EX-99.1 4 y42630ex99-1.txt AUDITED FINANCIAL STATEMENTS 1 HMS JEWELRY COMPANY, LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998 WITH INDEPENDENT AUDITORS' REPORT 2 INDEPENDENT AUDITORS' REPORT To the Partners HMS Jewelry Company, ltd. Dallas, Texas We have audited the accompanying balance sheets of HMS Jewelry Company, Ltd. (a Texas limited partnership) as of December 31, 1999 and 1998, the related statements of income and retained earnings, and the statements of cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HMS Jewelry Company, Ltd. as of December 31, 1999 and 1998, and the results of their operations and their cash flows for years then ended, in conformity with generally accepted accounting principles. March 10, 2000 3 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) BALANCE SHEETS As of December 31, 1999 and 1998
ASSETS 1999 1998 ----------- ----------- Current Assets: Cash $ 711,050 $ 697,554 Accounts receivable: Trade 2,826,015 1,616,209 Other 38,009 18,150 Inventory 4,474,471 3,907,066 Prepaid expenses 19,128 117,522 ----------- ----------- Total Current Assets 8,068,673 6,356,501 ----------- ----------- Property and Equipment (Note 4): Machinery and equipment 255,632 229,803 Computer software 61,626 61,626 Furniture and fixtures 93,115 75,656 ----------- ----------- Total Property and Equipment 410,373 367,085 Less accumulated depreciation (191,679) (168,997) ----------- ----------- Net Property and Equipment 218,694 198,088 ----------- ----------- Other Assets: Investment in HMS Leasing, LLC (Note 7) 0 126,348 Rent and utility deposits 21,997 24,497 ----------- ----------- TOTAL OTHER ASSETS 21,997 150,845 ----------- ----------- Total Assets $ 8,309,364 $ 6,705,434 =========== ===========
The accompanying notes are an integral part of these financial statements. See Independent Auditors' Report. 2 4 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) BALANCE SHEETS As of December 31, 1999 and 1998
LIABILITIES AND PARTNERS' EQUITY 1999 1998 ---------- ---------- Current Liabilities: Accounts payable and accrued liabilities $1,574,420 $1,013,424 Revolving line of credit and consignment facility (Note 5) 2,844,525 2,631,522 ---------- ---------- Total Current Liabilities 4,418,945 3,644,946 ---------- ---------- Long-Term Debt: Note payable - partner (Note 6) 316,708 401,708 ---------- ---------- Total Long-Term Debt 316,708 401,708 ---------- ---------- Total Liabilities 4,735,653 4,046,654 ---------- ---------- Partners' Equity (Note 10) 3,573,711 2,658,780 ---------- ---------- Total Liabilities and Partners' Equity $8,309,364 $6,705,434 ========== ==========
The accompanying notes are an integral part of these financial statements. See Independent Auditors' Report. 3 5 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) STATEMENTS OF INCOME AND PARTNERS' EQUITY For the Years Ended December 31, 1999 and 1998
1999 1998 ------------ ------------ Revenue: Sales $ 15,084,117 $ 14,127,270 Finance charges 31,160 33,949 ------------ ------------ Total Revenue 15,115,277 14,161,219 ------------ ------------ Cost of Sales: Materials 11,177,026 10,904,622 Discounts 168,288 167,186 ------------ ------------ Total Cost of Sales 11,345,314 11,071,808 ------------ ------------ Gross Profit 3,769,963 3,089,411 ------------ ------------ Expenses: Salaries and wages 806,838 613,744 Catalogs 101,127 47,556 General and administrative 1,168,124 1,253,277 Interest 162,400 140,408 ------------ ------------ Total Expenses 2,238,489 2,054,985 ------------ ------------ Net Income From Operations 1,531,474 1,034,426 Other Income (Expenses): Other income (expense) 158,498 3,177 Partnership loss 0 (6,805) ------------ ------------ Net Income 1,689,972 1,030,798 Partners' Equity, Beginning of Year (Note 10) 2,658,780 2,165,357 Plus Partners' Contributions 4,000 0 Less Partners' Distributions (779,041) (537,375) ------------ ------------ Partners' Equity, End of Year (Note 10) $ 3,573,711 $ 2,658,780 ============ ============
The accompanying notes are an integral part of these financial statements. See Independent Auditors' Report. 4 6 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999 and 1998
1999 1998 ----------- ----------- Cash Flows From Operating Activities: Net income $ 1,689,972 $ 1,030,798 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 22,682 32,408 Partnership loss 0 6,805 Loss on sale of equipment 0 2,806 Decrease (increase) in: Accounts receivable (1,229,665) 499,358 Inventory (567,405) (1,009,767) Prepaid expenses 98,394 (24,650) Increase (decrease) in accounts payable 560,996 (472,722) ----------- ----------- 574,974 65,036 ----------- ----------- Cash Flows From Investing Activities: Proceeds from sale of equipment 0 3,574 Purchase of equipment (43,288) (27,815) Decrease in investment in HMS Leasing Company 126,348 0 Return (addition) of rent and security deposits 2,500 (1,997) ----------- ----------- 85,560 (26,238) ----------- ----------- Cash Flows From Financing Activities: Reduction of automobile loan 0 (3,574) Increase in revolving line of credit and consignment facility 213,003 806,699 Repayment of partner loan (85,000) (75,000) Contributions from partners 4,000 0 Distributions to partners (779,041) (537,375) ----------- ----------- (647,038) 190,750 ----------- ----------- Net Increase in Cash and Cash Equivalents 13,496 229,548 Cash and Cash Equivalents, Beginning of Year 697,554 468,006 ----------- ----------- Cash and Cash Equivalents, End of Year $ 711,050 $ 697,554 =========== =========== Supplemental Disclosures: Interest paid $ 162,400 $ 140,408 =========== ===========
The accompanying notes are an integral part of these financial statements. See Independent Auditors' Report. 5 7 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 NOTE 1 - ORGANIZATION HMS Jewelry Company ("the Company"), began business August 18, 1983, as a wholesale jewelry distributor. HMS Jewelry Company was originally formed as an S Corporation, with Harry M. Schmidt as the sole stockholder. Effective January 1, 1999, the assets of the S Corporation (with the exception of the investment in HMS Leasing Company, LLC) were transferred to a Texas limited partnership. The partners and ownership percentages of HMS Jewelry Company, Ltd. are HMS Operating Company, Inc. (6% general partner), Harry M. Schmidt (43.5% limited partner), Terri L. Schmidt (49.5% limited partner), and The Schmidt Gifting Trust (1% limited partner). The Company is headquartered in Dallas, Texas and primarily sells gold products to a network of over 30,000 retail jewelers, through a catalog and telephone ordering system. The Company markets primarily classic jewelry lines, such as necklaces, earrings, and bracelets. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The Company maintains its books and records on the accrual basis of accounting. Accordingly, revenues are recognized when earned and expenses are recognized when incurred. For financial reporting purposes, the Company capitalizes expenditures that benefit future months as prepaid expenses, so that those expenses will be applied to the appropriate monthly period benefited, up to a year. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers any short-term investments to be cash equivalents. INVENTORY Inventory consists primarily of gold products purchased for resale. Inventory is stated at lower of cost or market value, using a perpetual inventory system that records labor factors on each item along with gold content at current market prices. The gold price used for valuing inventory is the London Bullion Brokers' second fixing price. 6 8 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation of property and equipment is provided using the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:
Years --------- Machinery and equipment 5 - 10 Computer software 10 Furniture and fixtures 10
INCOME TAXES The Company has elected to be taxed as a Partnership pursuant to elective provisions of the Internal Revenue Code. Under those provisions, the Company does not pay federal corporate income taxes on its taxable income. Instead, each partner is liable for individual federal income taxes on their share of the Company's net taxable income. Therefore, no provision or liability for federal income taxes has been included in these financial statements. NOTE 3 - PREPAID EXPENSES As described in Note 2, the Company capitalizes expenses that benefit future periods, totaling $19,128 and $117,522 at December 31, 1999 and 1998. The prepaid expenses include insurance, advertising, jewelry shows and professional fees. NOTE 4 - PROPERTY AND EQUIPMENT Depreciation expense for the years ended December 31, 1999 and 1998, are $37,979 and $32,409 respectively. For financial reporting purposes, depreciation is computed using accelerated depreciation methods and the assets' estimated useful lives in accordance with generally accepted accounting principles. Expenditures for maintenance and repairs are charged to 7 9 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 NOTE 4 - PROPERTY AND EQUIPMENT (CONTINUED) expense as incurred. Expenditures for betterments that materially extend the life of the assets are capitalized. Property and equipment are summarized by major classifications as follows:
1999 1998 --------- --------- Machinery and equipment $ 255,632 $ 229,803 Computer software 61,626 61,626 Furniture and fixtures 93,115 75,656 --------- --------- 410,373 367,085 Less accumulated depreciation (191,679) (168,997) --------- --------- $ 218,694 $ 198,088 ========= =========
NOTE 5 - REVOLVING LINE OF CREDIT AND CONSIGNMENT FACILITY The Company entered into a contract establishing a revolving line of credit, and gold consignment facility, on June 30, 1997. The revolving line of credit had a maximum principal amount of $1,500,000, with interest payable monthly. The consignment of gold for use by the Company, originally included a maximum $3,000,000 consignment limit, with consignment fees (interest) payable on demand. The line of credit and consignment combined limit was $3,000,000. The Company was required to maintain a Tangible Capital Base (Net Worth plus Subordinated Indebtness) of $2,000,000 at the end of the Company's fiscal year. The original contract was amended September 7, 1997, to include a forward contracts letter agreement, effectively extending an additional $500,000 of credit. The combined maximum for all three facilities remained at $3,000,000. A second amendment on October 2, 1997 increased the consignment limit and the combined limit to $3,500,000. The third amendment dated October 14, 1998, increased the consignment and combined limit to $4,500,000, only for the period beginning September 1 and ending January 15, for seasonal financing needs. The fourth amendment dated April 9, 1999, eliminated the seasonal reduction component of the consignment and combined limits. The combined limit remained at $4,500,000. It also modified the Tangible Capital Base to a minimum of $2,500,000 at the end of the Company's fiscal year. 8 10 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 NOTE 5 - REVOLVING LINE OF CREDIT AND CONSIGNMENT FACILITY The fifth, and last amendment dated November 2, 1999 increased the consignment and combined limit to $4,950,000. The revolving line of credit bears interest at the defined prime rate plus -3/4%, payable monthly. The consignment facility carries a consignment fee (interest) of 6.0% per annum payable on demand. The interest rate on the forward contracts letter agreement is based on the floating prime rate, but is agreed to at the making of each forward contract, with maturity no longer than 120 days from contract date. The revolving line of credit, consignment facility and forward contract agreement are secured by inventory, accounts receivable, life insurance on Harry M. Schmidt and the personal guaranty of Harry M. Schmidt. The total balance owed on the contract, as amended, is $2,844,525 and $2,631,522 as of December 31, 1999 and 1998. NOTE 6 - NOTES PAYABLE - SHAREHOLDER The Company executed a promissory note to Harry M. Schmidt in the amount of $475,000 for funds provided for operations. The note bears interest at four percent (4%) per annum, payable annually beginning December 31, 1993. The note balance on December 31, 1999 and 1998 is $200,000 and $285,000 respectively. Additional advances by Harry M. Schmidt amount to $116,708 on December 31, 1999 and 1998. The promissory note and advances are subordinate to the revolving line of credit described in Note 5. NOTE 7 - INVESTMENT IN HMS LEASING, LLC Effective in 1997, the Company invested $159,034 in HMS Leasing, LLC, which owns the facilities housing the operations of HMS Jewelry Company, other real estate and equipment. In exchange for the invested funds, the Company owned a 50% interest in the real estate and equipment rental company, with Harry M. Schmidt owning the other 50%. This asset was not part of the assets contributed to the limited partnership on January 1, 1999. The General Partner, HMS Operating Company, Inc., retained ownership. 9 11 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998 NOTE 8 - MINIMUM LEASE OBLIGATIONS On October 1, 1997, the Company relocated to new facilities and executed a three-year lease with HMS Leasing, LLC. In addition, the Company leases other real estate, one automobile, telephone equipment, digital camera equipment, signage, and office equipment under noncancelable leases ranging from three to five years. The following is a schedule of future minimum lease payments required under the above operating leases as of December 31, 1999 and 1998:
Year Ending December 31, 1999 1998 ------------ -------- -------- 1999 $271,922 2000 $193,595 198,871 2001 24,337 29,613 2002 5,797 11,072 2003 0 4,836 -------- -------- $223,729 $516,314 ======== ========
Lease expense amounts were $280,029 in 1999 and $259,003 in 1998. NOTE 9 - RELATED PARTY TRANSACTIONS As stated in Note 7, HMS Leasing, LLC is owned by the General Partner, HMS Operating Company, Inc. and Harry M. Schmidt, a limited partner. HMS Leasing, LLC owns real estate and equipment leased by the Company. The Company paid $240,000 and $240,412 to HMS Leasing, LLC in 1999 and 1998. Further, the Company originally advanced $20,000 as lease deposits pursuant to the lease agreements, and owes HMS Leasing, LLC $185,002 and $130,563 as of December 31, 1999 and 1998. Harry M. Schmidt advanced or loaned the Company a total of $316,708 and $401,708 as of December 31, 1999 and 1998. The Company paid $85,000 and $75,000 in principal on the loans, plus interest, in 1999 and 1998. The Company paid Harry M. Schmidt $39,788 and $39,766 in salary and benefits in 1999 and 1998 for services as President. NOTE 10 - RECLASSIFICATIONS Certain accounts in the prior-year financial statements have been reclassified for comparative purposes to conform with the presentation in the current-year financial statements. 10 12 SUPPLEMENTARY INFORMATION 11 13 HMS JEWELRY COMPANY, LTD. (A TEXAS LIMITED PARTNERSHIP) SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES For the Years Ended December 31, 1999 and 1998
1999 1998 ---------- ---------- Accounting and legal fees $ 57,772 $ 38,152 Advertising 173,380 269,377 Auto expense 2,456 3,586 Bad debts 37,809 152,698 Bank charges 5,286 1,726 Collections expense 1,059 3,058 Commissions 96,483 73,885 Computer expense 19,643 4,520 Consulting fees 5,276 13,176 Credit reports 5,515 5,058 Depreciation 37,979 32,409 Donations 14,265 5,114 Dues and subscriptions 800 1,007 Equipment rental 31,698 7,628 Insurance 102,757 94,045 Miscellaneous expenses 2,840 3,480 Office expense 41,215 38,655 Photography testing 0 1,572 Postage 15,161 12,905 Rent 240,000 240,412 Repairs and maintenance 8,703 14,277 Security 4,738 7,548 Show expenses 60,931 44,856 Supplies 19,595 21,971 Taxes 123,765 92,955 Telephone 44,873 38,091 Travel 0 16,578 Utilities 14,125 14,538 ---------- ---------- Total General and Administrative Expenses $1,168,124 $1,253,277 ========== ==========
The accompanying notes are an integral part of these financial statements. See Independent Auditors' Report. 12