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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
D.G. JEWELLERY OF CANADA, LTD.
FORM 20-F
(MARK ONE)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER
I-14600
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D.G. JEWELLERY OF CANADA LTD.
(Exact Name of Registrant as specified in its charter)
Canada
(Jurisdiction of incorporation or organization)
1001 Petrolia Road
Toronto, Ontario, Canada M3J 2X7
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange
- -------------- ----------------
Common Stock, no par value Boston Stock Exchange
Redeemable Common Stock Purchase Warrants Boston Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Redeemable Common Stock Purchase Warrants
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
Common Stock, no par value
Redeemable Common Stock Purchase Warrants
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
5,165,000 shares of Common Stock
1,265,000 Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark which financial statement item the registrant has elected
to follow:
[X] Item 17 [ ] Item 18
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EXCHANGE RATE DATA
The Company maintains its books of account in Canadian dollars, but has
provided the financial data in this Prospectus in United States dollars with its
audit conducted in accordance with generally accepted auditing standards in the
United States of America. All references to dollar amounts in this Prospectus
are in United States dollars.
The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On June 19, 1998, the exchange rate was US$1.00
per Cdn$1.47.
Year Ended December 31, 1994 1995 1996 1997
----------------------- ---- ---- ---- ----
RATE AT END OF PERIOD $0.7143 $0.7353 $0.7299 $ 0.6991
AVERAGE RATE DURING PERIOD 0.7299 0.7299 0.7353 0.7223
HIGH 0.7092 0.7009 0.7212 0.6945
LOW 0.7642 0.7533 0.7526 0.7493
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS GENERAL
D.G. Jewellery of Canada, Ltd. (the "Company") is primarily engaged in the
design, manufacture, merchandising and distribution of stone-set jewelry for
department stores, mass merchants, catalogue showrooms, television shopping
networks and other high volume retailers and major discounters. The Company is
also seeking to take advantage of non-traditional wholesale distribution outlets
such as Internet wholesale advertising services, liquidation operations, and
consumer product rental companies.
The Company believes it has established itself as a low-cost, high-volume and
quality manufacturer in the value priced jewelry market. Its primary competitive
advantage, particularly for the DG Division, is its innovative manufacturing
methods (the "D.G. Manufacturing Process") which allow for substantially reduced
costs per unit, provide substantial capacity and better quality, and require
minimal skilled labor. See "Business--Manufacturing." The Company's
merchandising strategy also involves the design of products that it believes
will continually appeal to the mass market. The Company also assists its
customers in creatively merchandising its jewelry to encourage impulse
purchases.
The Company's operations are divided into three divisions. The "DG Division"
manufacturers and distributes value priced stone-set rings and other jewelry
products. The Company has operated the DG Division in Canada for 29 years. The
"Aviv" division manufactures and assembles bridal jewelry. The Company acquired
Aviv in February 1998. The "Diamonair" division assembles and distributes
jewelry, primarily set with synthetic stones. The Company acquired Diamonair in
November 1997.
Growth has been achieved by providing its customers with quality and service and
in recent years through the D.G. Manufacturing Process, which enables the
Company to provide its customers with value priced stone-set mass appeal jewelry
at lower cost than many of its competitors. The Company maintains long-standing
relationships with Canadian customers such as Reed's Jewellers, The Twain Group
and The Shopping Channel. In the last two years, the Company has also focused on
the much larger American market. The DG Division established a United States
sales office in Tampa, Florida and currently sells products to customers such as
Wal-Mart, Fred Meyer Inc., Value Vision International Inc., Suarez Corporation,
which is a direct mail order company, and others, including Zales Corporation
("Zales"), the largest jewelry retailer in the United States. The Company has
also utilized strategic acquisitions to increase its presence in the United
States. Diamonair's customers include Finlay Fine Jewelry Corp. ("Finlay"),
which operates leased fine jewelry departments in department stores for
retailers such as May Department Stores and Federated Department Stores. Aviv
sells to Zales and Finlay, as well as many independent jewelers in the United
States. In 1997, approximately 63% of the Company's sales were in the United
States, as compared to 17% in 1995.
Business Strategy
The Company believes that its business strategy will enable it to become a
leader in the value priced, stone-set jewelry market. The Company believes that
its business strategy will allow it to leverage the expertise and customer base
it has established in the Canadian market to increase sales in the much larger
markets of the United States. The Company also believes that it can increase
sales of its other products, including bridal jewelry, by integrating the
Company's divisions. The Company's primary business
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strategies are as follows:
Capitalize on the DG manufacturing processes
The DG Manufacturing Process allows the Company to produce mass quantities of
stone-set, value priced jewelry. The Company is able to offer quality products
to its customers at prices that are competitive with or lower than its
competitors offering similar goods while maintaining adequate profit margins.
Management believes that the DG Manufacturing Process produces goods that are
superior to comparably priced goods produced by competitors. The Company
believes that these advantages will allow for continued growth in market share
of value priced jewelry.
Integrate the Aviv and Diamonair Acquisitions
The Company completed both the Aviv and Diamonair acquisitions in the last eight
months. Although the DG Division manufactures products for Diamonair, the three
divisions' operations have not been fully integrated. The Company is reviewing
the Aviv and Diamonair product lines to determine how to manufacture more of
their product lines with the DG manufacturing process. The Company is also
looking into the feasibility of utilizing each division's distributions lines
and customers to promote and "cross-sell" the products of the other divisions.
The Company believes that this cross-promotion will increase the rate of
penetration of DG's products into the US markets.
Extend Customer Base and Utilize Non-traditional Distribution Lines
While the Company has developed a broad customer base, the Company targets its
marketing efforts towards large retailers, such as department stores, mass
merchandisers, television shopping networks, catalogue showrooms and other
discount stores, whose overall share of retail jewelry sales is expected to
increase. These customers typically require a high level of service, and the
Company seeks to build long-term relationships by making it convenient and
cost-effective for these customers to rely on the Company for essential services
such as product design, inventory control and delivery.
The Company is also seeking to sell its products through non-traditional
wholesale distribution outlets such as television shopping networks, internet
wholesale advertising services, liquidation operations and consumer product
rental companies. Management believes that the Company's products are ideal for
many of these non-traditional outlets, which usually feature moderate and lower
priced products.
Maintain a Broad Product Mix
The Company maintains a broad product mix so that it can meet the varying needs
of its customers, who range from discount stores such as Wal-Mart, Inc. to
department stores such as Sak's Fifth Avenue. This also enables the Company to
supply each customer with a number of different styles of each product, which
jewelry retailers generally like to have in stock. The DG Division, Aviv and
Diamonair currently offer the Company's customers approximately 5,000, 4,000 and
600 styles of rings, respectively. The Company also offers its customers over
800 other products, primarily pendants and earrings.
The Company attempts to provide its customers with rings and other jewelry
products that incorporate traditional styles and designs. While the Company
regularly updates its product lines and offers new products, it seeks to avoid
designs incorporating fashion trends that are expected to have short life
cycles. This approach enables the Company and its customers to avoid
accumulating obsolete inventory. Additionally, the Company can create specially
designed products in response to requests or pictures submitted by customers.
This variety and flexibility allows the Company to meet a wide variety of its
customers' jewelry needs.
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Acquisitions and Joint Ventures
The Company has utilized the Aviv and Diamonair acquisitions to increase the
rate of the Company's penetration into the U.S. jewelry markets. Each
acquisition also broadened the Company's product line and increased the number
of customers that the Company works with, creating cross-selling opportunities.
Although it has no current plans or potential targets, the Company may make
additional acquisitions of manufacturers or distributors of complementary
jewelry products in the future if such potential targets offer strategic
opportunities for the Company as a whole.
The Company also intends to use strategic partnerships and joint ventures to
create additional revenue for the Company and to create opportunities for the
sale of the Company's products. Currently, the Company is in negotiations with
Time Group USA, Inc. ("Time") to acquire 50.1% of Time. Time primarily will
provide repair and engraving services for watches and other jewelry. See "Time
Group, Inc." The Company is also in negotiation with Silverman Jeweler's
Consultants to establish an inventory liquidation services company in Canada.
See "Silverman Retail Solutions, Inc."
Marketing
The Company maintains sales offices at its Toronto headquarters, at the Aviv
manufacturing and office facility in Houston, Texas, at the Diamonair offices in
Cedar Knolls, New Jersey and in Tampa, Florida. The Company's sales staff
promotes the Company's products to a wide range of customers via existing
relationships, trade shows and product presentations.
The Company seeks to provide value priced, quality products. Price and quality
are of particular importance in the jewelry market because, except at the
highest end of the market, advertising and brand name recognition are minimal.
The Company believes that the D.G. Manufacturing Process allows it to provide
its customers the DG Division products at prices that are competitive with or
lower than its competitors' products. Similarly, the incorporation of DG
Division products and manufacturing into Diamonair has allowed for competitive
pricing of that division's products. The Aviv products, which usually are made
of more expensive metals and contain more expensive stones, are also
competitively priced when compared with goods of similar quality. Marketing of
Aviv products are aided by Aviv's specialization in bridal jewelry, which allows
Aviv's sales people to focus their marketing efforts on certain market segments.
Often, retail stores are provided pre-arranged presentation trays. These trays
usually contain the Company's most popular styles in common sizes. The Company
believes that these trays make it convenient and cost effective for retail
stores to display and promote the Company's products. The Company believes that
retail store operators who utilize these pre-arranged presentation displays,
which may include point-of-purchase displays, will elicit impulse purchases of
the Company's products because the styles are familiar to customers and are
priced at attractive levels. Aviv also utilizes independent sales
representatives, who promote Aviv's products to smaller retail outlets.
Management emphasizes maintaining and building upon the Company's relationships
with existing customers. The Company provides specialized support services to
its customers, including bar-coding and drop shipping to individual customer
locations as well as central distribution centers. Further, in order to fill
customer orders more quickly and effectively the Company has an Electronic Data
Interchange ("EDI") program pursuant to which the Company electronically
receives purchase orders from participating
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customers and electronically transmits to the customers order acknowledgments,
invoices and advance shipping notices. The EDI link and other support options,
in management's opinion, assures an ongoing business relationship. The Company
believes these specialized services, which are particularly important in
marketing to large retailers, enhance the Company's ability to attract and
retain customers.
Although the Company's sales are generally non-refundable, the Company may
accept returns of certain items in order to maintain customer goodwill and as
part of promotional programs. Returns of products are not significant and
generally are made as part of stock balancing transactions in which the returned
products are replaced with products better suited to the customer's needs. The
Company has not experienced any difficulty in reselling returned merchandise.
In 1997, the Company began listing excess inventory on an Internet wholesale
commerce website. The Company intends to continue this practice because it
provides an inexpensive method for disposing of excess inventory on favorable
terms.
Customers
The Company maintains a broad base of customers concentrated in four major
jewelry segments: (i) department stores such as Sears Roebuck, J.C. Penney and
Saks Fifth Avenue (the Company's products are also sold in certain Federated
Department Stores and May Department Stores through, Finlay Fine Jewelry Corp.,
an operator of jewelry boutiques within other department stores); (ii) specialty
markets, such as The Shopping Channel (Canada) and ValueVision; (iii) jewelry
chain stores such as Zales, Gordons, Friedmans and others and (iv) mass
merchandisers such as Wal-Mart. The Company generally does not sell pursuant to
any formal or long-term contracts.
For the year ended December 31, 1997, three major customers accounted for 42% of
sales. Finlay accounted for 19% of sales, Silverman Jeweler Consultants, Inc.
accounted for 14% of sales and WalMart accounted for 9% sales. For the year
ended December 31, 1996, the Company's two largest customers were Wal-Mart (21%
of sales) and Zellers, Inc. (Canada)(11% of sales). The loss of any of the these
customers or a significant reduction in their orders would have a materially
adverse effect on the Company. Except for Zellers, the Company believes that its
relationship with its customers is good. Zellers, who had purchased rings
pursuant to a contract with the Company, has stopped purchasing products from
the Company and is in litigation with the Company. See "Item 3 - Legal
Proceedings."
Product and Design
The Company seeks to provide its customers with a broad selection of jewelry
products that incorporate traditional styles and designs. The Company seeks to
avoid designs incorporating fashion trends which are expected to have short life
cycles. This approach enables the Company and its customers to avoid
accumulating obsolete inventory. Additionally, producing a greater quantity of a
particular product results in a more efficient manufacturing process.
However, the Company regularly updates its product lines and offers new
products. The Company maintains a staff of model makers/designers who develop
new designs based on research of the market and surveying stores, catalogues and
industry publications to determine current trends. Additionally, the Company can
create specially designed products in response to requests or pictures submitted
by customers. New product design prototypes are created, and after evaluation
the final product design is
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produced. Currently, the Company is perfecting its computer aided design system
which is quicker and more accurate than design by humans.
A principal goal of the Company's design program is to maximize the perceived
value of the Company's products through design and manufacturing innovations
that enhance the appearance of the jewelry without causing corresponding
increases in product costs. This design approach assists the Company in
producing quality products reflecting general consumer tastes. The Company,
particularly the D.G. Division and Diamonair, seeks products, not as fashion
leaders or faddish styles, but of enduring styles that encourage moderately
priced impulse purchases.
Rings account for approximately 90% of the Company's sales by units sold and
dollar revenue. The D.G. Division currently offers approximately 5,000 styles of
rings. The rings are moderately priced and the average wholesale price of the
rings is approximately $150.00. The retail price of the D.G. Division's better
selling products range from $30.00 to $600.00, although some products can cost
as much as $1,000. The rings are made principally in 10 karat gold. The
Company's products contain a variety of stones classified as diamonds, precious
(e.g., rubies, sapphires, emeralds), semi-precious (e.g., garnet, topaz,
amethyst, aquamarine, opal) or synthetics (e.g., cubic zirconia, spinel). The
use of stones increases average unit sales price and results in greater margins.
Additionally, the inclusion of stones creates a greater margin flexibility to
insulate the Company from fluctuation in the value of gold. The D.G. Division
manufactures a number of rings with multiple stones because management believes
the D.G. Manufacturing Process allows the Company to produce multiple stone
items at a lower cost than the Company's competition.
Aviv offers approximately 4,000 rings, most of which are intended to be used as
wedding or engagement rings. Aviv's rings are made up of precious metals,
including 24 karat gold and platinum. The average wholesale price of the Aviv
products is $700.00. The retail price of Aviv's better selling products range
from between $500.00 and $1,500.00. Some of Aviv's diamond rings are sold for as
much as $5,000.
Diamonair offers approximately 600 rings, primarily adorned with cubic zirconia
stones. Although many of Diamonair's products are made of precious metals, the
Diamonair products are generally lower priced goods. The average wholesale price
of Diamonair's products is $100. The retail price of Diamonair's better selling
products range from $50 to $500. The Company is planning to introduce other
stones, which may include gem stones as well as other synthetic stones into the
Diamonair products.
The Company, through each of its three divisions, offers approximately 800
earrings and pendants. Many of these products are manufactured with the D.G.
Manufacturing Process, which allows the Company to produce these items at costs
which are competitive with or less than the Company's competitors. The Company
also designs earrings and pendents to match some of the Company's rings so that
the products can be sold as a set.
Manufacturing Process
The D.G. Manufacturing Process is a special process for producing a high-volume
of low-cost multi-stone rings. The D.G. Manufacturing Process provides the
Company, with a current estimated manufacturing capacity of approximately 15,000
rings per week. This process is utilized at the Toronto facility for the DG
Division product line and certain Diamonair products. The Company believes that
it has a reputation for its expertise in the setting of stones and the Toronto
facility is presently producing an average of
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approximately 1,500 to 1,800 rings per week. Management believes that its
manufacturing capabilities distinguish it from most of its competitors and
enable it to produce very competitively priced, quality and consistent products
satisfying its customers' demands for mass merchandising.
The D.G. Manufacturing Process combines modern technology, mechanization and
hand craftsmanship to produce fashionable and moderately priced jewelry. Its
manufacturing operations involve combining pure gold with other metals to
produce 10 and 14 karat gold, manufacturing cast jewelry, and finishing
operations such as cleaning, polishing, diamond-cut, engraving, plating and
other jewelry work. The Company utilizes the lost-wax/cast-in-place method of
jewelry manufacturing to produce high-quality gold rings, earrings, pendants and
bracelets. This is based on an investment casting process used in the jewelry
manufacturing industry. It entails creating wax duplicates of the items which
are encased in a plaster mold. The plaster is hardened in an oven while the heat
melts away the wax, leaving a hollow mold pre-set with stones in place. The mold
is injected with metal, in effect reverse-mounting the stones in the jewelry.
After the casting process, the jewelry undergoes a series of cleaning and
polishing stages before being labeled with the retailer's price tag and bar
codes and shipped. This process allows unskilled labor with virtually no
training to set as many as 8,000 stones per day per stone setter, at a cost of
approximately four cents per stone. This compares to the normal setting process
of a skilled setter, setting up to 150 stones per day, at a cost of up to $1.00
per stone or more. However, the percentage savings are far more significant when
the intrinsic values which make up the jewelry item are lower. This is so
because the greater the labor factor in the product's cost structure, the
greater the percentage savings when such labor factor is reduced.
Many of the D.G. Division's manufacturing personnel are paid on a piece-work
basis. Management believes this basis provides incentive to maximize
productivity while at the same time, it provides the Company accuracy in cost
accounting. The Company's strict quality control guidelines ensure that quality
is not sacrificed for productivity. The Company uses a bar-coded tracking system
for all inventory in process. When a job bag is transferred from one employee to
another, it is automatically electronically 'wanded' (UPC bar coded for number
of units, style, and other pertinent customer information) into that employee's
custody. This has the effect of assigning responsibility for the inventory. It
also causes the recipient employee to verify quality of the product prior to his
commencement of work, in effect, policing the prior person's work. If the
previous employee's work was substandard, the recipient will require that person
to take the extra time to correct the work. Otherwise, the recipient would have
to correct such product at no additional compensation and would further make the
recipient's work more difficult as well as delaying his production. Therefore,
the system is self policing.
Management believes that these significant savings will allow the Company to
produce jewelry that previously did not warrant large labor costs and
accordingly have not been produced by anyone else. Specifically, multi-stone
sterling silver products could now be mass produced to retail at prices
geared to mass merchandiser's "customers" profiles. These products could now
sell in a range from $9.99 to $49.97 retail, and project a quality and perceived
value of several times that amount. Management believes the jewelry industry has
avoided producing this type of product since the sterling silver metal value and
the synthetic stone values did not warrant too much labor costs. The Company's
lower labor costs makes it possible to produce these products profitably.
Currently, manufacturing and other operations for the Aviv product line are
accomplished at the Company's facility in Texas. The lease to this factory was
assigned to the Company in connection with the acquisition of Aviv. This four
year old facility produces an average weekly volume of 800 rings and Management
believes its current facilities have the capacity to produce approximately 4,500
rings per week.
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Diamonair primarily purchases products from the D.G. Division and other
manufacturers in a finished condition. However, Diamonair does do some assembly,
repair and packaging of its products from its facility in Cedar Knolls, New
Jersey.
The manufacturing process in the jewelry industry results in great volumes of
gold scrap. The Company has strict controls to minimize waste. Management
believes that its manufacturing processes reduce the handling of the end jewelry
product and accordingly, the quantity of jewelry scrap is greatly reduced. The
scrap in the form of chips, filings, grindings and sweepings, are recovered by
the Company and sent to refiners to recover the gold. The Company's recovery
from refiners in 1996 and 1997 were 1,065 ounces or approximately $420,000, and
1,565 ounces or approximately $545,000, respectively.
Supply
The Company purchases its gold from banks, gold refiners and commodity dealers.
Management believes this arrangement is sufficient to meet the Company's
requirements. Gold acquired for manufacture is at least .995 fine and is
combined with other metals to produce 10 or 14 karat gold. The term 'karat'
refers to the gold content of alloyed gold, measured from a maximum of 24 karats
(100% fine gold). Varying quantities of metals such as silver, copper, nickel
and zinc are combined with fine gold to produce 10 or 14 karat gold of different
colors. These alloys are in abundant supply and are readily available to the
Company. Other precious and semi-precious stones are available from many
suppliers in Canada and the United States.
The world's supply of diamonds comes primarily from De Beers Consolidated Mines,
Limited ('De Beers'), a South African company. The continued availability of
diamonds to the jewelry industry is dependent, to some degree, on a continual
supply from De Beers. While several other countries are major suppliers of
diamonds, in the event of an interruption of supply from South Africa, the
Jewelry industry, as a whole, could be adversely affected, which could impact
the supply of diamonds to the Company.
The Company does not presently engage in hedging activities with respect to
possible fluctuations in the prices of precious, semi-precious gemstones or
metals. The Company believes the risk of price fluctuations can be mitigated by
changes in the prices the Company charges its customers, which the Company has
historically done in response to such fluctuations. However, there can be no
assurance that a downward trend in the prices of stones or metals would not have
a material adverse impact on the valuation of the Company's inventories or that
an increase in prices would not make it more difficult or costly for the Company
to acquire inventory.
The Company purchases its supplies and raw materials from a variety of suppliers
and it does not believe the loss of any of the suppliers would have a material
effect on its business. Alternative sources of supply for raw materials for
production of jewelry are readily available.
The Company carefully inspects all materials sent and received from outside
suppliers, monitors the location and status of all inventory, and has strict
internal control procedures of all jewelry as it proceeds through the
manufacturing process. A complete physical inventory of gold, silver and
gemstones is taken at the Company's manufacturing and administrative facilities
on an annual basis. The Company employs an agency to provide a security staff
and has various security procedures in the hiring of personnel as well as
internal-security procedures regulating employee conduct.
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Insurance
The Company maintains primary all-risk insurance, with limits in excess of the
Company's current inventory levels, to cover thefts and damage to inventory
located on the Company's premises. The Company also maintains insurance covering
thefts and damage to Company owned inventory located off-site. The amount of
coverage available under such policies is limited and may vary by location, but
generally is in excess of the value of the gold supplied by the Company. The
Company maintains fidelity insurance which provides coverage against theft or
embezzlement by employees of the Company. Additionally, the Company maintains
director's and officer's liability insurance in the amount of $5,000,000.
Competition
The jewelry manufacturing industry is highly competitive, and the Company's
competitors include domestic and foreign jewelry manufacturers and wholesalers
and importers who may operate on a national, regional and local scale. The
primary competitive factors are price, design, quality, customer service and
established customer relationships.
The diverse distribution channels in which the Company markets its products
frequently involve different competitive factors. The ability to provide
specialized services is a particularly important competitive factor in its sales
to certain large retailers such as mass merchandisers, discount stores and
warehouse clubs. Product availability and the ability to offer consistent
product quality at competitive prices tend to be the key competitive factors to
the customer segments which the Company serves. Some of the Company's
competitors may specialize in sales to particular distribution channels and may
have relationships with customers in those distribution channels that make
competition by the Company more difficult. The Company believes that the recent
trend towards consolidation at the retail level in the jewelry industry will
increase the level of competition in the markets in which the Company competes.
In Canada, management believes it has two primary competitors, both larger than
the Company. A&A Jewelry of Scarborough, Ontario is the Canada's largest jewelry
manufacturer. It manufactures both casted ring products and stamped gold
earrings and pendants, and its sales are both in Canada and the United States.
Finecraft Industries Limited is the other major Canadian manufacturer, which
also imports from the Far East.
In the United States, the market, although highly fragmented, does contain a
number of major competitors many of whom import much of their product from the
Far East and many of whom sell higher priced items. The United States
competitors include Town & Country Fine Jewelry Group, M. Fabrikant & Sons,
Inc., Samuel Aaron Inc., Simon Golub, PAJ, Inc., Nissko Jewellery Trading, World
Pacific Products, Andel, Andin International Inc., Oroamerica, Inc., Dalow
Industries and Michael Anthony Jewelers Inc.
Patents and Trademarks
The Company has received or applied for trademarks of certain product names and
for patents on approximately 200 Aviv product designs. These trademarks and
patents are not economically material to the Company.
The Company does not have, nor does it rely, on patents to establish or protect
its market position. The
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Company has not applied for patent protection of the D.G. Manufacturing
Processes to avoid disclosing its unique application, modification and
improvements relating to certain basic processes known in the industry. Further,
the Company cannot be assured that the process which it believes is proprietary
would qualify for a patent, and if a patent would be granted, there is no
assurance as to the extent of its enforceability. There can be no assurance that
competitors will not be able to imitate the Company's manufacturing processes,
which could have a material adverse effect on the Company.
The New York Gold and Diamond Exchange.
As part of the acquisition of Aviv, the Company acquired the New York Gold and
Diamond Exchange ("NY Gold"), a retail store. NY Gold is located in a 1,500
square foot area of the Aviv facility in Houston, Texas. NY Gold sells the
products of Aviv and other manufacturers and offers the Company an excellent
opportunity to profitably dispose of excess inventory of Aviv products. The
Company intends to increase the amount of DG Division and Diamonair products
that it sells in the store.
Time Group USA, Inc.
The Company is currently in negotiations with the owners and management of Time
Group USA, Inc. ("Time") to acquire 50.1% of the issued and outstanding stock of
Time. Time is a development stage company that provides repair and engraving
services for watches and other jewelry. Currently, Time engages in limited
operations on five military bases. There can be no assurance that the Company
will successfully complete the agreement to acquire a controlling interest in
Time or that the Time operations will provide the Company with significant or
any revenue or net income.
Silverman Retail Solutions, Inc.
The Company is currently in negotiations with the owners and management of
Silverman Jeweler's Consultants, Inc. to form a joint venture, Silverman Retail
Solutions, Inc. ("SRS"), to engage in inventory liquidation services in Canada.
Silverman Jewelers Consultants has provided such services in the U.S. and
intends to utilize the Company's familiarity with the Canadian markets to expand
into Canada via SRS. SRS will purchase and resell, or act as a sales agent, to
sell excess inventory from entities in financial trouble or other entities who
need to dispose of large amounts of inventory quickly. SRS will sell a variety
of consumer products, including jewelry. Management believes that SRS' jewelry
sales will create opportunities to sell the Company's products when packaged
with inventory acquired through the liquidations. There can be no assurance that
the Company will successfully complete the agreement to form the SRS joint
venture or that the SRS operations will provide the Company with significant or
any revenue or net income.
Employees
At May 31, 1998, the Company employed 200 persons on a full-time basis,
including approximately 165 engaged in manufacturing and distribution, 12
salespeople, 16 general and administrative and seven executives, each of whom
performs various other functions such as sales and marketing.
The Company has no unions and believes its relationship with its employees is
good.
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Environmental Compliance
Certain of the manufacturing processes utilized by the Company require the use
of chemicals and other hazardous materials. The Company has an ongoing
compliance program to ensure that its manufacturing processes are in compliance
with environmental rules and regulations.
Seasonality
Retail sales of jewelry are weighted to the fourth quarter. According to the
World Gold Council, retail sales by quarter have remained consistent over the
last three years with the fourth quarter accounting for approximately 44% of the
retail dollar sales and 46% of the retail unit sales in the jewelry industry. In
1995 the month of December accounted for 28% of the retail dollar sales and 31%
of the retail unit volumes. For manufacturers these sales patterns reflect a
business that tends to fall one-third in the first half of the year with the
remaining two-thirds in the second half of the year.
While the Company's sales are subject to seasonal fluctuations, this fluctuation
is mitigated to a degree by the early placement of orders by many of the
Company's customers, particularly for the Christmas holiday season. Further,
management believes that its sales and those of its customers are not as
seasonally affected as most competitor's sales because many of the Company's
products are lower priced goods designed for mass merchandising, which generate
year round impulse purchases.
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<PAGE>
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's executive and administrative offices and primary manufacturing and
marketing facilities are located in a newly-renovated 23,000 square foot
facility in Toronto, Ontario. This facility is leased from 1001 Petrolia Road
Limited Partnership, the general partner being 1013418 Ontario Inc. Jack
Berkovits, Chairman, CEO and President of the Company is the sole shareholder,
officer and director of that general partner. The lease is a 10 year net, net
lease and expires January 31, 2005. Annual lease payments are currently
$100,600, increasing each year by the greater of $.37 a square foot or the
percentage increase in the Consumer Price Index for the Municipality of
Metropolitan Toronto. Real estate taxes, utilities, maintenance and insurance
cost the Company approximately $95,000 for the year ended December 31, 1997.
Management is of the opinion that the terms of the lease are as favorable as
could be obtained from unaffiliated third parties. See "Item 13. Interest of
Management in Certain Transactions."
The limited partnership owned by Mr. Berkovits originally obtained a $660,000
five year mortgage on the property from the Canadian Imperial Bank of Commerce
in 1993. At June 1, 1998, the mortgage was $618,689. The loan was interest free
for the first six months with the balance of the term at 5% per annum. The
Company is a guarantor of this mortgage. A second mortgage was obtained to
secure the Company's financing facilities with The Bank of Nova Scotia.
Effective as of June 1, 1997, the Company entered into a sublease for the 25,000
square foot manufacturing and office facility in Houston, Texas from which Aviv,
Inc. had operated prior to the Company's acquisition of Aviv. The sublease is to
terminate on the earliest of (i) May 30, 2003, (ii) four months after notice is
given by the Company, or (iii) upon termination of the primary lease on the
property. The primary lease is not due to terminate until March 2014, although
it is terminable by the landlord upon certain events, such as the failure of the
tenant to pay rent. The Company pays annual rent of $130,476. The Company
primarily uses the Houston facility for the manufacturing and storage of the
Aviv products, as well as sales, design and administrative offices. Also located
at the Houston Facility is the Company's retail store, which occupies
approximately 1,500 square feet.
Effective as of November 21, 1997, the Company entered into a sublease for the
7,880 square foot facility in Cedar Knolls, New Jersey that Litton Systems had
used to operate Diamonair prior to its acquisition by the Company. The Company
has the option, upon thirty days notice, to reduce the total area which it
occupies and receive a proportionate reduction in rent so long as the Company
occupies at least 5,000 square feet. The sublease terminates on November 20,
1998. The Company has the right to renew the lease for three successive one year
terms. The Company pays annual rent of $84,789. The Company uses the facility
for the assembly and storage of Diamonair products, as well as sales, design and
administrative offices.
The Company believes that its facilities are adequate for the Company's current
operating levels and presently foreseeable growth.
ITEM 3 - 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
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<PAGE>
credit certain returns to Zellers' account and to provide Zellers with
replacement merchandise. Zellers had been purchasing rings from the Company
pursuant to a contract which was to terminate in December 2001. Zellers is
seeking compensatory damages of $1,800,000, punitive damages of $360,000 and
counsel fees and court costs. The Company intends to vigorously defend the
action. The Company has also filed a counterclaim for breach of the contract,
for, among other claims, Zellers failure to continue to purchase rings from the
Company and the Company is seeking damages in excess of $13,000,000. Although
discovery has occurred, no trial has commenced. The parties are currently
attempting to negotiate a settlement. There can be no assurance that a
settlement will be reached or that any resolution of this matter will not have a
material adverse effect on the Company.
The Company is not a party to any other material litigation nor are any such
proceedings pending or threatened.
ITEM 4 - CONTROL OF REGISTRANT
The Company is not directly or indirectly owned or controlled by another
corporation or by any foreign government.
PRINCIPAL SHAREHOLDERS
The following table sets forth as of the date of this Prospectus, the
names and beneficial ownership of the Company's Common Stock beneficially owned,
directly or indirectly, by (i) each person who is a director or executive
officer of the Company, (ii) all directors and executive officers of the Company
as a group, and (iii) all holders of 5% or more of the outstanding shares of
Common Stock of the Company, both before and after giving effect to this
Offering.
15
<PAGE>
<TABLE>
<CAPTION>
Amount and
Nature of
Names and Address of Beneficial Beneficial
Owner(1) Ownership(2) Percentage of Shares Outstanding
-------- ------------ --------------------------------
Prior to the Following the
Offering Offering(3)
-------- -----------
<S> <C> <C> <C>
Jack Berkovits.................................. 2,811,250(4) 52.4% 41.0%
The Berkovits Family Trust...................... 426,000 8.2% 6.4%
Sheba Berkovits(5).............................. 816,000(5) 15.8% 12/3%
Gary Davis...................................... 11,250(6) * *
Leonard Fasullo................................. 11,250(6) * *
Charles Winston................................. 5,625(6) * *
Aaron Grubner................................... 7,500(6) * *
5140 Yonge Street
Suite 1540
Toronto, Ontario M2N 6L7
Joan A. Pajunen................................. 7,500(6) * *
All directors and executive officers
as a group (6) persons.......................... 2,854,375 52.8% 41.4%
</TABLE>
* Less than one %.
(1) Except as set forth above, 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.
(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.
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<PAGE>
Berkovits and his wife are co-trustees; (ii) 390,000 shares of
Common Stock owned by his wife and (iii) 201,250 shares issuable
upon options that are currently exercisable or exercisable in the
next sixty days. Does not include an aggregate of 390,000 shares
of Common Stock owned by two of Mr. Berkovits' sons who are
independent of their father; and (ii)176,250 shares of Common
Stock underlying the Options which are not currently exercisable
or exercisable in the next sixty days.
(5) Includes 426,000 shares of Common Stock owned by the Berkovits
Family Trust of which Ms. Berkovits is a co-trustees. Ms.
Berkovits is the wife of Jack Berkovits.
(6) Consists of options which are currently exercisable or exercisable
in the next sixty days.
ITEM 5 - NATURE OF TRADING MARKET
Since the initial public offering of the Company's Common Stock on April 17,
1998, the Common Stock and Warrants have been traded on the NASDAQ SmallCap
Market ("NASDAQ") under the symbols DGJLF and DGJWF, respectively, and on the
Boston Stock Exchange under the symbols DGJ and DGJW. Prior to April 1997, there
was no market for the Company's shares. There is no non-United States trading
market for such securities and there is no limitation on non-Canadians owning
shares of the Company's Common Stock.
The following are the high and low sales prices reported for the Company's
shares as reported on NASDAQ/NMS during each quarter since such trading
commenced in April 17, 1997:
Quarter High Low
------- ---- ---
April 18, 1997-June 30, 1997 10 1/8 4 3/4
Third Quarter 1997 5 1 3/4
Fourth Quarter 1997 2 11/16 1 3/4
First Quarter 1998 3 5/8 1 3/4
April 1-June 5, 1998 5 3 1/2
As of June 1, 1998, there were 13 shareholders of record and approximately 700
beneficial owners.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no governmental laws, decrees or regulations in Canada relating to
restrictions on the export or import of capital, or affecting the remittance of
interest, dividends or other payments to non-resident holders of the Company's
common stock. See Item 7 "Taxation".
Except as provided in the Investment Canada Act, there are no limitations
specific to the rights of non-Canadians to hold or vote the common stock of the
Company under the laws of Canada or the Province of Ontario or in the charter
documents of the Company.
17
<PAGE>
The Investment Canada Act requires a non-Canadian making an investment which
would result in the acquisition of control of a Canadian business, the gross
value of the assets of which exceed certain threshold levels or the business
activity of which is related to Canada's cultural heritage or national identity,
to either notify, or file an application for review with, Investment Canada, the
federal agency created by the Investment Canada Act.
The notification procedure involves a brief statement of information about the
investment on a prescribed form which is required to be filed with Investment
Canada by the investor at any time up to 30 days following implementation of the
investment. It is intended that investments requiring only notification will
proceed without government intervention unless the investment is in a specific
type of business activity related to Canada's cultural heritage and national
identity.
If an investment is reviewable under the Act, an application for review in the
form prescribed is normally required to be filed with Investment Canada prior to
the investment taking place and the investment may not be implemented until the
review has been completed and the Minister responsible for Investment Canada is
satisfied that the investments is likely to be of net benefit to Canada. If the
Minister is not satisfied that the investment is likely to be of net benefit to
Canada, the non-Canadian must not implement the investment or, if the investment
has been implemented, must divest himself of control of the business that is the
subject of the investment.
ITEM 7. TAXATION
Management considers that the following general summary fairly describes the
principal Canadian federal income tax consequences applicable to a holder of
common stock of the Company who is a resident of the United States and who is
not a resident of Canada and who does not use or hold, and is not deemed to use
or hold, his common stock in connection with carrying on a business in Canada (a
"non-resident shareholder").
This summary is based upon the current provisions of the Income Tax Act (Canada)
(the ITA), the regulations thereunder (the "Regulations") and the current
publicly announced administrative and assessing policies of Revenue Canada,
Taxation. This description is not exhaustive of all possible Canadian federal
income tax consequences and, does not take into account or anticipate any
changes in law, whether by legislative, governmental or judicial action, nor
does it take into account provincial or foreign tax considerations which may
differ significantly from those\discussed herein.
Dividends
Dividends paid on Common Stock of the Company to a non-resident holder will be
subject to withholding tax. The Canada-US Income Tax Convention (1980) as
amended by the protocol signed on March 17, 1995 (the "Treaty"), provides that
the normal, .25% withholding tax rate is reduced to 5% on dividends paid on
shares of a corporation resident in Canada (such as the Company) to residents of
the United States, and also provides for a further reduction of this rate to 5%
where the beneficial owner of the dividends is a corporation which is a resident
of the United States which owns at least 10% of the voting shares of the
corporation paying the dividend. However, the Company does not anticipate paying
dividends in the near future. See
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<PAGE>
Item 5, "Nature of Trading Market."
Capital Gains
A non-resident of Canada is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a share of a public corporation
unless the share represents "taxable Canadian property" to the holder thereof.
The Company's common stock is listed on a prescribed exchange and therefore will
be taxable Canadian property to a non-resident holder if, at any time during the
period of five years immediately preceding the disposition, the non-resident
holder, non-arms length persons, or the non-resident together with all such
persons owned not less than 25% of the issued shares of any class of the capital
stock of the Company.
In the case of a non-resident holder to whom shares of the Company represent
taxable Canadian property and who is resident in the United States, no Canadian
taxes will be payable on a capital gain realized on such shares by reason of the
Treaty unless the value of such shares is derived from real property or natural
resources situated in Canada. However, in such case, certain transitional relief
under the Treaty may be available. In certain circumstances, the Treaty allows
Canada to tax former residents on gains from the disposition of taxable Canadian
property where such property was owned at the time of their departure from
Canada or was received in substitution therefor in a transaction that is
tax-free under Canadian law.
ITEM 8. SELECTED FINANCIAL DATA
Summary Financial Information
The summary financial information set forth below is derived from the more
detailed consolidated financial statements and notes thereto appearing elsewhere
in this Form 20-F. The Company maintains its books and records in Canadian
Dollars, but has reconciled such financial data to United States dollars (see
'Exchange Rate Data') and has prepared its consolidated financial statements
contained in this Form 20-F in accordance with generally accepted auditing
standards in the United States. See 'Report of Independent Auditors' and
'Consolidated Financial Statements.' All information should be read in
conjunction with the consolidated financial statements of the Company and the
notes contained elsewhere in this Form 20-F.
19
<PAGE>
Year Ended December 31
----------------------
1995 1996 1997
---- ---- ----
(In thousands except per share data)
------------------------------------
Revenue................ $13,942 $14,182 $22,128
Gross Profit........... 2,821 2,807 6,450
Net Income............. 478 457 1,045
Net Income Per......... 0.12 0.11 0.22
Share..................
December 31
-----------
Balance Sheet Data: 1995 1996 1997
---- ---- ----
Working capital........ $4,637 $3,317 $10,235
Total assets........... 13,103 16,773 33,922
Long-term debt......... 2,693 1,081 2,865
Total liabilities...... 10,402 13,610 23,327
Shareholders' 2,701 3,163 10,595
equity.................
- --------------
(1) The Company changed its fiscal year in January 1995 from January 31, to a
calendar year. Therefore, the fiscal year ended December 31, 1995 includes
only eleven (11) months rather than a full fiscal year.
(2) The information in this table has been retroactively restated to reflect a
39,000-for-1 share stock split in the Company's Shares effected in
December, 1996. See 'Capitalization.'
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS.
The statements contained in this Prospectus that are not historical are
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including statements regarding the
Company's expectations, intentions, beliefs or strategies regarding the future.
Forward looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward looking statements included in this Prospectus are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially
20
<PAGE>
from those in such forward looking statements.
The Company's future success as a manufacturer and distributor of
value-priced, stone-set jewelry will be influenced by several factors including
technological developments in the mass production of jewelry, the ability of the
Company to efficiently meet the design and production requirements of its
customers, and the market acceptance of its jewelry. Further factors impacting
the Company's operations are increases in expenses associated with continued
sales growth, the ability of the Company to control costs, management's ability
to evaluate the public's tastes and orders to target satisfactory profit
margins, the ability to develop and manage the introduction of new designed
products, and competition. Quality control is also essential to the Company's
success, since customers demand compliance with design and product
specifications and consistency of production.
The Company had an agreement with Diamante, a retail jeweler owned by a
former Vice President of the Company which provided the Company with the ability
to control that company and be entitled to 95% of Diamante's profits. That
agreement, which terminated as of February 7, 1997, resulted in Diamante's
financial statements being consolidated with the Company. The amount of profits
of Diamante that have been recorded in the consolidated financial statements
were approximately $8,000, $27,000 and $0 for the periods ended December 31,
1995, December 31, 1996 and December 31, 1997, respectively. The forfeiture of
the aggregate amount of profits of Diamante for the period since inception to
February 7, 1997 of approximately $35,000 was recorded in the financial
statements for the first quarter of 1997 as a compensation charge. Furthermore,
all sales to Diamante subsequent to February 7, 1997 have been recorded on a
cash basis. The Company's utilization of its high-volume manufacturing
techniques sometimes results in excess inventories. In the past, the Company
either sold these excess inventories in lots at prices which usually resulted in
losses of its investment in labor and overhead and without recovering its full
cost of stones, or it internally recycled the metal and most stones by
disassembling the product, re-melting the gold or silver and removing the
stones. This recycling resulted in additional incurred labor and overhead costs.
Once Diamante established its factory outlet stores, it provided the Company
with an opportunity to sell its excess inventories on more favorable terms. The
Company, by selling to Diamante then avoided the costs and losses that it had
incurred in the past and afforded it a more advantageous method of dealing with
its excess inventories. The Company is the primary supplier of product to
Diamante and the Company's account receivable from Diamante is fully secured by
all the assets of Diamante, which security interest has been pledged by the
Company to The Bank of Nova Scotia for the Company's financing facilities. The
Company performs certain administrative functions for Diamante.
Generally, the Company does not provide products pursuant to long-term
contracts. The Company has an exclusive jewelry supply contract with Zellers,
Inc. of Canada ("Zellers") that, pursuant to its terms, is to terminate in
December 2001. Sales to Zeller's were $1.6 million in 1996 and $550,000 in 1997.
Currently, the Company is in litigation with Zellers and Zellers is not
purchasing any products from the Company. See Item 3 - Legal Proceedings.
On November 21, 1997, the Company acquired substantially all of the assets
of the wholesale jewelry division of Litton Systems, Inc., which division had
operated under the trade name Diamonair, for approximately $5.8 million. The
acquisition was accounted for using the purchase accounting method. In
accordance with the purchase accounting method, Diamonair's results
21
<PAGE>
have been included in the Company's consolidated financial statements since the
acquisition date.
Sales of Diamonair products after the acquisition by the Company on a
non-consolidated, unaudited basis were approximately $3.8 million and the profit
margin was approximately 25%. Diamonair purchased products from approximately 20
suppliers. The Company believes that it can increase the profit margin on
Diamonair products by increasing the amount of Diamonair products manufactured
by the Company using the D.G. Manufacturing Process. The Company also intends to
increase sales of Diamonair products by introducing the Diamonair products into
the distribution lines used by the D.G. Division and the Aviv Divisions.
On February 10, 1998, the Company completed its acquisition of
substantially all of the assets of Aviv, Inc., by assuming approximately $4.3
million in debt. The effective date of the acquisition was June 1, 1997. The
acquisition was accounted for using the purchase accounting method. In
accordance with the purchase accounting method, Aviv's results have been
included within the Company's consolidated financial statement since the
effective date of the acquisition on June 1, 1997.
Sales of Aviv products after the acquisition by the Company on a
non-consolidated, unaudited basis were approximately $7.3 million and the profit
margin was approximately 24%. Of Aviv's sales, approximately $700,000 were
attributable to the New York Gold and Diamond Exchange, a retail store at Aviv's
facilities in Houston, Texas. The Company does not anticipate that the cost of
many of the Aviv products will be reduced significantly by the D.G.
Manufacturing Process. Aviv's products generally are made with more expensive
metals and stones than the Company's other products. Therefore, savings in the
manufacturing process do not result in unit cost reductions that are material in
relation to the total price of the Aviv jewelry. The Company also intends to
increase sales of Aviv products by introducing the Aviv products to the
distribution lines used by the D.G. Division ad Diamonair Division.
Currently, the Company is reviewing its administrative costs to determine
if there are areas where expenses could be reduced through further integration
and consolidation of the acquisitions. Although the Company expects to achieve
some level of consolidation, these potential cost reductions are limited in many
areas because (i) operating in the United States and Canada limits the
advantages of consolidating certain accounting and human resources functions and
(ii) Management believes that maintaining the existing Aviv and Diamonair sales
offices and manufacturing facilities will be beneficial for maintenance of those
divisions' existing customer relationships and will increase the Company's
opportunities in the United States.
Fluctuations in the Canadian dollar against other currencies, especially
the U.S. dollar, may have a material adverse effect on the Company's results of
operations. A substantial portion of the Company's sales and purchases are set
in U.S. dollars or are influenced by local currency against the U.S. dollar. To
date, the Company has not sought to hedge the risks associated with fluctuations
in exchange rates and does not a have a policy relating to hedging. See Note 2
to the Consolidated Financial Statements and "Exchange Rate Data."
Many computer systems and software products worldwide will not function
properly as the year 2000 approaches due to the common programming device of
using just the last two digits of a year in all dates. Currently, the Company is
reviewing its computer software and hardware
22
<PAGE>
to determine what changes will be necessary to avoid this problem. The Company
expects to implement any necessary changes in Fiscal 1999. The Company does not
believe that the costs of implementing necessary changes to its computer systems
will have a material adverse effect on the Company.
Results of Operations
Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996
Sales for the year ended December 31, 1997 ("Fiscal 1997) were $22.1
million, as compared to $14.2 million for the year ended December 31, 1996
("Fiscal 1996"). This $7.9 million, or 56%, increase was primarily due to the
addition of Aviv revenue of $7.3 million and Diamonair revenue of $3.8 million.
Revenue from the D.G. Division decreased by $3.2 million due to a change in the
product and customer mix, which resulted in lower volumes or more expensive,
higher margin goods being sold in Fiscal 1997.
Cost of sales increased to $15.7 million in Fiscal 1997 as compared to
$11.4 million in Fiscal 1996. This $4.3 million, or 38%, increase was primarily
due to the increase in sales. Gross margin (which is gross profit primarily
expressed as a percentage of sales) increased to 29% in Fiscal 1997 from 20% in
Fiscal 1996. Gross margin increased due to a change in the product and customer
mix discussed above.
Selling, general and administrative costs increased to $3.7 million in
Fiscal 1997 from $1.1 million in Fiscal 1996. This $2.6 million, or 26%,
increase is due to the increased expenses associated with operating from
multiple locations and being a public company. In particular, professional fees
increased by $750,000 due to costs associated with being a public entity and
transaction costs associated with the acquisitions. Executive salaries increased
by $417,000, partially due to the increase in executives required to operate in
three locations.
Interest and other expenses increased to $1.2 million in Fiscal 1997 from
$923,000 in fiscal 1996. Interest expense increased by $26,000 in Fiscal 1997 to
$822,000 as a result of increased borrowings, however the Company's weighted
average interest rate was reduced from 6.58% in Fiscal 1996 to 5.42% in Fiscal
1997. Other expenses increased primarily due to a $280,000 write down of
receivables from Zellers.
Due to increased income before taxes, the Company's taxes increased to
$541,000 from $296,000. However, the Company's effective tax rate was reduced to
34% from 39% due to the increase in the percentage of income from U.S.
operations, which has a lower tax rate than Canada.
As a result of the foregoing, net income increased to $1.0 million in
Fiscal 1997 from $457,000 in Fiscal 1996.
23
<PAGE>
Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31, 1995
(11 Months)
The Company changed its fiscal year end in 1995 to December 31, from a
January 31 year-end in the previous year resulting in an 11 month fiscal year.
Sales for fiscal 1996 increased by 1.4% compared to fiscal 1995; however,
if January, 1996 is included in the 1995 fiscal year (in order to bring it to 12
months), then the sales actually decreased by 9.0%. This decrease was generated
by (i) the bankruptcy of a major Canadian customer; (ii) management's decision
to reduce the sales volume to low gross profit margin customers; and (iii) the
effect of the consolidation with Diamante. As a result, total sales dropped by
9.0% but gross profit as a percentage of sales increased to 22.7% in 1996 from
21.4% for the year ended Dec. 31, 1995. Gross profit has increased from the year
ended January 31, 1995 when gross profit was 15.5%.
The operating expenses for the current year increased to approximately
$12,265,000 from approximately $12,068,000 for the year ended December 31, 1995.
However, if the month of January, 1996 is added to bring the fiscal year to 12
months, then the total operating expenses actually decreased by approximately
$1,234,000. This decrease is mostly the result of reduction of operating costs
due to a reduction in sales.
Financial expenses and other income decreased to approximately $858,000
from $956,000. If the month of January, 1996 is added to the 11 month fiscal
year, then the decrease is actually $178,000. This reduction is attributed
mostly to the following: i) decrease in interest expense of approximately
$110,000 due to decreased interest rates in 1996; ii) decrease in other expenses
of approximately $25,000; iii) an increase in shipping and handling charges of
approximately $40,000.
Income before income taxes was $818,123 compared to $743,755, an increase
of $74,368. However, if the month of January, 1996 is added to the fiscal year
1995 the income increased by only approximately $2,000. The increased income,
despite a 9% decline in sales, is the result of the implementation of the
management's program to: (i) decrease sales to low gross profit margin
customers;(ii) optimization of the use of internal resources; (iii) reduction of
expenses through tighter internal controls.
The income tax expenses reflect the current tax rate for the company; the
taxes for the previous fiscal year were lowered by a loss carry forward which
was utilized in 1995. This resulted in decreased income after taxes.
Liquidity and Capital Resources
In April 1997, the Company completed an initial public offering in which it
sold 1,265,000 shares of Common Stock and 1,265,000 Warrants. The Company
realized net proceeds of $6.7 million from this offering. The Company may
realize additional proceeds from the exercise of the Warrants, although three
can be no assurance that such Warrants will be exercised.
The Company currently has an operating line of credit with The Bank of Nova
Scotia in the amount of $20.3 million subject to certain margin requirements.
See Note 8 to the "Consolidated Financial Statements." The amount available to
the Company is equal to 75% to 80% of "eligible
24
<PAGE>
accounts receivable", as defined in the Line of Credit Agreement, plus 50% of
the inventory values up to a maximum advance against inventory of approximately
$9.7 million. The Company utilized the credit line to borrow the $5.8 million
and $4.3 million necessary for the acquisitions of Diamonair and Aviv,
respectively.
The Company's borrowings under the Line of Credit bear interest at Canadian
prime plus 1/2% which at June 1, 1998 amounted to 6.5%. Interest on any
borrowings is payable monthly. The Company is in full compliance with all of the
banking covenants (including the financial covenants and ratios) and is required
to report to its bankers on a monthly basis.
The Company's obligations under the revolving credit facility are secured
by a security interest on all the assets of the Company, guaranteed by Diamante,
a jewelry retail chain owned by a former Vice President of the Company and
further secured by a mortgage on the property owned by a limited partnership
controlled by Jack Berkovits and leased to the Company, which mortgage is
guaranteed by the Company.
At December 31, 1997, the Company owed $3.0 million to Bank Boston, which
loan had been assumed pursuant to the Aviv acquisition. The Company utilized
proceeds from the Bank of Nova Scotia line of credit to repay this loan in
February 1998.
For the year ended December 31, 1997, the Company used cash from operating
activities of $11.2 million, primarily due to an increase of accounts receivable
of $8.3 million and an increase in inventory of $6.1 million.
The Company's accounts receivable net of allowances for doubtful accounts
as of December 31, 1997 was $17.2 million, or 78% of revenue for Fiscal 1997.
Accounts receivable is such a large percentage of sales because (i) accounts
receivable include a 7% goods and services tax and a 10% federal excise tax on
most Canadian sales, which taxes are not included in sales (ii) sales volume in
the fourth quarter was higher than the rest of the year due to the acquisitions
during the year of Aviv and Diamonair (iii) sales volume is generally higher in
the fourth quarter and some customers do not pay the Company for goods until
after the holiday selling season.
The Company's inventory as of December 31, 1997 was $12.9 million, or 58%
of revenue for Fiscal 1997. Inventory is such a large percentage of sales
because the inventory reflects needs for all three divisions, while sales
reflects the Aviv and Diamonair divisions only after their acquisitions. The
increased inventory also reflected management's belief that sales will increase
in the first quarter of 1998 due to increased exposure on television shopping
networks.
At December 31, 1997, the Company had loans outstanding to its principal
shareholder, Jack Berkovits, of $2.0 million and such loans bear interest at 10%
per annum. In the event that any Warrants are exercised, the proceeds will be
applied to working capital, as well as a potential repayment of a portion of its
credit facility.
The Company anticipates that cash flow from operations, as well as
borrowings available under the Company's existing credit line will be sufficient
to satisfy the Company's credit needs for the next twelve months.
25
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
MANAGEMENT
The directors and executive officers of the Company are as follows.
Mr. Feiler and Mr. Bonsignore will be nominated to serve as directors at the
Company's next Annual Meeting:
Position
Position with the Held
Name Age Company Since
Samuel J. Berkovits........... 45 Chairman of the 1979
Board, CEO and
President
Gary Davis.................... 50 Vice President-- 1987
Finance Chief
Financial Officer,
Controller,
Treasurer,
Secretary
Leonard Fasullo............... 56 Vice President-- 1989
Production
Charles Winston............... 40 Vice President-- 1997
U.S. Operations
Aaron Grubner................. 50 Director 1997
Joan A. Pajunen............... 55 Director 1997
Meyer Feiler.................. 45 Director Nominee 1996
Theodore Bonsignore........... 51 General Manager-- 1998
Diamonair,
Director Nominee
Samuel Jacob "Jack" Berkovits has served as President and a director of the
Company since 1979. He is a founding member of the Jeweller's Vigilance
Committee (Canadian Jeweler's Association) and is active in community affairs.
Mr. Berkovits became a member of the Canadian Institute of Chartered Accountants
in 1976. He practiced as an accountant in Montreal from 1972 to 1977 when he
joined the Company.
Gary Davis has served as Chief Financial Officer and Vice President -
Finance of the Company since 1987. Prior to that, Mr. Davis served for 12 years
as Chief Financial Officer at a Canadian company engaged in manufacturing
jewelry. Mr. Davis has been a certified general accountant since 1972.
26
<PAGE>
Leonard Fasullo has been Vice President - Production of the Company since
1989. Mr. Fasullo joined the Company as a manufacturing foreman in 1984.
Charles Winston has been Vice President - U.S. Operations of the Company
since March 1996. Mr. Winston was Vice President of national accounts at
Princess Pride Creations from March 1995 until March 1996, at B. D'Elia from
1994 until March 1995 and at World Wide Imports from 1991 until 1994.
Theodore Bonsignore has served as General Manager of Diamonair since May,
1998. Mr. Bonsignore works for the Company an average of between fifteen - to
twenty hours a week and also operates T.L. Bonsignore Management and Advisory
Services, a consulting firm specializing in the jewelry industry. From 1975 to
1997, Mr. Bonsignore was employed by Krementz & CO., a jewelry manufacturer,
serving as President since 1990. Mr. Bonsignore has been a director of the
Jewelers Board of Trade since 1990 and has served as Chairman of that Board
since 1998. Mr. Bonsignore is a certified public accountant. Mr. Bonsignore will
be nominated to serve as a director at the Company's annual meeting.
Aaron Grubner is a lawyer admitted to practice before The Bar of the
Province of Ontario. He has been practicing law since 1973, primarily corporate
and commercial law in Toronto, Ontario. Mr. Grubner is a founding member of the
law firm of Grubner, Krauss and represents the Company with respect to corporate
and commercial matters.
Joan A. Pajunen is managing director of Service Dimensions, Inc., an
international retail and service industry consulting firm with which she has
been affiliated since 1985. She is a member of the board of directors of
Workbench, Inc., a major private United States furniture retailer. Ms. Pajunen
is an author and international speaker.
Meyer Feiler has been President of Carmen Incorporated, one of the largest
jewelry companies in Canada since 1993. Mr. Feiler has worked at Carmen
Incorporated since 1979.
There is no family relationship between any of the above named officers or
directors.
The term of office for directors and officers is one year.
Audit and Compensation Committees
The Audit Committee consists of Messrs. Pajunen and Grubner. The
responsibilities of the audit committee include recommending to the board of
directors the firm of independent auditors to serve the Company, reviewing the
independent auditors reports, services and results of audit, and reviewing the
scope, results and adequacy of the Company's internal control procedures. The
Compensation Committee consists of Messrs. Pajunen, Grubner and Berkovits. The
compensation committee is expected to periodically review and evaluate officers'
compensation and will administer the Company's 1996 Stock Option Plan.
For a period of three years after the effective date of the Company's
Initial Public Offering
27
<PAGE>
on April 17, 1997, the Company has agreed to invite a designee of Dillon to
attend all meetings of the board of directors, but such designee will not be
entitled to vote or be compensated.
It is not expected that any director or committee member will receive any
compensation for acting in such capacity. The Company will reimburse directors
and committee members for all ordinary and necessary expenses incurred in
attending any meeting of the board or any committee thereof.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
Executive Compensation
The Summary Compensation Table below sets forth compensation paid by the
Company and its subsidiaries for the last three fiscal year for services in all
capacities for its CEO and any other officer who received a total annual salary
and bonus from the Company which exceeded $100,000.
Summary Compensation Table
The following table sets forth all cash compensation for services rendered
in all capacities to the Company, for the fiscal years ended December 31, 1997,
December 31, 1996 and January 31, 1996 paid to the Company's Chief Executive
Officer, and the two other most highly compensated executive officers (the
"Named Executive Officers") at the end of the above fiscal years whose total
annual salary plus bonus exceeded $100,000 per annum.
<TABLE>
<CAPTION>
Name and Year/ Annual Restricted Other
Principal Period Compensa- Stock Options/ Compensa-
Position Ended tion Bonus Awards SARs tion
-------- ----- -------- ----- ------ ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Jack Berkovits, 1997 $197,242 187,798 0 377,500 $12,000(1)
Chief 1996 $147,061 0 0 $12,000(1)
Executive 1995 $146,600 0 0 $12,000(1)
Office
and
Chairman........
Gadi Beer, 1997(2) $109,375 0 0
Vice President 1996 0 0
of Sales and 1995 0 0
Aviv............
</TABLE>
1. Represents auto allowance.
2. Mr. Beer's employment with the Company commenced on June 1, 1997, after
the Company's acquisition of Aviv.
Employment Contracts and Termination of Employment Change and Change-In-Control
Arrangements
Jack Berkovits and the Company entered into a three year employment
agreement commencing April 17, 1997 for Mr. Berkovits to serve as Chief
Executive Officer and President at an annual salary of $250,000 with yearly
increases of no less than $10,000. Should Mr. Berkovits die during the term of
this agreement, his estate or designee shall receive, upon his
28
<PAGE>
death, two years full salary. In the event of disability, Mr. Berkovits is to
receive 70% of his salary for the remainder of the term of the agreement. The
agreement also provides for the Company to maintain approximately $2,000,000 in
key-man insurance on the life of Mr. Berkovits. Currently, the Company is
beneficiary of two "key-man" term policies with a total death benefit of
$840,000. The $700,000 policy has been assigned to secure the Company's
financing facilities with The Bank of Nova Scotia. The Company maintains a third
policy with a death benefit of $1.1 million for which Mr. Berkovits is the
beneficiary.
Based upon any wrongful termination, which includes changes in control of
the Company through an acquiring person (any person who has acquired or
announces a tender offer or exchange for 25% of the Company), a sale of
substantially all of the assets or merger, acquisition of the Company or its
consolidation with another, or certain types of board changes, the Company shall
pay Mr. Berkovits a lump sum payment, based upon his then compensation,
including benefits and perquisites, from such termination. Such payment shall be
the balance of his compensation for the remainder of the term or compensation
for one year whichever is less; provided, if the payment is in excess of
$100,000, then such excess shall be payable in equal quarterly payments with
interest at the legal rate. The employment agreement also contains a one-year
non-competition provision within a 200 mile radius of the Company's primary
operation in Canada or anywhere in the United States.
The Company entered into an employment agreement with Gadi Beer, the Vice-
President of Sales and Marketing of Aviv for a term of one year terminating on
February 9, 1999. Mr. Beer earns an annual base salary of $120,000 and is
entitled to receive 0.8% of the total sales of Aviv. Mr. Beer has agreed to a
covenant not to compete with the Company for a period of three years from the
date of termination of the agreement. The agreement is renewable for additional
successive one year terms upon the consent of both parties.
No other officer has an employment contract with the Company.
Compensation of Directors
There are no standard arrangements for the payment of any fees to directors
of the Company for acting in such capacity. Directors are reimbursed for
expenses for attending meetings.
The Company has adopted a 1996 Stock Option Plan pursuant to which options
have been granted to officers, directors, consultants, key employees, advisors
and similar parties who provide their skills and expertise to the Company.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
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.
29
<PAGE>
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 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
30
<PAGE>
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 were to
be exercisable at $4.50 per share for five years expiring February 9, 2002. On
August 22, 1997, the Compensation Committee lowered the exercise price to $1.38,
which was the Company's stock price on such date. On August 22, 1997, the
Company granted an additional 327,500 options exercisable at $1.38 per share to
Jack Berkovits. All options granted vest and become issuable at the rate of 25%
every six months so that the options are fully vested and issuable two years
from their issuance date. The table below reflects the Options granted to the
present officers and directors of the Company and the percentage of Options
owned by such persons.
<TABLE>
<CAPTION>
Officer and/or Expiration Exercise
Director Date Options Percent Price
-------- ---- ------- ------- -----
<S> <C> <C> <C> <C>
Jack Berkovits......... (1) 377,500 75.5% $1.38
Gary Davis............. 02/09/02 15,000 3.0% $1.38
Drew Bricker........... 02/09/02 15,000 3.0% $1.38
Leonard Fasullo........ 02/09/02 15,000 3.0% $1.38
Charles Winston........ 02/09/02 7,500 1.5% $1.38
Aaron Grubner.......... 02/09/02 10,000 2.0% $1.38
Joan A. Pajunen........ 02/09/02 10,000 2.0% $1.38
</TABLE>
--------
(1) 327,500 of such options expire on August 21, 2002 and 50,000
expire on February 9, 2002.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
In February 1995, the Company entered into a 10 year lease consisting of
23,000 square feet for its executive offices and manufacturing operations in
North York, Ontario. The lease is with 1001 Petrolia Road Limited Partnership
("Petrolia L.P."), the general partner being Ontario Inc. Jack Berkovits,
Chairman, CEO and President of the Company, is the sole owner, officer and
director of that general partner. Current rent is $100,605 and increases each
year by the greater of $.37 a square foot or the percentage increase in the
Consumer Price Index for the Municipality of Metropolitan Toronto. Additionally,
the Company is paying real estate taxes, utilities and insurance aggregating
$95,000 per year for this facility. See Item 2 - Description of Property.
Management is of the opinion that the lease is on terms as favorable as
obtainable from unaffiliated third parties.
Petrolia L.P. through #1013418 Ontario, Inc., the general partner, owned by
Mr. Berkovits, has obtained a five year $660,000 mortgage on the property, which
at April 30, 1998 was in the principal amount of $565,000, with interest at 5%
per annum. The Company is a guarantor of this mortgage. See "Note 10" to "Notes
to Consolidated Financial Statements."
Jack Berkovits loaned the Company monies from time to time for operations
and working capital which sums at April 30, 1998 aggregated approximately $1.9
million and the
31
<PAGE>
weighted average interest rate was 10%. In 1997, the Company repaid $1.2 million
of such loans, including payments to a third party, Laurbrad Holdings Limited,
who had loaned funds to Mr. Berkovitz. Mr. Berkovitz loaned the funds to the
Company on the same terms, which included a 20% annual interest rate.
Diamante is a Canadian company operating under the name Oromart which has
five retail jewelry stores. Diamante is owned by a former Vice President of the
Company, Drew Bricker, who is also Diamante's President (since 1984). In 1986,
when Mr. Bricker joined the Company as Vice President of Marketing, Diamante
became inactive. It reinitiated jewelry outlet stores in 1994. Pursuant to an
agreement between the Company and Diamante, recently rescinded, the Company
acted as exclusive supplier of inventory to Diamante. In 1994 and 1995, the
Company had advanced approximately $50,000 to Diamante to initiate the Diamante
stores including leasehold improvements all of which has been repaid. The
Company does not anticipate advancing any further funds to Diamante. The
inventory provided to Diamante, consists primarily of manufacturing surplus,
returns or refurbished jewelry, and on occasion gold chains and watches
purchased by the Company for resale to Diamante. The inventory is secured by a
registered security agreement covering the assets of Diamante, which security
agreement has been assigned to The Bank of Nova Scotia which holds a substantial
security interest in the assets of the Company. Diamante has guaranteed the
Company's bank financing and provided the bank with a direct security interest
in its assets. The Company consolidated, for financial reporting purposes, with
Diamante until February 7, 1997, the termination date of the agreement with
Diamante reflecting the Company's control over that retail operation. The
Company performs certain administrative functions for Diamante. See Item 9.
Diamante leases each facility for its five stores, of which two leases are
guaranteed by the Company. Each of these two leases are terminable by Diamante
on 90 days written notice, and each is for five years, is a net, net lease, with
renewal options, one lease for a rental of approximately $17,000 per year plus
taxes, maintenance, insurance and utilities. The other guaranteed lease calls
for a rental of approximately $20,000 per year plus taxes, maintenance,
insurance and utilities.
All transactions between the Company, its officers, directors, principal
shareholders or affiliates are, in the opinion of management, except for the
interest rate charges on a portion of Mr. Berkovits' loans which are above the
market rate, on terms no less favorable to the Company then may be obtained from
unaffiliated third parties. All future transactions and loans between itself and
its officers, directors and 5% shareholders to be on terms no less favorable
than could be obtained from independent, unaffiliated parties and will be
approved by a majority of the independent, disinterested directors of the
Company.
32
<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES.
Not applicable.
33
<PAGE>
PART IV
ITEM 17. FINANCIAL STATEMENTS
See Pages F-1 to F -
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
(a). See the Exhibit to the Financial Statements on Page F-1.
(b). Exhibit Index
Exhibit
Number Description
------ -----------
3(a) Articles of Incorporation+
(b) By-laws of the Company+
4(a) Form of Common Stock Certificate of the Company+
(b) Form of Redeemable Common Stock Purchase Warrant+
(c) Form of Underwriters' Options+
(d) Form of Warrant Agreement between the Company, American
Stock Transfer & Trust Co. and Joseph Dillon & Company,
Inc.+
5(a) Opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP
10(a) Lease between 1013418 Ontario Inc., In Trust and the
Company dated February 1, 1995+
(b) Operating Credit Line between the Company and The Bank of
Nova Scotia dated July 15, 1996+
(c) Security Agreement between the Company and The Bank of
Nova Scotia dated November 21, 1994+
(d) General Assignment by the Company to The Bank of Nova
Scotia dated November 21, 1994+
(e) Assignment of keyman life insurance by the Company to The
Bank of Nova Scotia dated November 29, 1994+
(f) Priority Agreement between the Company, The Bank of Nova
Scotia, Laurbrad Holdings Limited and Jack Berkovits
dated December 1, 1995+
(g) Priority Agreement between The Bank of Nova Scotia, Jack
Berkovits and Laurbrad Holdings Limited dated December 1,
1995+
34
<PAGE>
(h) Priority Agreement between the Company, The Bank of Nova
Scotia and Jack Berkovits dated December 1, 1995+
(i) Pledge and Assignment of Security Interest held by the
Company in Diamante Fine Jewellery Limited and The Bank
of Nova Scotia dated December 1, 1995 including General
Security Agreement from Diamante Fine Jewellery Limited
to the Company dated May 11, 1995.+
(j) Guarantee of payment by 1013418 Ontario, Inc. to The Bank
of Nova Scotia dated November 21, 1994+
(k) Collateral Mortgage from 1013418 Ontario, Inc. to The
Bank of Nova Scotia dated November 30, 1994+
(l) Loan Agreement between the Company and Jack Berkovits
dated May 31, 1995+
(m) Promissory Note of the Company to Jack Berkovits dated
May 31, 1995+
(n) Security Agreement granted by the Company to Jack
Berkovits dated May 31, 1995+
(o) Loan Agreement between the Company, Jack Berkovits and
Laurbrad Holdings Limited dated November 30, 1995+
(p) Loan Agreement between the Company and Jack Berkovits
dated November 30, 1995+
(q) Promissory Note of the Company to Jack Berkovits dated
November 30, 1995+
(r) Guarantee by the Company of Diamante Fine Jewellery
Limited Cookstown Mall Lease dated March 24, 1995+
(s) Guarantee by the Company of Diamante Fine Jewellery
Limited St. Jacobs Lease dated July 14, 1993+
(t) Promissory Note of the Company to Sherfam, Inc. dated
April 1, 1996+
(u) Equipment lease between the Company and The Bank of Nova
Scotia(three equipment leases substantially similar)
dated April 29, 1994+
(v) General Security Agreement from Diamante Fine Jewellery
Limited to The Bank of Nova Scotia dated August 4, 1995+
(w) Diamante Fine Jewellery Limited Guarantee of the
Company's Bank Financing dated August 1, 1995+
(x) Agreement between the Company and Diamante Fine Jewellery
Limited dated May 3, 1995+
(y) Agreement between Rent-A-Center and the Company dated
November 20, 1996, as clarified by letter dated December
13, 1996+
35
<PAGE>
(a)(a) 1996 Stock Option Plan of the Company+
(a)(b) Form of Stock Option Certificate under 1996 Stock Option
Plan+
(a)(c) Form of Lock-Up Letter by Jack Berkovits, the Berkovits
Family Trust and Mr. Berkovits' two sons+
(a)(d) Employment Agreement between the Company and Jack
Berkovits dated December 20, 1996, as amended+
(a)(e) Recission Agreement between the Company and Diamante Fine
Jewellery Limited dated February 7, 1997+
(a)(f) Purchase and Sale Agreement between Diamonair, Inc. and
Litton Systems, Inc. dated November 21, 1997.
(a)(g) Asset Purchase Agreement between the Company and Aviv,
Inc. dated February 10, 1998.
(a)(h) Employment Agreement between the Company and Gadi Beer
dated February 10, 1998.
23(a) Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP
(included on Page II-7)
(b) Consent of Grubner, Krauss (included in their opinion
filed as Exhibit 5(a))
(c) Consent of Schwartz Levitsky Feldman (included on
Page II-6)
24 Power of Attorney+
+ Documents previously filed with this Registration Statement
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, hereunder duly authorized.
For and on Behalf of
D.G. JEWELLERY OF CANADA LTD.
By: /s/ Gary Davis
-------------------------
Gary Davis
Vice President-Finance and Chief
Financial Officer
Date: June 25, 1998
37
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
TABLE OF CONTENTS
Report of Independent Auditors 1
Consolidated Balance Sheet 2
Consolidated Statement of Income 3
Consolidated Statement of Cash Flows 4
Consolidated Statement of Stockholders' Equity 5
Notes to Consolidated Financial Statements 6-18
<PAGE>
Schwartz Levitsky Feldman
CHARTERED ACCOUNTANTS
TORONTO, OTTAWA, MONTREAL
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
D.G. Jewellery of Canada Ltd.
We have audited the accompanying consolidated balance sheets of D.G.
Jewellery of Canada Ltd. (incorporated in Canada) and subsidiaries as of
December 31, 1997 and 1996 and the related consolidated statements of
income, cash flows and changes in stockholders' equity for the years
ended December 31, 1997 and 1996. These consolidated financial statements
are the responsibility of the company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of D.G.
Jewellery of Canada Ltd. and subsidiaries as of December 31, 1997 and
1996 and the results of their operations and their cash flows for the
years ended December 31, 1997 and 1996, in conformity with generally
accepted accounting principles in the United States of America.
[illegible Sig]
Toronto, Ontario
March 5, 1998 Chartered Accountants
1167 Caledonia Road
Toronto, Ontario M6A281
Tel: 416 785 5353
Fax: 436 785 5663
F-1
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Balance Sheet
As of December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
$ $
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Accounts receivable (notes 3, 8 and 10) 17,197,875 8,871,980
Inventory (notes 4, 8 and 10) 12,852,760 6,779,338
Cash surrender value of life insurance (note 5) 476,445 -
Prepaid expenses and sundry assets 169,696 67,267
---------- ----------
30,696,776 15,718,585
DEFERRED COSTS OF PUBLIC ISSUE - 131,777
PROPERTY, PLANT AND EQUIPMENT (notes 6, 8 and 10) 1,888,148 744,661
GOODWILL (note 7) 1,336,609 177,963
---------- ----------
33,921,533 16,772,986
========== ==========
</TABLE>
APPROVED ON BEHALF OF THE BOARD
_______________________Director
_______________________Director
F-2
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Balance Sheet
As of December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
$ $
LIABILITIES
CURRENT LIABILITIES
<S> <C> <C> <C>
Bank indebtedness (note 8) 12,120,832 8,321,794
Accounts payable and accrued expenses (note 9) 3,891,394 1,982,423
Income taxes payable 1,008,548 593,402
Current portion of loans payable (note 10) 3,441,109 1,195,936
Class B redeemable special stock (note 11) - 81,067
Other loan - 226,989
---------- ----------
20,461,883 12,401,611
LOANS PAYABLE (note 10) 2,864,997 1,080,838
DEFERRED INCOME TAXES (note 12) - 127,138
---------- ----------
23,326,880 13,609,587
---------- ----------
COMMITMENTS AND CONTINGENCIES (notes 16 and 17)
STOCKHOLDERS' EQUITY
COMMON STOCK (note 13) 6,700,827 84
CUMULATIVE TRANSLATION ADJUSTMENTS (359,434) (44,711)
RETAINED EARNINGS 4,253,260 3,208,026
---------- ----------
10,594,653 3,163,399
---------- ----------
33,921,533 16,772,986
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Statement of Income
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
$ $
Net sales 22,127,825 14,181,540
Cost of sales 15,677,870 11,374,603
---------- ----------
Gross profit 6,449,955 2,806,937
Operating expenses
Selling 1,188,308 588,809
General and administrative 2,463,242 541,456
---------- ----------
3,651,550 1,130,265
---------- ----------
Operating income 2,798,405 1,676,672
---------- ----------
Interest expenses 822,215 796,412
Other expenses 389,533 127,086
---------- ----------
1,211,748 923,498
---------- ----------
Income before income taxes 1,586,657 753,174
Provision for income taxes (note 12) 541,423 296,146
---------- ----------
Net income 1,045,234 457,028
========== ==========
Earnings per common share 0.22 0.11
========== ==========
Earnings per common share assuming dilution 0.22 0.11
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Statement of Cash Flows
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 1,045,234 457,028
------------ -----------
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Amortization 389,603 197,054
Increase in accounts receivable (8,325,895) (1,848,027)
Increase in inventory (6,073,422) (1,948,113)
Increase in cash surrender value
of life insurance (476,445) -
Increase in prepaid expenses
and sundry assets (102,429) (64,421)
Increase in accounts payable
and accrued expenses 1,908,971 1,186,529
Increase in income taxes payable 415,146 300,940
Decrease in deferred income taxes - (5,182)
------------ -----------
Total adjustments (12,264,471) (2,181,220)
------------ -----------
Net cash used in operating activities (11,219,237) (1,724,192)
------------ -----------
Cash flows from investing activities:
Purchases of property, plant and
equipment (1,491,736) (274,845)
Purchase of goodwill (1,200,000) -
Proceeds from disposal of property,
plant and equipment - 10,935
------------ -----------
Net cash used in investing activities (2,691,736) (263,910)
------------ -----------
Cash flows from financing activities:
Proceeds from/(repayment of)
loans payable 3,802,343 (303,488)
Issuance of capital stock 6,705,382 -
Deferred public issue costs - (131,777)
Redemption of capital stock (81,067) -
------------ -----------
Net cash provided by (used in) financing activities 10,426,658 (435,265)
------------ -----------
</TABLE>
F-5
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Statement of Cash Flows
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Effect of foreign currency exchange
rate changes (314,723) 20,966
----------- -----------
Net increase in bank indebtedness and
cash equivalents (3,799,038) (2,402,401)
Bank indebtedness and cash equivalents
- Beginning of year (8,321,794) (5,919,393)
----------- ----------
- End of year (12,120,832) (8,321,794)
=========== ==========
Interest paid 822,215 827,864
=========== ==========
Income taxes paid 43,000 -
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Consolidated Statement of Stockholders' Equity
For the years ended December 31, 1997 and 1996
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
Common Issued and
Stock Outstanding Cumulative
Number of Common Retained Translation
Shares Warrants Amount Earnings Adjustments
$ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 3,900,000 - 84 2,750,998 (65,677)
Foreign currency translation - - - - 20,966
Net income for the year - - - 457,028 -
--------- --------- --------- --------- --------
Balance as of December 31, 1996 3,900,000 - 84 3,208,026 (44,711)
Common stock issued (note 13) 1,265,000 1,265,000 6,700,743 - -
Foreign currency translation - - - - (314,723)
Net income for the year - - - 1,045,234 -
--------- --------- --------- --------- --------
Balance as at December 31, 1997 5,165,000 1,265,000 6,700,827 4,253,260 (359,434)
========= ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
1. BASIS OF CONSOLIDATED FINANCIAL STATEMENTS PRESENTATION
These financial statements consolidate, using the purchase method,
the accounts of the company and its two wholly-owned subsidiaries,
Diamonair, Inc. and Aviv, Inc. All material intercompany accounts
have been eliminated. Consolidation commenced with the effective
dates of acquisition of the operations of the subsidiary companies.
The year ends of the subsidiaries are December 31. Acquisition of the
operations of the subsidiaries was effected by the purchase of the
assets and trade name of Diamonair, Inc. from a third party,
effective November 21, 1997, and by the purchase of the assets and
trade name of Aviv, Inc. from a third party, effective June 1, 1997.
The purchases were effected through the company's wholly-owned
subsidiaries, Diamonair, Inc. and Aviv, Inc. and the final documents
were signed on November 21, 1997 and February 10, 1998 respectively.
Total assets acquired and total liabilities assumed by D.G. Jewellery
of Canada Ltd. as a result of these acquisitions is as follows:
<TABLE>
<CAPTION>
Aviv, Inc. Diamonair, Inc.
---------- ---------------
$ $
<S> <C> <C> <C>
Total assets (exclusive of goodwill) 4,286,000 4,549,000
Goodwill - 1,200,000
</TABLE>
The total amount of consideration given by D.G. Jewellery of Canada
Ltd. as a result of these acquisitions is as follows:
<TABLE>
<CAPTION>
Aviv, Inc. Diamonair, Inc.
---------- ---------------
$ $
<S> <C> <C> <C>
Cash - 5,749,000
Accounts payable 988,500 -
Loans payable (as described in note 10) 3,297,500 -
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i) Principal Activities
The company was incorporated in Canada on October 18, 1979. The
company is principally engaged in the production and trading of
jewellery in Canada and the United States of America.
ii) Bank indebtedness and Cash Equivalents
Bank indebtedness and cash equivalents include cash on hand,
amounts due to banks, and any other highly liquid investments
purchased with a maturity of three months or less. The carrying
amount approximates fair value because of the short maturity of
those instruments.
F-8
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
iii) Other Financial Instruments
The carrying amount of the company's other financial instruments
approximates fair value because of the short maturity of these
instruments or the current nature of interest rates borne by
these instruments.
iv) Long-term Financial Instruments
The fair value of each of the company's long-term financial
assets and debt instruments is based on the amount of future
cash flows associated with each instrument discounted using an
estimate of what the company's current borrowing rate for
similar instruments of comparable maturity would be.
v) Accounts Receivable and Accounts Payable
In certain instances, the company's practice is to sell to and
purchase from the same entities. In such circumstances, on a
periodic basis, the payable is set-off against the receivable as
payment. Until such time as such a set-off occurs, the
respective receivable and payable amounts are reported on a
gross basis. At year end, amounts owing to the company from
customers who participate in this practice was approximately
$100,000 ($4.2 million as at December 31, 1996). Of this amount,
$35,000 ($1.5 million as at December 31, 1996) was owed to these
customers as at December 31, 1997.
vi) Inventory
Raw materials and work-in-process are valued at the lower of
cost (first-in, first-out basis) or market.
Finished goods are valued at the lower of cost or market. Cost
is calculated using selling price less normal gross margin.
vii) Depreciation
Depreciation is provided over the estimated useful lives of the
assets, principally using the declining balance method.
viii) Goodwill
Goodwill is the excess of cost over the value of tangible assets
acquired. It is amortized on the straight-line basis over 25 to
40 years.
ix) Sales
Sales represents the invoiced value of goods supplied to
customers. Sales are recognized upon delivery of goods and
passage of title to customers.
F-9
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
x) Income taxes
The company accounts for income tax under the provisions of
Statement of Financial Accounting Standards No. 109, which
requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial
statement bases of assets and liabilities.
xi) Accounting Changes
On January 1, 1996, the company adopted the provision of SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires
that long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995.
Adoption of SFAS No. 121 did not have a material impact on the
company's result of operations.
In December 1995, SFAS No. 123, Accounting for Stock-Based
Compensation, was issued. It introduced the use of a fair
value-based method of accounting f0r stock-based compensation.
It encourages, but does not require, companies to recognize
compensation expense for stock-based compensation to employees
based on the new fair value accounting rules. Companies that
choose not to adopt the new rules will continue to apply the
existing accounting rules contained in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees.
However, SFAS No. 123 requires companies that choose not to
adopt the new fair value accounting rules to disclose pro forma
net income and earnings per share under the new method. SFAS No.
123 is effective for financial statements for fiscal years
beginning after December 15, 1995. The company has adopted the
disclosure provisions of SFAS No. 123.
xii) Foreign Currency Translation
The translation of the financial statements from Canadian
dollars ("CDN $") into United States dollars is performed for
the convenience of the reader. Balance sheet accounts are
translated using closing exchange rates in effect at the balance
sheet date and income and expense accounts are translated using
an average exchange rate prevailing during each reporting
period. No representation is made that the Canadian dollar
amounts could have been, or could be, converted into United
States dollars at the rates on the respective dates and or at
any other certain rates. Adjustments resulting from the
translation are included in the cumulative translation
adjustments in stockholders' equity.
F-10
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
xiii) Net Income Per Weighted Average Common Stock
Net income per common stock is computed by dividing net income
for the year by the weighted average number of common stock
outstanding during the year.
xiv) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principals in the United States of
America requires management to make estimates and assumptions
that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Accounts receivable 17,690,675 8,972,747
Less: Allowance for doubtful accounts 492,800 100,767
---------- ---------
Accounts receivable, net 17,197,875 8,871,980
========== =========
</TABLE>
4. INVENTORY
Inventory comprised of the following:
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Raw materials 2,244,686 1,526,385
Work-in-process 590,778 248,792
Finished goods 10,017,296 5,004,161
---------- ---------
12,852,760 6,779,338
========== =========
</TABLE>
5. CASH SURRENDER VALUE OF LIFE INSURANCE
The cash surrender value of life insurance represents the value of
life insurance policies of the former directors of Aviv, Inc.
Subsequent to December 31, 1997, the majority of the policies were
redeemed for proceeds aggregating $393,285.
F-11
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Office equipment 327,565 165,569
Machinery and manufacturing equipment 1,025,183 268,561
Computer equipment and software 189,653 140,118
Automobile 6,000 -
Leasehold improvements 340,906 208,459
Waxes and moulds 1,466,264 1,081,129
--------- ---------
Cost 3,355,571 1,863,836
--------- ---------
Less: Accumulated amortization
Office equipment 130,512 110,960
Machinery and manufacturing equipment 265,913 169,440
Computer equipment and software 121,260 111,426
Automobile - -
Leasehold improvements 68,795 37,794
Waxes and moulds 880,943 689,555
--------- ---------
1,467,423 1,119,175
--------- ---------
Net 1,888,148 744,661
========= =========
</TABLE>
7. GOODWILL
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Cost 1,483,848 283,848
Less: Accumulated amortization 147,239 105,885
--------- ---------
Net 1,336,609 177,963
========= =========
</TABLE>
F-12
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
8. BANK INDEBTEDNESS
The bank loan bears interest at the bank's prime lending
rate plus 1/2% per annum (8.0% at December 31, 1997 and
5.25% at December 31, 1996) with interest payable monthly.
The weighted average interest rates incurred on the bank
loan were 5.42% and 6.58% per annum for the years ended
December 31, 1997 and December 31, 1996, respectively. As
security, the company has provided a general assignment of
accounts receivable, a general security agreement
constituting a first charge over all present and future
personal property of the company and an assignment of key
man life insurance of a director in the amount of $704,225
payable to the bank as of December 31, 1997 and $734,107 as
of December 31, 1996. The available line of credit under the
bank loan amounted to $16,549,000 as at December 31, 1997.
The company also provided to the bank an assignment of
accounts receivable, and a general security agreement
constituting a first charge over all present and future
property with UCC filings of security in the appropriate
jurisdictions of its subsidiary companies, as well as
hypothecation of all the shares of these subsidiaries. (See
note 1). Furthermore, an affiliated company (owned wholly by
the company's majority stockholders) has provided a general
security agreement constituting a first charge over its
present and future property and a corporate guarantee
secured by a collateral mortgage providing a second fixed
charge over its property. Furthermore, the company also
provided to the bank an assignment of all security taken by
the company from a related party, Diamante Fine Jewellery
Limited, over which it has effective control. Certain
stockholders have provided a postponement of their loans to
the company in an amount of $1,400,000.
The facility contains covenants specifying minimum and
maximum selected financial ratios. The agreement contains
restrictions on changes in ownership and line of business,
on further encumbrances of assets and on the guarantees and
other contingent liabilities.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Trade payables 3,240,877 1,582,701
Accrued expenses 650,517 399,722
--------- ---------
3,891,394 1,982,423
========= =========
</TABLE>
F-13
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
10. LOANS PAYABLE
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C> <C>
a) Loans from stockholders
Loans are secured by a general assignment of the
company's assets subject to the prior encumbrances
disclosed in note 8, $1,400,000 subordinated to the
company's banker and bear interest at 10% (9% for 1996) 1,965,148 1,080,838
b) Loan is provided by the company's banker, subject to
the encumbrances disclosed in note 8, bearing interest
at the prime lending rate of the company's bank plus 1%,
repayable in 36 equal monthly installments plus interest
with the final payment due in November 2000 1,369,327 -
c) Loan is provided by the bankers of Aviv, Inc., with no
specific terms of repayment. This loan was repaid in full
in February 1998 2,971,631 -
d) Repaid during the year - 1,195,936
--------- ---------
6,306,106 2,276,774
Less: Current portion 3,441,109 1,195,936
--------- ---------
2,864,997 1,080,838
========= =========
Aggregate maturities of loans payable are as follows:
1997 1996
$ $
Repayable during the following periods:
Within one year 3,441,109 1,195,936
Over one year but not exceeding two years 468,690 1,080,838
--------- ---------
3,909,799 2,276,774
========= =========
</TABLE>
The weighted average interest rates per annum incurred
were 9.5% for the year ended December 31, 1997 and
12.83% for the year ended December 31, 1996.
F-14
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
11. CLASS B REDEEMABLE SPECIAL STOCK
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Redeemable Special Stock
11,111 Class B special stock - 81,067
Less: Current portion - 81,067
======= =======
- -
======= =======
</TABLE>
These stock were redeemed during 1997.
12. INCOME TAXES
a) Significant components of provision for income taxes are:
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Current 541,423 301,328
Deferred - (5,182)
------- -------
541,423 296,146
======= =======
</TABLE>
b) Deferred income taxes represented the tax charges
derived primarily from temporary differences between
amortization of property, plant and equipment and
amortization of goodwill charged to operations and
amounts deducted from taxable income. As a consequence
of the issuance of common stock during the year, issue
expenses were incurred which are deductible for tax
purposes over five years. The deferred income taxes at
December 31, 1996 has been applied to the issue
expenses (note 13).
F-15
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
13. CAPITAL STOCK
a) D.G. Jewellery of Canada Ltd.
Authorized
An unlimited number of common stock
Issued
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
5,165,000 Common stock (3,900,000 in 1996) 6,587,602 84
1,265,000 Warrants 113,225 -
--------- --
6,700,827 84
========= ==
</TABLE>
b) All authorized classes of capital stock, other than common stock,
were eliminated during 1997.
c) During the year, the company issued 1,265,000 common shares and
1,265,000 warrants as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Proceeds received from issuance $7,716,500
Issue expenses (net of income taxes) 1,015,757
----------
Net proceeds $6,700,743
==========
</TABLE>
Net proceeds include the non-cash items of deferred costs of
public issue and deferred income tax recoveries.
d) As at December 31, 1997, the company had warrants outstanding to
purchase 1,265,000 shares of the common stock at $6.25 per
share. The warrants expire in 2001.
e) In December, 1996, the board of directors and stockholders
adopted the 1996 D.G. Jewellery of Canada Ltd. Stock Option Plan
(the "1996 Plan"), pursuant to which 500,000 shares of Common
Stock are provided for issuance. The 1996 Plan is administered
by the board of directors.
The 1996 Plan is for a period of ten years, expiring on December
15, 2006. Options may be granted to officers, directors,
consultants, key employees, advisors and similar parties who
provide their skills and expertise to the Company. Options
granted under the 1996 Plan may be exercisable for up to ten
years, may require vesting, and shall be at an exercise price
all as determined by the board.
The exercise price of an option may not be less than the fair
market value per share of Common Stock on the date the option is
granted in order to receive certain tax benefits under the
Income Tax Act of Canada (the "ITA"). The exercise price of all
future options will be at least 85% of the fair market value of
the Common Stock on the date of granting of the options.
F-16
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
13. CAPITAL STOCK (cont'd)
e) (cont'd)
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the Company become
available again for issuance under the 1996 Plan.
The 1996 Plan may be terminated or amended at any time by the
board of directors, except that the number of shares of Common
Stock reserved for issuance upon the exercise of options granted
under the 1996 Plan may not be increased without the consent of
the stockholders of the Company.
The Board has granted 172,500 Options to date under the 1996
Plan to 20 persons, including officers, directors and key
employees. The options are exercisable at $1.38 per share for
five years expiring February 9, 2002.
These options were not exercisable until August 20, 1997 at
which time they were able to be exercised up to 25% of the
amount of shares issueable under the Options, and an additional
25% each six month anniversary date thereafter.
None of these options have been exercised to date.
f) The underwriters for the issuance of the common shares in 1997
hold options to acquire 110,000 common shares at $9.90 and
110,000 warrants at 16.5(cent). This option expires in 2002.
14. Earnings Per Common Share
The company has adopted Statement No. 128, Earnings Per Share, which
requires presentation, in the consolidated statement of income, of
both basic and diluted earnings per share.
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Average common stock outstanding 4,743,333 3,900,000
Average common shares issuable 62,137 -
--------- ---------
Average common stock outstanding assuming dilution 4,805,470 3,900,000
========= =========
</TABLE>
The outstanding warrants and underwriters' options were not included
in the computation of earnings per common share assuming dilution
because the exercise prices were greater than the average market
price of the common shares.
F-17
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
15. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Rent paid to a company owned by stockholders 100,605 92,067
Interest paid to stockholders 217,724 293,578
</TABLE>
(See additional related party transactions disclosure in notes 10 and
17).
16. COMMITMENTS
The company has operating leases for leasehold improvements and
premises which extend through January 31, 2005. Rental and leasing
expenses for the year ended December 31, 1997 under these leases were
$169,500.
Future minimum rental payments as of December 31, 1997 under
agreements classified as operating leases with non-cancellable terms
in excess of one year, are as follows:
Payable during the following periods:
<TABLE>
<CAPTION>
<S> <C> <C>
Within one year $ 209,361
Over one year but not exceeding two years 215,185
Over two years but not exceeding three years 183,971
Over three years but not exceeding four years 125,158
Over four years but not exceeding five years 133,548
Thereafter 452,721
-------------
$ 1,319,944
=============
</TABLE>
17. CONTINGENCIES
The company is contingently liable under contested lawsuits amounting
to approximately $1,760,000. In the opinion of management there is no
merit for these claims and the company has filed counter claims. No
provision has been recorded in the accounts for possible losses or
gains. Should any expenditures be incurred by the company for the
resolution of these lawsuits, they will be charged to the operations
of the year in which such expenditures are incurred.
The company is contingently liable to a mortgage corporation for the
guarantee of a mortgage in the amount of approximately $575,000 given
to a party related to the major stockholders of the company.
F-18
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
18.SEGMENTED INFORMATION
a) Sales to Major Customers
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Sales to major customers $18,042,967 $ 2,659,931
Percentage of total sales 82% 19%
Accounts receivable due from major customers $14,446,215 $ 2,038,420
Percentage of total accounts receivable 84% 28%
Ongoing credit evaluations of each customer's financial
condition are performed and, generally, no collateral is
required. The company maintains reserves for potential credit
losses and such losses, in the aggregate, have not exceeded
management's expectations.
</TABLE>
b) Sales by Geographic Area
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Canada 7,848,152 10,991,826
United States of America 13,909,306 3,093,148
Other 325,478 -
----------- -----------
22,082,936 14,084,974
=========== ===========
</TABLE>
c) Net Income by Geographic Area
The company's accounting records do not readily provide
information on net income by geographic area. Management is of
the opinion that the proportion of net income based principally
on sales, presented below, would fairly present the results of
operations by geographic area.
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Canada 371,458 356,660
United States of America 658,371 100,368
Other 15,405 -
----------- -----------
1,045,234 457,028
=========== ===========
</TABLE>
F-19
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
18. SEGMENTED INFORMATION (cont'd)
d) Identifiable Assets by Geographic Area
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Canada 2,200,171 1,863,836
United States of America 1,155,400 -
----------- -----------
3,355,571 1,863,836
=========== ===========
e) Purchases From Major Suppliers
1997 1996
Purchases from major suppliers $ 6,928,865 $ 4,985,269
Percentage of total purchases 48% 45%
Accounts payable due to major suppliers $ 1,815,001 $ 663,705
Percentage of total suppliers 70% 26%
</TABLE>
F-20
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Amounts expressed in US dollars)
19. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the statements of income:
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C> <C>
Amortization of property, plant and equipment 348,248 184,838
Amortization of goodwill 41,355 12,216
------- -------
389,603 197,054
======= =======
Operating lease rentals for
- rented premises 187,075 141,104
- leasehold improvements 68,893 75,363
------- -------
255,968 216,467
======= =======
Interest expense on
- bank indebtedness 604,490 529,856
- loans payable 217,725 293,578
- other - 4,430
------- -------
822,215 827,864
======= =======
</TABLE>
20. INVESTMENT TAX CREDITS
As of December 31, 1997 and December 31, 1996 the company has made
claims to Revenue Canada for research and research development
expenditures totalling $150,000. The related investment tax credits
refundable as December 31, 1997, which is approximately 35 cents per
dollar of expenditure, have not been recognized for accounting
purposes, and will be accounted for as reduction of the related
current or capital expenditure when they are approved by Revenue
Canada.
21. COMPARATIVE FIGURES
Certain figures in the December 31, 1996 consolidated financial
statements have been reclassified to conform with the basis of
presentation used in 1997.
F-21
<PAGE>
(b). Exhibit Index
Exhibit
Number Description
------ -----------
3(a) Articles of Incorporation+
(b) By-laws of the Company+
4(a) Form of Common Stock Certificate of the Company+
(b) Form of Redeemable Common Stock Purchase Warrant+
(c) Form of Underwriters' Options+
(d) Form of Warrant Agreement between the Company, American
Stock Transfer & Trust Co. and Joseph Dillon & Company,
Inc.+
5(a) Opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP
10(a) Lease between 1013418 Ontario Inc., In Trust and the
Company dated February 1, 1995+
(b) Operating Credit Line between the Company and The Bank of
Nova Scotia dated July 15, 1996+
(c) Security Agreement between the Company and The Bank of
Nova Scotia dated November 21, 1994+
(d) General Assignment by the Company to The Bank of Nova
Scotia dated November 21, 1994+
(e) Assignment of keyman life insurance by the Company to The
Bank of Nova Scotia dated November 29, 1994+
(f) Priority Agreement between the Company, The Bank of Nova
Scotia, Laurbrad Holdings Limited and Jack Berkovits
dated December 1, 1995+
(g) Priority Agreement between The Bank of Nova Scotia, Jack
Berkovits and Laurbrad Holdings Limited dated December 1,
1995+
F-22
<PAGE>
(h) Priority Agreement between the Company, The Bank of Nova
Scotia and Jack Berkovits dated December 1, 1995+
(i) Pledge and Assignment of Security Interest held by the
Company in Diamante Fine Jewellery Limited and The Bank
of Nova Scotia dated December 1, 1995 including General
Security Agreement from Diamante Fine Jewellery Limited
to the Company dated May 11, 1995.+
(j) Guarantee of payment by 1013418 Ontario, Inc. to The Bank
of Nova Scotia dated November 21, 1994+
(k) Collateral Mortgage from 1013418 Ontario, Inc. to The
Bank of Nova Scotia dated November 30, 1994+
(l) Loan Agreement between the Company and Jack Berkovits
dated May 31, 1995+
(m) Promissory Note of the Company to Jack Berkovits dated
May 31, 1995+
(n) Security Agreement granted by the Company to Jack
Berkovits dated May 31, 1995+
(o) Loan Agreement between the Company, Jack Berkovits and
Laurbrad Holdings Limited dated November 30, 1995+
(p) Loan Agreement between the Company and Jack Berkovits
dated November 30, 1995+
(q) Promissory Note of the Company to Jack Berkovits dated
November 30, 1995+
(r) Guarantee by the Company of Diamante Fine Jewellery
Limited Cookstown Mall Lease dated March 24, 1995+
(s) Guarantee by the Company of Diamante Fine Jewellery
Limited St. Jacobs Lease dated July 14, 1993+
(t) Promissory Note of the Company to Sherfam, Inc. dated
April 1, 1996+
(u) Equipment lease between the Company and The Bank of Nova
Scotia(three equipment leases substantially similar)
dated April 29, 1994+
(v) General Security Agreement from Diamante Fine Jewellery
Limited to The Bank of Nova Scotia dated August 4, 1995+
(w) Diamante Fine Jewellery Limited Guarantee of the
Company's Bank Financing dated August 1, 1995+
(x) Agreement between the Company and Diamante Fine Jewellery
Limited dated May 3, 1995+
(y) Agreement between Rent-A-Center and the Company dated
November 20, 1996, as clarified by letter dated December
13, 1996+
F-23
<PAGE>
(a)(a) 1996 Stock Option Plan of the Company+
(a)(b) Form of Stock Option Certificate under 1996 Stock Option
Plan+
(a)(c) Form of Lock-Up Letter by Jack Berkovits, the Berkovits
Family Trust and Mr. Berkovits' two sons+
(a)(d) Employment Agreement between the Company and Jack
Berkovits dated December 20, 1996, as amended+
(a)(e) Recission Agreement between the Company and Diamante Fine
Jewellery Limited dated February 7, 1997+
(a)(f) Purchase and Sale Agreement between Diamonair, Inc. and
Litton Systems, Inc. dated November 21, 1997.
(a)(g) Asset Purchase Agreement between the Company and Aviv,
Inc. dated February 10, 1998.
(a)(h) Employment Agreement between the Company and Gadi Beer
dated February 10, 1998.
+ Documents previously filed with the Company's Registration Statement
on Form SB-2
<PAGE>
Exhibit 10.(a)(f)
PURCHASE AND SALE AGREEMENT
BETWEEN
DIAMONAIR, INC., AS BUYER,
AND
LITTON SYSTEMS, INC., AS SELLER
NOVEMBER 14, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1
Transfer of Properties, Rights and Assets In Exchange for Cash and the Assumption of
Liabilities................................................................................................ 2
1.1 Transfer of Assets................................................................................. 2
1.2 Excluded Assets.................................................................................... 3
1.3 Consideration...................................................................................... 4
1.4 Purchase Price and Payment......................................................................... 4
(a) Payment on the Closing Date.................................................................. 4
(b) Determination of Purchase Price.............................................................. 4
(c) Settlement of Purchase Price................................................................. 6
(d) Allocation of Consideration.................................................................. 6
1.5 Liabilities Assumed by Buyer....................................................................... 6
1.6 Liabilities Not Assumed by Buyer................................................................... 7
SECTION 2
Closing Date................................................................................................. 8
SECTION 3
Representations and Warranties of Seller..................................................................... 9
3.1 Corporate.......................................................................................... 9
(a) Due Organization............................................................................. 9
(b) Power and Authority to Enter Into Agreement.................................................. 9
(c) Due Execution and Enforceability............................................................. 9
3.2 Non-Contravention.................................................................................. 9
3.3 1997 Balance Sheet................................................................................. 10
3.4 Liens.............................................................................................. 10
3.5 Contracts.......................................................................................... 10
3.6 No Litigation...................................................................................... 11
3.7 Brokers' or Finders' Fees.......................................................................... 11
3.8 Consents........................................................................................... 11
3.9 Government Authorizations and Compliance with Laws................................................. 11
3.10 Accounts Receivable; Inventory; Equipment.......................................................... 12
3.11 Intellectual Property.............................................................................. 12
3.12 Taxes.............................................................................................. 13
3.13 Employee Benefits.................................................................................. 13
3.14 Environmental...................................................................................... 13
3.15 Expiration of Representations and Warranties....................................................... 13
3.16 No Other Warranties................................................................................ 14
SECTION 4
Representations and Warranties of Buyer...................................................................... 14
4.1 Corporate.......................................................................................... 14
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
(a) Due Organization............................................................................. 14
(b) Power and Authority to Enter Into Agreement.................................................. 14
(c) Due Execution and Enforceability............................................................. 14
4.2 Non-Contravention.................................................................................. 15
4.3 No Litigation...................................................................................... 15
4.4 Brokers' or Finders' Fees.......................................................................... 15
4.5 Consents........................................................................................... 15
4.6 Expiration of Representations and Warranties....................................................... 15
SECTION 5
Non-Competition and Confidentiality Agreement................................................................ 16
5.1 Non-Competition Agreement.......................................................................... 16
(a) Definition................................................................................... 16
(b) Limitations on Non-Competition Agreement..................................................... 16
5.2 Confidentiality.................................................................................... 17
5.3 Injunctive and Equitable Relief.................................................................... 17
SECTION 6
Pre and Post-Closing Matters................................................................................. 18
6.1 Intentionally Omitted.............................................................................. 18
6.2 Transition Services ............................................................................... 18
6.3 Access to Books and Records........................................................................ 18
6.4 Cooperation........................................................................................ 19
6.5 Further Instruments and Assurance.................................................................. 19
6.6 Use of Litton Trademark and Notice to Customers.................................................... 20
6.7 Employee Matters................................................................................... 20
(a) Offers of Employment; Definition of Offerees and Continuing Employees........................ 20
(b) Employee Benefits............................................................................ 21
(c) Severance Pay................................................................................ 21
(d) Other Pre-Closing Employment Related Liabilities............................................. 21
(e) Notices Including WARN Act Notices........................................................... 21
6.8 Use of Names....................................................................................... 21
6.9 Remittance of Payments Due Other Party............................................................. 22
6.10 UCC Financing Statements........................................................................... 22
6.11 Allexite........................................................................................... 22
SECTION 7
Indemnification and Reimbursement............................................................................ 22
7.1 Indemnification by Seller.......................................................................... 22
(a) Misrepresentation or Breach of Warranty...................................................... 22
(b) Breach of Covenant or Agreement.............................................................. 23
(c) Excluded Assets and Excluded Liabilities..................................................... 23
7.2 Indemnification by Buyer........................................................................... 23
(a) Misrepresentation or Breach of Warranty...................................................... 23
(b) Breach of Covenant or Agreement.............................................................. 23
(c) Assumed Liabilities.......................................................................... 23
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
(d) Operations After Effective Date.............................................................. 23
7.3 Procedure.......................................................................................... 23
7.4 Limitation On Indemnity............................................................................ 24
7.5 Sole Remedy........................................................................................ 25
SECTION 8
Guarantee of Parent.......................................................................................... 25
8.1 Consideration...................................................................................... 25
8.2 Continuing Guarantee............................................................................... 25
8.3 Waiver of Modification Defense..................................................................... 25
8.4 Waiver of Other Defenses........................................................................... 26
SECTION 9
Miscellaneous Provisions..................................................................................... 26
9.1 Public Statements and Press Releases............................................................... 26
9.2 Costs, Expenses and Sales Taxes.................................................................... 26
9.3 Amendment and Modification......................................................................... 27
9.4 No Assignment...................................................................................... 27
9.5 Notices............................................................................................ 27
9.6 Counterparts....................................................................................... 27
9.7 Headings and Table of Contents..................................................................... 27
9.8 Schedules and Exhibits............................................................................. 28
9.9 Waiver............................................................................................. 28
9.10 Governing Law and Resolution of Disputes........................................................... 28
9.11 No Third Party Beneficiaries....................................................................... 28
9.12 Construction....................................................................................... 28
9.13 Entire Agreement................................................................................... 28
9.14 References to Sections, Schedules and Exhibits..................................................... 29
</TABLE>
iii
<PAGE>
LIST OF EXHIBITS
Forms Of Closing Documents
Exhibit Description
------- -----------
A Sublease
B Bill of Sale and Assignment
C Assumption Agreement
D Seller's Opinion
E Buyer's Opinion
1.4(d) Allocation of Purchase Price
LIST OF SCHEDULES
Schedule Description
-------- -----------
1.4(a) Wire Transfer Instructions
3.3 1997 Balance Sheet
3.5 Contracts
3.8 Seller's Consents and Permits
3.9 Compliance with Laws
3.10(a) Receivables
3.10(b) Inventory
3.10(c) Financing Statements
3.10(d) Equipment
3.11 Intellectual Property and Software
3.13(a) Employee Compensation
3.13(b) Employee Benefits
3.14 Environmental Authorizations and Approvals
3.17 Knowledge
4.1(a) Jurisdictions
4.5 Buyer's Consents and Permits
6.2(a) Transition Services
6.7(b) Employee Benefits after Effective Date
iv
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT, made, entered into and effective on and as of this 14th
day of November, 1997, (the "Effective Date") by and between Diamonair, Inc., a
Delaware corporation ("Buyer"), and Litton Systems, Inc., a Delaware corporation
("Seller").
BACKGROUND
1. Seller is engaged in manufacturing, producing, distributing,
selling, and reselling jewelry incorporating simulated diamonds, semiprecious
stones and colored stones (the "Products"). Seller's product line with respect
to the Products is referred to as the "Diamonair Product Line".
2. As provided in Section 5 below, effective as of the Effective
Date, Seller will agree to be bound by a covenant not to compete. Further,
effective as of the Effective Date, Litton Industries, Inc. will agree to be
bound by such covenant not to compete.
3. Seller distributes and sells the Products from a facility
leased by it located at 54 Horsehill Road, Cedar Knolls, New Jersey (the
"Facility"). Effective as of the Effective Date, Buyer and Seller will execute
and deliver the Sublease in substantially the form of Exhibit A (the
"Sublease").
4. Seller desires to sell the Diamonair Product Line and certain
of its properties, rights and assets to Buyer, and Buyer desires to purchase and
acquire the Diamonair Product Line and such properties, rights and assets from
Seller, all in accordance with the terms and conditions of this Agreement.
5. On the Closing Date, Seller will execute and deliver to Buyer
(a) the Bill of Sale and Assignment in substantially the form of Exhibit B,
effective as of the Effective Date (the "Bill of Sale and Assignment"), and (b)
various assignments of trademarks to be filed with the appropriate United States
and Canadian government offices.
6. On the Closing Date, Buyer will execute and deliver to Seller
the Assumption Agreement in substantially the form of Exhibit C, effective as of
the Effective Date (the "Assumption Agreement").
7. The Sublease, the Bill of Sale and Assignment and the
Assumption Agreement are referred to herein as the "Transaction Agreements".
1
<PAGE>
8. Effective as of the Closing Date, Seller and Buyer will each
deliver to the other an opinion of counsel. The opinion of Seller's counsel will
be in substantially the form of Exhibit D. The opinion of Buyer's counsel will
be in substantially the form of Exhibit E.
NOW THEREFORE, in consideration of the terms and conditions of this
Agreement and the transactions provided for herein, the parties agree as
follows:
AGREEMENT
SECTION 1
Transfer of Properties, Rights and Assets
In Exchange for Cash and the Assumption of Liabilities
1.1 Transfer of Assets.
As of the Effective Date, Seller shall validly sell, transfer, assign,
and deliver to Buyer the Assets (as defined below), free and clear of all Liens
(as defined below) other than Permitted Liens (as defined below). The "Assets"
means all of the assets of every kind and nature, real, personal and mixed,
tangible and intangible, wherever located, owned by, used by or held for use by
Seller predominantly in connection with the Diamonair Product Line, including,
without limitation, any and all of the following assets:
(a) all accounts receivable relating exclusively to the Diamonair
Product Line (the "Receivables") including the pre-bankruptcy Montgomery Ward
receivable with respect to which Seller has established a reserve of 70% of the
value thereof as of the Effective Date, in addition to the reserve for doubtful
accounts of $25,000;
(b) the Products and any and all inventory of raw materials, work
in process, finished goods, supplies and packaging materials relating
exclusively to the Diamonair Product Line including an obsolescence and lower of
cost or market reserve of $200,000 (the "Inventory");
(c) any and all rights in and to all United States and foreign
trademarks, patents, copyrights, trademark, patent and/or copyright
applications, trade names, service marks and the like, and all other
intellectual property, whether arising under statute, common law or otherwise,
and whether registered or unregistered, predominantly used in connection with
the Diamonair Product Line and all goodwill associated with the foregoing and
the joint right to sue with Seller for infringements prior to the Effective Date
of this Agreement with respect to the foregoing, provided that with respect to
the trademark "LI", only to the extent provided in Section 6.6 below (all of the
foregoing, the "Intellectual Property");
(d) any and all fixed assets, machinery, equipment and all
tooling, dies, models, molds, fixtures, or other production assets owned by
Seller and used predominantly by Seller in the manufacture and testing of the
Products (the "Equipment");
2
<PAGE>
(e) any and all drawings, standards, specifications, bills of
material and similar assets used predominantly in connection with the Diamonair
Product Line;
(f) any and all sales and purchasing records pertaining
predominantly to the Diamonair Product Line;
(g) any and all of Seller's leasehold interest and rights in and
to its leased postage meter and mail machine;
(h) any and all computer software owned or licensed by Seller used
predominantly in the Diamonair Product Line ("Software");
(i) any and all rights under the executory sales orders, purchase
orders, financing statements, consignment agreements and other contracts and
agreements with respect to the Diamonair Product Line (the "Contracts");
(j) any and all mailing and customer lists, trade secrets,
goodwill and all other intangibles used predominantly in connection with the
Diamonair Product Line;
(k) any and all rights, to the extent transferable under
applicable law, in and to all authorizations, permits, licenses, registrations
and other regulatory approvals issued by any governmental entity relating
predominantly to the Diamonair Product Line ("Governmental Authorizations and
Approvals");
(l) any and all warranties, guarantees and rights of indemnity, at
common law, by contract or otherwise, to the extent transferable, relating to
any of the Assets; and
(m) any and all other rights relating to the Assets, including all
security agreements and other collateral in respect of any such Assets and
claims now existing or hereafter arising relating thereto.
1.2 Excluded Assets.
Seller shall not sell, transfer, assign or deliver to Buyer the
"Excluded Assets". The Excluded Assets are:
(a) assets or properties of Seller which are not Assets;
(b) cash;
(c) corporate stock books and records of Seller;
(d) all records and files relating to the Diamonair Product Line
other than as described in Section 1.1(f), and all records and files relating to
the Excluded Assets;
3
<PAGE>
(e) except for claims relating to the accounts receivable from
Montgomery Ward (which shall be sold and transferred to Buyer), all claims or
causes of action against third parties for breach of contract prior to the
Effective Date, or for contribution or indemnity based on acts or omissions of
such third party prior to the Effective Date;
(f) the IBM Model AS 400 computer;
(g) any claim, right or interest of Seller in and to any refund of
federal, state, foreign, or local income, sales, value added, franchise or other
taxes of any kind relating to any period ending on or prior to the Effective
Date and any deferred income or franchise tax assets of Seller; and
(h) any property, rights or assets related to the employee benefit
plans of Seller or any of its affiliates.
1.3 Consideration.
Upon the terms and subject to the conditions set forth in this
Agreement and in exchange and consideration for the Assets, Buyer shall:
(a) On the dates indicated below, pay and remit to Seller the
Purchase Price (as defined below), in accordance with and to the extent provided
in Section 1.4; and
(b) Assume as of the Effective Date the Assumed Liabilities (as
defined below).
1.4 Purchase Price and Payment.
(a) Payment on the Closing Date.
On the Closing Date, Buyer shall pay and remit to Seller by
wire transfer of immediately available United States denominated federal funds
to such bank account as is specified on Schedule 1.4(a), the sum of $5,749,000
(the "Estimated Purchase Price" as determined on Schedule 3.3).
(b) Determination of Purchase Price.
(i) Definition of Purchase Price.
The purchase price (the "Purchase Price") for the
Assets shall be 105% of net book value of the Assets (book value of the Assets
less the Assumed Liabilities, as they are reflected on the books of Seller as of
the Effective Date) provided, that for purposes of calculating such net book
value (A) the reserve for doubtful accounts shall be equal to $25,000, (B) the
reserve relating to the pre-bankruptcy Montgomery Ward account receivable shall
be equal to seventy percent (70%) of the amount thereof, and (C) the inventory
obsolescence and lower of cost or market reserve shall be equal to $200,000. The
net book value shall be determined in accordance with generally accepted
accounting principles applied
4
<PAGE>
on a basis consistent with the 1997 Balance Sheet (as defined in Section 3.3),
with the inventory valued based on the physical inventory taken immediately
prior to the Effective Date by Seller and observed by Buyer, and consignment
inventory valued as per the perpetual records of the Airtron Division of Seller.
(ii) Initial Calculation.
Within 30 calendar days after the Closing Date,
Seller shall provide a post-closing balance sheet, prepared on the basis as
provided in Section 1.4(b)(i) above, and a calculation of the Purchase Price
("Seller's Calculation"). Buyer shall have 30 calendar days following its
receipt of Seller's Calculation (the "Review Period") to review the same for
compliance with Section 1.4(b)(i). If Buyer objects to Seller's Calculation on
or before the expiration of the Review Period, Buyer shall deliver to Seller a
written statement itemizing Buyer's objections to Seller's Calculation. If no
such statement is delivered by Buyer to Seller within the Review Period, Buyer
shall be conclusively deemed to have accepted Seller's Calculation as
establishing the Purchase Price.
(iii) Resolution of Purchase Price.
(A) In the event that Buyer shall accept or shall be
conclusively deemed to have accepted Seller's Calculation, Seller's Calculation
shall establish the Purchase Price. In the event, however, that Buyer shall
object to Seller's Calculation within the Review Period, Seller and Buyer shall
promptly meet and in good faith attempt to resolve such objections.
(B) If any of such objections cannot be resolved
between Seller and Buyer within 30 days following Seller's receipt of Buyer's
statement of objections, then either party may require by written notice to the
other that the dispute be submitted to binding arbitration before a single
arbitrator in an arbitration hearing which shall not exceed one day in duration.
The arbitrator shall be mutually agreed upon by Buyer and Seller, or if Buyer
and Seller cannot so agree within 30 days, the arbitrator shall be a "Big 6"
accounting firm appointed by the American Arbitration Association.
(C) The arbitrator may request from the parties such
information and documents as the arbitrator feels necessary to resolve the
dispute and the parties may each present to the arbitrator such documents and
testimony as they feel is necessary to present their position, subject to the
following limitations: the hearing must be held within 30 days after the
appointment of the arbitrator; and the arbitrator shall be instructed by the
parties to render a written decision and award within 30 days after the
conclusion of the hearing. In resolving any disputed item, the arbitrator may
not assign a value to any item greater than the greatest value for such items
claimed by either party, or less than the smallest value for such item claimed
by either party, in each case, as presented to the arbitrator.
(D) The arbitration award shall be enforceable as a
final judgment in any court where jurisdiction may be found over the party
against whom enforcement is sought. The parties shall each bear their own costs
in connection with the arbitration, except
5
<PAGE>
that the compensation and expenses of the arbitrator shall be split equally
between the parties and shall be made part of the arbitrator's award. The
arbitrator shall determine all issues regarding such dispute, including without
limitation, procedure, discovery, arbitrability and waiver. The arbitrator shall
not have authority to make any award other than adjustment of the purchase price
in accordance with this Agreement. The arbitration hearing shall be held in the
New York City metropolitan area (including Northern New Jersey).
(c) Settlement of Purchase Price.
In the event that the Purchase Price as finally determined is
greater or less than the Estimated Purchase Price (such excess or deficiency,
being hereinafter referred to as the "Adjustment"), no later than three business
days following the date upon which the Purchase Price is finally determined as
provided for in this Section 1.4, Buyer shall pay and remit the Adjustment to
Seller if the Purchase Price is greater than the Estimated Purchase Price, or
Seller shall pay and remit the Adjustment to Buyer if the Purchase Price is less
than the Estimated Purchase Price plus interest at 6% (simple interest based on
a 365-day year). Payment of the Adjustment shall be made by wire transfer of
immediately available federal funds to the bank account specified by the
recipient.
(d) Allocation of Consideration.
The consideration given by Buyer under this Agreement
(including without limitation the payment of the Purchase Price and the
assumption of the Assumed Liabilities) shall be allocated among the Assets in
accordance with Section 1060 of the Internal Revenue Code of 1986, as amended,
the form of which is set forth on Exhibit 1.4(d). Within 60 days following the
date upon which the Purchase Price is finally determined, Buyer shall prepare an
Asset Acquisition Statement (Form 8594) and shall furnish a copy thereof to
Seller. Buyer and Seller shall proceed in good faith to agree on the Asset
Acquisition Statement.
1.5 Liabilities Assumed by Buyer.
On and as of the Effective Date, Buyer shall assume and agree to pay,
discharge and perform, when due and payable, the following debts, liabilities
and obligations (collectively, the "Assumed Liabilities"):
(a) All debts, liabilities, and obligations arising out of the
Contracts after the Effective Date (except as provided in Section 1.6(d) below);
(b) Accrued advertising liability as reflected on Seller's books
as of the Effective Date and deducted in determining the net book value of the
Assets pursuant to Section 1.4(b)(i);
(c) The obligation to issue credits with regard to the Products
sold by Seller prior to the Effective Date returned by the customer to Buyer
after the Effective Date;
6
<PAGE>
(d) All obligations to repair or replace products arising out of
Seller's warranties relating to defective materials and workmanship;
(e) All obligations arising under Governmental Authorizations and
Approvals from and after the Effective Date; and
(f) Except as expressly provided in Section 1.6(g), any claim,
proceeding or other action arising out of or relating to any actions of Buyer or
the existence of any state of facts related to the Assets arising after the
Effective Date, regardless of whether or not referred to in this Agreement or
otherwise disclosed or known to Seller.
1.6 Liabilities Not Assumed by Buyer.
All debts, liabilities and obligations of Seller other than the Assumed
Liabilities are referred to herein as the "Excluded Liabilities." Buyer shall
not assume, undertake, be bound by or be responsible for Excluded Liabilities.
Without limiting the definition of Excluded Liabilities, Excluded Liabilities
includes any debts or liabilities of Seller consisting of or arising out of, in
connection with or otherwise relating to the following:
(a) debts, liabilities or obligations of Seller either (A) not
related to the Diamonair Product Line or (B) related to the Diamonair Product
Line and arising on or prior to the Effective Date;
(b) debts, liabilities or obligations to any affiliate of Seller;
(c) except as expressly provided in Sections 1.5(c) and (d), any
claims whether made before or after the Effective Date, or any proceeding or
other action, whether commenced before or after the Effective Date, arising out
of any state of facts existing as of the Effective Date (regardless of whether
or not referred to in this Agreement or otherwise disclosed or known to Buyer);
(d) any Contract not effectively assigned to Buyer and which Buyer
does not directly or indirectly receive the benefits of;
(e) indebtedness for borrowed money;
(f) accounts payable;
(g) product liabilities relating to products either manufactured
by or on behalf of Seller or shipped by Seller on or prior to the Effective
Date;
(h) environmental liabilities arising or relating to any actions
or state of facts existing on or prior to the Effective Date;
(i) employee liabilities (including those under collective
bargaining or other labor agreements, or employee benefit plans) existing on or
prior to the Effective Date or, except as
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set forth in Section 6.7(c), arising on account of the consummation of the
transactions contemplated by this Agreement (including severance pay);
(j) violations of law arising or relating to any actions or state
of facts existing on or prior to the Effective Date;
(k) federal, state, local and foreign income, sales, value added,
franchise and other taxes attributable to any period or portion thereof that
includes any date prior to or including the Effective Date (other than transfer
taxes as provided in Section 9.2); and
(l) the debts, obligations or liabilities of any person or entity
owning or operating the Diamonair Product Line (or any portion thereof) or any
other business of Seller prior to Seller.
SECTION 2
Closing Date
Consummation of the transactions provided for in this Agreement shall
take place at the offices of Sills Cummis Zuckerman Radin Tischman Epstein &
Gross, P.A., One Riverfront Plaza, Newark, New Jersey 07102, on November 14,
1997, commencing at 9:00 a.m. local time on such date, or at such other date or
time or other place as the parties hereto may mutually agree upon in writing
(such date being referred to as the "Closing Date"). All transactions
contemplated by this Agreement shall be deemed to have occurred simultaneously
and to be effective as of 11:59 p.m. Eastern Daylight Savings Time on the
Effective Date. Consummation on the Closing Date of the transactions
contemplated by this Agreement is referred to herein as the "Closing".
SECTION 3
Representations and Warranties of Seller
Seller hereby represents and warrants to Buyer as follows:
3.1 Corporate.
(a) Due Organization.
Seller is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has all requisite
power and authority to own, lease and operate all of the Assets and to carry on
its business as and where it is now conducted. Seller is duly qualified to do
business and is in good standing in the State of New Jersey, which is the only
jurisdiction in which the character and location of the Assets or the nature of
the business transacted by it, require such qualification.
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(b) Power and Authority to Enter Into Agreement.
Seller has the corporate power and authority to enter into
this Agreement and the Transaction Agreements executed by Seller and, subject to
the conditions herein and therein provided, to consummate the transactions
contemplated hereby and thereby.
(c) Due Execution and Enforceability.
The execution, delivery and performance of this Agreement and
the Transaction Agreements executed by Seller have been duly and validly
authorized and approved by the Board of Directors of Seller and Seller has taken
all such other corporate action necessary or required to be taken by it to enter
into, execute and deliver this Agreement and the Transaction Agreements executed
by Seller and to perform its respective obligations hereunder and thereunder.
This Agreement and the Transaction Agreements executed by Seller constitute the
valid and legally binding obligations of Seller, enforceable against it in
accordance with their respective terms and conditions, except to the extent that
the same may be limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or similar laws affecting creditors' rights generally or
by general equitable principles.
3.2 Non-Contravention.
The execution, delivery and performance of this Agreement and the
Transaction Agreements executed by Seller on the part of Seller will not (a)
violate, conflict with or result in the breach of any of the terms or conditions
of, or constitute a default (with or without notice or lapse of time or both)
under, the Certificate of Incorporation or By-laws of Seller or, to Seller's
knowledge, any material agreement (other than agreements with customers) to
which Seller is a party or by which any of the Assets are or may be bound,
subject or affected or result in any rights of termination, acceleration or
cancellation with respect thereto; or (b) result in the creation or imposition
of any Lien.
3.3 1997 Balance Sheet.
Set forth on Schedule 3.3 is an unaudited balance sheet of Seller with
respect to the Diamonair Product Line as of a date reasonably proximate to the
Closing Date which includes only those assets of a type which would have
constituted Assets if the Closing had occurred on such date and includes only
those liabilities of a type which would have constituted Assumed Liabilities if
the Closing had occurred on the such date (the "1997 Balance Sheet"). The 1997
Balance Sheet was prepared in a manner consistent with the past reporting
practices and policies of the Airtron Division of Seller except for the failure
to include assets of a type not constituting Assets and the failure to include
liabilities of a type not constituting Assumed Liabilities. The 1997 Balance
Sheet is correct in all material respects, in accordance with all books and
records of Seller (and such books and records accurately reflect the
transactions of Seller with respect to the Diamonair Product Line). The 1997
Balance Sheet presents fairly in all material respects the Assets and the
Assumed Liabilities with respect to the Diamonair Product Line.
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3.4 Liens.
Seller owns and has good and marketable title to, and is hereby
conveying to Buyer, all of the Assets (including intellectual property rights),
free and clear of all Liens, except for Permitted Liens. No security agreement,
financing statement or other public notice with respect to all or any part of
the Assets is on file or of record in any public office except for notices filed
without Seller's consent or knowledge or disclosed on Schedule 3.10(c). "Lien"
means any mortgage, deed of trust, security interest, lien, pledge, charge,
equity, trust, hypothecation, easement, right of way, encroachment, other
encumbrance, lease, capital lease, sublease, license, occupancy agreement,
adverse claim or interest, covenant, possibility of reversion, option, right of
first refusal, mechanics' and materialmen's liens, inchoate liens, or other
ownership or interest in favor of any third party, burden, title defect,
restriction or limitation of any nature whatsoever, or the interest of a vendor
or lessor under any conditional sales agreement, or title retention agreement,
or deposit for security. "Permitted Lien" means (a) Liens for current taxes not
yet due and delinquent, being contested in good faith by appropriate proceedings
or as to which adequate reserves have been established by Seller; (b) statutory
Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen
and other similar persons and other Liens imposed by applicable law incurred in
the ordinary course of business for sums not yet delinquent or being contested
in good faith; (c) Liens relating to deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security; and (d) Liens to secure the payment of Assumed
Liabilities.
3.5 Contracts.
Set forth on Schedule 3.5 is a list of all Contracts as of a date
reasonably proximate to the Closing Date, including, without limitation, all
consignment and similar agreements of which Seller is aware. To Seller's
knowledge, Seller has performed all obligations required to be performed by it
thereunder (and is not otherwise in default or claimed or purported or alleged
to be in default thereunder) and, to Seller's knowledge, no other party thereto
is in default of any of its material obligations thereunder, and Seller has not
received or given notice of default with respect to any Contract. When used in
this Section 3.5, "default" includes a state of facts which with notice or lapse
of time or both would constitute a default on the part of any party in the
performance of any obligation to be performed or paid by any party under any
Contract. Seller has provided or made available to Buyer true and complete
copies of all Contracts in Seller's possession. Whenever Seller has represented
or covenanted herein or in any Transaction Agreement that it has provided or
furnished true and complete copies of or given or will give access to or
otherwise make available Contracts in Seller's possession or other documents in
Seller's possession, this includes the original document and all documents which
supplement, amend, otherwise modify or otherwise interpret (including letter
interpretations) such Contracts and other documents.
3.6 No Litigation.
There is no investigation, suit, action or other proceeding pending
against Seller (a) with respect to which there is a reasonable likelihood of a
determination which would have a
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material adverse effect on the ability of Seller to perform its obligations
under this Agreement, or (b) which seeks to enjoin or obtain substantial damages
in respect of the consummation of the transactions provided for in this
Agreement.
3.7 Brokers' or Finders' Fees.
No person or firm other than Seller and its affiliates (and their
respective directors, officers, employees, and outside accountants and
attorneys) has arranged, or participated in arranging, on behalf of Seller, the
transactions provided for in this Agreement. There are no brokers' or finders'
fees to be paid by Seller, and Seller has no knowledge of any claim (or the
reasonable basis therefor) for a broker's or finder's fee to be paid by Buyer in
connection with the consummation of the transactions provided for in this
Agreement.
3.8 Consents.
Except as set forth on Schedule 3.8, no consent or order of, or filing
or registration with, any governmental entity or any other person or entity on
the part of Seller is required for or in connection with the execution, delivery
and performance by it of this Agreement.
3.9 Government Authorizations and Compliance with Laws.
The Diamonair Product Line has been operated in such a manner to be
materially in compliance with all applicable legal requirements. Except as set
forth on Schedule 3.9, Seller has not received any notice from any Governmental
Authority to the effect that Seller is in violation of applicable legal
requirements other than in cases where Seller has cured or remedied such
noncompliance as of the Closing Date. To Seller's knowledge, Seller has not
committed any act or omission that could result in Seller not being in
compliance with applicable legal requirements which noncompliance could
individually or in the aggregate have a material adverse effect on the Assets or
the operations of the Diamonair Product Line as presently operated by Seller.
Except as set forth on Schedule 3.14, there are no material Governmental
Authorizations and Approvals (or applications pending with respect to any such
Governmental Authorizations and Approvals) necessary to operate the business
relating to the Diamonair Product Line as presently operated by Seller.
3.10 Accounts Receivable; Inventory; Equipment.
(a) The Receivables as of a date reasonably proximate to the
Effective Date, together with an aging analysis, are listed on Schedule 3.10(a).
The Receivables (i) constitute valid claims for the full amount against the
account debtor; (ii) arise from bona fide sales in the ordinary course of
business; (iii) except as set forth on Schedule 3.10(a), are not due from any
employees or affiliates of Seller; and (iv) to Seller's knowledge, are not
subject to any defense, set-off or counterclaim.
(b) Seller has no obligations, contingent or otherwise, to
repurchase or replace any Product that it has sold, other than in the ordinary
course of business or pursuant to the Contracts. A list of the Inventory is
listed on Schedule 3.10(b). Schedule 3.10(c) lists each
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financing statement (including amendments and renewals) in effect with respect
to the Inventory (collectively, the "Financing Statements"), along with the date
such Financing Statement was filed and the governmental office where such
Financing Statement was filed. The locations where the Seller maintains its
records concerning the Assets are 54 Horsehill Road, Cedar Knolls, New Jersey,
and 200 East Hanover Avenue, Morris Plains, New Jersey.
(c) The Equipment as of a date reasonably proximate to the Closing
Date is listed on Schedule 3.10(d). The Equipment is kept at 54 Horsehill Road,
Cedar Knolls, New Jersey.
3.11 Intellectual Property.
Schedule 3.11 sets forth a true, correct and complete list of all of
the Intellectual Property and Software as of the Effective Date other than
pre-packaged commercial personal computer Software. Except for pre-packaged
commercial personal computer software and items disclosed on Schedule 3.11, all
of the Intellectual Property is owned by Seller free and clear of all Liens and
is not subject to any license, royalty or other Agreement. None of the
Intellectual Property has been or is the subject of any pending or, to Seller's
knowledge, threatened litigation or claim of infringement. No license or royalty
agreement to which Seller is a party (i) is in breach or default by Seller or,
to Seller's knowledge, any other party thereto or (ii) the subject of any notice
of termination given or, to Seller's knowledge, threatened. The Intellectual
Property does not infringe any trademark, servicemarks, trade name, trade secret
or confidential or proprietary rights of any other person or entity and Seller
has not received any notice contesting Seller's right to use any such
Intellectual Property. Seller has no reason to believe that the Intellectual
Property infringes any copyrights or patents of any other person or entity and
Seller has not received any notice contesting Seller's right to use any such
Intellectual Property. Seller has not granted any license or agreed to pay or
receive any royalty in respect of any Intellectual Property or Software. Seller
owns or possesses adequate rights in and to all Intellectual Property necessary
in connection with the Diamonair Product Line as Seller presently conducts such
business.
3.12 Taxes.
Seller has filed or caused to be filed all federal, state and local tax
returns which are required to be filed by it (except to the extent that
extensions are in effect), and all such tax returns are complete, accurate and
in accordance with all applicable legal requirements, and all monies required to
be withheld by Seller from employees for income taxes, Social Security and
unemployment insurance taxes have been collected or withheld, and either paid to
the respective governmental entities or set aside in accounts for such purposes,
or accrued, reserved against, and entered upon the books of Seller. With respect
to Seller's sales taxes or other Taxes for which Buyer may be liable as a matter
of law under state law, there are no such taxes payable by Seller to any
governmental entity. For purposes of this Section 3.12, "Taxes" means any and
all federal, state, local or foreign taxes or assessments of any kind or nature
whatsoever, including any and all income, franchise, gross receipts, sales,
alternative, add-on, minimum, employment, real property, personal property,
business, capital stock, use and occupancy, ad valorem, transfer, license,
excise, stamp, other transfer, estimated,
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withholding, service, payroll and recording taxes and any related penalties,
charges, interest and other additions thereto.
3.13 Employee Benefits.
All employees employed by Seller in connection with the Diamonair
Product Line and their respective rates of pay as of the date hereof are listed
on Schedule 3.13(a). Except set forth on Schedule 3.13(a), none of such
employees are currently, or have within the last six months been, on leave.
Schedule 3.13(b) sets forth a complete list of all benefits provided to such
employees, including all benefit plans, policies, agreements and arrangements of
Seller.
3.14 Environmental.
Except as disclosed on Schedule 3.14, no Governmental Authorizations
and Approvals are required under any environmental laws for the operation of the
Diamonair Product Line as currently conducted by Seller. There are no pending,
civil or criminal actions or other type of proceedings against or affecting
Seller with respect to the operation of the Diamonair Product Line or the
Facility alleging any violation of or other proceedings pursuant to any
environmental laws. Seller is in material compliance with all environmental laws
with respect to the Facility and operations of the Diamonair Product Line as
presently conducted and has not knowingly committed any act or omission
resulting in such noncompliance.
3.15 Expiration of Representations and Warranties.
The representations and warranties contained in this Section 3 shall
expire eighteen (18) months from the Effective Date. Notwithstanding the
foregoing, representations and warranties contained in Section 3.4 shall survive
this Agreement indefinitely.
3.16 No Other Warranties.
EXCEPT AS SPECIFICALLY SET FORTH IN THIS SECTION 3, SELLER MAKES NO
EXPRESS OR IMPLIED WARRANTY WITH RESPECT TO THE ASSETS, AND SPECIFICALLY
EXCLUDES THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR PARTICULAR
PURPOSE. Without limiting
the generality of the preceding sentences, Seller specifically makes no warranty
as to the future prospects or profitability of the business of producing and
selling the Products.
3.17 Knowledge.
Whenever a representation or warranty is made herein by Seller to its
"knowledge," such knowledge shall be limited to the knowledge of those
individuals listed on Schedule 3.17.
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SECTION 4
Representations and Warranties of Buyer
Buyer hereby represents and warrants to Seller as follows:
4.1 Corporate.
(a) Due Organization.
Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
power and authority to own, lease and operate all of its Assets and to carry on
its business as and where it is now conducted. Buyer is duly qualified to do
business and is in good standing in the jurisdictions specified in Schedule
4.1(a).
(b) Power and Authority to Enter Into Agreement.
Buyer has the corporate power and authority to enter into this
Agreement and the Transaction Agreements executed by Buyer and, subject to the
conditions herein and therein provided, to consummate the transactions
contemplated hereby and thereby.
(c) Due Execution and Enforceability.
The execution, delivery and performance of this Agreement and
the Transaction Agreements executed by Buyer and Buyer's parent, D.G. Jewellery
of Canada Ltd. ("Parent") have been duly and validly authorized and approved by
the Board of Directors of Buyer and Parent, and each of Buyer and Parent has
taken all such other corporate action necessary or required to be taken by it to
enter into, execute and deliver this Agreement and the Transaction Agreements
executed by Buyer and Parent and to perform its respective obligations hereunder
and thereunder. This Agreement and the Transaction Agreements executed by Buyer
and Parent constitute the valid and legally binding obligations of Buyer and
Parent enforceable against them in accordance with their respective terms and
conditions, except to the extent that the same may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or similar laws
affecting creditors' rights generally or by general equitable principles.
4.2 Non-Contravention.
The execution, delivery and performance of this Agreement and the
Transaction Agreements executed by Buyer and Parent will not violate, conflict
with or result in the breach of any of the terms or conditions of, or constitute
a default (with or without notice or lapse of time or both) under, the
Certificate of Incorporation or By-laws of Buyer, or any agreement to which
Buyer or Parent is a party.
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4.3 No Litigation.
There is no investigation, suit, action or other proceeding pending
against Buyer or Parent (a) with respect to which there is a reasonable
likelihood of a determination which would have a material adverse effect on the
ability of Buyer or Parent to perform its obligations under this Agreement, or
(b) which seeks to enjoin or obtain substantial damages in respect of the
consummation of the transactions provided for in this Agreement.
4.4 Brokers' or Finders' Fees.
No person or firm other than Buyer and Parent (and their respective
directors, officers, employees and outside accountants and attorneys) have
arranged, or participated in arranging, on behalf of Buyer or Parent the
transactions provided for in this Agreement. There are no brokers' or finders'
fees to be paid by Buyer or Parent, and Buyer and Parent have no knowledge of
any claim (or the reasonable basis therefor) for a broker's or finder's fee to
be paid by Seller in connection with the consummation of the transactions
provided for in this Agreement.
4.5 Consents.
Except for the Bank of Nova Scotia and as set forth on Schedule 4.5, no
consent or order of, or filing or registration with, any governmental entity or
any other person or entity on the part of Buyer or Parent is required for or in
connection with the execution, delivery and performance by Buyer or Parent of
this Agreement.
4.6 Expiration of Representations and Warranties.
The representations and warranties contained in this Section 4 shall
expire eighteen (18) months from the Effective Date.
SECTION 5
Non-Competition and Confidentiality Agreements
5.1 Non-Competition Agreement.
(a) Definition.
In consideration of the benefits to be derived, directly and
indirectly, from this Agreement and the transactions provided for herein, Seller
covenants and agrees that for a period of five years from and after the
Effective Date neither it nor any of its affiliates shall directly or
indirectly, own, manage, operate, join, control or participate in the ownership,
management, operation or control of any business or corporation, company,
limited liability company, partnership or other entity (a "Company") engaged in
the manufacture, production, distribution, sale or resale of the Products (the
"Defined Business") or that competes, directly or indirectly, with the Diamonair
Product Line anywhere in the world.
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(b) Limitations on Non-Competition Agreement.
(i) Notwithstanding Section 5.1(a), Seller shall not be
prohibited from:
(A) the continued conduct and operation of the
business of manufacturing, producing, distributing, selling or reselling
products other than the Products and other products that compete directly or
indirectly with the Products and services in connection therewith;
(B) the acquisition, by asset purchase, stock
purchase, merger, consolidation or otherwise, of at least a majority of the
ownership of the business operations, rights and/or assets of any corporation,
company, partnership or other business entity (a "Company") partially engaged in
the Defined Business, provided that such activity does not exceed ten percent
(10%) of the net revenues, net assets or equity of such Company (the "10%
Limitation"), and provided, further, that if the 10% Limitation is not
satisfied, Seller may nonetheless make such acquisition so long as Seller shall
sell or otherwise dispose of the portion of the Company engaged in the Defined
Business to an unaffiliated third-party within a reasonable time (determined
assuming a sale on commercially reasonable terms, but in any event within nine
(9) months following such acquisition (subject to an extension upon Buyer's
exercise of its right of first refusal described below). Seller shall give Buyer
prompt written notice of any acquisition which does not satisfy the 10%
Limitation. Thereafter, Seller shall give Buyer written notice of any written
offer from an unaffiliated third-party (an "Offer") to purchase the portion of
the acquired Company engaged in the Defined Business to be sold or otherwise
disposed of by Seller. Buyer shall have a right of first refusal to purchase
such portion of the acquired Company on the same terms and conditions contained
in the Offer or, if no such Offer, based on commercially reasonable terms.
Within thirty (30) days after its receipt of such notice, Buyer shall give
Seller written notice of whether or not it intends to exercise such right of
first refusal. If Buyer exercises such right, such purchase shall be consummated
within sixty (60) days after Buyer gives written notice of acceptance to Seller;
or
(C) the direct or indirect ownership of not more
than five percent (5%) of any class of debt or equity security of any Company
engaged partially in the Defined Business, provided that such security is traded
on a national securities exchange or regularly quoted on NASDAQ, the National
Quotation Bureau, Incorporated or any similar or successor organization or
automated quotation system.
(ii) In the event that any provision of this Section 5.1
shall be held invalid or unenforceable by a court of competent jurisdiction by
reason of the geographic or business scope or the duration of such provision,
such invalidity or unenforceability shall attach only to the scope or duration
of such provision and shall not affect or render invalid or unenforceable any
other provision of this Agreement, and, to the fullest extent permitted by
applicable law, this Agreement shall be construed as if the geographic or
business scope or the duration of such provision had been more narrowly drafted
so as not to be invalid or unenforceable.
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5.2 Confidentiality.
For a period of three (3) years after the Closing, Seller shall not,
directly or indirectly, make any use of or disclose, or permit any of its
affiliates to, directly or indirectly, make any use of or disclose, any
Confidential Information for itself or himself or as an agent or employee of, on
behalf of, or in conjunction with, any other person or entity, including as an
owner, lender, proprietor, stockholder, partner, officer, director, manager,
employee, consultant or otherwise (collectively, "Capacity").
"Confidential Information" shall include, without limitation, product
information, market information, processes, trade secrets, information relating
to customers, information relating to suppliers, pricing information, other
financial information, advertising and marketing plans, current strategies and
contractual relations and other proprietary or confidential information, all of
the above which relate solely to the Diamonair Product Line; provided, that
"Confidential Information," as defined above, may be used by Seller in
connection with required legal filings, tax reporting, internal financial
reporting and planning to the extent required thereby and may be disclosed when
disclosure is required by an agency of the Government or under subpoena or other
court order to the extent required thereby, and provided, further, that
"Confidential Information" does not include any such information which becomes
generally available to the public other than as a result of a disclosure,
directly or indirectly, by Seller or its affiliates or has been disclosed by a
third party that did not receive such information from Seller or its affiliates
and who was not under any obligation of confidence at the time of disclosure.
5.3 Injunctive and Equitable Relief.
Seller covenants and agrees that Buyer's remedy at law for any breach
of Section 5.1 may be inadequate and that, in the event of any such breach by
Seller, Buyer shall be entitled to injunctive relief without posting bond or
other security in addition to any other remedy, at law, in equity or under this
Agreement to which it may be entitled. Without limiting the generality of the
preceding sentence, the parties acknowledge and agree that it is impossible to
measure in money all of the damages that would accrue to Buyer by reason of any
breach of Section 5.1. Seller waives in advance any claim or defense, in any
legal proceeding that may in the future be commenced by Buyer to enforce such
provisions, that Buyer has an adequate remedy at law and Seller agrees not to
urge in any legal proceeding that an adequate remedy at law exists.
SECTION 6
Pre and Post-Closing Matters
6.1 Intentionally Omitted.
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6.2 Transition Services.
For a period not to exceed twelve (12) months following the Closing
Date, unless extended by mutual agreement, Seller shall provide data processing
services of the types described on Schedule 6.2(a) at the rate of $17,500 per
month, payable on the first day of each month during which services are
provided. Buyer may terminate these services as of the end of any month, upon
written notice delivered 30 days prior to the requested termination date.
6.3 Access to Books and Records.
From and after the Closing Date, Seller and its authorized
representatives shall have reasonable access at Seller's expense, during normal
business hours and upon reasonable notice, to inspect and examine and the right
to photocopy all books and records constituting Assets (other than those of
which Seller has retained a copy) and Buyer and its authorized representatives
shall have reasonable access at Buyer's expense, during normal business hours
and upon reasonable notice, to inspect and examine and the right to photocopy
all books and records constituting Assets (other than those of which Buyer has
retained a copy).
For a period of six (6) years following the Effective Date, Buyer and
Seller shall consult with the other party prior to the destruction of any books
and records constituting Assets (other than those of which Seller has retained a
copy) which are normally retained in accordance with customary business
practices. If Buyer or Seller desires to destroy any books and records
constituting Assets (other than those of which the other party has retained a
copy), if requested by the other party, such party shall permit the other party
at its expense to take possession thereof.
6.4 Cooperation.
In the event that Seller or Buyer shall participate in any claim, suit,
action, proceeding or investigation concerning the business or affairs of the
Diamonair Product Line on, prior to or after the Effective Date, the other party
shall, upon the request of Seller or Buyer, as the case may be, cooperate fully
with Seller or Buyer, as the case may be, in connection therewith to the extent
that such other party has reasonable access to information which is unavailable
or not readily accessible to the Seller or Buyer, as the case may be. Buyer
shall, upon Seller's request, furnish to Seller in a timely manner all data and
information regarding the Diamonair Product Line on or prior to the Effective
Date or the Assets which Seller may reasonably require to calculate its income
tax liability in respect of the Diamonair Product Line on or prior to the
Effective Date and to prepare and file its tax returns and declarations in
respect thereof.
Cooperation under this Section 6.4 shall include making available to
the requesting party, at such times and under such circumstances so as not to
unreasonably disrupt business, the relevant information, documents, records,
employees and premises of the assisting party, allowing the relevant personnel
to assist the requesting party in participating in such claim, proceeding,
investigation or audit, executing and delivering the documents or instruments
and
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taking all such action as may be reasonably requested by the requesting party in
connection with such claim, proceeding or audit; provided, however, that the
requesting party shall promptly reimburse the assisting party for all
out-of-pocket costs, travel and subsistence expenses of any of employees of the
assisting party, and provided, further, that the requesting party and its
employees shall be subject to a confidentiality agreement if the assisting party
determines such agreement is necessary.
6.5 Further Instruments and Assurance.
From and after the Effective Date, the parties shall execute and
deliver to or cause to be executed and delivered to each other such further
instruments of transfer, assignment, conveyance and assumption as each may
reasonably require to more effectively carry out the transactions provided for
in this Agreement.
6.6 Use of Litton Trademark and Notice to Customers.
Buyer shall have no right to use the Litton name, trademark or any
derivations thereof, including any use thereof in any proposals, brochures,
promotional materials, advertisements, Internet "Web" pages, stationery or other
items or materials of any kind (whether in written form, electromagnetic media
or otherwise). However, Buyer shall be permitted to use, on a first-in,
first-out basis, in conduct and operation of the Diamonair Product Line the
existing inventories of catalogs and sales brochures which bear the name
"Litton" or any corporate symbols or logos incorporating "Litton", for the
period necessary to exhaust such inventories, but in no event longer than three
(3) months from and after the Closing Date; provided, however, that Buyer shall
use reasonable efforts from and after the Closing Date to overprint, overstamp,
apply an appropriate label or otherwise obliterate the name "Litton" or
corporate symbol logo on such items. Notwithstanding the foregoing, Buyer may
use the trademark "LI" to the extent marked on the Inventory or Products ordered
by Seller or being manufactured as of the Closing Date, and Seller hereby grants
to Buyer the right to order additional Products incorporating or using the
trademark "LI" for a period of thirty (30) days after the Closing Date. Buyer
agrees to sell or otherwise dispose of all Products incorporating or using the
trademark "LI" within five (5) years following the Closing Date.
Notwithstanding the provisions of this Section 6.6, Buyer shall not
represent or hold itself out to the public as representing or being affiliated
in any manner with Litton Industries, Inc. or Seller. Buyer shall cause all
Products sold by Buyer to be marked to show that such products were sold by
Buyer.
Buyer and Seller shall, jointly, promptly after the Closing Date notify
the current and recent customers, suppliers and vendors of the Diamonair Product
Line, and the other parties to the Assumed Liabilities, of the consummation of
the transactions provided for in this Agreement, including without limitation
the assumption by Buyer of the Contracts as of the Effective Date. The form of
such notice shall be subject to the prior approval of Seller, which approval
shall not be unreasonably delayed or withheld. Should Buyer or Seller fail to
promptly cooperate with the other for joint notification as required hereby, the
other may on
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its own and at its own volition make such notification as it in its sole
judgment is desired or required to be made.
6.7 Employee Matters.
(a) Offers of Employment; Definition of Offerees and Continuing
Employees.
As of the Closing Date, Buyer shall offer employment on an "at
will" basis to all of the employees of the Diamonair Product Line (the
"Offerees") except for Edward K. Kutiak who is on disability who Buyer shall
offer employment if he comes off of such disability on or prior to May 26, 1998.
Those Offerees who accept Buyer's offer of employment are referred to as the
"Continuing Employees"
(b) Employee Benefits.
Buyer shall provide to the Continuing Employees a salary at
least equal to such employee's salary in effect on the business day next
preceding the Effective Date, which amounts are set forth on Schedule 3.13(a),
and with the benefits substantially similar to those described on Schedule
6.7(b). Buyer shall recognize and give each Continuing Employee credit for all
prior service recognized by Seller for purposes of eligibility and vesting under
such benefit plans to the extent permitted by applicable law. Buyer shall obtain
the medical, dental, long-term disability, short-term disability benefits and
life insurance coverage for the Continuing Employees with a waiver of any
condition on benefits for preexisting conditions.
(c) Severance Pay.
If Buyer terminates the employment of any Continuing Employee
after the Closing Date, Buyer shall bear all severance pay liabilities according
to the Airtron Division of Seller's severance policy, as described on Schedule
3.13(b), recognizing credit for all prior service with the Airtron Division of
Seller.
(d) Other Pre-Closing Employment Related Liabilities.
Except as specifically set forth in this Section 6.7, Buyer
shall have no liability to or with respect to any employee or former employee of
Seller or any Continuing Employee with respect to his or her employment, or
based upon or arising out of any event occurring on or prior to the Effective
Date or as a result of consummation of the transactions contemplated by this
Agreement.
(e) Notices Including WARN Act Notices.
Seller shall give all notices and other information required
to be given to the employees of Seller, any collective bargaining unit
representing any group of employees of Seller, and any applicable government
authority under the WARN Act, the Consolidated Omnibus Budget Reconciliation
Act, ERISA, and other applicable law in connection with the transactions
provided for in this Agreement.
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6.8 Use of Names.
Seller agrees that after the Closing it will not, and will cause its
affiliates not to, use the name "Diamonair" or any other trade names,
expressions, corporate symbols, logos, service marks or trademarks of the
Diamonair Product Line or any derivative of any thereof or any name or logo etc.
that is confusingly similar to any thereof, in any form or manner or for any
purpose.
6.9 Remittance of Payments Due Other Party.
Each party hereto shall promptly remit to the other (but in no event
less than weekly with respect to the remittance to Buyer of all collections of
accounts receivable by Seller) any amounts received by it after the Closing Date
which, pursuant to the terms and conditions hereof, are properly payable to such
other party.
6.10 UCC Financing Statements.
After the Closing Date, Buyer may file UCC-1 financing statements with
respect to any Inventory which Buyer feels is not adequately protected. Seller
hereby agrees to reimburse Buyer for any legal fees, filing fees and other
expenses incurred by Buyer in connection with such filings up to an aggregate
amount of $25,000. Seller shall so reimburse Buyer within five (5) business days
after presentment by Buyer to Seller of invoices reflecting such fees and
expenses.
6.11 Allexite.
Seller is the owner of United States trademark registration No.
1,301,327 registered October 23, 1984 for the trademark "Allexite" for laser
rods and lasers that incorporate the rods for industrial and scientific use.
Seller agrees that after the Closing it will not, and will cause its affiliates
not to, use the trademark "Allexite" or any derivative thereof for jewelry and
Buyer agrees that after the Closing it will not, and will cause its affiliates
not to, use the trademark "Allexite" or any derivative thereof for laser rods
and lasers that incorporate the rods or for similar goods for industrial or
scientific use.
SECTION 7
Indemnification and Reimbursement
7.1 Indemnification by Seller.
Seller covenants and agrees to and shall indemnify Parent and its
subsidiaries (including Buyer) and their respective officers, directors and
employees (collectively, the "Buying Interests") and shall defend and hold the
Buying Interests harmless against and with respect to any and all loss, damage,
cost or expense, including without limitation all investigations, settlements,
judgments and reasonable attorneys' fees and costs relating thereto ("Loss")
suffered or incurred by the Buying Interests and resulting from or arising out
of:
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(a) Misrepresentation or Breach of Warranty.
Any misrepresentation or breach of warranty by Seller of any
of its representations or warranties set forth in this Agreement or in any
Transaction Agreement executed by Seller;
(b) Breach of Covenant or Agreement.
Any breach or nonfulfillment by Seller or Litton Industries,
Inc. of any of its covenants, agreements or other obligations set forth in this
Agreement or in any Transaction Agreement executed by Seller; and
(c) Excluded Assets and Excluded Liabilities.
Any Loss with respect to or arising from the Excluded Assets
and Excluded Liabilities.
7.2 Indemnification by Buyer and Parent.
Buyer and Parent covenant and agree to and shall indemnify Litton
Industries, Inc. and its subsidiaries and their respective officers, directors
and employees (collectively, the "Selling Interests") and shall defend and hold
the Selling Interests harmless against and with respect to any and all Loss
suffered or incurred by the Selling Interests and resulting from or arising out
of:
(a) Misrepresentation or Breach of Warranty.
Any misrepresentation or breach of warranty by Buyer or Parent
of any of their respective representations or warranties set forth in this
Agreement or in any Transaction Agreement executed by Buyer or Parent;
(b) Breach of Covenant or Agreement.
Any breach or nonfulfillment by Buyer or Parent of any of its
covenants, agreements or other obligations set forth in this Agreement or in any
Transaction Agreement executed by Buyer or Parent;
(c) Assumed Liabilities.
Any and all Assumed Liabilities; and
(d) Operations After Effective Date.
The production or sale of the Products by Buyer from and after
the Effective Date, and the use, application and disposition of the Assets by
Buyer on or after the Effective Date.
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7.3 Procedure.
(a) Promptly after acquiring knowledge of any claim in respect of
which a party (the "Indemnified Party") may seek indemnification from the other
party (the "Indemnifying Party") hereunder, the Indemnified Party shall give
written notice thereof to the Indemnifying Party describing such claim and
demanding indemnification hereunder. Notwithstanding the foregoing, failure to
provide the aforementioned notice will not relieve the Indemnifying Party of any
liability that it may have to the Indemnified Party under this Agreement, except
to the extent that (i) such failure to provide notice causes the amounts paid by
the Indemnifying Party to be greater than they would have been had such notice
been given on a reasonably timely basis, or (ii) such notice is not delivered to
the Indemnifying Party prior to the expiration of any applicable survival period
under Section 3.15 or 4.6. The Indemnifying Party will be entitled to assume
control of the defense of any claim, and to settle or compromise such claim in
its discretion, subject to the provisions of Section 7.3(b). After written
notice by the Indemnifying Party to the Indemnified Party of its election to
assume control of the defense of any such action, the Indemnifying Party shall
not be liable to such Indemnified Party hereunder for any legal expenses
subsequently incurred by such Indemnified Party in connection with the defense
thereof. Notwithstanding anything in this Section 7.3 to the contrary, if the
Indemnifying Party does not promptly assume control of the defense of such
action as provided in this Section 7.3, the Indemnified Party shall have the
right to defend such action in such manner as it may deem appropriate at the
cost and expense of the Indemnifying Party and the Indemnifying Party will
promptly reimburse the Indemnified Party therefor (subject, if applicable, to
the limitations contained in Section 7.4). An Indemnified Party may, at its
option and expense, participate in the defense of any indemnifiable claim.
(b) Neither the Indemnifying Party nor the Indemnified Party
shall, without the written consent of the other party, settle or compromise any
indemnifiable claim or permit a default or consent to entry of any judgment. If
a settlement offer solely for money damages is made by the applicable third
party claimant, and the Indemnifying Party notifies the Indemnified Party in
writing of the Indemnifying Party's willingness to accept the settlement offer
and pay the amount called for by such offer without reservation of any rights or
defenses against the Indemnified Party, the Indemnified Party may withhold its
consent and continue to contest such claim, free of any participation by the
Indemnifying Party, and the amount of any ultimate liability with respect to
such indemnifiable claim that the Indemnifying Party shall have an obligation to
pay thereunder (regardless of the ultimate Loss sustained by the Indemnified
Party) shall be equal to the amount of the settlement offer that the Indemnified
Party declined to accept plus the previously unpaid Losses of the Indemnified
Party relating to such indemnifiable claim through the date of its rejection of
the settlement offer. If the Indemnifying Party makes any payment on any
indemnifiable claim, the Indemnifying Party shall be subrogated, to the extent
of such payment, to all rights and remedies of the Indemnified Party to any
insurance benefits or other claims of the Indemnified party with respect to such
claim.
(c) Any amounts to which an Indemnifying Party is entitled under
this Section 7 shall be paid by the Indemnifying Party promptly upon request.
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7.4 Limitation On Indemnity.
Neither Seller nor Buyer shall have any obligation to indemnify and
hold harmless the other with respect to Sections 7.1(a) or 7.2(a) until the
aggregate of all claims against Seller or Buyer, as the case may be, in respect
thereof (including claims previously made) exceeds $50,000 and thereafter,
Seller and Buyer, as the case may be, shall indemnify and hold harmless the
Buying Interests or the Selling Interests, as the case may be, on a first dollar
basis. Seller shall have no obligation to indemnify and hold harmless Buyer with
respect to Section 7.1(a) after the aggregate amount of claims paid by Seller
with respect to Section 7.1(a) equals one hundred percent (100%) of the Purchase
Price.
7.5 Sole Remedy.
The making of a claim under the indemnification provisions of this
Agreement and legal action to enforce such claim shall be the sole remedy of
either the Buying Interests against Seller or the Selling Interest against Buyer
for matters within the scope of the indemnity provisions of this Agreement.
SECTION 8
Guarantee of Parent
8.1 Consideration.
In consideration of Seller entering into this Agreement with Buyer,
Parent hereby guarantees ("this Guarantee") to the Selling Interests the
obligations of Buyer pursuant to the Transaction Agreements, including, without
limitation, the indemnification obligation of Buyer under Section 7.2.
If the Selling Interests have any rights against Buyer, Parent agrees
and confirms that the Selling Interests can enforce those rights against Parent
as if it were a party to this Agreement, and Parent shall be primarily liable to
such Selling Interests, provided that Parent shall be entitled to all of the
rights and defenses of Buyer with respect thereto.
8.2 Continuing Guarantee.
This is a continuing guarantee, and notwithstanding anything in law or
in equity to the contrary, any indulgence or waiver of time granted to Buyer by
Seller shall not discharge Parent from any obligations under this Guarantee.
This Guarantee shall come into effect as of the Effective Date.
8.3 Waiver of Modification Defense.
The provisions of this Agreement may be changed by written agreement
between Buyer and Seller at any time without the consent of or notice to Parent.
This Guarantee shall guarantee obligations of Buyer pursuant to this Agreement
as changed or modified.
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8.4 Waiver of Other Defenses.
Parent waives (a) notice of acceptance of this Guarantee, (b) demand of
payment, presentation and protest to Parent or Buyer, (c) all rights to assert
or plead any statute of limitations as to or relating to this Guarantee other
than the statute of limitations applicable to the obligations of Buyer, (d) any
defense by reason of any disability of Buyer, and (e) all rights and defenses
arising out of an election of remedies by Seller, even though that election of
remedies, such as a nonjudicial foreclosure with respect to security for a
guaranteed obligation, has adversely affected Parent's rights of subrogation and
reimbursement against Buyer.
SECTION 9
Miscellaneous Provisions
9.1 Public Statements and Press Releases.
No party shall make, issue or release any public announcement
(including without limitation public announcements made to employees and
customers), press release, statement or acknowledgment of the existence of, or
reveal publicly the terms, conditions and status of, the transactions provided
for in this Agreement, without the prior written consent of the other party as
to the content and time of release of and the media in which such statement or
announcement is to be made; provided, however, that in the case of
announcements, statements, acknowledgments or revelations which either party is
required by law or regulation, including those of public stock exchanges on
which the securities of such party or its affiliates are traded to make, issue
or release, the making, issuing or releasing of any such disclosure by the party
so required to do so shall not constitute a breach of this Agreement if such
party shall have given, to the extent reasonably possible, not less than ten
days' prior notice to the other party, and shall have attempted, to the extent
reasonably possible, to clear such disclosure with the other party. Each party
hereto agrees that it will not unreasonably withhold any such consent or
clearance.
9.2 Costs, Expenses and Sales Taxes.
Each party covenants and agrees that it shall be responsible for and
bear its respective costs and expenses in connection with, or arising out of,
the negotiation and execution of this Agreement and consummation of the
transactions provided for herein. Buyer shall pay any transfer, sale, use or
other taxes imposed by reason of the transfer of the Assets to Buyer, and any
deficiency, interest or penalty asserted with respect thereto. Buyer shall pay
the costs of recording or filing any applicable conveyancing instruments,
including, but not limited to, bills of sale and any instruments necessary to
vest in Buyer title in and to the Assets as required pursuant to this Agreement.
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9.3 Amendment and Modification.
This Agreement may be amended, modified or supplemented only in writing
executed by each of the parties to this Agreement.
9.4 No Assignment.
No party hereto shall assign, in whole or in part, this Agreement or
the Transaction Agreements or its respective rights and obligations hereunder
and thereunder without the express prior written consent of the other party
hereto, and, absent such consent, any assignment (including without limitation
any assignment by merger, death, dissolution or operation of law) shall be null
and void; provided, however, that notwithstanding the foregoing, Seller shall
have the right to assign this Agreement, without consent, to Litton Industries,
Inc. or any of its subsidiaries or to any party acquiring substantially all of
the stock or assets of Litton Industries, Inc. or Seller, or with which either
of them may merge or consolidate, but notwithstanding any such assignment,
Seller and its successors and assigns shall remain liable for any and all of its
liabilities and obligations hereunder.
9.5 Notices.
All notices, requests, demands or other communications under this
Agreement must be in writing executed by an authorized representative of the
party responsible for such communication, and shall be given, either by hand,
telex, telecopy or other telecommunications or by mailing, certified or
registered mail with first-class postage prepaid or overnight courier addressed
as follows: (a) if to Buyer to: Diamonair, Inc., c/o D. G. Jewellery of Canada
Ltd., 1001 Petrolia Road, North York, Ontario, Canada M3J 2X7, Attention:
President, telecopy number: 416-665-4986; with a copy to Sills Cummis Zuckerman
Radin Tischman Epstein & Gross, P.A., One Riverfront Plaza, Newark, New Jersey
07102-5400, Attention: Ira A. Rosenberg, Esq., telecopy number 973-643-6500 or
(b) if to Seller to: Litton Systems, Inc., c/o Litton Industries, Inc., 21240
Burbank Boulevard, Woodland Hills, California 91367-6675, Attention: General
Counsel, telecopy number: 818- 598-2025, with a copy to Airtron, 200 East
Hanover Avenue, Morris Plains, New Jersey 07950, Attention: President, telecopy
number 973-984-7701; or to such other person or place as any party shall furnish
to the other party in writing.
9.6 Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
9.7 Headings and Table of Contents.
Section headings and the table of contents to this Agreement are
provided for convenience of reference only and shall not be deemed to constitute
a part of this Agreement.
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9.8 Schedules and Exhibits.
One complete set of the Schedules and Exhibits has been marked for
identification and delivered to each of the parties hereto simultaneously with
the execution and delivery of this Agreement. The Schedules and Exhibits are an
integral part of this Agreement and are incorporated into this Agreement by
reference.
9.9 Waiver.
No waiver of any breach of any provision of this Agreement shall be
held to be a waiver of any other or subsequent breach, and the failure of a
party to enforce at any time any provision of this Agreement shall not be deemed
a waiver of any right of such party to subsequently enforce such provision or
any other provision of this Agreement.
9.10 Governing Law and Resolution of Disputes.
This Agreement shall be construed, interpreted and enforced in
accordance with the law of the State of New Jersey without regard to its choice
of law principles, and controlling applicable United States Federal Law. Except
as provided in Section 1.3, any and all disputes between the parties which may
arise pursuant to this Agreement will be heard and determined before any federal
or state court having jurisdiction under applicable law.
9.11 No Third Party Beneficiaries.
Nothing in this Agreement, whether express or implied, shall confer any
rights or remedies under or by reason of this Agreement on any persons other
than the parties to it and their respective successors, permitted assigns and
permitted designees, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
Agreement, nor shall any provision of this Agreement give any third persons any
right of subrogation or action against any party to this Agreement.
9.12 Construction.
This Agreement shall be interpreted without regard to any presumption
or rule requiring construction against the party causing such agreements to be
drafted.
9.13 Entire Agreement.
This Agreement, including the Schedules and Exhibits, and the
Transaction Agreements, constitute the entire agreement and understanding
between the parties with respect to the transactions provided for in such
agreements and supersedes and cancels any and all prior discussions,
correspondence, agreements or understandings between the parties with respect to
such matters. Except for the covenants, agreements, understandings,
representations and warranties expressly made by parties in this Agreement and
the Transaction Agreements, no covenants, agreements, understandings,
representations or warranties, express or implied, are made by the parties, and
the parties expressly disclaim any
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reliance on any other covenants, agreements, understandings, representations or
warranties, express or implied.
9.14 References to Sections, Schedules and Exhibits.
Unless otherwise indicated, all references to Sections, Schedules and
Exhibits are to Sections hereof and to Schedules and Exhibits hereto.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have caused this Agreement to be executed by their authorized representatives on
and as of the day and date first above set forth.
LITTON SYSTEMS, INC. DIAMONAIR, INC.
By: ___________________________ By: ___________________________
Title: ________________________ Title: ________________________
The undersigned, Litton Industries, Inc., hereby agrees to be bound by the
non-compete covenant contained in Section 5 of the foregoing Purchase and Sale
Agreement, effective as of the Effective Date (as defined therein).
LITTON INDUSTRIES, INC.
By: ___________________________
Title: ________________________
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The undersigned hereby executes and delivers the foregoing Purchase and Sale
Agreement solely for the purposes of Sections 4, 7 and 8.
D.G. JEWELLERY OF CANADA LTD.
By: ___________________________
Title: ________________________
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Exhibit 10.(a)(g)
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT (this "Agreement") dated as of the day of
February, 1998, effective as of the first day of June, 1997 (the "Effective
Date"), by and among D.G. Jewellery of Canada, Ltd., a province of Ontario,
Canada corporation ("Parent") with a principal place of business at 1001
Petrolia Road, North York, Ontario, Canada M3J 2X7, Aviv, Inc., a Delaware
corporation with a principal place of business at 1001 Petrolia Road, North
York, Ontario, Canada M3J 2X7 ("Buyer"), Aviv, Inc., a Texas corporation with a
principal place of business at 4665 Southwest Freeway, Houston, Texas 77027
("Seller"), New York Gold & Diamond Exchange, Inc., a Texas corporation with a
principal place of business at 4665 Southwest Freeway, Houston, Texas 77027
("Subsidiary"), Gadi Beer, an individual residing at 49 Briar Hollow #1102,
Houston, Texas 77027 ("Beer"), Allan Wayne, an individual residing at 12107
Almond Grove Court, Houston, Texas 77077 ("Wayne") and Steven Cash, an
individual residing at 10220 Memorial #5, Houston, Texas 77024 ("Cash" and,
together with Beer and Wayne, the "Stockholders").
WITNESSETH:
WHEREAS, Seller and Subsidiary engage in a business which manufactures,
advertises, markets and/or sells jewelry and conducts related activities (the
"Business");
WHEREAS, Subsidiary is a direct, wholly-owned subsidiary of Seller;
WHEREAS, the Stockholders are the owners, beneficially and of record
of, in the aggregate, one hundred percent (100%) of the issued and outstanding
shares of Common Stock, $.50 par value per share, of Seller (the "Aviv Common
Stock"); and
WHEREAS, Buyer desires to acquire substantially all of the assets of
Seller and Subsidiary, and Seller and Subsidiary desire to sell such assets to
Buyer, all on the terms and conditions set forth herein.
NOW, THEREFORE, for full and adequate consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
ARTICLE 1
PURCHASE AND SALE
1.1 The Purchase and Sale. Upon the terms and conditions contained in
this Agreement, on the Closing Date (as defined in Section 1.3 below), effective
as of the Effective Date, Seller and Subsidiary shall each sell, assign,
transfer, set over, convey and deliver to Buyer, and Buyer shall purchase from
Seller and Subsidiary, all of Seller and Subsidiary's respective right, title
and interest in, to and under the Purchased Assets (as defined below) for the
Purchase Price (as defined below), free and clear of all security interests,
liens, claims, charges, restrictions, mortgages, third-party interests, equities
<PAGE>
or encumbrances of any kind (each, a "Lien") save and except Liens to secure the
debt in favor of Rhode Island Hospital Trust and/or Bank of Boston described on
Schedule 2.16(d). The "Purchased Assets" means all of the assets of every kind
and nature, real, personal and mixed, tangible and intangible, wherever located,
owned by, used by or held for use by Seller or Subsidiary, including any and all
of the following assets of Seller and Subsidiary (except, and only except, the
Excluded Assets):
1.1.1 Cash; Bank Accounts. All cash and cash equivalents and all
amounts held in bank accounts and other similar accounts (the "Bank Accounts").
1.1.2 Accounts and Instruments. All accounts, instruments and
chattel paper (as such terms are defined in Article 9 of the Uniform Commercial
Code currently in effect in the State of Texas), including all trade receivables
and non-trade receivables.
1.1.3 Inventory. All inventory, including all finished goods, raw
materials (if any), work in progress (if any) and supplies ("Inventory").
1.1.4 Machinery, Equipment, Fixtures and Supplies. All machinery
and equipment, test equipment, office equipment, vehicles and other
transportation equipment, accessories, tools, spare parts, molds, dies, patterns
and gauges, fixtures, furniture, supplies relating to the foregoing and other
similar personal property.
1.1.5 Leasehold Interests. All leasehold interests in real and
personal property held by Seller or Subsidiary (including all rights under
leases) and rights of Seller or Subsidiary in leasehold improvements.
1.1.6 Customer and Supplier Information. All current or historical
information relating to customers, vendors or other suppliers, including all
customer lists, mailing lists, customer price lists, customer files, customer
account histories, vendor and supplier lists, vendor and supplier price lists
and other correspondence and other recorded knowledge relating to customers,
vendors or suppliers.
1.1.7 Proprietary Technology; Other Information. All proprietary
technology, including all know-how, trade secrets, quality control standards,
reports (including test reports), processes, market research and other data,
computer software and programs, formulae, inventions and other ideas, current
and historical information relating to products purchased or sold by Seller or
Subsidiary (or contemplated to be purchased or sold), including all sales
literature, sales data and other related information (including correspondence
and recorded knowledge) and all other current and historical information
relating to the Purchased Assets, including employee records and other
information pertaining to the Business, and all computer disks and other media
on which such information is stored.
1.1.8 Goodwill. All goodwill.
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<PAGE>
1.1.9 Permits; Intellectual Property; Contract Rights; Prepaid
Assets; Insurance Policies; Other Assets. All of the following: (a) all rights,
to the extent transferable under applicable law, in and to all authorizations,
permits, licenses, registrations, other Regulatory Approvals, franchises,
variances, consents, clearances, waivers, certificates, other approvals and
similar writings, including certificates of occupancy, issued by any
governmental entity ("Permits"); (b) all rights in and to all United States and
foreign trademarks, patents, copyrights, trademark, patent and/or copyright
applications, trade names, service marks and the like (including the name "Aviv,
Inc." and "New York Gold & Diamond Exchange, Inc." and any derivatives thereof),
all other intellectual property whether arising under statute, common law or
otherwise, and whether registered or unregistered, all goodwill associated with
the foregoing and the right to sue for infringements of any of the foregoing
prior to the Effective Date ("Intellectual Property"); (c) all of Seller and
Subsidiary's rights under all material contracts, mortgages, indentures, leases,
subleases, notes, bonds, deeds of trust, licenses, sublicenses, purchase orders,
sales order, consignment agreements, undertakings, understanding, plan,
commitment, arrangement, instrument, commitment or other agreement, oral or
written, formal or informal, to which Seller or Subsidiary is a party or has
rights (each a "Contract") other than the Excluded Contracts (as defined in
1.7.5 below); (d) all prepaid or deferred expenses, including all advertising
and promotional materials, catalogs and labels; (e) all plans, blueprints,
drawings, surveys, engineering reports, appraisal reports and other similar
property; (f) all warranties, guarantees and rights of indemnity, at common law,
by contract or otherwise to the extent relating to any of the other Purchased
Assets; (g) all other rights relating to the Purchased Assets, including all
guaranties, security agreements and other collateral in respect of any such
assets and claims now existing or hereafter arising relating thereto; (h) other
than the policies set forth on Schedule 1.1.9 (the "Excluded Policies"), all
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of Seller and
Subsidiary (the "Insurance Policies"), the cash surrender value of the Excluded
Policies (including all amounts pledged to the Small Business Administration
(the "Pledged Cash Surrender Value")) (the "Cash Surrender Values") (which, for
the avoidance of doubt, such cash surrender values of all of the Excluded
Policies shall be Purchased Assets), and all rights to receive proceeds of
insurance and condemnation awards payable on or after the Effective Date with
respect to any damage, destruction, loss, condemnation or taking of any
Purchased Asset; (i) all security deposits; (j) all claims and other causes of
action inuring to Seller or Subsidiary's benefit; (k) all trade and similar
association memberships; and (l) all UCC consignment notice filings related to
any of the Purchased Assets naming Seller or Subsidiary as secured
party/consignor.
1.1.10 Tax Refunds. All of Seller and/or Subsidiary's rights to and
claims for federal and state income, customs, excise, franchise and sales and
use tax refunds, insurance refunds and real and personal property tax refunds,
each relating to operations prior to or after the Effective Date but not after
the Closing Date.
Notwithstanding the foregoing enumeration of assets, it is the purpose
and intent of the parties that Buyer is acquiring, and Seller and Subsidiary are
selling, and the term "Purchased Assets" includes, all assets, property, rights
and interests of Seller and Subsidiary other than the Excluded Assets, whether
or not above enumerated. For purposes of the transactions contemplated by this
Agreement, Seller and Subsidiary shall have deemed to have used the Purchased
Assets to operate the Business as agent for Buyer (provided, however, that the
foregoing shall not be deemed to affect the liability of Seller, Subsidiary or
Stockholders hereunder).
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1.2 Excluded Assets. Notwithstanding the provisions of Section 1.1, the
Purchased Assets shall not include any of the following assets (the "Excluded
Assets"):
1.2.1 Consideration Under This Agreement. The consideration to be
delivered to Seller and Subsidiary pursuant to this Agreement for the Purchased
Assets and all rights of Seller and Subsidiary under this Agreement.
1.2.2 Stock of Subsidiary. The capital stock of Subsidiary.
1.2.3 Corporate Records. The certificate of incorporation,
corporate seals, minute books, stock books and other corporate records having to
do with the corporate organization, corporate proceedings and capitalization of
Seller and Subsidiary.
1.2.4 Tax Records. The tax records of Seller and Subsidiary to the
extent the same do not constitute books of account, subject, however, to the
rights of Buyer to inspect such tax records after the Closing during reasonable
hours upon reasonable prior written notice.
1.3 Closing. The closing of the purchase and sale contemplated by this
Agreement (the "Closing") shall take place at the offices of Sills Cummis
Zuckerman Radin Tischman Epstein & Gross, One Riverfront Plaza, Newark, New
Jersey 07102-5400 on February , 1998, or at such other place, date and time as
the parties may agree in writing (the "Closing Date").
1.4 Purchase Price. As the purchase price for the Purchased Assets (the
"Purchase Price"), at the Closing Seller shall assume all of the Assumed
Liabilities, as set forth in Section 1.6 below.
1.5 Allocation of Purchase Price. The Purchase Price shall be allocated
in the manner set forth on Schedule 1.5. The parties hereto agree that (a) the
allocation of the Purchase Price hereunder to items, classes and categories of
the Purchased Assets as set forth in Schedule 1.5 reflects and constitutes
arms-length negotiations between the parties, and (b) the foregoing allocation
is reasonable based on the parties' estimates of the fair market value as of the
Effective Date of each such class of Purchased Assets. The allocation reflected
in this Section 1.5 shall be binding on the parties for United States and state
income tax purposes and shall be consistently reflected by each party on its
United States and state income tax returns.
1.6 Assumption of Assumed Liabilities by Buyer. Buyer shall, at the
Closing, assume and agree to pay, perform and discharge the Assumed Liabilities.
For purposes of this Agreement, "Assumed Liabilities" means
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1.6.1 Seller and Subsidiary's obligations under the Contracts other
than as set forth in Section 1.7.5 below.
1.6.2 All trade payables and accounts payable in the amounts
included in the Current Balance Sheet which are unpaid as at the Closing plus
such other trade payables and accounts payable which are of the same nature as
the trade payables and accounts payable reflected on the Current Balance Sheet
and which have been incurred on or before the Closing Date in connection with
the ordinary course of the business of Seller and/or Subsidiary.
1.6.3 All accrued expenses and other liabilities in the amounts
included in the Current Balance Sheet which are unpaid as at the Closing Date
plus such other accrued expenses and other liabilities which have been incurred
on or before the Closing in the ordinary course of business of Seller and
Subsidiary and which are of the same nature as the accrued expenses and other
liabilities historically reflected on the financial statements of Seller and/or
Subsidiary.
1.6.4 Intentionally omitted.
1.6.5 The outstanding principal, interest, penalties and other sums
owing by Seller and/or Subsidiary to The Bank of Boston/Rhode Island Hospital
Trust (the "Bank") set forth on Schedule 2.16(d) immediately prior to the
Closing.
1.6.6 Twenty-five percent (25%) of the amounts owing by Seller to
the Major Creditors (as defined in Section 2.8 below) as of October 1, 1997
(such assumed amounts being listed on Schedule 2.8(b)) and one hundred percent
(100%) of the amounts owing by Seller to the Major Creditors after October 1,
1997 to the extent that Seller has provided Buyer with copies of, and Buyer has
approved, the purchase orders relating to such amounts.
1.6.7 All accrued vacation pay of employees of Seller and/or the
Subsidiary and such accrued compensation of employees of Seller and/or
Subsidiary incurred in the ordinary course of business since the last pay period
prior to Closing and payroll taxes of Seller and/or Subsidiary incurred in the
ordinary course of business since the last pay period prior to Closing which are
of the same nature as the accrued compensation and payroll taxes historically
reflected on the financial statements of Seller and/or Subsidiary.
It is confirmed and agreed that references in Sections 1.6.2 and 1.6.3 above to
trade payables and accrued expenses included in the Current Balance Sheet or
incurred thereafter do not include contingent liabilities. Notwithstanding the
provisions of this Section 1.6, Buyer shall not assume any liabilities,
commitments or other obligations of any kind or nature whatsoever, known or
unknown, accrued, fixed, contingent or otherwise, liquidated or unliquidated,
choate or inchoate, determined or non-determinable, due or to become due
("Liabilities") which are Excluded Liabilities pursuant to Section 1.7.
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1.7 Non-Assumption of Excluded Liabilities. Buyer shall not assume,
undertake, accept, be bound by or otherwise be responsible for any Liabilities
other than the Assumed Liabilities. Notwithstanding the provisions of Section
1.6, and without limiting the generality of the foregoing, Assumed Liabilities
shall not include Liabilities consisting of or arising out of, in connection
with or otherwise relating to:
1.7.1 Any Taxes (as defined in Section 2.18 below) except for
payroll taxes assumed pursuant to Section 1.6.7 above.
1.7.2 Any Liabilities to be borne by Seller, Subsidiary and/or any
Stockholder hereunder.
1.7.3 Any Liabilities to any affiliate of Seller, Subsidiary and/or
any Stockholder, including all loans made by the Stockholders to Seller or
Subsidiary or pursuant to any Contract (except as set forth in the Lease
referred to in Section 5.1.8).
1.7.4 Any claims (product liability or otherwise), whether made
before or after the Closing Date, or any claims, controversies, demands,
actions, suits, investigations, proceedings or other disputes, formal or
informal, including any by, involving or before any arbitrator or any
governmental entity (each a "Proceeding"), whether commenced before or after the
Closing Date, arising out of the Business or otherwise relating to Seller,
Subsidiary and/or any Stockholder, prior to Closing Date, or otherwise arising
out of any act or occurrence prior to, or any state or facts existing as of the
Closing Date (regardless of whether or not referred to on a Schedule to this
Agreement or otherwise disclosed or known to Buyer).
1.7.5 Any Contract of Seller or Subsidiary (a) listed on Schedule
1.7.5 hereto (the "Excluded Contracts"), or (b) not effectively assigned to
Buyer which Buyer does not directly receive the benefits of.
1.7.6 Indebtedness for borrowed money other than as specified on
Schedule 1.7.6 or as specifically assumed pursuant to Section 1.6.5.
1.7.7 The employment prior to the Closing Date by Seller or
Subsidiary of former employees of Seller or Subsidiary or specific events and
occurrences arising from the employment prior to the Closing Date by Seller or
Subsidiary of current employees, whether or not they become employees of Buyer
on the Closing Date, including severance payable to such persons that relates to
the fact that certain employees of Seller or Subsidiary will at the Closing Date
become employees of Buyer, severance Liabilities arising from the termination of
employment by Seller or Subsidiary caused by the transactions contemplated
hereby, severance liabilities to those employees who do not become employees of
Buyer and any other severance liabilities of Seller or Subsidiary.
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1.7.8 The employment prior to the Closing Date by Seller or
Subsidiary of any employees who become employed by Buyer on the Closing Date, to
the extent such Liabilities arise out of (A) any present or terminated employee
benefit plan of any kind or nature, oral or written, including Seller or
Subsidiary's profit sharing plan, any "Top Hat" plan for a select group of
employees, any non-qualified deferred compensation plan (whether funded or not),
any split dollar life insurance agreement between Seller or Subsidiary and any
employee, and any agreement to pay a disability or death benefit on behalf of
any employee (including any such requirement under the terms of any
shareholders' agreement to which Seller or Subsidiary is a party), or (B) any
disability or workman's compensation arising out of any act or omission
occurring prior to the Closing Date.
1.7.9 Obligations to comply with Environmental Laws (as defined in
Section 2.23.1.2 below) and all Liabilities and other Damages (as defined in
Section 7.2 below) arising out of non-compliance with Environmental Laws prior
to the Closing Date or otherwise arising out of other environmental
contamination of any property prior to the Closing Date (regardless of whether
such contamination occurred prior to or after Seller or Subsidiary's lease of
any such property which was leased by Seller or Subsidiary), including fees and
costs arising out of the settlement, defense or response to directives or orders
of any governmental entities or other persons or entities arising from the
protection of human health or safety, the environment or natural resources, or
otherwise arising out of environmental contamination of any kind or nature prior
to the Closing Date on or under or which has migrated from or to any property
the lease of which is to be assigned to Buyer pursuant to the terms hereof or to
any property which now is or previously has been owned or leased by Seller or
Subsidiary (regardless of whether such contamination occurred prior to or after
the purchase or lease of any such property purchased or leased by Seller or
Subsidiary), including personal injury claims and other claims of any kind or
nature relating to environmental contamination existing on or prior to the
Closing Date, including any Liabilities arising from the shipment,
transportation, generation or otherwise arranging for the shipment or
transportation of, on or prior to the Closing Date, any waste or any remediation
on or prior to the Closing Date including any pre-remedial response, studies or
investigations and subsequent remedial monitoring and care of or contamination
of ground water, surface water, soils or air.
1.7.10 Proceedings existing on the Closing Date.
1.7.11 Seller or Subsidiary's accrued medical insurance (if any) or
otherwise in connection with Seller or Subsidiary's medical plans;
1.7.12 Liabilities related to any business of Seller or Subsidiary
other than the Business.
1.7.13 Professional fees incurred in connection with the
negotiation of this Agreement and the other Transaction Documents and matters
related thereto.
1.7.14 Any amounts owing by Seller or Subsidiary to the Major
Creditors other than as specifically assumed by Buyer pursuant to Section 1.6.6
above.
1.7.15 Any other Liabilities of Seller or Subsidiary not
specifically assumed pursuant to Section 1.6.
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The parties hereto confirm and agree that the Liabilities under Seller or
Subsidiary's Contracts that do not constitute Assumed Liabilities pursuant to
Section 1.7 hereof shall constitute Excluded Liabilities as between Buyer on the
one hand and Seller and/or Subsidiary, on the other hand, whether or not Buyer
has agreed with a third party to assume or otherwise be responsible for any
Liabilities not constituting Assumed Liabilities. All Liabilities described in
this Section 1.7 are hereinafter collectively referred to as the "Excluded
Liabilities". For the purposes of this Section 1.7, Seller includes any person
or entity owning or operating the Business (or any portion thereof) prior to
Seller.
1.8 Closing Financial Statements. Within thirty (30) calendar days
after the Closing Date, Seller and Subsidiary shall provide Buyer with
consolidated balance sheets of Seller and Subsidiary as of the Closing Date and
related statements of income and retained earnings and cash flows for the period
ended the Closing Date (the "Closing Financial Statements"), which Closing
Financial Statements shall be at least as favorable as the Current Balance Sheet
and the related statements of income and retained earnings and cash flows for
the period ending December 31, 1997, including, without limitation, with respect
to cash, accounts receivable, inventory and other assets. Buyer shall have sixty
(60) calendar days following its receipt of the Closing Financial Statements
(the "Review Period") to review the same and the Purchased Assets. If Buyer in
good faith reasonably determines that the Closing Financial Statements do not
satisfy the foregoing requirements and objects to Seller and Subsidiary in
writing on or before the expiration of the Review Period, the amount of direct
damages suffered by Buyer as a result of such non-conformity may be offset
against the amounts otherwise due pursuant to the terms of the Promissory Notes
described in Section 5.2.11 below (pro rata among the Stockholders based on
their pro rata portion of the original principal balance of such Promissory
Notes).
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Seller, Subsidiary and the Stockholders hereby jointly and severally
represent and warrant to Buyer as follows:
2.1 Status; Authority; Binding Agreement. Seller and Subsidiary each
have the requisite corporate power and authority to enter into this Agreement
and the other documents and executed and delivered, or to be executed and
delivered by them, in connection herewith (the "Transaction Documents") and to
carry out their respective obligations hereunder and thereunder. The
Stockholders each have the requisite power and authority to enter into this
Agreement and the other Transaction Documents. This Agreement and the other
Transaction Documents to which Seller, Subsidiary and/or the Stockholders are a
party constitute the valid and binding obligations of Seller, Subsidiary and/or
Stockholders, as the case may be, enforceable against them in accordance with
their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency and similar laws affecting creditors' rights generally.
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2.2 Share Ownership. The Stockholders are the legal beneficial and
record owners of, and have good and valid title to, the Aviv Common Stock, free
and clear of any and all Liens. The Aviv Common Stock represents one hundred
percent (100%) of the issued and outstanding capital stock of Seller. The Aviv
Common Stock is owned by each of the Stockholders in the amount set forth
opposite his respective name on Schedule 2.2.
2.3 Capitalization. All of the currently issued and outstanding shares
of capital stock of Seller and Subsidiary have been duly authorized and are
validly issued, fully paid and nonassessable and have not been issued in
violation of any law (including State and federal securities laws) or in
violation of any preemptive, first refusal or other subscription rights of any
person or entity or of any agreement. Except as set forth on Schedule 2.3, there
are no outstanding (a) shares of capital stock or other securities of Seller or
Subsidiary, (b) securities of Seller or Subsidiary convertible into or
exchangeable for shares of capital stock or other securities of Seller or
Subsidiary, (c) options, warrants, exchange rights, subscription rights or other
agreements, commitments or rights to purchase or otherwise acquire from Seller
or Subsidiary, or agreements, commitments or obligations of Seller or Subsidiary
to issue or sell, any capital stock, other securities or securities convertible
into or exchangeable for capital stock or other securities of Seller or
Subsidiary, or (d) agreements, commitments or obligations of Seller or
Subsidiary to grant, or enter into any such option, warrant, call, right,
commitment or agreement (the items in clauses (a), (b) (c) and (d) being
referred to collectively as the "Company Securities"). There are no outstanding
obligations of Seller or Subsidiary to sell, issue or deliver, or to repurchase,
redeem or otherwise acquire any Company Securities.
2.4 Corporate Existence and Power. Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Texas and has all corporate power and authority necessary to enable it to
own, lease or otherwise hold its properties and assets and to carry on its
business as now conducted and currently proposed to be conducted. Subsidiary is
a corporation duly incorporated, validly existing and in good standing under the
laws of the State of Texas and has all corporate power and authority necessary
to enable it to own, lease or otherwise hold its properties and assets and to
carry on its business as now conducted and currently proposed to be conducted.
Each of Seller and Subsidiary is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary except where such failure to qualify will not have and
could not be reasonably expected to have a material adverse effect on the
business or assets of Seller or Subsidiary (a "Material Adverse Effect"). All
jurisdictions in which Seller or Subsidiary is so qualified to do business are
listed in Schedule 2.4. Seller, Subsidiary and the Stockholders have previously
delivered to Buyer true and complete copies of the certificate of incorporation
and by-laws of Seller and Subsidiary, as amended to date and as currently in
effect, and all minutes of meetings (including actions in lieu thereof) of the
board of directors (and each committee thereof) and stockholders of Seller and
Subsidiary.
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2.5 Governmental Authorization; Permits. Except and set forth on
Schedule 2.5 the execution, delivery and performance by Seller, Subsidiary and
the Stockholders of this Agreement and the other Transaction Documents, and the
consummation of the transactions contemplated hereby and thereby, do not and
will not require any consent, approval or action by or in respect of, or any
declaration, filing or registration with, by or on behalf of Seller, Subsidiary
or the Stockholders, any governmental or regulatory body, court, agency,
official or authority (each, a "Governmental Authority"). Schedule 2.5 also
lists all Permits registered in the name of Seller or Subsidiary or otherwise
related to the Business.
2.6 Non-Contravention. Except as set forth on Schedule 2.6, the
execution, delivery and performance by Seller, Subsidiary and the Stockholders
of this Agreement and the other Transaction Documents and the consummation of
the transactions contemplated hereby and thereby, do not and will not, with or
without the giving of notice, the lapse of time or both (a) contravene or
conflict with the certificate of incorporation or by-laws of Seller or
Subsidiary, (b) contravene or conflict with or constitute a violation of any
provision of any law, rule, regulation, judgment, injunction, order or decree
currently in effect and binding upon or applicable to Seller, Subsidiary or the
Stockholders, which contravention, conflict or violation has had or could
reasonably be expected to result in or have a Material Adverse Effect, (c)
require any consent, approval or other action by any person, contravene or
conflict with or constitute a violation of or a default under, or give rise to
any right of termination, cancellation or acceleration of any right or
obligation of Seller or Subsidiary or to a loss of any benefit to which Seller
or Subsidiary is entitled, under any provision of (i) any agreement, contract,
indenture, lease or other instrument binding upon Seller or Subsidiary, or (ii)
any license, franchise, Permit or other similar authorization held by Seller or
Subsidiary, or (d) result in the creation or imposition of any Lien on any asset
of Seller or Subsidiary.
2.7 Subsidiaries. Subsidiary is a direct, wholly-owned subsidiary of
Seller. Except for Subsidiary, Seller does not hold or own, directly or
indirectly, any capital stock or other equity securities of any other
corporation, or have any direct or indirect equity or ownership interest in any
association, partnership, joint venture or other entity, other than Subsidiary.
To the extent possible, Seller and the Stockholders shall indicate on all
Schedules to this Agreement whether each particular disclosure applies to
Seller, Subsidiary or both. All references in this Agreement to "Seller and
Subsidiary" or "Seller and Subsidiary" shall also be interpreted to mean "Seller
or Subsidiary or both Seller and Subsidiary."
2.8 Financial Statements. Attached hereto as Schedule 2.8(a) are true
and complete copies of the consolidated balance sheets of Seller and Subsidiary
as of May 31, 1997 (the "Annual Balance Sheets") and as of December 31, 1997
(the "Current Balance Sheet") and the related statements of income and retained
earnings and cash flows for the fiscal years ended May 31, 1997 and for the
period ended December 31, 1997. As used herein, "Balance Sheets" means the
Annual Balance Sheet and the Current Balance Sheet and "Financial Statements"
means each of the Balance Sheets and the annual and interim statements of income
and retained earnings and cash flows referred to above in this Section 2.8. The
Financial Statements are complete and correct in all material respects, in
accordance with all books and records of Seller and Subsidiary (and such books
and records accurately reflect the transactions of Seller and Subsidiary) and
have been prepared in conformity with generally accepted accounting principles
consistently applied. Seller and Subsidiary's books of account have been
maintained on a consistent basis. Each Balance Sheet presents fairly the
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financial position of Seller and Subsidiary as of its date, and each statement
of income and retained earnings and cash flows presents fairly the results of
operations and changes in cash flow, respectively, for the respective periods
then ended. All accounts receivable of Seller and Subsidiary are valid and
enforceable, are not subject to any valid defense, set off, counterclaim or
returns. and arose out of bona-fide transactions, except to the extent of any
reserves therefor reflected on the Current Balance Sheet. There are no
non-recurring types of income in excess (individually or in the aggregate) of
$5,000 included in any line item of income in any of the statements of income
and retained earnings included in the Financial Statements which are not
identified as non-recurring types of income either in the caption or in notes to
such Financial Statements. Seller's creditors other than the Bank representing
at least eighty percent (80%) of all obligations and liabilities of Seller to
its creditors other than the Bank are listed on Schedule 2.8(b) (the "Major
Creditors").
2.9 Absence of Certain Changes. Except as disclosed in Schedule 2.9,
since May 31, 1997, the respective businesses of Seller and Subsidiary have been
conducted in the ordinary course and there has not been:
2.9.1 any event, occurrence, development or state of circumstances
or facts which has had or could reasonably be expected to result in or have a
Material Adverse Effect on Seller or Subsidiary;
2.9.2 any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of Seller or
Subsidiary, or any repurchase, redemption or other acquisition by Seller or
Subsidiary of any outstanding shares of capital stock or other securities of, or
other equity or ownership interests in, Seller or Subsidiary;
2.9.3 any amendment of any term of any outstanding security of
Seller or Subsidiary;
2.9.4 any incurrence, assumption or guarantee by Seller or
Subsidiary of any indebtedness for borrowed money other than in the ordinary
course of business, but in any event not exceeding an aggregate of $5,000;
2.9.5 any creation or assumption by Seller or Subsidiary of any
Lien;
2.9.6 any making of any loan, advance or capital contributions to
or investment in any person;
2.9.7 any damage, destruction or other casualty loss (whether or
not covered by insurance) affecting the business or assets of Seller or
Subsidiary which has had or would reasonably be expected to result in or have a
Material Adverse Effect on Seller or Subsidiary;
2.9.8 any acquisitions of any capital assets or other investments;
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2.9.9 any sale, lease, pledge, transfer or other disposition of any
capital assets other than in the ordinary course of business consistent with
past practices;
2.9.10 any transaction or commitment made, or any contract or
agreement entered into, by Seller or Subsidiary relating to its assets or
business (including the acquisition or disposition of any assets) other than
those transactions covered by any other subparagraphs of this Section 2.9 or any
relinquishment by Seller or Subsidiary of any contract or other right, in either
case, involving an amount in excess of $5,000, other than transactions,
commitments and relinquishments in the ordinary course of business and/or those
contemplated by this Agreement;
2.9.11 any change in any method of accounting or accounting
practice by Seller or Subsidiary;
2.9.12 other than with respect to employees of Seller (other than
the Stockholders) in the ordinary course of Seller's business consistent with
past practices, any (a) grant of any severance or termination pay to any
director, officer or employee of Seller or Subsidiary, (b) entering into of any
employment, severance, management, consulting, deferred compensation or other
similar agreement (or any amendment to any such existing agreement) with any
director, officer, consultant or employee of Seller or Subsidiary, (c) change in
benefits payable under existing severance or termination pay policies or
employment, severance, management, consulting or other similar agreements, or
(d) change in compensation, bonus or other benefits payable to directors,
consultants, officers or employees of Seller or Subsidiary;
2.9.13 any labor dispute, other than routine individual grievances,
or to the knowledge of Seller, Subsidiary or the Stockholders, any activity or
proceeding by a labor union or representative thereof to organize any employees
of Seller or Subsidiary, or any lockouts, strikes, slowdowns, work stoppages or
threats thereof by or with respect to any employees of Seller or Subsidiary;
2.9.14 any agreement or commitment containing a covenant limiting
or purporting to limit the freedom of Seller or Subsidiary to compete with any
person in any geographic area or engage in any line of business;
2.9.15 any joint venture or similar arrangement which involves a
sharing of profits or future payments to other persons;
2.9.16 any license of any of the Intellectual Property; or
2.9.17 any agreement, undertaking or commitment to do any of the
foregoing.
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2.10 Absence of Undisclosed Liabilities. Each of Seller and Subsidiary
has no liabilities or obligations except those liabilities or obligations which
are (a) fully reflected or in the aggregate adequately reserved against in the
Current Balance Sheet (including any notes thereto), (b) disclosed on Schedule
2.10 hereto, or (c) incurred in the ordinary course of business since the date
of the Current Balance Sheet consistent with prior practices of Seller or
Subsidiary. To the knowledge of Seller, Subsidiary and the Stockholders, there
is no basis for any assertion against Seller or Subsidiary of any material
liability or obligation of any nature or in any amount not fully reflected or in
the aggregate adequately reserved against in the Current Balance Sheet. For the
purposes of this Agreement the phrase "liabilities or obligations" shall include
any direct or indirect indebtedness, claim, loss, damage, deficiency (including
deferred income tax and other net tax deficiencies), cost, expense, obligation,
guarantee, or responsibility, whether accrued, absolute or contingent, known or
unknown, fixed or unfixed, liquidated or unliquidated, secured or unsecured.
2.11 Properties. Except as set forth in Schedule 2.11(a), all of the
assets and properties of Seller and Subsidiary are reflected on the Current
Balance Sheet (except to the extent not required to be so reflected by generally
accepted accounting principles), and Seller and Subsidiary have good, valid and
marketable title to all of their respective owned assets and properties, whether
real, personal or mixed, tangible or intangible, that are material to the
business of Seller and Subsidiary, free and clear of all Liens. All Bank
Accounts (including account number, location and balance) and all safe deposit
boxes are listed on Schedule 2.11(b).
2.12 Real Property. Except as set forth on Schedule 2.12, Seller and
Subsidiary do not own any real property. Set forth on Schedule 2.12 is an
accurate and complete list and summary description of all real property
currently leased by or on behalf of Seller or Subsidiary and, except as set
forth on Schedule 2.12, none of the described leases require any consent to the
transactions contemplated by this Agreement or the other Transaction Documents.
Seller, Subsidiary and the Stockholders have previously delivered to Buyer
accurate and complete copies of all leases listed and described on Schedule
2.12. Except as set forth on Schedule 2.12, Seller or Subsidiary has possession
of each of the aforementioned properties and no event has occurred which, with
the lapse of time or notice or both, could result in a default under any of the
described leases. All rents or other material payment obligations which have
become due in respect of each of such leased properties have been paid. Each of
Seller and Subsidiary has complied with its obligations under said leases and
neither has received any notice of any breach of its obligations under any
covenants, agreements, statutory requirements, planning consents, by-laws,
orders and regulations affecting any of such properties (whether owned or
leased), their use and any business of Seller or Subsidiary there carried on.
2.13 Condition of Tangible Assets. All tangible property, including the
real property and structures thereon, of Seller and Subsidiary is in good
operating condition, reasonable wear and tear excepted, and the operation and
use of such property in the business of Seller and Subsidiary conforms to all
applicable laws, ordinances, regulations, Permits, licenses and certificates,
except where the failure to so conform has not had and could not reasonably be
expected to result in or have a Material Adverse Effect on Seller or Subsidiary.
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2.14 Intellectual Property. Schedule 2.14 sets forth a true, correct
and complete list of all of Seller and Subsidiary's rights in and to all
Intellectual Property other than design copyrights. Except as disclosed on
Schedule 2.14, Seller or Subsidiary owns all of the Intellectual Property, free
and clear of all Liens and is not subject to any license, royalty or other
agreement. None of the Intellectual Property has been or is the subject of any
pending or litigation or claim of infringement and, to the knowledge of Seller,
Subsidiary and the Stockholders, no such litigation or claim is threatened. No
license or royalty agreement to which Seller or Subsidiary is a party is in
breach or default by any party thereto or the subject of any notice of
termination given or threatened. To the knowledge of Seller, Subsidiary and the
Stockholders, the use or sale of the Intellectual Property does not infringe any
trademark, servicemarks, trade name, copyrights, trade secret, patent or
confidential or proprietary rights of any other person or entity and Seller or
Subsidiary has not received any notice contesting its right to use any
Intellectual Property. Neither Seller nor Subsidiary has granted any license or
agreed to pay or receive any royalty in respect of any Intellectual Property.
Each of Seller and Subsidiary owns or possesses adequate rights in and to all
Intellectual Property necessary in connection with the operation of its
respective business.
2.15 Litigation. Except as set forth in Schedule 2.15, there is no
Proceeding pending against or, to the knowledge of Seller, Subsidiary and the
Stockholders, threatened against or affecting, Seller, Subsidiary or any of
their respective properties or assets before any court or arbitrator or any
Governmental Authority. Except as set forth in Schedule 2.15, there is no
Proceeding pending or, to the knowledge of Seller, Subsidiary or the
Stockholders, threatened against any officer or key employee relating to Seller,
Subsidiary or their respective businesses. Neither Seller, Subsidiary nor any
officer or key employee of Seller or Subsidiary is subject to any judgment,
order or decree relating to Seller or Subsidiary entered in any lawsuit or
proceeding or issued by any Governmental Authority. The foregoing sentences
include, without limiting their generality, actions pending or, to the knowledge
of Seller, Subsidiary and the Stockholders, threatened (or any basis therefor
known to Seller, Subsidiary and the Stockholders) involving, to the knowledge of
Seller, Subsidiary and the Stockholders, the prior employment or engagement of
any of Seller or Subsidiary's officers or key employees or their use in
connection with Seller or Subsidiary's business or any information or techniques
allegedly proprietary to any of their former employers or to any other person.
2.16 Contracts. Set forth on Schedule 2.16(a) is a list of any and all
Contracts which require the payment by Seller or Subsidiary of at least $10,000
in any one year or $25,000 over a series of years. Seller and Subsidiary have
entered into a written consignment Contract with each person or entity to whom
Seller or Subsidiary has consigned any of its Inventory with a value of $75,000
or more. Except as set forth on Schedule 2.16(b), none of the rights of Seller
or Subsidiary under any Contract will be adversely affected by the consummation
of the transactions contemplated hereby. Each Contract is valid, binding and in
full force and effect and is enforceable by Seller or Subsidiary, as the case
may be, in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency and similar laws effecting creditors' rights
generally. Except with respect to the accounts payable and trade payables listed
on Schedule 2.16(c) and the debt to the Bank set forth on Schedule 2.16(d),
Seller and Subsidiary have each performed all material obligations required to
be performed by it under each Contract (and is not otherwise in default or
claimed or purported or alleged to be in default thereunder which defaults will
require payment by Seller or Subsidiary of at least $1,000 individually or
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$10,000 in the aggregate) and, to the knowledge of Seller, Subsidiary and the
Stockholders (except with respect to the timely receipt of accounts receivable),
no other party thereto is in default thereunder, and neither Seller, Subsidiary
nor any Stockholder has received or given notice of default with respect to any
Contract, except as set forth on Schedule 2.16(e). When used in this Section
2.16, "default" includes a state of facts which with notice or lapse of time or
both would constitute a default on the part of any party in the performance of
any obligation to be performed or paid by any party under any Contract. Seller,
Subsidiary and the Stockholders have provided Buyer true and complete copies of
all Contracts. Whenever any party represented or covenanted herein or in any
Transaction Document that he or it has provided or furnished true and complete
copies of or given or will give access to or otherwise make available Contracts
or other documents, this includes the original document and all documents which
supplement, amend, otherwise modify or otherwise interpret (including letter
interpretations) such Contracts and other documents.
2.17 Inventory. A list of all of Seller and Subsidiary's Inventory as
of December 31, 1997, together with its physical location (specifying the
location of the warehouse or place of consignment, as applicable), is listed on
Schedule 2.17(a). In the case any item of Inventory on consignment, Schedule
2.17(a) describes the terms of such consignment. Schedule 2.17(b) is a copy of
each financing statement or consignment notice filing in effect with respect to
the Inventory which have been filed by Seller or Subsidiary (collectively, the
"Financing Statements").
2.18 Taxes.
2.18.1 Definitions. The term "Taxes" as used herein means all
federal, state, local, foreign and other net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease,
service, service use, withholding, payroll, employment, excise, severance,
stamp, occupation, premium, property, windfall profits, customs duties,
unemployment insurance, environmental, worker's compensation, Pension Benefit
Guaranty Corporation premiums and all other taxes, fees, assessments or other
charges of any kind similar to Taxes, together with any interest and any
penalties, additions to tax or additional amounts with respect thereto, and the
term "Tax" means any one of the foregoing taxes. The term "Returns" as used
herein means all returns, declarations, reports. statements and other documents
required to be filed in respect of Taxes, including information returns or
reports with respect to backup withholding and other payments to third parties,
and "Return" means any one of the foregoing returns. All citations to the
Internal Revenue Code of 1986, as amended (the "Code"), or the Treasury
Regulations promulgated thereunder, shall include any amendments or any
substitute or successor provisions thereto.
2.18.2 General. Each of Seller and Subsidiary has filed all Returns
required to be filed by or on its behalf on a timely basis and such Returns are
true, complete and correct. None of the Returns filed or required to be filed by
Seller or Subsidiary contains or will contain a disclosure statement under
former Section 6661 or Section 6662 of the Code or any similar provision of any
state, local or foreign law. All Taxes shown to be payable by Seller or
Subsidiary on the Returns or on subsequent assessments with respect thereto have
been paid in full on a timely basis, and, the knowledge of Seller, Subsidiary or
the Stockholders, no other Taxes are payable by Seller or Subsidiary with
respect to items or periods covered by such Returns (whether or not shown on or
reportable on such Returns) or with respect to any period with respect to which
Seller has been required to file a Return or make a payment with respect to
Taxes. Each of Seller and Subsidiary has withheld and paid over all Taxes
required to have been withheld and paid over by it, and complied in all respects
with all information reporting and backup withholding requirements, including
maintenance of required records with respect thereto, in connection with amounts
paid or owing to any employee, creditor, independent contractor or other third
party. There are no Liens on any of the assets of Seller or Subsidiary with
respect to Taxes other than Liens for Taxes not yet due and payable and no Liens
will arise as a result of the transactions contemplated by this Agreement
directly as a result of acts of Seller, Subsidiary or the Stockholders.
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2.18.3 Waivers, etc. No issues have been raised and are currently
pending by any taxing authority in connection with any of the Returns of Seller
or Subsidiary. No waivers of statutes of limitation with respect to any of the
Returns have been given by or requested from Seller or Subsidiary. All
deficiencies asserted or assessments made as a result of any examinations have
been fully paid, or are fully reflected as a liability in the Financial
Statements, or are being contested and an appropriate reserve therefor has been
established and is fully reflected in the Financial Statements. All elections
with respect to Taxes affecting Seller or Subsidiary, as of the date hereof, are
set forth in the Returns, other than any such elections which are not required
to be included in the Returns, copies of which have been made available to
Buyer.
2.19 Employees. Schedule 2.19 sets forth a true and complete list of
(a) the names, titles, annual salaries and other compensation of all employees
of Seller and Subsidiary (the "Employees") as of the date first above written
and the location at which such Employees regularly perform services for Seller
or Subsidiary, and (b) the wage rates for non-salaried Employees of Seller or
Subsidiary (by classification). Any agreements, commitments or understandings
between Seller or Subsidiary and any Employee concerning such Employee's future
salary, compensation or terms of employment are summarized in Schedule 2.19.
Except as set forth on Schedule 2.19, as of the date first written above none of
such Employees has indicated to Seller, Subsidiary or a Stockholder that he or
she intends to resign or retire as a result of the transactions contemplated by
this Agreement or otherwise. Seller and Subsidiary have no Employees represented
by a union and each of Seller and Subsidiary (a) is in compliance with all
material applicable laws and regulations respecting welfare and retirement
benefit plans, employment wages and laws, and (b) is not engaged in any unfair
labor practice. All of Seller and Subsidiary's employees are employees-at-will
and may be terminated by Seller or Subsidiary, as the case may be, for any
reason at any time.
2.20 Transactions with Affiliates. Except as set forth in Schedule
2.20, there are no Contracts or other continuing transactions between Seller
and/or Subsidiary, on the one hand, and any affiliate of Seller, Subsidiary or
any Stockholder, on the other hand. Except as set forth in Schedule 2.20, none
of the officers or directors of Seller or Subsidiary (a) has any material direct
or indirect interest in any entity which does business with Seller or
Subsidiary, (b) has any direct or indirect interest in any property, asset or
right which is used by Seller or Subsidiary in the conduct of its business, or
(c) has any contractual relationship with Seller or Subsidiary other than such
relationships which occur from being an employee, officer, director or
stockholder of Seller or Subsidiary.
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2.21 Insurance Coverage. Schedule 2.21 sets forth an accurate and
complete list of all Insurance Policies and the cash surrender values of each
such life Insurance Policy. To the knowledge of Seller, Subsidiary and the
Stockholders, there is no claim by Seller or Subsidiary pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums payable
under all such policies and bonds have been paid, and Seller and Subsidiary have
otherwise complied in all material respects with the terms and conditions of the
Insurance Policies. Such Insurance policies have been in effect since the dates
indicated on Schedule 2.21 and remain in full force and effect. Seller and the
Stockholders have no knowledge of any threatened termination of, and have not
received written notice of, any premium increase with respect to, any of such
policies or bonds.
2.22 Compliance with Laws; No Defaults. Except as disclosed in Schedule
2.22, Seller and Subsidiary are not in violation of any applicable provisions of
any law, statute, ordinance, regulation, judgment, order, injunction, Permit,
license, certificate or other authorization, or its governing instruments,
except for violations that have not had and could not reasonably be expected to
have a Material Adverse Effect on Seller or Subsidiary. Neither Seller nor
Subsidiary is in material default under, and to the knowledge Seller, Subsidiary
or the Stockholders, no condition exists that with notice or lapse of time or
both would constitute a material default under, any applicable law, statute,
ordinance, regulation, judgment, order, injunction, Permit, license, certificate
or other authorization, or its governing instruments. Except as set forth on
Schedule 2.22, each of Seller and Subsidiary is in compliance with all currently
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, and is not engaged in any unfair
labor practice, failure to comply with which or engagement in which, as the case
may be, has had, or could reasonably be expected to have, a Material Adverse
Effect on Seller or Subsidiary. There is no unfair labor practice complaint
pending or, to the knowledge of Seller, Subsidiary or the Stockholders,
threatened against Seller or Subsidiary before the National Labor Relations
Board.
2.23 Environmental Matters.
2.23.1 Definitions. As used herein:
2.23.1.1 "CERCLA" means the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended.
2.23.1.2 "Environmental Laws" means any and all laws or
regulations, judicial decisions, orders or Permits issued to Seller or
Subsidiary of applicable governing authorities relating to the environment or to
emissions, discharges or releases of pollutants, contaminants, petroleum or
petroleum products, chemicals or industrial, toxic, radioactive or hazardous
substances or wastes into the environment including, without limitation, ambient
air, surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic, radioactive or hazardous substances
medical wastes or other wastes or the clean-up or other remediation thereof.
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2.23.1.3 "Environmental Liabilities" means all liabilities
arising in connection with or in any way relating to the assets of Seller,
Subsidiary or Seller or Subsidiary's use or ownership thereof, whether vested or
unvested, contingent or fixed, actual or potential, which (i) arise under or
relate to Environmental Laws or arise in connection with or relate to any matter
disclosed or required to be disclosed in Schedule 2.23, or (ii) arise from or
relate in any way to actions occurring or conditions existing before the Closing
Date.
2.23.1.4 "Hazardous Substance" means petroleum products or
hazardous substances as defined in Section 101 of CERCLA on the date of this
Agreement.
2.23.1.5 "Release" has the meaning specified in 42 U.S.C.
ss.9601(22) on the date of this Agreement.
2.23.1.6 For purposes of this Section, the term "Seller" or
"Subsidiary" shall include any business or business entity (including a
corporation) which is a predecessor, in whole or in part, of Seller or
Subsidiary, as the case may be.
2.23.2 Except as disclosed on Schedule 2.23, to the knowledge of
Seller, Subsidiary and the Stockholders:
2.23.2.1 no notice, notification, demand, request for
information, citation, summons, complaint or order has been issued, no complaint
has been filed with any Governmental Authority, no penalty has been assessed and
no investigation or review is pending or, to the knowledge of Seller, Subsidiary
and the Stockholders, threatened by any governmental entity or other person with
respect to any (a) alleged violation by Seller or Subsidiary of any
Environmental Law or liability thereunder, (b) alleged failure by Seller or
Subsidiary to have any Permit, certificate, license, approval, registration or
authorization required under any Environmental Law in connection with the
conduct of its business, or (c) Release of Hazardous Substances;
2.23.2.2 no polychlorinated biphenyls, radioactive material,
urea formaldehyde, lead, asbestos. asbestos-containing material or underground
storage tank (active or abandoned) is or was present at any property now owned
or leased by Seller or Subsidiary in such quantities, concentrations, forms or
levels which would constitute a violation of any applicable Environmental Laws;
2.23.2.3 there are no Environmental Liabilities that have
had or may reasonably be expected to have a Material Adverse Effect on Seller or
Subsidiary; and
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2.23.2.4 there has been no environmental investigation,
study, audit, test, review or other analysis conducted of which Seller or
Subsidiary has possession, or to the knowledge of Seller, Subsidiary and the
Stockholders, to which it has access, in relation to the current or prior
business of Seller or Subsidiary or any property or facility now or previously
owned or leased by Seller or Subsidiary which has not been delivered to Buyer at
least five days prior to the date hereof. Seller and Subsidiary have not
transported or arranged for the transportation (directly or indirectly) of any
Hazardous Substance to any location which is listed or, to the knowledge of
Seller, Subsidiary and the Stockholders, proposed for listing under CERCLA, or
under any similar state or local environmental law or which is the subject of
Federal, state or local enforcement actions or other investigations by
applicable governing authorities which may lead to claims for clean-up costs,
remedial work, damages to natural resources or for personal injury claims,
including, but not limited to, claims under CERCLA or analogous state
environmental clean-up laws.
2.24 Employee Plans. Schedule 2.24 sets forth a complete list of all
benefits provided to employees of Seller and Subsidiary, including all benefit
plans, policies, agreements and arrangements of Seller.
2.25 No Brokers or Finders. Seller, Subsidiary and the Stockholders
have not employed any broker or finder or incurred any liability for any
brokerage or finder's fees or commissions or similar payments in connection with
any of the transactions contemplated by this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF BUYER AND PARENT
Buyer and Parent hereby represent and warrant to the Stockholders as
follows:
3.1 Status; Authority; Binding Agreement. Each of Buyer and Parent has
all requisite corporate power and authority to enter into this Agreement and the
other Transaction Documents to which it is a party. This Agreement and the other
Transaction Documents to which it is a party constitute the valid and binding
obligations of Buyer and Parent, enforceable against each of them in accordance
with their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency and similar laws affecting creditors' rights generally.
3.2 Corporate Existence and Power. Buyer and Parent are each
corporations duly incorporated, validly existing and in good standing under the
laws of the state of Delaware and the province of Ontario, Canada, respectively,
and each has all corporate power and authority necessary to enable it to own,
lease or otherwise hold its properties and assets and to carry on its business
as now conducted and currently proposed to be conducted. Each of Buyer and
Parent is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction where the character of the property owned or
leased by it or the nature of its activities makes such qualification necessary
except (a) where such failure to qualify will not have a Material Adverse Effect
on the business of Buyer or Parent, as the case may be, and (b) that Buyer will
qualify to do business as a foreign corporation in the State of Texas after
Seller and Subsidiary have complied with the requirements contained in Section
4.3 below regarding the use of the corporate name "Aviv, Inc." Buyer has
delivered to Seller, Subsidiary and the Stockholders true and correct copies of
the Certificate of Incorporation and bylaws of Buyer, as amended to date.
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3.3 Governmental Authorization. The execution, delivery and performance
by Buyer and Parent of this Agreement and the other Transaction Documents to
which it is a party, and the consummation of the transactions contemplated
hereby and thereby, do not and will not require any consent, approval or action
by or in respect of, or any declaration, filing or registration by Buyer or
Parent with any Governmental Authority.
3.4 Non-Contravention. The execution, delivery and performance of this
Agreement and the other Transaction Documents and the consummation of the
transactions contemplated hereby and thereby, do not and will not, with or
without the giving of notice, the lapse of time or both (a) contravene or
conflict with the certificate of incorporation or by-laws of Buyer or Parent,
(b) contravene or conflict with or constitute a violation of any provision of
any law, rule, regulation, judgment, injunction, order or decree currently in
effect and binding upon or applicable to Buyer or Parent which contravention,
conflict or violation has had or could reasonably be expected to result in or
have a material adverse effect on the business or assets of Buyer or Parent, (c)
require any consent, approval or other action by any person, contravene or
conflict with or constitute a violation of or a default under, or give rise to
any right of termination, cancellation or acceleration of any right or
obligation of Buyer or Parent or to a loss of any benefit to which Buyer or
Parent is entitled, under any provision of (i) any agreement, contract,
indenture, lease or other instrument binding upon Buyer or Parent, or (ii) any
license, franchise, Permit or other similar authorization held by Buyer or
Parent, or (d) result in the creation or imposition of any Lien on any asset of
Buyer or Parent.
3.5 Authorization of Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
approved by all requisite corporate action on the part of Buyer and Parent. This
Agreement has been duly executed and delivered on behalf of Buyer and Parent.
3.11 Brokerage Agreement. Buyer and Parent have not employed any broker
or finder or incurred any liability for any brokerage or finder's fees or
commissions or similar payments in connection with any of the transactions
contemplated by this Agreement.
3.12 Solvency. Neither the Buyer nor Parent (a) is now insolvent, nor
will it be rendered insolvent by the occurrence of the transactions contemplated
by this Agreement, and (b) is subject to any currently pending, or to the
knowledge of the Buyer or Parent, threatened bankruptcy or insolvency
proceedings.
ARTICLE 4
COVENANTS
4.1 Non-Compete, Non-Solicitation and Confidentiality.
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4.1.1 Non-Compete; Non-Solicitation. For a period ending three (3)
years after the Closing Date, neither Seller, Subsidiary, Beer nor their
respective affiliates shall, without the prior written consent of Buyer, engage
in a business which competes with the business of Seller, Subsidiary or Buyer as
conducted on the Closing Date, directly or indirectly, personally or as an
employee, owner, consultant, manager, associates, partner, agent or otherwise,
or by means of any corporate or other device within the United States (the
"Territory"); nor shall Seller, Subsidiary, Beer or their respective affiliates
for such period and in the Territory solicit orders, directly or indirectly from
any customer of Seller, Subsidiary or Buyer on or prior to the Closing Date for
any product substantially similar to those sold, manufactured or distributed by
Seller, Subsidiary or Buyer on or prior to the Closing Date, personally or as an
employee, owner, consultant, manager, associate, partner, agent or otherwise, or
by means of any corporate or other device (each a "Capacity"); nor shall Seller,
Subsidiary, Beer or their respective affiliates for such period solicit for
employment any employee of Seller, Subsidiary or Buyer as of, following or six
(6) months prior to the Closing Date. Notwithstanding anything contained herein
to the contrary, this Section 4.1.1 shall not apply to (a) Cash, (b) Wayne or
(c) any affiliates of Cash or Wayne which are not affiliates of Seller,
Subsidiary or Beer.
4.1.2 Confidentiality. Seller, Subsidiary and the Stockholders
acknowledge that by reason of their affiliation with Seller, Subsidiary and
Buyer, they have had access to confidential information of Seller, Subsidiary
and Buyer. Seller, Subsidiary and the Stockholders covenant and agree that they
shall not directly or indirectly, in any Capacity, use for their own benefit or
divulge to any third party any Confidential Information or trade secrets of
Buyer, Seller or Subsidiary except as required by law. As used herein
"Confidential Information" shall consist of the terms of this Agreement and all
information, knowledge or data relating to the Purchased Assets, the Assumed
Liabilities, the Business and Buyer (including without limit all information
relating to inventions, production methods, customer and prospective customer
lists, prices and trade practices) which is not in the public domain or
otherwise published or publicly available as of the date of execution and
delivery of this Agreement.
4.1.3 Specific Performance. Seller, Subsidiary and the Stockholders
acknowledge that the restrictions contained in this Section 4.1 are reasonable
and necessary to protect the legitimate interests of Buyer, do not cause Seller,
Subsidiary and the Stockholders undue hardship, and that any violations of any
provision of this Section 4.1 will result in irreparable injury to Buyer and
that, therefore, Buyer shall be entitled to preliminary and permanent injunctive
relief in any court of competent jurisdiction and to an equitable accounting of
all earnings, profits and other benefits arising from such violation, which
rights shall be cumulative and in addition to any other rights or remedies to
which Buyer may be entitled.
4.2 Intentionally Omitted.
4.3 Change of Name; Use of Names. Promptly following the Closing,
Seller and Subsidiary shall each file, to the extent necessary, an amendment to
its charter, trade name certificate or similar document and cause its affiliates
to file an amendment to their respective charter, trade name certificate or
similar document changing their respective names immediately after the Closing
to a name not confusingly similar in the sole judgment of Buyer to the name
"Aviv, Inc." or "New York Gold & Diamond Exchange, Inc." Seller, Subsidiary and
the Stockholders agree that after the Closing it or he will not, and will cause
its or his respective affiliates not to, use the name "Aviv, Inc." or "New York
Gold & Diamond Exchange, Inc." or any other trade names, expressions, corporate
symbols, logos, service marks or trademarks of the Business or any derivative of
any thereof or any name or logo etc. that is confusingly similar to any thereof,
in any form or manner or for any purpose.
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4.4 Cooperation. Each of the parties hereto covenants and agrees that
he or it shall cooperate fully with the other parties in furnishing any
information or performing any action reasonably requested by such other party,
which information or action is necessary to the successful consummation of the
transactions contemplated by this Agreement or is necessary, appropriate or
desirable for the corporate purposes of Buyer. Subject to its further rights
under this Agreement, he or it shall use all reasonable efforts to cause the
Closing to occur at the earliest practicable time.
4.5 Certain Other Covenants. Seller and Subsidiary hereby covenant and
agree with Buyer to do, or not do, as the case may be, the following prior to
the Closing Date:
4.5.1 Preservation of Business Organization. Seller and Subsidiary
shall use all reasonable efforts to preserve without material impairment the
business organization of Seller and Subsidiary and their respective goodwill as
to payors, providers, suppliers, distributors, clients and others having
business relations with Seller and Subsidiary.
4.5.2 Carry on in Regular Course. Seller and Subsidiary shall each
carry on its respective business in the ordinary course in a manner consistent
with its past practices.
4.5.3 Capital Stock. Seller and Subsidiary shall not redeem,
purchase or otherwise acquire any Seller Securities or agree to do any of the
foregoing. Seller and Subsidiary shall not issue, deliver, sell or grant or
authorize or propose the issuance, delivery, sale or grant of, or purchase or
propose the purchase of, any shares of its capital stock or securities
convertible into, or subscriptions, rights, warrants or options to acquire, or
other agreements or commitments of any character obligating it to issue any such
shares or other convertible securities.
4.5.4 Other Actions. Without the prior written consent or approval
of Buyer, each of Seller and Subsidiary shall not (a) amend its certificate of
incorporation or by-laws; (b) declare, set aside or pay any dividend or
otherwise make a distribution with respect to any shares of capital stock of
Seller or Subsidiary, or repurchase, redeem or otherwise acquire any outstanding
shares of capital stock or other securities of, or other equity or ownership
interests in, Seller or Subsidiary; (c) amend any term of any outstanding
security of Seller or Subsidiary; (d) incur, assume or guarantee any
indebtedness for borrowed money other than in the ordinary course of business
and in amounts and on terms consistent with past practices, but in any event not
exceeding an aggregate of $5,000; (e) create or assume any Lien on any asset;
(f) make any loan, advance or capital contributions to or investment in any
person; (g) acquire any capital assets or any other investments; (h) sell,
lease, pledge, transfer or dispose of any capital assets other than in the
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ordinary course of business consistent with past practices; (i) enter into any
transaction or make any commitment or any contract or agreement relating to its
assets or business (including the acquisition or disposition of any assets) or
relinquish any contract or other right, in either case, material to Seller or
Subsidiary, other than transactions, commitments and relinquishments in the
ordinary course of business consistent with past practices and those
contemplated by this Agreement; (j) make or change any election in respect of
Taxes, adopt or change any method of accounting or accounting practice in
respect of Taxes, settle any claim in respect of Taxes, or consent to any
consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of Taxes; (k) grant any severance or termination
pay to any director, officer or employee of Seller or Subsidiary, enter into any
employment, severance, management, consulting, deferred compensation or other
similar agreement (or any amendment to any such existing agreement) with any
director, officer or employee of Seller or Subsidiary, change the benefits
payable under existing severance or termination pay policies or employment,
severance, management, consulting or other similar agreements or change the
compensation, bonus or other benefits payable to directors, officers or
employees of Seller or Subsidiary, other than increases in the ordinary course
of business of the compensation of the employees of Seller or Subsidiary; (l)
enter into any partnership arrangements, joint development agreements or
strategic alliances; (m) transfer or license to any person or entity or
otherwise extend, amend or modify in any material respect any rights to the
Intellectual Property or enter into grants to future patent rights, other than
in the ordinary course of business; (n) make any grant of exclusive rights to
any third party; (o) enter into any transaction with any of the stockholders or
any affiliates of any of the stockholders, other than in the ordinary course of,
and pursuant to the reasonable requirements of, its business and upon terms that
are no less favorable to Seller or Subsidiary than Seller or Subsidiary could
obtain in a comparable transaction with a person who was not such a stockholder
or an affiliate of such a stockholder or other than as contemplated by this
Agreement; or (p) agree to do any of the foregoing.
4.5.5 Access. Seller and Subsidiary shall permit officers,
employees, agents, attorneys and accountants and other persons designated by
Buyer full access after reasonable notice during normal business hours to the
properties, books, contracts, commitments, tax returns, examination reports of
the Internal Revenue Service and other records of Seller or Subsidiary in
connection with and in furtherance of the transactions contemplated by this
Agreement. Unless prohibited by law or contract, such designees of Buyer shall
be furnished with true, accurate and complete copies of such contracts,
commitments and other records and all other information with respect to the
assets and business of Seller or Subsidiary as such designees may reasonably
request. Until the Closing Date, (a) Buyer shall keep all such information and
documentation disclosed by the Stockholders, Seller and/or Subsidiary hereunder
confidential; (b) Buyer shall treat such information and documentation with the
same degree of care and confidentiality that it affords its own trade secrets
and proprietary information and shall not make more than one copy of such
information or documentation; (c) Buyer shall not disclose or communicate to any
third party in any manner whatsoever any such information or documentation
supplied by the Stockholders, Seller and/or Subsidiary hereunder without the
prior written consent of the Stockholders; and (d) Buyer shall confine access to
such information and documentation to its attorney and/or accountant or other
individuals who are directly concerned with the evaluation of the acquisition of
the stock of Seller and Subsidiary and shall insure that every such individual
is informed that he or she is bound by the provisions of this Agreement.
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4.5.6 Notices of Certain Events. Seller and Subsidiary shall
promptly notify Buyer of:
4.5.6.1 any notice or other communication from any person
alleging that the consent of such person is or may be required in connection
with the transactions contemplated by this Agreement;
4.5.6.2 any notice or other communication from any
Governmental Authority in connection with the transactions contemplated by this
Agreement;
4.5.6.3 any actions, suits, claims, investigations or
proceedings commenced relating to or involving or otherwise affecting Seller or
Subsidiary that relate to the consummation of the transactions contemplated by
this Agreement; and
4.5.6.4 any matter arising and discovered after the date of
this Agreement that, if existing or known on the date of this Agreement, would
have been required to be disclosed pursuant to this Agreement or that
constitutes a breach or prospective breach of this Agreement by Seller,
Subsidiary or the Stockholders.
4.6 No Press Pledge. Neither the Buyer, Parent, Seller, Subsidiary or
the Stockholders shall issue any press release regarding the transactions
contemplated by this Agreement without obtaining the prior written consent of
the other parties hereto.
ARTICLE 5
CONDITIONS OF CLOSING
5.1 Conditions to Obligations of Buyer. Consummation by Buyer of the
transactions contemplated by this Agreement is subject to the fulfillment on or
prior to the Closing Date of each of the following conditions:
5.1.1 Representations and Warranties. The representations and
warranties of Seller, Subsidiary and the Stockholders contained herein
(including the Schedules hereto) and in any other Transaction Document shall be
true and correct as of the date hereof, as of the Effective Date and as of the
Closing Date; provided, that the representations and warranties contained in
Sections 2.11, 2.15, 2.16, 2.17, 2.19 and 2.21 of this Agreement shall be true
as of date hereof and as of the Closing Date.
5.1.2 Covenants. Each of Seller, Subsidiary and the Stockholders,
as the case may be, shall have performed or complied with all obligations,
agreements and covenants required to be performed or complied with by him or it
hereunder prior to or on the Closing Date.
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<PAGE>
5.1.3 Certificate. Buyer shall have received a certificate from
Seller, Subsidiary and the Stockholders as to their compliance with Sections
5.1.1, 5.1.2, 5.1.11 and 5.1.14 hereof.
5.1.4 No Adverse Change. In the sole opinion of Buyer, there shall
not have occurred since the date of execution and delivery of this Agreement any
adverse change in the business, operations, results of operations, or condition,
financial or otherwise, of Seller and Subsidiary.
5.1.5 Tax Refund. Seller and Subsidiary shall have executed and
delivered an Assignment of Tax Refund in the form attached hereto as Exhibit
5.1.5 and related UCC-1 financing statements in favor of Buyer. In the event
that the Assignment of Tax Refund is deemed invalid or unenforceable in whole or
in part, Seller, Subsidiary and the Stockholders agree to promptly make a cash
payment to Buyer in the amount that would otherwise be due to Buyer thereunder
in the absence of such invalidity or unenforceability.
5.1.6 Employment Agreement. Buyer and Beer shall have executed and
delivered an Employment Agreement on terms acceptable to Buyer and Beer (the
"Employment Agreement").
5.1.7 Consents and Permits. Seller, Subsidiary and the Stockholders
shall have delivered to Buyer all consents, Permits and authorizations necessary
with respect to them for consummation of the transactions contemplated by this
Agreement.
5.1.8 Leased Property. Buyer and Seller shall have entered into a
sublease for the premises located at 4665 Southwest Freeway, Houston, Texas
77027 (the "Lease"). The term of the Lease shall be for five (5) years (with the
right of termination thereof by Buyer at any time upon giving Seller at least
four (4) months' written notice at any time after the first two (2) months of
such Lease). Parent shall have guaranteed the obligations of Buyer pursuant to
the Lease.
5.1.9 Outstanding Debt. Upon payment by Buyer to the Bank of the
amount described in Section 5.2.11 below, the Bank shall at Closing execute and
deliver a release of Buyer, Parent and all of their respective affiliates and
all officers, directors, employees, agents and advisors of Buyer, Parent and all
of their respective affiliates from any further liability or obligation with
respect thereto.
5.1.10 Intentionally Omitted.
5.1.11 No Injunction, Etc. There shall be no legal proceeding then
pending or threatened or any legal requirement proposed, promulgated, enacted or
applicable to the transactions contemplated hereby which seeks to or does (a)
restrain, delay, invalidate, or otherwise prohibit or otherwise make illegal
this Agreement or its consummation in whole or in part, or (b) obtain material
damages or any other material relief arising out of the execution, delivery or
performance of this Agreement.
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<PAGE>
5.1.12 Opinion of Counsel. Schlanger, Mills, Mayer & Grossberg,
L.L.P., counsel to Seller, Subsidiary and the Stockholders, shall have delivered
to Buyer an opinion, dated the Closing Date, substantially in the form of
Exhibit 5.1.12 hereto.
5.1.13 Assignment and Assumption Documents. Seller, Subsidiary
and/or Buyer, as appropriate, shall have executed assignment and assumption
documents in form and content mutually satisfactory to the parties, including,
without limitation, a Bill of Sale substantially in the form of Exhibit
5.1.13(a) hereto (the "Bill of Sale"), an Assumption Agreement substantially in
the form of Exhibit 5.1.13(b) hereto (the "Assumption Agreement"), trademark
assignments substantially in the form of Exhibit 5.1.13(c) hereto (the
"Trademark Assignments"), copyright assignments substantially in the form of
Exhibit 5.1.13(d) hereto, and UCC-3 financing statements assigning the Financing
Statements to Buyer (the "UCC-3s").
5.1.14 Material Customer. No material customer of Seller or
Subsidiary shall have ceased to do business or shall have substantially reduced
its business relationship with Seller or Subsidiary and Seller and Subsidiary
shall not have received any notice to such effect.
5.1.15 Financing. Buyer shall have received financing to effectuate
the transactions contemplated by this Agreement from a lender satisfactory to
Buyer in its sole discretion.
5.1.16 Deliveries. All deliveries required to be made under this
Agreement to Buyer on or before the Closing Date shall have been received by
Buyer.
5.1.17 Creditors. The Major Creditors shall have each agreed to
accept twenty-five percent (25%) of all amounts owed by Seller to it in full
satisfaction of all amounts owed by Seller to such creditor and shall deliver to
Seller and Buyer a general release in substantially the form of Exhibit 5.1.17
hereto.
5.1.18 Cash Surrender Value. Buyer shall have received (a) the Cash
Surrender Values of the Excluded Policies other than the Pledged Cash Surrender
Value, and (b) all documentation deemed necessary by Buyer to assign to Buyer
all rights in the Pledged Cash Surrender Value.
5.1.19 Due Diligence. Buyer shall have been satisfied in its sole
discretion with the results of all due diligence conducted in connection with
this Agreement and the other Transaction Documents, including, without
limitation, with respect to the amounts to be paid by Buyer to the Bank as set
forth in Section 5.2.11 below.
5.2 Conditions to Obligations of Seller, Subsidiary and the
Stockholders. Consummation by Seller, Subsidiary and the Stockholders of the
transactions contemplated by this Agreement is subject to the fulfillment on or
prior to the Closing Date of each of the following conditions:
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<PAGE>
5.2.1 Representations and Warranties. The representations and
warranties of Buyer contained herein and in any other Transaction Document shall
be true and correct as of the date hereof, the Effective Date and the Closing
Date.
5.2.2 Covenants. Buyer shall have performed or complied with all
obligations, agreements and covenants required to be performed or complied with
by it hereunder prior to or on the Closing Date.
5.2.3 Certificate. Seller, Subsidiary and the Stockholders shall
have received a certificate of the President of Buyer as to compliance with
Sections 5.2.1, 5.2.2 and 5.2.4 above.
5.2.4 No Injunction, Etc. There shall be no legal proceeding then
pending or threatened or any legal requirement proposed, promulgated, enacted or
otherwise applicable to the transactions contemplated hereby which seeks to or
does (a) restrain, delay, invalidate, or otherwise prohibit or otherwise make
illegal this Agreement or its consummation in whole or in part, or (b) obtain
material damages or any other material relief arising out of the execution,
delivery or performance of this Agreement.
5.2.5 Deliveries. All deliveries required to be made under this
Agreement by Buyer to Seller, Subsidiary and the Stockholders on or before the
Closing Date shall have been received by the Stockholders.
5.2.6 Employment Agreement. Buyer and Beer shall have executed and
delivered the Employment Agreement.
5.2.7 Consents and Permits. The Buyer shall have delivered to
Seller, Subsidiary and the Stockholders all consents, Permits and authorizations
necessary for consummation by the Buyer and Parent of the transactions
contemplated by this Agreement.
5.2.8 Assignment and Assumption Documents. Seller, Subsidiary
and/or Buyer, as appropriate, shall have executed assignment and assumption
documents in form and content mutually satisfactory to the parties, including,
without limitation, the Bill of Sale, the Assumption Agreement, the Trademark
Assignments and the UCC-3s.
5.2.9 Outstanding Debt. The outstanding principal, interest,
penalties and all other sums due by Seller and/or Subsidiary to the Bank shall
be paid in full by Buyer at Closing and the Bank shall at Closing execute and
deliver a release of Cash, Beer and Wayne of any and all liability or obligation
with respect to such debt (including without limitation the termination and
cancellation of their respective personal guarantees of Cash, Beer and Wayne of
such debt).
5.2.10 Opinion of Counsel. Sills Cummis Zuckerman Radin Tischman
Epstein & Gross, counsel to Buyer, shall have delivered to Seller and Subsidiary
an opinion, dated the Closing Date, substantially in the form of Exhibit 5.2.11
hereto.
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<PAGE>
5.2.11 Promissory Note. Samuel Jacob Berkovits shall have executed
and delivered a Promissory Note to each of the Stockholders in form and
substance satisfactory to Mr. Berkovits and the Stockholders pursuant to which
Mr. Berkovits will assume the loans by the Stockholders to Seller in the amounts
set forth on Schedule 5.2.11.
ARTICLE 6
TERMINATION
6.1 Right to Terminate. This Agreement may be terminated by (a) mutual
written consent of the parties hereto, or (b) written notice from either (i)
Buyer to Seller, Subsidiary and the Stockholders, or (ii) Seller to Buyer if the
Closing has not been consummated within seven (7) business days after the date
of execution and delivery of this Agreement.
6.2 Effect of Termination. In the event of the termination of this
Agreement, each party hereto shall have all rights and remedies to the extent
such termination arises from a misrepresentation, breach of warranty or breach
of covenant.
ARTICLE 7
SURVIVAL; INDEMNIFICATION
7.1 Survival. The covenants, agreements, representations and warranties
of the parties hereto contained in this Agreement shall survive the Closing (a)
indefinitely with respect to those made pursuant to Sections 2.1, 2.2, 2.3 and
2.4 above, (b) until the later of the third anniversary of the Closing Date or
the expiration of the applicable statute of limitations with respect to those
made pursuant to Sections 2.18, 2.23 and 2.24 above, and (c) until twenty-one
(21) months after the Closing Date with respect to all others; provided, that
covenants and agreements contained in this Agreement to be performed following
the Closing Date shall continue in effect as specified herein. Notwithstanding
the preceding sentence (other than the proviso), any claim or liability
regarding any covenant, agreement, representation or warranty arising prior to
the termination of the covenant, agreement, representation or warranty in
respect of which indemnity may be sought under Section 7.2 shall survive such
termination pursuant to the preceding sentence if written notice of the
inaccuracy or breach thereof giving rise to such right to indemnity shall have
been given to party against whom such indemnity may be sought prior to such
time.
7.2 Indemnification by Seller, Subsidiary and the Stockholders. Seller,
Subsidiary and the Stockholders hereby jointly and severally agree to indemnify,
defend, protect, and hold harmless each of Buyer, Parent, their respective
affiliates, and all officers, directors, employees, agents and advisors of
Buyer, Parent and their respective affiliates (each in its capacity as an
indemnified party, a "Buyer Indemnitee") at all times from and after the date of
this Agreement from and against all claims, damages, actions, suits,
proceedings, demands, assessments, adjustments, costs and expenses net of income
tax benefits to such Buyer Indemnitee in the current year (including
specifically, but without limitation, reasonable attorneys' fees and expenses of
investigation) (collectively "Damages") incurred by such Buyer Indemnitee as a
result of or arising out of (a) any breach of any representation or warranty of
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<PAGE>
Seller, Subsidiary, or the Stockholders set forth herein, or in any certificate
or other document delivered in connection herewith with respect to which a claim
for indemnification is brought by a Buyer Indemnitee hereunder, (b) any breach
or nonfulfillment by Seller, Subsidiary or the Stockholders, or any
noncompliance by Seller, Subsidiary or the Stockholders with any, covenant,
agreement, or obligation of Seller, Subsidiary or the Stockholders contained
herein, or in any certificate or other document delivered in connection
herewith, or (c) any Excluded Liability.
7.3 Indemnification by Buyer and Parent. Buyer and Parent hereby
jointly and severally agree to indemnify, defend, protect and hold harmless
Seller, Subsidiary, their respective affiliates (including the Stockholders),
and all officers, directors, employees, agents and advisors of Seller,
Subsidiary and their respective affiliates (each in its capacity as an
indemnified party, a "Seller Indemnitee") at all times from and after the date
of this Agreement from and against all Damages incurred by any of Seller
Indemnitees as a result of or arising out of (a) any breach of any
representation or warranty of the Buyer or Parent set forth herein, or in any
certificate or other document delivered in connection herewith with respect to
which a claim for indemnification is brought by any Stockholder, and/or (b) any
breach or nonfulfillment by the Buyer or Parent or any noncompliance by the
Buyer or Parent with any covenant, agreement or obligation contained herein or
in any certificate or other document delivered in connection herewith, or (c)
any Assumed Liability.
7.4 Third Person Claims. Promptly after a Buyer Indemnitee or a
Stockholder entitled to indemnification hereunder has received notice of or has
knowledge of any claim by a person not a party to this Agreement ("Third
Person") or the commencement of any action or proceeding by a Third Person, such
Buyer Indemnitee or Stockholder, as the case may be, shall, as a condition
precedent to a claim pursuant to this Article 7, give the Buyer, Parent or
Stockholders, as the case may be, required to indemnify such Buyer Indemnitee or
Stockholder pursuant to this Article 7 notice of such claim or the commencement
of such action or proceeding; provided, however, that the failure to give such
notice will not affect such Buyer Indemnitee or Stockholder's right to
indemnification hereunder with respect to such claim, action or proceeding
except to the extent actually prejudiced by such failure to give notice. The
Buyer Indemnitee or Stockholder, as the case may be, shall be entitled to
indemnification under this Article 7 for the reasonable fees and expenses of its
counsel for any period during which the indemnifying parties have not assumed
the defense of any claim. It is understood and agreed that in situations where
failure to settle a claim expeditiously could have an adverse effect on the
indemnified party, the failure of the indemnifying parties to object thereto
within five (5) business days of receipt of notice thereof shall be deemed to
constitute consent to such settlement for purposes of this Article 7.
ARTICLE 8
MISCELLANEOUS
8.1 Amendments. This Agreement may be amended, modified or supplemented
by, and only by, written agreement executed and delivered by the parties hereto
at any time prior to the Closing with respect to any of the terms contained
herein.
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<PAGE>
8.2 Notices. Any and all notices or other communications required or
permitted under this Agreement shall be in writing and shall be deemed
sufficient when sent by confirmed facsimile transmission or federal express,
mailed by United States certified mail, return receipt requested ("Certified
Mail") or delivered in person against receipt, to the party and its counsel to
whom it is to be given at their addresses set forth on Schedule 8.2 or to such
other address as a party shall have furnished in writing in accordance with the
provisions of this Section 8.2. Any such notice shall conclusively be deemed to
have been received three (3) days after mailing by Certified Mail.
8.3 Counterparts; Construction; Joint Effort; No Third Party
Beneficiaries. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument. The headings herein are for convenience of
reference only, do not constitute a part of this Agreement, and shall not be
deemed to limit or affect any of the provisions hereof. All personal pronouns
used in this Agreement and in any other Transaction Document, whether used in
the masculine, feminine or neuter gender, include all other genders; the
singular includes the plural and vice versa. All references herein to Articles,
Sections or Subsections refer to the corresponding Articles, Sections or
Subsections of this Agreement unless specific reference is made to Articles,
Sections or Subsections of another document.
8.4 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by and against the
parties hereto and their respective successors and assigns; provided, however,
that Seller, Subsidiary and the Stockholders may not assign, delegate or
otherwise transfer any of their rights or obligations under this Agreement or
under any other Transaction Document.
8.5 Governing Law; to Jurisdiction. This Agreement and the other
Transaction Documents other than (a) the Promissory Notes referred to in Section
5.2.11, above and (b) the issue as to whether or not a purchaser may rely on the
financial statements prepared by an accountant for a seller (collectively, the
"Texas Issues"), shall be governed by and construed in accordance with the laws
of New Jersey, without regard to the conflicts of law principles thereof. The
Texas Issues shall be governed by and construed in accordance with the laws of
Texas, without regard to the conflicts of law principles thereof. The parties
hereby consent to the jurisdiction of the courts of the State of New Jersey with
respect to all matters relating to this Agreement or any of the other
Transaction Documents.
8.6 Entire Agreement; Amendments; Waivers. This Agreement, together
with the other Transaction Documents and Schedules and Exhibits hereto and
thereto, constitutes the entire understanding of the parties and supersedes any
prior agreements or understandings, written or oral, between or among the
parties hereto with respect to the subject matter hereof. No amendment of,
waiver or consent under, or other modification of this Agreement shall be valid
or binding upon the party against whom same is desired to be enforced unless
made in writing and executed by such party. No consent or waiver, express or
implied, by a party to or of any breach by any other party in the performance by
it of any of its obligations hereunder on any one occasion shall be deemed or
construed to be a consent or waiver to or of the breach in the performance by
such party of the same or any other obligation of such party hereunder on any
other occasion. Failure on the part of any party to complain of any act or
failure to act of any other party hereunder or to declare any other party in
default, irrespective of how long such failure continues, shall not constitute a
waiver by a party of its rights hereunder.
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8.7 Survival of Agreements. Subject to the limitations set forth in
Section 7.1, all of the representations, warranties, covenants and agreements of
all of the parties contained in this Agreement (including in any Schedule or
Exhibit) and/or in any other Transaction Document shall survive the execution,
delivery and performance of this Agreement and each other Transaction Document.
8.8 Severability. If any provision of this Agreement or the application
thereof to any person or circumstance(s) shall be invalid or unenforceable to
any extent, (a) the remainder of this Agreement and the application of such
provision to other person(s) or circumstance(s) shall not be affected thereby,
and (b) each such provision shall be enforced to the greatest extent permitted
by applicable legal requirements. The parties agree that if a court invalidates
or renders unenforceable any provision hereof, it is their intent that such
court either reduce the scope, duration or other aspects of such provision to
the maximum extent enforceable or replace any such provision with a valid and
enforceable provision that comes closest to expressing the intention of the
invalid or unenforceable provision to the maximum extent permitted by law and
this Agreement shall be fully enforceable as so modified.
8.9 Further Assurances. Without limiting the generality of any
provisions of this Agreement, each party shall from time to time prior to, on
and/or after the Closing Date cooperate and take such action as may be
reasonably requested by another party in order to carry out the provisions and
purposes of this Agreement and the transactions contemplated hereby.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this Asset Purchase
Agreement as of the day and year first written above.
<TABLE>
<CAPTION>
<S> <C>
Witness/Attest: AVIV, INC., a Delaware corporation (Buyer)
________________________ By:______________________________
D.G. JEWELLERY OF CANADA LTD. (Parent)
________________________ By:______________________________
AVIV, INC., a Texas corporation (Seller)
________________________ By:______________________________
NEW YORK GOLD & DIAMOND EXCHANGE,
INC., a Texas corporation (Subsidiary)
________________________ By:______________________________
- ------------------------ ------------------------
Gadi Beer
- ------------------------ ------------------------
Allan Wayne
- ------------------------ ------------------------
Steven Cash
</TABLE>
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Exhibit 10.(a)(h)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement") dated as of the day of
February, 1998, by and between Aviv, Inc., a Delaware corporation with a
principal place of business at 4665 Southwest Freeway, Houston, Texas 77027 (the
"Company"), and Gadi Beer, an individual who resides at 49 Briar Hollow #1102,
Houston, Texas 77027 ("Employee").
RECITAL:
The Company desires to offer, and Employee desires to accept,
employment with the Company, in accordance with the terms and subject to the
conditions set forth in this Agreement.
AGREEMENT:
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and accepted, the parties hereto do
hereby agree as follows:
1. TERM OF EMPLOYMENT.
(a) Employment. The Company hereby employs Employee, and
Employee hereby accepts employment with the Company, as the Company's Vice
President, Sales and Marketing, pursuant to the terms hereof.
(b) Employment Term. Employee's term of employment with the
Company hereunder (the "Employment Term") shall commence as of the date hereof
and shall continue for a period of one (1) year. The Employment Term shall be
renewable for successive one (1) year terms upon the joint written agreement of
the parties prior to the expiration of the preceding one (1) year term. This
Agreement shall continue until its expiration or sooner termination in
accordance with the provisions of Section 4 hereof.
2. RESPONSIBILITIES; OTHER ACTIVITIES.
During the Employment Term, Employee shall undertake such
reasonable responsibilities and duties as indicated to him, from time to time,
by the Company. Employee shall be based in Houston, Texas during the Employment
Term, Employee shall faithfully perform the duties of his office, devote all of
his business time and energies to the business and affairs of the Company and
use his good faith, reasonable efforts, skills and abilities to promote the
Company's interests. Employee may not engage in any business activities or
render any services of a business, commercial, or professional nature (whether
or not for
<PAGE>
compensation) that would affect adversely Employee's performance of his
responsibilities and duties hereunder or conflict with the business of the
Company for the benefit of any person or entity other than the Company or any
other division or subsidiary of the Company.
3. COMPENSATION.
(a) Salary. As compensation for the services to be
performed hereunder, Employee shall be entitled to a base salary of One Hundred
Twenty Thousand Dollars ($120,000) per year ("Base Salary"), which Base Salary
shall be payable, in accordance with the standard payroll policies and
procedures of the Company.
(b) Annual Commission. For each fiscal year of the
Company during the Employment Term, Employee shall be entitled to receive a
commission equal to 0.8 percent of the Company's sales (net of returns and
discounts), as determined by the Company's accountants, for such fiscal year
(the "Annual Commission") (such Annual Commission to be prorated for partial
years). The Annual Commission shall be paid by the Company to Employee in
fifty-two (52) weekly draws of $1,539.00 each, provided, however, that the
Company shall have the right to make quarterly adjustments to the amount of such
draws based on the actual sales of the Company. Within thirty (30) days after
the completion of the Company's financial statements for each fiscal year or
termination of this Agreement, the Company or Employee, as the case may be,
shall make the appropriate payment to the other in an amount which the Company's
accountants have determined is necessary to adjust for any overpayments or
underpayments of the Annual Commission. The Company shall have the right to
setoff any amounts owing by Employee to the Company pursuant to this Section
against any amounts owing by the Company to Employee, whether pursuant to this
Agreement or otherwise. Employee shall have the right from time-to-time to
review, inspect and/or audit the books and records of the Company in order to
compute and/or verify the Annual Commission owing to Employee pursuant to this
Section 3(b).
(c) Benefit Plans. During the Employment Term, Employee
shall be entitled to participate in such employee benefit plans or programs,
including health, life, accident and disability insurance, in accordance with
the Company's policies and procedures if offered by the Company or otherwise as
mutually agreed upon by the Company and employee.
(d) Vacation. Employee shall be entitled to accrue ten
(10) vacation days for each year of the Employment Term, determined in
accordance with the Company's standard policies and procedures. Employee shall
also be entitled to all paid holidays to which employees of the Company are
entitled.
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<PAGE>
(e) Travel. Employee shall be required to travel to the
Company's parent's office in Canada from time to time as reasonably requested by
the Company.
(f) Expense Reimbursement. The Company shall pay or
reimburse Employee for all reasonable business and travel expenses incurred by
Employee during the Employment Term in connection with the performance of
Employee's duties and responsibilities hereunder, upon submission of appropriate
invoices, receipts and other documentation in accordance with the standard
policies and procedures of the Company.
4. TERMINATION OF EMPLOYMENT.
(a) Termination Due to Death. In the event of the death
of Employee during the Employment Term, the estate or other legal
representatives of Employee shall be entitled to any amount of earned but unpaid
Base Salary and Annual Commission accrued through the date of death. Any rights
and benefits Employee, or Employee's estate or other legal representatives, may
have under employee benefit plans and programs of the Company upon Employee's
death during the Employment Term, if any, shall be determined in accordance with
the terms and provisions of such plans and programs.
(b) Termination Due to Disability.
(i) Employee's employment hereunder may at the
option of the Company terminate due to disability in the event that for a period
of sixty (60) consecutive days or ninety (90) days during any six (6) month
period during the Employment Term he is unable to fully perform his duties
hereunder due to a physical or mental disability.
(ii) Upon the termination of Employee's employment
due to disability pursuant to Section 4(b)(i) hereof, any rights and benefits
Employee, or Employee's legal representatives, under employee benefit plans and
programs of the Company upon Employee's termination due to disability, if any,
shall be determined in accordance with the terms and provisions of such plans
and programs. In the event of termination of Employee due to disability,
Employee shall be entitled to any amount of earned but unpaid Base Salary and
Annual Commission accrued through the date of termination.
(c) Termination for Cause.
(i) The Company may elect, at any time, to terminate
its obligations hereunder and remove Employee from his employment for "cause" by
giving Employee twenty (20) days prior written notice thereof; provided,
however, that in the event that such termination is a result of the
circumstances contemplated in subsections (A) or (B) of this Section 4(c)(i), no
such notice
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shall be required. For purposes of this Section, "cause" shall mean the
following:
(A) willful misconduct of Employee in
connection with the performance of any of his material duties, including,
without limitation, misappropriation of funds or property of the Company or any
of its affiliates or securing or attempting to secure personally any profit in
connection with any transaction entered into on behalf of the Company or any of
its affiliates;
(B) conduct by Employee that would result in
material injury to the reputation of the Company if he were retained in his
position with the Company;
(C) the entry of any legal order in any action
instituted by any party other than the Company which has the effect of
precluding Employee from performing his duties hereunder for more than twenty
(20) consecutive days;
(D) active and material disloyalty, such as
aiding a competitor; or
(E) continued, deliberate neglect by Employee
of any of his duties hereunder, or;any other material breach by or material
default of Employee of the terms of or under this Agreement, subject to
Employee's right to effect a cure of such neglect or breach within ten (10) days
following Employee's receipt of notice from the Company of such neglect or
breach.
(ii) In the event of termination for cause pursuant
to Section 4(c)(i) hereof, Employee shall be entitled to receive any earned but
unpaid Base Salary and Annual Commission through the date of termination;
provided, however, that any such amounts shall be reduced by the amount of any
damages or expenses incurred by the Company as a result of the event giving rise
to the termination for cause; and provided, further, that such damages shall not
include the amount of any judgment against the Company in favor of Employee as
determined by any court of competent jurisdiction. The rights and benefits
Employee may have under employee benefit plans and programs of the Company
existing as of the date of such termination, if any, shall be determined in
accordance with the terms of such plans and programs. Except as provided in this
Section 4(c)(ii) and otherwise by applicable law, upon termination pursuant to
Section 4(c)(i) hereof, all obligations of the Company to Employee hereunder
shall cease immediately.
(d) Surrender of Company-Related Materials Upon
Termination. If Employee's employment with the Company is terminated for any
reason, except as may be consented to specifically by the Company in writing,
Employee will immediately return to the Company all memoranda, notes, records,
drawings,
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manuals, computer programs, documentation, diskettes, computer tapes and other
documents or media (including all copies thereof) pertaining in any way to all
or any portion of the business of the Company, including, but not limited to,
any Confidential Information or Trade Secrets (as both terms are defined
herein), in the possession or control of Employee, whether drafted, created or
compiled by Employee or received by Employee from other individuals or entities
(whether or not employees of or affiliated with the Company).
5. OWNERSHIP OF EMPLOYEE DEVELOPMENTS.
(a) Employee Developments. All technological, financial,
operating and trading ideas, discoveries, improvements, inventions, discoveries,
enhancements, computer programs, written materials and developments relating in
any way to products designed, developed, sold, installed, or maintained by the
Company, that are developed or conceived of by Employee, individually or in
concert with others (whether or not employees of the Company), during the
Employment Term, wholly or partially during Employee's normal working hours, or
with the use of Company resources (each, an "Employee Development") shall be
considered made for hire by Employee for the Company and prepared within the
scope of Employee's employment. Employee agrees that he shall disclose to the
Company promptly any such Employee Development and provide the Company any work
papers, models, diskettes, computer tapes and any other tangible evidence of
such Employee Development upon the Company's request.
(b) Company Property or Rights. Work made for hire will,
upon creation, be owned exclusively by the Company. If any Employee Development
that otherwise meets the definition set forth above is not considered work made
for hire under applicable law, Employee agrees to assign promptly to the Company
the ownership of such Employee Development without further consideration.
Employee agrees to (i) provide, upon reasonable request of the Company, any
required affidavits or documents of conveyance with respect to such Employee
Development, (ii) assist the Company in obtaining and maintaining patents or
copyrights on or with respect to such Employee Development, and (iii) provide
testimony in any proceeding affecting the right, title, or interest of the
Company in or to such Employee Development or to any trade secrets, patents,
patent applications, copyrights or copyright applications covering any such
Employee Development.
6. CONFIDENTIAL INFORMATION AND TRADE SECRETS.
(a) Non-Disclosure. Except as specifically authorized by
the Company in writing, from the date hereof and continuing forever, Employee
agrees not to (i) disclose any Trade Secrets or Confidential Information to any
individual or entity, or otherwise permit any person or entity to obtain or
disclose any Trade Secrets or Confidential Information, or (ii) use any Trade
Secrets or Confidential Information for Employee's own financial
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gain, whether individually or on behalf of another individual or entity (whether
or not such other individual or entity is any way employed by or affiliated with
the Company). Employee, however, may disclose Trade Secrets or Confidential
Information if and only to the extent required by law or by a valid order or
subpoena issued by a court or administrative agency of competent jurisdiction,
provided that in such event Employee promptly notifies the Company or any
affiliate of the Company which the Trade Secrets or Confidential Information
relates, to afford the Company or its affiliate the opportunity to protect its
interests in such Trade Secrets or Confidential Information.
(b) Trade Secrets. For purposes hereof, the term "Trade
Secrets" means the whole or any portion of any phase of any scientific,
technical or other information, design, process, method, procedure, discovery,
invention, research, formula or improvement that is secret and valuable to the
Company or any affiliate of the Company including, without limitation, system
designs, program materials, source codes, object codes, operations, methods,
system and user documentation, operating processes, equipment design and product
specifications.
(c) Confidential Information. For purposes hereof, the
term "Confidential Information" means any and all information and compilations
of information, in whatever form or medium (including any copies thereof),
relating to any part of the business of the Company or the business of any
affiliate of the Company provided to Employee or any affiliate of Employee
(including any member of Employee's immediate family) or to which Employee or
any affiliate of Employee had access or which he or they obtained or compiled or
had obtained or compiled on his or their behalf, which information or
compilations of information are not a matter of public record or generally known
to the public, including, without limitation, (i) financial information
regarding the Company or any affiliate of the Company; (ii) personnel data,
including compensation arrangements, relating to Employee or any other employee
of the Company or any affiliate of the Company; (iii) internal plans, practices
and procedures of the Company or any affiliate of the Company; (iv) the
requirements of any customers or clients of the Company or any affiliate of the
Company; (v) any other information expressly deemed confidential by labelling or
otherwise by the officers or directors or the Company; and (vi) the terms and
conditions of any other agreements, documents and instruments executed in
connection therewith, including, but not limited to, this Agreement.
(d) Remedy. Employee acknowledges that Employee will have
access to and will become familiar with or obtain Trade Secrets and Confidential
Information and that a violation of Section 6(a) of this Agreement by Employee
may cause irreparable harm to the Company. Accordingly, and notwithstanding the
provisions of Section 9(d) hereof, Employee grants the Company the right to seek
injunctive relief for any such violation, in
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addition to any other legal remedies that may be available to the Company.
7. NON-COMPETITION AGREEMENT.
(a) Covenant. In consideration of Company's agreement to
employ Employee upon the terms and conditions set forth in this Agreement,
Employee covenants and agrees that during the Employment Term, and for a period
of three (3) years following the termination of Employee's employment with the
Company for any reason, Employee shall not engage in a business which competes
with the business of the Company or any of the Company's affiliates as conducted
during the Employment Term, directly or indirectly, personally or as an
employee, owner, consultant, manager, associate, partner, agent or otherwise, or
by means of any corporate or other device within the United States.
(b) Remedy. Employee acknowledges that a violation of
Section 7(a) of this Agreement by Employee may cause irreparable harm to the
Company. Accordingly, Employee grants the Company the right to seek injunctive
relief for any such violation, in addition to any other legal remedies that may
be available to the Company.
8. ASSIGNABILITY.
No rights or obligations under this Agreement may be assigned
or transferred by Employee except (a) his rights to compensation and benefits
hereunder may be transferred by will or operation of law, and (b) his rights
under employee benefit plans or programs described in Section 3(c) may be
assigned or transferred in accordance with such plans or programs.
9. MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of New Jersey without
reference to laws governing conflicts of law.
(b) Entire Agreement. This Agreement contains all of the
understandings and representations between the parties hereto pertaining to the
subject matter hereof and supersede all undertakings and agreements, whether
oral or in writing, if any, previously entered into by them with respect
thereto.
(c) Amendment or Modification; Waiver. No provision in
this Agreement may be amended or waived unless such amendment or waiver is
agreed to in writing, signed by Employee and by an officer of the Company
thereunto duly authorized by the Company. Except as otherwise specifically
provided in this Agreement, no waiver by a party hereto of any breach by the
other party hereto of any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of a similar or
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<PAGE>
dissimilar provision or condition at the same or any prior or subsequent time.
(d) Notice. Any notice or other document or communication
required or permitted to be given or delivered hereunder shall be in writing and
shall be deemed to have been duly given or delivered if (i) mailed by United
States mail, certified, return receipt requested, with proper postage prepaid,
or (ii) otherwise delivered by hand or by overnight delivery, against written
receipt, by a common carrier or commercial courier or delivery service, to the
party to whom it is to be given at the address of such party set forth in the
opening paragraph of this Agreement (or to such other address as a party shall
have designated by notice to the other parties given pursuant hereto). Any such
notice, request, demand, advice, schedule, report, certificate, direction,
instruction or other document or communication so mailed or sent shall be deemed
to have been duly given, if sent by mail, on the third business day following
the date on which it was deposited at a United States post office, if delivered
by hand, at the time of delivery by such commercial courier or delivery service,
and, if delivered by overnight delivery, on the first business day following the
date on which it was delivered to the custody of such common carrier or
commercial courier or delivery service, as all such dates are evidenced by the
applicable delivery receipt, airbill or other shipping or mailing document.
(f) Severability. In the event that any provision or
portion of this Agreement shall be determined to be invalid or unenforceable for
any reason, the remaining provisions or portions of this Agreement shall be
unaffected thereby and shall remain in full force and effect to the fullest
extent permitted by law.
(g) References. In the event of Employee's death or a
judicial determination of his incompetence, reference in this Agreement to
Employee shall be deemed, where appropriate, to refer to his legal
representative, or, where appropriate, to his beneficiary or beneficiaries.
(h) Headings. Headings contained herein are for
convenient reference only and shall not in any way affect the meaning or
interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed, or have caused
this Agreement to be executed by their duly authorized officers, as the case may
be, all as of the day and year first above written.
AVIV, INC., a Delaware corporation
----------------------------------
By: Samuel Jacob Berkovits
Title: President
----------------------------------
Gadi Beer
D.G. Jewellery of Canada, Ltd., a province of Ontario, Canada
corporation (which is the parent of the Company) hereby unconditionally and
irrevocably guarantees to Employee the monetary and other compensatory
obligations of Company under this Employment Agreement to the same extent and
effect as if D.G. Jewellery of Canada, Ltd. were the Company hereunder. This
guaranty of D.G. Jewellery of Canada, Ltd. shall be construed as a guaranty of
payment and not of collection.
D.G. JEWELLERY OF CANADA, LTD.
By:_________________________________
By: Samuel Jacob Berkovits
Title: President
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