UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ____________ to ________________
Commission file number 001-146600
DG JEWELLERY OF CANADA LTD.
(Exact name of Small Business Issuer as Specified in Its Charter)
Ontario N/A
- ------- ---
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Petrolia Road
North York Ontario M3J2X7
- ------------------ ------
(Address of principal executive offices) (Zip Code)
(416) 665-8844 (Issuer's telephone number, including area code)
--------------
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
The number of shares outstanding of the registrant's Common Stock, No Par
Value, on August 12, 1999 was 6,363,530 shares.
Transitional Small Business Disclosure Format (check one):
Yes |X| No |_|
<PAGE>
DG JEWELLERY OF CANADA LTD.
JUNE 30, 1999 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements ...............................................2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................20
Item 4. Submission of Matters to a Vote of Security Holders................20
Item 6. Exhibits and Reports on Form 8-K...................................20
ii
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements, which are other than statements of historical facts. These
statements are subject to uncertainties and risks including, but not limited to,
product and service demand and acceptance, changes in technology, economic
conditions, the impact of competition and pricing, government regulation, and
other risks defined in this document and in statements filed from time to time
with the Securities and Exchange Commission. All such forward-looking statements
are expressly qualified by these cautionary statements and any other cautionary
statements that may accompany the forward-looking statements. In addition, DG
Jewellery of Canada Ltd. disclaims any obligations to update any forward-looking
statements to reflect events or circumstances after the date hereof.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 ..................................................1
Consolidated Income Statements for the six and
three months ended June 30, 1999 and 1998.....................2
Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998.....................3
Interim Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1999 and 1998...............4
Notes to Consolidated Financial Statements..........................5-8
iii
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
D.G.Jewellery of Canada Ltd.
Interim Consolidated Balance Sheets As of June 30, 1999 and December 31, 1998
(Amounts expressed in US dollars) (Unaudited)
June 30, December 31,
1999 1998
$ $
ASSETS
CURRENT ASSETS
Cash 68,253 305,784
Accounts receivable 21,936,083 17,647,428
Inventory 19,711,223 20,887,122
Cash surrender of life insurance (Note 2) 58,167 57,232
Prepaid expenses and sundry assets 249,953 25,845
---------- ----------
42,023,679 38,923,411
PROPERTY, PLANT AND EQUIPMENT 2,274,419 1,974,300
OTHER ASSETS (Note 3) 1,245,695 1,327,315
GOODWILL 1,199,515 1,278,879
---------- ----------
46,743,308 43,503,905
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (Note 4) 18,679,453 18,855,201
Accounts payable and accrued expenses 2,620,558 5,016,172
Income taxes payable 1,994,277 2,209,470
Current portion of loans payable 455,685 434,788
---------- ----------
23,749,973 26,515,631
LOANS PAYABLE 2,186,283 2,695,835
---------- ----------
25,936,256 29,211,466
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 5) 10,813,961 6,704,986
ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS) (Note 6) 132,375 55,501
RETAINED EARNINGS 9,860,716 7,531,952
---------- ----------
20,807,052 14,292,439
---------- ----------
46,743,308 43,503,905
---------- ----------
<PAGE>
D.G.Jewellery of Canada Ltd.
Interim Consolidated Statements of Operations
For the three and six months ended June 30, 1999 and 1998 (Amounts
expressed in US dollars) (Unaudited)
<TABLE>
<CAPTION>
For the period ended June 30,
three months six months
$ $ $ $
1999 1998 1999 1998
<S> <C> <C> <C> <C>
SALES 8,815,305 6,174,328 16,143,571 14,903,824
Cost of Sales 5,880,867 4,139,095 10,902,533 10,550,840
GROSS PROFIT 2,934,438 2,035,233 5,241,038 4,352,984
--------- --------- --------- ---------
Other Income 33 -- 63 --
Gross earnings 2,934,471 2,035,233 5,241,101 4,352,984
--------- --------- --------- ---------
EXPENSES
Selling 453,413 573,321 877,761 1,196,838
General and administrative 314,189 310,319 649,457 713,955
--------- --------- --------- ---------
767,602 883,640 1,527,218 1,910,793
--------- --------- --------- ---------
Operating income 2,166,869 1,151,593 3,713,883 2,442,191
--------- --------- --------- ---------
Interest expenses 360,504 398,713 599,320 718,002
Other expenses 94,645 (743,778) 272,973 (767,087)
--------- --------- --------- ---------
455,149 (345,065) 872,293 (49,085)
--------- --------- --------- ---------
Income before income taxes 1,711,720 1,496,658 2,841,590 2,491,276
Provision for income taxes 408,960 295,159 512,826 495,658
--------- --------- --------- ---------
Net income 1,302,760 1,201,499 2,328,764 1,995,618
--------- --------- --------- ---------
Earnings per common share (Note 7) 0.21 0.23 0.40 0.39
--------- --------- --------- ---------
Earnings per common share assuming dilution (Note 7) 0.21 0.22 0.39 0.36
--------- --------- --------- ---------
Average weighted number of shares
Basic 6,119,833 5,165,000 5,854,031 5,165,000
--------- --------- --------- ---------
Diluted 6,220,883 5,565,000 5,995,648 5,565,000
--------- --------- --------- ---------
</TABLE>
<PAGE>
D.G.Jewellery of Canada Ltd.
Interim Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and June 30, 1998 (Amounts
expressed in US dollars) (Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
$ $
<S> <C> <C>
Cash flow from operating activities:
Net income 2,328,764 1,995,618
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization 236,556 204,806
Decrease (increase) in accounts receivable (4,288,655) (2,855,464)
Decrease (increase) in inventory 1,175,899 1,698,240
Decrease (increase) in cash surrender value of life insurance (935) 396,068
Decrease (increase) in prepaid expenses and sundry assets (224,108) (1,204)
Increase (decrease) in accounts payable and accrued expenses (2,395,614) (2,700,134)
Increase (decrease) in income taxes (215,193) 693,354
--------- ---------
Total adjustments (5,712,050) (2,564,334)
--------- ---------
Net cash used in operating activities (3,383,286) (568,716)
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (536,675) (93,743)
Purchase of goodwill -- --
--------- ---------
Net cash used in investing activities (536,675) (93,743)
--------- ---------
Cash flows from financing activities:
Proceeds from bank indebtedness (175,748) 4,104,122
Proceeds from/(repayment of) loans payable (488,655) (3,475,119)
Issuance of capital stock 4,108,975 (24,121)
--------- ---------
Net cash provided by financing activities 3,444,572 604,882
--------- ---------
Effect of foreign currency exchange rate changes 237,858 (241,659)
--------- ---------
Net increase (decrease) in cash and cash equivalents (237,531) (299,236)
Cash and cash equivalents
Beginning of period 305,784 361,347
--------- ---------
End of period 68,253 62,111
--------- ---------
Interest paid 599,320 718,002
--------- ---------
Income taxes paid 227,423 50,000
--------- ---------
</TABLE>
<PAGE>
D.G.Jewellery of Canada Ltd.
Interim Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 1999 (Amounts
expressed in US dollars) (Unaudited)
<TABLE>
<CAPTION>
Cumulative
Common Retained Translation
Stock Earnings Adjustments Total
$ $ $ $
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 84 3,208,026 (44,711) 3,163,399
Common Stock Issued 6,700,743 6,700,743
Foreign Currency Translation (314,723) (314,723)
Net income for the year 1,045,234 1,045,234
---------- --------- ------- ----------
Balance as at December 31, 1997 6,700,827 4,253,260 (359,434) 10,594,653
Common stock issued 4,159 4,159
Foreign Currency Translation 414,935 414,935
Net income for the year 3,278,692 3,278,692
---------- --------- ------- ----------
Balance as at December 31, 1998 6,704,986 7,531,952 55,501 14,292,439
Common stock issued 4,108,975 4,108,975
Foreign Currency Translation 76,874 76,874
Net incomse for the period 2,328,764 2,328,764
---------- --------- ------- ----------
10,813,961 9,860,716 132,375 20,807,052
========== ========= ======= ==========
</TABLE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Consolidated Financial Statements Presentation
These Interim Consolidated Financial Statements have been prepared in accordance
with Form 10-QSB specifications and, therefore, do not include all information
and footnotes normally shown in full annual or Interim Financial Statements.
These financial statements consolidate, using the purchase method, the accounts
of the company and its two wholly-owned subsidiaries, Diamonair, Inc. and Aviv,
Inc. All material intercompany accounts have been eliminated.
b) Principal Activities
The company was incorporated in Canada on October 18, 1979. The company is
principally engaged in the production and trading of jewelry in Canada and the
United States of America.
c) Cash and Bank Indebtedness
Cash and bank indebtedness includes cash in bank, amounts due to banks, and any
other highly liquid investments purchased with a maturity of three months or
less. The carring amount approimates fair valur brcause of the short maturity of
those instruments.
d) Other Financial Instruments
The carrying amount of the company's accounts receivable and approximate fair
value because of the short maturity of these instruments.
e) Long-term Financial Instruments
The fair value of each of the company's long-term financial assets and debt
instruments is based on the amount of future cash flows associated with each
instrument discounted using an estimate of what the company's current borrowing
rate for similar instruments of comparable maturity would be.
f) Inventory
Raw materials and work-in-process are valued at the lower of cost (first-in,
first-out basis) or market.
Finished goods are valued at the lower of cost or market. Cost is calculated
using selling price less normal gross margin.
g) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are mainly depreciated on
the declining balance basis over their estimated useful lives.
<PAGE>
h) Goodwill
Goodwill is the excess of cost over the value of tangible assets acquired. It is
amortized on the straight-line basis over 25 to 40 years.
i) Sales
Sales represent the invoiced value of goods supplied to customers. Sales are
recognized upon delivery of goods and passage of title to customers. Sales are
translated to US dollars for reporting purposes only.
j) Foreign Currency Translation
The translation of the Interim Financial Statements from Canadian dollars
("CDN$") into United States dollars is performed for the convenience of the
reader. Balance Sheet accounts are translated using closing exchange rates in
effect at the Balance Sheet date and income and expense accounts are translated
using an average exchange rate prevailing during each reporting period. No
representation is made that the Canadian dollar amounts could have been, or
could be, converted into United States dollars at the rates on the respective
dates and or at any other certain rates. Adjustments resulting from the
translation are included in the cumulative translation adjustments in
stockholders' equity.
k) Use of Estimates
The preparation of Interim Financial Statements requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the Interim Financial Statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. CASH SURRENDER VALUE OF LIFE INSURANCE
The surrender value of cash insurance represents the value of life insurance
policies of former directors of Aviv, Inc.
3. OTHER ASSETS
Other assets represent the value of a six year contract of a supplier and it is
depreciated over the life of the contract.
4. BANK INDEBTEDNESS
The bank indebtedness bears interest at the bank's prime lending rate plus 3/4%
per annum. As security, the company has provided a general assignment of
accounts receivable, a general security agreement constituting a first charge
over all present and future personal property of the company and an assignment
of key man life insurance of a director payable to the bank. The facility
contains covenants specifying minimum and maximum financial ratios. The
agreement contains restrictions on changes in ownership and line of business, on
further encumbrances of assets and on the guarantees and other contingent
liabilities.
<PAGE>
5. CAPITAL STOCK
a) Authorized
An unlimited number of common stock
Issued
Issued June 30, December 31,
1999 1998
6,330030 Common Stock $10,700,736 $ 6,591,761
(5,168,000 in 1998)
1,265,000 Warrants 113,225 113,225
----------- -----------
10,813,961 6,704,986
b) Stock Option Plan
1996 Plan - 500,000 authorized (all issued)
1999 Plan - 500,000 authorized (all issued)
1999 Plan - 500,000 authorized (0 issued)
6. COMPREHENSIVE INCOME
The company has adopted Statement of Financial Accounting Standards No. 130
"reporting Comprehensive Income" as of January 1, 1998 which requires new
standards for reporting and display of comprehensive income and its components
in the financial statements. However, it does not affect net income or total
stockholders' equity. The components of comprehensive income are as follows:
June 30, December 31,
1999 1998
$ $
Net Income 2,328,764 3,278,692
Other comprehensive income (loss):
Foreign currency translation adjustments 76,874 414,935
--------- ---------
2,405,638 3,693,627
The components of accumulated other comprehensive income (loss) are as follows:
Accumulated other comprehensive loss, December 31, 1996 (44,711)
Foreign currency translation adjustments for the year ended
December 31, 1997 (314,723)
--------
Accumulated other comprehensive loss, December 31, 1997 (359,434)
Foreign currency translation adjustments for the year ended
December 31, 1998 414,935
--------
Accumulated other comprehensive loss, December 31, 1998 55,501
Foreign currency translation adjustments for the six months ended
June 30, 1999 76,874
--------
Accumulated other comprehensive income, June 30, 1999 132,375
========
7. NET INCOME PER COMMON SHARE
Net income per common share is computed by dividing net income by the weighted
average number of common shares outstanding.
Fully diluted income per share is computed by dividing net income by the
weighted average number of shares calculated using the "treasury stock" method.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The statements contained in this filing that are not historical are forward
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act, including statements regarding the Company's
expectations, liquidity, anticipated cash needs and availability and anticipated
expense levels. All forward looking statements included in this report are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward looking statement. It is
important to note that the Company's actual results could differ materially from
those in such forward looking statements.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1999 Compared to the Three and Six Months
Ended June 30, 1998.
Revenues for the three months ended June 30, 1999 were $8.8 million, an increase
of over 42% over the second quarter of 1998 revenues of $6.1 million. Year to
date revenue for the period ended June 30, 1999 was $16.1 million, an increase
of over 8% over the comparable six month period ended June 30, 1998. This
increase reflects the success of our efforts to diversify the company's
distribution channels and broaden our product lines. The largest growth came
from the home shopping networks which now represent over one third of D.G.'s
revenues.
Gross profit for the second quarter of 1999 was $2.9 million which is an
increase of $900,000 (44%) over the second quarter of 1998. The year to date
gross profit increased in 1999 by approximately $900,000 (20%) over the same
period in 1998. This was mainly attributed to the increase in sales volume;
gross profit also increased as a percentage of sales. For the quarter ended June
30, 1999 gross profit increased from 32.96% in 1998 to 33.29% in 1999. The year
to date gross profit percentage increased from 32.96% in 1998 to 33.29% in 1999.
The year to date gross profit percentage increased from 29.21% in 1998 to 32.47%
in 1999.
Selling expenses decreased in the quarter by approximately $120,000 from $
573,321 in 1998 to $453,413 in 1999 (20.9%). The decrease for the six months
ended June 30, 1999 compared to the same period last year was approximately
$319,000 or 26.6%.
Administrative expenses of $649,457 for the six months ended June 30, 1999 were
9.1% lower than the six months ended June 30, 1998. The savings occurred mostly
in the first quarter of the year; they were approximately equal in the second
quarters.
Interest expense decreased for the three months ended June 30, 1999 by
approximately $40,000 as compared to the three months ended June 30, 1998.
Interest expense decreased by approximately $120,000 for the six months ended
June 30, 1999 as compared to the same period in the previous year. The decrease
was due mainly to decreases in the operating line of credit due to cash inflows
from accounts receivable in the first quarter and proceeds of the sale of shares
in the second quarter.
As a result of the above factors, net income for the second quarter of 1999
increased by approximately 8.4% to $1,302,760 (16.7% and $2,328,764 year to date
over 1998).
LIQUIDITY AND CAPITAL RESOURCES
The company had a net use of cash from operations of $3,383,286 for the six
months ended June 30, 1999 mainly as result of higher accounts receivables and a
reduction in accounts payables at the end of the period. The use of cash was
reduced both by net income in the period and a decrease in inventories.
<PAGE>
Capital spending increased for some equipment, but mainly because of two new
computer systems (at D.G. Jewelry in Toronto and at Diamonair Inc. in New
Jersey). These systems (hardware and software) are Y2000 compliant. A large
portion of the capital spending will be converted to operating leases.
The company also received net proceeds from the issuance of capital stock. The
main proceeds (approximately $3,745,000) came from the private placement in May,
1999 of 615, 385 shares. Other proceeds came from the exercise of stock options
and the conversion of approximately $325,000 in loans payable to the former
directors of Aviv Inc. through the issuance of 45,145 shares.
YEAR 2000 BUSINESS SYSTEM IMPLEMENTATION
As many computer systems and other equipment with embedded chips or processes
(collectively, "Business Systems") use only two digits to represent the year,
they may be unable to process accurately certain data before, during or after
the year 2000. As a result , business and governmental entities are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. The company has committed to and is in the process of
implementing a Y2K readiness program, with the objective of having all of their
significant Business Systems, including those that affect facilities and
manufacturing activities, functioning properly, well in advance of January 1,
2000.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company issued an aggregate of 615,385 shares in a private placement
in May 1999 resulting in net proceeds of approximately $3,745,000. The Company
also issued an aggregate of 45,145 shares in consideration for the conversion of
approximately $325,000 in loans. The Company is utilizing the proceeds for
working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
period covered by this report through the solicitation of proxies or otherwise.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits (Numbered In Accordance with Item 601 of Regulation S-B).
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the quarter
for which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DG JEWELLERY OF CANADA LTD.
Dated: August 13, 1999 By: /s/ Gary Davis
----------------------------------
Gary Davis
Principal Accounting Officer
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 68,253
<SECURITIES> 0
<ALLOWANCES> 0
<RECEIVABLES> 21,936,083
<INVENTORY> 19,711,223
<CURRENT-ASSETS> 42,023,679
<PP&E> 2,274,419
<DEPRECIATION> 118,278
<TOTAL-ASSETS> 46,743,308
<CURRENT-LIABILITIES> 23,749,973
<BONDS> 0
0
0
<COMMON> 10,813,961
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 46,743,308
<SALES> 8,815,305
<TOTAL-REVENUES> 8,815,305
<CGS> 5,880,867
<TOTAL-COSTS> 5,880,867
<OTHER-EXPENSES> 767,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 360,504
<INCOME-PRETAX> 1,711,720
<INCOME-TAX> 408,960
<INCOME-CONTINUING> 1,302,760
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,302,760
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
</TABLE>
