; and provided, further, that if the holder of an option
shall not in any given installment period purchase all of the shares which such
holder is entitled to purchase in such installment period, such holder's right
to purchase any shares not purchased in such installment period shall continue
until the expiration or sooner termination of such holder's option. The
Committee may, at any time after grant of the option and from time to time,
increase the number of shares purchasable in any installment, subject to the
total number of shares subject to the option and the limitations set forth in
Section 2.5 of the 1998 Stock Option Plan. At any time and from time to time
prior to the time when any exercisable option or exercisable portion thereof
becomes unexercisable under the Plan or the applicable Stock Option Agreement,
such option or portion thereof may be exercised in whole or in part; provided,
however, that the Committee may, by the terms of the option, require any partial
exercise to be with respect to a specified minimum number of shares. No option
or installment thereof shall be exercisable except with respect to whole shares.
Fractional share interests shall be disregarded, except that they may be
accumulated as provided above and except that if such a fractional share
interest constitutes the total shares of Common Stock remaining available for
purchase under an option at the time of exercise, the optionee shall be entitled
to receive on exercise a certified or bank cashier's check in an amount equal to
the Fair Market Value of such fractional share of stock.
Transferability of Options.
Except as the Committee may determine as aforesaid, an option
granted under the Plan shall, by its terms, be nontransferable by the optionee
other than by will or the laws of descent and distribution, or pursuant to a
qualified domestic relations order (as defined by the Code), and shall be
exercisable during the optionee's lifetime only by the optionee or by his or her
guardian or legal representative.
Issuance of Stock Certificates.
Upon exercise of an option, the Company shall deliver to the person
exercising such option a stock certificate evidencing the shares of Common Stock
acquired upon exercise. Notwithstanding the foregoing, the Committee in its
discretion may require the Company to retain possession of any certificate
evidencing stock acquired upon exercise of an option which remains subject to
repurchase under the provisions of the Stock Option Agreement or any other
agreement signed by the optionee in order to facilitate such repurchase
provisions.
Adjustments Upon Changes in Capitalization; Merger and Consolidation.
If the outstanding shares of Common Stock are changed into, or
exchanged for cash or a different number or kind of shares or securities of the
Company or of another corporation through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment shall be made by the Committee in
the number and kind of shares as to which options and restricted stock may be
granted. In the event of such a change or exchange, other than for shares or
securities of another corporation or by reason of reorganization, the Committee
shall also make a corresponding adjustment changing the number or kind of shares
and the exercise price per share allocated to unexercised options or portions
thereof, which shall have been granted prior to any such change, shall likewise
be made. Any such adjustment, however, shall be made without change in the total
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for
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<PAGE>
each share (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices).
In the event of a "spin-off" or other substantial distribution of
assets of the Company which has a material diminutive effect upon the Fair
Market Value of the Common Stock, the Committee in its discretion shall make an
appropriate and equitable adjustment to the exercise prices of options then
outstanding under the Plan.
Where an adjustment under Section 3.5 of the 1998 Stock Option
Plan, of the type described above is made to an Incentive Stock Option held by a
resident of the United States, the adjustment will be made in a manner which
will not be considered a "modification" under the provisions of subsection
424(b)(3) of the Code.
In connection with the dissolution or liquidation of the Company or
a partial liquidation involving 50% or more of the assets of the Company, a
reorganization of the Company in which another entity is the survivor, a merger
or reorganization of the Company under which more than 50% of the Common Stock
outstanding prior to the merger or reorganization is converted into cash or into
a security of another entity, a sale of more than 50% of the Company's assets,
any person or group of affiliated or associated persons, other than present
management and directors, acquires 25% of more of the outstanding shares, or a
similar event that the Committee determines, in its discretion, would materially
alter the structure of the Company or its ownership, the Committee, upon 30 days
prior written notice to the option holders, may, in its discretion, do one or
more of the following: (i) shorten the period during which options are
exercisable (provided they remain exercisable for at least 30 days after the
date the notice is given); (ii) accelerate any vesting schedule to which an
option is subject; (iii) arrange to have the surviving or successor entity grant
replacement options with appropriate adjustments in the number and kind of
securities and option prices, or (iv) cancel options upon payment to the option
holders in cash, with respect to each option to the extent then exercisable
(including any options as to which the exercise has been accelerated as
contemplated in clause (ii) above), of any amount that is the equivalent of the
Fair Market Value of the Common Stock (at the effective time of the dissolution,
liquidation, merger, reorganization, sale or other event) or the fair market
value of the option. In the case of a change in corporate control, the Committee
may, in considering the advisability or the terms and conditions of any
acceleration of the exercisability of any option pursuant to this Section 3.5,
take into account the penalties that may result directly or indirectly from such
acceleration to either the Company or the option holder, or both, under Section
280G of the Code, and may decide to limit such acceleration to the extent
necessary to avoid or mitigate such penalties or their effects.
No fractional share of Common Stock shall be issued under the
Plan on account of any adjustment under Section 3.5 of the 1998 Stock Option
Plan.
Amendment and Termination.
The Board or the Committee may at any time suspend, amend or
terminate the Plan and may, with the consent of the option holder, make such
modifications of the terms and conditions of such option holder's option as it
shall deem advisable, provided, however, that, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or the Committee may, (A) materially
increase the benefits accruing to participants under the Plan; (B) materially
increase the number of securities which may be issued under the Plan; or
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<PAGE>
(C) materially modify the requirements as to eligibility for participation in
the Plan. No option may be granted during any suspension of the Plan or after
such termination. The amendment, suspension or termination of the Plan shall
not, without the consent of the option holder affected thereby, alter or impair
any rights or obligations under any option theretofore granted under the Plan.
No option way be granted during any period of suspension nor after termination
of the Plan, and in no event may any option be granted under the Plan after the
expiration of ten years from the date the Plan is adopted by the Board.
Privileges of Stock Ownership; Non-Distributive Intent; Reports to
Option Holders.
A participant in the Plan shall not be entitled to the privilege of
stock ownership as to any shares of Common Stock not actually issued to the
optionee. Upon exercise of an option at a time when there is not in effect under
the Securities Act of 1933, as amended, a Registration Statement relating to the
Common Stock issuable upon exercise or payment therefor and available for
delivery a Prospectus meeting the requirements of Section 10(a)(3) of said Act,
the optionee shall represent and warrant in writing to the Company that the
shares purchased are being acquired for investment and not with a view to the
distribution thereof.
The Company shall furnish to each optionee under the Plan the
Company's annual report and such other periodic reports, if any, as are
disseminated by the Company in the ordinary course to its stockholders.
Termination.
The Plan shall terminate automatically as of the close of business
on the day preceding the tenth anniversary date of its adoption by the Board or
earlier as provided in Section 3.8. Unless otherwise provided herein, the
termination of the Plan shall not affect the validity of any option agreement
outstanding at the date of such termination.
U.S. Federal Income Tax Treatment
Under the Code, neither the grant nor the exercise of Incentive
Stock Options is a taxable event to the optionee (except to the extent an
optionee may be subject to alternative minimum tax); rather, the optionee is
subject to tax only upon the sale of the common stock acquired upon exercise of
the Incentive Stock Option. Upon such a sale, the entire difference between the
amount realized upon the sale and the exercise price of the option will be
taxable to the optionee. Subject to certain holding period requirements, such
difference will be taxed as a capital gain rather than as ordinary income.
Optionees who receive Nonstatutory Options will be subject to
taxation upon exercise of such options on the spread between the Fair Market
Value of the Common Stock on the date of exercise and the exercise price of such
options. This spread is treated as ordinary income to the optionee, and the
Company is permitted to deduct as an employee expense a corresponding amount.
Nonstatutory Options do not give rise to a tax preference item subject to the
alternative minimum tax.
Canadian Federal Income Tax Treatment
The exercise price of an option may not be less than the fair
market value per share of Common Stock on the date that the option is granted in
order to receive certain tax benefits under the Income Tax
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<PAGE>
Act of Canada (the "ITA"). If the exercise price is below fair market value a
benefit equal to the amount by which the fair market value of the shares at 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 ITA 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.
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.
<TABLE>
<CAPTION>
Exercise
Officer and/or Director Expiration Date Options Percent Price
----------------------- --------------- ------- ------- -----
<S> <C> <C> <C> <C>
Samuel Jacob Berkovits...................... (1) 387,500 58.1% $1.38(2)
Gary Davis.................................. (8) 35,000 5.2% $1.38(3)
Leonard Fasullo............................. (9) 35,000 5.2% $1.38(4)
Charles Winston............................. (10) 22,500 3.4% $1.38(5)
Joan A. Pajunen............................. (11) 20,000 3.0% $1.38(6)
Meyer Feiler................................ 07/13/08 10,000(7) 1.5% $4.125
Theodore Bonsignore......................... 07/13/08 10,000(7) 1.5% $4.125
James B. Fleischer.......................... 07/13/08 5,000(7) .75% $4.125
</TABLE>
- --------
(1) 327,500 of such options expire on August 21, 2002, 50,000 expire on
February 9, 2002 and 10,000 options expire on July 13, 2008.
(2) The exercise price for 10,000 of the 387,500 options is $4.125.
(3) The exercise price for 20,000 of the 35,000 options is $4.125.
(4) The exercise price for 20,000 of the 35,000 options is $4.125.
(5) The exercise price for 15,000 of the 22,500 options is $4.125.
(6) The exercise price for 10,000 of the 20,000 options is $4.125.
(7) All options pursuant to the 1998 Stock Option Plan expire July 13,
2008.
(8) 15,000 of the options expire on February 9, 2002 and 20,000 of the
options expire on July 13,
2008.
(9) 15,000 of the options expire on February 9, 2002 and 20,000 of the
options expire on July 13, 2008.
(10) 7,500 of the options expire on February 9, 2002 and 15,000 of the
options expire July 13, 2008.
(11) 10,000 of the options expire on February 9, 2002 and 10,000 of the
options expire July 13, 2008.
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<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.
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. 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.
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
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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.
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 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.
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
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<PAGE>
the Company, has stopped purchasing products from the Company and is in
litigation with the Company. See "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.
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.
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 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.
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.
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
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<PAGE>
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. 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 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.
Risk Factors Relating to the Securities and the Offering
1. Control by Current Security Holders.
As of the date of this Prospectus, Samuel Jacob 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, 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, 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.
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, Samuel
Jacob Berkovits and loans from the Company
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<PAGE>
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.
3. Possible Delisting and Risks of Low Priced Stocks.
The Common Stock and Warrants are listed on the 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 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
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<PAGE>
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.
6. Outstanding Options and Warrants.
The Company has outstanding 1,265,000 warrants exercisable at
$6.25 per share. Upon exercise of the warrants granted to the underwriter of the
Company's initial public offering, 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 adopted the 1998
Stock Option Plan at its annual meeting in July 1998 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 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.
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,
22
<PAGE>
including 2,540,000, held by Samuel Jacob 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.
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.
8. 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.
23
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Selling Stockholder's
sale of securities, although the Company would receive proceeds from any
exercise of the Options. Any proceeds from such exercise would be applied to
working capital.
24
<PAGE>
SELLING STOCK HOLDERS
The Selling Stock Holders acquired the Securities in connection with the
1996 Stock Option Plan and the 1998 Stock Option Plan.
The following table sets forth (a) the name of the Selling Stock Holder,
(b) the number of Securities beneficially owned by the Selling Stock Holder as
of August 31, 1998; (c) the number of Securities being offered by the Selling
Stock Holders, and (d) the number of Securities outstanding to be beneficially
owned by the Selling Stock Holders following this Offering, assuming the sale
pursuant to this Offering or otherwise of all of the Securities that are the
subject of the Registration Statement of which this Prospectus forms a part.
There can be no assurance, however, that the Selling Security Holder will sell
any or all of the Securities offered hereunder.
<TABLE>
<CAPTION>
Securities
Beneficial Securities Offered Owned After
Selling Stockholder Ownership Hereby Offering
- ------------------- ---------- ------------------ ------------
<S> <C> <C> <C>
Samuel Jacob Berkovits 2,811,250(1) 387,500 2,610,000
Gary Davis 11,250(2) 35,000 0
Drew Bricker 11,250(3) 15,000 0
Leonard Fasullo 11,250(4) 35,000 0
</TABLE>
- --------
(1) 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 (i) an aggregate
of 390,000 shares of Common Stock owned by two of Mr. Berkovits' sons
who are independent of their father; and (ii) 186,250 shares of Common
Stock underlying the Options which are not currently exercisable or
exercisable in the next sixty days.
(2) Does not include 23,750 shares issuable upon options which are not
exercisable in the next 60 days.
(3) Does not include 3,750 shares issuable upon options which are not
exercisable in the next 60 days.
(4) Does not include 23,750 shares issuable upon options which are not
exercisable in the next 60 days.
25
<PAGE>
<TABLE>
<CAPTION>
Securities
Beneficial Securities Offered Owned After
Selling Stockholder Ownership Hereby Offering
- ------------------- ---------- ------------------ -----------
<S> <C> <C> <C>
Charles Winston 5,625(5) 22,500 0
Aaron Grubner 7,500 10,000 0
Joan A. Pajunen 7,500(6) 20,000 0
Marty Kirshenbaum 7,500(7) 20,000 0
Anca Perieteanu 7,500(8) 25,000 0
Bentzion Berkovits 0(9) 5,000 0
Robert Gross 0(10) 5,000 0
Donna Kong-Cowan 0(11) 2,000 0
</TABLE>
- --------
(5) Does not include 16,875 shares issuable upon options which are not
exercisable in the next 60 days.
(6) Does not include 12,500 shares issuable upon options which are not
exercisable in the next 60 days.
(7) Does not include 12,500 shares issuable upon options which are not
exercisable in the next 60 days.
(8) Does not include 17,500 shares issuable upon options which are not
exercisable in the next 60 days.
(9) These shares are not considered beneficially owned because they
options do not vest in 60 days.
(10) These shares are not considered beneficially owned because the options
do not vest in 60 days.
(11) These shares are not considered beneficially owned because the options
do not vest in 60 days.
26
<PAGE>
<TABLE>
<CAPTION>
Securities
Beneficial Securities Offered Owned After
Selling Stockholder Ownership Hereby Offering
- ------------------- ---------- ------------------- -----------
<S> <C> <C> <C>
Sandra Fiedler 0(12) 1,000 0
Jana Spagnuolo 0(13) 1,000 0
James B. Fleischer 0(14) 5,000 0
Angeliki Parpoula 0(15) 1,000 0
Maria Tavares 0(16) 1,000 0
Louis Elzas 0(17) 1,000 0
Jeanne Eckerson 0(18) 25,000 0
Theodore Bonsignore 0(19) 10,000 0
Meyer Feiler 0(20) 10,000 0
</TABLE>
- --------
(12) These shares are not considered beneficially owned because the options
do not vest in 60 days.
(13) These shares are not considered beneficially owned because the options
do not vest in 60 days.
(14) These shares are not considered beneficially owned because the options
do not vest in 60 days.
(15) These shares are not considered beneficially owned because the options
do not vest in 60 days. 16 These shares are not considered
beneficially owned because the options do not vest in 60 days.
(17) These shares are not considered beneficially owned because the options
do not vest in 60 days.
(18) These shares are not considered beneficially owned because the options
do not vest in 60 days.
(19) These shares are not considered beneficially owned because the options
do not vest in 60 days.
(20) These shares are not considered beneficially owned because the options
do not vest in 60 days.
27
<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, before this Offering.
<TABLE>
<CAPTION>
Percentage of Share Ownership
-------------------------------------------------------
Amount and Nature of Percentage of
Beneficial Shares Outstanding
Names and Address of Beneficial Owner(1) Ownership(2) Prior to the Offering
---------------------------------------- --------------------- ----------------------
<S> <C> <C>
Samuel Jacob Berkovits................................. 2,811,250(4) 52.4%
The Berkovits Family Trust............................. 426,000 8.2%
Sheba Berkovits........................................ 816,000(5) 15.8%
Gary Davis............................................. 11,250(6) *
Leonard Fasullo........................................ 11,250(6) *
Charles Winston........................................ 5,625(6) *
Joan A. Pajunen........................................ 7,500(6) *
All directors and executive officers
as a group - 5 persons................................. 2,846,875 52.7%
</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.
28
<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 (iv)
186,250 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.
29
<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.
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
5,165,000 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
30
<PAGE>
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.
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.
31
<PAGE>
PLAN OF DISTRIBUTION
The Securities offered hereby are being sold by the Selling Stock Holder
acting as a principal for its own account. The distribution of the Securities by
the Selling Stock Holder may be effected from time to time in ordinary brokerage
transactions in the over-the-counter market at market prices prevailing at the
time of sale or in one or more negotiated transactions at prices acceptable to
the Selling Stock Holder. The brokers or dealers through or to whom the
Securities may be sold may be deemed underwriters of the Securities within the
meaning of the Securities Act, in which event all brokerage commissions or
discounts and other compensation received by such brokers or dealers may be
deemed to be underwriting compensation. The Company will bear all expenses of
the offering, except that the Selling Stock Holder will pay any applicable
brokerage fees or commissions and transfer taxes. In order to comply with the
securities laws of certain states, if applicable, the Securities will be sold
only through registered or licensed brokers or dealers. In addition, in certain
states, the Securities may not be sold unless they have been registered or
qualified for sale in such state or an exemption from such registration or
qualification requirement is available and is complied with.
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.
32
<PAGE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company shall, to the fullest extent permitted by the laws of the
Province of Ontario, as the same may be amended and supplemented, indemnify
under said section from and against any and all expenses, liabilities or other
matters referred in or covered by said section, and the indemnification provided
for herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person. The Company will have the power to purchase and maintain officers' and
directors' liability insurance in order to insure against the liabilities for
which such officers and directors are indemnified pursuant to Article 6.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISION, OR OTHERWISE, THE COMPANY HAS BEEN
INFORMED THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION SUCH
INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS
THEREFORE UNENFORCEABLE. IN THE EVENT THAT A CLAIM FOR INDEMNIFICATION AGAINST
SUCH LIABILITIES OTHER THAN THE PAYMENT BY THE COMPANY OR EXPENSES INCURRED OR
PAID BY A DIRECTOR, OFFICER OR CONTROLLING PERSON IN CONNECTION WITH THE
SECURITIES BEING REGISTERED, THE COMPANY WILL, UNLESS IN THE OPINION OF ITS
COUNSEL THE MATTER HAD BEEN SETTLED BY CONTROLLING PRECEDENT, SUBMIT TO A COURT
OF APPROPRIATE JURISDICTION THE QUESTION WHETHER SUCH INDEMNIFICATION IS AGAINST
PUBLIC POLICY AS EXPRESSED IN THE ACT AND WILL BE COVERED BY THE FINAL
ADJUDICATION OF SUCH ISSUE.
LEGAL MATTERS
Certain legal matters relating to Canadian law, including the validity
of the issuance of the options and the shares issuable upon exercise of the
options, will be passed upon for the Company by Grubner, Krauss, Barristers &
Solicitors, 5140 Yonge Street, Suite 1540, North York, Canada M2N6L7. 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.
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.
33
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 3. Incorporation of Certain Documents by Reference
The following documents filed by D.G. Jewellery of Canada Ltd. (the
"Company") with the Commission are incorporated herein by reference:
(1) The Company's Annual Report on Form 20-F for the Year Ended December
31, 1997. (2) The Company's Post-Effective Registration Statement on
Form SB-2 dated July 1, 1998.
In addition to the foregoing, all documents subsequently filed by the
Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934, prior to the filing of a post-effective amendment
indicating that all of the securities offered hereunder have been sold or
deregistering all securities then remaining unsold, shall be deemed to be
incorporated by reference in this Registration Statement and to be part hereof
from the date of filing of such documents.
Any statement contained in a document incorporated by reference in this
Registration Statement shall be deemed to be modified or superseded for purposes
of this Registration Statement to the extent that a statement contained herein
or in any subsequently filed document that is also incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Registration Statement. All information appearing in
this Registration Statement is qualified in its entirety by the information and
financial statements (including notes thereto) appearing in the documents
incorporated herein by reference, except to the extent set forth in the
immediately preceding statement.
The Company will provide without charge to each person to whom a copy of
a Section 10(a) Prospectus hereunder is delivered, upon the oral or written
request of such person, a copy of any document incorporated in this Registration
Statement by reference, except exhibits to such documents. Requests for such
information should be directed to D.G. Jewellery of Canada Ltd., 1001 Petrolia
Road, Toronto, Ontario M3J 2X7 Canada, telephone number (416) 665-8844.
Item 4. Description of Securities
The Common Stock of the Company is registered under Section 12 of the
Securities Exchange Act of 1934.
Item 5. Interests of Named Experts and Counsel
Certain legal matters, including the legality of the issuance of the
Securities are being passed upon for the Company by Gersten, Savage, Kaplowitz &
Fredericks, LLP, 101 East 52nd Street, New York, New York 10022, special counsel
to the Company.
The financial statements included in this Prospectus have been audited
by Schwartz, Levitsky, Feldman, Chartered Accountants, to the extent and for the
periods set forth in their reports appearing
II-1
<PAGE>
elsewhere herein, and are included in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting.
Item 6. Indemnification of Directors and Officers
The Company shall, to the fullest extent permitted by the laws of the
Province of Ontario, as the same may be amended and supplemented, indemnify
under said section from and against any and all expenses, liabilities or other
matters referred in or covered by said section, and the indemnification provided
for herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person. The Company will have the power to purchase and maintain officers' and
directors' liability insurance in order to insure against the liabilities for
which such officers and directors are indemnified pursuant to Article 6.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "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 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 counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 7. Exemption from Registration Claimed
Shares.
Not applicable to the Shares registered hereunder.
Options.
Inasmuch as the officers, directors, employees and
consultants who received the Options of the Registrant was knowledgeable,
sophisticated and had access to comprehensive information relevant to the
Registrant, such transaction was undertaken in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
As a condition precedent to such grant, the officers, directors, employees and
consultants were required to express an investment intent and consent to the
imprinting of a restrictive legend on each stock certificate to be received from
the Registrant except upon sale of the underlying shares of common stock
pursuant to a registration statement.
Item 8. Exhibits
5.1. Opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP as to
the legality of the securities being registered
II-2
<PAGE>
10.1. 1998 Stock Option Plan
23.1. Accountant's consent and opinion letter
23.2 Consent of Gersten, Savage Kaplowitz & Fredericks, LLP
(combined with Exhibit 5.1)
Item 9. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to suit information in the
registration statement,
provided, however, that paragraphs 9(a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the small business issuer
pursuant to Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to any charter provision,
by-law, contract, arrangement, statute, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
small business issuer 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 small business
issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to
II-3
<PAGE>
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-8 and has duly caused this registration
statement to be signed on its behalf by the undersigned thereunto duly
authorized in the City of Toronto, Province of Ontario, Canada on the 21st day
of September, 1998.
D.G. JEWELLERY OF CANADA LTD.
By: /s/ Gary Davis
------------------------------
Gary Davis
Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Samuel Jacob Berkovits Chairman of the Board of September 21, 1998
- ---------------------------
Samuel Jacob Berkovits Directors, Chief Executive Officer
and President
/s/ Gary Davis Vice President--Finance, Chief September 21, 1998
- ----------------------------
Gary Davis Financial Officer, Controller,
Treasurer, Secretary and Chief
Accounting Officer
/s/ Leonard Fasullo Vice President--Production September 21, 1998
- ----------------------------
Leonard Fasullo
Director September , 1998
- ----------------------------
Joan A. Pajunen
Vice President--U.S. Operations September , 1998
- ----------------------------
Charles Winston
/s/ Meyer Feiler Director September 21, 1998
- ----------------------------
Meyer Feiler
/s/ Theodore Bonsignore Director September 21, 1998
- -----------------------------
Theodore Bonsignore
/s/ James Fleischer Vice President--Business September 21, 1998
- -----------------------------
James B. Fleischer Development
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
5.1. Opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP as
to the legality of the securities being registered
10.1. 1998 Stock Option Plan
23.1. Accountant's consent and opinion letter
23.2. Consent of Gersten, Savage Kaplowitz & Fredericks, LLP
(combined with Exhibit 5.1)
II-6
<PAGE>
II-7
<PAGE>
Gersten, Savage, Kaplowitz & Fredericks, LLP
101 East 52nd Street
New York, New York 10022
Exhibit 5.1
September 18, 1998
D.G. Jewellery of Canada Ltd.
1001 Petrolia Road
Toronto, Ontario M3J 2X7 Canada
Gentlemen:
You have requested our opinion, as counsel for D.G. Jewellery of Canada
Ltd., incorporated in Ontario, Canada (the "Company"), in connection with the
registration statement on Form S-8 (the "Registration Statement"), under the
Securities Act of 1933 (the "Act"), being filed by the Company with the
Securities and Exchange Commission.
The Registration Statement relates to an offering of 1,000,000 shares
of common stock, no par value ("Common Stock") underlying the options (the
"Selling Stockholder Shares"), issued or to be issued pursuant to the 1996 Stock
Option Plan and 1998 Stock Option Plan.
We have examined such records and documents and made such examinations
of law as we have deemed relevant in connection with this opinion. It is our
opinion that upon exercise of the options, the Selling Stockholder Shares will
have been fully paid, validly issued and are non-assessable.
No opinion is expressed herein as to any laws other than the laws of
the State of New York and the laws of the United States.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the Act
of the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Very truly yours,
/s/ Gersten, Savage, Kaplowitz & Fredericks, LLP
Gersten, Savage, Kaplowitz & Fredericks, LLP
<PAGE>
<PAGE>
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Option Plan") was
adopted by the Board of Directors in June 1998. The purpose of the 1998 Option
Plan is to grant directors, executive officers, employees, consultants and
others who provide significant services to the Company a favorable opportunity
to acquire Common Stock so that they have an incentive to contribute to its
success and remain in its employ. Under the 1998 Option Plan, the Company is
authorized to issue options for a total of 500,000 shares of Common Stock.
Description of 1998 Stock Option Plan
All directors, executive officers, employees, consultants and other
persons who perform significant services for or on behalf of the Company are
eligible to participate in the 1998 Option Plan. The Company currently has
approximately 160 full-time employees.
The Company may grant under the 1998 Option Plan both incentive stock
options ("Incentive Stock Options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and stock options that
do not qualify for incentive treatment under the Code ("Nonstatutory Options")
or the Income Tax Act of Canada.
Administration.
The Plan shall be administered by the Board of Directors of the Company
(the "Board"), if each member is a "disinterested person" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"),
or a committee (the "Committee") of two or more directors, each of whom is a
disinterested person. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be filled
by the Board. A majority of the members of the Committee shall constitute a
quorum for the purposes of the Plan. Provided a quorum is present, the Committee
may take action by affirmative vote or consent of a majority of its members
present at a meeting.
Subject to the express provisions of the Plan, the Committee shall have
the authority to construe and interpret the Plan and all Stock Option Agreements
(as defined in Section 3.4 of the 1998 Stock Option Plan) entered into pursuant
hereto and to define the terms used therein, to prescribe, adopt, amend and
rescind rules and regulations relating to the administration of the Plan and to
make all other determinations necessary or advisable for the administration of
the Plan; provided, however, that the Committee may delegate nondiscretionary
administrative duties to such employees of the Company as it deems proper; and,
provided, further, in its absolute discretion, the Board may at any time and
from time to time exercise any and all rights and duties of the Committee under
the Plan. Subject to the express limitations of the Plan, the Committee shall
designate the individuals from among the class of persons eligible to
participate as provided in Section 1.3 of the 1998 Stock Option Plan, who shall
receive options, whether an optionee will receive Incentive Stock Options or
Nonstatutory Options, or both, and the amount,
<PAGE>
price, restrictions and all other terms and provisions of such options (which
need not be identical).
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and the
Company's officers and directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No members of the Committee or Board
shall be personally liable for any action, determination or interpretation made
in good faith with respect to the Plan, and all members of the Committee shall
be fully protected by the Company in respect of any such action, determination
or interpretation.
Stock Subject to the Plan.
Subject to adjustment as provided in Section 3.5 of the 1998 Stock
Option Plan, the stock to be offered under the Plan shall be shares of
authorized but unissued Common Stock, including any shares repurchased under the
terms of the Plan or any Stock Option Agreement entered into pursuant hereto.
The cumulative aggregate number of shares of Common Stock to be issued under the
Plan shall not exceed 500,000, subject to adjustment as set forth in Section 3.5
of the 1998 Stock Option Plan.
If any option granted hereunder shall expire or terminate for any
reason without having been fully exercised, the unpurchased shares subject
thereto shall again be available for the purposes of the Plan. For purposes of
Section 1.4 of the 1998 Stock Option Plan, where the exercise price of options
is paid by means of the grantee's surrender of previously owned shares of Common
Stock, only the net number of additional shares issued and which remain
outstanding in connection with such exercise shall be deemed "issued" for
purposes of the Plan.
Option Price.
The exercise price of each incentive Stock option granted under the
Plan shall be determined by the Committee, but shall not be less than 100% of
the "Fair Market Value" (as defined below) of Common Stock on the date of grant.
If an Incentive Stock Option is granted to an employee who is a resident of the
United States and who at the time such option is granted owns (within the
meaning of section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of capital stock of the Company, the option exercise
price shall be at least 110% of the Fair Market Value of Common Stock on the
date of grant and the option by its terms shall not be exercisable after the
expiration of 5 years from the date such option is granted. The exercise price
of each Nonstatutory Option also shall be determined by the Committee, but shall
not be less than 85% of the Fair Market Value of Common Stock, as defined in
Section 2.1 of the Plan on the date of grant. The status of each option granted
<PAGE>
under the Plan as either an Incentive Stock Option or a Nonstatutory Stock
Option shall be determined by the Committee at the time the Committee acts to
grant the option, and shall be clearly identified as such in the Stock Option
Agreement relating thereto.
In the discretion of the Committee exercised at the time the option is
exercised, the exercise price of any option granted under the Plan shall be paid
in full in cash, by check or by the optionee's interest-bearing promissory note
(subject to any limitations of applicable state corporations law) delivered at
the time of exercise; provided, however, that subject to the timing requirements
of Section 2.7 of the 1998 Stock Option Plan, in the discretion of the Committee
and upon receipt of all regulatory approvals, the person exercising the option
may deliver as payment in whole or in part of such exercise price certificates
for Common Stock of the Company (duly endorsed or with duly executed stock
powers attached), which shall be valued at its Fair Market Value on the day of
exercise of the option, or other property deemed appropriate by the Committee;
and, provided further, the so-called cashless exercises as permitted under
applicable rules and regulations of the Securities and Exchange Commission and
the Federal Reserve Board shall be permitted in the discretion of the Committee.
Without limiting the Committee's discretion in this regard, consecutive book
entry stock-for-stock exercises of options (or "pyramiding") also are permitted
in the Committee's discretion.
Irrespective of the form of payment, the delivery of shares pursuant to
the exercise of an option shall be conditioned upon payment by the optionee to
the Company of amounts sufficient to enable the Company to pay all federal,
state, and local withholding taxes applicable, in the Company's judgment, to the
exercise. In the discretion of the Committee, such payment to the Company may be
effected through (i) the Company's withholding from the number of shares of
Common Stock that would otherwise be delivered to the optionee by the Company on
exercise of the option a number of shares of Common Stock equal in value (as
determined by the Fair Market Value of Common Stock on the date of exercise) to
the aggregate withholding taxes, (ii) payment by the optionee to the Company of
the aggregate withholding taxes in cash, (iii) withholding by the Company from
other amounts contemporaneously owed by the Company to the optionee, or (iv) any
combination of these three methods, as determined by the Committee in its
discretion.
Option Period.
(a) The Committee shall provide, in the terms of each Stock Option
Agreement, when the option subject to such agreement expires and becomes
unexercisable, but in no event will an Incentive Stock Option granted under the
Plan be exercisable after the expiration of ten years from the date it is
granted. Without limiting the generality of the foregoing, the Committee may
provide in the Stock Option Agreement that the option subject thereto expires 90
days following a Termination of Employment for any reason other than death or
disability or one year following a Termination of Employment for disability or
following an optionee's death.
(b) Outside Date for Exercise. Notwithstanding any provision of this
Section 2.2 of the 1998 Stock Option Plan, in no event shall any option granted
under the Plan be exercised
<PAGE>
after the expiration date of such option set forth in the applicable Stock
Option Agreement.
Exercise of Options.
Each option granted under the Plan shall become exercisable and the
total number of shares subject thereto shall be purchasable, in a lump sum or in
such installments, which need not be equal, as the Committee shall determine;
provided, however, that each option shall become exercisable in full no later
than ten years after such option is granted, and each option shall become
exercisable as to at least 10% of the shares of Common Stock covered thereby on
each anniversary of the date such option is granted; and provided, further, that
if the holder of an option shall not in any given installment period purchase
all of the shares which such holder is entitled to purchase in such installment
period, such holder's right to purchase any shares not purchased in such
installment period shall continue until the expiration or sooner termination of
such holder's option. The Committee may, at any time after grant of the option
and from time to time, increase the number of shares purchasable in any
installment, subject to the total number of shares subject to the option and the
limitations set forth in Section 2.5 of the 1998 Stock Option Plan. At any time
and from time to time prior to the time when any exercisable option or
exercisable portion thereof becomes unexercisable under the Plan or the
applicable Stock Option Agreement, such option or portion thereof may be
exercised in whole or in part; provided, however, that the Committee may, by the
terms of the option, require any partial exercise to be with respect to a
specified minimum number of shares. No option or installment thereof shall be
exercisable except with respect to whole shares. Fractional share interests
shall be disregarded, except that they may be accumulated as provided above and
except that if such a fractional share interest constitutes the total shares of
Common Stock remaining avail able for purchase under an option at the time of
exercise, the optionee shall be entitled to receive on exercise a certified or
bank cashier's check in an amount equal to the Fair Market Value of such
fractional share of stock.
The exercise price of an option may not be less than the fair market
value per share of Common Stock on the date that the option is granted in order
to receive certain tax benefits under the Income Tax Act of Canada (the "ITA").
If the exercise price is below fair market value a benefit equal to the amount
by which the fair market value of the shares at 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 ITA 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.
Transferability of Options.
<PAGE>
Except as the Committee may determine as aforesaid, an option granted
under the Plan shall, by its terms, be nontransferable by the optionee other
than by will or the laws of descent and distribution, or pursuant to a qualified
domestic relations order (as defined by the Code), and shall be exercisable
during the optionee's lifetime only by the optionee or by his or her guardian or
legal representative.
Issuance of Stock Certificates.
Upon exercise of an option, the Company shall deliver to the person
exercising such option a stock certificate evidencing the shares of Common Stock
acquired upon exercise. Notwithstanding the foregoing, the Committee in its
discretion may require the Company to retain possession of any certificate
evidencing stock acquired upon exercise of an option which remains subject to
repurchase under the provisions of the Stock Option Agreement or any other
agreement signed by the optionee in order to facilitate such repurchase
provisions.
Adjustments Upon Changes in Capitalization; Merger and Consolidation.
If the outstanding shares of Common Stock are changed into, or
exchanged for cash or a different number or kind of shares or securities of the
Company or of another corporation through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment shall be made by the Committee in
the number and kind of shares as to which options and restricted stock may be
granted. In the event of such a change or exchange, other than for shares or
securities of another corporation or by reason of reorgani zation, the Committee
shall also make a corresponding adjustment changing the number or kind of shares
and the exercise price per share allocated to unexercised options or portions
thereof, which shall have been granted prior to any such change, shall likewise
be made. Any such adjustment, however, shall be made without change in the total
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for each share (except for any change in
the aggregate price resulting from rounding-off of share quantities or prices).
In the event of a "spin-off" or other substantial distribution of
assets of the Company which has a material diminutive effect upon the Fair
Market Value of the Common Stock, the Committee in its discretion shall make an
appropriate and equitable adjustment to the exercise prices of options then
outstanding under the Plan.
Where an adjustment under Section 3.5 of the 1998 Stock Option Plan, of
the type described above is made to an Incentive Stock Option held by a resident
of the United States, the adjustment will be made in a manner which will not be
considered a "modification" under the provisions of subsection 424(b)(3) of the
Code.
In connection with the dissolution or liquidation of the Company or a
partial liquidation involving 50% or more of the assets of the Company, a
reorganization of the Company in which another entity is the survivor, a merger
or reorganization of the Company under which more than
<PAGE>
50% of the Common Stock outstanding prior to the merger or reorganization is
converted into cash or into a security of another entity, a sale of more than
50% of the Company's assets, any person or group of affiliated or associated
persons, other than present management and directors, acquires 25% of more of
the outstanding shares, or a similar event that the Committee determines, in its
discretion, would materially alter the structure of the Company or its
ownership, the Committee, upon 30 days prior written notice to the option
holders, may, in its discretion, do one or more of the following: (i) shorten
the period during which options are exercisable (provided they remain
exercisable for at least 30 days after the date the notice is given); (ii)
accelerate any vesting schedule to which an option is subject; (iii) arrange to
have the surviving or successor entity grant replacement options with
appropriate adjustments in the number and kind of securities and option prices,
or (iv) cancel options upon payment to the option holders in cash, with respect
to each option to the extent then exercisable (including any options as to which
the exercise has been accelerated as contemplated in clause (ii) above), of any
amount that is the equivalent of the Fair Market Value of the Common Stock (at
the effective time of the dissolution, liquidation, merger, reorganization, sale
or other event) or the fair market value of the option. In the case of a change
in corporate control, the Committee may, in considering the advisability or the
terms and conditions of any acceleration of the exercisability of any option
pursuant to this Section 3.5, take into account the penalties that may result
directly or indirectly from such acceleration to either the Company or the
option holder, or both, under Section 280G of the Code, and may decide to limit
such acceleration to the extent necessary to avoid or mitigate such penalties or
their effects.
No fractional share of Common Stock shall be issued under the
Plan on account of any adjustment under Section 3.5 of the 1998 Stock Option
Plan.
Amendment and Termination.
The Board or the Committee may at any time suspend, amend or terminate
the Plan and may, with the consent of the option holder, make such modifications
of the terms and conditions of such option holder's option as it shall deem
advisable, provided, however, that, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or the Committee may, (A) materially
increase the benefits accruing to participants under the Plan; (B) materially
increase the number of securities which may be issued under the Plan; or (C)
materially modify the requirements as to eligibility for participation in the
Plan. No option may be granted during any suspension of the Plan or after such
termination. The amendment, suspension or termination of the Plan shall not,
without the consent of the option holder affected thereby, alter or impair any
rights or obligations under any option theretofore granted under the Plan. No
option way be granted during any period of suspension nor after termination of
the Plan, and in no event may any option be granted under the Plan after the
expiration of ten years from the date the Plan is adopted by the Board.
Privileges of Stock Ownership; Non-Distributive Intent; Reports to
Option Holders.
A participant in the Plan shall not be entitled to the privilege of
stock ownership as to any
<PAGE>
shares of Common Stock not actually issued to the optionee. Upon exercise of an
option at a time when there is not in effect under the Securities Act of 1933,
as amended, a Registration Statement relating to the Common Stock issuable upon
exercise or payment therefor and available for delivery a Prospectus meeting the
requirements of Section 10(a)(3) of said Act, the optionee shall represent and
warrant in writing to the Company that the shares purchased are being acquired
for investment and not with a view to the distribution thereof.
The Company shall furnish to each optionee under the Plan the Company's
annual report and such other periodic reports, if any, as are disseminated by
the Company in the ordinary course to its stockholders.
Termination.
The Plan shall terminate automatically as of the close of business on
the day preceding the tenth anniversary date of its adoption by the Board or
earlier as provided in Section 3.8. Unless otherwise provided herein, the
termination of the Plan shall not affect the validity of any option agreement
outstanding at the date of such termination.
U.S. Federal Income Tax Treatment
Under the Code, neither the grant nor the exercise of Incentive Stock
Options is a taxable event to the optionee (except to the extent an optionee may
be subject to alternative minimum tax); rather, the optionee is subject to tax
only upon the sale of the common stock acquired upon exercise of the Incentive
Stock Option. Upon such a sale, the entire difference between the amount
realized upon the sale and the exercise price of the option will be taxable to
the optionee. Subject to certain holding period requirements, such difference
will be taxed as a capital gain rather than as ordinary income.
Optionees who receive Nonstatutory Options will be subject to taxation
upon exercise of such options on the spread between the Fair Market Value of the
Common Stock on the date of exercise and the exercise price of such options.
This spread is treated as ordinary income to the optionee, and the Company is
permitted to deduct as an employee expense a corresponding amount. Nonstatutory
Options do not give rise to a tax preference item subject to the alternative
minimum tax.
Canadian Federal Income Tax Treatment
The exercise price of an option may not be less than the fair market
value per share of Common Stock on the date that the option is granted in order
to receive certain tax benefits under the Income Tax Act of Canada (the "ITA").
If the exercise price is below fair market value a benefit equal to the amount
by which the fair market value of the shares at 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
<PAGE>
ITA 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.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We hereby consent to the incorporation by reference in this
Registration Statement on Form S-8 of our report dated March 5, 1998 which
appears on page F-1 of the Post-Effective Amendment No. 1 to the Registration
Statement Form SB-2 of D.G. Jewellery of Canada Ltd. We also consent to the
reference to our Firm under the caption "Experts" in the S-8.
/s/ Schwartz Levitsky Feldman
-----------------------------
Schwartz Levitsky Feldman
Chartered Accountants
