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HMS JEWELRY COMPANY, LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
WITH
INDEPENDENT AUDITORS' REPORT
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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
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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SUPPLEMENTARY INFORMATION
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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.
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