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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 01, 2000 to March 31, 2000
Commission file number 001-15279
D.G. JEWELRY INC.
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(Exact name of registrant as specified in its charter)
Province of Ontario N/A
- ------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Petrolia Road
Toronto, Ontario Canada M3J 2X7
- ----------------------- ----------------
(Address of principal executive offices) (Zip Code)
(416) 665-8844
--------------
(Registrant's telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
The number of shares outstanding of the registrant's Common Stock, No
Par Value, on May 11, 2000 was 6,434,530 shares.
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D.G. JEWELRY INC.
MARCH 31, 2000 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Page Number
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Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999..........................1
Consolidated Statements of Income
for the quarters ended March 31, 2000 and 1999............................................ 2
Consolidated Statements of Cash Flows
for the quarters ended March 31, 2000 and 1999.............................................3
Consolidated Statements of Stockholders' Equity
for the quarters ended March 31, 2000 and 1999.............................................4
Notes to Consolidated Financial Statements......................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................13
Item 2. Changes in Securities and Use of Proceeds......................................................13
Item 3. Defaults Upon Senior Securities................................................................14
Item 4. Submission of Matters to a Vote of Security Holders............................................14
Item 5. Other Information..............................................................................14
Item 6. Exhibits and Reports on Form 8-K...............................................................14
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements, which are other statements of historical facts. These
statements are subject to uncertainties and risks including, but not limited to,
product and service demand and acceptance, changes in technology, economic
conditions, the impact of competition and pricing, government regulation, and
other risks defined in this document and in statements filed from time to time
with the Securities and Exchange Commission. All such forward-looking statements
are expressly qualified by these cautionary statements and any other cautionary
statements that may accompany the forward-looking statements. In addition, D.G.
Jewelry Inc. (the "Company") disclaims any obligations to update any
forward-looking statements to reflect events of circumstances after the date
hereof.
ii
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
D.G.Jewelry Inc.
Interim Consolidated Balance Sheets As of March 31, 2000 and December 31, 1999
(Amounts expressed in US dollars) (Unaudited)
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<CAPTION>
March 31, December 31,
2000 1999
$ $
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash 92,565 1,359,104
Accounts receivable 24,355,221 24,129,922
Inventory 23,678,880 23,310,675
Cash surrender of life insurance (Note 2) 58,240 57,232
Prepaid expenses and sundry assets 38,069 102,673
-----------------------------------------
48,222,975 48,959,606
PROPERTY, PLANT AND EQUIPMENT 1,208,726 1,128,875
INVESTMENT (DEFFICIENCY) IN 50% OWNED INVESTEE COMPANY (115,726) 141
GOODWILL 1,102,500 1,110,000
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50,418,475 51,198,622
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LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (Note 3) 20,114,915 19,280,551
Accounts payable and accrued expenses 3,275,555 5,892,801
Income taxes payable 3,399,876 3,195,246
Current portion of loans payable 506,452 541,849
-----------------------------------------
27,296,798 28,910,447
LOANS PAYABLE 2,200,069 2,201,770
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29,496,867 31,112,217
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 4) 10,940,329 10,940,329
ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS) (Note 5) 682,635 613,896
RETAINED EARNINGS 9,298,644 8,532,180
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20,921,608 20,086,405
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50,418,475 51,198,622
-----------------------------------------
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D.G.Jewelry Inc.
Interim Consolidated Statements of Income For the three months ended March 31,
2000 and 1999 (Amounts expressed in US dollars) (Unaudited)
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For the period ended March 31,
three months
$ $
2000 1999
<S> <C> <C>
SALES 8,669,107 7,328,266
Cost of Sales 5,856,093 5,021,666
GROSS PROFIT 2,813,014 2,306,600
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EXPENSES
Selling 564,775 424,348
General and administrative 400,133 335,268
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964,908 759,616
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Operating income 1,848,106 1,546,984
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Interest expenses 373,770 324,223
Other expenses 116,908 92,891
Loss on investment in 50% owned investee company 115,864 -
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606,542 417,114
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Income before income taxes and unusual item 1,241,564 1,129,870
Unusual Item (Note 6) - 667,426
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Income Before Income Taxes 1,241,564 462,444
Provision for income taxes 475,099 103,866
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Net income 766,465 358,578
Earnings per common share (Note 8) 0.12 0.07
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Earnings per common share assuming dilution (Note 8) 0.12 0.05
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Average weighted number of shares
Basic 6,624,655 5,668,500
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Diluted 6,630,186 7,430,000
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</TABLE>
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D.G.Jewelry Inc.
Interim Consolidated Statements of Cash Flows for the three months ended March
31, 2000 and March 31, 1999 (Amounts expressed in US dollars) (Unaudited)
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March 31, March 31,
2000 1999
$ $
<S> <C> <C>
Cash flow from operating activities: 766,465 358,578
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Net income
Adjustments to reconcile net income to net cash used in operating activities:
Amortization 105,775 170,887
Decrease (increase) in accounts receivable (326,852) (1,417,607)
Decrease (increase) in inventory (466,311) 3,995,682
Decrease (increase) in cash surrender value of life insurance (1,249) (280)
Decrease (increase) in prepaid expenses and sundry assets 64,172 (213,310)
Increase (decrease) in accounts payable and accrued expenses (2,592,447) (3,439,565)
Increase (decrease) in income taxes 394,281 (64,737)
Unusual item (Note 6) - 667,426
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Total adjustments (2,822,631) (301,504)
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Net cash used in operating activities (2,056,166) 57,074
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Cash flows from investing activities:
Purchases of property, plant and equipment (178,126) (749,380)
Investment in 50% owned investee company 118,263 -
- -
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Net cash used in investing activities (59,863) (749,380)
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Cash flows from financing activities:
Proceeds from/(repayment of) bank indebtedness 915,508 (18,742)
Proceeds from/(repayment of) loans payable (25,552) (518,347)
Issuance of capital stock - 374,439
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Net cash provided by financing activities 889,956 (162,650)
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Effect of foreign currency exchange rate changes (40,466) 549,174
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Net increase (decrease) in cash and cash equivalents (1,266,539) (305,782)
Cash and cash equivalents
Beginning of period 1,359,104 305,782
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End of period 92,565 -
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Interest paid 376,206 387,313
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Income taxes paid 270,470 -
-------------------------------------
</TABLE>
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D.G.Jewelry Inc.
Interim Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999 and 1998 (Amounts
expressed in US dollars) (Unaudited)
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Common Issued and
Stock Outstanding Cumulative
Number of Common Retained Translation
Shares Warrants Amount Earnings Adjustments
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<S> <C> <C> <C> <C> <C>
$ $ $
Balance as of December 31, 1997 5,165,000 1,265,000 6,700,827 4,253,260 (359,434)
Common Stock Issued 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
Common stock issued 1,240,780 4,235,343
Foreign Currency Translation - 558,395
Net income for the year 1,000,228
--------- --------- ---------- --------- -------
Balance as at December 31, 1999 6,408,780 1,265,000 10,940,329 8,532,180 613,896
========= ========= ========== ========= =======
</TABLE>
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Consolidated Financial Statements Presentation
These Interim Consolidated Financial Statements have been prepared in
accordance with Form 10-QSB specifications and, therefore, do not include all
information and footnotes normally shown in full annual Financial Statements.
These financial statements consolidate, using the purchase method, the accounts
of the company and its two wholly-owned subsidiaries, Diamonair, Inc. and Aviv,
Inc. All material intercompany accounts have been eliminated. The investment in
NETJEWELS.COM is accounted for based on the equity method.
b) Principal Activities
The company was incorporated in Canada on October 18, 1979. The company
is principally engaged in the production and trading of jewelry in Canada and
the United States of America.
c) Cash and Bank Indebtedness
Cash and bank indebtedness includes cash in bank, amounts due to banks,
and any other highly liquid investments purchased with a maturity of three
months or less. The carrying amount approximates fair value because of the short
maturity of those instruments.
d) Other Financial Instruments
The carrying amount of the company's accounts receivable approximates
fair value because of the short maturity of these instruments.
e) Long-term Financial Instruments
The fair value of each of the company's long-term financial assets and
debt instruments is based on the amount of future cash flows associated with
each instrument discounted using an estimate of what the company's current
borrowing rate for similar instruments of comparable maturity would be.
f) Inventory
Raw materials and work-in-process are valued at the lower of cost
(first-in, first-out basis) or market.
Finished goods are valued at the lower of cost or market. Cost is
calculated using selling price less normal gross margin.
g) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are mainly
depreciated on the declining balance basis over their estimated useful lives.
Leasehold improvements are amortized on the straight-line basis over
the terms of the lease.
h) Goodwill
Goodwill is the excess of cost over the value of tangible assets
acquired on the acquisition of subsidiary companies. It is being amortized on
the straight-line basis over 40 years.
The valuation and amortization of goodwill is evaluated on an ongoing
basis and, if considered permanently impaired, goodwill is written down. The
determination as to whether there has been an impairment in value is made by
comparing the carrying value of the goodwill to the projected undiscounted net
revenue stream to be generated by the related activity.
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i) Sales
Sales represent the invoiced value of goods supplied to customers.
Sales are recognized upon delivery of goods and passage of title to customers.
j) Foreign Currency Translation
The translation of the Interim Financial Statements from Canadian
dollars ("CDN$") INTO United States dollars is performed for the convenience of
the reader. Balance Sheet accounts are translated using closing exchange rates
in effect at the Balance Sheet date and income and expense accounts are
translated using an average exchange rate prevailing during each reporting
period. No representation is made that the Canadian dollar amounts could have
been, or could be, converted into United States dollars at the rates on the
respective dates and or at any other certain rates. Adjustments resulting from
the translation are included in the cumulative translation adjustments in
stockholders' equity.
k) Use of Estimates
The preparation of Interim Financial Statements requires management to
make estimates and assumptions that affect certain reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the Interim Financial Statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
l) Long-Lived Assets
On January 1, 1996, the company adopted the provosions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of SFAS No. 21 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. Management used its best estimate of the undiscounted cash flows to
evaluate the carrying amount and have determined that no impairment has
occurred.
m) Stock Based Compensation
In December 1995, FAS No. 123, Accounting for Stock-based Compensation,
was issued. It introduced the use of a fair value-based method of accounting for
stock-based compensation. It encourages, but does not require, companies to
recognize compensation to employees based on the new fair value accounting
rules. The company chose to continue to account for stock-based compensation
using the using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the company's stock at the
measurement date over the amount an employee must pay to acquire the stock.
n) Concentrations of Credit Risks
The company's receivables are unsecured and are generally due in 90
days. Currently, the company's customers are primarly local, national and
international users of jewelry products. The company's receivables do not
represent significant concentrations of credit risk as at March 31, 2000, due to
the wide variety of customers, markets and geographic areas to which the
company's products are sold.
6
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o) 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
period by the weighted average number of common stock outstanding during the
period.
Fully diluted net income per common stock is computed by dividing net
income for the period by the weighted average number of common stock outstanding
during the period, assuming that all stock options were exercised. Stock
warrants have not been included in the fully diluted net income per common stock
calculations as their inclusion would have been anti-dilutive.
2. CASH SURRENDER VALUE OF LIFE INSURANCE
The cash surrender value of life insurance represents the value of life
insurance policies of former directors of Aviv, Inc.
3. BANK INDEBTEDNESS
The bank indebtedness bears interest at the bank's prime lending rate
plus 3/4% per annum. As security, the company has provided a general assignment
of accounts receivable, a general security agreement constituting a first charge
over all present and future personal property of the company and an assignment
of key man life insurance of a director payable to the bank. The facility
contains covenants specifying minimum and maximum financial ratios. The
agreement contains restrictions on changes in ownership and line of business, on
further encumbrances of assets and on the guarantees and other contingent
liabilities.
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4. CAPITAL STOCK
a) Authorized
An unlimited number of common stock Issued
March 31, December 31,
2000 1999
6,624,655 Common Stock (6,408,780 $10,827,104 $10,827,104
for December 31, 1999)
1,265,000 Warrants 113,225 113,225
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10,940,329 10,940,329
Proceeds of $557,387.50 receivable from the issuance of 215,875 common
shares on exercise of stock options in January, 2000 less subscrption receivable
of $557,387.50 resulted in no increase in the dollar amount of capital stock.
b) Stock Option Plan
1996 Plan - 500,000 authorized (all issued)
1998 Plan - 500,000 authorized (all issued; 4,250 forfeited)
1999 Plan - 500,000 authorized (44,500 issued)
5. 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:
March 31, December 31,
2000 1999
Net Income $766,465 $1,000,228
Other comprehensive income (loss):
Foreign currency translation adjustments 68,739 558,395
-------- ----------
835,204 1,558,623
======== ==========
Accumulated other comprehensive loss, December 31, 1997 (359,434)
Foreign currency translation adjustments for the year ended
December 31, 1998 414,935
----------
Accumulated other comprehensive loss, December 31, 1998 55,501
Foreign currency translation adjustments for the year ended
December 31, 1999 558,395
----------
Accumulated other comprehensive loss, December 31, 1999 613,896
Foreign currency translation adjustments for the three months ended
March 31, 2000 68,739
----------
Accumulated other comprehensive income, March 31, 2000 682,635
==========
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6. UNUSUAL ITEM
The entire amount represents the net book value of waxes, models and
moulds that management decided to write-off.
7. NET INCOME PER COMMON SHARE
Net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding.
Fully diluted income per share is computed by dividing net income by
the weighted average number of shares calculated using the "treasury stock"
method.
8. CHANGE OF NAME
The Company changed the name from "D.G. Jewellery of Canada Ltd." to
"D.G. Jewelry Inc." effective July 29, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and related notes included elsewhere
in this Form 10-Q.
The Company's future success as a manufacturer and distributor of
value-priced, stone-set jewelry will be influenced by several factors including
technological developments in the mass production of jewelry, the Company's
ability to efficiently meet the design and production requirements of its
customers, and the market acceptance of its jewelry. Further factors impacting
the Company's operations are increases in expenses associated with continued
sales growth, the Company's 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 the Company's success, since
customers demand compliance with design and product specifications and
consistency of production.
The Company's utilization of our high-volume manufacturing techniques
sometimes results in excess inventories. In the past, the Company either sold
these excess inventories in lots at prices which usually resulted in losses of
the Company's investment in labor and overhead and without recovering the
Company's full cost of stones, or the Company internally recycled the metal and
most stones by disassembling the product, re-melting the gold or silver and
removing the stones. This recycling resulted in additional incurred labor and
overhead costs. Once Diamante established its factory outlet stores, it provided
the Company with an opportunity to sell its excess inventories on more favorable
terms. By selling to Diamante, the Company avoids the costs and losses that it
had incurred in the past and the Company is afforded a more advantageous method
of dealing with its excess inventories. The Company is the primary supplier of
products to Diamante and the Company accounts receivable from Diamante is fully
secured by all the assets of Diamante, which security interest has been pledged
by the Company to The Bank of Nova Scotia for the Company's financing
facilities. In addition, the Company performs certain administrative functions
for Diamante.
Generally, the Company does not provide products pursuant to long-term
contracts. The Company has an exclusive jewelry supply contract with Zellers,
Inc. of Canada that, pursuant to its terms, is to terminate in December 2004.
On November 21, 1997, the Company acquired substantially all of the
assets of the wholesale jewelry division of Litton Systems, Inc., which division
had operated under the trade name Diamonair, for approximately $5.8 million. The
acquisition was accounted for using the purchase accounting method. In
accordance with the purchase accounting method, Diamonair's results have been
included in the Company's consolidated financial statements since the
acquisition date.
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On February 10, 1998, the Company completed its acquisition of
substantially all of the assets of Aviv, Inc., by assuming approximately $4.3
million in debt. The effective date of the acquisition was June 1, 1997.
The Company continuously reviews its administrative costs to determine
if there are areas where expenses could be reduced through further integration
and consolidation of the acquisitions. Although the Company expects to achieve
some level of consolidation, these potential cost reductions are limited in many
areas because (i) operating in the United States and Canada limits the
advantages of consolidating certain accounting and human resources functions and
(ii) management believes that maintaining the existing Aviv and Diamonair sales
offices and manufacturing facilities will be beneficial for maintenance of those
divisions' existing customer relationships and will increase the Company's
opportunities in the United States.
Fluctuations in the Canadian dollar against other currencies,
especially the U.S. dollar, may have a material effect on the Company's results
of operations. A substantial portion of the Company's sales and purchases are
set in U.S. dollars or are influenced by local currency against the U.S. dollar.
To date, the Company has not sought to hedge the risks associated with
fluctuations in exchange rates and currently does not have a policy relating to
hedging.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenues. Revenues for the three months ended March 31, 2000 increased
by $1.4 million, or approximately 18%, to $8.7 million, as compared to $7.3
million for the three months ended March 31, 1999. The increase was mainly a
result of increased sales to the Company's Internet and television customer
base.
Gross Profit. Gross profit for the three months ended March 31, 2000
increased by $506,000, or approximately 21%, to $2.8 million, as compared to
$2.29 million for the three months ended March 31, 1999. The increase was mainly
a result of increased sales.
Selling Expenses. Selling expenses for the three months ended March 31,
2000 increased by $104,000, or approximately 33%, to $564,000, as compared to
$424,000 for the three months ended March 31, 1999. The increase was mainly a
result of an increase in the number of sales and marketing employees.
Administrative Expenses. Administrative expenses for the three months
ended March 31, 2000 increased by $76,000, or approximately 19%, to $400,000, as
compared to $324,000 for the three months ended March 31, 1999. The increase was
mainly a result of an increase in the number of administrative employees and an
increase in computer related expenses.
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Liquidity and Capital Resources
In April 1997, the Company completed an initial public offering in
which it sold 1,265,000 shares of common stock and 1,265,000 warrants to
purchase common stock. The Company realized net proceeds of $6.7 million from
this offering. The Company may realize additional proceeds from the exercise of
the warrants, although there can be no assurance that such warrants will be
exercised.
The Company currently has an operating line of credit with The Bank of
Nova Scotia in the amount of $20.8 million subject to certain margin
requirements. The amount available to the Company 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 $10.0 million. The Company utilized the credit line to borrow the
$5.8 million and $4.3 million necessary for the acquisitions of Diamonair and
Aviv, respectively.
The Company's borrowings under the line of credit bear interest at
Canadian prime plus 3/4% which at March 31, 2000 amounted to 7.75%. Interest on
any borrowings is payable monthly. The Company is in full compliance with all of
the banking covenants (including the financial covenants and ratios) and is
required to report to its bankers on a monthly basis.
The Company's obligations under the revolving credit facility are
secured by a security interest on all of the Company's assets, guaranteed by
Diamante, a jewelry retail chain owned by one of the Company's Vice Presidents
and are further secured by a mortgage on the property owned by a limited
partnership controlled by Jack Berkovits and leased to the Company, which
mortgage the Company has guaranteed.
At March 31, 2000, the Company had loans outstanding to its principal
shareholder, Jack Berkovits, of $ 1,880,453 million which bear interest at 11.6%
per annum.
In May 1999, the Company 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. The Company 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.
The Company is required to issue additional shares of our 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 the Company, 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 the
Company's common stock during the applicable reset period (as defined below);
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(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 the Company's common stock during the
applicable reset period) / (the average of the lowest twelve bid prices of the
Company's common stock during the applicable reset period); and (iii) there will
be two reset periods, each reset period consisting of thirty trading days. The
Company has not issued any additional shares required to be issued pursuant to
the agreement. See "Part II - Item 1 - Legal Proceedings."
Pursuant to the terms of the Common Stock Purchase Agreement, the
Company has the option to sell, and Haymarket, LLC has agreed to buy, up to a
maximum of $2,000,0000 worth of the Company's common stock. The number of shares
acquired by Haymarket, LLC will be calculated according to the following
formula: (the dollar amount of the shares the Company has 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 the Company's 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. The Company is required to
exercise its option to sell the additional shares within 20 days after the
earlier of (a) or (b). The Company did not exercise the option.
The net cash used in operating activities for the three months ended
March 31, 2000 increased by approximately $2.1 million, or approximately 3,600%,
to $ 2,056,166, as compared to cash used in operating activities of $57,074 for
the three months ended March 31, 1999. The increase was mainly a result of an
increase in the acquisition of additional inventory.
The cash flow from investing activities for the three months ended
March 31, 2000 increased by approximately $700,000, or approximately 1,252%, to
$ 59,863, as compared to $ 749,380 for the three months ended March 31, 1999.
The increase was mainly a result of a decrease in the purchases of property and
equipment.
The cash flow from bank financing activities for the three months ended
March 31, 2000 increased by approximately $900,000, or approximately 4,885%, to
$ 915,598, as compared to a repayment of $ 18,742 for the three months ended
March 31, 1999. This increase was a result a decrease in the dollar amount of
loans repaid.
The Company did not receive any proceeds from the issuance of capital
stock during the three months ended March 31, 2000. During the three months
ended March 31, 1999, the Company received approximately $375,000 in proceeds
from the issuance of capital stock.
The Company anticipates that cash flow from operations, as well as
borrowings available under the Company's existing credit line will be sufficient
to satisfy the Company's credit needs for the next twelve months. In addition,
the Company may sell equity securities to raise additional capital as needed.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1999, Engex, Inc. commenced a suit in the United States
District Court, Southern District of New York alleging breach of contract and
fraud. The complaint seeks damages, which the plaintiff alleges to be in excess
of $2,000,000. The Company disputes the claims and the parties are proceeding
with discovery.
In January 2000, Haymarket LLC commenced an action in the Supreme Court
of the State of New York, County of New York and seeking undetermined damages.
The complaint alleges that the Company breached the terms of a Purchase
Agreement entered into by the parties. The Company disputes the claims and is
proceeding with discovery.
On August 13, 1997, L. Luria & Son, Inc., a customer of the Company,
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. The
Company believes the allegations are without merit and intends to vigorously
defend its position. The outcome of the litigation can not be presently
determined. The Company was never properly served with the summons and complaint
in this bankruptcy litigation and plaintiff's counsel failed to provide the
Company with any proof that the Court has continued to extend the time in which
service on the Company was to have been made.
Other than the above, the Company is not involved in any material legal
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 1999, the Company 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. The Company 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, which resulted in
net proceeds of approximately $3,745,000. The Company is utilizing these net
proceeds for working capital purposes.
The Company issued three promissory notes in the aggregate principal
amount of $325,864.01 as part of the consideration for the Company's February
1998 acquisition of Aviv. On March 17, 1999 the Company entered into a
settlement agreement with the former shareholders of Aviv, pursuant to which the
Company issued 45,145 shares of common stock to the former shareholders of Aviv
in satisfaction of the three promissory notes of the promissory notes.
13
<PAGE>
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three month
period ended March 31, 2000.
(c) Exhibits.
27 Financial Data Schedule
14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
D.G. JEWELRY INC.
Dated: May 15, 2000 By: /s/ GARY DAVIS
--------------------------------
Gary Davis
Principal Accounting Officer
15
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 92,565
<SECURITIES> 0
<RECEIVABLES> 24,727,886
<ALLOWANCES> 372,665
<INVENTORY> 23,678,880
<CURRENT-ASSETS> 48,222,975
<PP&E> 1,208,726
<DEPRECIATION> 105,775
<TOTAL-ASSETS> 50,418,475
<CURRENT-LIABILITIES> 27,296,798
<BONDS> 0
0
0
<COMMON> 10,940,329
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 50,418,475
<SALES> 8,669,107
<TOTAL-REVENUES> 8,669,107
<CGS> 5,856,093
<TOTAL-COSTS> 5,856,093
<OTHER-EXPENSES> 964,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 373,770
<INCOME-PRETAX> 1,241,564
<INCOME-TAX> 475,099
<INCOME-CONTINUING> 766,465
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 766,465
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
