AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 1999
Registration Statement No. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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D.G. JEWELLERY OF CANADA LTD.
(Name of small business issuer as specified in its charter)
------------
Ontario, Canada 3911
(State or other (Primary Standard
jurisdiction of Industrial N/A
incorporation or Classification (IRS Employer
organization) Code Number) I.D. No.)
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1001 Petrolia Road
Toronto, Ontario, Canada M3J 2X7
(416) 665-8844
(Address and telephone number of principal executive offices
and principal place of business)
-----------
Jay M. Kaplowitz, Esq. Gary Davis, Vice-President Finance and Chief
Arthur S. Marcus, Esq. Financial Officer
GERSTEN, SAVAGE & KAPLOWITZ, LLP D.G. Jewellery of Canada Ltd.
101 East 52nd Street, 9th floor 1001 Petrolia Road
New York, New York 10022 Toronto, Ontario, Canada M3J 2X7
(212) 752-9700 (416) 665-8844
(212) 752-9713 (fax) (416) 665-4986 (fax)
(Name, address and telephone number of agents for service)
-----------
Copies to:
-----------
Jay M. Kaplowitz, Esq.
Arthur S. Marcus, Esq.
GERSTEN, SAVAGE & KAPLOWITZ, LLP
101 East 52nd Street, 9th floor
New York, New York 10022
(212) 752-9700
(212) 752-9713 (fax)
Approximate date of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [x]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount Being Offering Price Offering Registration
Securities Being Registered Registered Per Security(1) Price(2) Fee
<S> <C> <C> <C> <C>
Shares of Common Stock, no par value 977,223 $7,451,325.38 $7,451,328.38 $2,071.46
Shares of Common Stock, no par value, issuable on 172,308 $1,313,848.50 $1,313,848.50 $365.25
exercise of warrants
Total registration fee $2,436.71
</TABLE>
(1) Pursuant to Rule 457, estimated solely for the purpose of calculating the
registration fee. Based upon the last reported sales price of the
registrant's common stock of the same class as quoted on Nasdaq National
Market on June 24, 1999.
(2) Pursuant to Rule 416, under the Securities Act of 1933, as amended, there
are also being registered such indeterminate number of shares of common
stock as may be issuable upon conversion of warrants described herein and
pursuant to the provisions of the warrants regarding determination of the
applicable conversion price.
(3) 615,385 shares of common stock were directly acquired by the selling
shareholders in the May private placement offering and 316,693 shares of
common stock are included to cover any potential adjustment in the amount
shares acquired by such selling shareholders.
Information contained herein is subject to completion or amendment. These
securities may not be sold nor may offers to buy be accepted prior to the
time the registration statement becomes effective. This prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS
Subject to Completion, Dated June 29, 1999
D.G. JEWELLERY OF CANADA LTD.
1,149,531 Shares of Common Stock
All of the shares of common stock, no par value, of D.G. Jewellery of
Canada Ltd., an Ontario corporation, offered hereby are being offered by the
selling security holders named in this prospectus under the caption "Selling
Security Holders". 615,385 of such shares to be sold were directly acquired by
the selling shareholders from us in connection with a private placement offering
in May 1999 and 45,145 of such shares to be sold were directly acquired by the
selling shareholders in lieu of payment of promissory notes owed by us. We
issued the 45,145 shares of common stock to the selling shareholders in June
1999, pursuant to an agreement entered into in March 1999. 172,308 of such
shares may be sold by the selling security holders upon the exercise of warrants
to purchase our common stock, which were also acquired in connection with the
private placement in May 1999. We will not receive any of the proceeds from
sales of the shares of the selling security holders, however, we will receive
US$1,400,864 upon the exercise of all of the warrants. We have also registered
an additional 316,693 shares of common stock to cover any potential adjustment
in the amount of shares of common stock purchased in the May private placement.
See "Selling Shareholders."
Our common stock is traded on the Nasdaq National Market under the symbol
"DGJL." On June 24, 1999, the last reported sales price of the common stock was
US$7.625.
The date of this Prospectus is June 29, 1999
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR
SALE UNDER THE SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA.
THE SECURITIES ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD,
DIRECTLY OR INDIRECTLY, IN CANADA, OR TO ANY RESIDENT THEREOF, IN VIOLATION OF
THE SECURITIES LAWS OF ANY PROVINCE OR TERRITORY OF CANADA.
ENFORCEMENT OF CIVIL LIABILITIES
Our headquarters is located in, and our officers, directors and auditors
are residents of, Canada and a substantial portion of our assets are, or may be,
located outside the United States. Accordingly, it may be difficult for
investors to effect service of process within the United States upon
non-resident officers and directors, or to enforce against them judgments
obtained in the United States courts predicated upon the civil liability
provision of the Securities Act of 1933, as amended or state securities laws. We
have been advised by our Canadian legal counsel, Grubner, Krauss, Barristers &
Solicitors, that there is doubt as to the enforceability in Canada against the
us or against any of our directors, controlling persons, officers or the experts
named herein, who are not residents of the United States, in original actions or
in actions for enforcement of judgments of U.S. courts, of liabilities
predicated solely upon U.S. federal securities laws. Service of process may be
effected, however, upon our duly appointed agent for service of process,
Gersten, Savage & Kaplowitz, LLP, New York, New York. If investors have
questions with regard to these issues, they should seek the advice of their
individual counsel. We have also been informed by our Canadian legal counsel,
Grubner, Krauss, Barristers & Solicitors that, pursuant to the Currency Act
(Canada), a judgment by a court in any Province of Canada may only be awarded in
Canadian currency. Pursuant to the provision of the Courts of Justice Act
(Ontario), however, a court in the Province of Ontario shall give effect to the
manner of conversion to Canadian currency of an amount in a foreign currency,
where such manner of conversion is provided for in an obligation enforceable in
Ontario.
<PAGE>
EXCHANGE RATE DATA
We maintain our books of account in Canadian dollars, but have provided
the financial data in this prospectus in United States dollars and on the basis
of generally accepted accounting principles as applied in the United States, and
our audit has been conducted in accordance with generally accepted auditing
standards in the United States. All references to dollar amounts in this
prospectus, unless otherwise indicated, are to United States dollars.
The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On May 31, 1999, the exchange rate was Cdn$1.00
per US$1.48.
Year Ended December 31,
-----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Rate at end of period $0.7143 $0.7353 $0.7299 $0.6991 $0.6532
Average rate during period 0.7299 0.7299 0.7353 0.7223 0.6745
High 0.7092 0.7009 0.7212 0.6945 0.7061
Low 0.7642 0.7533 0.7526 0.77493 0.6376
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<PAGE>
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all the information that is important to you. To understand
our business and this offering fully, you should read this entire prospectus,
including the financial statements and the related notes beginning on page F-1.
References in this prospectus to "we", "our" and "us" refer to D.G. Jewellery of
Canada Ltd., an Ontario corporation.
Our Business
We are primarily engaged in the design, manufacture, merchandising and
distribution of stone-set jewelry for department stores, mass merchants,
catalogue showrooms, television shopping networks and other high volume
retailers and major discounters. We are also seeking to take advantage of
non-traditional wholesale distribution outlets such as Internet wholesale
advertising services, liquidation operations, and consumer product rental
companies.
Our manufacturing and wholesale distribution business is divided into
three divisions. We have operated in Canada under the DG name (these operations
shall be hereinafter referred to as the DG division for 30 years. The DG
division's principal product is rings, which account for approximately 90% of
the DG division's sales based on both dollars and units. The DG division also
produces pendants and earrings. The jewelry produced by the DG division is made
of gold or silver and most contain one or more precious, semi-precious or
synthetic stones. The stones include diamonds, pearls, gems, cubic zirconia and
other synthetic stones. The average wholesale price of the DG division products
is approximately $150.00 and retail prices for the D.G. Division's better
selling products range from $30.00 to $600.00.
In November 1997, we acquired our Diamonair division. Diamonair assembles
and wholesales a product line which consists of earrings, rings, bracelets and
necklaces. The products are primarily gold jewelry set with cubic zirconia
stones. The average wholesale price of the Diamonair products is approximately
$100.00 and retail prices for the Diamonair's better selling products range from
$50.00 to $500.00. Approximately 30% of Diamonair's products are manufactured
partly or entirely by the DG Division and we intend to seek to expand this
percentage.
In February 1998, we acquired our Aviv division. Aviv is a manufacturer
and wholesaler of bridal jewelry. Its products are primarily gold rings set with
diamonds or gem-stones. The average wholesale price of its jewelry is
approximately $700 and retail prices for Aviv's better selling products range
from $500.00 to $1,500.00. Certain Aviv products retail for as much as
$10,000.00.
We believe we have established our self as a low-cost, high-volume and
quality manufacturer in the value priced jewelry market. Our primary competitive
advantage, particularly for our DG division, is our innovative manufacturing
method which allows for substantially reduced costs per unit, provides
substantial capacity and better quality, and requires minimal skilled labor. Our
merchandising strategy also involves the design of products that we believe will
continually appeal to the mass market. We also assist our customers in
creatively merchandising our jewelry to encourage impulse purchases.
Growth has been achieved by providing our customers with quality and
services and in recent years, through our manufacturing process, which enables
us to provide our customers with value priced, stone-set mass appeal jewelry at
lower cost than many of our competitors. We maintain long-standing relationships
with Canadian customers such as Reed's Jewellers, The Twain Group and The
Shopping Channel. In the last three years we have focused on the much larger
American market. The DG division established a United States sales office in
Tampa, Florida and currently sells products to customers such as Wal-Mart, Fred
Meyer Inc., Value Vision International Inc., Suarez Corporation, which is a
direct mail order company, and others, including Zales Corporation, the largest
jewelry retailer in the United States. We have also utilized strategic
acquisitions to increase our presence in the United States. Diamonair's
customers include Finlay Fine Jewelry Corp., which operates leased fine jewelry
departments in department stores for retailers such as May Department Stores and
Federated Department Stores. Aviv sells to Zales Corporation and Finlay Fine
Jewelry Corp., as well as many independent jewelers in the
3
<PAGE>
United States. In 1998, approximately 81% of our sales were in the United
States, as compared to 17% and 63% in 1995 and 1997, respectively.
Manufacturing for the DG division's product line and many of the Diamonair
products occurs at our facility in Toronto, Canada. Our manufacturing process is
a unique lost-wax/cast-in-place manufacturing process which enables us to
produce high volume, quality jewelry, particularly multi-stone rings. We
presently produce an average weekly volume of 3,000 rings at our Toronto
facility. Our management believes our Toronto facilities have the capacity to
produce approximately 20,000 multi-stone rings per week. This special
manufacturing process has positioned us as a major competitor in this product
line, having become a low-cost producer of quality rings for the value priced
jewelry market.
Currently, manufacturing and other operations for the Aviv product line
are accomplished at our facility in Houston, Texas. We entered into a sublease
agreement for this factory in connection with the acquisition of Aviv. This
facility produces an average weekly volume of 800 rings and Aviv's management
believes its Texas facilities have the capacity to produce approximately 4,500
rings per week.
Our merchandising strategy is to provide quality, value priced products
and to display our products in varied retail environments. We maintain a broad
base of customers and concentrate on four major jewelry market segments: (i)
department stores such as Sears Roebuck, J.C. Penney and Saks Fifth Avenue (our
products are also sold in Federated Department Stores and May Department Stores
through Finlay Fine Jewelry Corp.); (ii) specialty markets, such as television
shopping networks and jewelry retail outlets; (iii) jewelry chain stores such as
Zales Corporation, Gordons, Freidmans and others; and (iv) mass merchandisers
such as Wal-Mart.
We have model makers and designers who design jewelry based on industry
trends, consumer tastes, or in some cases, based upon customer's requests.
However, we primarily seek to produce products with enduring styles. This
eliminates the use of faddish styles and reduces risks associated with fashion
jewelry that may not receive customer acceptance and result in increased and
stagnant inventory. This also reduces designer personnel and costs.
In connection with the acquisition of Aviv, we acquired a retail store
located at the Aviv factory in Texas. This store, called the New York Gold and
Diamond Exchange, sells Aviv products as well as products purchased from other
jewelry manufacturers. We are increasing the amount of our products,
particularly DG division and Diamonair products, in the store.
We also intend to use strategic partnerships and joint ventures to create
additional revenue for us and to create opportunities for the sale of our
products.
Our executive offices are located at 1001 Petrolia Road, Toronto, Ontario
M3J 2X7, telephone (416) 665-8844. We maintain a sales office in New Providence,
Rhode Island. Aviv operates from Houston, Texas and Diamonair operates from
Cedar Knolls, New Jersey.
4
<PAGE>
THE OFFERING
Common Stock Offered ................. 1,149,531 shares of common stock.
660,530 which may be immediately sold by
the selling security holders and 172,308
which may be sold by the selling
security holders upon the exercise of
all of the warrants. See "Description of
Security:
Shares of Common Stock Outstanding ... 5,960,280
Use of Proceeds ...................... We will not receive any proceeds from
the sale of the shares of common stock
by the selling security holders, but we
would receive the proceeds of the
exercise of any warrants exercised by
the selling security holders which will
be applied to working capital. See "Use
of Proceeds."
Common Stock Trading Symbols ......... NASADAQ National Market: DGJL
Risk Factors ......................... An investment in our common stock
involves a high degree of risk and
should be made only after careful
consideration of the significant risk
factors that may affect us. Such risks
include special risks concerning us and
our business. See "Risk Factors".
5
<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION
Year ended, December 31,
------------------------
1996 1997 1998
---- ---- ----
(in thousands except per share data)
------------------------------------
Statement of Operations Data
Revenue $14,182 $22,128 $35,350
Gross profit
2,807 6,450 11,495
Net income 457 1,045 3,279
Net income per share 0.11 0.22 0.59
Year ended, December 31,
------------------------
1996 1997 1998
---- ---- ----
(in thousands except per share data)
------------------------------------
Balance Sheet Data
Working capital $ 3,317 $10,235 $12,408
Total Assets 16,773 33,922 43,504
Long-term debt 1,081 2,865 2,696
Total liabilities 13,610 23,327 29,211
Shareholders' equity 3,163 10,595 14,292
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<PAGE>
RISK FACTORS
An investment in the shares of common stock offered hereby is highly
speculative, involves a high degree of risk, and should be made only by
investors who can afford the loss of their entire investment. Prospective
investors, prior to making an investment decision, should carefully consider the
following risk factors, together with the other matters referred to in this
prospectus, including the financial statements and the notes to the financial
statements. Prospective investors should be in a position to risk the loss of
their entire investment. This prospectus contains certain forward-looking
statements that involve certain risks and uncertainties. Our actual results may
differ materially from those anticipated in such forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this prospectus.
RISKS SPECIFIC TO US
We may not be able to compete effectively in our industry.
The manufacture and distribution of jewelry is a highly competitive
industry. We compete with major domestic and international companies, many of
which have significantly greater financial, technical, marketing and human
resources than we have. While we believe that our manufacturing process provides
us with a competitive edge in certain markets, we have not applied for a patent
on the process since we are reluctant to divulge our proprietary secrets. There
can be no assurance that other jewelry manufacturers will not similarly develop
low-cost, high-volume production capabilities or better processes or develop
other competitive advantages over us, thereby providing greater competition for
us and materially effecting our business prospects. See "Business--Competition".
We may be unable to protect our intellectual property.
We believe one of our significant competitive advantages is our
manufacturing process which utilizes the lost- wax/cast-in-place method allowing
us to use unskilled labor with minimal training to set as many as 8,000 stones
per day, per stone setter, at a significantly lower cost than our competitors.
Although the general concepts of such high volume production are known in the
industry, to our knowledge no-one else has been able to develop and perfect the
unique applications that we have developed to accomplish such high volume
production of stone-set jewelry. We have not applied for a patent for the
application and modifications of the basic processes, since we do not want to
disclose our unique developments and applications. Furthermore, there can be no
assurance that the process would qualify for patents, or to the extent of the
enforceability of any patent that would be granted. See "Business--Patents and
Trademarks." The ability of others to build upon the basic processes and develop
similar, if not better applications to the high volume, lost-wax manufacturing
process, could have an adverse competitive impact. See "Business-Competition"
and "Business-Manufacturing."
Our marketing strategy may not result in success.
Our business strategy is designed to expand our sales of stone-set
jewelry, in particular rings, in Canada and the United States by taking
advantage of our manufacturing process and promoting our popular designs. Our
ability to implement our plans will depend primarily on the ability to expand
our penetration in the United States and the availability of qualified and cost
effective sales personnel. There are no firm agreements for employment of
additional marketing personnel, and there is no assurance that any of the
expansion factors will be satisfied or that we will be able to establish
additional favorable relationships for merchandising of our jewelry in the
United States. There is no certainty, assuming we could hire the appropriate
marketing personnel and ultimately establish additional merchandising
relationships in the United States, when such events might occur or to what
extent. See "Business-Business Strategy."
Prior to the acquisition of Aviv, we had not engaged directly in retail
operations. We have never engaged in the
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<PAGE>
inventory liquidation business or in the operation of retail outlets for jewelry
and watch repair. However, we have hired experienced personnel or entered into
joint ventures with experienced operators of such businesses. Nonetheless, the
prospects for the New York Gold and Diamond Exchange must be considered in light
of the risks, expenses and difficulties frequently encountered by small
businesses in highly competitive industries.
The availability and cost of precious metals and precious and semi-precious
stones could have a material adverse effect on our results of operations and
financial condition.
The jewelry industry in general is effected by fluctuations in the prices
of precious metals and precious and semi- precious stones. The availability and
prices of gold, diamonds and other precious metals and precious and
semi-precious stones may be influenced by cartels, political instability in
exporting countries and inflation. Shortages of these materials or sharp changes
in their prices could have a material adverse effect on our results of
operations or financial condition.
Approximately 90% of our products are made of gold, which we obtain from
commodity dealers, banks and gold refiners in U.S. dollars at market prices on a
cash basis. Changes in the market price of gold could require us to reduce the
carrying value of the gold owned by us and recognize a charge against earnings,
which could be substantial, in the period in which the change in market value
occurs. We do not engage in hedging transactions to protect against this
potential risk. See the "Consolidated Financial Statements" and notes attached
hereto.
Prices for our products generally are determined by reference to the
current market price of gold. Consequently, our sales could be affected by
significant increases, decreases or volatility in the price of gold. While we
believe that our sales have not suffered materially during the periods of rising
or declining gold prices, there can be no assurance, if the price of gold were
to move substantially above or substantially below current price levels and
remain as such for a prolonged period of time, that such increase or decrease
would not have an adverse effect on our results of operations. In addition, our
results of operations may be adversely affected during periods of extreme
volatility in the price of gold since many customers may elect to defer
purchases until the price of gold has become relatively stable.
A significant portion of our sales depend upon purchases by a limited number of
our customers.
For the year ended December 31, 1998, the major customers accounted for
36% of sales. Value Vision accounted for 21% of sales. Other than Value Vision,
no customer accounted for more than 10% of sales. For the year ended December
31, 1997, three major customers accounted for 42% of sales. Finlay Fine Jewelry
Corp. accounted for 19% of sales, Silvermans Jewelers Consultants, Inc.
accounted for 14% of sales and Wal-Mart accounted for 9% of sales. For the year
ended December 31, 1996, our two largest customers were Wal-Mart (21% of sales)
and Zellers Inc. of Canada (11% of sales). The loss of any of these customers or
a significant reduction in their orders would have a materially adverse effect
on our results of operations. No assurance can be given that such customers will
continue to use us for the design and manufacture of their jewelry requirements.
See "Business--Customers."
We depend upon our senior management and their loss or unavailability could put
us at a competitive disadvantage.
Our operations have depended to a great extent on the management efforts
of Jack Berkovits, our Chairman, CEO and President and Gadi Beer, the Vice
President of Sales and Marketing for Aviv. Mr. Berkovits has a three year
employment agreement with us which became effective on April 14, 1997. Mr. Beer
has a one year employment agreement which became effective on February 10, 1998.
The loss of these individuals would have a materially adverse effect upon us. We
maintain approximately $840,000 of "key-man" life insurance on Mr. Berkovits.
One policy in the amount of $700,000 has been pledged to secure our line of
credit to The Bank of Nova Scotia. See "Management."
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<PAGE>
We may not be able to obtain future financing because in order to obtain an
existing line of credit and existing equipment financing, we pledged all of our
assets to the Bank of Nova Scotia as collateral.
All of our assets have been pledged as collateral to secure our
indebtedness to The Bank of Nova Scotia, a Canadian bank, for a line of credit
and equipment financing provided to us. In the event we default on payment of
our obligations, including the making of required payments of principal and
interest, our indebtedness could be declared immediately due and payable and, in
certain cases, our assets could be foreclosed upon. The aforementioned pledging
of the assets and assignments of insurance to secure outstanding indebtedness
makes such assets unavailable to secure additional debt financing, which most
likely will adversely effect our ability to borrow in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Fluctuations in our quarterly and annual operating results may affect our stock
price.
We may to experience significant fluctuations in our future quarterly and
annual operating results due to a variety of factors, may of which are outside
our control. Factors that may adversely effect our quarterly operating results
include: technological developments in the mass production of jewelry, our
ability to efficiently meet the design and production requirements of our
customers, and market acceptance of our customers' jewelry. Further factors
impacting the success of our operations are increases in expenses associated
with continued sales growth, our ability to control costs, management's ability
to evaluate the public's taste and new orders to target satisfactory profit
margins, our capacity to develop and manage the introduction of new designed
products, and competition. Quality control is also essential to our operations,
since customers demand compliance with design and product specifications and
consistency of production. There can be no assurance that the revenue growth
will be sustained on a quarterly or annual basis. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition, retail sales of jewelry are greater in the fourth quarter of
the calendar year which includes the holiday selling season. It has been
management's experience that our and our customers' purchases are seasonally
sensitive causing a significant portion of our sales to be concentrated in the
fall in anticipation of the holiday season.
The sale of our jewelry is dependent upon a strong economy.
Retail jewelry sales are sensitive to fluctuations in the economic cycle.
Unfavorable general economic conditions have an adverse effect on consumer
spending, and therefore on our business. We believe our growth and products are
less sensitive to economic downturns due to our mass manufacturing capabilities,
merchandising, and low-cost products which are impulse purchase items. There can
be no assurance that unfavorable general economic conditions or a downturn in
consumer confidence could in the future have an adverse effect on consumer
spending preferences and, therefore, on our business.
Investors in our common stock are not afforded the same protection or
information generally available to investors in public companies in the United
States because as a foreign private issuer, we are exempt from certain
provisions of the Securities Exchange Act of 1934.
We are a foreign private issuer within the meaning of rules promulgated
under the Securities Exchange Act of 1934. As such, we are exempt from certain
provisions applicable to United States companies with securities registered
under the Securities Exchange Act of 1934, including the rules under the
Securities Exchange Act of 1934 requiring the filing with the United States
Securities Exchange Commission of quarterly reports on Form 10-Q or current
reports on Form 8-K. Because of these exemptions, investors in our common stock
are not afforded the same protections or information generally available to
investors in public companies organized in the United States.
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<PAGE>
RISKS RELATING TO THIS OFFERING
Our management will retain substantial influence following this offering,
As of the date of this prospectus, Jack Berkovits, our Chairman, President
and Chief Executive Officer, beneficially owns, in the aggregate, approximately
44.2% of the outstanding common stock. Accordingly, he is in a position to cause
an increase in the authorized capital or cause the dilution, merger or sale of
assets of us, cause directors to be elected or removed and generally control our
affairs. Assuming that all of the warrants are exercised by the selling security
holders, Mr. Berkovits will beneficially own, in the aggregate, approximately
41.7% of the outstanding common stock (assuming no exercise of any other options
or warrants other than those held by such individuals). Although he would not
represent a majority of our voting securities, his significant beneficial
holdings would enable him to exercise substantial influence over our business.
See "Principal Shareholders."
There is the possibility of conflicts of interest between us and our Chairman
and certain of our employees because in the past we have entered into business
transactions with our Chairman and certain employees.
There have been transactions in the past and are ongoing transactions
between us and our Chairman, CEO and President, Jack Berkovits and loans from us
to certain of our employees, some of whom are our officers. In the future, all
related party transactions will be disclosed to our board of directors, who will
decide whether such transactions are in our best interests and on terms no less
favorable than could be obtained from unaffiliated third parties. There exists
the potential for conflicts of interest between us and such parties. There can
be no assurance that any further conflicts of interest will be resolved in our
favor. See "Management," "Certain Transactions" and "Principal Shareholders."
The market for the common stock may suffer in the event of de-listing from the
Nasdaq National Market and if our common stock is deemed to be a "penny stock."
Our common stock is listed on the Nasdaq National Market. In order to
maintain the listing, we must meet the following criteria: (i) either at least
$4,000,000 in net tangible assets, a $50,000,000 market capitalization or total
assets and total revenue each of at least $50,000,000 in two of the three prior
years, (ii) at least 750,000 shares in the public float valued at $5,000,000 or
more, (iii) a minimum common stock bid price of $1.00, (iv) at least four active
market makers, and (v) at least 400 shareholders of common stock. If we are
unable to satisfy the Nasdaq National Market maintenance criteria, our common
stock may be de-listed from trading on the Nasdaq National Market. In such
event, we would seek to have our common stock listed on the Nasdaq SmallCap
Market. In the event we were unsuccessful in listing our common stock on the
Nasdaq SmallCap Market or that our common stock was de-listed from the Nasdaq
SmallCap Market, trading in our common stock would be conducted in the
over-the-counter market on the NASD's OTC Bulletin Board or in the National
Quotation Bureau's "pink sheets." As a consequence, an investor would most
likely find it more difficult to dispose of, or to obtain prompt and accurate
quotations as to the price of our securities, and may be exposed to a risk of a
decline in the market price of the common stock.
In addition, if our securities are delisted from Nasdaq, and we do not
meet any other exclusion from the definition of a "penny stock" under the
Securities Exchange Act of 1934, our stock would be subject to the penny stock
rules that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors (generally defined as investors with net worth in excess of $1,000,000
or annual income exceeding $200,000 or $300,000 together with a spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase, and must have received the
purchaser's written consent to the transaction prior to sale. As a result,
de-listing, if it were to occur, could materially adversely effect the ability
of the broker-dealers to sell our common stock and the ability of purchasers in
this offering to sell their shares of common stock in the secondary market.
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Our management has broad discretion in the application of net proceeds.
The proceeds received by us upon exercise of the warrants, if any, will be
used for working capital. Our management will have complete discretion in
determining the use of such proceeds and shareholders may not be provided
advanced information on such plans, facilities or procedures, and will not be
permitted to approve or disapprove such transactions. See "Use of Proceeds."
We have not, and do not intend, to pay cash dividends in the foreseeable future.
We have not paid any cash dividends on our common stock and do not intend
to pay any cash dividends in the foreseeable future. We intend to retain future
cash earnings, if any, for reinvestment in the development and expansion of our
business. Any credit agreements, which we may enter into with institutional
lenders may restrict our ability to pay dividends. Whether we pay cash dividends
in the future will be at the discretion of our board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, and any other factors our board of directors decides is relevant.
See "Dividend Policy."
Future sales by our existing shareholders may effect the market for our common
stock.
Upon consummation of this offering, we will have 6,440,281 shares of
common stock issued and outstanding (assuming issuance of an aggregate of
172,308 shares pursuant to the exercise of the warrants), of which 1,527,250 are
freely tradeable without restriction or registration under the Securities Act of
1933, as amended. All of the 4,193,031 remaining shares of our common stock are
"restricted securities" as defined under Rule 144 of the Securities Act,
including 2,634,975, held by Jack Berkovits, our Chairman, Chief Executive
Officer and President. Mr. Berkovits is deemed an "affiliate" (control person)
of D.G. Jewellery of Canada Ltd. as defined in Rule 144 promulgated under the
Securities Act of 1933, as amended, and may only sell his shares, which are
deemed "restricted securities" as defined under Rule 144 of the Securities Act
of 1933, as amended, absent registration, in accordance with the provisions of
Rule 144, exclusive of Rule 144's one-year holding period. Options granted under
the 1998 Stock Option Plan to our employees, officers and directors, and the
common stock issuable upon exercise of those options, would be deemed
"restricted securities" under Rule 144. Restricted securities may only be
publicly sold pursuant to a registration under the Securities Act of 1933, as
amended, or pursuant to Rule 144 or some other exemption that may be available
from the registration requirements of the Securities Act of 1933, as amended.
Rule 144 entitles each person holding restricted securities for a period of
one-year, and affiliates who own restricted securities for two years, to sell
every three months in ordinary brokerage transactions an amount of shares which
does not exceed the greater of 1% of the common stock outstanding, or assuming
the common stock is then traded on Nasdaq, the average weekly trading volume
during the four calendar weeks prior to said sale. Any substantial sales
pursuant to Rule 144, including the potential sale of Mr. Berkovits' common
stock, may have an adverse effect on the market price of our common stock, and
may hinder our ability to arrange subsequent equity or debt financing or affect
the terms and time of such financing. See "Shares Eligible for Future Sale."
Our results of operations may be materially adversely effected as a result of
currency fluctuations.
Our consolidated financial statements are prepared in Canadian dollars and
are converted into United States dollars. A portion of our revenues is derived
from activities in the United States. Fluctuations in exchange rates between the
Canadian and United States dollars may have a material adverse effect on our
results of operations. The impact of future exchange rate fluctuations on our
results of operations cannot be accurately predicted. To date, we have not
sought to hedge the risks associated with fluctuation in exchange rates and do
not have a policy relating to hedging. There can be no assurance that any
hedging techniques that we might implement in the future would be successful or
that our results of operations will not be materially adversely effected by
exchange rate fluctuations.
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The forward-looking statements included in this prospectus present certain risks
and uncertainties.
This prospectus contains certain forward-looking statements regarding our
plans and objectives for the future. These forward-looking statements are based
on current expectations that involve numerous risks and uncertainties. Our plans
and objectives are based on a successful execution of our expansion strategy and
are based upon a number of assumptions, including assumptions relating to the
growth of the jewelry manufacturing industry and that there will be no
unanticipated material adverse change in our operations or business. These
assumptions involve judgements with respect to, among other things, future
economic, political, competitive, and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the assumptions
underlying our forward-looking statements are reasonable, any of the assumptions
could prove to be inaccurate. In light of the significant uncertainties inherent
in these forward-looking statements, you should not regard these statements as
representations by us or any other person that we will achieve our objectives
and plans.
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USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of common
stock owned by the selling security holders. All proceeds from the sales of the
shares of common stock owned by the selling security holders will be for the
account of the selling security holders described below. See "Selling Security
Holders." In the event that the warrants are exercised, we will receive an
aggregate of $1,400,864, which will be utilized for working capital. There can
be no assurance that such warrants will be exercised.
CERTAIN MARKET INFORMATION
Since the initial public offering of our common stock on April 17, 1997,
our common stock and warrants have been traded on the Nasdaq SmallCap Market
under symbols "DGJL." and "DGJW, respectively, and on the Boston Stock Exchange
under the symbols "DGJ" and "DGJW." On May 27, 1999, our common stock began
trading on the Nasdaq National Market System. Prior to April 1997, there was no
market for our shares of common stock. There is no non-United States trading
market for our securities and there is no limitation on non-Canadians owning
shares of our common stock.
The following table sets forth the high and the low sales prices for our
common stock as reported by the Nasdaq SmallCap Market during each quarter since
such trading commenced on April 17, 1997.
Common Stock
------------
Quarter High Low
- ------- ---- ---
1997
April 18, 1997 - June 30, 1997 10 1/8 4 3/4
Third Quarter 5 1 3/4
Fourth Quarter 2 11/16 1 3/4
1998
First Quarter 3 5/8 1 3/4
Second Quarter 4 5/8 3 1/8
Third Quarter 5 1/2 1 7/8
Fourth Quarter 9 7/16 4 1/2
1999
First Quarter 9 7/16 4 1/2
Second Quarter April 1 - May 31, 1999 8 1/2 5 7/8
As of May 31, 1999, there were 17 shareholders of record and approximately
800 beneficial owners.
On May 31, 1999, the last sale price of our common stock as reported on
the Nasdaq SmallCap Market was $6.50.
DIVIDEND POLICY
The payment of dividends, if any, in the future is within the discretion
of the board of directors and will depend upon our earnings, capital and legal
requirements and financial condition and such other factors that the board of
directors deems relevant. For the foreseeable future, we intend to retain future
earnings, if any, for reinvestment in the development and
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expansion of our business.
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SELECTED FINANCIAL DATA
The following selected statement of operations data is for the period from
January 1, 1996 through December 31, 1998. The selected balance sheet data is
for the period from January 1, 1996 through December 31, 1998. The statement of
operations and balance sheet data is derived from our financial statements and
the related notes included elsewhere in this prospectus audited by Schwartz
Levitsky Feldman, Certified Accountants. Our books and records are maintained in
Canadian Dollars, but our auditors have reconciled such financial data to United
States dollars (see "Exchange Rate Data") and the financial statements contained
in this prospectus have been prepared in accordance with generally accepted
auditing standards in the United States. See "Report of Independent Auditors"
and "Consolidated Financial Statements." All information should be read in
conjunction with our consolidated financial statements and the notes contained
elsewhere in this prospectus.
Year ended, December 31,
------------------------
1996 1997 1998
---- ---- ----
(in thousands except per share data)
------------------------------------
Statement of Operations Data
Revenue $14,182 $22,128 $35,350
Gross profit 2,807 6,450 11,495
Net income 457 1,045 3,279
Net income per share 0.11 0.22 0.59
Year ended, December 31,
------------------------
1996 1997 1998
---- ---- ----
(in thousands except per share data)
------------------------------------
Balance Sheet Data
Working capital $3,317 $10,235 $12,408
Total Assets 16,773 33,922 43,504
Long-term debt 1,081 2,865 2,696
Total liabilities 13,610 23,327 29,211
Shareholders' equity 3,163 10,595 14,292,439
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
The statements contained in this prospectus that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
including statements regarding our expectations, intentions, beliefs or
strategies regarding the future. Forward looking statements include our
statements regarding liquidity, anticipated cash needs and availability and
anticipated expense levels. All forward-looking statements included in this
prospectus are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statement. It is
important to note that our actual results could differ materially from those in
such forward-looking statements.
Our future success as a manufacturer and distributor of value-priced,
stone-set jewelry will be influenced by several factors including technological
developments in the mass production of jewelry, our ability to efficiently meet
the design and production requirements of our customers, and the market
acceptance of our jewelry. Further factors impacting our operations are
increases in expenses associated with continued sales growth, our ability to
control costs, management's ability to evaluate the public's tastes and orders
to target satisfactory profit margins, the ability to develop and manage the
introduction of new designed products, and competition. Quality control is also
essential to our success, since customers demand compliance with design and
product specifications and consistency of production.
Our utilization of our high-volume manufacturing techniques sometimes
results in excess inventories. In the past, we either sold these excess
inventories in lots at prices which usually resulted in losses of our investment
in labor and overhead and without recovering our full cost of stones, or our
internally recycled the metal and most stones by disassembling the product,
re-melting the gold or silver and removing the stones. This recycling resulted
in additional incurred labor and overhead costs. Once Diamante established its
factory outlet stores, it provided us with an opportunity to sell our excess
inventories on more favorable terms. By selling to Diamante, we then avoided the
costs and losses that we had incurred in the past and we are afforded a more
advantageous method of dealing with our excess inventories. We are the primary
supplier of products to Diamante and our account receivable from Diamante is
fully secured by all the assets of Diamante, which security interest has been
pledged by us to The Bank of Nova Scotia for our financing facilities. In
addition, we perform certain administrative functions for Diamante.
Generally, we do not provide products pursuant to long-term contracts. We
have an exclusive jewelry supply contract with Zellers, Inc. of Canada that,
pursuant to its terms, is to terminate in December 2004. Sales to Zellers Inc.
of Canada were $1.6 million in 1996, $550,000 in 1997 and $1,814,000 in 1998.
On November 21, 1997, we acquired substantially all of the assets of the
wholesale jewelry division of Litton Systems, Inc., which division had operated
under the trade name Diamonair, for approximately $5.8 million. The acquisition
was accounted for using the purchase accounting method. In accordance with the
purchase accounting method, Diamonair's results have been included in our
consolidated financial statements since the acquisition date.
Sales of Diamonair products in 1998 on a non-consolidated, unaudited basis
were $7,560,993 and the profit margin was approximately 41%. Diamonair purchased
products from approximately 20 suppliers. We believe that it was able to
increase the profit margin on Diamonair products sold by us by increasing the
amount of Diamonair products manufactured by us using our manufacturing process.
We have increased sales of Diamonair products by introducing the Diamonair
products into the distribution lines used by the D.G. division and the Aviv
division.
On February 10, 1998, we completed our acquisition of substantially all of
the assets of Aviv, Inc., by assuming approximately $4.3 million in debt. The
effective date of the acquisition was June 1, 1997.
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Of Aviv's total sales of approximately $10.3 million, approximately $1.2
million were attributable to the New York Gold and Diamond Exchange, a retail
store at Aviv's facilities in Houston, Texas. We do not anticipate that the cost
of many of the Aviv products will be reduced significantly by our manufacturing
process. Aviv's products generally are made with more expensive metals and
stones than our other products. Therefore, savings in the manufacturing process
do not result in unit cost reductions that are material in relation to the total
price of the Aviv jewelry. We also intend to increase sales of Aviv products by
introducing the Aviv products to the distribution lines used by the D.G.
division and Diamonair division.
Currently, we are reviewing our administrative costs to determine if there
are areas where expenses could be reduced through further integration and
consolidation of the acquisitions. Although we expect to achieve some level of
consolidation, these potential cost reductions are limited in many areas because
(i) operating in the United States and Canada limits the advantages of
consolidating certain accounting and human resources functions and (ii)
management believes that maintaining the existing Aviv and Diamonair sales
offices and manufacturing facilities will be beneficial for maintenance of those
divisions' existing customer relationships and will increase our opportunities
in the United States.
Fluctuations in the Canadian dollar against other currencies, especially
the U.S. dollar, may have a material effect on our results of operations. A
substantial portion of our sales and purchases are set in U.S. dollars or are
influenced by local currency against the U.S. dollar. To date, we have not
sought to hedge the risks associated with fluctuations in exchange rates and
currently do not a have a policy relating to hedging.
Many computer systems and software products worldwide will not function
properly as the year 2000 approaches due to the common programming device of
using just the last two digits of a year in all dates. Currently, we have
installed new computer systems at both DG and Diamonair and are completing
implementing and conversion to avoid this problem. We expect to implement any
necessary changes in Fiscal 1999. We do not believe that the costs of
implementing any additional necessary changes to our computer systems will have
a material adverse effect on our business.
Results of Operations
Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996
Sales for the year ended December 31, 1997 were $22.1 million, as compared
to $14.2 million for the year ended December 31, 1996. This $7.9 million, or
56%, increase was primarily due to the addition of Aviv revenue of $7.3 million
and Diamonair revenue of $3.8 million. Revenue from the D.G. division decreased
by $3.2 million due to a change in the product and customer mix, which resulted
in lower volumes or more expensive, higher margin goods being sold in the year
ended December 31, 1997.
Cost of sales increased to $15.7 million in the year ended December
31,1997 as compared to $11.4 million in the year ended December 31, 1996. This
$4.3 million, or 38%, increase was primarily due to the increase in sales. Gross
margin (which is gross profit primarily expressed as a percentage of sales)
increased to 29% in the year ended December 31, 1997 from 20% in the year ended
December 31,1996. Gross margin increased due to a change in the product and
customer mix discussed above.
Selling, general and administrative costs increased to $3.7 million in the
year ended December 31, 1997 from $1.1 million in the year ended December 31,
1996. This $2.6 million, or 26%, increase is due to the increased expenses
associated with operating from multiple locations and being a public company. In
particular, professional fees increased by $750,000 due to costs associated with
being a public entity and transaction costs associated with the acquisitions.
Executive salaries increased by $417,000, partially due to the increase in the
number of executives required to operate in three locations.
Interest and other expenses increased to $1.2 million in the year ended
December 31, 1997 from $923,000 in the
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year ended December 31, 1996. Interest expense increased by $26,000 in the year
ended December 31, 1997 to 822,000 as a result of increased borrowings, however,
our weighted average interest rate was reduced from 6.58% in the year ended
December 31, 1996 to 5.42% in the year ended December 31, 1997. Other expenses
increased primarily due to a $280,000 write down of receivables from Zellers
Inc. of Canada.
Due to increased income before taxes, our taxes increased to $541,000 from
$296,000. However, our effective tax rate was reduced to 34% from 39% due to the
increase in the percentage of income from U.S. operations, which has a lower tax
rate than Canada.
As a result of the foregoing, net income increased to $1.0 million in the
year ended December 31, 1997 from $457,000 in the year ended December 31, 1996.
Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31, 1997
Sales for the year ended December 31, 1998 increased by $13,222,199
compared to the year ended December 31, 1997. This increase of 59.8% was a
result of the successful integration of the Aviv and Diamonair acquisitions, as
well as the increase in revenues from alternative customers, such as
ValueVision. Gross profit increased by $5,044,889 and represented 32.5% of sales
as compared to 29.1% in the year ended December 31, 1997. Operating expenses
increased to approximately $4,912,686 for the year ended December 31, 1998
compared to $3,651,550 for the year ended December 31, 1997. Operating expenses
represented 13.9% of revenues in the year ended December 31, 1998 compared to
16.5% in the year ended December 31,1997. This improvement was the result of our
ability to control general and administrative costs which were only partially
offset by increases in selling expenses.
Interest expenses increased by approximately $998,000 as a result of
increased financing to service our growth. Other expenses increased by $698,525
from $389,533 to $1,088,058 primarily as a result of the Zellers Inc. of
Canada's settlement. We had other income of $1,082,239 in the year ended
December 31, 1998, primarily as a result of the settlement with Zellers Inc.
Canada.
Income before income taxes was $4,756,061 compared to $1,586,657, an
increase of $3,165,404 or approximately 200%. As a result of the higher income,
income taxes increased from $541,423 to $1,477,369 in the year ended December
31, 1998. Net income was $3,278,692 in the year ended December 31,1998 as
compared to net income of $1,045,234 in the year ended December 31, 1997. This
was an increase of 214%.
Liquidity and Capital Resources
In April 1997, we completed an initial public offering in which we sold
1,265,000 shares of common stock and 1,265,000 warrants to purchase common
stock. We realized net proceeds of $6.7 million from this offering. We may
realize additional proceeds from the exercise of the warrants, although there
can be no assurance that such warrants will be exercised.
We currently have an operating line of credit with The Bank of Nova Scotia
in the amount of $20.3 million subject to certain margin requirements. The
amount available to us is equal to 75% to 80% of "eligible accounts receivable",
as defined in the Line of Credit Agreement, plus 50% of the inventory values up
to a maximum advance against inventory of approximately $9.7 million. We
utilized the credit line to borrow the $5.8 million and $4.3 million necessary
for the acquisitions of Diamonair and Aviv, respectively.
Our borrowings under the Line of Credit bear interest at Canadian prime
plus 1/2% which at March 31, 1999 amounted to 6.5%. Interest on any borrowings
is payable monthly. We are in full compliance with all of the banking covenants
(including the financial covenants and ratios) and are required to report to our
bankers on a monthly basis.
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Our obligations under the revolving credit facility are secured by a
security interest on all of our assets, guaranteed by Diamante, a jewelry retail
chain owned by one of our Vice Presidents and are further secured by a mortgage
on the property owned by a limited partnership controlled by Jack Berkovits and
leased to us, which mortgage we have guaranteed.
For the year ended December 31, 1998, we used cash from operating
activities of $5.1 million, primarily due to an increase of accounts receivable
of $2.7 million and an increase in inventory of $9.7 million.
Our accounts receivable net of allowances for doubtful accounts as of
December 31, 1998 was $17.6 million, or 50% of revenue for the year ended
December 31, 1998. Accounts receivable is such a large percentage of sales
because (i) accounts receivable include a 7% goods and services tax and a 10%
federal excise tax on most Canadian sales, which taxes are not included in
sales, and (ii) sales volume is generally higher in the fourth quarter and some
customers do not pay us for goods until after the holiday selling season.
Our inventory as of December 31, 1998 was $20.9 million, or 59% of revenue
for the year ended December 31, 1998. Inventory is such a large percentage of
sales because the inventory reflects needs for all three divisions for their
anticipated expansion and growth in 1999.
At December 31, 1998, we had loans outstanding to its principal
shareholder, Jack Berkovits, of $2.0 million which bear interest at 10% per
annum.
In May 1999, we issued 615,385 shares of common stock and an aggregate of
172,308 warrants exercisable at $8.13 per share in connection with a private
placement offering. The exercise price of the warrants is subject to adjustment
in certain circumstances. These warrants are exercisable from May 1999 until May
2004. We issued 615,385 shares of common stock to Haymarket, LLC, 110,769
warrants to purchase common stock to Haymarket, LLC, and 61,539 warrants to
purchase common stock to Oscar Gruss & Son.
We may be required to issue an additional 316,693 shares of common stock
to cover any potential adjustment in the amount of shares of common stock
purchased in the May private placement offering. Pursuant to the Common Stock
Purchase Agreement between Haymarket, LLC and us, the number of shares purchased
by Haymarket, LLC will be adjusted to reflect a reset in the purchase price of
the shares acquired according to the following terms: (i) the reset price of the
shares will be the average of the lowest twelve bid prices of our common stock
during the applicable reset period (as defined below); (ii) the number of shares
of common stock to be issued upon the expiration of each of the two reset
periods will be calculated by the following formula: (307,692.5 (1/2 the number
of shares purchased)) x (1,500,000 x 115% - the average of the lowest twelve bid
prices of our common stock during the applicable reset period) / (the average of
the lowest twelve bid prices of our common stock during the applicable reset
period); and (iii) there will be two reset periods, each reset period consisting
of thirty trading days, (a) the first reset period covering 306,692.5 of the
shares purchased by Haymarket, LLC to expire on the 30th day after the date this
prospectus is declared effective, and (b) the second reset period covering
306,692.5 of the shares purchased by Haymarket, LLC to expire on the 30th day
after the date of the expiration of the first reset period.
Pursuant to the terms of the Common Stock Purchase Agreement, we have the
option to sell, and Haymarket, LLC has agreed to buy, up to a maximum of
$2,000,0000 worth of our common stock. The number of shares acquired by
Haymarket, LLC will be calculated according to the following formula: (the
dollar amount of the shares we have an option to issue (up to a maximum of
$2,000,000 worth)) / (($3,000,000 / 100% of the bid price of the shares of our
common stock on the trading day immediately preceding the date of the purchase
of the additional shares). The issuance of the additional shares will occur on
the earlier of (a) November 13, 1999 or (b) 20 days after the expiration of the
second reset period. We are required to exercise our option to sell the
additional shares within 20 days after the earlier of (a) or (b).
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We anticipate that cash flow from operations, as well as borrowings
available under our existing credit line will be sufficient to satisfy our
credit needs for the next twelve months. In addition, we may sell equity
securities to raise additional capital as needed.
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BUSINESS
We are primarily engaged in the design, manufacture, merchandising and
distribution of stone-set jewelry for department stores, mass merchants,
catalogue showrooms, television shopping networks and other high volume
retailers and major discounters. We also taking advantage of non-traditional
wholesale distribution outlets such as Internet wholesale advertising services,
liquidation operations, and consumer product rental companies.
We believe we have established ourselves as a low-cost, high-volume and
quality manufacturer in the value priced jewelry market. Our primary competitive
advantage, particularly for the DG division, is our innovative manufacturing
methods which allow for substantially reduced costs per unit, provide
substantial capacity and better quality, and require minimal skilled labor. Our
merchandising strategy also involves the design of products that we believe will
continually appeal to the mass market. We also assist our customers in
creatively merchandising our jewelry to encourage impulse purchases.
Our operations are divided into three divisions. The "DG division"
manufactures and distributes value priced stone- set rings and other jewelry
products. We have operated the DG division in Canada for 30 years. The "Aviv"
division manufactures and assembles bridal jewelry. We acquired Aviv in February
1998, effective June 1, 1997. The "Diamonair" division assembles and distributes
jewelry, primarily set with synthetic stones. We acquired Diamonair in November
1997.
Growth has been achieved by providing our customers with quality and
service and in recent years through our manufacturing process, which enables us
to provide our customers with value priced stone-set mass appeal jewelry at
lower cost than many of our competitors. We maintain long-standing relationships
with Canadian customers such as Reed's Jewellers, the Twain Group, Zellers, Inc.
and The Shopping Channel. In the last three years, we have also focused on the
much larger American market. The DG division established a United States sales
office in Tampa, Florida and currently sells products to customers such as
Wal-Mart, Fred Meyer Inc., Value Vision International Inc., Suarez Corporation,
which is a direct mail order company, and others, including Zales Corporation,
the largest jewelry retailer in the United States. We have also utilized
strategic acquisitions to increase our presence in the United States.
Diamonair's customers include Finlay Fine Jewelry Corp, which operates leased
fine jewelry departments in department stores for retailers such as May
Department Stores and Federated Department Stores. Aviv sells to Zales
Corporation and Finlay Jewelry Corp., as well as many independent jewelers in
the United States. In 1998, approximately 81% of our sales were in the United
States, as compared to 17% and 63% in 1995 and 1997, respectively.
Business Strategy
We believe that our business strategy is enabling us to become a leader in
the value priced, stone- set jewelry market. We believe that our business
strategy allows us to leverage the expertise and customer base we have
established in the Canadian market to increase sales in the much larger markets
of the United States. We also believe that we can increase sales of our other
products, including bridal jewelry, by integrating our divisions. Our primary
business strategies are as follows:
Capitalize on Our Manufacturing Processes
Our manufacturing process allows us to produce mass quantities of
stone-set, value priced jewelry. We are able to offer quality products to our
customers at prices that are competitive with or lower than our competitors
offering similar goods, while maintaining adequate profit margins. Management
believes that our manufacturing process produces goods that are superior to
comparably priced goods produced by competitors. We believe that these
advantages will allow for continued growth in market share of value priced
jewelry.
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Integrate the Aviv and Diamonair Acquisitions
We completed both the Aviv and Diamonair acquisitions in 1997. Although
the DG division manufactures products for Diamonair, the three divisions'
operations have not been fully integrated. We continue to review the Aviv and
Diamonair product lines to determine how to continue to manufacture more of
their product lines with our manufacturing process. We have begun to utilize
each division's distributions lines and customers to promote and "cross-sell"
the products of the other divisions. We believe that we will continue this
cross-promotion to increase the rate of penetration of our products into the
U.S. markets.
Extend Customer Base and Utilize Non-traditional Distribution Lines such as the
Internet
While we have developed a broad customer base, we currently target our
marketing efforts towards large retailers, such as department stores, mass
merchandisers, television shopping networks, catalogue showrooms and other
discount stores, whose overall share of retail jewelry sales is expected to
increase. These customers typically require a high level of service, and we seek
to build long-term relationships by making it convenient and cost-effective for
these customers to rely on us for essential services such as product design,
inventory control and delivery.
We also sell our products through non-traditional wholesale distribution
outlets such as Internet wholesale advertising services, liquidation operations
and consumer product rental companies. In 1998 and 1999, we entered into
agreements to sell our products on or through Bid.com, U-Bid, Amazon.com, Lycos,
Go2Net, Egghead and Shop at Home. Management believes that our products are
ideal for many of these non-traditional outlets, which usually feature moderate
and lower priced products. These agreements have been assigned to Xite
Jewelry.Com which is 50% owned by us and 50% owned by two sons of Jack
Berkovits. See "Certain Transactions."
Maintain a Broad Product Mix
We maintain a broad product mix so that we can meet the varying needs of
our customers, who range from discount stores such as Wal-Mart, Inc. to
department stores such as Saks Fifth Avenue. This also enables us to supply each
customer with a number of different styles of each product, which jewelry
retailers generally like to have in stock. The DG division, Aviv and Diamonair
currently offer our customers approximately 5,000, 4,000 and 600 styles of
rings, respectively. We also offer our customers over 800 other products, the
majority of which consist of pendants and earrings.
We attempt to provide our customers with rings and other jewelry products
that incorporate traditional styles and designs. While we regularly update our
product lines and offer new products, we seek to avoid designs incorporating
fashion trends that are expected to have short life cycles. This approach
enables us and our customers to avoid accumulating obsolete inventory.
Additionally, we can create specially designed products in response to requests
or pictures submitted to us by our customers. This variety and flexibility
allows us to meet a wide variety of our customers' jewelry needs.
Acquisitions and Joint Ventures
We have utilized the Aviv and Diamonair acquisitions to increase the rate
of our penetration into the U.S. jewelry markets. Each acquisition also
broadened our product line and increased the number of customers that we work
with, creating cross-selling opportunities. Although we have no current plans or
potential targets, we may make additional acquisitions of manufacturers or
distributors of complementary jewelry products in the future, if such potential
targets offer strategic opportunities for us as a whole.
We also intend to use strategic partnerships and joint ventures to create
additional revenue and to create opportunities for the sale of our products.
22
<PAGE>
Marketing
We maintain sales offices at our Toronto headquarters, at the Aviv
manufacturing and office facility in Houston, Texas, at the Diamonair offices in
Cedar Knolls, New Jersey and in Tampa, Florida. Our sales staff promote our
products to a wide range of customers via existing relationships, trade shows
and product presentations.
We seek to provide value priced, quality products. Price and quality are
of particular importance in the jewelry market because, except at the highest
end of the market, advertising and brand name recognition are minimal. We
believe that our manufacturing process allows us to provide our customers DG
division products at prices that are competitive with or lower than our
competitors' products. Similarly, the incorporation of DG division products and
manufacturing into Diamonair has allowed for competitive pricing of that
division's products. The Aviv products, which usually are made of more expensive
metals and contain more expensive stones, are also competitively priced when
compared with goods of similar quality. Marketing of Aviv products is aided by
Aviv's specialization in bridal jewelry, which allows Aviv's sales people to
focus their marketing efforts on certain market segments.
Often, retail stores are provided pre-arranged presentation trays. These
trays usually contain our most popular styles in common sizes. We believe that
these trays make it convenient and cost effective for retail stores to display
and promote our products. We believe that retail store operators who utilize
these pre-arranged presentation displays, which may include point- of-purchase
displays, will elicit impulse purchases of our products because the styles are
familiar to customers and are priced at attractive levels. Aviv also utilizes
independent sales representatives, who promote Aviv's products to smaller retail
outlets.
Management emphasizes maintaining and building upon our relationships with
existing customers. We provide specialized support services to our customers,
including bar-coding and drop shipping to individual customer locations, as well
as central distribution centers. Further, in order to fill customer orders more
quickly and effectively we have implemented an electronic data interchange
program pursuant to which we electronically receive purchase orders from
participating customers and electronically transmit to the customers order
acknowledgments, invoices and advance shipping notices. The electronic data
interchange link and other support options, in management's opinion, assures an
ongoing business relationship. We believe these specialized services, which are
particularly important in marketing to large retailers, enhance our ability to
attract and retain customers.
Although our sales are generally non-refundable, we may accept returns of
certain items in order to maintain customer goodwill and as part of promotional
programs. Returns of products are not significant and generally are made as part
of stock balancing transactions in which the returned products are replaced with
products better suited to the customer's needs. We have not yet experienced any
difficulty in reselling returned merchandise.
In 1997, we began listing excess inventory on an Internet wholesale
commerce web site. We intend to continue this practice because it provides an
inexpensive method for disposing of excess inventory on terms favorable to us.
Customers
We maintain a broad base of customers concentrated in four major jewelry
segments: (i) department stores such as Sears Roebuck, J.C. Penney and Saks
Fifth Avenue (our products are also sold in certain Federated Department Stores
and May Department Stores through, Finlay Fine Jewelry Corp., an operator of
jewelry boutiques within other department stores); (ii) specialty markets, such
as The Shopping Channel (Canada), ValueVision; and (iii) jewelry chain stores
such as Zales Corporation, Gordons, Freidmans and others and (iv) mass
merchandisers such as Zellers, Inc. and Wal-Mart. We generally do not sell
pursuant to any formal or long-term contracts, although we do have a long-term
supply agreement with Zellers, Inc.
23
<PAGE>
For the year ended December 31, 1998, three major customers accounted for
approximately 36% of sales. For the year ended December 31, 1998 , Value Vision
accounted for approximately 21% of sales. Other than ValueVision, no customer
accounted for more than 10% of sales in the year ended December 31, 1998. For
the year ended on December 31, 1997, Finlay Fine Jewelry Corp. accounted for 19%
of sales, Silverman Jeweller's Consultants, Inc. accounted for 14% of sales and
Wal-Mart accounted for 9% sales. The loss of any of these customers or a
significant reduction in their orders would have an adverse effect on D.G.
Jewellery of Canada Ltd.
Product and Design
We seek to provide our customers with a broad selection of jewelry
products that incorporate traditional styles and designs. We seek to avoid
designs incorporating fashion trends which are expected to have short life
cycles. This approach enables us and our customers to avoid accumulating
obsolete inventory. Additionally, producing a greater quantity of a particular
product results in a more efficient manufacturing process.
However, we regularly update our product lines and offer new products. We
maintain a staff of model makers/designers who develop new designs based on
research of the market and surveying stores, catalogues and industry
publications to determine current trends. Additionally, we can create specially
designed products in response to requests or pictures submitted to us by our
customers. New product design prototypes are created, and after evaluation, the
final product design is produced.
A principal goal of our design program is to maximize the perceived value
of our products through design and manufacturing innovations that enhance the
appearance of the jewelry without causing corresponding increases in product
costs. This design approach assists us in producing quality products reflecting
general consumer tastes. D.G. Jewellery of Canada Ltd., particularly the D.G.
division and Diamonair, seeks products, not as fashion leaders or faddish
styles, but of enduring styles that encourage moderately priced impulse
purchases.
Rings account for approximately 90% of our sales by units sold and dollar
revenue. The D.G. division currently offers approximately 5,000 styles of rings.
The rings are moderately priced and the average wholesale price of the rings is
approximately $150.00. The retail price of the D.G. division's better selling
products ranges from $30.00 to $600.00, although some products can cost as much
as $1,000. The rings are made principally in 10 karat gold. Our products contain
a variety of stones classified as diamonds, precious (e.g., rubies, sapphires,
emeralds), semi-precious (e.g., garnet, topaz, amethyst, aquamarine, opal) or
synthetics (e.g., cubic zirconia, spinel). The use of stones increases average
unit sales price and results in greater margins. Additionally, the inclusion of
stones creates a greater margin flexibility to insulate us from fluctuation in
the value of gold. The D.G. division manufactures a number of rings with
multiple stones because management believes our manufacturing process allows us
to produce multiple stone items at a cost lower than our competitors.
Aviv offers approximately 4,000 rings, most of which are intended to be
used as wedding or engagement rings. Aviv's rings are made up of precious
metals, including 22 karat gold and platinum. The average wholesale price of the
Aviv products is $700.00. The retail price of Aviv's better selling products
range from between $500.00 and $1,500.00. Some of Aviv's diamond rings are sold
for more than $5,000.
Diamonair offers approximately 600 rings, primarily adorned with cubic
zirconia stones. Although many of Diamonair's products are made of precious
metals, the Diamonair products are generally lower priced goods. The average
wholesale price of Diamonair's products is $100. The retail price of Diamonair's
better selling products ranges from $50 to $500. We are planning to introduce
other stones, which may include gem stones as well as other synthetic stones
into the Diamonair products.
We, through each of our three divisions, offer approximately 800 earrings
and pendants. Many of these products are manufactured through our manufacturing
process, which allows us to produce these items at costs which are competitive
with
24
<PAGE>
or less than our competitors. We also design earrings and pendants to match some
of our rings so that the products can be sold as a set.
Manufacturing Process
Our manufacturing process is a special process for producing a high-volume
of low-cost multi-stone rings. Our manufacturing process provides us with a
current estimated manufacturing capacity of approximately 20,000 rings per week.
This process is utilized at the Toronto facility for the DG division product
line and certain Diamonair products. The Toronto facility is presently producing
an average of approximately 3,000 rings per week, but sometimes producing as
much as 20,000 rings in a week. We believe that our manufacturing capabilities
distinguish us from most of our competitors and enable us to produce very
competitively priced, quality and consistent products satisfying our customers'
demands for mass merchandising.
Our manufacturing process combines modern technology, mechanization and
hand craftsmanship to produce fashionable and moderately priced jewelry. Our
manufacturing operations involve combining pure gold with other metals to
produce 10 and 14 karat gold, manufacturing cast jewelry, and finishing
operations such as cleaning, polishing, diamond- cutting, engraving, plating and
other jewelry work. We utilize the lost-wax/cast-in-place method of jewelry
manufacturing to produce high-quality gold rings, earrings, pendants and
bracelets. This is based on an investment casting process used in the jewelry
manufacturing industry. It entails creating wax duplicates of the items which
are encased in a plaster mold. The plaster is hardened in an oven while the heat
melts away the wax, leaving a hollow mold pre-set with stones in place. The mold
is injected with metal, in effect reverse-mounting the stones in the jewelry.
After the casting process, the jewelry undergoes a series of cleaning and
polishing stages before being labeled with the retailer's price tag and bar
codes and shipped. This process allows unskilled labor with virtually no
training to set as many as 8,000 stones per day per stone setter. This compares
to the normal setting process of a skilled setter, setting up to 150 stones per
day, at a cost of up to $1.00 per stone or more. However, the percentage savings
are far more significant when the intrinsic values which make up the jewelry
item are lower. This is so because the greater the labor factor in the product's
cost structure, the greater the percentage savings when such labor factor is
reduced.
Many of the D.G. division's manufacturing personnel are paid on a
piece-work basis. Management believes this basis provides incentive to maximize
productivity while at the same time, it provides us accuracy in cost accounting.
Our strict quality control guidelines ensure that quality is not sacrificed for
productivity. We use a bar-coded tracking system for all inventory in process.
When a job bag is transferred from one employee to another, it is automatically
electronically "wanded" (UPC bar coded for number of units, style, and other
pertinent customer information) into that employee's custody. This has the
effect of assigning responsibility for the inventory. It also causes the
recipient employee to verify quality of the product prior to his or her
commencement of work, in effect, policing the prior person's work product. If
the previous employee's work product was substandard, the recipient would return
the job to production control who would require the previous employee to correct
the work product with no compensation. Otherwise, the recipient would have to
correct the product at no additional compensation and would further make the
recipient's work more difficult as well as delaying his or her production.
Therefore, the system is self policing.
Management believes that these significant savings will allow us to
produce jewelry that previously did not warrant large labor costs and,
accordingly have not been produced by anyone else. Specifically, multi-stone
sterling silver products could now be produced en masse to retail at prices
geared to mass merchandiser's "customers" profiles. These products could now
sell in a range from $9.99 to $49.97 retail, and project a quality and perceived
value of several times that amount. Management believes the jewelry industry has
avoided producing this type of product since the sterling silver metal value and
the synthetic stone values did not warrant increased labor costs. Our reduced
labor costs enables us to produce these products profitably.
Currently, manufacturing and other operations for the Aviv product line
are accomplished at our facility in Texas. The lease to this factory was
assigned to D.G. Jewellery of Canada Ltd. in connection with the acquisition of
Aviv. This four
25
<PAGE>
year old facility produces an average weekly volume of 800 rings and management
believes its current facilities have the capacity to produce approximately 4,500
rings per week.
Diamonair primarily purchases products from the D.G. division and other
manufacturers in a finished condition. However, Diamonair does do some assembly,
repair and packaging of its products from its facility in Cedar Knolls, New
Jersey.
The manufacturing process in the jewelry industry results in great volumes
of gold scrap. We have strict controls to minimize waste. Management believes
that our manufacturing processes reduce the handling of the end jewelry product
and accordingly, the quantity of jewelry scrap is greatly reduced. The scrap in
the form of chips, filings, grindings and sweepings, are recovered by us and
sent to refiners to recover the gold. Our recovery from refiners in 1997 and
1998 were 1,565 ounces or approximately $545,000, 4,774 ounces, and $1,406,029,
respectively.
Supply
We purchase our gold from banks, gold refiners and commodity dealers.
Management believes this arrangement is sufficient to meet our current
requirements. Gold acquired for manufacture is at least .995 fine and is
combined with other metals such as silver, copper, nickel and zinc, to produce
10,14,18, or 22 karat gold of different colors. The term "karat" refers to the
gold content of alloyed gold, measured from a maximum of 24 karats (100% fine
gold). These alloys are in abundant supply and are readily available to us.
Other precious and semi-precious stones are available from many suppliers in
Canada and the United States.
The world's supply of diamonds comes primarily from De Beers Consolidated
Mines, Limited, a South African company. The continued availability of diamonds
to the jewelry industry is dependent, to some degree, on a continual supply from
De Beers Consolidated Mines, Limited. While several other countries are major
suppliers of diamonds, in the event of an interruption of supply from South
Africa, the Jewelry industry, as a whole, could be adversely effected, which
could impact the supply of diamonds to us.
We do not presently engage in hedging activities with respect to possible
fluctuations in the prices of precious, semi- precious gemstones or metals. We
believe the risk of price fluctuations can be mitigated by changes in the prices
we charge our customers, which we have historically done in response to such
fluctuations. However, there can be no assurance that a downward trend in the
prices of stones or metals would not have a material adverse impact on the
valuation of our inventories or that an increase in prices would not make it
more difficult or costly for us to acquire inventory.
We purchase our supplies and raw materials from a variety of suppliers and
we do not believe the loss of any of the suppliers would have a material effect
on our business. Alternative sources of supply for raw materials for production
of jewelry are readily available.
We carefully inspect all materials sent and received from outside
suppliers, monitor the location and status of all inventory, and have strict
internal control procedures of all jewelry as it proceeds through the
manufacturing process. A complete audited physical inventory of gold, silver and
gemstones is taken at our manufacturing and administrative facilities on an
annual basis, in addition to other physical inventories during the year. We
employ an agency to provide a security staff and have various security
procedures in the hiring of personnel as well as internal-security procedures
regulating employee conduct.
Insurance
We maintain primary all-risk insurance, with limits in excess of our
current inventory levels, to cover thefts and
26
<PAGE>
damage to inventory located on our premises. We also maintain insurance covering
thefts and damage to the inventory we own which is located off-site. The amount
of coverage available under such policies is limited and may vary by location,
but generally is in excess of the value of the gold supplied by us. We maintain
fidelity insurance which provides coverage against theft or embezzlement by our
employees. Additionally, we maintain director's and officer's liability
insurance in the amount of Cdn$10,000,000.
Competition
The jewelry manufacturing industry is highly competitive, and our
competitors include domestic and foreign jewelry manufacturers and wholesalers
and importers who may operate on a national, regional and local scale. The
primary competitive factors are price, design, quality, customer service and
established customer relationships.
The diverse distribution channels in which we market our products
frequently involve different competitive factors. The ability to provide
specialized services is a particularly important competitive factor in our sales
to certain large retailers such as mass merchandisers, discount stores and
warehouse clubs. Product availability and the ability to offer consistent
product quality at competitive prices tend to be the key competitive factors to
the customer segments which we serve. Some of our competitors may specialize in
sales to particular distribution channels and may have relationships with
customers in those distribution channels that make competition by us more
difficult. We believe that the recent trend towards consolidation at the retail
level in the jewelry industry will increase the level of competition in the
markets in which we compete.
In Canada, management believes we have two primary competitors, A&A
Jewelry of Scarborough, Ontaria and Finecraft Industries Limited, both of which
are larger than D.G. Jewellery of Canada Ltd. A&A Jewelry of Scarborough,
Ontario is Canada's largest jewelry manufacturer. It manufactures both casted
ring products and stamped gold earrings and pendants, and its sales are both in
Canada and the United States. Finecraft Industries Limited is the other major
Canadian manufacturer, which imports from the Far East.
In the United States, the market, although highly fragmented, does contain
a number of major competitors many of whom import much of their product from the
Far East and many of whom sell higher priced items. The United States
competitors include M. Fabrikant & Sons, Inc., Samuel Aaron Inc., Simon Golub,
PAJ, Inc., Nissko Jewellery Trading, World Pacific Products, Andel, Andin
International Inc., Oroamerica, Inc., Dalow Industries and Michael Anthony
Jewelers Inc.
Patents and Trademarks
We have received trademarks of certain product names and for patents on
approximately 250 Aviv product designs. These trademarks and patents are not
economically material to us.
We do not have, nor do we rely, on patents to establish or protect our
market position. We have not applied for patent protection of our manufacturing
processes to avoid disclosing our unique application, modification and
improvements relating to certain basic processes known in the industry. Further,
we cannot be assured that the process which we believe is proprietary would
qualify for a patent, and if a patent would be granted, there is no assurance as
to the extent of its enforceability. There can be no assurance that competitors
will not be able to imitate our manufacturing processes, which could have a
material adverse effect on our business.
The New York Gold and Diamond Exchange
As part of the acquisition of Aviv, we acquired the New York Gold and
Diamond Exchange, a retail store. New York Gold and Diamond Exchange is located
in a 1,500 square foot area of the Aviv facility in Houston, Texas. New York
27
<PAGE>
Gold and Diamond Exchange sells the products of Aviv and other manufacturers and
offers us an excellent opportunity to profitably dispose of excess inventory of
Aviv products. We intend to increase the amount of DG division and Diamonair
products that we sell in the store.
Employees
At May 31, 1999, we employed 212 persons on a full-time basis, including
approximately 174 engaged in manufacturing and distribution, 14 salespeople, 17
general and administrative and 7 executives, each of whom performs various other
functions such as sales and marketing.
We have no unions and believe we have an excellent relationship with our
employees.
Environmental Compliance
Certain of the manufacturing processes utilized by us require the use of
chemicals and other hazardous materials. We have an ongoing compliance program
to ensure that our manufacturing processes are in compliance with environmental
rules and regulations.
Seasonality
Retail sales of jewelry are generally weighted to the fourth quarter. For
most manufacturers these sales patterns reflect a business that tends to fall
one-third in the first half of the year with the remaining two-thirds in the
second half of the year. Our sales in the first half of 1998 represented
approximately 40% of total revenues.
While our sales are subject to seasonal fluctuations, these fluctuations
are mitigated to a degree by the early placement of orders by many of our
customers, particularly for the Christmas holiday season. Further, management
believes that our sales and those of our customers are not as seasonally
effected as most competitor's sales because many of our products are lower
priced goods designed for mass merchandising, which generate year round impulse
purchases. In addition, we do not expect to be as effected because of our
anticipated revenues from alternative customers such as television shopping
networks and sales over the Internet.
Properties
Our executive and administrative offices and primary manufacturing and
marketing facilities are located in a recently renovated 23,000 square foot
facility in Toronto, Ontario. This facility is leased from 1001 Petrolia Road
Limited Partnership, the general partner being 1013418 Ontario Inc. Jack
Berkovits, Chairman, CEO and President of D.G. Jewellery of Canada Ltd. is the
sole shareholder, officer and director of the general partner, 1013418 Ontario
Inc. The lease is a 10 year net, net lease and expires January 31, 2005. Annual
lease payments are $107,948, increasing each year by the greater of $.37 a
square foot or the percentage increase in the Consumer Price Index for the
Municipality of Metropolitan Toronto. Real estate taxes, utilities, maintenance
and insurance cost us approximately $95,000 for the 12 months ended December 31,
1998. Management is of the opinion that the terms of the lease are as favorable
as could be obtained from unaffiliated third parties. See "Certain
Transactions."
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The general partnership, 1013418 Ontarion Inc, of which Mr. Berkowits is
the sole shareholder, officer and director, originally obtained a $660,000 five
year mortgage on the property from the Canadian Imperial Bank of Commerce in
1993. At March 31, 1999, the mortgage was $515,661. The loan bears interest at
7.8% and was renewed in October 1998 for an additional five years. We are a
guarantor of this mortgage. A second mortgage was obtained to secure our
financing facilities with The Bank of Nova Scotia.
Effective as of June 1, 1997, we entered into a sublease for the 25,000
square foot manufacturing and office facility in Houston, Texas from which Aviv,
Inc. had operated prior to its acquisition. The sublease is to terminate on the
earliest of (i) May 30, 2003, (ii) four months after we give notice, or (iii)
upon termination of the primary lease on the property. The primary lease is not
due to terminate until March 2014, although it is terminable by the landlord
upon certain events, such as the failure of the tenant to pay rent. We pay
annual rent of $130,476. We use the Houston facility primarily for the
manufacturing and storage of the Aviv products, as well as sales, design and
administrative offices. Also located at the Houston facility is our retail
store, which occupies approximately 1,500 square feet.
Effective as of November 21, 1997, we entered into a sublease for the
7,880 square foot facility in Cedar Knolls, New Jersey that Litton Systems had
used to operate Diamonair prior to its acquisition. We have the option, upon
thirty days notice, to reduce the total area which it occupies and receive a
proportionate reduction in rent so long as we occupy at least 5,000 square feet.
The sublease terminates on November 20, 1999. We pay annual rent of $84,789. We
use the facility for the assembly and storage of Diamonair products, as well as
sales, design and administrative offices.
We believe that our facilities are adequate for our current operating
levels and presently foreseeable growth
Legal Proceedings
On May 29, 1997, Zellers, a department store chain, initiated an action
against us in the Ontario Court of Justice (General Division) alleging a breach
of contract for failure by us to credit certain returns to Zellers' account and
to provide Zellers with replacement merchandise. Zellers had been purchasing
rings from us pursuant to a contract which was to terminate in December 2001.
Zellers sought compensatory damages of $1,800,000, punitive damages of $360,000
and counsel fees and court costs. The parties have settled the matter. We
entered into a long term supply agreement with Zellers for six years from
January 1999.
On August 13, 1997, L. Luria & Son, Inc., a customer of DG Jewellery of
Canada, Ltd., commenced a Chapter 11 bankruptcy action in the United States
Bankruptcy Court in the Southern District of Florida. The Trustee in Bankruptcy
is seeking to recover preferential transfers of approximately $133,857. The
Trustee alleges, among other claims, that certain payments were fraudulent
conveyance. We believe the allegations are without merit and intends to
vigorously defend its position. The outcome of the litigation can not be
presently determined.
We are not a party to any other material litigation nor are any such
proceedings pending or threatened.
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<PAGE>
MANAGEMENT
The directors and executive officers of the D.G. Jewellery of Canada Ltd.
are as follows.
<TABLE>
<CAPTION>
Position Held
Name Age Position with the Since
Company
<S> <C> <C> <C>
Samuel J. Berkovits..................... 47 Chairman of the Board, 1979
CEO and President
Gary Davis.............................. 51 Vice President-Finance, 1987
Chief Financial Officer,
Controller, Treasurer,
Secretary
Leonard Fasullo......................... 58 Vice President-Production 1989
Meyer Feiler............................ 46 Director 1998
Theodore L. Bonsignore.................. 52 General Manager, 1998
Diamonair, Director
Ronald Rutman........................... 46 Director 1999
</TABLE>
Samuel Jacob "Jack" Berkovits has served as our President and a Director
since 1979. He is a founding member of the Jeweler'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
D.G. Jewellery of Canada Ltd.
Gary Davis has served as our Chief Financial Officer and Vice President -
Finance since 1987. Prior to that, Mr. Davis served for 12 years as Chief
Financial Officer at a Canadian company engaged in manufacturing jewelry. Mr.
Davis has been a certified general accountant since 1972.
Leonard Fasullo has been our Vice President-Production since 1989. Mr.
Fasullo joined D.G. Jewellery of Canada Ltd. as a manufacturing foreman in 1984.
Theodore L. Bonsignore has served as our General Manager of Diamonair
since May, 1998 and as a Director of D.G. Jewellery of Canada Ltd. since July
1998. Mr. Bonsignore works for us on 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.
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<PAGE>
Meyer Feiler has been a Director of D.G. Jewellery of Canada Ltd. since
July 1998. Mr. Feiler has served as President of Carmen Incorporated, one of the
largest jewelry companies in Canada since 1993. Mr. Feiler has worked at Carmen
Incorporated since 1979.
Ronald Rutman has served a Director of D.G. Jewellery of Canada Ltd. since
March 1999. Mr. Rutman is a Chartered Accountant with the firm of Zeifman &
Company where he is a partner. Mr. Rutman has been with Zeifman & Company since
1973. Mr. Rutman specializes in taxation, consulting and bank finance. He has a
particular expertise in the jewelry and health care industries. He has a B.A.
from the University of Toronto.
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. Berkovits, Rutman and Feiler. The
responsibilities of the Audit Committee include recommending to the board of
directors the firm of independent auditors to serve us, reviewing the
independent auditors reports, services and results of audit, and reviewing the
scope, results and adequacy of our internal control procedures. The Compensation
Committee consists of Messrs. Berkovits, Rutman and Feiler. The Compensation
Committee is expected to periodically review and evaluate officers' compensation
and will administer our 1998 Stock Option Plan and the 1999 Stock Option Plan,
if adopted.
For a period of three years after the effective date of our Initial Public
Offering on April 17, 1997, we have agreed to invite a designee of Joseph Dillon
& Company to attend all meetings of the board of directors, but such designee
will not be entitled to vote or be compensated.
It is not expected that any director or committee member will receive any
compensation for acting in such capacity. We will reimburse directors and
committee members for all ordinary and necessary expenses incurred in attending
any meeting of the board or any committee thereof.
Executive Compensation
The following table sets forth all cash compensation for services rendered
in all capacities to us, for the fiscal years ended December 31, 1998, December
31, 1997 and December 31, 1996 paid to our Chief Executive Officer, and the
other most highly compensated executive officers at the end of the above fiscal
years whose total annual salary plus bonus exceeded $100,000 per annum.
31
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Restricted
Name and Principal Year/Period Annual Stock Options/ Other
Position Ended Compensation Bonus Awards SARs Compensation
- -------- ----- ------------ ----- ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Jack Berkovits 1998 $216,951 $125,000 0 266,000 $12,000(1)
Chief Executive 1997 $197,242 $187,798 0 377,500 $12,000(1)
Officer and 1996 $147,061 $0 0 0 $12,000(1)
Chairman
Gadi Beer 1998 $196,755 $0 0 10,000 $7,710(3)
Vice President of 1997(2) $109,375 $0 0 0 $0
Sales and Marketing, 1996 -- -- -- -- --
Aviv
</TABLE>
(1) Represents monthly auto allowance.
(2) Mr. Beer's employment with D.G. Jewellery of Canada Ltd. commenced on June
1, 1997, after our acquisition of Aviv.
(3) Represents car allowance of $5,628 and health insurance of $2,082.
Employment Contracts
Jack Berkovits and D.G. Jewellery of Canada Ltd. 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 us to maintain approximately $2,000,000 in key-man insurance
on the life of Mr. Berkovits. Currently, we are beneficiary of two "key-man"
term policies with a total death benefit of $840,000. The $700,000 policy has
been assigned to secure our financing facilities with The Bank of Nova Scotia.
We maintain 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 the control
of D.G. Jewellery of Canada Ltd. through an acquiring person (any person who has
acquired or announces a tender offer or exchange for 25% of D.G. Jewellery of
Canada ltd.), a sale of substantially all of the assets or merger, acquisition
of us or our consolidation with another, or certain types of board changes, we
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 our primary operation in
Canada or anywhere in the United States.
We 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,
2000. 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 D.G. Jewellery of Canada Ltd. 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 D.G. Jewellery of Canada
Ltd.
32
<PAGE>
Compensation of Directors
There are no standard arrangements for the payment of any fees to
directors of D.G. Jewellery of Canada Ltd. for acting in such capacity.
Directors are reimbursed for expenses for attending meetings.
Stock Options
In December 1996, the board of directors and shareholders adopted the
1996. Stock Option Plan, pursuant to which 500,000 shares of common stock are
provided for issuance. All of such options have been granted.
In February 1997, the board of directors granted 172,500 options under the
1996 Stock Option Plan to 20 persons, including officers, directors and key
employees. The options were to be exercisable at $4.50 per share for five years
expiring February 9, 2002. On August 22, 1997, the compensation committee
lowered the exercise price to $1.38, which was our stock price on such date. On
August 22, 1997, we granted an additional 327,500 options exercisable at $1.38
per share to Jack Berkovits. All options granted vest at the rate of 25% every
six months so that the options are fully vested two years from their issuance
date. The table below reflects the options under the 1996 Stock Option Plan
granted to our present officers and directors and the percentage of options
issued to such persons.
<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
Leonard Fasullo 02/09/02 15,000 3.0% $1.38
</TABLE>
- ----------
(1) 327,500 of such options expire on August 21, 2002 and 50,000 expire on
February 9, 2002.
In July 1998, the board of directors and shareholders adopted the 1998
Stock Option Plan. In July 1998, the board granted 500,000 options to 42 persons
including officers, directors, consultants and key employees. The options were
exercisable at the following prices; $2.77 (410,000); $3.25 (40,000); and $4.00
(50,000). All options granted vest at the rate of 25% every six months so that
the options are fully vested by July 2000. The table below reflects the options
under the 1998 Stock Option Plan granted to our present officers and directors
and the percentage of options issued to such persons.
<TABLE>
<CAPTION>
Officer and/or
Director Expiration Date Options Percent Exercise Price
-------- --------------- ------- ------- --------------
<S> <C> <C> <C> <C>
Jack Berkovits 07/14/03 266,000 53.2% $2.77
Gary Davis 07/14/03 20,000 4.0% $2.77
Leonard Fasullo 07/14/03 20,000 4.0% $2.77
Theodore L. Bonsignore 07/14/03 10,000 2.0% $2.77
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Myer Feiler 07/14/03 60,000 12.0% (1)
</TABLE>
(1) 10,000 of such options are exercisable at $2.77 and the remaining 50,000
options are exercisable at $4.00 per share.
Indemnification of Officers and Directors
We shall, to the fullest extent permitted by the laws of the Province of
Ontario, as the same may be amended and supplemented, indemnify under said
section from and against any and all expenses, liabilities or other matters
referred in or covered by said section, and the indemnification provided for
herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person. We will have the power to purchase and maintain officers' and
directors' liability insurance in order to insure against the liabilities for
which such officers and directors are indemnified pursuant to Article 6.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, it may be permitted to directors, officers and
controlling persons of D.G. Jewellery of Canada Ltd. pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the United
States Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of us in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and will be governed by the final adjudication of such
issue.
34
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of May 31, 1999, the names and
beneficial ownership of our 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.
<TABLE>
<CAPTION>
Names and Address of Beneficial Amount and Nature of Percentage of Shares
Owner(1) Beneficial Ownership(2) Outstanding
-------- ----------------------- -----------
<S> <C> <C>
Jack Berkovits.................................. 2,634,975(3) 44.2%
The Berkovits Family Trust...................... 426,000 7.1%
Sheba Berkovits................................. 816,000(4) 13.7%
Gary Davis...................................... 29,000(5) *
Leonard Fasullo................................. 20,000(6) *
Theodore L. Bonsignore.......................... 2,500 *
Myer Feiler..................................... 50,000(7) *
Ronald Rutman................................... -- --
Haymarket, LLC.................................. 787,693(8) 13.2%
All directors and executive officers
as a group (6) persons.......................... 2,736,475 45.9%
</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 us by either the directors and
executive officers or obtained from our stock transfer books . We
are informed that these persons hold the sole voting and dispositive
power with respect to the common stock except as noted herein. For
purposes of computing "beneficial ownership" and the percentage of
outstanding common stock held by each person or group of persons
named above as of May 31, 1999, 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 May
31, 1999, we had 5,960,280 shares of common stock outstanding, an
additional 83,875 shares of common stock provided for issuance under
the 1996 Stock Option Plan and an additional 411,375 shares of
common stock provided for issuance under the 1998 Stock Option Plan.
35
<PAGE>
(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)
148,375 shares issuable upon options that are currently exercisable
or exercisable in the next sixty days. Does not include (i) an
aggregate of 390,000 shares of common stock owned by two of Mr.
Berkovits' sons who are independent of their father; and (ii)133,000
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-trustee. Ms. Berkovits
is the wife of Jack Berkovits.
(5) Includes 5,000 shares issuable upon the exercise of options which
are currently exercisable or exercisable in the next sixty days.
(6) Includes 5,000 shares issuable upon the exercise options which are
currently exercisable or exercisable in the next sixty days.
(7) Includes 30,000 shares issuable upon the exercise of options which
are currently exercisable or exercisable in the next sixty days.
(8) Includes 172,308 shares issuable upon the exercise of warrants which
are currently exercisable or exercisable in the next sixty days.
36
<PAGE>
CERTAIN TRANSACTIONS
In February 1995, we entered into a 10 year lease consisting of 23,000
square feet for our executive offices and manufacturing operations in North
York, Ontario. The lease is with 1001 Petrolia Road Limited Partnership, the
general partner being 1013418 Ontario Inc. Jack Berkovits, our president
Chairman, CEO and President, is the sole owner, officer and director of that
general partner. Current rent is $107,948 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, we are paying real
estate taxes, utilities and insurance aggregating $95,000 per year for this
facility. See "Properties". Management is of the opinion that the lease is on
terms as favorable as obtainable from unaffiliated third parties.
1001 Petrolia Road Limited Partnership through 1013418 Ontario, Inc., the
general partner, of which Mr. Berkovits is the sole shareholder, officer and
director, had obtained a five year $660,000 mortgage on the property, which was
renewed in October 1998. On April 30, 1999, the principal amount outstanding was
$515,661. We are a guarantor of this mortgage.
Jack Berkovits loaned us monies from time to time for operations and
working capital which sums at April 30, 1999 aggregated approximately $2.0
million and the weighted average interest rate was 10%. In 1997, we 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 us on the same terms, which included a 20% annual interest rate. The rate has
now been reduced to 10%.
Diamante is a Canadian company operating under the name Oromart which has
four retail jewelry stores and operates jewelry departments in six Best Value
Discount Stores. Diamante is owned by one of our Vice Presidents, Leonard
Fasullo, who is also Diamante's President (since 1998). The inventory provided
to Diamante, consists primarily of manufacturing surplus, returns or refurbished
jewelry, and on occasion gold chains and watches purchased by us 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 our assets.
Diamante has guaranteed our bank financing and provided the bank with a direct
security interest in its assets. We consolidated, for financial reporting
purposes, with Diamante until February 7, 1997, the termination date of the
agreement with Diamante reflecting our control over that retail operation. We
perform certain administrative functions for Diamante.
Diamante leases each facility for its four stores, of which one lease is
guaranteed by D.G. Jewellery of Canada Ltd. This lease is terminable by Diamante
on 90 days written notice, and is for five years, is a net, net lease, with
renewal options for a rental rate of approximately $17,000 per year plus taxes,
maintenance, insurance and utilities.
In connection with the purchase of Aviv, we agreed to issue the former
owners of Aviv an amount of shares having a value of $325,000 based on the
average closing price in April 1999 in settlement of a note in that amount.
Based on the closing prices we have issued an aggregate of 45,145 shares. All of
the former owners are presently employees of D.G. Jewellery of Canada Ltd.
We have entered into a supply agreement with Xite Jewelry.Com, Inc., which
is a newly formed company owned 50% by D.G. Jewellery of Canada Ltd. and 50% by
two sons of Jack Berkovits. The agreement provides that Xite will purchase
jewelry from us on the best terms offered to our other customers. In turn, Xite
will sell such jewelry to or through certain Internet companies who have
previously entered into arrangements with D.G. Jewellery of Canada Ltd. We have
assigned certain Internet contracts to Xite. To date, sales through the Internet
do not represent a significant percentage of total sales. Xite has entered into
a letter of intent with a broker-dealer to effect a public offering of its
common stock. There can be no assurance that such public offering will be
effectuated or what the terms of such offering would be.
37
<PAGE>
All transactions between D.G Jewellery of Canada Ltd., 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 us than may
be obtained from unaffiliated third parties. All future transactions and loans
between us and our officers, directors and 5% shareholders are to be on terms no
less favorable than could be obtained from independent, unaffiliated parties and
will be approved by a majority of our independent, disinterested directors.
38
<PAGE>
DESCRIPTION OF SECURITIES
General
The following description of the material terms of the common stock is
subject to the Ontario Business Corporation Act, 1982 and to the provisions
contained in D.G. Jewellery of Canada Ltd.'s articles of incorporation and
by-laws, as amended, copies of which have been filed as exhibits to the
registration statement of which this prospectus is a part.
Common Stock
We are authorized to issue an unlimited number of shares of common stock,
no par value per share, of which as of the date of this prospectus 5,960,280
shares of common stock are issued and outstanding. All outstanding shares of
common stock are validly authorized, issued, fully paid, and non-assessable.
The holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of shareholders. Holders of common
stock are entitled to receive ratably dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of the common stock are entitled
to share ratably in all assets remaining, if any, after payment of liabilities.
Holders of common stock have no preemptive rights and have no rights to convert
their common stock into any other securities.
Pursuant to the Ontario Business Corporation Act, a shareholder of an
Ontario Corporation has the right to have the corporation pay the shareholder
the fair market value for his shares of the corporation in the event such
shareholder dissents to certain actions taken by the corporation such as
amalgamation or the sale of all or substantially all of the assets of the
corporation and such shareholder follows the procedures set forth in the Ontario
Business Corporation Act.
Warrants
Pursuant to the initial public offering in April 1997 and a private
placement in May 1999, we have issued an aggregate of 1,437,308 warrants to
purchase our common stock.
1,265,000 warrants were issued in the initial public offering and pursuant
to a warrant agreement between D.G. Jewellery of Canada Ltd. and American Stock
Transfer & Trust Company, the warrant and transfer agent. Each warrant entitles
its holder to purchase, one share of common stock at an exercise price of $6.25
per share, subject to adjustment in accordance with the anti-dilution and other
provisions referred to below. These warrants are exercisable from April 17, 1998
until April 16, 2002. None of these warrants have been exercised as of the date
of this prospectus.
Such warrants may be redeemed by us at any time after April 17, 1998, at a
redemption price of $.10 per warrant, on not less than 30 days' prior written
notice to the holders of such warrants, provided that the closing high bid price
of the common stock on Nasdaq, or the last sale price per share of the common
stock, if listed on the Nasdaq National Market or on a national exchange, is at
least 150% ($9.38 per share, subject to adjustment) of the exercise price of the
warrants for a period of 15 consecutive trading days ending on the fifth day
prior to the date the notice of redemption is given. Holders of warrants shall
have exercise rights until the close of the business day preceding the date
fixed for redemption. The exercise price of these warrants should in no event be
regarded as an indication of any future market price of the securities offered
hereby.
The exercise price and the number of shares of common stock purchasable
upon the exercise of these warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or
39
<PAGE>
reclassification of the common stock. The warrants do not confer upon the
holders any voting or any other rights as shareholders of D.G. Jewellery of
Canada Ltd.
We have agreed to pay Joseph Dillon & Company a fee of five percent of the
exercise price of each warrant exercised, a portion of which fee may be allowed
to the dealer who solicited the exercise. As of the date of this prospectus, we
have not paid Joseph Dillon & Company any commissions.
In May 1999, 172,308 warrants were issued to investors in a private
placement offering. Each warrant entitles its holder to purchase one share of
common stock at an exercise price of $8.13 per share, subject to adjustment in
accordance with the anti-dilution and other provisions referred to below. These
warrants are exercisable from May 1999 until May 2004.
The exercise price and the number of shares purchasable upon the exercise
of these warrants are subject to adjustment upon the occurrence of certain
events, including stock splits, stock dividends, combinations or
reclassifications of the common stock. These warrants do not confer upon the
holders any voting or any other rights as the shareholders of D.G. Jewellery of
Canada Ltd.
The holders of these warrants have the option to pay the exercise price in
cash or pursuant to a cashless exercise.
None of these warrants have been exercised as of the date of this
prospectus.
Transfer Agent
The transfer agent of our shares of common stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005. American
Stock Transfer & Trust Company also acts as the warrant agent for our warrants.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
No assurance can be given as to effect, if any, that future sales of
common stock will have on the market price of the common stock. Of our shares of
common stock currently outstanding, 4,433,030 are "restricted securities" as the
term is defined in rule 144 under the Securities Act of 1933, as amended, and
under certain circumstances may be sold without registration pursuant to that
rule. Subject to the compliance with the notice and manner of sale requirements
of Rule 144 and provided that we are current in our reporting obligations under
the Securities Exchange Act of 1934, a person who beneficially owns restricted
shares of stock for a period of at least one year is entitled to sell, within
any three month period, shares equal to the greater of 1% of the then
outstanding shares of common stock, or if the common stock is quoted on the
Nasdaq System, the average weekly trading volume of the common stock during the
four calendar weeks preceding the filing of the required notice of sale on the
Form 144, with the United States Securities and Exchange Commission. As of the
date of this prospectus, 4,433,030 shares of common stock, held by beneficial
owners, are eligible for sale pursuant to Rule 144. We are unable to predict the
effect that the sales made under Rule 144 otherwise may have on the market price
of the common stock prevailing at the time of any such sales. Nevertheless,
sales of substantial amounts of the restricted shares of common stock in the
public market could adversely effect the then prevailing market for our common
stock and could impair our ability to raise capital through the sale of our
equity securities.
41
<PAGE>
SELLING SECURITY HOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the common stock by the selling security holders and as adjusted to
give effect to the sale of the shares offered in this prospectus.
In May 1999, Haymarket LLC acquired 615,385 shares of common stock and
172,308 warrants exercisable at $8.13 per share in connection with a private
placement offering. The exercise price of the warrants is subject to adjustment
in certain circumstances. These warrants are exercisable from May 1999 until May
2004. See "Description of Securities - Warrants."
We have also registered an additional 316,693 shares of common stock to
cover any potential adjustment in the amount of shares of common stock purchased
in the May private placement offering. Pursuant to the Common Stock Purchase
Agreement between Haymarket, LLC and us, dated May 18, 1999, the number of
shares purchased by Haymarket, LLC will be adjusted to reflect a reset in the
purchase price of the shares acquired according to the following terms: (i) the
reset price of the shares will be the average of the lowest twelve bid prices of
our common stock during the applicable reset period (as defined below); (ii) the
number of shares of common stock to be issued upon the expiration of each the
two reset periods will be calculated by the following formula: (307,692.5 (1/2
the number of shares purchased)) x (1,500,000 x 115% - the average of the lowest
twelve bid prices of our common stock during the applicable reset period) / (the
average of the lowest twelve bid prices of our common stock during the
applicable reset period); and (iii) there will be two reset periods, each reset
period consisting of thirty trading days, (a) the first reset period covering
306,692.5 of the shares purchased by Haymarket, LLC to expire on 30th day after
the date this prospectus is declared effective, and (b) the second reset period
covering 306,692.5 of the shares purchased by Haymarket, LLC to expire on the
30th day after the date of the expiration of the first reset period.
We issued three promissory notes in the aggregate principal amount of
$325,864.01 as part of the consideration for our February 1998 acquisition of
Aviv. On March 17, 1999 we entered into a settlement agreement with the former
shareholders of Aviv, pursuant to which we issued 45,145 shares of our common
stock to the former shareholders of Aviv in satisfaction of the three promissory
notes of the promissory notes.
<TABLE>
<CAPTION>
Beneficial Percentage of Common
Ownership of Stock Beneficially
Name of Selling Common Stock Shares of Common Stock Owned After the
Security Holder Position Held Prior to Sale(1) to be Sold(1) Offering(2)
- --------------- ------------- ---------------- ------------- -----------
<S> <C> <C> <C> <C>
Haymarket LLC None 1,033,847(3) 1,033,847(3) 0%
Oscar Gruss & Son None 61,539(4) 61,539(4) *
Gadi Beer Vice 20,793(5) 10,793 *
President of
Sales and
Marketing,
Aviv
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Allen Wayne Manager, 18,176(6) 17,176 *
Aviv
Steve Cash Manager, 18,176(6) 17,176 *
Aviv
</TABLE>
* Less than 1%
(1) The number of shares of common stock shown as beneficially owned and
offered by the selling security holders represents the number of
shares which we have initially agreed to register. Pursuant to Rule
146 of the Securities Act of 1933, as amended, the number of shares
of common stock offered by the selling security holders hereby and
included in this registration statement of which this prospectus is
a part, also includes such presently indeterminate number of
additional shares as may be issued upon the exercise of the warrants
pursuant to the provisions of the warrant certificates regarding the
possible adjustment of the exercise price. Accordingly, the actual
number of shares of the common stock issued or issuable upon the
exercise of the warrants is subject to adjustment depending upon
certain events, which we cannot predict at this time, including
stock dividends, stock splits, combinations or the reclassification
of the common stock.
(2) Assumes all of the shares of common stock offered are sold.
(3) The aggregate 1,033,847 shares of common stock includes the 110,769
shares of common stock underlying the warrants, assuming all of such
warrants were exercised and 307,693 shares of common stock to
reflect an adjustment in the amount of shares acquired according to
the rest provisions discussed above.
(4) 61,539 shares of common stock underlying the warrants, assuming all
of such warrants were exercised.
(5) Includes 10,000 shares issuable upon the exercise of options which
are exercisable in the next sixty days.
(6) Includes 1,000 shares issuable upon the exercise of options which
are exercisable in the next sixty days.
In recognition of the fact that the selling security holders may wish to
be legally permitted to sell their shares of common stock when they deem
appropriate, we agreed with the selling security holders to file with the United
States Securities and Exchange Commission, under the Securities Act of 1933, as
amended, a registration statement on Form SB-2, of which this prospectus is a
part, with respect to the resale of the shares of common stock, and have agreed
to prepare and file such amendments and supplements to the registration
statement as may be necessary to keep the registration statement effect until
the shares of common stock are no longer required to be registered for the sale
thereof by the selling security holders.
43
<PAGE>
PLAN OF DISTRIBUTION
The shares of common stock offered hereby by the selling security holders
may be sold from time to time by the selling security holders, or by pledgees,
donees, transferees and other successors in interest. Such pledgees, donees,
transferees and other successors in interest will be deemed "selling security
holders" for the purposes of this prospectus. Such sales may be made on one or
more exchanges or in the over-the-counter market (including the OTC Electronic
Bulletin Board), in privately negotiated transactions, through the writing of
private options on the shares, or otherwise at market prices then prevailing or
at prices related to the then-current market price, at fixed prices that may be
changed, or at negotiated prices. The shares of common stock may be sold to or
through brokers or dealers, who may act as agent or principal, or in direct
transactions between the selling security holders and purchasers. In addition,
the selling security holder may, from time to time, sell short the common stock,
and in such instances, this prospectus may be delivered in connection with such
short sale and the shares of common stock offered hereby may be used to cover
such short sale.
Transactions involving brokers or dealers may include, without limitation,
(a) ordinary brokerage transactions, (b) transactions in which the broker or
dealer solicits purchasers, (c) block trades in which the broker or dealer will
attempt to sell the shares of common stock as agent but may position and resell
a portion of the block as principal to facilitate the transaction, and (d)
purchases by a broker or dealer as a principal and resale by such broker or
dealer for its account. In effecting sales, brokers and dealers engaged by the
selling security holders or the purchasers of the shares of common stock may
arrange for other brokers or dealers to participate. Such brokers or dealers may
receive discounts, concessions or commissions from the selling security holders
and/or the purchasers of the shares of common stock for whom such broker or
dealer may act as agent or to whom they may sell as principal, or both (which
compensation as to a particular broker or dealer may be in excess of customary
commissions). The selling security holders and such brokers and dealers who act
in connection with the sale of the shares of common stock may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, and
any commission received by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended.
We are bearing all of the costs relating to the registration of the shares
of common stock other than certain fees and expenses, if any, of counsel or
other advisors to the selling security holders. Any commissions, discounts or
other fees payable to brokers or dealers in connection with any sale of the
shares of common stock will be borne by the selling security holders, the
purchasers participating in such transaction, or both. None of the proceeds from
the sale of the shares of common stock by the selling security holders will be
received by us, except for the exercise price of the warrants. D.G. Jewellery of
Canada Ltd. and the selling security holders, have each agreed to indemnify the
other against certain liabilities, including liabilities arising under the
Securities Act of 1933, as amended.
Any shares of covered by this prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act of 1933, as amended, may be sold under Rule
144 rather than pursuant to this prospectus.
44
<PAGE>
CERTAIN UNITED STATES AND CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
United States
The following describes the principal United States federal income tax
consequences of the purchase, ownership and disposition of the shares of common
stock by a shareholder, that is a citizen or resident of the United States or a
United States domestic corporation or that otherwise will be subject to United
States federal income tax. This summary is based on the United States Internal
Revenue Code of 1986, as amended, administrative pronouncements, judicial
decisions and existing and proposed Treasury Regulations, changes to any of
which subsequent to the date of this prospectus may affect the tax consequences
described herein. This summary discusses only the principal United States
federal income tax consequences to those beneficial owners holding the
securities as capital assets within the meaning of Section 1221 of the Code and
does not address the tax treatment of a beneficial owner that owns 10% or more
of the shares of common stock. It is for general guidance only and does not
address the consequences applicable to certain specialized classes of taxpayers
such as certain financial institutions, insurance companies, dealers in
securities or foreign currencies, or United States persons whose functional
currency (as defined in Section 985 of the Code) is not the United States
dollar. Persons considering the purchase of these securities should consult
their tax advisors with regard to the application of the United States and other
income tax laws to their particular situations. In particular, a U.S. Holder
should consult his tax advisor with regard to the application of the United
States federal income tax laws to his situation.
A U.S. Holder generally will realize, to the extent of D.G. Jewellery of
Canada Ltd.'s current and accumulated earnings and profits, foreign source
ordinary income on the receipt of cash dividends, if any, on the shares of
common stock equal to the United States dollar value of such dividends
determined by reference to the exchange rate in effect on the day they are
received by the U.S. Holder (with the value of such dividends computed before
any reduction for any Canadian withholding tax). U.S. Holders should consult
their own tax advisors regarding the treatment of foreign currency gain or loss,
if any, on any dividends received which are converted into United States dollars
on a date subsequent to receipt. Subject to the requirements and limitations
imposed by the United States Internal Revenue Code of 1986, as amended, a U.S.
Holder may elect to claim Canadian tax withheld or paid with respect to
dividends on the shares of common stock as a foreign credit against the United
States federal income tax liability of such holder. Dividends on the shares of
common stock generally will constitute "passive income" or, in the case of
certain U.S. Holders, "financial services income," for United States foreign tax
credit purposes. U.S. Holders who do not elect to claim any foreign tax credits
may claim a deduction for Canadian income tax withheld. Dividends paid on the
shares of common stock will not be eligible for the dividends received deduction
available in certain cases to United States corporations.
Upon a sale or exchange of a share of common stock, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized on
such sale or exchange and the tax basis of such share of common stock.
Generally, any gain or loss recognized as a result of the foregoing will
be a capital gain or loss and will either be long-term or short-term depending
upon the period of time the shares of common stock sold or exchanged, as the
case may be, were held.
This summary is of general nature only and is not intended to be, and
should not be construed to be, legal or tax advice to any prospective investor
and no representation with respect to the tax consequences to any particular
investor is made.
45
<PAGE>
Canada
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to the acquisition, holding and disposition
of shares of common stock purchased pursuant to this prospectus by a holder,
who, for the purposes of the Income Tax Act of Canada and the Canada-United
States Income Tax Convention, as applicable and at all relevant times, (i) is
resident in the United States and not resident in Canada, (ii) holds shares of
common stock as capital property, (iii) does not have a "permanent
establishment" or "fixed base" in Canada (as defined in the Convention), and
(iv) deals at arm's length with D.G Jewellery of Canada Ltd. Special rules,
which are not discussed in this summary, may apply to "financial institutions"
as defined in the Investment Tax Act and to non-resident insurers carrying on an
insurance business in Canada and elsewhere.
This summary is based on the current provisions of the Investment Tax Act
and the regulations thereunder and the Canada-United States Income Tax
Convention, all specific proposals to amend the Investment Tax Act or the
regulations thereunder announced by the Canadian Minister of Finance prior to
the date of this prospectus and the current published administrative practices
of Revenue Canada. This summary does not otherwise take into account or
anticipate any changes in law or administrative practice nor does it take into
account income tax laws or considerations of any province or territory of Canada
or any jurisdiction other than Canada, which may differ from the federal income
tax consequences described herein. This summary is of a general nature only and
is not intended to be, and should not be interpreted as, legal or tax advice to
any particular purchaser of the shares of common stock.
Dividends
Under the Investment Tax Act and the Canada-United Stated Income Tax
Convention, dividends paid or credited, or deemed to be paid or credited, on the
shares of common stock to a U.S. holder who owns less than 10% of our voting
shares will be subject to Canadian withholding tax at the rate of 15% of the
gross amount of such dividends or deemed dividends.
Under the Canada-United Stated Income Tax Convention, dividends paid or
credited to certain religious, scientific, charitable and similar tax exempt
organizations and certain pension organizations that are resident, and exempt
from tax, in the United States and that have complied with certain
administrative procedures are exempt from this Canadian withholding tax.
Disposition of Common Shares
A capital gain realized by a U.S. holder on a disposition or deemed
disposition of the shares of common stock will not be subject to tax under the
Investment Tax Act unless such shares of common stock constitute taxable
Canadian property within the meaning of the Investment Tax Act at the time of
the disposition or deemed disposition. In general, the shares of common stock
will not be "taxable Canadian property" to a U.S. holder unless they are not
listed on a prescribed stock exchange (which includes the Nasdaq SmallCap
Market) or at any time within the five year period immediately preceding the
disposition the U.S. holder, persons with whom the U.S. holder did not deal at
arm's length, or the U.S. holder together with such persons owned or had an
interest in or a right to acquire more than 25% of any class or series of our
shares. A deemed disposition of the shares of common stock will arise on the
death of a U.S. holder.
If the shares of common stock are taxable Canadian property to a U.S.
holder, any capital gain realized on a disposition or deemed disposition of such
shares of common stock will generally be exempt from tax under the Investment
Tax Act by virtue of the Canada-United Stated Income Tax Convention if the value
of the shares of common stock at the time of the disposition or deemed
disposition is not derived principally from real property (as defined by the
Canada-United Stated Income Tax Convention) situated in Canada. We are of the
view that the shares of common stock do not now derive their value
46
<PAGE>
principally from real property situated in Canada; however, the determination as
to whether Canadian tax would be applicable on a disposition or deemed
disposition of the shares of common stock must be made at the time of the
disposition or deemed disposition.
This summary is of general nature only and is not intended to be, and
should not be construed to be, legal or tax advice to any prospective investor
and no representation with respect to the tax consequences to any particular
investor is made.
47
<PAGE>
INVESTMENT CANADA ACT
The Investment Canada Act, a Federal Canadian statute, regulates the
acquisition of control of existing Canadian businesses by any non-Canadian (as
that term is defined in the Investment Canada Act).
We are currently a Canadian (as that term is defined in the Investment
Canada Act). If a non-Canadian seeks to acquire control of us, such acquisition
will be subject to the Investment Canada Act. In general, any transaction which
is subject to the Investment Canada Act is a reviewable transaction if the book
value of our assets, as set out in its most recent financial statements, exceeds
the applicable threshold. If the potential acquiror is a WTO Investor, acquiring
control of us would only be reviewable if the book value of our assets exceeded
Cdn$184 million. (This number is the threshold amount for 1999 and this amount
is increased each year by a factor equal to the increase in the Canadian Nominal
Gross Domestic Product for the previous year). A WTO Investor is defined in the
Investment Canada Act as an investor ultimately controlled by nationals of World
Trade Organization member states, such as the United States of America.
If the book value of our assets exceeds the applicable threshold for
review, the potential acquiror must file an application for review and obtain
the approval of the Minister of Industry before acquiring control of us. In
deciding whether to approve the reviewable transaction, the Minister considers
whether the investment "is likely to be of net benefit to Canada". This
determination is made on the basis of economic and policy criteria set out in
the Investment Canada Act.
The approval process begins with an initial review period of 45 days from
the date the completed application is received. However, the Minister of
Industry has authority to extend the review period unilaterally for 30 more
days. If the Minister is not then satisfied that the investment "is likely to be
of net benefit to Canada", the Minister is required to notify the potential
acquiror of the acquiror's right to make representations and submit undertakings
within 30 days or such further period as may be agreed upon by the potential
acquiror and the Minister and the potential acquiror is to be provided a
reasonable opportunity to make representations and to give undertakings as the
acquiror sees fit. After the expiration of that period, the Minister must make a
determination as to whether the Minister is satisfied that the investment is
likely to be of net benefit to Canada or confirm that the Minister is not so
satisfied. In the latter case, the investment is not permitted.
48
<PAGE>
LEGAL MATTERS
Certain legal matters relating to Canadian law, including the validity of
the issuance of the shares of common stock offered hereby, will be passed upon
for D.G. Jewellery of Canada Ltd. by Grubner, Krauss, Barristers & Solicitors.
Certain legal matters in connection with the offering will be passed upon for
the D.G. Jewellery of Canada Ltd. by its United States counsel, Gersten, Savage
& Kaplowitz, LLP, New York, New York.
EXPERTS
The financial statements appearing in this prospectus and registration
statement have been audited by Schwartz Levitsky Feldman, Chartered Accountants,
as set forth in their report thereon appearing elsewhere herein and in the
registration statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We are subject to the information requirements of the Exchange Act of 1934
for foreign issuers, and, in accordance therewith will have been filing reports,
proxy statements and other information with the United States Securities and
Exchange Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the United
States Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the regional offices of the
United States Securities and Exchange Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained from the Public Reference Section of the Securities
and Exchange Commission, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and its public reference facilities in New York, New
York and Chicago, Illinois upon payment of the prescribed fees. Electronic
registration statements filed through the Electronic Data Gathering, Analysis,
and Retrieval System are publicly available through the United States Securities
and Exchange Commission's Web site (http://www.sec.gov). Further information on
public reference rooms available at the United States Securities and Exchange
Commission is available by contacting the United States Securities and Exchange
Commission at 1-(800) SEC-0330.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
We shall, to the fullest extent permitted by the laws of the Province of
Ontario, as the same may be amended and supplemented, indemnify under said
section from and against any and all expenses, liabilities or other matters
referred in or covered by said section, and the indemnification provided for
herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person. We will have the power to purchase and maintain officers' and
directors' liability insurance in order to insure against the liabilities for
which such officers and directors are indemnified pursuant to Article 6.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, it may be permitted to directors, officers and
controlling persons of D.G. Jewellery of Canada Ltd. pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the United
States Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses
49
<PAGE>
incurred or paid by a director, officer or controlling person of in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, as amended, and will be governed by the
final adjudication of such issue.
50
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
TABLE OF CONTENTS
Report of Independent Auditors 1
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Stockholders' Equity 5
Notes to Consolidated Financial Statements 6 - 20
<PAGE>
[Letterhead of Schwartz Levitsky Feldman LLP]
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
D.G. Jewellery of Canada Ltd.
We have audited the accompanying consolidated balance sheets of D.G. Jewellery
of Canada Ltd. (incorporated in Canada) as of December 31, 1998 and 1997 and the
related consolidated statements of income, cash flows and changes in
stockholders' equity for each of the years ended December 31, 1998 and 1997.
These consolidated financial statements are the responsibility of the management
of D.G. Jewellery of Canada Ltd. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of D.G. Jewellery of
Canada Ltd. as of December 31, 1998 and 1997 and the consolidated results of its
operations and its cash flows for each of the years ended December 31, 1998 and
1997, in conformity with generally accepted accounting principles in the United
States of America.
/s/ Schwartz Levitsky Feldman LLP
Toronto, Ontario
March 17, 1999 Chartered Accountants
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash 305,784 361,347
Accounts receivable (notes 3, 8 and 10) 18,974,743 17,197,875
Inventory (notes 4, 8 and 10) 20,887,122 12,852,760
Cash surrender value of life insurance (note 5) 57,232 476,445
Prepaid expenses and sundry assets 25,845 169,696
---------- ----------
40,250,726 31,058,123
PROPERTY, PLANT AND EQUIPMENT (notes 6, 8 and 10) 1,974,300 1,888,148
GOODWILL (note 7) 1,278,879 1,336,609
---------- ----------
43,503,905 34,282,880
========== ==========
</TABLE>
APPROVED ON BEHALF OF THE BOARD
Director
- -------------------------------
Director
- -------------------------------
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 8) 18,855,201 12,482,179
Accounts payable and accrued expenses (note 9) 5,016,172 3,891,394
Income taxes payable 2,209,470 1,008,548
Current portion of loans payable (note 10) 434,788 3,441,109
---------- ----------
26,515,631 20,823,230
LOANS PAYABLE (note 10) 2,695,835 2,864,997
---------- ----------
29,211,466 23,688,227
---------- ----------
COMMITMENTS AND CONTINGENCIES (notes 16 and 17)
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 11) 6,704,986 6,700,827
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (note 12) 55,501 (359,434)
RETAINED EARNINGS 7,531,952 4,253,260
---------- ----------
14,292,439 10,594,653
---------- ----------
43,503,905 34,282,880
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Net sales 35,350,022 22,127,825
Cost of sales 23,855,178 15,677,870
---------- ----------
Gross profit 11,494,844 6,449,955
Other income 1,082,239 -
---------- ----------
Gross earnings 12,577,083 6,449,955
---------- ----------
Operating expenses
Selling 2,305,130 1,188,308
General and administrative 2,607,556 2,463,242
---------- ----------
4,912,686 3,651,550
---------- ----------
Operating income 7,664,397 2,798,405
---------- ----------
Interest expenses 1,820,278 822,215
Other expenses 1,088,058 389,533
---------- ----------
2,908,336 1,211,748
---------- ----------
Income before income taxes 4,756,061 1,586,657
Provision for income taxes (note 13) 1,477,369 541,423
---------- ----------
Net income 3,278,692 1,045,234
========== ==========
Earnings per common share (note 14) 0.63 0.22
========== ==========
Earnings per common share assuming dilution (note 14) 0.59 0.22
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Cash flows from operating activities:
Net income 3,278,692 1,045,234
----------- -----------
Adjustments to reconcile net income to
net cash used in operating activities:
Amortization 509,871 389,603
Increase in accounts receivable (2,726,285) (8,325,895)
Increase in inventory (9,712,446) (6,073,422)
Decrease (increase) in cash surrender value
of life insurance 397,006 (476,445)
Decrease (increase) in prepaid expenses
and sundry assets 137,778 (102,429)
Increase in accounts payable
and accrued expenses 1,487,961 1,908,971
Increase in income taxes payable 1,512,698 415,146
----------- -----------
Total adjustments (8,393,417) (12,264,471)
----------- -----------
Net cash used in operating activities (5,114,725) (11,219,237)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and
equipment (659,383) (1,491,736)
Purchase of goodwill -- (1,200,000)
----------- -----------
Net cash used in investing activities (659,383) (2,691,736)
----------- -----------
Cash flows from financing activities:
Proceeds from bank indebtedness 6,373,022 4,018,732
Proceeds from/(repayment of)
loans payable (2,829,520) 3,802,343
Issuance of capital stock 4,325 6,705,382
Redemption of capital stock -- (81,067)
----------- -----------
Net cash provided by financing activities 3,547,827 14,445,390
----------- -----------
</TABLE>
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Effect of foreign currency exchange
rate changes 2,170,718 (314,723)
---------- ----------
Net increase (decrease) in cash and
cash equivalents (55,563) 219,694
Cash and cash equivalents
- Beginning of year 361,347 141,653
---------- ----------
- End of year 305,784 361,347
========== ==========
Interest paid 1,789,275 822,215
========== ==========
Income taxes paid nil 43,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
Common Issued and
Stock Outstanding Cumulative
Number of Common Retained Translation
Shares Warrants Amount Earnings Adjustments
$ $ $
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 3,900,000 - 84 3,208,026 (44,711)
Common stock issued (note 11) 1,265,000 1,265,000 6,700,743 - -
Foreign currency translation - - - - (314,723)
Net income for the year - - - 1,045,234 -
--------- --------- --------- --------- ------
Balance as at December 31, 1997 5,165,000 1,265,000 6,700,827 4,253,260 (359,434)
Common stock issued (note 11) 3,000 - 4,159 - -
Foreign currency translation - - - - 414,935
Net income for the year - - - 3,278,692 -
--------- --------- --------- --------- ------
Balance as at December 31, 1998 5,168,000 1,265,000 6,704,986 7,531,952 55,501
========= ========= ========= ========= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
1. BASIS OF CONSOLIDATED FINANCIAL STATEMENTS PRESENTATION
These financial statements consolidate, using the purchase method,
the accounts of the company and its two wholly-owned subsidiaries,
Diamonair, Inc. and Aviv, Inc. All material intercompany accounts
have been eliminated. Consolidation commenced with the effective
dates of acquisition of the operations of the subsidiary companies
and these financial statements include the financial results of the
subsidiaries to December 31, 1998 and December 31, 1997.
Acquisition of the operations of the subsidiaries was effected by the
purchase of the assets and trade name of Diamonair, Inc. from a third
party, effective November 21, 1997, and by the purchase of the assets
and trade name of Aviv, Inc. from a third party, effective June 1,
1997. The purchases were effected through the company's wholly-owned
subsidiaries, Diamonair, Inc. and Aviv, Inc. and the final documents
were signed on November 21, 1997 and February 10, 1998 respectively.
Total assets acquired and total liabilities assumed by D.G. Jewellery
of Canada Ltd. as a result of these acquisitions is as follows:
<TABLE>
<CAPTION>
AVIV, INC. DIAMONAIR, INC.
$ $
<S> <C> <C>
Total assets (exclusive of goodwill) 4,286,000 4,549,000
Goodwill - 1,200,000
</TABLE>
The total amount of consideration given by D.G. Jewellery of Canada
Ltd. as a result of these acquisitions is as follows:
<TABLE>
<CAPTION>
AVIV, INC. DIAMONAIR, INC.
$ $
<S> <C> <C>
Cash - 5,749,000
Accounts payable 988,500 -
Loans payable (as described in note 10) 3,297,500 -
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i) Principal Activities
The company was incorporated in Canada on October 18, 1979. The
company is principally engaged in the production and trading of
jewellery in Canada and the United States of America.
ii) Bank indebtedness and Cash Equivalents
Bank indebtedness and cash equivalents include cash on hand,
amounts due to banks and any other highly liquid investments
purchased with a maturity of three months or less. The carrying
amount approximates fair value because of the short maturity of
those instruments.
6
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
iii) Other Financial Instruments
The carrying amount of the company's other financial instruments
approximates fair value because of the short maturity of these
instruments or the current nature of interest rates borne by
these instruments.
iv) Long-term Financial Instruments
The fair value of each of the company's long-term financial
assets and debt instruments is based on the amount of future
cash flows associated with each instrument discounted using an
estimate of what the company's current borrowing rate for
similar instruments of comparable maturity would be.
v) Accounts Receivable and Accounts Payable
In certain instances, the company's practice is to sell to and
purchase from the same entities. In such circumstances, on a
periodic basis, the payable is set-off against the receivable as
payment. Until such time as such a set-off occurs, the
respective receivable and payable amounts are reported on a
gross basis. At year end, amounts owing to the company from
customers who participate in this practice was approximately
$1,050,000 ($100,000 as at December 31, 1997). Of this amount,
$287,000 ($35,000 as at December 31, 1997) was owed to these
customers as at December 31, 1998.
vi) Inventory
Raw materials and work-in-process are valued at the lower of
cost (first-in, first-out basis) or market.
Finished goods are valued at the lower of cost or market. Cost
is calculated using selling price less normal gross margin.
vii) Amortization of capital assets
Amortization of capital assets is provided over the estimated
useful lives of the assets, principally using the declining
balance method.
viii) Goodwill
Goodwill is the excess of cost over the value of tangible assets
acquired. It is amortized on the straight-line basis over 25 to
40 years.
ix) Sales
Sales represents the invoiced value of goods supplied to
customers. Sales are recognized upon delivery of goods and
passage of title to customers.
7
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
x) Income taxes
The company accounts for income tax under the provisions of
Statement of Financial Accounting Standards No. 109, which
requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial
statement bases of assets and liabilities.
xi) Accounting Changes
On January 1, 1997, the company adopted the provision of SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires
that long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995.
Adoption of SFAS No. 121 did not have a material impact on the
company's result of operations.
In December 1995, SFAS No. 123, Accounting for Stock-Based
Compensation, was issued. It introduced the use of a fair
value-based method of accounting f0r stock-based compensation.
It encourages, but does not require, companies to recognize
compensation expense for stock-based compensation to employees
based on the new fair value accounting rules. Companies that
choose not to adopt the new rules will continue to apply the
existing accounting rules contained in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees.
However, SFAS No. 123 requires companies that choose not to
adopt the new fair value accounting rules to disclose pro forma
net income and earnings per share under the new method. SFAS No.
123 is effective for financial statements for fiscal years
beginning after December 15, 1995. The company has adopted the
disclosure provisions of SFAS No. 123.
xii) Foreign Currency Translation
The translation of the financial statements from Canadian
dollars ("CDN $") into United States dollars is performed for
the convenience of the reader. Balance sheet accounts are
translated using closing exchange rates in effect at the balance
sheet date and income and expense accounts are translated using
an average exchange rate prevailing during each reporting
period. No representation is made that the Canadian dollar
amounts could have been, or could be, converted into United
States dollars at the rates on the respective dates and or at
any other certain rates. Adjustments resulting from the
translation are included in the cumulative translation
adjustments in stockholders' equity.
8
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
xiii) Net Income and Fully Diluted Net Income Per Weighted Average
Common Stock
Net income per common stock is computed by dividing net income
for the year by the weighted average number of common stock
outstanding during the year.
Fully diluted net income per common stock is computed by
dividing net income for the year by the weighted average number
of common stock outstanding during the year, assuming that all
stock options as described in note 11 were exercised. Stock
warrants as described in note 11 have not been included in the
fully diluted net income per common stock calculations as their
inclusion would have been anti-dilutive.
xiv) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principals in the United States of
America requires management to make estimates and assumptions
that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Accounts receivable 19,279,616 17,690,675
Less: Allowance for doubtful accounts 304,873 492,800
---------- ----------
Accounts receivable, net 18,974,743 17,197,875
========== ==========
</TABLE>
Subsequent to December 31, 1998, an account receivable of $1,327,315
was used to secure a six year supply contract with the customer. The
supply contract will commence on January 1, 1999.
4. INVENTORY
Inventory comprised of the following:
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Raw materials 4,502,270 2,244,686
Work-in-process 426,456 590,778
Finished goods 15,958,396 10,017,296
---------- ----------
20,887,122 12,852,760
========== ==========
</TABLE>
9
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
5. CASH SURRENDER VALUE OF LIFE INSURANCE
The cash surrender value of life insurance represents the value of
life insurance policies of the former directors of Aviv, Inc.
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Office equipment 315,861 327,565
Machinery and manufacturing equipment 1,000,806 1,025,183
Computer equipment and software 396,637 189,653
Automobile 6,000 6,000
Leasehold improvements 362,570 340,906
Waxes and moulds 1,677,943 1,466,264
--------- ---------
Cost 3,759,817 3,355,571
--------- ---------
Less: Accumulated amortization
Office equipment 165,164 130,512
Machinery and manufacturing equipment 346,023 265,913
Computer equipment and software 148,507 121,260
Automobile 3,000 -
Leasehold improvements 112,306 68,795
Waxes and moulds 1,010,517 880,943
--------- ---------
1,785,517 1,467,423
--------- ---------
Net 1,974,300 1,888,148
--------- ---------
7. GOODWILL
1998 1997
$ $
Cost 1,452,506 1,483,848
Less: Accumulated amortization 173,627 147,239
--------- ---------
Net 1,278,879 1,336,609
========= =========
</TABLE>
10
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
8. BANK INDEBTEDNESS
The bank loan bears interest at the bank's prime lending rate plus
3/4% per annum depending on key financial ratios (7.25% at December
31, 1998 and 8.0% at December 31, 1997) with interest payable
monthly. The weighted average interest rates incurred on the bank
loan were 7.13% and 5.42% per annum for the years ended December 31,
1998 and December 31, 1997 respectively. As security, the company has
provided a general assignment of accounts receivable, a general
security agreement constituting a first charge over all present and
future personal property of the company and an assignment of key man
life insurance of a director of $652,188 payable to the bank as of
December 31, 1998 and $704,225 as of December 31, 1997. The available
line of credit under the bank loan amounted to $18,913,455 as at
December 31, 1998.
The company also provided to the bank an assignment of accounts
receivable, and a general security agreement constituting a first
charge over all present and future property with UCC filings of
security in the appropriate jurisdictions of its subsidiary
companies, as well as hypothecation of all the shares of these
subsidiaries. (See note 1). Furthermore, an affiliated company (owned
wholly by the company's majority stockholders) has provided a general
security agreement constituting a first charge over its present and
future property and a corporate guarantee secured by a collateral
mortgage providing a second fixed charge over its property.
Furthermore, the company also provided to the bank an assignment of
all security taken by the company from a related party, Diamante Fine
Jewellery Limited, over which it has effective control. Certain
stockholders have provided a postponement of their loans to the
company.
The facility contains covenants specifying minimum and maximum
selected financial ratios. The agreement contains restrictions on
changes in ownership and line of business, on further encumbrances of
assets and on the guarantees and other contingent liabilities.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Trade payables 4,454,250 3,240,877
Accrued expenses 561,922 650,517
--------- ---------
5,016,172 3,891,394
========= =========
</TABLE>
11
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
10. LOANS PAYABLE
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
a) Loans from stockholders
Loans are secured by a general assignment of the company's
assets subject to the prior encumbrances disclosed in note 8,
subordinated to the company's banker, bear interest at 12% per
annum (10% for 1997) and not subject to specified
terms of repayments 2,297,267 1,965,148
b) Loan is provided by the company's banker, subject to the
encumbrances disclosed in note 8, bearing interest at the prime
lending rate of the company's bank plus 1% per annum, repayable
in 24 equal monthly instalments plus interest
with the final payment due in November 2000 833,356 1,369,327
c) Loan is provided by the bankers of Aviv, Inc., with no
specific terms of repayment - 2,971,631
--------- ---------
3,130,623 6,306,106
Less: Current portion 434,788 3,441,109
--------- ---------
2,695,835 2,864,997
========= =========
Aggregate maturities of loans payable are as follows:
1998 1997
$ $
Repayable during the following periods:
Within one year 434,788 3,441,109
Over one year but not exceeding two years 398,568 468,690
--------- ---------
833,356 3,909,799
========= =========
</TABLE>
The weighted average interest rates per annum incurred were 9.9%
for the year ended December 31, 1998 and 9.5% for the year ended
December 31, 1997.
12
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
11. CAPITAL STOCK
a) Authorized
An unlimited number of common stock
<TABLE>
<CAPTION>
Issued
1998 1997
$ $
<S> <C> <C> <C>
5,168,000 Common stock (5,165,000 in 1997) 6,591,761 6,587,602
1,265,000 Warrants 113,225 113,225
--------- ---------
6,704,986 6,700,827
========= =========
</TABLE>
b) During 1997, the company issued 1,265,000 common shares
and 1,265,000 warrants as follows:
<TABLE>
<CAPTION>
<S> <C>
Proceeds received from issuance $ 7,716,500
Issue expenses (net of income taxes) 1,015,757
-------------
Net proceeds $ 6,700,743
=============
</TABLE>
Net proceeds include the non-cash items of deferred costs of
public issue and deferred income tax recoveries.
As at December 31, 1998, the company had warrants outstanding to
purchase 1,265,000 shares of the common stock at $6.25 per
share. The warrants expire in 2001.
d) In December, 1996, the board of directors and stockholders
adopted the 1996 D.G. Jewellery of Canada Ltd. Stock Option Plan
(the "1996 Plan"), pursuant to which 500,000 shares of Common
Stock are provided for issuance. The 1996 Plan is administered
by the board of directors.
The 1996 Plan is for a period of ten years, expiring on December
15, 2006. Options may be granted to officers, directors,
consultants, key employees, advisors and similar parties who
provide their skills and expertise to the Company. Options
granted under the 1996 Plan may be exercisable for up to ten
years, may require vesting, and shall be at an exercise price
all as determined by the board.
The exercise price of an option may not be less than the fair
market value per share of Common Stock on the date the option is
granted in order to receive certain tax benefits under the
Income Tax Act of Canada (the "ITA"). The exercise price of all
future options will be at least 85% of the fair market value of
the Common Stock on the date of granting of the options.
13
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
11. CAPITAL STOCK (cont'd)
d) (cont'd)
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the Company become
available again for issuance under the 1996 Plan.
The 1996 Plan may be terminated or amended at any time by the
board of directors, except that the number of shares of Common
Stock reserved for issuance upon the exercise of options granted
under the 1996 Plan may not be increased without the consent of
the stockholders of the Company.
The Board has granted 500,000 Options to date under the 1996
Plan to 10 persons, including officers, directors and key
employees. The options are exercisable at $1.38 per share for
five years expiring February 9, 2002.
These options were not exercisable until August 20, 1997 at
which time they were able to be exercised up to 25% of the
amount of shares issueable under the Options, and an additional
25% each six month anniversary date thereafter.
As at December 31, 1998, 3,00o of these options have been
exercised (nil in 1997).
e) In July 1998, the board of directors and stockholders adopted
the 1998 D.G. Jewellery of Canada Ltd. Stock Option Plan (the
"1998 Plan"), pursuant to which 500,000 shares of Common Stock
are provided for issuance. The 1998 Plan is administered by the
board of directors.
The 1998 Plan is for a period of ten years, expiring on July 14,
2008. 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 1998 Plan may be exercisable for up to ten
years, may require vesting, and shall be an exercise price all
as determined by the board.
The exercise price of an option may not be less than the fair
market value per share of Common Stock on the date the option is
granted an order to receive certain tax benefits under the
Income Tax Act of Canada (the "ITA"). The exercise price of all
future options will be at least 85% of the fair market value of
the Common Stock on the date of granting of the options.
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 1998 Plan.
The 1998 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 1998 Plan may not be increased without the consent of
the stockholders of the Company.
The Board has granted 500,000 Options to date under the 1998
Plan to 34 persons, including officers, directors and key
employees. The options are exercisable at $2.77 per share for
five years expiring February 9, 2002.
14
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
11. CAPITAL STOCK (cont'd)
e) (cont'd)
These options were not exercisable until January 14, 1999 at
which time they were able to be exercised up to 25% of the
amount of shares issuable under the Options, and an additional
25% each six month anniversary date thereafter.
None of these options have been exercised to date.
f) The underwriters for the issuance of the common shares in 1997
hold options to acquire 110,000 common shares at $9.90 and
110,000 warrants at 16.5(cent). This option expires in 2002.
12. 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:
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Net income 3,278,692 1,045,234
Other comprehensive income (loss):
Foreign currency translation adjustments 414,935 (314,723)
--------- ----------
Comprehensive income 3,693,627 730,511
========= ==========
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 income, December 31, 1998 $ 55,501
==========
</TABLE>
15
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
12. COMPREHENSIVE INCOME (cont'd)
The foreign currency translation adjustments are not currently
adjusted for income taxes since the company is situated in Canada and
the adjustments relate to the translation of the financial statements
from Canadian dollars into United States dollars done only for the
convenience of the reader as disclosed in note 1 (xii).
13. INCOME TAXES
The provision for income taxes is current and is calculated based on
the Federal, State and Provincial rates.
14. EARNINGS PER COMMON SHARE
The company has adopted Statement No. 128, Earnings Per Share, which
requires presentation, in the consolidated statement of income, of
both basic and diluted earnings per share.
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Average common stock outstanding 5,165,090 4,743,333
Average common stock issuable 393,251 62,137
--------- ---------
Average common stock outstanding assuming dilution 5,558,341 4,805,470
========= =========
</TABLE>
The outstanding warrants and underwriters' options were not included
in the computation of earnings per common stock assuming dilution
because the exercise prices were greater than the average market
price of the common stock.
15. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Rent paid to a company owned by stockholders 115,502 100,605
Interest paid to stockholders 178,103 217,724
</TABLE>
(See additional related party transactions disclosure in notes 10 and
17).
16
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
16. COMMITMENTS
The company has an operating lease for leasehold improvements and
premises which extends through January 31, 2005. Rental and leasing
expenses for the year ended December 31, 1998 under this lease
agreement was $115,502.
Future minimum rental payments as of December 31, 1998 under the
operating lease agreement are as follows:
<TABLE>
<CAPTION>
Payable during the following periods:
<S> <C>
Within one year $ 104,377
Over one year but not exceeding two years 111,878
Over two years but not exceeding three years 119,378
Over three years but not exceeding four years 126,878
Over four years but not exceeding five years 134,378
Thereafter 145,576
------------
$ 742,465
============
</TABLE>
17. CONTINGENCIES
The company is contingently liable under contested lawsuits amounting
to approximately $265,000. In the opinion of management there is no
merit for these claims and the company has filed counter claims. No
provision has been recorded in the accounts for possible losses or
gains. Should any expenditures be incurred by the company for the
resolution of these lawsuits, they will be charged to the operations
of the year in which such expenditures are incurred.
The company is contingently liable to a mortgage corporation for the
guarantee of a mortgage in the amount of approximately $533,000 given
to a party related to the major stockholders of the company.
18. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems
may recognize the year 2000 as 1900 or some other date, resulting in
errors when information using year 2000 dates is processed. In
addition, similar problems may arise in some systems which use
certain dates in 1999 to represent something other than a date. The
effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on
operations and financial reporting may range from minor errors to
significant systems failure which could affect a company's ability to
conduct normal business operations. It is not possible to be certain
that all aspects of the Year 2000 Issue affecting the company,
including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
17
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
19. SEGMENTED INFORMATION
a) Sales to Major Customers
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales to major customers $23,487,403 $ 18,042,967
Percentage of total sales 66% 82%
Accounts receivable due from major customers $10,905,973 $ 14,446,215
Percentage of total accounts receivable 62% 84%
</TABLE>
Ongoing credit evaluations of each customer's financial
condition are performed and, generally, no collateral is
required. The company maintains reserves for potential credit
losses and such losses, in the aggregate, have not exceeded
management's expectations.
b) Sales by Geographic Area
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
United States of America 28,568,376 13,909,306
Canada 6,729,624 7,848,152
Other 52,022 370,367
---------- ----------
35,350,022 22,127,825
========== ==========
</TABLE>
c) Net Income by Geographic Area
The company's accounting records do not readily provide
information on net income by geographic area. Management is of
the opinion that the proportion of net income based principally
on sales, presented below, would fairly present the results of
operations by geographic area.
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
United States of America 2,649,699 658,371
Canada 624,168 371,458
Other 4,825 15,405
--------- ---------
3,278,692 1,045,234
========= =========
</TABLE>
18
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
19. SEGMENTED INFORMATION (cont'd)
d) Identifiable Assets by Geographic Area
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
United States of America 1,273,581 1,155,400
Canada 2,486,236 2,200,171
---------- -------------
3,759,817 3,355,571
========== =============
e) Purchases From Major Suppliers
1998 1997
Purchases from major suppliers $8,993,250 $ 6,928,865
Percentage of total purchases 36% 48%
Accounts payable due to major suppliers $1,276,632 $ 1,815,001
Percentage of total suppliers 29% 56%
</TABLE>
20. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the statements of income:
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Amortization of property, plant and equipment 484,383 348,248
Amortization of goodwill 40,442 41,355
--------- -------
524,825 389,603
========= =======
Operating lease rentals for rental premises 313,862 255,968
========= =======
Interest expense on
- bank indebtedness 1,413,186 604,490
- loans payable 260,706 217,725
- other 146,386 -
--------- -------
1,820,278 822,215
========= =======
</TABLE>
19
<PAGE>
D.G. JEWELLERY OF CANADA LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
21. COMPARATIVE FIGURES
Certain figures in the December 31, 1997 consolidated financial
statements have been reclassified to conform with the basis of
presentation used in 1998.
20
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by D.G. Jewellery of Canada Ltd. This
prospectus does not constitute an offer or solicitation to any person in any
jurisdiction where such offer or solicitation would be unlawful. Neither
delivery of this prospectus nor any sale of the shares of common stock hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of D.G. Jewellery of Canada Ltd. since the date hereof.
-----------
TABLE OF CONTENTS
Page
----
Enforcement of Civil Liabilities............................................. 1
Exchange Rate Data........................................................... 2
Prospectus Summary........................................................... 3
The Offering................................................................. 5
Summary Combined Financial Information....................................... 6
Risk Factors................................................................. 7
Use of Proceeds.............................................................. 13
Certain Market Information................................................... 13
Dividend Policy.............................................................. 13
Selected Financial Data...................................................... 15
Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................... 16
Business..................................................................... 21
Management................................................................... 30
Principal Shareholders....................................................... 35
Certain Transactions......................................................... 37
Description of Securities.................................................... 39
Shares Eligible for Future Sale.............................................. 41
Selling Security Holders..................................................... 42
Plan of Distribution......................................................... 44
Certain United States and Canadian Federal Income Tax Considerations......... 45
Investment Canada Act........................................................ 48
Legal Matters................................................................ 49
Experts...................................................................... 49
Additional Information....................................................... 49
Indemnification of Securities Act Liabilities................................ 49
Financial Statements.........................................................F-1
-----------
Until , 1999 (25 days after the date of this prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters.
D.G. JEWELLERY OF CANADA LTD.
1,149,531 Shares of Common Stocks
-----------
PROSPECTUS
-----------
June 29, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We shall, to the fullest extent permitted by the laws of the Province of
Ontario, as the same may be amended and supplemented, indemnify under said
section from and against any and all expenses, liabilities or other matters
referred in or covered by said section, and the indemnification provided for
herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person. We will have the power to purchase and maintain officers' and
directors' liability insurance in order to insure against the liabilities for
which such officers and directors are indemnified pursuant to Article 6.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the estimated expenses to be paid by D.G.
Jewellery of Canada Ltd. in connection with the issuance and distribution of the
securities being registered:
SEC Registration Fee ....................................... $ 2,436.71
Legal Fees and Expenses* ................................... $ 0
Accounting Fees and Expenses* .............................. $ 0
Miscellaneous* ............................................. $ 10,000
Total ................................................ $12,436.71
- -----------
* estimate
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, D.G. Jewellery of Canada has sold
unregistered securities as described below. There were no underwriters involved
in the transactions and there were no underwriting discounts or commissions paid
in connection therewith, except as disclosed below. The issuances of these
securities were considered to be exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, and the regulations promulgated
thereunder. The purchasers of the securities in such transactions represented
their intention to acquire the securities for investment purposes only and not
with a view to or for sales in connection with any distribution thereof and
appropriate legends were affixed to the certificates for the securities issued
in such transactions. The purchasers of the securities in the transactions had
adequate information about the registrant.
All of the following issuances were made pursuant to Section 4(2) of the
Securities Act of 1933, as amended:
(i) Shares of common stock to the former shareholders of Aviv
On February 10, 1998, we completed our acquisition of substantially all of
the assets of Aviv, Inc., by assuming approximately $4.3 million in debt. The
effective date of the acquisition was June 1, 1997. As part of the consideration
for our acquisition of Aviv, we issued three promissory notes to three of the
former shareholders of Aviv in the aggregate principal amount of $325,864.01; a
$77,901.33 principal amount promissory note to Gadi Beer, a $123,981.34
principal amount promissory note to Allen Wayne and a $123,981.01 principal
amount promissory note to Steve Cash. In March 1999 we entered into a settlement
agreement with Gadi Beer, Allen Wayne and Steve Cash, pursuant to which we
agreed to issue an amount of shares equal to the amount of such debts based on
the price of the common stock in April 1999. As such, we issued an aggregate of
45,145 shares of our common stock to the former shareholders of Aviv as payment
in full of the promissory notes. We issued 10,793 shares of common stock to Gadi
Beer, 17,176 shares of common stock to Allen Wayne, and 17,176 shares of common
stock to Steve Cash. The offer and sale of the shares of common stock were
exempt from registration under the Securities Act of 1933, as amended, in
reliance on Section 4(2) thereof, because the offers and the sales were made to
sophisticated investors who had access to information about us and were able to
bear the risk of loss of their entire investment. We did not use a placement
agent in connection with the issuance of these shares and we did not pay any
fees or commissions in connection with issuance of these shares of common stock.
(ii) The May 1999 private placement offering
In May 1999, we issued 615,385 shares of common stock and an aggregate of
172,308 warrants exercisable at $8.13 per share in connection with a private
placement offering. The exercise price of the warrants is subject to adjustment
in certain circumstances. These warrants are exercisable from May 1999 until May
2004. We issued 615,385 shares of common stock to Haymarket, LLC, 110,769
warrants to purchase common stock to Haymarket, LLC, and 61,539 warrants to
purchase common stock to Oscar Gruss & Son.
We may be required to issue Haymarket, LLC an additional 316,693 shares of
common stock to cover any potential adjustment in the amount of shares of common
stock purchased in the May private placement offering. Pursuant to the Common
Stock Purchase Agreement between Haymarket, LLC and us, dated May 18, 1999, the
number of shares purchased by Haymarket, LLC will be adjusted to reflect a reset
in the purchase price of the shares acquired according to the following terms:
(i) the reset price of the shares will be the average of the lowest twelve bid
prices of our common stock during the applicable reset period (as defined
below); (ii) the number of shares of common stock to be issued upon the
expiration of each the two reset periods will be calculated by the following
formula: (307,692.5 (1/2 the number of shares purchased)) x (1,500,000 x 115% -
the average of the lowest twelve bid prices of our common stock during the
applicable reset period) / (the average of the lowest twelve bid prices of our
common stock during the applicable reset period); and (iii) there will be two
reset periods, each reset period consisting of thirty trading days, (a) the
first reset period covering 306,692.5 of the shares purchased by Haymarket, LLC
to expire on 30th day after the date this prospectus is declared effective, and
(b) the second reset period
II-2
<PAGE>
covering 306,692.5 of the shares purchased by Haymarket, LLC to expire on the
30th day after the date of the expiration of the first reset period.
The offer and sale of the shares of common stock and the warrants were
exempt from registration under the Securities Act of 1933, as amended, in
reliance on Section 4(2) thereof, because the offers and the sales were made to
sophisticated investors who had access to information about us and were able to
bear the risk of loss of their entire investment. We did not use a placement
agent in connection with the issuance of these shares and warrants and we did
not pay any fees or commissions in connection with this private placement
offering.
(iii) Options to purchase common stock issued to Consultants for Strategic
Growth, Inc.
In April 1999 we issued 6,250 options to purchase shares of common stock
to Consultants for Strategic Growth, Inc. The options were issued for services
rendered in connection with public relations. The options vested immediately and
terminate in April 2004. The options are exercisable at an exercise price of
$4.37 per share.
II-3
<PAGE>
ITEM 27. EXHIBITS
+3.1 Articles of Incorporation
+3.2 By-laws of the Registrant
+4.1 Form of Common Stock Certificate of the Registrant
+4.2 Form of Redeemable Common Stock Purchase Warrant
+4.2 Form of Underwriters' Options
+4.3 Form of Warrant Agreement between the Company, American Stock
Transfer & Trust Co. and Joseph Dillon & Company, Inc.
*5.1 Opinion of Grubner, Krauss, Barristers & Solicitors
+10.1 Lease between 1013418 Ontario Inc., In Trust and the Registrant dated
February 1, 1995
+10.2 Operating Credit Line between the registrant and The Bank of Nova Scotia
dated July 15, 1996
+10.3 Security Agreement between the Registrant and The Bank of Nova Scotia
dated November 21, 1994
+10.4 General Assignment by the Registrant to The Bank of Nova Scotia dated
November 21, 1994
+10.5 Assignment of keyman life insurance by the Registrant to The Bank of
Nova Scotia dated November 29, 1994
+10.6 Priority Agreement between the Registrant, The Bank of Nova Scotia,
Laurbrad Holdings Limited and Jack Berkovits dated December 1, 1995
+10.7 Priority Agreement between The Bank of Nova Scotia, Jack Berkovits and
Laurbrad Holdings Limited dated December 1, 1995
+10.8 Priority Agreement between the Registrant, The Bank of Nova Scotia and
Jack Berkovits dated December 1, 1995
+10.9 Pledge and Assignment of Security Interest held by the Registrant in
Diamante Fine Jewellery Limited and The Bank of Nova Scotia dated
December 1, 1995 including General Security Agreement from Diamante Fine
Jewellery Limited to the Registrant dated May 11, 1995
+10.10 Guarantee of payment by 1013418 Ontario, Inc. to The Bank of Nova Scotia
dated November 21, 1994
+10.11 Collateral Mortgage from 1013418 Ontario, Inc. to The Bank of Nova
Scotia dated November 30, 1994
+10.12 Loan Agreement between the Registrant and Jack Berkovits dated
May 31, 1995
+10.13 Promissory Note of the Registrant to Jack Berkovits dated May 31, 1995
+10.14 Security Agreement granted by the Registrant to Jack Berkovits dated
May 31, 1995
+10.15 Loan Agreement between the Registrant, Jack Berkovits and Laurbrad
Holdings Limited dated November 30, 1995
+10.16 Loan Agreement between the Registrant and Jack Berkovits dated November
30, 1995
+10.17 Promissory Note of the Registrant to Jack Berkovits dated November 30,
1995
+10.18 Guarantee by the Registrant of Diamante Fine Jewellery Limited Cookstown
Mall Lease dated March 24, 1995
+10.19 Guarantee by the Registrant of Diamante Fine Jewellery Limited St.
Jacobs Lease dated July 14, 1993
+10.20 Promissory Note of the Registrant to Sherfam, Inc. dated April 1, 1996
+10.21 Equipment lease between the Registrant and The Bank of Nova Scotia
(three equipment leases substantially similar) dated April 29, 1994
+10.22 General Security Agreement from Diamante Fine Jewellery Limited to The
Bank of Nova Scotia dated August 4, 1995
+10.23 Diamante Fine Jewellery Limited Guarantee of the Registrant's Bank
Financing dated August 1, 1995
+10.24 1996 Stock Option Plan
+10.25 1998 Stock Option Plan
*10.26 Common Stock Purchase Agreement between the Registrant and Haymarket,
LLC, dated May 18, 1999
II-4
<PAGE>
+10.27 Sale and Purchase Agreement between the Registrant and Aviv dated June
1, 1997
+10.28 Settlement Agreement between the Registrant and the former Aviv
shareholders dated March 17, 1999
*23.1 Consent of Schwart Levitsky Feldman, independent auditors of the
Registrant
*23.2 Consent of Gersten, Savage & Kaplowitz, LLP
*23.3 Consent of Grubner, Krauss, Barristers & Solicitors.
- ----------
+ Incorporated herein by reference to the Registrant's Form 20-F as filed on
June 21, 1999.
* Filed herewith.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to any charter provision, by-law,
contract arrangements, statute, or otherwise, the registrant has been advised
that in the opinion of the United States Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Actof
1933, as amended, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Ac of 1933, as amended,t and will be governed by the final
adjudication of such issue.
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) For determining any liability under the Securities Act of 1933, as
amended, treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule 424(b)(1), or
(4) or 497(h), under the Securities Act of 1933, as amended, as part of this
registration statement as of the time the United States Securities and Exchange
Commission declared it effective.
(5) For determining any liability under the Securities Act of 1933, as
amended, treat each post-effective amendment that contains a form of prospectus
as a new registration statement at that time as the initial bona fide offering
of those securities.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirement for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Province of Ontario, Canada on June 29, 1999.
D.G. JEWELLERY OF CANADA LTD.
By: /s/ GARY DAVIS
-------------------------------------
Gary Davis
Vice President - Finance and Chief
Financial Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
We, the undersigned officers and directors of D.G. JEWELLERY OF CANADA
LTD. hereby severally constitute and appoint Gary Davis, our true and lawful
attorney-in-fact and agent with full power of substitution for us and in our
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and all documents
relating thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith with the United States Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing necessary or advisable
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ JACK BERKOVITS Chairman, Chief Executive Officer June 29, 1999
- ----------------------------------- and President
Jack Berkovits
/s/ GARY DAVIS Vice President, Finance, Chief Financial June 29, 1999
- ----------------------------------- Officer, Controller, Treasurer and
Gary Davis Secretary
/s/ THEODORE L. BONSIGNORE General Manager, Diamonair and June 29, 1999
- ----------------------------------- Director
Theodore L. Bonsignore
/s/ MYER FEILER Director June 29, 1999
- -----------------------------------
Myer Feiler
/s/ RONALD RUTMAN Director June 29, 1999
- -----------------------------------
Ronald Rutman
</TABLE>
II-7
EXHIBIT 5.1
June 29, 1999
D.G. Jewellery of Canada Ltd.
1001 Petrolia Road
North York, Ontario
M3J 2X7
Gentlemen:
Re: D.G. Jewellery of Cnaada Ltd.
We have acted as Ontario counsel to D.G. Jewellery of Canada Ltd. (the
"Company"), a corporation formed under the laws of the Province of Ontario, in
connection with its filing of a registration statement on Form SB-2
(Registration No. 333-__________, the "Registration Statement") covering
1,149,531 shares of common stock, no par value (the "Common Stock") to be sold
by selling security holders ("Selling Security Holders").
In our capacity as Ontario counsel to the Company, we have examined such
statutes, public and corporate records, documents and certificates of
governmental authorities, auditors and officers of the Company and others and
made investigations as we have considered necessary and appropriate to enable us
to render the opinions expressed herein. In such examinations, we have assumed
the genuineness of all signatures, the truthfulness of all statements and the
authenticity of all documents submitted to us as copies. We have also considered
such questions of law as we have considered necessary or appropriate to enable
us to render the opinion expressed herein.
We have assumed for the purposes of this opinion that the issuance of the
shares has been effected outside the Province of Ontario and the Company has not
distributed any securities to or for the benefit of residents of Ontario.
The opinion expressed herein is based on and limited to the laws of the
Province of Ontario and the federal laws of Canada applicable therein, as in
effect on the date hereof. We are qualified to practice law only in the Province
of Ontario.
<PAGE>
Page 2
Based and relying upon the foregoing, and subject to the qualifications
set forth below we are of the opinion that:
The shares of Common Stock covered by this Registration Statement have
been validly authorized and will, when sold as contemplated by the Registration
Statement, be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to us under the caption "Legal
Matters" in the prospectus constituting the Registration Statement.
This opinion is for the sole use and benefit of the person to whom it is
addressed and may not be transmitted to or relied upon by any other person,
except for Gersten, Savage & Kalpowitz, LLP, United States counsel to the
Company, without prior written consent.
Yours very truly,
/s/ GRUBNER, KRAUSS
----------------------------------------
Grubner, Krauss
Barristers & Solicitors
EXHIBIT 10.26
================================================================================
COMMON STOCK PURCHASE AGREEMENT
between
D.G. Jewellery of Canada, Ltd.
and
Haymarket LLC
dated as of May 18, 1999
================================================================================
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT, dated as of May 18, 1999 (the
"Agreement"), between the entity listed on Schedule A attached hereto (referred
to as the "Investor"), and D.G JEWELLERY OF CANADA, LTD., a corporation
organized and existing under the laws of the Province of Ontario, Canada (the
"Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
and the Investor shall purchase up to an aggregate principal amount of
$6,000,000 of Common Stock pursuant to the terms set forth herein and Warrants
to purchase 110,769 Warrant Shares; and
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended, and the regulations promulgated
thereunder (the "Securities Act"), and/or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect
to any or all of the investments in Common Stock to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1 "Additional Shares" shall have that meaning set forth in
Section 2.4 below.
Section 1.2 "Bid Price" shall mean the closing bid price (as reported by
Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.3 "Business Day" means any day except Saturday, Sunday and any
day which shall be a Federal legal holiday or a day on which banking
institutions in the State of New York are authorized or required by law or other
government actions to close.
Section 1.4 "Capital Shares" shall mean the Common Stock and any shares of
any other class of Common Stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
Section 1.5 "Capital Shares Equivalents" shall mean any securities,
rights, or obligations that are convertible into or exchangeable for, or giving
any right to, subscribe for any Capital Shares of the Company or any warrants,
options or other rights to subscribe for or purchase Capital Shares or any such
convertible or exchangeable securities.
Section 1.6 "Closing" shall mean one of the closings of the purchase and
sale of the Common Stock and Warrants pursuant to Article II below.
<PAGE>
Section 1.7 "Closing Date" shall mean the date the closing of the purchase
and sale of the Common Stock and Warrants occurs pursuant to Article II below.
Section 1.8 "Common Stock" shall mean the Company's common stock, no par
value per share.
Section 1.9 "Damages" shall mean any loss, claim, damage, liability, costs
and expenses which shall include, but not be limited to, reasonable attorney's
fees, disbursements, costs and expenses of expert witnesses and investigation.
Section 1.10 "Effective Date" shall mean the date on which the SEC first
declares effective the Registration Statement registering the resale of
1,750,000 shares of Common Stock.
Section 1.11 "Escrow Agent" shall mean the law firm of The Goldstein Law
Group, P.C., pursuant to the terms of the Escrow Agreement.
Section 1.12 "Escrow Agreement" shall mean the agreement regarding the
escrow of the Purchase Price, Initial Shares, Secondary Shares, and Warrants
entered into between the Company, the Escrow Agent and the Investor on the
Subscription Date annexed hereto as Exhibit A.
Section 1.13 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
Section 1.14 "First Tranche Closing Date" shall mean the date of the
closing of the purchase and sale of the Initial Shares and Warrants associated
with the first tranche occurs pursuant to Article II below
Section 1.15 "First Tranche Purchase Price" shall mean $4,000,000.
Section 1.16 "Initial Shares" shall mean the shares of Common Stock
issuable upon the Closing of the first tranche as contained in Section 2.7
below.
Section 1.17 "Issuance Price" shall mean the result of the following: the
applicable Purchase Price divided by the 100% of the Bid Price of the Common
Stock on the Trading Day immediately preceding the applicable Closing Date.
Section 1.18 "Legend" shall have the meaning set forth in Article VIII
below.
Section 1.19 "Material Adverse Effect" shall mean any effect on the
business, Bid Price, trading volume of the Common Stock, operations, properties,
prospects, or financial condition of the Company that is material and adverse to
the Company and its subsidiaries and affiliates, taken as a whole, and/or any
condition, circumstance, or situation that would prohibit or otherwise in any
material respect interfere with the ability of the Company to enter into and
2
<PAGE>
perform any of its obligations under this Agreement, the Registration Rights
Agreement, the Escrow Agreement, or the Warrants in any material respect.
Section 1.20 "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.21 "Outstanding" when used with reference to shares of Common
Stock, or Capital Shares (collectively the "Shares"), shall mean, at any date as
of which the number of such Shares is to be determined, all issued and
outstanding Shares, and shall include all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that Outstanding shall not mean any such Shares then
directly or indirectly owned or held by or for the account of the Company.
Section 1.22 "Person" shall mean an individual, a corporation, a
partnership, an association, a limited liability company, a trust or other
entity or organization, including a government or political subdivision or an
agency or instrumentality thereof.
Section 1.23 "Principal Market" shall mean the NASDAQ National Market, the
NASDAQ Small Cap Market, the American Stock Exchange, or the New York Stock
Exchange, whichever is at the time the principal trading exchange or market for
the Common Stock.
Section 1.24 "Purchase Price" shall mean collectively the First Tranche
Purchase Price and the Second Tranche Purchase Price.
Section 1.25 "Registrable Securities" shall have the definition set forth
in the Registration Rights Agreement.
Section 1.26 "Registration Rights Agreement" shall mean the agreement
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company, and the Investor on
the Subscription Date annexed hereto as Exhibit B.
Section 1.27 "Registration Statement" shall mean a registration statement
on Form S-1, or other available form, for the registration of the resale by the
Investor of the Registrable Securities under the Securities Act.
Section 1.28 "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.29 "SEC" shall mean the Securities and Exchange Commission.
Section 1.30 "Second Tranche Closing Date" shall mean the date of the
closing of the purchase and sale of the Secondary Shares and Warrants associated
with the second tranche occurs pursuant to Article II below.
3
<PAGE>
Section 1.31 "Second Tranche Purchase Price" shall mean that dollar amount
set forth in the Company's option notice for the Secondary Shares which shall be
a minimum of $1,000,000 and a maximum of $2,000,000.
Section 1.32 "Secondary Shares" shall mean the shares of Common Stock
issuable upon the Closing of the second tranche as contained in Section 2.7
below.
Section 1.33 "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.34 "Securities" shall mean the Initial Shares, Secondary Shares,
Additional Shares, and Warrant Shares.
Section 1.35 "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.36 "SEC Documents" shall mean the Company's latest Form 20-F
(and all amendments thereto), all Form 8-Ks, and the Proxy Statement for its
latest fiscal year as of the time in question until such time as the Company no
longer has an obligation to maintain the effectiveness of a Registration
Statement as set forth in the Registration Rights Agreement.
Section 1.37 "Subscription Date" shall mean the date on which this
Agreement and all Exhibits and attachments hereto, are executed and delivered by
the parties hereto and all of the conditions relating to the issuance of the
Initial Shares and Warrants shall have been fulfilled.
Section 1.38 "Trading Day" shall mean any day during which the then
Principal Market shall be open for business.
Section 1.39 "Warrants" shall mean the Common Stock Purchase Warrants
annexed hereto as Exhibit C.
Section 1.40 "Warrant Shares" shall mean all shares of Common Stock or
other securities issued or issuable pursuant to the exercise of the Warrants.
ARTICLE II
Purchase and Sale of the Common Stock and Warrants
Section 2.1 Closing. The Company will sell, and the Investor will buy, on
the Closing Dates of the two tranches as set forth in Section 2.6 below, an
aggregate of up to $6,000,000 worth of Common Stock, and shall acquire Warrants
to purchase that number of Warrant Shares as set forth in Section 2.5 below, in
exchange for the Purchase Price, provided each of the conditions set forth in
Section 2.7 below have been satisfied or waived in writing.
4
<PAGE>
Section 2.2 Form of Payment. The Investor shall pay the Purchase Price by
delivering good funds in United States Dollars by wire transfer to the Escrow
Agent, against delivery of the original shares of Common Stock and Warrants as
per the terms of the Escrow Agreement.
Section 2.3 Liquidated Damages. In addition to any other provisions for
liquidated damages in this Agreement or any Exhibit annexed hereto, in the event
that the Company does not deliver unlegended Common Stock in connection with the
sale of such Common Stock by the Investor as set forth in Article VIII below
within five Business Days of surrender by the Investor of the Common Stock
certificate in accordance with the terms and conditions set forth in Article
VIII below (such date of receipt is referred to as the "Receipt Date"), the
Company shall pay to the Investor, in immediately available funds, upon demand,
as liquidated damages for such failure and not as a penalty, one quarter of one
percent of the value of the Common Stock undelivered (based upon the Bid Price
of the Common Stock on the Receipt Date) for every day thereafter for the first
ten days and two percent for every day thereafter that the unlegended shares of
Common Stock are not delivered, which liquidated damages shall run from the
sixth Business Day after the Receipt Date. The parties hereto acknowledge and
agree that the sum payable pursuant to the Registration Rights Agreement and as
set forth above, and the obligation to issue Registrable Securities, shall
constitute liquidated damages and not penalties. The parties further acknowledge
that the amount of loss or damages likely to be incurred is incapable or is
difficult to precisely estimate, and the parties are sophisticated business
parties and have been represented by sophisticated and able legal and financial
counsel and negotiated this Agreement at arm's length. Any and all payments
required pursuant to this paragraph shall be payable only in cash, and any
payment hereunder shall not relieve the Company of its delivery obligations
under this Section.
Section 2.4 Additional Shares. In the event that a "blackout period"
occurs, during a Repricing Period or within twenty Trading Days after receipt by
the Company of a Repricing Notice, which is defined as any period in which the
effectiveness of an Amendment is suspended for a reason other than a suspension
of the Registration Statement arising in the event the Company possesses
material non-public information or if caused by the investigation by the SEC
into the distribution by the Investor of the Securities, and the Bid Price on
the Trading Day immediately preceding such "blackout period" (the "Old Bid
Price") is greater than the Bid Price on the first Trading Day following such
"blackout period" (the "New Bid Price"), the Company shall issue to the Investor
the number of additional Repricing Shares equal to the difference between (y)
the product of (i) the number of Initial Shares subject to such repricing held
by the Investor during such "blackout period" that are or were not otherwise
freely tradable and (ii) the Old Bid Price, divided by the New Bid Price and (z)
the number of Initial Shares subject to repricing held by the Investor during
such "blackout period" that were not otherwise freely tradable during such
blackout period.
Section 2.5 Warrants. On the Subscription Date, the Company will issue to
the Investor Warrants exercisable beginning on the Subscription Date and then
exercisable any time over the five year period thereafter, to purchase 110,769
Warrant Shares at an Exercise Price (as defined in the Warrant) equal to 125% of
the average Bid Prices of the Common Stock during the five consecutive Trading
Days immediately preceding the Issuance Date (as defined in the
5
<PAGE>
Warrants) of the Warrants. The Warrant shall be delivered by the Company to the
Escrow Agent, and delivered to the Investor pursuant to the terms of this
Agreement and the Escrow Agreement. The Warrant Shares shall be registered for
resale pursuant to the Registration Rights Agreement.
Section 2.6 Closings. The Company agrees to sell and the Investor agrees
to purchase up to an aggregate of $6,000,000 principal amount of Common Stock in
two separate tranches of $4,000,000, and up to $2,000,000, as is more fully set
forth in (a) and (b) below.
(a) First Tranche. On the Subscription Date, the Company will sell
and the Investor will buy (in the amounts set forth on Schedule A), in reliance
upon the representations and warranties contained in this Agreement, and upon
the terms and satisfaction of each of the conditions set forth below, that
number of Initial Shares derived from dividing the First Tranche Purchase Price
by the Issuance Price.
The conditions precedent to the sale of the Initial Shares and
Warrants are as follows:
(A) Acceptance by each of the Investor of a satisfactory
Common Stock Purchase Agreement and due execution by all parties of
this Agreement and the Exhibits annexed hereto;
(B) Delivery into escrow by the Company of the original
Initial Shares and the original Warrants, as more fully set forth in
the Escrow Agreement;
(C) All representations and warranties of the Company
contained herein shall remain true and correct in all material
respects as of the First Tranche Closing Date;
(D) The Investor shall have received an opinion of counsel
substantially in the form of Exhibit D annexed hereto; and
(E) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Initial Shares, and Warrants, or shall have the availability of
exemptions therefrom. At the First Tranche Closing Date, the sale
and issuance of the Initial Shares and Warrants shall be legally
permitted by all laws and regulations to which the Company and the
Investor is subject.
(b) Second Tranche. At the Company's option (which must be in the
form of written notice to the Investor at least five Business Days prior to the
Closing of the Second Tranche setting forth the dollar amount which shall be a
maximum of $2,000,000) the Company will sell and the Investor will buy, in
reliance upon the representations and warranties contained in this Agreement,
and upon the terms and satisfaction of each of the conditions set forth below,
that number of Secondary Shares derived from dividing the dollar amount set
forth in the Company's option notice by the Issuance Price, after the earlier to
occur of (y) 180 calendar days
6
<PAGE>
after the Subscription Date, and (z) 20 Trading Days after the expiration of the
second Reset Period for the Initial Shares (the Company must exercise this
option within 20 calendar days after the earlier of (y) and (z) herein). The
maximum principal dollar amount of Secondary Shares that the Company may sell to
the Investor in connection with the second tranche shall be subject to the
following: (i) if the average Bid Price of the Common Stock during the 20
consecutive Trading Days immediately preceding the notice by the Company of its
intention to proceed with the second tranche, and during the five Trading Days
immediately preceding the Second Tranche Closing Date (both periods are
hereinafter collectively referred to as the "Second Tranche Pricing Period") is
lower than $5.00 per share, the Company may not serve such written notice, (ii)
if the average Bid Price for the Common Stock during the Second Tranche Pricing
Period is equal to, or greater than, $5.00 per share but less than $6.00 per
share than the Company's option for the second tranche shall be a maximum of
$1,000,000, and (iii) if the average Bid Price of the Common Stock during the
Second Tranche Pricing Period is equal to, or greater than $6.00 per share than
the Company's option for the second tranche shall be a maximum of $2,000,000. In
the event the Company wishes to serve a notice for the second tranche it must
provide ten Trading Days notice of its intention to proceed with the second
tranche. The Company's right to proceed with the second tranche is subject to
the satisfaction or written waiver of each of the following conditions:
(A) Delivery into escrow by the Company of the original
Secondary Shares, as more fully set forth in the Escrow Agreement
attached hereto;
(B) The Investor shall have received an opinion of counsel of
the Company as set forth in Exhibit D annexed to this Agreement,
dated on the Second Tranche Closing Date;
(C) The Registration Statement (which includes at least 150%
of the Initial Shares which have not yet been subject to a Reset
Period, 100% of the Initial Shares that were subject to a Reset
Period, 150% of the Secondary Shares, and 100% of the Warrant
Shares) has previously become effective and remains effective for at
least 50 calendar days, and remains effective during the ten (10)
Trading Days immediately prior to the Company's notice for the
Second Tranche and the Second Tranche Closing Date, and (A) neither
the Company nor the Investor shall have received notice that the SEC
has issued or intends to issue a stop order with respect to the
Registration Statement or that the SEC otherwise has suspended or
withdrawn the effectiveness of the Registration Statement, either
temporarily or permanently, or intends or has threatened to do so
(unless the SEC's concerns have been addressed and the Investor is
reasonably satisfied that the SEC no longer is considering or
intends to take such action), and (B) no other suspension of the use
or withdrawal of the effectiveness of the Registration Statement or
related prospectus shall exist;
(D) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Secondary Shares, or shall have the availability of exemptions
therefrom. The sale and issuance of the Secondary Shares shall be
legally permitted by all laws and regulations to which the Company
is subject;
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(E) The Investor shall have received written certification
that the representations and warranties of the Company contained in
this Agreement and all Exhibits annexed hereto are true and correct
in all material respects as of the Second Tranche Closing Date as
though made at each such time (except for representations and
warranties specifically made as of a particular date) with respect
to all periods, and as to all events and circumstances occurring or
existing to and including the Second Tranche Closing Date;
(F) The Company shall have performed, satisfied and complied
in all material respects with all covenants, agreements and
conditions required by this Agreement, the Escrow Agreement, the
Registration Rights Agreement and the Warrants, to be performed,
satisfied or complied with by the Company at or prior to the Second
Tranche Closing Date;
(G) No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent
jurisdiction that prohibits or directly and adversely affects any of
the transactions contemplated by this Agreement or the Exhibits
annexed hereto, and no proceeding shall have been commenced that may
have the effect of prohibiting or adversely affecting any of the
transactions contemplated by this Agreement or the Exhibits annexed
hereto;
(H) The trading of the Common Stock shall not have been
suspended by the SEC or the Principal Market, and the Common Stock
shall not have been delisted from the Small Cap Stock Market since
the First Tranche Closing Date (except for normal and customary
information dissemination). As of the Secondary Shares Closing Date
the Company currently meets all applicable listing requirements of
the Principal Market;
(I) No "Change of Control" in the Company shall have occurred.
Where "Change of Control" shall mean the occurrence of any of (a) an
acquisition after the Subscription Date by a Person of in excess of
50% of the voting securities of the Company, (b) a replacement of
more than one half of the board of directors in place as of the
Subscription Date which is not approved by those individuals who are
members of the board of directors on the Subscription Date in one or
a series of transactions, (c) the merger of the Company with, or
into another entity, consolidation or sale of all or substantially
all of the assets of the Company in one or a series of related
transactions, or (d) the execution by the Company of an agreement to
which the Company is a party or by which it is bound, providing for
any of the events set forth in (a), (b) or (c) herein;
(J) The average Bid Price of the Common Stock during the
Second Tranche Pricing Period shall be greater than $5.00;
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(K) The average daily trading volume for the Common Stock as
reported by Bloomberg, LP during the Second Tranche Pricing Period
shall be a minimum of 30,000;
(L) The issuance of the Secondary Shares will not violate the
rules and regulations of the Principal Market;
(M) No Material Adverse Effect shall have occurred since the
First Tranche Closing Date, and no Material Adverse Effect shall be
in existence as of the Second Tranche Closing Date; and
(N) The Investor, in the event of the Closing of the Secondary
Shares would not own or be deemed beneficially to own, more than
9.99% of the outstanding shares of Common Stock.
Notwithstanding the foregoing, the Investor will not be obligated to
purchase the Secondary Shares in the event the Registration Statement has not
been declared effective by the SEC prior to six months after the First Tranche
Closing Date.
Section 2.8 Repricing.
(a) There will be two "Reset Periods" per tranche. Each Reset Period
will consist of 30 Trading Days. The first Reset Period for the Initial Shares
will expire on the 30th Trading Day after the Effective Date and will cover
fifty percent (50%) of the Initial Shares. The second Reset Period for the
Initial Shares will expire on the 30th Trading Day after the expiration of the
first Reset Period for the Initial Shares, for the remaining fifty percent (50%)
of the Initial Shares. The first Reset Period for the Secondary Shares will
expire on the 30th Trading Day after the Closing Date for the Secondary Shares
and will cover fifty percent (50%) of the Secondary Shares. The second Reset
Period for the Secondary Shares will expire on the 30th Trading Day after the
expiration of the first Reset Period for the Secondary Shares, and cover the
remaining fifty percent (50%) of the Secondary Shares.
(b) For each Reset Period, the "Reset Price" shall be equal to the
average of the lowest twelve (12) Bid Prices of the Common Stock during each
reset Period. The number of shares of Common Stock (the "Reset Shares") to be
issued upon the expiration of each Reset Period shall be calculated by the
following formula:
((# of shares subject to repricing as set forth above) x
(Purchase Price of shares subject to repricing x 115% - Reset
Price)) / Reset Price
Upon the expiration of each Reset Period the Company agrees to issue that
number of Reset Shares (if any) resulting from the above formula. Such shares
shall be delivered within five Business Days following the expiration of the
applicable Reset Period. In the event that the Company does not deliver Reset
Shares within five Business Days after the expiration of a Reset Period (if so
required pursuant to the terms herein), the Company shall pay to the Investor,
in
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immediately available funds, upon demand, as liquidated damages for such failure
and not as a penalty, two percent of the value of the Reset Shares undelivered
(based upon the Bid Price of the Common Stock on the Receipt Date) for every day
thereafter for the first ten calendar days and two percent per calendar day
thereafter that the Reset Shares are not delivered, which liquidated damages
shall run from the sixth Business Day after the expiration of the applicable
Reset Period. The parties hereto acknowledge and agree that the sum payable
herein, shall constitute liquidated damages and not penalties. The parties
further acknowledge that the amount of loss or damages likely to be incurred is
incapable or is difficult to precisely estimate, and the parties are
sophisticated business parties and have been represented by sophisticated and
able legal and financial counsel and negotiated this Agreement at arm's length.
Any and all payments required pursuant to this paragraph shall be payable only
in cash, and any payment hereunder shall not relieve the Company of its delivery
obligations under this Section. All Reset Shares shall be included in the
Registration Statement.
(c) In the event the Company is obligated to issue Reset Shares, and
the Reset Price is lower than sixty percent (60%) of the Issuance Price
(hereinafter the "Floor Price"), then the Company shall have the option, in lieu
of issuing such Reset, of paying to the Investor the cash value of said Reset
Shares based upon the Bid Price of the Common Stock on the Trading Day of the
expiration of the applicable Reset Period. Such cash payment must be wired
transferred to the Investor within five Business Days after the expiration of
such Reset Period, if it is not, then the Company will be obligated to pay to
the Investor liquidated damages for such failure and not as a penalty, two
percent of the amount due to the Investor for every day thereafter for the first
ten calendar days and two percent per calendar day thereafter that the funds are
not delivered, which liquidated damages shall run from the sixth Business Day
after the expiration of the applicable Reset Period.
(d) In the event the Company is obligated to issue Reset Shares, but
the Investor then owns more than 9.99% of the then outstanding shares of Common
Stock, the Company will issue such Reset Shares at such time as the Investor
owns less than 9.99% of the then outstanding shares of Common Stock.
(e) The Reset Shares shall be included in the Registration Statement
as per the terms of the Registration Rights Agreement.
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ARTICLE III
Representations and Warranties of the Investor
The Investor represents and warrants to the Company that:
Section 3.1 Intent. The Investor is entering into this Agreement for its
own account and has no present arrangement (whether or not legally binding) at
any time to sell the Common Stock to or through any person or entity; provided,
however, that by making the representations herein, the Investor does not agree
to hold the Common Stock for any minimum or other specific term and reserve the
right to dispose of the Common Stock at any time in accordance with federal and
state securities laws applicable to such disposition.
Section 3.2 Sophisticated Investor. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and the Investor has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in the Initial Shares, Secondary Shares,
Reset Shares, and Warrants. The Investor acknowledges that an investment in the
Common Stock is speculative and involves a high degree of risk.
Section 3.3 Authority. This Agreement has been duly authorized and validly
executed and delivered by the Investor and is a valid and binding agreement of
the Investor enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application.
Section 3.4 Not an Affiliate. The Investor is neither an officer, director
or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company.
Section 3.5 Organization and Standing. The Investor is duly organized,
validly existing, and in good standing under the laws of the countries and/or
states of their incorporation or organization. None of such companies, or
officers, directors, or principal stockholders thereof are the subject or have
been the subject of any criminal or material regulatory discipline related to
securities.
Section 3.6 Absence of Conflicts. The execution and delivery of this
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investor, or, to
the Investor's knowledge, (a) violate any provision of any indenture, instrument
or agreement to which the Investor is a party or are subject, or by which the
Investor or any of its assets is bound; (b) conflict with or constitute a
material default thereunder; (c) result in the creation or imposition of any
lien pursuant to the terms of any such indenture, instrument or agreement, or
constitute a breach of any fiduciary duty owed by Investor to any third party;
or (d) require the approval of any third-party (which has not been obtained)
pursuant to any material
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contract, agreement, instrument, relationship or legal obligation to which any
of the Investors is subject or to which any of their assets, operations or
management may be subject.
Section 3.7 Disclosure; Access to Information. The Investors has received
all documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor, including the
opportunity to ask questions and receive answers. The Company is subject to the
periodic reporting requirements of the Exchange Act as they apply to foreign
issuers, and the Investor has reviewed or received copies of any such reports
that have been requested by it. The Investor represents that it has reviewed the
Company's, Form 20-F for the year ended December 31, 1997.
Section 3.8 Manner of Sale. At no time was the Investor presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
Section 3.9 Registration or Exemption Requirements. The Investor further
acknowledges and understands that the Securities may not be transferred, resold
or otherwise disposed of except in a transaction registered under the Securities
Act and any applicable state securities laws, or unless an exemption from such
registration is available. The Investor understands that the certificate(s)
evidencing the Initial Shares, Secondary Shares, Reset Shares, and Warrants will
be imprinted with a legend that prohibits the transfer of these securities
unless (i) they are registered or such registration is not required, and (ii) if
the transfer is pursuant to an exemption from registration.
Section 3.10 No Legal, Tax or Investment Advice. The Investor understands
that nothing in this Agreement or any other materials presented to the Investor
in connection with the purchase and sale of the Initial Shares, Secondary
Shares, Reset Shares, and Warrants constitutes legal, tax or investment advice.
The Investor has relied on, and have consulted with, such legal, tax and
investment advisors as they, in their sole discretion, have deemed necessary or
appropriate in connection with their purchase of the Initial Shares, Secondary
Shares, Reset Shares, and Warrants.
ARTICLE IV
Representations and Warranties of the Company
The Company represents and warrants to the Investor that:
Section 4.1 Organization of the Company. The Company is a corporation duly
incorporated and validly existing under the laws of the Province of Ontario,
Canada, and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted except as described in the SEC
Documents. The Company is duly qualified to do business as a foreign corporation
and is in good standing in every jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary,
other than those in which the failure so to qualify would not reasonably be
expected to have a Material Adverse Effect.
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Section 4.2 Authority. (i) The Company has the requisite corporate power
and authority to enter into and perform its obligations under this Agreement,
and all Exhibits annexed hereto, and to issue the Initial Shares, Secondary
Shares, Reset Shares, Warrants, Additional Shares, and the Warrant Shares, (ii)
the execution, issuance and delivery of this Agreement, and all Exhibits annexed
hereto, by the Company and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
and no further consent or authorization of the Company or its Board of
Directors, and (iii) this Agreement, and all Exhibits annexed hereto, have been
duly executed and delivered by the Company and constitute valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application. Upon their issuance and delivery pursuant to this
Agreement, the Initial Shares, Secondary Shares, Reset Shares, Warrants, Warrant
Shares and Additional Shares, will be validly issued, fully paid and
nonassessable and will be free of any liens or encumbrances other than those
created hereunder or by the actions of the Investor; provided, however, that the
Initial Shares, Secondary Shares, Reset Shares, Warrants, Warrant Shares and
Additional Shares are subject to restrictions on transfer under state and/or
federal securities laws. The issuance and sale of the Initial Shares, Secondary
Shares, Reset Shares, Warrants, Warrant Shares and Additional Shares hereunder
will not give rise to any preemptive right or right of first refusal or right of
participation on behalf of any person.
Section 4.3 Capitalization. The authorized capital stock of the Company
consists of an unlimited number of shares of Common Stock, no par value per
share, of which approximately 5,664,375 shares are issued and outstanding, and
no shares of Preferred Stock. The Company has no present intention of creating a
series or class of preferred stock. All of the outstanding shares of Common
Stock of the Company have been duly and validly authorized and issued and are
fully paid and nonassessable. No shares of Common Stock are entitled to
preemptive or similar rights. Except as specifically disclosed in Schedule 4.3
annexed hereto, there are no outstanding options, warrants, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or, except as
a result of the purchase and sale of the Initial Shares, Secondary Shares, Reset
Shares, Additional Shares, and the Warrants, securities, rights or obligations
convertible into or exchangeable for, or giving any Person any right to
subscribe for or acquire, any shares of Common Stock, or contracts, commitments,
understandings, or arrangements by which the Company or any subsidiary is or may
become bound to issue additional shares of Common Stock or securities or rights
convertible or exchangeable into shares of Common Stock. Except as disclosed in
the SEC Documents, to the knowledge of the Company, no Person or group of
Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated
under the Exchange Act) or has the right to acquire by agreement with or by
obligation binding upon the Company beneficial ownership of in excess of five
percent of the Common Stock.
Section 4.4 Common Stock. The Company has registered its Common Stock
pursuant to Section 12(g) of the Exchange Act and is in full compliance with all
reporting requirements of the Exchange Act, and such Common Stock is currently
listed or quoted on the NASDAQ Small
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Cap Market, and the Company is in full compliance with all of the listing
requirements of the NASDAQ Small Cap Market.
Section 4.5 SEC Documents. The Company has delivered or made available to
the Investor true and complete copies of the SEC Documents filed by the Company
with the SEC during the twelve (12) months immediately preceding the
Subscription Date (including, without limitation, proxy information and
solicitation materials). The Company has not provided to the Investor any
information that, according to applicable law, rule or regulation, should have
been disclosed publicly prior to the date hereof by the Company, but which has
not been so disclosed. The SEC Documents comply in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may be,
and rules and regulations of the SEC promulgated thereunder and none of the SEC
Documents contain any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended.
Section 4.6 Valid Issuances. When issued and payment has been made
therefor, Initial Shares, Secondary Shares, Reset Shares, Warrants, Warrant
Shares, and the Additional Shares, sold to the Investor will be duly and validly
issued, fully paid, and nonassessable. Neither the issuance of the Initial
Shares, Secondary Shares, Reset Shares, Warrants, Warrant Shares, and Additional
Shares, to the Investor, pursuant to, nor the Company's performance of its
obligations under this Agreement, and all Exhibits annexed hereto will (i)
result in the creation or imposition by the Company of any liens, charges,
claims or other encumbrances upon the Initial Shares, Secondary Shares, Reset
Shares, Warrants, Warrant Shares, or Additional Shares, issued to the Investor,
or any of the assets of the Company, or (ii) entitle the holders of Outstanding
Capital Shares to preemptive or other rights to subscribe to or acquire the
Capital Shares or other securities of the Company.
Section 4.7 No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor any distributor
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising with respect to any of the Initial Shares, Secondary
Shares, Reset Shares, Additional Shares, Warrants, or Warrant Shares, or (ii)
made any offers or sales of any security or solicited any offers to buy any
security under any circumstances that would require registration of the Initial
Shares, Secondary Shares, Reset Shares, Additional Shares, Warrants, or Warrant
Shares under the Securities Act.
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Section 4.8 Corporate Documents. The Company has furnished or made
available to the Investor true and correct copies of the Company's Articles of
Incorporation, as amended and in effect on the date hereof, and the Company's
by-laws, as amended and in effect on the date hereof (the "By-Laws").
Section 4.9 No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the Initial
Shares, Secondary Shares, Reset Shares, Warrants, Warrant Shares and Additional
Shares, do not and will not (i) result in a violation of the Company's Articles
of Incorporation or By-Laws, or (ii) conflict with, or constitute a material
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture, instrument
or any "lock-up" or similar provision of any underwriting or similar agreement
to which the Company is a party, or (iii) result in a violation of any federal,
state or local law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations) applicable to the Company or
by which any property or asset of the Company is bound or affected, nor is the
Company otherwise in violation of, conflict with or in default under any of the
foregoing as would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect. The business of the Company is not being
conducted in violation of any law, ordinance or regulation of any governmental
entity, except for possible violations that either singly or in the aggregate
would not reasonably be expected to have a Material Adverse Effect. Except for
the Company's obligations to make the SEC Reports, the Company is not required
under federal, state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement (including all Exhibits annexed hereto) or to
issue and sell the Initial Shares, Secondary Shares, Reset Shares, Warrants,
Warrant Shares, or Additional Shares in accordance with the terms hereof;
provided that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investor herein.
Section 4.10 No Material Adverse Change. Since December 31, 1998, no
Material Adverse Effect has occurred or exists with respect to the Company,
except as disclosed in the SEC Documents, or as publicly announced.
Section 4.11 No Undisclosed Liabilities. The Company has no liabilities or
obligations which are material, individually or in the aggregate, that are not
disclosed in the SEC Documents or otherwise publicly announced, other than those
set forth in the Company's financial statements or as incurred in the ordinary
course of the Company's businesses since December 31, 1998, and which,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect.
Section 4.12 No Undisclosed Events or Circumstances. Since December 31,
1998, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or
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regulation, requires public disclosure or announcement prior to the date hereof
by the Company but which has not been so publicly announced or disclosed in the
SEC Documents.
Section 4.13 Integration. The Company, any of its affiliates, or any
person acting on its or their behalf has not, shall not, and shall use its best
efforts to ensure that no affiliate shall, directly or indirectly, sell, offer
for sale or solicit offers to buy or otherwise negotiate in respect of any
security of the Company that would be integrated with the offer or sale of the
Initial Shares, Secondary Shares, and Warrants in a manner that would require
the registration under the Securities Act of the issue, offer or sale of the
Initial Shares, Secondary Shares, and Warrants to the Investor. The Initial
Shares, Secondary Shares, and Warrants are being offered and sold pursuant to
the terms hereunder, are not being offered and sold as part of a previously
commenced private placement of securities.
Section 4.14 Litigation and Other Proceedings. Except as may be set forth
in the SEC Documents, there are no lawsuits or proceedings pending or to the
knowledge of the Company threatened, against the Company, nor has the Company
received any written or oral notice of any such action, suit, proceeding or
investigation, which would reasonably be expected to have a Material Adverse
Effect. Except as set forth in the SEC Documents, no judgment, order, writ,
injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which would
be reasonably expected to result in a Material Adverse Effect. A summary of the
Company's material legal proceedings is attached hereto as Schedule 4.14.
Section 4.15 Accuracy of Reports and Information. The Company is in
compliance, to the extent applicable, with all reporting obligations for foreign
issuers under either Section 12(b), 12(g) or 15(d) of the Exchange Act. The
Company is a "foreign issuer" as that term is defined in the Exchange Act. The
Company has registered its Common Stock pursuant to Section 12 of the Exchange
Act and the Common Stock is listed and trades on the NASDAQ Small Cap Market.
The Company has complied in all material respects and to the extent applicable
with all reporting obligations, under either Section 13(a) or 15(d) of the
Exchange Act for a period of at least twelve (12) months immediately preceding
the offer and sale of the Initial Shares, Secondary Shares, and Warrants (or for
such shorter period that the Company has been required to file such material).
Section 4.16 The Company is aware and acknowledges that issuance of
Initial Shares, Secondary Shares, Additional Shares, Reset Shares, and/or
exercise of the Warrants, may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligation to issue (i) Additional
Shares, (ii) Reset Shares, and (iii) the Warrant Shares in accordance with the
Warrants is unconditional and absolute regardless of the effect of any such
dilution, except that it has been agreed by the Investor and the Company that in
no event will the Company be required to issue more than 20% of its total
outstanding securities at a discount to the market price without first obtaining
stockholder approval.
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Section 4.17 Employee Relations. The Company is not involved in any labor
dispute, nor, to the knowledge of the Company, is any such dispute threatened
which could reasonably be expected to have a Material Adverse Effect. None of
the Company's employees is a member of a union and the Company believes that its
relations with its employees are good.
Section 4.18 Environmental Laws. The Company is (i) in compliance with any
and all foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants and which the Company know is
applicable to them ("Environmental Laws"), (ii) has received all permits,
licenses or other approvals required under applicable Environmental Laws to
conduct its business, and (iii) is in compliance with all terms and conditions
of any such permit, license or approval.
Section 4.19 Insurance. The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company is engaged. The Company has no notice to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires, or obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not cause a Material
Adverse Effect.
Section 4.20 Board Approval. The board of directors of the Company has
concluded, in its good faith business judgment, that the issuances of the
securities of the Company in connection with this Agreement are in the best
interests of the Company.
Section 4.21 Patents and Trademarks. The Company has, or has rights to
use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses, trade secrets and other
intellectual property rights which are necessary for use in connection with its
business or which the failure to so have would have a Material Adverse Effect
(collectively, the "Intellectual Property Rights"). To the best knowledge of the
Company, none of the Intellectual Property Rights infringe on any rights of any
other Person, and the Company either owns or has duly licensed or otherwise
acquired all necessary rights with respect to the Intellectual Property Rights.
The Company has not received any notice from any third party of any claim of
infringement by the Company of any of the Intellectual Property Rights, and has
no reason to believe there is any basis for any such claim. To the best
knowledge of the Company, there is no existing infringement by another Person on
any of the Intellectual Property Rights.
Section 4.22 Use of Proceeds. The Company represents that the net proceeds
from this offering will be used for working capital purposes, and not for the
repayment of any outstanding judgments against the Company (including any
affiliate or subsidiary) or any officer, director or employee of the Company.
Section 4.23 Subsidiaries. Except as disclosed in the Reports, the Company
does not presently own or control, directly or indirectly, any interest in any
other corporation, partnership, association or other business entity.
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Section 4.24 No Private Placements. The Company has not conducted a
private placement of its Common Stock or of any debt or equity instrument
convertible into Common Stock within one year prior to the Closing Date. Except
for the transactions contemplated hereby and as disclosed in the SEC Documents,
there are no outstanding securities issued by the Company that are entitled to
registration rights under the Securities Act. Except as disclosed in the SEC
Documents, there are no outstanding securities issued by the Company that are
directly or indirectly convertible into, exercisable into, or exchangeable for,
shares of Common Stock, that have anti-dilution or similar rights that would be
affected by the issuance of the Initial Shares, Secondary Shares, Warrants,
Warrant Shares, and/or Additional Shares.
Section 4.25 Permits; Compliance. The Company and each of its subsidiaries
is in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its business
as it is now being conducted (collectively, the "Company Permits"), and there is
no action pending or, to the knowledge of the Company, threatened regarding the
suspension or cancellation of any of the Company Permits except for such Company
Permits, the failure of which to possess, or the cancellation, or suspension of
which, would not, individually or in the aggregate, have a Material Adverse
Effect. To the Company's knowledge, neither the Company nor any of its
subsidiaries is in material conflict with, or in material default or material
violation of, any of the Company Permits. Since January 1, 1999 neither the
Company nor any of its subsidiaries has received any notification with respect
to possible material conflicts, material defaults or material violations of
applicable laws.
Section 4.26 Taxes. All federal, provincial, city and other tax returns,
reports and declarations required to be filed by or on behalf of the Company
have been filed and such returns are complete and accurate and disclose all
taxes (whether based upon income, operations, purchases, sales, payroll,
licenses, compensation, business, capital, properties or assets or otherwise)
required to be paid in the periods covered thereby.
Section 4.27 No Bankruptcy. The Company is aware of no facts or claims
against it which would, and the Company has no present intention to, liquidate
the assets of the Company and/or seek bankruptcy protection either voluntarily
or involuntarily.
Section 4.28 Material Contracts. Except as set forth in the SEC Documents,
the agreements to which the Company is a party described in the SEC Documents
are valid agreements, in full force and effect. The Company is not in material
breach or material default under any of such agreements, except where such
breach or default would not cause a Material Adverse Effect.
Section 4.29 Title to Assets. Except as set forth in SEC Documents, the
Company has good and marketable title to all properties and material assets
described in the SEC Documents as owned by it, free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest other than
such as would not cause a Material Adverse Effect.
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Section 4.30 Filings. Except for the filing of a Form D within 15 days
after the Closing Date (which the Company agrees it will file), and such other
form(s) required by "blue sky" laws, the Company is not required under federal,
state or local law, rule or regulation to obtain any consent, authorization or
order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement or issue and sell the Preferred Stock, or Warrants, in
accordance with the terms hereof; provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investor
herein.
ARTICLE V
Covenants of the Investor
Section 5.1 Additional Agreements. The Investor consents to its inclusion
in the Registration Statement, or Registration Statements, required to be filed
by the Company pursuant to this Agreement and the Registration Rights Agreement.
The Investor covenants and agrees that it will (i) timely supply the Company
with all information reasonably required by the Company in connection with the
preparation and filing of such Registration Statements or any supplements or
amendments thereto, and (ii) make, and permit the inclusion in such Registration
Statements or supplements or amendments thereto, all disclosures and filings
required by the SEC to be made in connection with such Registration Statements
or supplements or amendments thereto. The Investor will comply with the
prospectus delivery requirements of the Securities Act.
ARTICLE VI
Covenants of the Company
Section 6.1 Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect so long as any Registrable
Securities remain outstanding and the Company shall comply in all material
respects with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the
Company has authorized and reserved and the Company shall continue to reserve
and keep available at all times, free of preemptive rights, shares of Common
Stock for the purpose of enabling the Company to satisfy any obligation to issue
the Additional Shares, Initial Shares, Secondary Shares, Reset Shares, and
Warrant Shares. The number of shares so reserved shall be increased or decreased
to reflect potential increases or decreases in the Common Stock that the Company
may thereafter be so obligated to issue by reason of adjustments to the
Warrants.
Section 6.3 Listing of Common Stock. If required by the Principal Market,
the Company shall (a) not later than the fifth Business Day following the date
the Principal Market requires, prepare and file with the Principal Market (as
well as any other national securities
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exchange, market or trading facility on which the Common Stock is then listed)
an additional shares listing application covering at least the sum of (i)
Initial Shares, and Secondary Shares and (ii) the Warrant Shares issuable upon
exercise in full of the Warrants, (b) take all steps necessary to cause such
shares to be approved for listing on the Principal Market (as well as on any
other national securities exchange, market or trading facility on which the
Common Stock is then listed) as soon as possible thereafter, and (c) provide to
the Investor evidence of such listing, and the Company shall maintain the
listing of its Common Stock on such exchange or market. If required by the
Principal Market, the Company shall (a) not later than the fifth Business Day
following the issuance of the Reset Shares and/or Additional Shares (if issued
pursuant to the terms of this Agreement) prepare and file with the Principal
Market (as well as any other national securities exchange, market or trading
facility on which the Common Stock is then listed) an additional shares listing
application covering at least the sum of Reset Shares and Additional Shares so
issued, (b) take all steps necessary to cause such shares to be approved for
listing on the Principal Market (as well as on any other national securities
exchange, market or trading facility on which the Common Stock is then listed)
as soon as possible thereafter, and (c) provide to the Investor evidence of such
listing, and the Company shall maintain the listing of its Common Stock on such
exchange or market. In addition, if at any time the number of shares of Common
Stock issuable hereunder, and upon exercise in full of the Warrants is greater
than the number of shares of Common Stock theretofore listed with the Principal
Market (and any such other national securities exchange, market or trading
facility), the Company shall promptly take such action (including the actions
described in the preceding sentence) to file an additional shares listing
application with the Principal Market (and any such other national securities
exchange, market or trading facility) covering such number of shares of Common
Stock as would be necessary. The Company (i) has not received any notice, oral
or written, affecting its continued listing on the NASDAQ Small Cap Market, and
(ii) is in full compliance with the requirements for continued listing on the
NASDAQ Small Cap Market. The Company will take no action which would impact its
continued listing or eligibility of the Company for such listing (except as set
forth in Section 6.11 below). The Company will comply with the listing and
trading requirements of its Common Stock on a Principal Market and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the Principal Market. In the event the Company receives
notification from the Principal Market or any other controlling entity stating
that the Company is not in compliance with the listing qualifications of such
Principal Market, the Company will take all action necessary to bring the
Company within compliance with all applicable listing standards of the Principal
Market.
Section 6.4 Exchange Act Registration. The Company will maintain the
registration of its Common Stock under Section 12 of the Exchange Act, will
comply in all respects with its reporting and filing obligations under the
Exchange Act, and will not take any action or file any document (whether or not
permitted by Exchange Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Act, for so long as the Registrable Securities are owned by the
Investor.
Section 6.5 Legends. The Initial Shares, Secondary Shares, Warrants,
Warrant Shares, and Additional Shares to be issued by the Company pursuant to
this Agreement shall be free of legends, except as set forth in Article VIII.
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Section 6.6 Corporate Existence. The Company will take all steps necessary
to preserve and continue the corporate existence of the Company.
Section 6.7 Notice of Certain Events Affecting Registration. The Company
will immediately notify the Investor within three Business Days after the
occurrence of any of the following events in respect of a registration statement
or related prospectus in respect of an offering of Registrable Securities: (i)
receipt of any request for additional information by the SEC or any other
federal or state governmental authority during the period of effectiveness of
the Registration Statement for amendments or supplements to the Registration
Statement or related prospectus; (ii) the issuance by the SEC or any other
federal or state governmental authority of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose; (iii) receipt of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in the Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (the Company shall not
be required to notify the Investor in this case in the event such notification
would be deemed the release of nonpublic information); and (v) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate. The Company will, within three Business Days of
when filed with the SEC make available to the Investor any such supplement or
amendment to the related prospectus.
Section 6.8 Consolidation; Merger. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all of the assets of the Company to,
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investor such shares of stock and/or securities as
the Investor is entitled to receive pursuant to this Agreement.
Section 6.9 Issuance of Warrant Shares. The issuance of the Warrant Shares
pursuant to exercise of the Warrants shall be made in accordance with the
provisions and requirements of Section 4(2) of the Securities Act, or Regulation
D and any applicable state securities law.
Section 6.10 Legal Opinion. The Company's independent counsel shall
deliver to the Investor upon execution of this Agreement, an opinion in the form
of Exhibit D annexed hereto. The Company will obtain for the Investor, at the
Company's expense, any and all opinions of
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counsel which may be reasonably required in order to remove the Legend from the
Initial Shares, Secondary Shares, and Warrant Shares, as such opinion can be
given under applicable law.
Section 6.11 Issuance Limitation. At no point in time will the Company be
obligated to issue more than 20% of the number of shares of Common Stock
outstanding as of the Closing Date, unless the Company has obtained shareholder
approval to the extent such shareholder approval is required. In lieu of such
issuance(s) (and in the event the Company is otherwise unable to issue shares of
Common Stock to the Investor as they become due pursuant to the terms of this
Agreement) the Company shall pay to the Investor the cash value of such shares
(the "20% Shares") within five Business Days of when such issuance is due based
upon the Bid Price of the Common Stock on the Trading Date of when due (or such
next Trading Day if such day is not a Trading Day, such date referred to as the
"Payment Date"). In the event the Company is obligated to make such payment and
does not do so in a timely fashion, the Company agrees that it shall call a
shareholders meeting within 20 days after the Payment Date (the "Meeting Date")
seeking authorization to issue more than 20% of the outstanding shares of Common
Stock pursuant to the terms hereunder. In the event the Company obtains
shareholder approval it shall issue such 20% Shares within five Business Days
after the Meeting Date. If the Bid Price of the Common Stock at such time is
lower at such time than on the Payment Date the Company shall issue shares of
Common Stock in addition to the 20% Shares equal to the following: (number of
20% Shares due times Bid Price on Payment Date) - (number of 20% Shares due
times Bid Price on Meeting Date) divided by the Bid Price on the Meeting Date.
Section 6.12 Exercise of Warrants. The Company will permit the Investor to
exercise the Warrants, by telecopying an executed and completed Notice of
Exercise to the Company, and the payment of the Exercise Price, as is set forth
in the Warrant.
Section 6.13 Increase in Authorized Shares. At such time as the Company
would be, if a notice of exercise were to be delivered on such date, precluded
from honoring the exercise in full of the Warrants, due to the unavailability of
a sufficient number of shares of authorized but unissued or re-acquired Common
Stock, the Board of Directors of the Company shall promptly (and in any case
within 60 calendar days from such date) hold a shareholders meeting in which the
shareholders would vote for authorization to amend the Company's certificate of
incorporation to increase the number of shares of Common Stock which the Company
is authorized to issue to at least a number of shares equal to the sum of (i)
all shares of Common Stock then outstanding, (ii) the number of shares of Common
Stock issuable on account of all outstanding warrants, options and convertible
securities (other than the Warrants) and on account of all shares reserved under
any stock option, stock purchase, warrant or similar plan, and (iv) such number
of Warrant Shares as would then be issuable upon the exercise in full of the
Warrants. In connection therewith, the Board of Directors shall promptly (x)
adopt proper resolutions authorizing such increase, (y) recommend to and
otherwise use its best efforts to promptly and duly obtain shareholder approval
to carry out such resolutions and (z) within three Business Days of obtaining
such shareholder authorization, file an appropriate amendment to the Company's
certificate of incorporation to evidence such increase. In no way shall the
aforementioned be deemed a waiver of the Company's obligations contained in
Section 6.2 above.
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Section 6.14 Notice of Breaches. Each of the Company on the one hand, and
the Investor on the other, shall give prompt written notice to the other of any
breach by it of any representation, covenant, warranty or other agreement
contained in this Agreement or any Exhibit annexed hereto, as well as any events
or occurrences arising after the date hereof, which would reasonably be likely
to cause any representation, covenant, or warranty or other agreement of such
party, as the case may be, contained in this Agreement or any Exhibit annexed
hereto, to be incorrect or breached as of such date. However, no disclosure by
either party pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in this Agreement or any
Exhibit annexed hereto. Notwithstanding the generality of the foregoing, the
Company shall promptly notify the Investor of any notice or claim (written or
oral) that it receives from any lender of the Company to the effect that the
consummation of the transactions contemplated by this Agreement or any Exhibit
annexed hereto, violates or would violate any written agreement or understanding
between such lender and the Company, and the Company shall promptly furnish by
facsimile to the Investor a copy of any written statement in support of or
relating to such claim or notice.
Section 6.15 Transfer of Intellectual Property Rights. Except in the
ordinary course of the Company's business or in connection with the sale of all
or substantially all of the assets of the Company, the Company shall not
transfer, sell or otherwise dispose of, any intellectual property rights, or
allow its intellectual property rights to become subject to any liens, or fail
to renew such intellectual property rights (if renewable and would otherwise
expire).
Section 6.16 Notices. The Company agrees to provide the Investor with
copies of all notices and information, including without limitation notices and
proxy statements in connection with any meetings, that are provided to the
holders of shares of Common Stock, contemporaneously with the delivery of such
notices or information to such Common Stock holders.
ARTICLE VII
Due Diligence Review; Non-Disclosure of Non-Public Information
Section 7.1 Due Diligence Review. The Company shall make available for
inspection and review by the Investor, advisors to and representatives of the
Investor (who may or may not be affiliated with the Investor), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investor pursuant to the Registration Statement, any such registration statement
or amendment or supplement thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the
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sole purpose of enabling the Investor and such representatives, advisors and
underwriters and their respective accountants and attorneys to conduct initial
and ongoing due diligence with respect to the Company and the accuracy of the
Registration Statement.
Section 7.2 Non-Disclosure of Non-Public Information
(a) The Company has not disclosed, and hereafter shall not disclose
non-public information to the Investor, advisors to, or representatives of, the
Investor unless prior to disclosure of such information the Company identifies
such information as being non-public information and provides the Investor, and
its advisors and representatives with the opportunity to accept or refuse to
accept such non-public information for review. The Company may, as a condition
to disclosing any non-public information hereunder, require each of the
Investor's advisors and representatives to enter into a confidentiality
agreement in form reasonably satisfactory to the Company and the Investor.
(b) Nothing herein shall require the Company to disclose non-public
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate non-public information to any
investor(s) who purchase stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Investor and, if any,
underwriters, of any event or the existence of any circumstance (without any
obligation to disclose the specific event or circumstance) of which it becomes
aware, constituting non-public information (whether or not requested of the
Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in order
to make the statements, therein, in light of the circumstances in which they
were made, not misleading. Nothing contained in this Section shall be construed
to mean that such persons or entities other than the Investor (without the
written consent of the Investor prior to disclosure of such information) may not
obtain non-public information in the course of conducting due diligence in
accordance with the terms of this Agreement and nothing herein shall prevent any
such persons or entities from notifying the Company of their opinion that based
on such due diligence by such persons or entities, that the Registration
Statement contains an untrue statement of a material fact or omits a material
fact required to be stated in the Registration Statement or necessary to make
the statements contained therein, in light of the circumstances in which they
were made, not misleading.
ARTICLE VIII
Legends
Section 8.1 Legends. The Investor agrees to the imprinting, so long
as is required by this Section, of the following legend (or such substantially
similar legend as is acceptable to the Investor and its counsel, the parties
agreeing that any unacceptable legended securities shall be replaced promptly by
and at the Company's cost) on the securities:
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[FOR WARRANTS AND INITIAL SHARES] NEITHER THESE SECURITIES NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE]
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
[ONLY FOR RESET SHARES, WARRANT SHARES TO THE EXTENT THE RESALE
THEREOF IS NOT COVERED BY AN EFFECTIVE REGISTRATION STATEMENT AT THE TIME
OF ISSUANCE OR EXERCISE] THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
The Warrant Shares and Reset Shares shall not contain the legend set forth
above or any other restrictive legend if the exercise of Warrants, occurs at any
time while a Registration Statement is effective under the Securities Act in
connection with the resale of the shares of Common Stock or, in the event there
is not an effective Registration Statement at such time, if in the opinion of
counsel to the Company such legend is not required under applicable requirements
of the Securities Act (including judicial interpretations and pronouncements
issued by the staff of the Commission). The Company agrees that it will provide
the Investor, upon request, with a certificate or certificates representing the
Reset Shares and/or Warrant Shares, free from such legend at such time as such
legend is no longer required hereunder. The Company may not make any notation on
its records or give instructions to any transfer agent of the Company which
enlarge the restrictions of transfer set forth in this Section.
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit E hereto. Such instructions shall be irrevocable by the Company from
and after the date hereof or from and after the issuance thereof to any such
substitute or replacement transfer agent, as the case may be, except as
otherwise expressly provided in the Registration Rights Agreement. It is the
intent and purpose of such instructions, as provided therein, to require the
transfer agent for the Common Stock from time to time upon
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transfer of Registrable Securities by the Investor to issue certificates
evidencing such Registrable Securities free of the Legend during the following
periods and under the following circumstances and except as provided below,
without consultation by the transfer agent with the Company or its counsel and
without the need for any further advice or instruction or documentation to the
transfer agent by or from the Company or its counsel or the Investor (in the
event such advice and/or instruction is needed the Company agrees that it will
have its counsel provide same):
(a) at any time after the Effective Date, upon surrender of one or
more certificates evidencing the Warrants, Initial Shares, Reset Shares,
Additional Shares, Secondary Shares, or Warrant Shares that bear the
aforementioned Legend, to the extent accompanied by a notice requesting the
issuance of new certificates free of the aforementioned legend to replace those
surrendered; provided that (i) the Registration Statement shall then be
effective; (ii) the Investor confirms to the transfer agent that it has sold,
pledged or otherwise transferred or agreed to sell, pledge or otherwise transfer
such Common Stock in a bona fide transaction to a third party that is not an
affiliate of the Company; and (iii) the Investor confirm to the transfer agent
that the Investor has complied with the prospectus delivery requirement.
(b) at any time upon any surrender of one or more certificates
evidencing Registrable Securities, that bear the aforementioned legend, to the
extent accompanied by a notice requesting the issuance of new certificates free
of such legend to replace those surrendered and containing representations that
(i) the Investor is permitted to dispose of such Registrable Securities, without
limitation as to amount or manner of sale pursuant to Rule 144(k) under the
Securities Act or (ii) the Investor has sold, pledged or otherwise transferred
or agreed to sell, pledge or otherwise transfer such Registrable Securities, in
a manner other than pursuant to an effective registration statement, to a
transferee who will upon such transfer be entitled to freely tradeable
securities. The Company shall have counsel provide any and all opinions
necessary for the sale under Rule 144, as permitted under applicable law.
Any of the notices referred to above in this Section may be sent by
facsimile to the Company's transfer agent.
Section 8.2 No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in this Article has been or shall be placed on the
share certificates representing the Common Stock, and no instructions or "stop
transfer orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article.
Section 8.3 Investor's Compliance. Nothing in this Article shall affect in
any way the Investor's obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.
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ARTICLE IX
Choice of Law
Section 9.1 Choice of Law; Venue; Jurisdiction. This Agreement will be
construed and enforced in accordance with and exclusively governed by the laws
of the State of New York, except for matters arising under the Securities Act,
without reference to principles of conflicts of law. Each of the parties
consents to the exclusive jurisdiction of the U.S. District Court sitting in the
Southern District of the State of New York sitting in Manhattan in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions.
Each party hereby agrees that if another party to this Agreement obtains a
judgment against it in such a proceeding, the party which obtained such judgment
may enforce same by summary judgment in the courts of any country having
jurisdiction over the party against whom such judgment was obtained, and each
party hereby waives any defenses available to it under local law and agrees to
the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law. Each party waives
its right to a trial by jury.
ARTICLE X
Assignment; Termination
Section 10.1 Assignment. The Investor's interest in this Agreement and its
ownership of Initial Shares, Secondary Shares, Additional Shares, Reset Shares,
and Warrants may be assigned or transferred at any time, in whole or in part, to
any other person or entity (including any affiliate of the Investor) provided
that the Company must consent to such assignment or transfer (which consent
shall not be unreasonably withheld), and such assignee or transferee must agree
to, and truthfully, make the representations and warranties contained in Article
III, agree to be bound by the covenants of Article V, and has the financial
capabilities to fund the Second Tranche. The provisions of this Agreement shall
inure to the benefit of, and be enforceable by, any transferee of any of the
shares of Initial Shares, Secondary Shares, Additional Shares, Reset Shares,
and/or Warrants purchased or acquired by the Investor hereunder with respect to
the Common Stock held by such person. In the event the Investor transfers or
assigns as set forth herein, the Investor shall remain liable under this
Agreement up until the time such transfer or assignment is completed, and shall
remain liable after the transfer or assignment is completed for its actions
taken prior to such assignment or transfer.
Section 10.2 Termination. This Agreement shall terminate upon the earliest
of (i) the date that all the Registrable Securities have been sold by the
Investor pursuant to the Registration Statement; (ii) the date the Investor
receives an opinion from counsel to the Company that all of the Registrable
Securities may be sold under the provisions of Rule 144, without volume
limitation; or (iii) five years after the expiration of the last Reset Period.
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ARTICLE XI
Notices
Section 11.1 Notices. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a Business Day during normal business hours where such notice is to
be received), or the first Business Day following such delivery (if delivered
other than on a Business Day during normal business hours where such notice is
to be received), or (b) on the second Business Day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company:
D.G. Jewellery of Canada, Ltd.
1001 Petrolia Road
North York, Ontario
Canada M3J 2X7
Attention: President
Facsimile: (416) 665-4986
Telephone: (416) 665-8784
with a copy to:
Gerstein, Savage & Kaplowitz, LLP
101 East 52nd Street
New York, NY 10022
Attention: Arthur S. Marcus
Facsimile: (212) 980-5192
Telephone: (212) 752-9700
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If to the Investor, at the address listed on Schedule A.
with a copy to:
The Goldstein Law Group, P.C.
65 Broadway, 10th Floor
New York, NY 10006
Attention: Scott H. Goldstein, Esq.
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 11.1 by giving at least ten calendar days'
prior written notice of such changed address or facsimile number to the other
party hereto.
Section 11.2 Indemnification. The Company agrees to indemnify and hold
harmless the Investor and each officer, director of the Investor or person, if
any, who controls the Investor within the meaning of the Securities Act against
any losses, claims, damages or liabilities, joint or several (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees), to which the Investor may
become subject, under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon the breach of any term of this Agreement by the Company. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
The Investor agrees that it will indemnify and hold harmless the Company,
and each officer, director of the Company or person, if any, who controls the
Company within the meaning of the Securities Act, against any losses, claims,
damages or liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company or any such officer, director or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the breach of any term of this Agreement
by the Investor. This indemnity agreement will be in addition to any liability
which the Investor or any subsequent assignee may otherwise have.
Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve the indemnifying
party from any liability which it may have to any indemnified party otherwise
than as to the particular item as to which indemnification is then being sought
solely pursuant to this Section. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party
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similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
one of the Investor, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Investor and the indemnifying party and the Investor shall have been advised by
such counsel that there may be one or more legal defenses available to the
indemnifying party in conflict with any legal defenses which may be available to
the Investor (in which case the indemnifying party shall not have the right to
assume the defense of such action on behalf of the Investor, it being
understood, however, that the indemnifying party shall, in connection with any
one such action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable only for the reasonable fees and expenses of one separate firm of
attorneys for the Investor, which firm shall be designated in writing by the
Investor). No settlement of any action against an indemnified party shall be
made without the prior written consent of the indemnified party, which consent
shall not be unreasonably withheld.
Section 11.3 Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 11.2 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 11.2 hereof
provide for indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any indemnified party, then the
Company and the Investor shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees), in either such case (after
contribution from others) on the basis of relative fault as well as any other
relevant equitable considerations. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in Section 11.2 shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contributions from any person who was
not guilty of such fraudulent misrepresentation.
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ARTICLE XII
Miscellaneous
Section 12.1 Counterparts; Facsimile; Amendments. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by the Company on the one hand, and the Investor, on the other hand.
Section 12.2 Entire Agreement. This Agreement, the Exhibits or Attachments
hereto, which include, but are not limited to the Warrant, the Escrow Agreement,
and the Registration Rights Agreement, set forth the entire agreement and
understanding of the parties relating to the subject matter hereof and
supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof. The terms and conditions of all Exhibits and Attachments
to this Agreement are incorporated herein by this reference and shall constitute
part of this Agreement as if fully set forth herein.
Section 12.3 Survival; Severability. The representations, warranties,
covenants and agreements of the parties hereto shall survive each Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
Section 12.4 Title and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 12.5 Reporting Entity for the Common Stock. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement and all
Exhibits shall be Bloomberg, L.P. or any successor thereto. The written mutual
consent of the Investor and the Company shall be required to employ any other
reporting entity.
Section 12.6 Replacement of Certificates. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Initial Shares, Secondary Shares,
Reset Shares, Warrants, Warrant Shares, or Additional Shares, and (ii) in the
case of any such loss, theft or destruction of such certificate, upon delivery
of an indemnity agreement or security reasonably satisfactory in form and amount
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to the Company, or (iii) in the case of any such mutilation, on surrender and
cancellation of such certificate, the Company at its expense will execute and
deliver, in lieu thereof, a new certificate of like tenor.
Section 12.7 Fees and Expenses. Each of the parties shall pay its own fees
and expenses (including the fees of any attorneys, accountants, appraisers or
others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby, except that the Company shall pay on (a) the
First Tranche Closing Date to Oscar Gruss & Son Incorporated (A) the sum equal
to six percent of the First Tranche Purchase Price payable in cash out of
escrow, (B) Warrants to purchase 61,539 Warrant Shares, and (b) on the Second
Tranche Closing Date, (i) the sum of $5,000, in cash, out of escrow, to the
Escrow Agent for legal, administrative, and escrow fees, and (ii) to Oscar Gruss
& Son Incorporated (A) the sum equal to six percent of the Second Tranche
Purchase Price payable in cash out of escrow, (B) Warrants to purchase that
number of Warrant Shares equal to 10% of the number of shares of number of
shares of Common Stock issued to the Investor in the Second Tranche.
Section 12.8 Publicity. The Company and the Investor shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and no party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law, in which such case the disclosing party
shall provide the other parties with prior notice of such public statement.
Notwithstanding the foregoing, the Company shall not publicly disclose the names
of the Investor without the prior written consent of the Investor, except to the
extent required by law or in response to a written SEC request, in which case
the Company shall provide the Investor with prior written notice of such public
disclosure.
Section 12.9 Currency. All references to currency in this Agreement and
all Exhibits annexed hereto shall be in United States currency.
SCHEDULES:
A: Investor Information
4.3: Outstanding Warrants, Options, etc.
4.14: Litigation and Other Proceedings
EXHIBITS:
A: Escrow Agreement
B: Registration Rights Agreement
C: Common Stock Purchase Warrant
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D: Opinion of Counsel
E: Instruction to Transfer Agent
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IN WITNESS WHEREOF, the parties hereto have caused this Common Stock
Purchase Agreement to be executed by the undersigned, thereunto duly authorized,
as of the date first set forth above.
D.G. JEWELLERY OF CANADA, LTD.
By ________________________________
HAYMARKET LLC
By______________________________________
<PAGE>
SCHEDULE A
INVESTOR:
Haymarket LLC
c/o Citco Trustees Cayman Limited
Commercial Centre
PO Box 31106SMB
Grand Cayman, Cayman Islands
British West Indies
Attention: Sabrina Hew
Facsimile: 345 945-7566
Telephone: 345 949-3977First Tranche Investment Amount: $4,000,000
<PAGE>
SCHEDULE 4.3
Outstanding Warrants, Options, etc.
<PAGE>
SCHEDULE 4.14
Litigation and Other Proceedings
EXHIBIT 23.1
CONSENT OF SCHWARTZ, LEVITSKY, FELDMAN, LLP
The undersigned, Schwartz, Levitsky, Feldman, LLP, hereby consents to the
use of our name and use of our auditor's report dated March 17, 1999 for for
D.G. Jewellery of Canada Ltd. (the "Company") as filed with its Registration
Statement on Form SB-2, and any amendments thereto, being filed by the Company.
/s/ SCHWARTZ, LEVITSKY, FELDMAN, LLP
----------------------------------------
June 29, 1999 Schwartz, Levitsky, Feldman, LLP
Chartered Accountants
EXHIBIT 23.2
CONSENT OF GERSTEN, SAVAGE & KAPLOWITZ, LLP
The undersigned, Gersten, Savage & Kaplowitz, LLP, hereby consents to the
use of our name as filed with D.G. Jewellery of Canada Ltd.'s Registration
Statement on Form SB-2, and any amendments thereto.
/s/ GERSTEN, SAVAGE & KAPLOWITZ, LLP
----------------------------------------
June 29, 1999 Gersten, Savage & Kaplowitz, LLP
EXHIBIT 23.3
CONSENT OF GRUBNER, KRAUSS, BARRISTERS & SOLICITORS
The undersigned, Grubner, Krauss, Barristers & Solicitors, hereby consents
to the use of our name and the use of our opinion for D.G. Jewellery of Canada
Ltd. (the "Company") as filed with its Registration Statement on Form SB-2, and
any amendments thereto.
/s/ GRUBNER, KRAUSS
----------------------------------------
June 29, 1999 Grubner, Krauss
Barristers & Solicitors
