<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant /_/
Check the appropriate box:
/_/ Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/_/ Definitive Additional Materials
/_/ Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
D.G. JEWELLERY OF CANADA LTD.
- --------------------------------------------------------------------------------
(Name of Registrant as specified in its charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement), if other than Registrant
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
____________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
____________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11:
____________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
____________________________________________________________________________
5) Total fee paid:
____________________________________________________________________________
/_/ Fee paid previously with preliminary materials.
/_/ Check box if any of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:__________________________________________________
2) Form, Schedule or Registration Statement No.:____________________________
3) Filing Party:____________________________________________________________
4) Date Filed:______________________________________________________________
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
1001 Petrolia Road
Toronto, Canada M3J 2X7
-------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 14, 1998
TO THE STOCKHOLDERS OF D.G. JEWELLERY OF CANADA LTD.:
NOTICE IS HEREBY GIVEN, that the Annual Meeting of Stockholders of D.G.
Jewellery of Canada Ltd. (the "Meeting") will be held at 10:00 a.m. on July 14,
1998 at the offices of D.G. Jewellery of Canada Ltd. (the "Company"), at 1001
Petrolia Road, Toronto, Ontario M3J 2X7, for the following purposes:
1. To elect the Board of Directors of D.G. Jewellery of Canada Ltd. for the
ensuing year;
2. To ratify the appointment of Schwartz, Levitsky, Feldman, Chartered
Accountants, as the Company's independent certified public accountants for
the ensuing year;
3. To ratify the adoption of the 1998 Stock Option Plan;
4. To transact such other business as may properly come before the Meeting and
any continuations and adjournments thereof.
Stockholders of record at the close of business on June 25, 1998 are entitled to
notice of and to vote at the meeting.
In order to ensure a quorum, it is important that Stockholders representing a
majority of the total number of shares issued and outstanding and entitled to
vote, be present in person or represented by their proxies. Therefore, whether
you expect to attend the meeting in person or not, please sign, fill out, date
and return the enclosed proxy in the self-addressed, postage-paid envelope also
enclosed. If you attend the meeting and prefer to vote in person, you can revoke
your proxy.
In addition, please note that abstentions included in the determination of the
number of shares present and voting, for purposes of determining the presence or
absence of a quorum for the transaction of business. Abstentions are not counted
as voted either for or against a proposal.
By Order of the Board of Directors,
Samuel Jacob "Jack" Berkovits
Chairman, Chief Executive Office and President
June 26, 1998
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
1001 PETROLIA ROAD
TORONTO, CANADA M3J 2X7
-------------------------------
PROXY STATEMENT
-------------------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 14, 1998
This Proxy Statement is being furnished in connection with the
solicitation by the Board of Directors of D.G. Jewellery of Canada Ltd. (the
"Company"), for use at the Annual Meeting of Stockholders of the Company (the
"Meeting") to be held on July 14, 1998 at 10:00 a.m. at the Company's offices at
1001 Petrolia Road, Toronto, Canada M3J 2X7, and at any continuation and
adjournment thereof. Anyone giving a proxy may revoke it at any time before it
is exercised by giving the Chairman of the Board of Directors of the Company
written notice of the revocation, by submitting a proxy bearing a later date or
by attending the meeting and voting. This statement, the accompanying Notice of
Meeting and form of proxy have been first sent to the Stockholders on or about
June 26, 1998.
In addition, please note that abstentions are included in the
determination of the number of shares present and voting, for purposes of
determining the presence or absence of a quorum for the transaction of business.
Abstentions are not counted as voted either for or against a proposal.
All properly executed, unrevoked proxies on the enclosed form, which
are received in time will be voted in accordance with the stockholder's
directions, and unless contrary directions are given, will be voted for the
election of directors of the nominees described below.
OWNERSHIP OF SECURITIES
Only stockholders of record at the close of business on June 25, 1998,
the date fixed by the Board of Directors in accordance with the Company's
By-Laws, are entitled to vote at the meeting. As of May 29, 1998, there were
issued and outstanding 5,165,000 shares of the Company's common stock.
Each outstanding share of common stock is entitled to one vote on all
matters properly coming before the meeting. A majority of the shares of the
outstanding common stock is necessary to constitute a quorum for the meeting.
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of the date of this Prospectus, the
names and beneficial ownership of the Company's Common Stock beneficially owned,
directly or indirectly, by (i) each person who is a director or executive
officer of the Company, (ii) all directors and executive officers of the Company
as a group, and (iii) all holders of 5% or more of the outstanding shares of
Common Stock of the Company, both before and after giving effect to this
Offering.
<TABLE>
<CAPTION>
Percentage of Share
Ownership
---------
Names and Address of Beneficial Amount and Nature of Percentage of Shares
Owner(1) Beneficial Ownership(2) Outstanding
-------- ----------------------- -----------
<S> <C> <C>
Jack Berkovits(3).......................... 2,811,250(3) 52.4%
The Berkovits Family Trust................. 426,000 8.2%
Sheba Berkovits(4)......................... 816,000(4) 15.8%
Gary Davis(5).............................. 11,250(5) *
Leonard Fasullo(5)......................... 11,250(5) *
Charles Winston(5)......................... 5,625(5) *
Aaron Grubner(5)........................... 7,500(5) *
5140 Yongo Street
Suite 1540
Toronto, Ontario M2N 62L
Joan A. Pajunen(5)......................... 7,500(5) *
All directors and executive officers
as a group 6 persons....................... 2,854,375 52.8%
</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
2
<PAGE>
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) Includes (i) 426,000 shares of Common Stock owned by the Berkovits Family
Trust of which Mr. Berkovits and his wife are co-trustees; (ii) 390,000
shares of Common Stock owned by his wife and (iii) 201,250 shares issuable
upon options that are currently exercisable or exercisable in the next
sixty days. Does not include an aggregate of 390,000 shares of Common Stock
owned by two of Mr. Berkovits' sons who are independent of their father;
and (ii)176,250 shares of Common Stock underlying the Options which are not
currently exercisable or exercisable in the next sixty days.
(4) 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.
(5) Consists of options which are currently exercisable or exercisable in the
next sixty days.
3
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Five directors are to be elected at the Meeting to hold office until
the next meeting of stockholders or until their successors have been duly
elected and qualified. The election of directors requires the affirmative vote
of at least the majority of shares of Common Stock present or represented at a
meeting at which a quorum is present or represented.
The By-Laws of the Company provide that the authorized number of
directors shall be as set by the Board of Directors but shall not be less than
one or more than ten. The By-Laws require that a majority of the Company's
directors be Canadian residents. The directors hold office until the next annual
meeting of stockholders and until their successors have been elected and
qualified. There are no agreements with respect to the election of directors.
The Company has not to date paid directors fees for service on the Board of
Directors or any committee thereof.
Stockholder Vote Required
The election of the directors will require the affirmative vote of the
majority of the shares present in person or represented by proxy at the Annual
Meeting of Stockholders and entitled to vote on the election of directors.
The Board of Directors recommends a vote for election to the Board of Directors
of the Company of each of the Nominees
<TABLE>
<CAPTION>
Position with the Company Position Held
Name Age Since
<S> <C> <C> <C>
Samuel J. Berkovits..................... 45 Chairman of the Board, 1979
CEO and President
Aaron Grubner........................... 50 Director 1997
Joan A. Pajunen......................... 55 Director 1997
Meyer Feiler............................ 45 Director Nominee
Theodore Bonsignore..................... 51 General Manager-- 1998
Diamonair, Director
Nominee
</TABLE>
4
<PAGE>
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.
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. Mr. Grubner has served as a director of the Company
since 1997.
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. Ms. Pajunen has served as a director
since 1997.
5
<PAGE>
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 administers the Company's 1996 Stock Option Plan, as well as
the 1998 Plan if adopted.
For a period of three years after the effective date of the Company's
Initial Public Offering on April 17, 1997, the Company has agreed to invite a
designee of Joseph Dillon & Co. ("Dillon"), the underwriter to the Company's
initial public offering to attend all meetings of the board of directors, but
such designee will not be entitled to vote or be compensated. To date, Dillon
has not designated a nominee.
It is not expected that any director or committee member will receive
any compensation for acting in such capacity. The Company will reimburse
directors and committee members for all ordinary and necessary expenses incurred
in attending any meeting of the board or any committee thereof.
During the fiscal year ended December 31, 1997, the Company's Board of
Directors met five times on July 24, 1997, August 22, 1997, September 15, 1997,
February 17, 1998 and May 21, 1998, at which all of the Directors were present
and acted by written consent nine times on February 6, 1997, February 10, 1997,
March 17, 1997, March 20, 1997, April 25, 1997, August 22, 1997, November 21,
1997, February 6, 1998 and February 10, 1998, the Audit Committee met on May 21,
1998. The Compensation Committee did not meet.
6
<PAGE>
Executive Compensation
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 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.
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 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/ Restricted Other
Principal Period Annual Stock Options/ Compensa-
Position Ended Compensation Bonus Awards SARs tion
-------- ----- ------------ ----- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Jack Berkovits, Chief 1997 $197,242 187,798 0 377,500 $12,000(1)
Executive Officer 1996 $147,061 0 0 $12,000(1)
and Chairman................. 1995 $146,600 0 0 $12,000(1)
Gadi Beer, Vice President 1997(2) $109,375 0 0
of Sales and Marketing 1996 0 0
Aviv......................... 1995 0 0
</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.
7
<PAGE>
Employment Contracts and Termination of Employment Change and Change-In-Control
Arrangements
Jack Berkovits and the Company entered into a three year employment
agreement commencing April 17, 1997 for Mr. Berkovits to serve as Chief
Executive Officer and President at an annual salary of $250,000 with yearly
increases of no less than $10,000. Should Mr. Berkovits die during the term of
this agreement, his estate or designee shall receive, upon his death, two years
full salary. In the event of disability, Mr. Berkovits is to receive 70% of his
salary for the remainder of the term of the agreement. The agreement also
provides for the Company to maintain approximately $2,000,000 in key-man
insurance on the life of Mr. Berkovits. Currently, the Company is beneficiary of
two "key-man" term policies with a total death benefit of $840,000. The $700,000
policy has been assigned to secure the Company's financing facilities with The
Bank of Nova Scotia. The Company maintains a third policy with a death benefit
of $1.1 million for which Mr. Berkovits is the beneficiary.
Based upon any wrongful termination, which includes changes in
control of the Company through an acquiring person (any person who has acquired
or announces a tender offer or exchange for 25% of the Company), a sale of
substantially all of the assets or merger, acquisition of the Company or its
consolidation with another, or certain types of board changes, the Company shall
pay Mr. Berkovits a lump sum payment, based upon his then compensation,
including benefits and perquisites, from such termination. Such payment shall be
the balance of his compensation for the remainder of the term or compensation
for one year whichever is less; provided, if the payment is in excess of
$100,000, then such excess shall be payable in equal quarterly payments with
interest at the legal rate. The employment agreement also contains a one-year
non-competition provision within a 200 mile radius of the Company's primary
operation in Canada or anywhere in the United States.
The Company entered into an employment agreement with Gadi Beer,
the Vice-President of Sales and Marketing of Aviv for a term of one year
terminating on February 9, 1999. Mr. Beer earns an annual base salary of
$120,000 and is entitled to receive 0.8% of the total sales of Aviv. Mr. Beer
has agreed to a covenant not to compete with the Company for a period of three
years from the date of termination of the agreement. The agreement is renewable
for additional successive one year terms upon the consent of both parties.
No other officer has an employment contract with the Company.
8
<PAGE>
Compensation of Directors
There are no standard arrangements for the payment of any fees to
directors of the Company for acting in such capacity. Directors are reimbursed
for expenses for attending meetings.
The Company has adopted a 1996 Stock Option Plan pursuant to which
options have been granted to officers, directors, consultants, key employees,
advisors and similar parties who provide their skills and expertise to the
Company. See "Options, Warrants or Rights" below.
Options, Warrants or Rights
In December 1996, the board of directors and shareholders adopted
the 1996 D.G. Jewellery of Canada Ltd. Stock Option Plan (the "1996 Plan"),
pursuant to which 500,000 shares of Common Stock are provided for issuance.
The 1996 Plan is administered by the compensation committee or the
board of directors, who determine among other things, those individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock issuable upon the
exercise of the options and the option exercise price.
The 1996 Plan is for a period of ten years, expiring on December
15, 2006. Options may be granted to officers, directors, consultants, key
employees, advisors and similar parties who provide their skills and expertise
to the Company. Options granted under the 1996 Plan may be exercisable for up to
ten years, may require vesting, and shall be at an exercise price all as
determined by the board. Options are non-transferable except by the laws of
descent and distribution or a change in control of the Company, as defined in
the 1996 Plan. Change in control includes (i) the sale of substantially all the
assets of the Company or its merger or consolidation with another, or (ii) a
majority of the board changes other than by election of shareholders pursuant to
board solicitation or by vacancies filled by the board caused by death or
resignation, or (iii) a person or group acquires 25% or makes a tender offer for
25% of the Company's outstanding shares.
If a participant ceases affiliation with the Company by reason of
death, permanent disability or retirement at or after age 65, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other termination gives the participant three months to
exercise except for termination for cause which results in the option becoming
immediately null and void.
Options granted under the 1996 Plan, at the discretion of the
compensation committee or the board, may be exercised either with cash, Common
Stock having a fair market equal to the cash exercise price, the participant's
personal recourse note, or with an assignment to the Company of sufficient
proceeds from the sale of the Common Stock acquired upon exercise of the options
with an authorization to the broker or selling agent to pay that amount to the
Company, or any combination of the above.
9
<PAGE>
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 of the Company.
In February 1997, the Board granted 172,500 Options under the 1996
Plan to 20 persons, including officers, directors and key employees. The Options
are exercisable at $4.50 per share for five years expiring February 9, 2002. On
August 22, 1997, the Compensation Committee lowered the exercise price to $1.38,
which was the Company's stock price on such date. On August 22, 1997, the
Company granted an additional 327,500 options exercisable at $1.38 per share for
five years expiring to Jack Berkovits. All options granted vest and become
issuable at the rate of 25% every six months so that the option are fully vested
and issuable two years from their issuance date. The table below reflects the
Options granted to the present officers and directors of the Company and the
percentage of Options owned by such persons.
10
<PAGE>
<TABLE>
<CAPTION>
Officer and/or Director Expiration Date Options Percent Exercise 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.
11
<PAGE>
CERTAIN TRANSACTIONS
In February 1995, the Company entered into a 10 year lease
consisting of 23,000 square feet for its executive offices and manufacturing
operations in North York, Ontario. The lease is with 1001 Petrolia Road
Limited Partnership ("Petrolia L.P."), the general partner being 1013418 Ontario
Inc. Jack Berkovits, Chairman, CEO and President of the Company, is the sole
owner, officer and director of that general partner. Current rent is $100,605
and increases each year by the greater of $.37 a square foot or the percentage
increase in the Consumer Price Index for the Municipality of Metropolitan
Toronto. Additionally, the Company is paying real estate taxes, utilities and
insurance aggregating $95,000 per year for this facility. See
'Business--Property.' Management is of the opinion that the lease is on terms as
favorable as obtainable from unaffiliated third parties.
Petrolia L.P. through 1013418 Ontario, Inc., the general partner,
owned by Mr. Berkovits, has obtained a five year $660,000 mortgage on the
property, which at 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 weighted average interest rate was 10%. See
Risk Factor No. 8 under "Risk Factors Relating to the Business of the Company",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 10 to "Notes to Consolidated Financial Statements." In
1997, the Company repaid $1.2 million of such loans, including payments to a
third party, Laurbrad Holdings Limited, who had loaned funds to Mr. Berkovits.
Mr. Berkovits loaned the funds to the Company on the same terms, which included
a 20% annual interest rate.
Diamante is a Canadian company operating under the name Oromart
which has five retail jewelry stores. Diamante is owned by a former Vice
President of the Company, Drew Bricker, who is also Diamante's President (since
1984). In 1986, when Mr. Bricker joined the Company as Vice President of
Marketing (see 'Management'), Diamante became inactive. It reinitiated jewelry
outlet stores in 1994. Pursuant to an agreement between the Company and
Diamante, recently rescinded, the Company acted as exclusive supplier of
inventory to Diamante. In 1994 and 1995, the Company had advanced approximately
$50,000 to Diamante to initiate the Diamante stores including leasehold
improvements all of which has been repaid. The Company does not anticipate
advancing any further funds to Diamante. The inventory provided to Diamante,
consists primarily of manufacturing surplus, returns or refurbished jewelry, and
on occasion gold chains and watches purchased by the Company for resale to
Diamante. The inventory is secured by a registered security agreement covering
the assets of Diamante, which security agreement has been assigned to The Bank
of Nova Scotia which holds a substantial security interest in the assets of the
Company. Diamante has guaranteed the Company's bank financing and provided the
bank with a direct security interest in its assets. The Company consolidated,
for financial reporting purposes, with Diamante until February 7, 1997, the
termination date of the agreement with Diamante reflecting the Company's control
over that retail operation. The Company performs certain administrative
functions for Diamante.
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.
12
<PAGE>
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.
13
<PAGE>
PROPOSAL 2
RATIFICATION OF SCHWARTZ, LEVITSKY, FELDMAN, CHARTERED
ACCOUNTANTS, AS THE COMPANY'S INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
The Board of Directors has unanimously approved and unanimously
recommends that the stockholders approve the appointment of Schwartz, Levitsky,
Feldman, Chartered Accountants as the Company's independent certified public
accountants for the ensuing year. A member of Schwartz, Levitsky, Feldman,
Chartered Accountants will be available to answer questions and will have the
opportunity to make a statement if he or she so desires at the Annual Meeting of
Stockholders.
Stockholder Vote Required
Ratification of the appointment of Schwartz, Levitsky, Feldman,
Chartered Accountants as independent certified public accountants will require
the affirmative vote of the majority of the shares present in person or
represented by proxy at the Annual Meeting of Stockholders.
The Board of Directors recommends a vote for the ratification of
the appointment of Schwartz, Levitsky, Feldman, Chartered Accountants as
independent certified public accountants
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PROPOSAL NO. 3
ADOPTION OF THE COMPANY'S
1998 STOCK OPTION PLAN
The Company's 1998 Stock Option Plan (the "1998 Option Plan") was
adopted by the Board of Directors in June 1998. The purpose of the 1998 Option
Plan is to grant directors, executive officers, employees, consultants and
others who provide significant services to the Company a favorable opportunity
to acquire Common Stock so that they have an incentive to contribute to its
success and remain in its employ. Under the 1998 Option Plan, the Company is
authorized to issue options for a total of 500,000 shares of Common Stock.
Description of 1998 Stock Option Plan.
All directors, executive officers, employees, consultants and other
persons who perform significant services for or on behalf of the Company are
eligible to participate in the 1998 Option Plan. The Company currently has
approximately 200 full-time employees.
The Company may grant under the 1998 Option Plan both incentive
stock options ("Incentive Stock Options") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and stock options
that do not qualify for incentive treatment under the Code ("Nonstatutory
Options") or the Income Tax Act of Canada.
A copy of the 1998 Option Plan is attached hereto as Appendix A.
The following summary of the 1998 Option Plan does not purport to be complete
and is qualified in its entirety by reference to the complete text of the 1998
Option Plan.
Administration.
The Plan shall be administered by the Board of Directors of the
Company (the "Board"), if each member is a "disinterested person" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
("Rule 16b-3"), or a committee (the "Committee") of two or more directors, each
of whom is a disinterested person. Appointment of Committee members shall be
effective upon acceptance of appointment. Committee members may resign at any
time by delivering written notice to the Board. Vacancies in the Committee may
be filled by the Board. A majority of the members of the Committee shall
constitute a quorum for the purposes of the Plan. Provided a quorum is present,
the Committee may take action by affirmative vote or consent of a majority of
its members present at a meeting.
Subject to the express provisions of the Plan, the Committee shall
have the authority to construe and interpret the Plan and all Stock Option
Agreements (as defined in Section 3.4 of the 1998 Stock Option Plan) entered
into pursuant hereto and to define the terms used therein, to prescribe, adopt,
amend and rescind rules and regulations relating to the administration of the
Plan and to make all other determinations necessary or advisable for the
administration of the Plan; provided, however, that the Committee may delegate
nondiscretionary administrative duties to such employees of the Company as it
deems proper; and, provided, further, in its absolute discretion, the Board may
at any time and from time to time exercise any and all rights and duties of the
Committee under the Plan. Subject to the express limitations of the Plan, the
Committee shall designate the individuals from among the class of persons
eligible to participate as provided in Section 1.3 of the 1998 Stock Option
Plan, who shall receive options, whether an optionee will receive Incentive
Stock Options or Nonstatutory Options, or both, and the amount, price,
restrictions and all other terms and provisions of such options (which need not
be identical).
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Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and the
Company's officers and directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No members of the Committee or Board
shall be personally liable for any action, determination or interpretation made
in good faith with respect to the Plan, and all members of the Committee shall
be fully protected by the Company in respect of any such action, determination
or interpretation.
Stock Subject to the Plan.
Subject to adjustment as provided in Section 3.5 of the 1998 Stock
Option Plan, the stock to be offered under the Plan shall be shares of
authorized but unissued Common Stock, including any shares repurchased under the
terms of the Plan or any Stock Option Agreement entered into pursuant hereto.
The cumulative aggregate number of shares of Common Stock to be issued under the
Plan shall not exceed 500,000, subject to adjustment as set forth in Section 3.5
of the 1998 Stock Option Plan.
If any option granted hereunder shall expire or terminate for any
reason without having been fully exercised, the unpurchased shares subject
thereto shall again be available for the purposes of the Plan. For purposes of
Section 1.4 of the 1998 Stock Option Plan, where the exercise price of options
is paid by means of the grantee's surrender of previously owned shares of Common
Stock, only the net number of additional shares issued and which remain
outstanding in connection with such exercise shall be deemed "issued" for
purposes of the Plan.
Option Price.
The exercise price of each incentive Stock option granted under the
Plan shall be determined by the Committee, but shall not be less than 100% of
the "Fair Market Value" (as defined below) of Common Stock on the date of grant.
If an Incentive Stock Option is granted to an employee who is a resident of the
United States and who at the time such option is granted owns (within the
meaning of section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of capital stock of the Company, the option exercise
price shall be at least 110% of the Fair Market Value of Common Stock on the
date of grant and the option by its terms shall not be exercisable after the
expiration of 5 years from the date such option is granted. The exercise price
of each Nonstatutory Option also shall be determined by the Committee, but shall
not be less than 85% of the Fair Market Value of Common Stock, as defined in
Section 2.1 of the Plan on the date of grant. The status of each option granted
under the Plan as either an Incentive Stock Option or a Nonstatutory Stock
Option shall be determined by the Committee at the time the Committee acts to
grant the option, and shall be clearly identified as such in the Stock Option
Agreement relating thereto.
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In the discretion of the Committee exercised at the time the option
is exercised, the exercise price of any option granted under the Plan shall be
paid in full in cash, by check or by the optionee's interest-bearing promissory
note (subject to any limitations of applicable state corporations law) delivered
at the time of exercise; provided, however, that subject to the timing
requirements of Section 2.7 of the 1998 Stock Option Plan, in the discretion of
the Committee and upon receipt of all regulatory approvals, the person
exercising the option may deliver as payment in whole or in part of such
exercise price certificates for Common Stock of the Company (duly endorsed or
with duly executed stock powers attached), which shall be valued at its Fair
Market Value on the day of exercise of the option, or other property deemed
appropriate by the Committee; and, provided further, the so-called cashless
exercises as permitted under applicable rules and regulations of the Securities
and Exchange Commission and the Federal Reserve Board shall be permitted in the
discretion of the Committee. Without limiting the Committee's discretion in this
regard, consecutive book entry stock-for-stock exercises of options (or
"pyramiding") also are permitted in the Committee's discretion.
Irrespective of the form of payment, the delivery of shares
pursuant to the exercise of an option shall be conditioned upon payment by the
optionee to the Company of amounts sufficient to enable the Company to pay all
federal, state, and local withholding taxes applicable, in the Company's
judgment, to the exercise. In the discretion of the Committee, such payment to
the Company may be effected through (i) the Company's withholding from the
number of shares of Common Stock that would otherwise be delivered to the
optionee by the Company on exercise of the option a number of shares of Common
Stock equal in value (as determined by the Fair Market Value of Common Stock on
the date of exercise) to the aggregate withholding taxes, (ii) payment by the
optionee to the Company of the aggregate withholding taxes in cash, (iii)
withholding by the Company from other amounts contemporaneously owed by the
Company to the optionee, or (iv) any combination of these three methods, as
determined by the Committee in its discretion.
Option Period.
(a) The Committee shall provide, in the terms of each Stock Option
Agreement, when the option subject to such agreement expires and becomes
unexercisable, but in no event will an Incentive Stock Option granted under the
Plan be exercisable after the expiration of ten years from the date it is
granted. Without limiting the generality of the foregoing, the Committee may
provide in the Stock Option Agreement that the option subject thereto expires 90
days following a Termination of Employment for any reason other than death or
disability or one year following a Termination of Employment for disability or
following an optionee's death.
(b) Outside Date for Exercise. Notwithstanding any provision of
this Section 2.2 of the 1998 Stock Option Plan, in no event shall any option
granted under the Plan be exercised after the expiration date of such option set
forth in the applicable Stock Option Agreement.
Exercise of Options.
Each option granted under the Plan shall become exercisable and the
total number of shares subject thereto shall be purchasable, in a lump sum or in
such installments, which need not be equal, as the Committee shall determine;
provided, however, that each option shall become exercisable in full no later
than ten years after such option is granted, and each option shall become
exercisable as to at least 10% of the shares of Common Stock covered thereby on
each anniversary of the date such option is granted; and provided, further, that
if the holder of an option shall not in
17
<PAGE>
any given installment period purchase all of the shares which such holder is
entitled to purchase in such installment period, such holder's right to purchase
any shares not purchased in such installment period shall continue until the
expiration or sooner termination of such holder's option. The Committee may, at
any time after grant of the option and from time to time, increase the number of
shares purchasable in any installment, subject to the total number of shares
subject to the option and the limitations set forth in Section 2.5 of the 1998
Stock Option Plan. At any time and from time to time prior to the time when any
exercisable option or exercisable portion thereof becomes unexercisable under
the Plan or the applicable Stock Option Agreement, such option or portion
thereof may be exercised in whole or in part; provided, however, that the
Committee may, by the terms of the option, require any partial exercise to be
with respect to a specified minimum number of shares. No option or installment
thereof shall be exercisable except with respect to whole shares. Fractional
share interests shall be disregarded, except that they may be accumulated as
provided above and except that if such a fractional share interest constitutes
the total shares of Common Stock remaining available for purchase under an
option at the time of exercise, the optionee shall be entitled to receive on
exercise a certified or bank cashier's check in an amount equal to the Fair
Market Value of such fractional share of stock.
The exercise price of an option may not be less than the fair
market value per share of Common Stock on the date that the option is granted in
order to receive certain tax benefits under the Income Tax Act of Canada (the
"ITA"). If the exercise price is below fair market value a benefit equal to the
amount by which the fair market value of the shares at the time the employee
acquires them exceeds the total of the amount paid for the shares or the amount
paid for the right to acquire the shares shall be deemed to be received by the
employee in the year the shares are acquired pursuant to paragraph 7(1) of the
ITA. Where the exercise price of the option is equal to the fair market value of
the shares at the time the option is granted, paragraph 110(1)(d) of the ITA
allows a deduction from income equal to one quarter of the benefit as calculated
above. If the exercise price of the option is less than the fair market value at
the time it is granted, no deduction under paragraph 110(1)(d) is permitted.
Options granted to any non-employees, whether directors or consultants or
otherwise will confer a tax benefit in contemplation of the person becoming a
shareholder pursuant to subsection 15(1) of the ITA.
Transferability of Options.
Except as the Committee may determine as aforesaid, an option
granted under the Plan shall, by its terms, be nontransferable by the optionee
other than by will or the laws of descent and distribution, or pursuant to a
qualified domestic relations order (as defined by the Code), and shall be
exercisable during the optionee's lifetime only by the optionee or by his or her
guardian or legal representative.
Issuance of Stock Certificates.
Upon exercise of an option, the Company shall deliver to the person
exercising such option a stock certificate evidencing the shares of Common Stock
acquired upon exercise. Notwithstanding the foregoing, the Committee in its
discretion may require the Company to retain possession of any certificate
evidencing stock acquired upon exercise of an option which remains subject to
repurchase under the provisions of the Stock Option Agreement or any other
agreement signed by the optionee in order to facilitate such repurchase
provisions.
18
<PAGE>
Adjustments Upon Changes in Capitalization; Merger and
Consolidation.
If the outstanding shares of Common Stock are changed into, or
exchanged for cash or a different number or kind of shares or securities of the
Company or of another corporation through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment shall be made by the Committee in
the number and kind of shares as to which options and restricted stock may be
granted. In the event of such a change or exchange, other than for shares or
securities of another corporation or by reason of reorganization, the Committee
shall also make a corresponding adjustment changing the number or kind of shares
and the exercise price per share allocated to unexercised options or portions
thereof, which shall have been granted prior to any such change, shall likewise
be made. Any such adjustment, however, shall be made without change in the total
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for each share (except for any change in
the aggregate price resulting from rounding-off of share quantities or prices).
In the event of a "spin-off" or other substantial distribution of
assets of the Company which has a material diminutive effect upon the Fair
Market Value of the Common Stock, the Committee in its discretion shall make an
appropriate and equitable adjustment to the exercise prices of options then
outstanding under the Plan.
Where an adjustment under Section 3.5 of the 1998 Stock Option
Plan, of the type described above is made to an Incentive Stock Option held by a
resident of the United States, the adjustment will be made in a manner which
will not be considered a "modification" under the provisions of subsection
424(b)(3) of the Code.
In connection with the dissolution or liquidation of the Company or
a partial liquidation involving 50% or more of the assets of the Company, a
reorganization of the Company in which another entity is the survivor, a merger
or reorganization of the Company under which more than 50% of the Common Stock
outstanding prior to the merger or reorganization is converted into cash or into
a security of another entity, a sale of more than 50% of the Company's assets,
any person or group of affiliated or associated persons, other than present
management and directors, acquires 25% of more of the outstanding shares, or a
similar event that the Committee determines, in its discretion, would materially
alter the structure of the Company or its ownership, the Committee, upon 30 days
prior written notice to the option holders, may, in its discretion, do one or
more of the following: (i) shorten the period during which options are
exercisable (provided they remain exercisable for at least 30 days after the
date the notice is given); (ii) accelerate any vesting schedule to which an
option is subject; (iii) arrange to have the surviving or successor entity grant
replacement options with appropriate adjustments in the number and kind of
securities and option prices, or (iv) cancel options upon payment to the option
holders in cash, with respect to each option to the extent then exercisable
(including any options as to which the exercise has been accelerated as
contemplated in clause (ii) above), of any amount that is the equivalent of the
Fair Market Value of the Common Stock (at the effective time of the dissolution,
liquidation, merger, reorganization, sale or other event) or the fair market
value of the option. In the case of a change in corporate control, the Committee
may, in considering the advisability or the terms and conditions of any
acceleration of the exercisability of any option pursuant to this Section 3.5,
take into account the penalties that may result directly or indirectly from such
acceleration to either the Company or the option holder, or both, under Section
280G of the Code, and may decide to limit such acceleration to the extent
necessary to avoid or mitigate such penalties or their effects.
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<PAGE>
No fractional share of Common Stock shall be issued under the Plan
on account of any adjustment under Section 3.5 of the 1998 Stock Option Plan.
Amendment and Termination.
The Board or the Committee may at any time suspend, amend or
terminate the Plan and may, with the consent of the option holder, make such
modifications of the terms and conditions of such option holder's option as it
shall deem advisable, provided, however, that, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or the Committee may, (A) materially
increase the benefits accruing to participants under the Plan; (B) materially
increase the number of securities which may be issued under the Plan; or (C)
materially modify the requirements as to eligibility for participation in the
Plan. No option may be granted during any suspension of the Plan or after such
termination. The amendment, suspension or termination of the Plan shall not,
without the consent of the option holder affected thereby, alter or impair any
rights or obligations under any option theretofore granted under the Plan. No
option way be granted during any period of suspension nor after termination of
the Plan, and in no event may any option be granted under the Plan after the
expiration of ten years from the date the Plan is adopted by the Board.
Privileges of Stock Ownership; Non-Distributive Intent; Reports to
Option Holders.
A participant in the Plan shall not be entitled to the privilege of
stock ownership as to any shares of Common Stock not actually issued to the
optionee. Upon exercise of an option at a time when there is not in effect under
the Securities Act of 1933, as amended, a Registration Statement relating to the
Common Stock issuable upon exercise or payment therefor and available for
delivery a Prospectus meeting the requirements of Section 10(a)(3) of said Act,
the optionee shall represent and warrant in writing to the Company that the
shares purchased are being acquired for investment and not with a view to the
distribution thereof.
The Company shall furnish to each optionee under the Plan the
Company's annual report and such other periodic reports, if any, as are
disseminated by the Company in the ordinary course to its stockholders.
Termination.
The Plan shall terminate automatically as of the close of business
on the day preceding the tenth anniversary date of its adoption by the Board or
earlier as provided in Section 3.8. Unless otherwise provided herein, the
termination of the Plan shall not affect the validity of any option agreement
outstanding at the date of such termination.
U.S. Federal Income Tax Treatment.
Under the Code, neither the grant nor the exercise of Incentive
Stock Options is a taxable event to the optionee (except to the extent an
optionee may be subject to alternative minimum tax); rather, the optionee is
subject to tax only upon the sale of the common stock acquired upon exercise of
the Incentive Stock Option. Upon such a sale, the entire difference between the
amount realized upon the sale and the exercise price of the option will be
taxable to the optionee. Subject to certain holding period requirements, such
difference will be taxed as a capital gain rather than as ordinary income.
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<PAGE>
Optionees who receive Nonstatutory Options will be subject to
taxation upon exercise of such options on the spread between the Fair Market
Value of the Common Stock on the date of exercise and the exercise price of such
options. This spread is treated as ordinary income to the optionee, and the
Company is permitted to deduct as an employee expense a corresponding amount.
Nonstatutory Options do not give rise to a tax preference item subject to the
alternative minimum tax.
Canadian Federal Income Tax Treatment.
The exercise price of an option may not be less than the fair
market value per share of Common Stock on the date that the option is granted in
order to receive certain tax benefits under the Income Tax Act of Canada (the
"ITA"). If the exercise price is below fair market value a benefit equal to the
amount by which the fair market value of the shares at the time the employee
acquires them exceeds the total of the amount paid for the shares or the amount
paid for the right to acquire the shares shall be deemed to be received by the
employee in the year the shares are acquired pursuant to paragraph 7(1) of the
ITA. Where the exercise price of the option is equal to the fair market value of
the shares at the time the option is granted, paragraph 110(1)(d) of the ITA
allows a deduction from income equal to one quarter of the benefit as calculated
above. If the exercise price of the option is less than the fair market value at
the time it is granted, no deduction under paragraph 110(1)(d) is permitted.
Options granted to any non-employees, whether directors or consultants or
otherwise will confer a tax benefit in contemplation of the person becoming a
shareholder pursuant to subsection 15(1) of the ITA.
21
<PAGE>
STOCKHOLDER VOTE REQUIRED
Approval of the Company's 1998 Stock Option Plan requires the
affirmative vote of the holders of a majority of the shares of Common Stock
present in person or represented by proxy at the Annual Meeting of Stockholders.
The Board of Directors recommends a vote for approval of
the Company's 1998 Stock Option Plan.
OTHER MATTERS
The Board of Directors does not know of any matters other than
those referred to in the Notice of Meeting which will be presented for
consideration at the meeting. However, it is possible that certain proposals may
be raised at the meeting by one or more stockholders. In such case, or if any
other matter should properly come before the meeting, it is the intention of the
person named in the accompanying proxy to vote such proxy in accordance with his
or her best judgement.
SOLICITATION OF PROXIES
The cost of soliciting proxies will be borne by the Company.
Solicitations may be made by mail, personal interview, telephone, and telegram
by directors, officers and employees of the Company. The Company will reimburse
banks, brokerage firms, other custodians, nominees and fiduciaries for
reasonable expenses incurred in sending proxy material to beneficial owners of
the Company's capital stock.
STOCKHOLDER PROPOSALS
In order to be included in the materials for the Company's next
Annual Meeting of Stockholders, stockholder proposals must be received by the
Company on or before March 31, 1999.
22
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ANNUAL AND QUARTERLY REPORTS TO THE SECURITIES AND EXCHANGE
COMMISSION
The Annual Report on Form 20-F for the year ended December 31, 1997
as filed with the Securities and Exchange Commission will be made available to
stockholders free of charge by writing to 1001 Petrolia Road, Toronto, Ontario
M3J 2X7, Attention: Corporate Secretary.
By Order of the Board of Directors,
Samuel Jacob "Jack" Berkovits
Chairman, President and Chief Executive Officer
June 26, 1998
23
<PAGE>
D.G. JEWELLERY OF CANADA, LTD.
1998 STOCK OPTION PLAN
As adopted June ___, 1998
<PAGE>
1. PURPOSE OF PLAN; ADMINISTRATION
1.1 Purpose.
D.G. Jewellery of Canada, Ltd. 1998 Stock Option Plan (hereinafter, the
"Plan") is hereby established to grant to officers and other employees of D.G.
Jewellery of Canada, Ltd. (the "Company") or of its parents or subsidiaries (as
defined in Sections 424(e) and (f), respectively, of the United States Internal
Revenue Code of 1986, as amended (the "Code")), if any (individually and
collectively, the Company"), and to non-employee directors, consultants and
advisors and other persons who may perform significant services for or on behalf
of the Company, a favorable opportunity to acquire common stock ("Common
Stock"), of the Company and, thereby, to create an incentive for such persons to
remain in the employ of or provide services to the Company and to contribute to
its success.
The Company may grant under the Plan both incentive stock options
within the meaning of Section 422 of the Code ("Incentive Stock Options") and
stock options that do not qualify for treatment as Incentive Stock Options
("Nonstatutory Options"). Unless expressly provided to the contrary herein, all
references herein to "options,' shall include both incentive Stock Options and
Nonstatutory Options.
1.2 Administration.
The Plan shall be administered by the Board of Directors of the Company
(the "Board"), if each member is a "Non-Employee Director" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"),
or a committee (the "Committee") of two or more directors, each of whom is a
Non-Employee Director. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be filled
by the Board.
A majority of the members of the Committee shall constitute a quorum
for the purposes of the Plan. Provided a quorum is present, the Committee may
take action by affirmative vote or consent of a majority of its members present
at a meeting. Meetings may be held telephonically as long as all members are
able to hear one another, and a member of the Committee shall be deemed to be
present for this purpose if he or she is in simultaneous communication by
telephone with the other members who are able to hear one another. In lieu of
action at a meeting, the Committee may act by written consent of a majority of
its members.
Subject to the express provisions of the Plan, the Committee shall have
the authority to construe and interpret the Plan and all Stock Option Agreements
(as defined in Section 3.4) entered into pursuant hereto and to define the terms
used therein, to prescribe, adopt, amend and rescind rules and regulations
relating to the administration of the Plan and to make all other determinations
2
<PAGE>
necessary or advisable for the administration of the Plan; provided, however,
that the Committee may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper; and, provided, further, in its
absolute discretion, the Board may at any time and from time to time exercise
any and all rights and duties of the Committee under the Plan. Subject to the
express limitations of the Plan, the Committee shall designate the individuals
from among the class of persons eligible to participate as provided in Section
1.3 who shall receive options, whether an optionee will receive Incentive Stock
Options or Nonstatutory Options, or both, and the amount, price, restrictions
and all other terms and provisions of such options (which need not be
identical).
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and the
Company's officers and directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No members of the Committee or Board
shall be personally liable for any action, determination or interpretation made
in good faith with respect to the Plan, and all members of the Committee shall
be fully protected by the Company in respect of any such action, determination
or interpretation.
1.3 Participation.
Officers and other employees of the Company, non-employee directors,
consultants and advisors and other persons who may perform significant services
on behalf of the Company shall be eligible for selection to participate in the
Plan upon approval by the Committee; provided, however, that only "employees"
(within the meaning of Section 3401(c) of the Code) of the Company shall be
eligible for the grant of Incentive Stock Options. An individual who has been
granted an option may, if otherwise eligible, be granted additional options if
the Committee shall so determine. No person is eligible to participate in the
Plan by matter of right; only those eligible persons who are selected by the
Committee in its discretion shall participate in the Plan.
1.4 Stock Subject to the Plan.
Subject to adjustment as provided in Section 3.5, the stock to be
offered under the Plan shall be shares of authorized but unissued Common Stock,
including any shares repurchased under the terms of the Plan or any Stock Option
Agreement entered into pursuant hereto. The cumulative aggregate number of
shares of Common Stock to be issued under the Plan shall not exceed 500,000,
subject to adjustment as set forth in Section 3.5.
If any option granted hereunder shall expire or terminate for any
reason without having been fully exercised, the unpurchased shares subject
thereto shall again be available for the purposes of the Plan. For purposes of
this Section 1.4, where the exercise price of options is paid by means of the
grantee's surrender of previously owned shares of Common Stock, only the net
number of additional shares issued and which remain outstanding in connection
with such exercise shall be deemed "issued" for purposes of the Plan.
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<PAGE>
2. STOCK OPTIONS
2.1 Exercise Price; Payment.
(a) The exercise price of each Incentive Stock Option granted under the
Plan shall be determined by the Committee, but shall not be less than 100% of
the "Fair Market Value" (as defined below) of Common Stock on the date of grant.
If an Incentive Stock Option is granted to an employee who (i) at the time such
option is granted owns (within the meaning of section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of capital stock of
the Company and (ii) is a U.S. resident, the option exercise price shall be at
least 110% of the Fair Market Value of Common Stock on the date of grant. The
exercise price of each Nonstatutory Option also shall be determined by the
Committee, but shall not be less than 85% of the Fair Market Value of Common
Stock on the date of grant. The status of each option granted under the Plan as
either an Incentive Stock Option or a Nonstatutory Option shall be determined by
the Committee at the time the Committee acts to grant the option, and shall be
clearly identified as such in the Stock Option Agreement relating thereto.
"Fair Market Value" for purposes of the Plan shall mean: (i) the
closing price of a share of Common Stock on the principal exchange on which
shares of Common Stock are then trading, if any, on the day immediately
preceding the date of grant, or, if shares were not traded on the day preceding
such date of grant, then on the next preceding trading day during which a sale
occurred; or (ii) if Common Stock is not traded on an exchange but is quoted on
Nasdaq or a successor quotation system, (1) the last sales price (if Common
Stock is then listed on the Nasdaq Stock Market) or (2) the mean between the
closing representative bid and asked price (in all other cases) for Common Stock
on the day prior to the date of grant as reported by Nasdaq or such successor
quotation system; or (iii) if there is no listing or trading of Common Stock
either on a national exchange or over-the-counter, that price determined in good
faith by the Committee to be the fair value per share of Common Stock, based
upon such evidence as it deems necessary or advisable.
(b) In the discretion of the Committee at the time the option is
exercised, the exercise price of any option granted under the Plan shall be paid
in full in cash, by check or by the optionee's interest-bearing promissory note
(subject to any limitations of applicable state corporations law) delivered at
the time of exercise; provided, however, that subject to the timing requirements
of Section 2.7, in the discretion of the Committee and upon receipt of all
regulatory approvals, the person exercising the option may deliver as payment in
whole or in part of such exercise price certificates for Common Stock of the
Company (duly endorsed or with duly executed stock powers attached), which shall
be valued at its Fair Market Value on the day of exercise of the option, or
other property deemed appropriate by the Committee; and, provided further, that,
subject to Section 422 of the Code, so-called cashless exercises as permitted
under applicable rules and regulations of the Securities and Exchange Commission
and the Federal Reserve Board shall be permitted in the discretion of the
Committee. Without limiting the Committee's discretion in this regard,
consecutive book entry stock-for-stock exercises of options (or "pyramiding")
also are permitted in the Committee's discretion.
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Irrespective of the form of payment, the delivery of shares issuable
upon the exercise of an option shall be conditioned upon payment by the optionee
to the Company of amounts sufficient to enable the Company to pay all federal,
state, and local withholding taxes resulting, in the Company's judgment, from
the exercise. In the discretion of the Committee, such payment to the Company
may be effected through (i) the Company's withholding from the number of shares
of Common Stock that would otherwise be delivered to the optionee by the Company
on exercise of the option a number of shares of Common Stock equal in value (as
determined by the Fair Market Value of Common Stock on the date of exercise) to
the aggregate withholding taxes, (ii) payment by the optionee to the Company of
the aggregate withholding taxes in cash, (iii) withholding by the Company from
other amounts contemporaneously owed by the Company to the optionee, or (iv) any
combination of these three methods, as determined by the Committee in its
discretion.
2.2 Option Period.
(a) The Committee shall provide, in the terms of each Stock Option
Agreement, when the option subject to such agreement expires and becomes
unexercisable, but in no event will an Incentive Stock Option granted under the
Plan be exercisable after the expiration of ten years from the date it is
granted. Without limiting the generality of the foregoing, the Committee may
provide in the Stock Option Agreement that the option subject thereto expires 90
days following a Termination of Employment (as defined in Section 3.2 hereof)
for any reason other than death or disability, or one year following a
Termination of Employment for disability or following an optionee's death.
Except as limited by the Option Agreement, the Committee may declare any options
null and void if the holder of such options is terminated for cause.
(b) Outside Date for Exercise. Notwithstanding any provision of this
Section 2.2, in no event shall any option granted under the Plan be exercised
after the expiration date of such option set forth in the applicable Stock
Option Agreement.
2.3 Exercise of Options.
Each option granted under the Plan shall become exercisable and the
total number of shares subject thereto shall be purchasable, in a lump sum or in
such installments, which need not be equal, as the Committee shall determine;
provided, however, that each option shall become exercisable in full no later
than ten years after such option is granted, and each option shall become
exercisable as to at least 10% of the shares of Common Stock covered thereby on
each anniversary of the date such option is granted; and provided, further, that
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if the holder of an option shall not in any given installment period purchase
all of the shares which such holder is entitled to purchase in such installment
period, such holder's right to purchase any shares not purchased in such
installment period shall continue until the expiration or sooner termination of
such holder's option. The Committee may, at any time after grant of the option
and from time to time, increase the number of shares purchasable in any
installment, subject to the total number of shares subject to the option and the
limitations set forth in Section 2.5. At any time and from time to time prior to
the time when any exercisable option or exercisable portion thereof becomes
unexercisable under the Plan or the applicable Stock Option Agreement, such
option or portion thereof may be exercised in whole or in part; provided,
however, that the Committee may, by the terms of the option, require any partial
exercise to be with respect to a specified minimum number of shares. No option
or installment thereof shall be exercisable except with respect to whole shares.
Fractional share interests shall be disregarded, except that they may be
accumulated as provided above and except that if such a fractional share
interest constitutes the total shares of Common Stock remaining available for
purchase under an option at the time of exercise, the optionee shall be entitled
to receive on exercise a certified or bank cashier's check in an amount equal to
the Fair Market Value of such fractional share of stock.
2.4 Transferability of Options.
Except as the Committee may determine as aforesaid, an option granted
under the Plan shall, by its terms, be nontransferable by the optionee other
than by will or the laws of descent and distribution, or pursuant to a qualified
domestic relations order (as defined by the Code), and shall be exercisable
during the optionee's lifetime only by the optionee or by his or her guardian or
legal representative. More particularly, but without limiting the generality of
the immediately preceding sentence, an option may not be assigned, transferred
(except as provided in the preceding sentence), pledged or hypothecated (whether
by operation of law or otherwise), and shall not be subject to execution,
attachment or similar process. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of any option contrary to the provisions of
the Plan and the applicable Stock Option Agreement, and any levy of any
attachment or similar process upon an option, shall be null and void, and
otherwise without effect, and the Committee may, in its sole discretion, upon
the happening of any such event, terminate such option forthwith.
2.5 Limitation on Exercise of Incentive Stock Options.
To the extent that the aggregate Fair Market Value (determined on the
date of grant as provided in Section 2.1 above) of the Common Stock with respect
to which Incentive Stock Options granted hereunder (together with all other
Incentive Stock Option plans of the Company) are exercisable for the first time
by an optionee who is a U.S. citizen in any calendar year under the Plan exceeds
$100,000, such options granted hereunder shall be treated as Nonstatutory
Options to the extent required by Section 422 of the Code. The rule set forth in
the preceding sentence shall be applied by taking options into account in the
order in which they were granted.
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2.6 Disqualifying Dispositions of Incentive Stock Options.
If the option holder is a U.S. citizen and if Common Stock acquired
upon exercise of any Incentive Stock Option is disposed of in a disposition
that, under Section 422 of the Code, disqualifies the option holder from the
application of Section 421(a) of the Code, the holder of the Common Stock
immediately before the disposition shall comply with any requirements imposed by
the Company in order to enable the Company to secure the related income tax
deduction to which it is entitled in such event.
2.7 Certain Timing Requirements.
At the discretion of the Committee, shares of Common Stock issuable to
the optionee upon exercise of an option may be used to satisfy the option
exercise price or the tax withholding consequences of such exercise, in the case
of persons subject to Section 16 of the Securities Exchange Act of 1934, as
amended, only (i) during the period beginning on the third business day
following the date of release of the quarterly or annual summary statement of
sales and earnings of the Company and ending on the twelfth business day
following such date or (ii) pursuant to an irrevocable written election by the
optionee to use shares of Common Stock issuable to the optionee upon exercise of
the option to pay all or part of the option price or the withholding taxes made
at least six months prior to the payment of such option price or withholding
taxes.
2.8 No Effect on Employment.
Nothing in the Plan or in any Stock Option Agreement hereunder shall
confer upon any optionee any right to continue in the employ of the Company, any
Parent Corporation or any subsidiary or shall interfere with or restrict in any
way the rights of the Company, its Parent Corporation and its Subsidiaries,
which are hereby expressly reserved, to discharge any optionee at any time for
any reason whatsoever, with or without cause.
For purposes of the Plan, "Parent Corporation" shall mean any
corporation in an unbroken chain of corporations ending with the Company if each
of the corporations other than the Company then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain. For purposes of the Plan, "Subsidiary" shall
mean any corporation in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
3. OTHER PROVISIONS
3.1 Sick Leave and Leaves of Absence.
Unless otherwise provided in the Stock Option Agreement, and to the
extent permitted by Section 422 of the Code, an optionee's employment shall not
be deemed to terminate by reason of sick leave, military leave or other leave of
absence approved by the Company if the period of any such leave does not exceed
a period approved by the Company, or, if longer, if the optionee's right to
reemployment by the Company is guaranteed either contractually or by statute. A
Stock Option Agreement may contain such additional or different provisions with
respect to leave of absence as the Committee may approve, either at the time of
grant of an option or at a later time.
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3.2 Termination of Employment.
For purposes of the Plan "Termination of Employment," shall mean the
time when the employee-employer relationship between the optionee and the
Company, any Subsidiary or any Parent Corporation is terminated for any reason,
including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) terminations where
there is a simultaneous reemployment or continuing employment of an optionee by
the Company, any Subsidiary or any Parent Corporation, (ii) at the discretion of
the Committee, terminations which result in a temporary severance of the
employee-employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company, a Subsidiary or any Parent Corporation
with the former employee. Subject to Section 3.1, the Committee, in its absolute
discretion, shall determine the affect of all matters and questions relating to
Termination of Employment; provided, however, that, with respect to Incentive
Stock Options, a leave of absence or other change in the employee-employer
relationship shall constitute a Termination of Employment if, and to the extent
that such leave of absence or other change interrupts employment for the
purposes of Section 422(a)(2) of the Code and the then-applicable regulations
and revenue rulings under said Section.
3.3 Issuance of Stock Certificates.
Upon exercise of an option, the Company shall deliver to the person
exercising such option a stock certificate evidencing the shares of Common Stock
acquired upon exercise. Notwithstanding the foregoing, the Committee in its
discretion may require the Company to retain possession of any certificate
evidencing stock acquired upon exercise of an option which remains subject to
repurchase under the provisions of the Stock Option Agreement or any other
agreement signed by the optionee in order to facilitate such repurchase
provisions.
3.4 Terms and Conditions of Options.
Each option granted under the Plan shall be evidenced by a written
Stock Option Agreement ("Stock Option Agreement") between the option holder and
the Company providing that the option is subject to the terms and conditions of
the Plan and to such other terms and conditions not inconsistent therewith as
the Committee may deem appropriate in each case.
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3.5 Adjustments Upon Changes in Capitalization; Merger and
Consolidation.
If the outstanding shares of Common Stock are changed into, or
exchanged for cash or a different number or kind of shares or securities of the
Company or of another corporation through reorganization, merger,
recapitalization, reclassification, stock split-up, reverse stock split, stock
dividend, stock consolidation, stock combination, stock reclassification or
similar transaction, an appropriate adjustment shall be made by the Committee in
the number and kind of shares as to which options may be granted. In the event
of such a change or exchange, other than for shares or securities of another
corporation or by reason of reorganization, the Committee shall also make a
corresponding adjustment changing the number or kind of shares and the exercise
price per share allocated to unexercised options or portions thereof, which
shall have been granted prior to any such change, shall likewise be made. Any
such adjustment, however, shall be made without change in the total price
applicable to the unexercised portion of the option (except for any change in
the aggregate price resulting from rounding-off of share quantities or prices).
In the event of a "spin-off" or other substantial distribution of
assets of the Company which has a material diminutive effect upon the Fair
Market Value of the Common Stock, the Committee in its discretion shall make an
appropriate and equitable adjustment to the exercise prices of options then
outstanding under the Plan.
Where an adjustment under this Section 3.5 of the type described above
is made to an Incentive Stock Option, the adjustment will be made in a manner
which will not be considered a "modification" under the provisions of subsection
424(b)(3) of the Code.
In connection with the dissolution or liquidation of the Company or a
partial liquidation involving 50% or more of the assets of the Company, a
reorganization of the Company in which another entity is the survivor, a merger
or reorganization of the Company under which more than 50% of the Common Stock
outstanding prior to the merger or reorganization is converted into cash or into
a security of another entity, a sale of more than 50% of the Company's assets,
any person or group of affiliated or associated persons, other than present
management and directors, acquires 25% of more of the outstanding shares, or a
similar event that the Committee determines, in its discretion, would materially
alter the structure of the Company or its ownership, the Committee, upon 30 days
prior written notice to the option holders, may, in its discretion, do one or
more of the following: (i) shorten the period during which options are
exercisable (provided they remain exercisable for at least 30 days after the
date the notice is given); (ii) accelerate any vesting schedule to which an
option is subject; (iii) arrange to have the surviving or successor entity grant
replacement options with appropriate adjustments in the number and kind of
securities and option prices, or (iv) cancel options upon payment to the option
holders in cash, with respect to each option to the extent then exercisable
(including any options as to which the exercise has been accelerated as
contemplated in clause (ii) above), of any amount that is the equivalent of the
Fair Market Value of the Common Stock (at the effective time of the dissolution,
liquidation, merger, reorganization, sale or other event) or the fair market
value of the option. In the case of a change in corporate control, the Committee
may, in considering the advisability or the terms and conditions of any
acceleration of the exercisability of any option pursuant to this Section 3.5,
take into account the penalties that may result directly or indirectly from such
acceleration to either the Company or the option holder, or both, under Section
280G of the Code, and may decide to limit such acceleration to the extent
necessary to avoid or mitigate such penalties or their effects.
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No fractional share of Common Stock shall be issued under the Plan on
account of any adjustment under this Section 3.5.
3.6 Rights of Participants and Beneficiaries.
The Company shall pay all amounts payable hereunder only to the option
holder or beneficiaries entitled thereto pursuant to the Plan. The Company shall
not be liable for the debts, contracts or engagements of any optionee or his or
her beneficiaries, and rights to cash payments under the Plan may not be taken
in execution by attachment or garnishment, or by any other legal or equitable
proceeding while in the hands of the Company.
3.7 Government Regulations.
The Plan, and the grant and exercise of options and the issuance and
delivery of shares of Common Stock under options granted hereunder, shall be
subject to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law) and
federal margin requirements and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
the Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and options granted hereunder shall be
deemed amended to the extent necessary to conform to such laws, rules and
regulations.
3.8 Amendment and Termination.
The Board or the Committee may at any time suspend, amend or terminate
the Plan and may, with the consent of the option holder, make such modifications
of the terms and conditions of such option holder's option as it shall deem
advisable, provided, however, that, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or the Committee may, (A) materially
increase the benefits accruing to participants under the Plan; (B) materially
increase the number of securities which may be issued under the Plan; or (C)
materially modify the requirements as to eligibility for participation in the
Plan. No option may be granted during any suspension of the Plan or after such
termination. The amendment, suspension or termination of the Plan shall not,
without the consent of the option holder affected thereby, alter or impair any
rights or obligations under any option theretofore granted under the Plan. No
option way be granted during any period of suspension nor after termination of
the Plan, and in no event may any option be granted under the Plan after the
expiration of ten years from the date the Plan is adopted by the Board.
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3.9 Time of Grant And Exercise of Option.
An option shall be deemed to be exercised when the Secretary of the
Company receives written notice from an option holder of such exercise, payment
of the exercise price determined pursuant to Section 2.1 of the Plan and set
forth in the Stock Option Agreement, and all representations, indemnifications
and documents reasonably requested by the Committee.
3.10 Privileges of Stock Ownership; Non-Distributive Intent; Reports
to Option Holders.
A participant in the Plan shall not be entitled to the privilege of
stock ownership as to any shares of Common Stock not actually issued to the
optionee. Upon exercise of an option at a time when there is not in effect under
the Securities Act of 1933, as amended, a Registration Statement relating to the
Common Stock issuable upon exercise or payment therefor and available for
delivery a Prospectus meeting the requirements of Section 10(a)(3) of said Act,
the optionee shall represent and warrant in writing to the Company that the
shares purchased are being acquired for investment and not with a view to the
distribution thereof.
The Company shall furnish to each optionee under the Plan the Company's
annual report and such other periodic reports, if any, as are disseminated by
the Company in the ordinary course to its stockholders.
3.11 Legending Share Certificates.
In order to enforce any restrictions imposed upon Common Stock issued
upon exercise of an option granted under the Plan or to which such Common Stock
may be subject, the Committee may cause a legend or legends to be placed on any
share certificates representing such Common Stock, which legend or legends shall
make appropriate reference to such restrictions, including, but not limited to,
a restriction against sale of such Common Stock for any period of time as may be
required by applicable laws or regulations. If any restriction with respect to
which a legend was placed on any certificate ceases to apply to Common Stock
represented by such certificate, the owner of the Common Stock represented by
such certificate may require the Company to cause the issuance of a new
certificate not bearing the legend.
Additionally, and not by way of limitation, the Committee may impose
such restrictions on any Common Stock issued pursuant to the Plan as it may deem
advisable, including, without limitation, restrictions under the requirements of
any stock exchange upon which Common Stock is then traded.
3.12 Use of Proceeds.
Proceeds realized pursuant to the exercise of options under the Plan
shall constitute general funds of the Company.
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3.13 Changes in Capital Structure; No Impediment to Corporate
Transactions.
The existence of outstanding options under the Plan shall not affect
the Company's right to effect adjustments, recapitalizations, reorganizations or
other changes in its or any other corporation's capital structure or business,
any merger or consolidation, any issuance of bonds, debentures, preferred or
prior preference stock ahead of or affecting Common Stock, the dissolution or
liquidation of the Company's or any other corporation's assets or business, or
any other corporate act, whether similar to the events described above or
otherwise.
3.14 Effective Date of the Plan.
The Plan shall be effective as of the date of its approval by the
stockholders of the Company within twelve months after the date of the Board's
initial adoption of the Plan. Options may be granted but not exercised prior to
stockholder approval of the Plan. If any options are so granted and stockholder
approval shall not have been obtained within twelve months of the date of
adoption of this Plan by the Board of Directors, such options shall terminate
retroactively as of the date they were granted.
3.15 Termination.
The Plan shall terminate automatically as of the close of business on
the day preceding the tenth anniversary date of its adoption by the Board or
earlier as provided in Section 3.8. Unless otherwise provided herein, the
termination of the Plan shall not affect the validity of any option agreement
outstanding at the date of such termination.
3.16 No Effect on Other Plans.
The adoption of the Plan shall not affect any other compensation or
incentive plans in effect for the Company, any Subsidiary or any Parent
Corporation. Nothing in the Plan shall be construed to limit the right of the
Company (i) to establish any other forms of incentives or compensation for
employees of the Company, any Subsidiary or any Parent Corporation or (ii) to
grant or assume options or other rights otherwise than under the Plan in
connection with any proper corporate purpose including but not by way of
limitation, the grant or assumption of options in connection with the
acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or association.
* * *
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