SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to .
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Commission File No. 0-25108
IWI HOLDING LIMITED
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(Exact Name of Registrant as Specified in Its Charter)
British Virgin Islands
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(Jurisdiction of Incorporation or Organization)
P.O. Box 3340, Dawson Building, Road Town, Tortola, British Virgin Islands
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Address of Principal Executive Offices
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
----------------
(Title of Class)
As of June 2, 1997, the Registrant had outstanding 2,554,700 shares of
Common Stock and 3,644,880 shares of Preferred Stock.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
twelve (12) months (or for such shorter period that the registrant was required
to file such reports); and (2) has been subject to such filing requirements for
the past ninety (90) days. Yes X No
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Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 Item 18
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<PAGE>
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. DESCRIPTION OF BUSINESS.............................. 3
ITEM 2. DESCRIPTION OF PROPERTY.............................. 5
ITEM 3. LEGAL PROCEEDINGS.................................... 6
ITEM 4. CONTROL OF REGISTRANT................................ 6
ITEM 5. NATURE OF TRADING MARKET............................. 7
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS
AFFECTING SECURITY HOLDERS........................... 7
ITEM 7. TAXATION............................................. 8
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA................. 8
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 9
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT................. 14
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS............... 16
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT
OR SUBSIDIARIES...................................... 17
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS....... 17
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED........... 18
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES...................... 18
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY
FOR REGISTERED SECURITIES............................ 18
PART IV
ITEM 17. FINANCIAL STATEMENTS................................. 18
ITEM 18. FINANCIAL STATEMENTS................................. 18
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.................... 18
SIGNATURES........................................... 21
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth in this
report.
General
The Company, through its wholly-owned subsidiaries, Imperial World, Inc.
("Imperial") and DACO Manufacturing Ltd. ("DACO"), is engaged in the design,
assembly, merchandising and wholesale distribution of jewelry. The Company
provides a broad range of fashionable jewelry targeted at consumers who seek
fine jewelry at moderate prices and costume jewelry for every day wear. These
customers are likely to purchase jewelry at frequent intervals as fashions and
styles change. The majority of the Company's U.S. sales are under the trade name
of "World Pacific Jewelry" through Imperial, while DACO sells principally in
Canada under its own name or through the manufacturing and distribution of
licensed products. Customers of the Company are principally large retail
establishments with jewelry departments and mass media marketers. Despite the
recent downturn in its U.S. sales, the Company believes that it is competitively
positioned in the jewelry industry.
Products and Pricing
The Company's principal products are rings, pendants, earrings, bracelets,
necklaces, pins and brooches made of diamonds, other precious or semi-precious
stones, pearls, silver and gold in addition to the more moderately priced gold,
silver and costume jewelry. The Company's products are currently sold in over
7,000 retail outlets. For the majority of products, the average wholesale price
is approximately $60 with the prices ranging from approximately $35 to $450.
DACO's products start as low as $3 with an average wholesale price of
approximately $11.
Purchasing
The Company imports most of its jewelry from the People's Republic of China
("PRC"), Hong Kong and Thailand. Cultured pearls are imported from Japan, the
PRC and Hong Kong and freshwater pearls are imported from the PRC. The imported
pearls are assembled by the Company into various pearl jewelry products. The
Company purchases jewelry from a number of suppliers based on quality, pricing
and available quantities. Rhine Jewellery, an affiliate of the Company, supplied
approximately $4.6 million of the Company's purchases, or approximately 20%, for
the fiscal year ended December 31, 1996. The Company believes it has good
relationships with its suppliers, most of whom have supplied the Company for
many years.
Although purchases of material are made from a relatively small number of
suppliers, the Company believes there are numerous alternative sources for all
materials, and that the failure of any principal supplier would not have a
material adverse effect on operations or the Company's financial condition. The
Company has not experienced any difficulty in securing product.
The Company engages in limited hedging activities with respect to possible
fluctuations in the price of precious, semi-precious gemstones or metals. The
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Company believes the risk of not engaging in such activities is minimal, since
historically the Company has been able to adjust prices as material fluctuations
have occurred. The Company believes that a downward trend in the prices of
stones or metals would have little, if any, impact on the valuation of the
Company's inventories.
Manufacturing and Assembly
DACO manufactures most of their costume jewelry and some of their precious
jewelry in a modern 40,000 square foot capacity outside of Toronto, Ontario,
Canada. DACO makes its own castings and has a state of the art plating facility.
The Company manufactures fashion jewelry with the Sarah Coventry name under
exclusive licenses for the Canadian and U.S. market.
Since Imperial imports most of its jewelry in an assembled state from
suppliers in the PRC, Hong Kong, Thailand and Japan, manufacturing and assembly
operations conducted by the Company are primarily limited to designing jewelry
and assembly of pearl products. Upon completing a design, the Company will
provide such design to its suppliers, including Rhine Jewellery, which will
purchase the raw materials, such as diamonds, other precious stones, gold and
silver, and manufacture the product or subcontract for its manufacture. Although
the Company receives priority in the processing and shipping of its orders, it
does not receive any price concessions from Rhine Jewellery, but rather
purchases on the same basis as other third party purchasers. The use of third
party manufacturers enables the Company to shift the risk and capital cost of
manufacturing.
Imperial maintains a light manufacturing and assembly operation in the
United States for the stringing of pearls. This enables the Company to assemble
pearls specifically to customer order and to provide shipment within two days of
the order date.
Marketing
The primary marketing efforts are product design and customer support
services. The productpresentatives on a commission basis. While such
representatives may also sell other products, they do not sell products which
compete with those of the Company. The Company supports the independent
representatives with internal account executives who have selling and account
management responsibilities.
The Company has an agreement with its affiliates to market in non-competing
geographic areas.
Customers
The Company's customers consist of jewelry retail stores, mass
merchandisers, such as Wal- Mart Stores, Inc., department stores, such as J.C.
Penney Company, Inc., catalog showrooms and various specialty markets including
The Home Shopping Network, Inc. J.C. Penney Company, Inc. accounted for
approximately 19% of net sales in 1996. The Company has no long-term contracts
with any customers, however, each of its large volume purchasers have been
customers for at least five years. The following table sets forth the
approximate percentage of net sales for the major market segments for the
periods indicated.
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Year Ended December 31,
1994 1995 1996
----- ----- -----
Jewelry retail stores........ 17.7% 12.3% 15.9%
Specialty markets............ 25.6 37.0 20.2
Mass merchandisers........... 24.2 14.4 22.6
Department stores............ 26.4 25.3 35.2
Catalog showrooms............ 6.1 11.0 6.1
------ ------ ------
Total.................. 100.0% 100.0% 100.0%
====== ====== ======
Competition
The jewelry industry in the United States is highly fragmented, with little
significant brand name recognition or consumer loyalty. Selection is generally a
function of design appeal, perceived high value and quality in relation to
price.
Jewelry stores alone account for an estimated $15 billion in annual sales
in the United States. Retail jewelry sales have historically increased at a rate
in excess of the inflation rate. This increase is principally attributable to
the growth in the number of dual working households which in turn has increased
the amount of disposable income for women, the largest group of jewelry
purchasers. The rise in number of women in the workforce has increased the
demand for women's business attire, including jewelry.
While many competitors may have a wider selection of products or greater
financial resources, the Company believes its competitive position is enhanced
by its information system and its close relationship with its customers and
vendors. Therefore, although the competition is intense, the Company believes it
is well positioned in the jewelry industry.
Employees
As of June 2, 1997, the Company had 151 employees, including 6 executive
officers, 17 persons in sales and merchandising, 100 persons in operations, and
28 persons in administrative and support functions. None of the employees is
governed by a collective bargaining agreement and the Company considers its
relations with its employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains is registered offices in the BVI; Imperial leases
approximately 25,000 square feet of space for operations and pearl assembly in
Westmont, Illinois; and DACO leases approximately 40,000 square feet for
manufacturing and distribution near Toronto, Ontario, Canada. Under the 10 year
lease which commenced in November, 1993, future minimum annual lease payments
with respect to the Company's Westmont, Illinois facilities range from
approximately $225,000 to $300,000. At the expiration of the lease, the Company
has the option to renew for an additional five years. The facility, which
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provides state of the art security, has, in the opinion of management, capacity
to more then double the current sales volume. It was designed to maximize the
efficiency of the Company's current operations and to provide for the Company's
anticipated growth.
The DACO facilities are leased through July, 2002 with an option to renew
for an additional five years. Future minimum annual rentals under the lease
range from $113,000 to $133,000. Management believes such facilities are
adequate to meet the needs of DACO for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is a codefendant in a lawsuit brought by a shareholder who
alleges the Company misrepresented its financial position in interim financial
statements. The shareholder has filed for class actions status and is seeking
damages of $11 million. The Company believes the allegation is without merit and
intends to vigorously defend the claim.
ITEM 4. CONTROL OF REGISTRANT
The following table is furnished as of June 2, 1997, to indicate beneficial
ownership of shares of the Company's Common Stock and Preferred Stock by (1)
each shareholder of the Company who is known by the Company to be a beneficial
owner of more than 10% of the Company's Common Stock or Preferred Stock and (2)
all officers and directors of the Company as a group. The information in the
following table was provided by such persons.
Amount and Percent
Nature of of
Name and Addresses of Beneficial Title Percent Voting
Beneficial Owner Ownership (1) of Class of Class Power
- --------------------- ------------- -------- -------- -------
David Chui(2) 523,700(3) Common 20.5% 12.0%
Lillian Chui(2) 523,700(3) Common 20.5% 12.0%
Sherman Chui 523,700(3) Common 20.5% 12.0%
Rhine Investment Holdings
Company Limited(2) 918,750(3) Common 36.0% 21.0%
Rhine Jewellery Limited(2) 3,644,880(3) Preferred 100.0% 41.6%
White Angel Holdings Ltd.(2) 523,700(3) Common 20.5% 12.0%
All executive officers and
directors as a group 590,700 Common 23.1% 13.5%
(8 persons) 2,077,582 Preferred 57.0% 23.7%
- ------------------------
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock and Preferred Stock shown as
beneficially owned by them, subject to community property laws, where
applicable, and the information contained in the footnotes to the table.
(2) Address is 2nd Floor, One Harbourfront, 18 Tak Fung Street, Hunghom, Hong
Kong.
(3) All shares of Common Stock and Preferred Stock indicated are held of record
by Rhine Investment Holdings Company Limited and Rhine Jewellery Limited,
respectively. Rhine Jewellery Limited is a wholly owned subsidiary of Rhine
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Investment Holdings Company Limited. Rhine Investment Holdings Company
Limited is wholly owned by Rhine Holdings Limited which is owned in part by
a series of trusts, including a trust for the benefit of David Chui,
Lillian Chui and Sherman Chui which owns approximately 57% of the
outstanding securities of Rhine Holdings Limited. White Angel Holdings Ltd.
Has the power to vote and dispose of the shares held by these trusts. David
Chui, Lillian Chui and Sherman Chui may be deemed to hold, but hereby
disclaim, beneficial ownership of all securities of the Company held by
Rhine Investment Holdings Company Limited and Rhine Jewellery Limited.
However, the table above reflects any possible beneficial ownership as well
as the holdings of White Angel Holdings Ltd. because the ownership of 57%
of the stock of Rhine Holdings gives the Chui family absolute control of
the Company.
ITEM 5. NATURE OF TRADING MARKET
There is no non-U.S. trading market for the Common Stock of the Company.
Within the United States, the Company's Common Stock is traded in the
over-the-counter market. The Company's Common Stock is quoted on the NASDAQ
Small Cap under the symbol "JEWLF".
The following table sets forth the high and low bid price per share for the
Company's Common Stock for each quarterly period since the completion of the
Company's IPO on December 16, 1994.
1996 1995
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High Low High Low
------ ------ ------ ------
First Quarter $3.250 $2.250 $10.25 $6.750
Second Quarter 2.625 1.000 9.00 4.375
Third Quarter 1.625 .500 6.25 4.375
Fourth Quarter 1.875 .500 5.125 1.875
The quotations reflect inter-dealer prices without mark-up, mark-down or
commission and may not represent actual transactions.
At June 2, 1997, the bid price at the Common Stock was $.5625.
As of June 2, 1997, there were approximately 1,470 beneficial holders of
the Common Stock of the Company, nearly all of which are believed to be in the
United States.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY-HOLDERS
The Company is not subject to any governmental laws, decrees or regulations
in the BVI which restrict the export or import of capital, including any foreign
exchange controls, or which affect the remittance of dividends, interest or
other payments to non-resident holders of the Company's Common Stock.
Additionally, neither the laws of the BVI nor the Company's Charter impose
any limitations on the right of non-resident foreign owners to hold or vote the
Common Stock of the Company.
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ITEM 7. TAXATION
The BVI imposes no withholding taxes and holders of Common Stock who are
not resident in the BVI will not be subject to BVI tax on any dividends received
from the Company or on gains realized from a sale or other disposition of the
Common Stock. The United States does not have a tax treaty with the BVI.
ITEM. 8 SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except share data)
Year Ended December 31,
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1992 1993 1994 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net Sales............................... $33,402 $35,616 $41,902 $ 41,710 $ 30,840
Cost of sales........................... 25,001 27,643 32,725 34,024 25,809
------- ------- ------- --------- ---------
Gross profit............................ 8,401 7,973 9,177 7,686 5,031
Operating expenses...................... 6,378 5,120 5,831 8,798 10,221
------- ------- ------- --------- ---------
Income (loss) from operations........... 2,023 2,853 3,346 (1,112) (5,190)
Other income (expense) - net............ (796) (579) (267) (901) (1,053)
------- ------- ------- --------- ---------
Income (loss) before income taxes....... 1,227 2,274 3,079 (2,013) (6,243)
Income data (1992 - 1993 Pro Forma)(2):
Income taxes (benefit)................ 476 767 788 (629) (307)
------- ------- ------- --------- ---------
Net income (loss)..................... $ 751 $ 1,507 $ 2,291 $ (1,384) $ (5,936)
======= ======= ======= ========= =========
Net income (loss) per common share (1) $ .87 $ 1.65 $ 2.34 $ (.53) $ (2.25)
======= ======= ======= ========= =========
Cash distributions per common share (1) $ 3.95 $ - $ - $ - $ -
======= ======= ======= ========= =========
Weighted average number of common
shares outstanding (1)................. 863,778 911,400 980,394 2,625,873 2,635,830
======= ======= ======= ========= =========
</TABLE>
Year Ended December 31,
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1992 1993 1994 1995 1996
------- ------- -------- -------- --------
Balance Sheet Data:
Working capital....... $ 5,751 $ 7,341 $ 16,064 $ 16,682 $ 12,038
Total assets.......... 22,144 19,652 31,695 44,137 29,768
Long-term debt........ 4,345 3,645 0 556 204
Shareholders' equity.. 1,631 4,205 20,035 20,288 14,287
- ------------------------
(1) Per share amounts reflect retroactively for the periods indicated, the
March 21, 1994 reorganization involving an exchange of 1,225,000 newly
issued Common Shares for the previously issued share of $1U.S. Common and
the return and retirement of 306,250 of such shares on October 27, 1994.
(2) For the years prior to the year ended December 31, 1993, the Company's
subsidiary, Imperial World, was an S corporation as defined in Sec. 1361 of
the Internal Revenue Code of 1986, as amended, and accordingly, was not
subject to federal income taxes. The pro forma information has been
computed as if Imperial World were subject to corporate income taxes for
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all periods presented, based on tax laws in effect during the respective
periods. As a result of Imperial World changing to a C corporation, a
nonrecurring tax benefit was recognized on January 1, 1993. Such benefit
has been excluded from the 1993 Pro Forma Income Data shown above, since it
would not have resulted had Imperial World always been subject to corporate
income taxes.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, certain
information derived from the Consolidated Statements of Income of the Company.
All dollar and share amounts are set forth in thousands, except per share data.
<TABLE>
<CAPTION>
1994 1995 1996
--------------------------- --------------------------- ---------------------------
Percent Percent Percent Percent Percent Percent
Amount Sales Change Amount Sales Change Amount Sales Change
------- ------- ------- ------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $41,902 100.0 + 17.6 $41,710 100.0 - 0.5 $30,840 100.0 - 26.1
Gross Profit................. 9,177 21.9 + 15.1 7,686 18.4 - 16.2 5,031 16.3 - 34.5
Operating expenses........... 5,831 13.9 + 13.9 8,798 21.1 + 50.9 10,221 33.1 + 16.2
Income (loss) from
operations.................. 3,346 8.0 + 17.3 (1,112) (2.7) -133.2 (5,190) (16.8) -366.7
Income (loss) before income
taxes....................... 3,079 7.4 + 35.4 (2,013) (4.8) -165.4 (6,243) (20.2) - 10.1
Income taxes (benefit)....... 788 1.9 + 2.7 (629) (1.5) -179.8 (307) (1.0) - 51.2
Net income (loss)............ 2,291 5.5 + 52.0 (1,384) (3.3) -160.4 (5,936) (19.2) -328.9
Net income (loss) per
common share................ $ (2.34) $ (.53) $ (2.25)
Weighted average number of
shares outstanding.......... 980 2,626 2,636
</TABLE>
The Company's operating results during 1995 and 1996 were adversely
impacted by a weak jewelry market, particularly for semi-precious colored
stones, which resulted in sales that were much lower than anticipated.
At December 31, 1995, management determined that the Company's inventory
was in excess of its requirements measured by its existing and anticipated level
of sales. A reserve of $1.5 million was recorded for anticipated losses required
to reduce inventories to desired levels over the near term. This inventory
reduction plan was substantially completed as anticipated.
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Net sales during 1996 continued at a lower level than expected. An
aggressive inventory reduction plan was initiated to maintain liquidity and
reduce inventory to desired levels. Approximately $3 million of losses were
recorded during 1996 from the reduction of inventory under this plan, including
$1.6 million in reserves for the completion of the plan during 1997.
The Company incurred significant operating losses during 1995 and 1996,
principally from the reduction of inventories. The Company has reduced operating
expenses and continues to aggressively reduce inventory. Management is actively
seeking to obtain a commitment for continuation of its bank operating facilities
for at least another year, as well as considering raising capital through the
issuance of equity-related securities. Management expects that these efforts
will result in maintaining liquidity. However, no assurance can be given that
the Company will be successful in accomplishing these objectives or that the
Company will again achieve profitability. The Company's continuation as a going
concern is dependent upon attaining future profitable operations and upon its
ability to obtain adequate financing or capital.
The Company's sales are generated through the wholesaling of jewelry
products to the following distinct groups:
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
Jewelry retail stores... 19.6% 17.4% 17.7% 12.3% 15.9%
Specialty markets....... 31.7 40.1 25.6 37.0 20.2
Mass merchandisers...... 25.0 16.2 24.2 14.4 22.6
Department stores....... 16.7 19.1 26.4 25.3 35.2
Catalog showrooms....... 7.0 7.2 6.1 11.0 6.1
------ ------ ------ ------ ------
Total................... 100.0% 100.0% 100.0% 100.0% 100.0%
The Company raised approximately $11.5 million of net proceeds from its IPO
in December of 1994 and January, 1995. The proceeds were utilized primarily for
acquisitions and internal expansion. Certain assets of Ullenberg Corp. were
acquired in February of 1995 for approximately $300,000. Effective July 1, 1995,
the Company completed the acquisition of DACO for approximately $500,000 in cash
and note payable of $1,435,000. DACO manufactures and distributes moderately
priced gold, silver and costume jewelry in Canada.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales decreased by $10.9 million, or 26.1% to $30.8 million
in 1996, $1.8 million of the decline in net sales was attributable to DACO. The
return of in excess of $1 million of inventory by a Canadian customer facing
bankruptcy, contributed to the low volume. The decline in domestic sales of $9.1
million related primarily to a decrease in sales to specialty markets
(principally military and television).
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Gross Profit. Gross profit decreased by $2.7 million to $5 million in 1996.
The 1996 level reflects a lower sales volume and includes approximately $3
million of losses from an aggressive inventory reduction plan.
Loss from Operations. The loss from operations increased by $4.1 million to
a loss of $5.2 million in 1996. In addition to the decline in gross profit, 1996
includes a full year of DACO's operating expenses, or an increase of $1.4
million over the amount included in 1995 operations. The Company has reduced
operating expenses to more closely match the current operating level.
Net Loss. The net loss for 1996 was $5.9 million as compared to $1.4
million in 1995. The increase in the 1996 net loss was principally attributable
to the increased operating loss described above. In addition, the increase of
$0.1 million in interest expense is the result of including a full year of
DACO's interest expense in 1996. The 1996 income tax benefit resulting from the
carryback of net operating losses was $0.3 million less than the amount realized
in 1995. Earnings attributable to Haupia were approximately $0.2 million in both
1995 and 1996. In August, 1996, the Company exercised its put option to sell its
remaining interest in Haupia to Rhine Holdings.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Sales. Net sales decreased by $0.2 million, or 0.5% from 1994 record
levels to $41.7 million in 1995. The decline in sales to domestic customers
amounted to $10.9 million, including a decrease in sales to mass merchandisers
of $6 million, jewelry retail stores of $2.2 million and department stores of
$1.9 million. This decline was almost entirely offset by the$10.7 million in
sales to the Canadian market during the last six months of 1995, through the
newly acquired DACO.
Gross Profit. Gross profit decreased by $1.5 million in 1995 to $7.7
million. The decrease is principally tome (loss) from Operations. Income from
operations decreased by $4.5 million to a loss of $1.1 million in 1995, or by
133.2% from 1994. In addition to the decline in gross profit, the balance of
this decrease is almost entirely attributable to the $3.0 million increase in
operating expenses of $1.8 million. Additional operating personnel were added at
a cost of $0.7 million for anticipated volume that did not materialize. These
positions were subsequently eliminated. Also contributing to the increase in
operating expenses was a $0.4 million increase in professional fees relating to
the increased acquisition activity and the Company's requirements as a public
company.
Net Loss. The Company reported a net loss of $1.4 million during 1995 as
compared to net income of $2.3 million in 1994. The adverse change was
attributable to higher interest expense in 1995 of $1.1 million compared to $0.7
million in 1994 and reduced equity in the income of Haupia totaling $0.2 million
in 1995 compared to $0.4 million in 1994 combined with a sharp reduction in
operating income as described above. The increase in interest expense of $0.4
million during 1995 resulted from higher borrowings under the Company's line of
credit to support higher inventory levels. $0.2 million of the increase in
interest expense was attributable to DACO. The reduction in earnings
attributable to Haupia resulted from lower operating results in its PRC retail
jewelry stores in 1995. The stores were opened just prior to the peak season in
1994. As noted elsewhere, the Company has exercised its option to put 50% of its
interest in Haupia to Rhine Holdings. Accordingly, future results are not
expected to be materially affected by Haupia's operations.
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Analysis of Financial Position, Liquidity and Capital Resources
The Company's primary liquidity needs are to fund accounts receivable and
inventories. The Company has historically financed its working capital
requirements through a combin-term borrowings under bank lines of credit, loans
from affiliates and in 1994 and 1995, the proceeds from an IPO. The Company's
working capital at December 31, 1996 was $12.0 million as compared to $16.7
million at December 31, 1995.
The following table summarizes cash provided by (used in) the Company's
business activities for the past three years:
(Dollars in thousands) 1994 1995 1996
-------- -------- -------
Operating activities.......... $(2,841) $(6,713) $6,773
Investing activities.......... (1,199) (2,883) -
Financing activities.......... 4,247 9,357 (6,763)
Increase (decrease) in cash... 207 (239) 10
Operating Activities. The net cash generated in 1996 was principally due to
the decrease in accounts receivable of $8.1 million and inventories of $3.9
million, of which approximately $5.2 million funded the net loss for the year.
Investing Activities. Cash used in 1996 for capital expenditures of $0.2
million was generated from the sale of equipment at DACO.
Financing Activities. During 1996, the Company reduced amounts outstanding
under its lines of credit by $6.2 million to $8 million at December 31, 1996.
Notes payable from the 1995 acquisition of DACO were reduced by $0.5 million to
$0.9 million. In addition, the Company repurchased and retired 60,850 shares of
common stock at a cost of $65 thousand.
Imperial has an agreement with a bank, through various credit facilities,
whereby Imperial can borrow up to $10 million, payable on demand. The total
credit facility is governed by a formula, as defined in the agreement, based
principally on accounts receivable and inventory levels. The credit facilities
are collaterized by substantially all assets of Imperial and bore interest at
10.25% at December 31, 1996, 2% over the bank's reference rate. As of the date
of this Form 20-F the Company was not in compliance with certain reporting
covenants of the agreement.
Included in the Company's bank credit facility is a gold consignment
financing agreement, which is common in the jewelry industry. Pursuant to such
agreement, the Company may transfer ownership of gold content in its inventory
at fair market value to the bank. Simultaneously, the bank cosigns the gold back
to the Company. The Company is charged a consignment fee at an annual percentage
rate of 6% of the market value of the cosigned gold. The term of the consignment
is indefinite, as long as the Company has sufficient gold in its inventory to
cover the consignment or the total credit facility has not been terminated. Upon
12
<PAGE>
either event, the Company has the option to satisfy its obthe then-quoted market
price of the gold. Market price fluctuations between the borrowing and
repurchase dates are borne by the Company and may result in either a gain or
loss. Unless required to repurchase the gold upon termination of the
consignment, as described previously, the Company's policy is to not repurchase
the gold unless it is favorable to the company.
At December 31, 1996, total borrowings under Imperial's credit facilities
were $6.7 million, including 4,450 troy ounces of gold, having a fair market
value of $1,643,200 which were held on consignment by the Company.
DACO entered into a similar credit agreement to Imperial's with a Canadian
bank. DACO can borrow up to approximately $6.9 million in United States dollars
through similar credit facilities. The line of credit bears interest at 5.0% at
December 31, 1996 (0.25% over the bank's prime rate) and precious metals bear a
consignment fee of $3.35%. The agreement is secured by substantially all of
DACO's assets and is guaranteed by the Company. This agreement expired on April
30, 1997.
Management is actively seeking to obtain a commitment for continuation of
its bank operating facilities for at least another year, as well as considering
raising capital through the issuance of equity-related securities.
Seasonality
The jewelry business is highly seasonal, with the fourth calendar quarter,
which includes the Christmas shopping season, historically contributing the
highest sales of any quarter during the year. Net sales in the third and forth
quarter of 1995 include the results from DACO which was acquired effective July
1, 1995. Seasonality cannot be predicted or counted upon, and the results of any
interim period are not necessarily indicative of the results that might be
expected during a full fiscal year.
The following table sets forth the Company's unaudited net sales for the
periods indicated (dollar amounts are in thousands):
Year Ended December 31,
-----------------------------------------------------------
1994 1995 1996
----------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
First Quarter $10,221 24.4 $ 7,877 18.9 $ 8,415 27.3
Second Quarter 8,091 19.3 8,093 19.4 7,286 23.6
Third Quarter 10,270 24.5 12,686 30.4 4,085 13.3
Fourth Quarter 13,320 31.8 13,054 31.3 11,054 35.8
------- ----- ------- ----- ------- -----
Total $41,902 100.0 $41,710 100.0 $30,840 100.0
======= ===== ======= ===== ======= =====
Inflation
Inflation has historically not had a material effect on the Company's
operations. When the price of gold or precious stones has increased, these costs
historically have been passed on to the customer. Furthermore, because the
Company does not have either long-term supply contracts or long-term contracts
13
<PAGE>
with customers, prices are quoted based on the prevailing prices for semi-
precious gemstones or metals. Accordingly, the Company does not believe
inflation will have a material effect on its future operations.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
Directors and Executive Officers
The following table sets forth certain information as of the date hereof
with respect to the directors and executive officers of the Company.
Name Age Position
- ------------------- --- -----------------------------------------------------
David F. Chui 56 Chairman of the Board of Directors
Bruce W. Anderson 45 President, Chief Executive Officer and Director
Richard J. Mick 55 Vice President - Sales and Director
Joseph K. Lau 49 Senior Vice President, Chief Operating Officer,
Secretary and Director
Richard W. Sigman 57 Vice President - Finance, Chief Financial Officer and
Director
James B. McCarthy 46 Director
James W. Pierpont 53 Director
Jack Reiff 70 Director
Each director is serving a one-year term that expires after the next annual
meeting of the Company's shareholders, or until their successors are elected and
qualified. Executive officers of the Company are elected by, and serve at the
discretion of , the Board of Directors.
David F. Chui and Joseph K. Lau are brothers-in-law.
David F. Chui co-founded Imperial World in 1975 and has served as Chairman
of the Board of Directors since inception. Mr. Chui has over 30 years of
experience in the jewelry industry and is presently the Chairman and President
of Rhine Holdings. He was the associate chairman of the Hong Kong Jewellery
Manufacturers Association for 1992/1993 and was awarded with a National
Entrepreneur of the Year Award in 1990 by the Institute of American
Entrepreneurs.
Bruce W. Anderson joined the Company in July, 1996 as President, Chief
Executive Officer and Director. Prior to joining the Company, Mr. Anderson was
Vice President of marketing for Donald Bruce & Co., a wholesale jewelry
manufacturer in Chicago, Illinois.
Richard J. Mick joined the Company in February, 1996 as Vice President -
Sales and Director. For 6 years prior to joining the Company he was President of
a sales and marketing firm selling jewelry and related products. Prior thereto,
Mr. Mick was employed by J.C. Penney Company, Inc. for 26 years.
Joseph K. Lau joined the Company in November, 1982 and was elected Senior
Vice President, Chief Executive Officer, Secretary and Director in February,
1986. For the 11 years prior to joining the Company, he held a management
position in the restaurant industry and owned a trading company in Hong Kong.
14
<PAGE>
Richard W. Sigman joined the Company in March, 1994 as Vice President -
Finance, Chief Financial Officer and Director. For the 22 years prior to joining
the Company, Mr. Sigman served as the Chief Financial Officer and/or the Chief
Executive Officer of various privately held companies as well as a self-employed
Financial Consultant. Prior thereto, Mr. Sigman was employed by Arthur Andersen
& Co.
James. B. McCarthy has served as a Director of the Company since October,
1996. Mr. McCarthy is the President of Gemini Consulting Group, Inc. a health
care consulting company.
James W. Pierpont has served as a Director of the Company since May, 1995.
Mr. Pierpont is Managing Director and Group Vice President for ABN AMRO bank.
Jack Reiff has served as a Director of the Company since May, 1995. Mr.
Reiff served as Chief Executive Officer of William Schneider Incorporated from
1970 to 1991 and as Chairman until 1993 when he retired.
For the period of three (3) years after the date of the Company's IPO, the
Company has agreed to use its best efforts to cause one (1)individual selected
by Sands Brothers & Co., Ltd., the underwriter of its IPO, to be elected to the
Board, if requested by Sands Brothers, which individual shall be reasonably
acceptable to the Board. Such individual may be a director, officer, employee or
affiliate of Sands Brothers.
Key Managers
Stephen E. Klopp joined the Company in March, 1989 as the Product
Development Manager. Prior to joining the Company, Mr. Klopp had nine years of
experience in jewelry buying and merchandising.
Connie S. Yui joined the Company in March, 1985 as the Production Manager.
She is responsible for inventory control and for all pearl assembly.
Ted Woyslaw joined the Company effective July, 1995. Mr. Woyslaw was a
prior shareholder and officer of DACO and continues to serve as President of
DACO.
David Wong joined the Company effective July, 1995. Mr. Wong was a prior
shareholder and officer of DACO and continues to serve as a Vice President of
DACO.
Employment Contracts
The Company has employment contracts with two officers of Imperial and two
officers of DACO.
15
<PAGE>
Bruce W. Anderson is employed by Imperial pursuant to a five year contract
expiring June 30, 2001 at a base salary of $300,000 per year, an automobile
allowance of $1,000 per month and bonuses all as determined by the Compensation
Committee of the Board of Directors.
Richard W. Sigman is employed by Imperial pursuant to a contract expiring
December 31, 1998. The contract provides for at a base salary of $142,800 per
year, an automobile allowance of $600 per month and bonuses as determined by the
Compensation Committee of the Board of Directors. Mr. Sigman is also employed by
Rhine Holdings, the ultimate controlling shareholder of the Company at an annual
salary of $50,000.
Ted Woyslaw is employed by DACO pursuant to a three year contract expiring
August 31 1998. The contract provides for a base salary of $250,000 (Canadian)
(approximately US$183,825), a commission of one and one-half percent (1.5%) of
sales of DACO in excess of $22,000,000 (Canadian), an automobile allowance of
$900 (U.S.) per month and bonuses as determined by the Board of Directors.
David Wong is employed by DACO pursuant to a three year contract expiring
August 31, 1998. The contract provides for a base salary of $130,000 (Canadian)
(approximately US$95,600), an automobile allowance of $900 (U.S.) per month and
bonuses as determined by the Board of Directors.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate cash compensation paid by the Company to all directors and
officers as a group during 1996 was approximately $852,000.
Certain officers of the Company will be entitled to bonuses from the
Company based on performance criteria to be established by the Compensation
Committee of the Board of Directors of the Company. Additionally, in December,
1993, the Company adopted a Stock Option Plan (the "Option Plan") to assist the
Company and its subsidiaries in retaining the service of current employees,
motivating selected key management personnel, and attracting new management by
providing the opportunity for such personnel to acquire a proprietary interest
in the Company and thereby share in its growth and success. Participation in the
Option Plan and the granting of options under the Option Plan are made by the
Compensation Committee of the Board of Directors, subject to ratification by the
Board. Pursuant to the Option Plan, a total of 150,000 shares of Common Stock
are reserved for issuance. The Option Plan requires that the exercise price of
the option be the fair market value of the Company's stock on the date of the
grant of the option but not less than $8.50 per share. The fair market value for
purposes of the Option Plan is for so long as Common Stock is quoted on the
NASDAQ Small Cap, the final closing sales price per share on the date of the
grant. The exercise price with respect to any option must be paid in cash. As of
the date hereof, options to purchase 80,000 shares of Common Stock had been
granted under the Option Plan.
The Company, during 1995, also adopted a Non-Qualified Stock Option Plan
(the "Non- Qualified Plan"). A total of 600,000 shares are reserved for issuance
under the Non-Qualified Plan. The Non-Qualified Stock Option Plan provides for
the granting of options and stock appreciation rights to non-employee directors,
16
<PAGE>
key management employees and consultants and is administered by the Compensation
Committee. The terms of any options and/or stock appreciation rights granted
under the Non-Qualified Plan shall be determined by the Compensation Committee
provided that options may not be exercisable for a term longer than ten years
and may not be exercisable at a price less than the stated value of the Common
Stock. No options or stock appreciation rights had been granted under the
Non-Qualified Stock Option Plan as of December 31, 1996.
In addition, the Company maintains a defined contribution plan which has
both a profit sharing feature and a 401(k) savings feature (the "Plan"). Under
the profit sharing portion of the Plan, contributions are an amount determined
by the Company's Board of Directors. Subject to certain limitations required by
law, the Company's contribution is allocated to each participant who is employed
by the Company at the end of the Plan year in the proportion that the total
compensation paid by the Company to each participant bears to the aggregate
compensation paid by the Company to all participants during such Plan year.
Under the 401(k) savings feature, eligible employees may elect, subject to
certain limitations required by law, to defer payment of up to 15% of their
compensation. The Plan provides that if an employee defers payment, the Company
will contribute 50% of the first 2% of compensation deferred, by making a cash
payment to the Plan on behalf of such participant. Contributions by the Company
to the profit sharing feature of the plan, and earnings thereon, vest based on
the participant's years of service with the Company, vesting 20% per year after
one year of service and being fully vested after six years of service. Employee
contributions are always 100% vested. Contributions by the Company to the 401(k)
savings feature vest on the employees first day of employment. All contributions
vest, regardless of years of service, upon termination of employment by reason
of death of disability, attainment of age 62 or the termination of the Plan.
After termination of employment, an employee is entitled to receive the
distribution of his or her entire vested interest in the Plan in a lump sum, in
installments for a specific period of time, or an annuity for life. The amounts
held under the Plan are invested according to the instructions of the
participant in investment funds designated by the plan administrator. The during
1996 and 1995 of $10,000 and $16,000, respectively.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
Pursuant to the Company's Option Plan, the Company presently has
outstanding incentive stock options to purchase 80,000 shares of the Company's
Common Stock, of which options to purchase 60,000 shares are held by an officer
of the Company, are exercisable at $8.50 per share and expire in January of
2000.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
The Company purchases products from an affiliate, Rhine Jewellery ($4.6
million in 1996 and $7.5 million in 1995). The Company believes that such
transactions are on terms at least as favorable as those obtained from
unaffiliated third parties. Additionally, Rhine Jewellery, a corporation under
common control, holds 3,644,880 shares of Preferred Stock of the Company. This
Preferred Stock was received in exchange for a promissory note of $3,644,880
which was payable to Rhine Jewellery. Such Preferred Stock is entitled to
one-half vote per share.
17
<PAGE>
All transactions between the Company, its officers, directors, principal
shareholder or affiliates, whether presently existing are, or in the future will
be, in the belief of management, on terms no less favorable to the Company than
may be obtained from unaffiliated third parties.
The Company and certain of its Hong Kong affiliates engage in overlapping
businesses. The Company and the other members of the Rhine Holdings affiliated
group have entered into an agreement to market in non-competing geographic
areas.
There is a family relationship existing among the management and key
personnel of the Company. David F. Chui is the brother in law of Joseph K. Lau.
Although these persons owe a fiduciary duty to the Company and its shareholders,
there can be no assurance that family relationships and considerations will not
at times take precedence over the Company's interests. Any such actions,
however, would likely constitute a breach of fiduciary duty.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None reportable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
None reportable.
PART IV
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to the index to Consolidated Financial Statements of the
Company, and notes thereto, appearing under Item 19 below, together with the
report of Ernst & Young, LLP thereon.
18
<PAGE>
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements Page
Page
----
Report of Independent Auditors................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995..... F-2
Consolidated Statements of Operations of Each of the Years
in the Three-Year Period Ended December 31, 1996................ F-3
Consolidated Statements of Shareholders' Equity for Each of the
Years in the Three-Year Period Ended December 31, 1996.......... F-4
Consolidated Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1996................... F-5
Notes to Consolidated Financial Statements....................... F-7
Financial Statement Schedules (1)
I - Condensed Financial Information of Registrant................ F-25
II - Valuation and Qualifying Accounts........................... F-28
- ------------------------
(1) All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedule.
(b) Exhibits
Exhibit
Number Description
- ------- -----------
2.1 Bill of Sale dated February 4, 1995 re: acquisition of assets of Ullenberg
Corporation (1)
2.2 Stock Purchase Agreement relating to DACO Manufacturing Ltd. (3)
3.1 Amended and Restated Memorandum of Association and Articles of Association
of IWI Holding Limited (2)
4.1 Specimen Form of Common Stock certificate (2)
10.1 Lease Agreement between Imperial World, Inc. and American National Bank and
Trust Company of Chicago dated October 15, 1993 for the site in Westmont,
Illinois (2)
10.2 Stock Option Plan (2)
10.3 Amended and Restated Credit Agreement dated June, 1996 between Rhode Island
Hospital Trust National Bank and Imperial World, Inc. (2)
10.4 Indemnity Agreement (2)
10.5 Profit Sharing Plan (2)
10.6 Territorial Agreement (2)
10.7 Employment Contract with Richard Sigman (4)
10.8 IWI Holding Limited 1995 Non-Qualified Stock Option Plan (4)
19
<PAGE>
Exhibit
Number Description
- ------- -----------
10.9 Lease Agreement relating to facilities of DACO Manufacturing (4)
10.10 Employment Contract with Bruce Anderson
- ------------------------
(1) Incorporated by reference to the Company's Report on Form 6-K for the month
of February, 1995.
(2) Incorporated by reference to the Company's Registration Statement on Form
F-1 (File No. 33-78904) declared effective December 13, 1994).
(3) Incorporated by reference to the Company's Report on Form 6-K for the month
of August, 1995.
(4) IncorporaDecember 31, ce to the Company's Form 20-F for the year-ended
1995.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IWI HOLDING LIMITED
By:
-------------------------------------
David Chui
Chairman
Dated: June , 1997
---
21
<PAGE>
Consolidated Financial Statements
IWI Holding Limited
Years ended December 31, 1996, 1995, and 1994
with Report of Independent Auditors
<PAGE>
IWI Holding Limited
Consolidated Financial Statements
Years ended December 31, 1996, 1995, and 1994
Contents
Report of Independent Auditors............................................1
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995..............2
Consolidated Statements of Operations for Each of the Years
in the Three-Year Period Ended December 31, 1996.........................3
Consolidated Statements of Shareholders' Equity for Each of
the Years in the Three-Year Period Ended December 31, 1996................4
Consolidated Statements of Cash Flows for Each of the Years
in the Three-Year Period Ended December 31, 1996.........................5
Notes to Consolidated Financial Statements................................7
<PAGE>
Report of Independent Auditors
The Board of Directors
IWI Holding Limited
We have audited the accompanying consolidated balance sheets of IWI Holding
Limited as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. Our audits also included
the financial statement schedules listed in the index at item 19(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 IWI Holding
Limited at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules when
considered in relation to the basic financial statements taken as a whole
present fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming IWI Holding
Limited will continue as a going concern. As more fully described in Note 2, the
Company has incurred operating losses in 1995 and 1996 and has no commitment to
ongoing financing. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets and the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG, LLP
Chicago, Illinois
May 8, 1997
F-1
<PAGE>
IWI Holding Limited
Consolidated Balance Sheets
(In Thousands, Except Share Data)
December 31
-------------------
1996 1995
------- -------
Assets
Current assets:
Cash $ 206 $ 196
Accounts receivable, less allowance for doubtful
accounts of $694 in 1996 and $454 in 1995 10,236 19,043
Accounts receivable from affiliated company 1,905 1,402
Inventories 14,122 18,060
Refundable income taxes 432 473
Deferred income taxes - 404
Prepaid expenses 414 397
------- -------
Total current assets 27,315 39,975
Equity in joint venture - 1,230
Property and equipment 3,858 3,858
Less: Accumulated depreciation 1,405 926
------- -------
Property and equipment-Net 2,453 2,932
------- -------
$29,768 $44,137
======= =======
Liabilities and shareholders' equity
Current liabilities:
Lines of credit $ 8,049 $14,205
Notes payable 689 879
Straight acceptances payable - 216
Accounts payable, trade 3,441 4,021
Accounts payable to affiliated company 1,381 1,789
Accrued liabilities 1,717 1,960
Income taxes payable - 223
------- -------
Total current liabilities 15,277 23,293
Notes payable 204 556
Commitments and contingency
Shareholders' equity:
Preferred stock, $1 par value; 5,000,000 shares
authorized; 3,644,880 shares issued and
outstanding 3,645 3,645
Common stock, no par value; 10,000,000 shares
authorized; 2,582,900 shares issued and
outstanding (2,643,750 shares in 1995) - -
Additional paid-in capital 12,475 12,540
Retained earnings (deficit) (1,833) 4,103
------- -------
Total shareholders' equity 14,287 20,288
------- -------
$29,768 $44,137
======= =======
See notes to consolidated financial statements.
F-2
<PAGE>
IWI Holding Limited
Consolidated Statements of Operations
(In Thousands, Except Share Data)
Year ended December 31
----------------------------------
1996 1995 1994
---------- --------- --------
Net sales $ 30,840 $ 41,710 $ 41,902
Cost of sales 25,809 34,024 32,725
---------- --------- --------
Gross profit 5,031 7,686 9,177
Selling, general, and administrative
expenses 10,221 8,798 5,831
---------- --------- --------
Income (loss) from operations (5,190) (1,112) 3,346
Other income (expense):
Interest expense (1,225) (1,089) (711)
Equity in joint venture 172 188 444
---------- --------- --------
Other expense-net (1,053) (901) (267)
---------- --------- --------
Income (loss) before income taxes (6,243) (2,013) 3,079
Income taxes (benefit) (307) (629) 788
---------- --------- --------
Net income (loss) $ (5,936) $ (1,384) $ 2,291
========== ========= ========
Net income (loss) per common share $ (2.25) $ (.53) $ 2.34
========== ========= ========
Weighted-average number of common
shares outstanding 2,635,830 2,625,873 980,394
========== ========= ========
See notes to consolidated financial statements.
F-3
<PAGE>
IWI Holding Limited
Consolidated Statements of Shareholders' Equity
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- ------------------- Additional Retained
Number of Number of Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit) Total
--------- ------ --------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 - $ - 918,750 $ - $ 1,009 $ 3,196 $ 4,205
Conversion of note payable to
affiliated company to preferred
stock 3,644,880 3,645 - - - - 3,645
Issuance of common stock, net
of issuance costs - - 1,500,000 - 9,894 - 9,894
Net income - - - - - 2,291 2,291
--------- ------ --------- --- ------- ------- -------
Balance at December 31, 1994 3,644,880 3,645 2,418,750 - 10,903 5,487 20,035
Issuance of common stock, net
of issuance costs - - 225,000 - 1,637 - 1,637
Net loss - - - - - (1,384) (1,384)
--------- ------ --------- --- ------- ------- -------
Balance at December 31, 1995 3,644,880 3,645 2,643,750 - 12,540 4,103 20,288
Repurchase of common stock - - (60,850) - (65) - (65)
Net loss - - - - - (5,936) (5,936)
--------- ------ --------- --- ------- ------- -------
Balance at December 31, 1996 3,644,880 $3,645 2,582,900 $ - $12,475 $(1,833) $14,287
========= ====== ========= === ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
IWI Holding Limited
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31,
----------------------------
1996 1995 1994
------- ------- ------
Operating activities
Net income (loss) $(5,936) $(1,384) $ 2,291
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation 479 367 181
Equity in joint venture (172) (188) (444)
Provision for doubtful accounts 736 313 184
Deferred income taxes 404 (63) (52)
Changes in operating assets and
liabilities:
Accounts receivable 8,071 (1,049) (7,229)
Accounts receivable from affiliated
company 899 842 339
Inventories 3,938 (5,001) (1,529)
Refundable income taxes 41 (473) -
Prepaid expenses (17) 56 (87)
Straight acceptances payable (216) (149) (126)
Accounts payable, trade (580) 368 1,766
Accounts payable to affiliated company (408) (77) 1,838
Accrued liabilities (243) 247 (64)
Income taxes payable (223) (522) 91
------ ------- -------
Net cash used in operating activities 6,773 (6,713) (2,841)
Investing activities
Purchases of property and equipment (212) (380) (1,199)
Proceeds from sale of equipment 212 - -
Business acquisitions, net of cash acquired - (2,503) -
------ ------- -------
Net cash used in investing activities - (2,883) (1,199)
F-5
<PAGE>
IWI Holding Limited
Consolidated Statements of Cash Flows (continued)
(In Thousands)
Year ended December 31
-----------------------------
1996 1995 1994
------- ------- -------
Financing activities
Proceeds from bank for consigned gold $ - $ 173 $ -
Net proceeds from issuance of common stock - 1,637 9,894
Proceeds from (payments on) lines of
credit, net (6,156) 7,547 (3,647)
Payments on notes payable to shareholders
and payable to affiliate (542) - (2,000)
Repurchase of common stock (65) - -
------- ------- -------
Net cash provided by (used in)
financing activities (6,763) 9,357 4,247
------- ------- -------
Net increase (decrease) in cash 10 (239) 207
Cash at beginning of year 196 435 228
------- ------- -------
Cash at end of year $ 206 $ 196 $ 435
======= ======= =======
See notes to consolidated financial statements.
F-6
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995, and 1994
1. Description of Business and Acquisitions
IWI Holding Limited (Holding) was incorporated in the British Virgin Islands on
February 22, 1993. Prior to December 16, 1994, the common stock of Holding was
wholly owned by Rhine Investment Holdings Company Limited (RIHC), which is a
wholly owned subsidiary of Rhine Holdings Limited (RHL), a public company on the
Stock Exchange of Hong Kong Limited. Pursuant to a corporate restructuring
effective April 28, 1993, Imperial World, Inc. (Imperial), an Illinois
corporation, became a wholly owned subsidiary of Holding when its shareholders
transferred their shares of common stock in Imperial to Holding, ultimately in
exchange for shares of RHL. Holding was inactive prior to this date. Effective
December 16, 1994, Holding completed an initial public offering of its common
stock (Note 6).
Holding and its wholly owned subsidiaries (together, the Company) import,
manufacture, and wholesale fine jewelry. The Company also imports pearls for
assembly and resale. Substantially all of the Company's sales are made in the
United States and Canada.
In February 1995, the Company purchased the corporate name, all trade names,
customer lists, other intangibles, and all active dies and molds of Ullenberg
Corp., a distributor of jewelry in the United States for $304,000.
Effective June 30, 1995, the Company acquired all the outstanding common stock
of Daco Manufacturing, Ltd., J.B. Manufacturing, and J and B Manufacturing
Company (collectively Daco, a Canadian jewelry manufacturer and distributor).
The total purchase price consisted of cash of approximately $500,000 and notes
payable of $1,435,000 (Note 9).
Each acquisition was accounted for as a purchase, and the purchase price was
allocated to assets acquired and liabilities assumed based on their estimated
fair market value at the date of acquisition. Operating results have been
included since the effective date of the acquisition.
F-7
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Acquisitions (continued)
Based on unaudited data, the following table presents selected financial
information for the Company and its subsidiaries on a pro forma basis, assuming
the acquired companies had been consolidated since January 1, 1994 (dollars in
thousands, except per share amounts):
Year ended December 31,
-----------------------
1995 1994
-------- -------
Net sales $46,040 $55,966
Net income (loss) (1,423) 2,614
Net income (loss) per share (.54) 2.67
The pro forma results are not necessarily indicative of future operations or the
actual results that would have occurred had the acquisitions been made as of
January 1, 1994.
2. Going Concern
The accompanying consolidated financial statements are prepared in accordance
with generally accepted accounting principles on a going-concern basis which
contemplates that the company will be able to realize its assets and discharge
its liabilities in the normal course of business for the foreseeable future.
The Company has incurred significant operating losses during 1995 and 1996 and,
in the opinion of management, has inventory in excess of desired levels at
December 31, 1996. The Company's principal lenders have not as of May 8, 1997,
committed to ongoing financing for 1997.
The Company has reduced monthly operating expenses and has initiated an
aggressive inventory reduction plan to maintain liquidity and reduce inventory
to desired levels (Note 3). Management is actively seeking to obtain a
commitment for continuation of its bank operating facilities for at least
another year, as well as considering raising capital through the issuance of
equity-related securities. Management expects that these efforts will result in
maintaining the liquidity necessary for the foreseeable future. However, no
assurances can be given that the Company will be successful in accomplishing
these objectives. Further, there can be no assurance that the Company will
achieve profitability. The Company's continuation as a going concern is
dependent upon attaining future profitable operations and upon its ability to
obtain adequate financing or capital. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets and the amounts and classifications of liabilities that
may result from the outcome of this uncertainty.
F-8
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies
Consolidation
All significant intercompany transactions have been eliminated.
Inventories
Inventories, primarily consisting of finished goods, are stated at the lower of
first in, first out (FIFO) cost or market.
At December 31, 1995, management determined that the Company's inventory was in
excess of its requirements measured by its existing and anticipated level of
sales. Accordingly, based on the existing market conditions, an inventory
valuation reserve of $1,500,000 was recorded at December 31, 1995, for the
anticipated losses required to reduce inventory to desired levels over the near
term. This inventory reduction plan was substantially completed as anticipated.
Net sales during 1996 continued at a level much lower than anticipated. An
aggressive inventory reduction plan was initiated to maintain liquidity and
reduce the inventory to desired levels. An inventory valuation reserve of
$1,600,000 was recorded at December 31, 1996, for the anticipated losses from
the completion of the plan during 1997, which management believes will be
sufficient to provide for such losses. However, it is possible that the
inventory reduction plan will not be successful or that losses in excess of
those recorded in the financial statements will be incurred. Approximately $3
million of losses were recorded during 1996 from the reduction of inventory
under this plan.
Property and Equipment
Property and equipment are stated at historical cost. Depreciation is computed
over the estimated useful lives of the related assets using the straight-line
method.
Joint Venture
The Company used the equity method of accounting for the investment in the joint
venture (Note 4).
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial reporting and tax bases of assets and liabilities using
the enacted tax rates in effect for the year in which the differences are
expected to reverse.
F-9
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
The Company's financial instruments include accounts receivable, accounts
payable, accrued liabilities, and notes payable. The fair values of all
financial instruments were not materially different than their carrying values.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires Company management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
The Company has granted stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees and, accordingly,
recognizes no compensation expense for the stock option grants.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs were
approximately $814,000; $809,000; and $527,000 in 1996, 1995, and 1994,
respectively.
Foreign Currency Translation
The functional currency of the Company is the U.S. dollar. Transactions arising
in foreign currencies have been translated at rates in effect at the dates of
the transactions. Gain or losses during the year have been included in net
income (loss). Assets and liabilities of Daco have been translated at current
exchange rates, and revenue and expense accounts are translated at the average
rates during the period. Related translation adjustments have not been material
to the financial statements.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period and
reflects the exchange of common stock (Note 6). When dilutive, stock options and
warrants are included as share equivalents using the treasury stock method.
Primary and fully diluted net income (loss) per common share are the same for
all years presented.
F-10
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating earnings per share, the dilutive effect of stock
options will be excluded. However, Statement 128 has no impact on the Company's
1996 or 1995 calculation because common equivalent shares are not included in
the net loss per share calculation since the effect of their inclusion would be
antidilutive.
Reclassifications
Certain amounts reported in 1995 have been reclassified to conform with the
presentation used in 1996.
4. Equity in Joint Venture
On October 27, 1994, the Company acquired a 50% interest in Haupia Corporation
(Haupia), effective September 1, 1994, for $2 million. Previously, Haupia was a
wholly owned subsidiary of RHL. Haupia had entered into management contracts
with companies in the People's Republic of China for the operation of retail
jewelry stores. Under the terms of the joint venture agreement, the Company had
the option, under certain conditions, to sell its interest in Haupia to RHL for
an amount at least equal to its total capital contributions plus a guaranteed
return.
On December 29, 1995, the Company exercised its put option for 50% of its
investment. In accordance with the joint venture agreement, RHL issued a
promissory note for $1,402,000 representing one-half of the Company's initial
interest in Haupia plus the allocable share of earnings of Haupia subject to an
18% minimum annual return through December 31, 1995. The note which accrued
interest at prime was paid in four quarterly installments ranging from $200,000
to $502,000 commencing April 1, 1996.
On August 15, 1996, the Company exercised its option to sell its remaining
interest to RHL for $1,402,000 payable in four quarterly installments of
approximately $350,000 plus interest, commencing February 1, 1997.
F-11
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
4. Equity in Joint Venture (continued)
The following table summarizes the condensed financial data of Haupia (in
thousands):
Period from
September 1,
Year ended 1994 to
December 31, December 31,
1995 1994
------------ ------------
Management fee income $ 419 $ 991
Net income 32 888
December 31, December 31,
1995 1994
------------ ------------
Current assets $4,997 $7,036
Current liabilities 530 2,538
Shareholders' equity 4,540 4,508
5. Credit Arrangements
Imperial has an agreement with a bank through various credit facilities, whereby
Imperial can borrow up to $10 million, payable on demand. The agreement can be
terminated without cause by the Company or the bank with 90 days written notice.
The total credit facility is governed by a formula, as defined in the agreement,
based principally on accounts receivable and inventory levels. The agreement
provides, among other things, that the credit facilities are collateralized by
substantially all assets of Imperial. The agreement contains certain reporting
and financial covenants which the Company is required to maintain. Under current
covenants, Imperial may not declare or pay dividends, or make loans or advances
to Holding. As of May 8, 1997, the Company is not in compliance with certain
reporting covenants of this agreement. At December 31, 1996 and 1995,
respectively, the amount of restricted net assets of Imperial was approximately
$10.3 and $16.2 million.
The following summarizes the terms of these facilities:
Line of Credit
Under the demand facility, interest is calculated at 2% over the bank's
reference rate. The line of credit bore interest at 10.25% at December 31, 1996,
and 9.25% at December 31, 1995 (0.75% over the bank's reference rate), and
borrowings at December 31, 1996, were $5,011,000.
F-12
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
5. Credit Arrangements (continued)
Straight Acceptances Payable
The Company purchases certain goods for sale by the issuance of straight
acceptances from the bank to foreign vendors. These instruments have maturities
of no longer than 180 days.
Letters of Credit
In addition to straight acceptances, Imperial also utilizes bank letters of
credit when importing goods for sale. Outstanding balances on letters of credit
at December 31, 1996 and 1995, were not material.
Consigned Gold
Gold consignment financing agreements are common in the jewelry industry. The
Company has such an agreement with the bank, whereby Imperial may transfer
ownership of gold content in its inventory at fair market value to the bank.
Simultaneously, the bank consigns the gold back to Imperial. Imperial is charged
a consignment fee at an annual percentage rate of 6.0% and 4.75% at December 31,
1996 and 1995, respectively, of the market value of the consigned gold. The term
of any consignment is indefinite, as long as Imperial has sufficient gold in its
inventory to cover the consignment or the total credit facility has not been
terminated. Upon either event, Imperial has the option to satisfy its obligation
by transferring gold to the bank or paying cash based on the then-quoted market
price of the gold. Imperial's policy is to exclude the gold held on consignment
from inventory.
Market price fluctuations between the borrowing and repurchase dates of the gold
consignment financing agreements are borne by Imperial and may result in either
a gain or a loss. Unless required to repurchase the gold upon termination of the
consignment, as described previously, Imperial's policy is to not repurchase the
gold unless it is favorable to Imperial.
At December 31, 1996, 4,450 troy ounces of gold, having a fair market value of
$1,643,200, were held on consignment by Imperial. Had Imperial repurchased the
gold at December 31, 1996, Imperial would have recorded a gain of $44,200.
F-13
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
5. Credit Arrangements (continued)
Daco Credit Arrangements
Daco has a credit agreement with a Canadian bank whereby Daco can borrow up to
Canadian $5 million (approximately U.S. $3.7 million) under an operating
facility, which is payable upon demand, at the bank's prime rate plus .25% (5%
at December 31, 1996). Borrowings under this facility are limited to 80% of
acceptable accounts receivable plus 35% of certain inventories. Canadian
$4,132,000 was payable under this facility at December 31, 1996 (approximately
U.S. $3,038,000).
Also under this credit agreement, Daco can borrow up to U.S. $3 million for gold
loans (7,000 ounces at December 31, 1996) and U.S. $200 thousand for silver
loans (30,000 ounces at December 31, 1996). These precious metal loans are due
on demand at a fixed interest rate of 3.35% per annum. Approximately $1,970,000
was payable under this facility at December 31, 1996, representing 5,031 ounces
of gold and 20,575 ounces of silver. The loans are valued based on gold and
silver market prices at December 31, 1996. Daco's policy is to exclude the gold
held on consignment from inventory.
The credit agreement is collateralized by substantially all of Daco's assets and
guaranteed by Holding and Imperial. The agreement expires on April 30, 1997.
The agreement contains certain restrictive covenants with respect to the
maintenance of certain financial ratios and use of funds. As of December 31,
1996, Daco was in violation of a covenant relating to interest coverage. The
bank waived this violation at December 31, 1996; however, there is no assurance
that a waiver will be provided with respect to future violations.
6. Shareholders' Equity
The 3,644,880 issued preferred shares are redeemable at the Company's option
after March 21, 1997, at an amount not to exceed 50% of net income in excess of
$15 million for the preceding year. If not redeemed, the preferred shares will
begin to accrue a 4% noncumulative dividend. The preferred shares have voting
rights equivalent to one-half vote per share, and a $1 per share liquidation
preference. On March 21, 1994, the Directors further authorized the exchange of
1,225,000 shares of the new no-par-value common stock for the initial one share
of $1 par value common stock which was held by RIHC. On October 27, 1994, RIHC
returned and the Company retired 306,250 shares of common stock of the Company.
All common share and per-share amounts in the consolidated financial statements
and notes to the consolidated financial statements have been restated to reflect
these stock transactions and increase in authorized shares.
F-14
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
6. Shareholders' Equity (continued)
On December 16, 1994, the Company issued 1,500,000 shares of its common stock at
$8.50 per share in an initial public offering (IPO). The proceeds received, net
of commissions and other related expenses, were approximately $9.9 million.
Additionally, the Company granted an option to purchase 225,000 shares of common
stock at an exercise price of $8.50 to the underwriters. This option was
exercised on January 30, 1995, with the Company receiving net proceeds of
approximately $1.6 million. In conjunction with the IPO, warrants to purchase an
aggregate of 150,000 shares of common stock at an exercise price of $14.025 were
issued to the representative of the underwriters of the IPO. The warrants are
exercisable for a period of four years beginning December 16, 1995.
In February 1996, the Company's Board of Directors authorized the repurchase of
up to 350,000 shares of its common stock. As of December 31, 1996, 60,850 common
shares had been repurchased and retired.
7. Stock Option Plans
The Company has 150,000 shares of common stock reserved for options which may be
granted to directors, officers, and key employees under a stock option plan
adopted in 1994. The exercise price of the options shall not be less than the
greater of $8.50 per share or the fair market value of the stock on the date the
option is granted. The only options outstanding were options for 80,000 shares
at an exercise price of $8.50 per share granted in 1995.
During 1995, the Company adopted a nonqualified stock option plan under which
600,000 shares of common stock have been reserved for options which may be
granted to key employees and third-party consultants at an option price to be
determined by the Compensation Committee of the Board of Directors. No options
have been granted under this plan.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123, Accounting for Stock-Based Compensation (FASB
123), requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, since the exercise price of the
Company's employee stock option grants has equaled the estimated fair value of
the underlying stock on the date of grant, no compensation expense is
recognized.
F-15
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
Pro forma information regarding net income and earnings per share is required
under FASB 123 and has been determined as if the Company had accounted for its
stock options granted subsequent to December 31, 1994, under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 7.8%; a dividend yield
of zero percent; and a weighted-average expected life of the options of five to
seven years. The volatility factor of the expected market price of the Company's
common stock is 1.2.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective input assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the respective option. The
Company's pro forma net loss and pro forma net loss per share, respectively,
would be $6,028,000 and $2.29 and $1,452,000 and $.55 for the years ended 1996
and 1995, respectively. Because FASB 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma impact will not be fully
reflected until 1999.
The weighted-average exercise price of options outstanding at December 31, 1996
and 1995, is $8.50. The weighted-average remaining contractual life of options
outstanding at December 31, 1996, was 4.5 years. The weighted-average fair value
of options granted in 1995 was $7.70.
8. Related Party Transactions
Rhine Jewelry Limited (Rhine), located in Hong Kong and the Company's principal
supplier, is also a subsidiary of RIHC (Note 1). For the years ended December
31, 1996, 1995, and 1994, the Company's purchases from Rhine were approximately
$4.6 million, $7.5 million, and $8.3 million, respectively.
F-16
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
9. Notes Payable
In conjunction with the Daco acquisition, Daco issued promissory notes to the
former shareholders (some of whom are officers). The amounts payable to officers
are due in eight quarterly installments of approximately $68,000 plus interest
at the Canadian bank's prime rate (5% at December 31, 1996) commencing November
30, 1996. The remainder of the notes were due February 28, 1997, and bore
interest at 12%.
Subsequent to December 31, 1996, the terms of these notes were renegotiated. One
half of the principal was paid when due, and the balance ($209,000) is payable
June 30, 1997, and bears interest at 15% per annum.
All of the notes are collateralized by a general security agreement over all
assets of Daco, subordinate to security granted to the bank, and are guaranteed
by Holding.
10. Income Taxes
The following table summarizes income taxes (benefits):
Year ended December 31,
------------------------------
1996 1995 1994
-------- -------- ------
(In Thousands)
Current:
U.S. federal $ (48) $ (782) $ 539
U.S. state - (176) 151
Other (259) 392 150
------- ------- ------
(307) (566) 840
Deferred:
U.S. federal - (51) (41)
U.S. state - (12) (11)
------- ------- ------
- (63) (52)
------- ------- ------
Income taxes $ (307) $ (629) $ 788
======= ======= ======
Income (loss) before income taxes:
United States $(5,818) $(3,848) $1,591
Other (425) 1,835 1,488
------- ------- ------
$(6,243) $(2,013) $3,079
======= ======= ======
F-17
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
The differences between the U.S. federal statutory tax rate and the Company's
effective tax rate are as follows:
Year ended December 31,
---------------------------
1996 1995 1994
------ ------- ------
U.S. federal statutory tax rate (34.0) (34.0)% 34.0%
Excess foreign income taxes (benefit) (1.8) (13.1) (11.5)
State income taxes (net of U.S. federal
income tax benefit) (1.0) (5.8) 3.0
Change in valuation allowance 30.0 24.6 -
Other 1.9 (2.9) .1
------- ------- ------
Consolidated effective tax rate (4.9)% (31.2)% 25.6%
======= ======= ======
The components of deferred income taxes are as follows:
December 31,
-----------------
1996 1995
------ ------
(In Thousands)
Deferred tax assets (liabilities):
Net operating loss carryforward $1,872 $ -
Accounts receivable 906 259
Inventories 64 723
Property and equipment (131) (106)
Other 23 23
------- ----
2,734 899
Less: Valuation allowance (2,734) (495)
------- ----
Net deferred tax assets $ - $404
======= ====
The valuation allowance increased in 1996 primarily due to the increase in the
net operating loss carryforward. For income tax purposes, the Company has a net
operating loss carryforward of approximately $4,800,000, which expires in 2011.
F-18
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
11. Supplemental Cash Flow Information
Year ended December 31,
-----------------------------
1996 1995 1994
------- ------ -----
(In Thousands)
Cash paid for income taxes $ - $ 380 $ 756
Cash paid for interest 1,302 1,027 678
Noncash investing and financing
activities:
Note payable to affiliated company
converted to preferred stock - - 3,645
Payable to affiliate to invest
in joint venture - - 2,000
Receivable from affiliate for
sale of investment in joint
venture 1,402 1,402 -
12. Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the years ended December 31, 1996 and
1995, are as follows:
Three months ended
------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In Thousands, Except Per Share Amounts)
1996:
Net sales $8,415 $7,286 $ 4,085 $11,054
Gross profit (loss) 1,580 2,062 (493) 1,882
Net income (loss) (802) (491) (3,359) (1,284)
Net income (loss) per common share (.30) (.19) (1.27) (.49)
1995:
Net sales $7,877 $8,093 $12,686 $13,054
Gross profit 1,520 1,947 3,192 1,027
Net income (loss) (33) 31 509 (1,891)
Net income (loss) per common share (.01) .01 .19 (.72)
Included in the fourth quarter in 1996 and 1995 financial data are inventory
valuation adjustments (Note 3).
F-19
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
13. Employee Benefit Plan
Imperial sponsors a defined-contribution, profit-sharing plan (Plan) covering
substantially all full-time employees who have completed one year of service.
Company contributions to the Plan are discretionary, determined by the Board of
Directors, and fully vest to employees upon completion of six years of service.
The Plan has a voluntary 401(k) savings feature. Participants may contribute up
to 15% of their compensation to the Plan. Imperial matches 50% of the first 2%
of compensation that a participant contributes. Participant and employer-matched
contributions to the Plan are 100% vested. Company contributions were
approximately $10,000, $16,000, and $40,000, respectively, in 1996, 1995, and
1994.
14. Significant Customers
Significant customers are those accounting for at least 10% of net sales in a
calendar year. During 1996, the Company derived 19% of its net sales from one
customer. In 1995, the Company derived 45% of its net sales from three
customers, and in 1994, the Company derived 64% of its sales from four
customers.
15. Commitments and Contingency
Litigation
The Company is a codefendant in a lawsuit brought by a shareholder who alleges
the Company misrepresented its financial position in interim financial
statements. The shareholder has filed for class action status and is seeking
damages of $11 million. The Company believes the allegation is without merit and
intends to vigorously defend the claim.
Futures Contracts
At December 31, 1996, the Company had futures contracts outstanding obligating
them to purchase 1,000 ounces of gold at $381.20 per ounce in April 1997 and
10,000 ounces of silver at $5.03 per ounce in July 1997. The Company also had
forward contracts obligating them to purchase 200 ounces of gold at $393.46 per
ounce in June 1997.
Operating Leases
Imperial is obligated under a lease on its operating facility for minimum
rentals as well as real estate taxes and other operating expenses through
October 2003, with an option for an additional five years. Daco has a lease
obligation with similar provisions through July 2002, with an option for an
additional five years.
F-20
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
15. Commitments and Contingency (continued)
The future minimum lease payments required under these leases as of December 31,
1996, approximated the following (in thousands):
1997 $ 387
1998 391
1999 398
2000 408
2001 417
Thereafter 620
-------
Total minimum lease payments $2,621
======
Rent expense included in the accompanying statements of operations amounted to
$470,000, $384,000, and $285,000 for 1996, 1995, and 1994, respectively.
Employment Agreements
The Company has various employment agreements with certain officers and key
employees expiring at various dates through July 2001. The agreements include
provisions for severance payments for the longer of one additional year or any
period for which the employee is required not to compete.
The future minimum annual compensation payments as required under the agreements
as of December 31, 1996, approximated the following (in thousands):
1997 $ 722
1998 486
1999 300
2000 300
2001 150
------
$1,958
======
F-21
<PAGE>
IWI Holding Limited
Notes to Consolidated Financial Statements (continued)
16. Geographic Segment Information
The Company's operations in 1994 were conducted primarily in the United States.
Financial information as of and for the years ended December 31, 1996 and 1995,
summarized by geographic area, is as follows:
United
States Canada Eliminations Consolidated
------- ------ ------------ ------------
1996
Total revenues
Unaffiliated customers $21,945 $8,895 $ - $30,840
Interarea transfers - - - -
------- ------ ------- -------
Total revenues $21,945 $8,895 $ - $30,840
======= ====== ======= =======
Income (loss) from
operations $(4,828) $ (488) $ 126 $(5,190)
======= ====== ======= =======
Assets
Identifiable assets $24,376 $8,360 $(2,968) $29,768
Corporate assets - - - -
------- ------ ------- -------
Total assets $24,376 $8,360 $(2,968) $29,768
======= ====== ======= =======
United
States Canada Eliminations Consolidated
------- ------- ------------ ------------
1995
Total revenues
Unaffiliated customers $31,005 $10,705 $ - $41,710
Interarea transfers 5,065 - (5,065) -
------- ------- ------- -------
Total revenues $36,070 $10,705 $(5,065) $41,710
======= ======= ======= =======
Income (loss) from
operations $(1,991) $ 1,005 $ (126) $(1,112)
======= ======= ======= =======
Assets
Identifiable assets $37,123 $13,086 $(7,302) $42,907
Corporate assets 1,230 - - 1,230
------- ------- ------- -------
Total assets $38,353 $13,086 $(7,302) $44,137
======= ======= ======= =======
Interarea transfers primarily represent shipments of finished goods inventory to
Canada. These interarea shipments are made at transfer prices which approximate
prices charged to unaffiliated customers and have been eliminated from
consolidated net revenues. Corporate assets consist of investment in joint
venture (Note 4).
F-22
<PAGE>
IWI HOLDING LIMITED
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
December 31,
-----------------------------
1996 1995
----------- -----------
Assets:
Cash $ 1,000 $ 1,000
Due from affiliate 500,000 500,000
Investments in wholly owned subsidiaries 13,786,000 19,787,000
----------- -----------
Total Assets $14,287,000 $20,288,000
=========== ===========
Shareholders' Equity:
Preferred stock, $1 par value; 5,000,000
shares authorized; 3,644,880 shares
issued and outstanding $ 3,644,880 $ 3,644,880
Common stock, no par value, 10,000,000
shares authorized; 2,582,900 shares
issued and outstanding (2,643,750 shares
in 1995)
Additional paid-in capital 14,354,722 14,419,722
Retained earnings (deficit) (3,712,602) 2,223,398
----------- -----------
$14,287,000 $20,288,000
=========== ===========
See note to condensed financial statements.
F-23
<PAGE>
IWI HOLDING LIMITED
Schedule I - Condensed Financial Information of Registrant
Statements of Income (Loss) and Retained Earnings
For the For the
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ -----------
Equity in net income (loss) of
subsidiaries $(5,936,000) $(1,384,000)
Retained earnings beginning of period 2,223,398 3,607,398
----------- -----------
Retained earnings (deficit) end of period $(3,712,602) $ 2,223,398
=========== ===========
See note to condensed financial statements.
F-24
<PAGE>
IWI HOLDING LIMITED
Schedule I - Condensed Financial Information of Registrant
Statements of Cash Flows
For the For the
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ ------------
Investing Activities
Investment in Imperial World, Inc. $ - $(1,636,588)
Financing Activities
Proceeds from sale of common stock - 1,636,588
-------- ------------
Net change in cash - -
Cash at beginning of period 1,000 1,000
-------- ------------
Cash at end of period $ 1,000 $ 1,000
-------- ------------
See note to condensed financial statements.
F-25
<PAGE>
IWI HOLDING LIMITED
Schedule I - Condensed Financial Information of Registrant
Note to Condensed Financial Statements
For the Years Ended December 31, 1996 and 1995
1. Basis of Presentation
The Company's share of net income (loss) of its unconsolidated subsidiaries, all
of which are wholly owned, is included in net income (loss) using the equity
method. Parent-company-only financial statements should be read in conjunction
with the Company's consolidated financial statements.
F-26
<PAGE>
IWI HOLDING LIMITED
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to
Beginning of Costs and Other Balance at End
Description Period Expenses Accounts Deductions of Period
- ------------ ----------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended
Decmber 31, 1994
Allowance for
Doubtful Accts $ 100,000 $ 184,000 $ - $ 34,000(1) $ 250,000
Year Ended
Decmber 31, 1995
Allowance for
Doubtful Accts $ 250,000 $ 313,000 $ - $ 109,000(1) $ 454,000
Inventory Valuation
Allowance $ - $1,500,000 $ - $ - $1,500,000
Deferred Income Tax
Valuation
Allowance $ - $ 495,000 $ - $ - $ 495,000
Year Ended
December 31, 1996
Allowance for
Doubtful Accts $ 454,000 $ 736,000 $ - $ 496,000(1) $ 694,000
Inventory Valuation
Allowance $1,500,000 $2,953,000 $ - $2,853,000(2) $1,600,000
Deferred Income Tax
Valuation
Allowance $ 495,000 $2,239,000 $ - $ - $2,734,000
</TABLE>
- ------------------------
(1) Writeoff of uncollectible accounts
(2) Inventory losses realized
F-27
