As filed with the Securities and Exchange Commission on August 3, 2001
Registration No.
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
THE TOPAZ GROUP, INC.
(Name of Issuer in its charter)
Nevada 91-1762285
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
---------------------------
126/1 Krungthonburi Road
Banglampoo Lang, Klongsarn
Bangkok 10600 Thailand
-----------------------------------------
(Address of principal executive offices and zip code)
-----------------------
(Issuer's telephone number, including area code)
Copies to:
Mitchell S. Nussbaum, Esq.
Jenkens & Gilchrist Parker Chapin LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Tel: (212) 704-6426; Fax: (212) 704-6288
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $ 0.001 per share
(Title of Class)
Table of Contents
Item Page Number
Item 1. Description of Business.............................................1
Item 2. Financial Information..............................................12
Item 3. Description of Property............................................16
Item 4. Security Ownership of Certain Beneficial Owners and Management.....16
Item 5. Directors and Executive Officers...................................18
Item 6. Executive Compensation.............................................19
Item 7. Certain Relationships and Related Transactions.....................22
Item 8. Legal Proceedings..................................................22
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters........................22
Item 10. Recent Sales of Unregistered Securities............................22
Item 11. Description of Securities..........................................23
Item 12. Indemnification of Officers and Directors..........................26
Item 13. Changes in and Disagreements with Accountants......................26
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EXPLANATORY NOTE
The Topaz Group, Inc. is filing this registration statement on Form 10 in
order to become a reporting company under the Securities Exchange Act of
1934. Topaz is currently traded on the Pink Sheets quotation service under
the symbol TPAZ. Under current NASD rules, we must become a reporting
company under the Exchange Act in order to have our stock traded on the
OTC Bulletin Board.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This registration statement on Form 10 contains forward-looking statements
that involve risks and uncertainties that address:
- Business and growth strategies;
- Financial condition and results of operations;
- Forecasts; and
- Trends, including growth, in the gem and jewelry markets.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof (including their use in
the negative), or by discussions of strategies, opportunities, plans or
intentions. Such statements include but are not limited to statements under
the captions "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business," as well as
captions elsewhere in this document. A number of factors could cause results
to differ materially from those anticipated by such forward-looking
statements, including those discussed under "Risk Factors" and "Business."
In addition, such forward-looking statements necessarily depend upon
assumptions and estimates that may prove to be incorrect. Although we believe
that the assumptions and estimates reflected in such forward-looking
statements are reasonable, we cannot guarantee that our plans, intentions or
expectations will be achieved. The information contained in this registration
statement, including the section discussing risk factors, identifies important
factors that could cause such differences.
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ITEM 1 DESCRIPTION OF BUSINESS
The Topaz Group, Inc. and its subsidiaries (collectively referred thereto
as The Topaz Group) is a vertically integrated manufacturing company engaged
in manufacturing and selling fine jewelry products and a broad array of
gemstones, including topaz, rubies, sapphires, emeralds, amethysts and a large
variety of other semi-precious stones. Our jewelry products are sold
throughout the world, with the United States representing our primary market.
Our products are sold by department stores such as Sears, J.C. Penny, TJ Maxx
and Marshalls, discount chains such as K-Mart, Wal-Mart, television marketers
such as QVC and Home Shopping Network, large wholesalers such as Helen Andrews
and Colibri, and e-tailers. Our strengths in sourcing, cutting and polishing
gemstones and our ability to design, craft and produce jewelry strategically
position us to be a significant source of virtually any gem and jewelry
product. However, our production capacity is largely focused on producing
topaz stones due to our ability to control the entire manufacturing process
from the acquisition of raw gemstones through the final phases of production.
This process includes:
o the sourcing of the highest quality materials directly from mines in
various locations, including, primarily, Brazil, Africa and Sri
Lanka;
o specialty gem cutting and polishing for mass production; and
o the treatment of the cut gemstones through an irradiation process
through our exclusive licensing agreement with the University of
Missouri for the use of its nuclear reactor.
BACKGROUND
Our History
The Topaz Group, Inc. is a Nevada corporation listed on the Pink Sheets
Service under the trading symbol TPAZ. We were originally incorporated in Utah
as H&H Energy Corporation. After several name changes, we changed domicile by
merging into Technivision, Inc., a Nevada corporation, in June 1996. In
November 1996, Technivision changed its name to Chancellor Corporation. In
November 1998, Chancellor changed its name to The Topaz Group, Inc.
In April 1999, we entered into two separate exchange agreements with Best
Worth Agents, Ltd., a British Virgin Islands corporation, to acquire all of
the issued and outstanding preferred shares of Creative Gems and Jewelry Co.,
Ltd. and Advance Gems and Jewelry Co., Ltd., both Thai corporations. According
to the terms of the exchange agreements, we acquired 99.7% of the voting and
dividend participation rights in each Thai company from Best Worth in
consideration for which Topaz issued 25,459,000 shares of series A convertible
voting and participating preferred stock to Best Worth.
Our principal business is the manufacture and sale of fine jewelry and
gemstones carried out through the operations of our subsidiaries, Creative
Gems and Jewelry Company, Advance Gems and Jewelry Manufacturing Company and
Advance Gems and Jewelry Company.
MARKET OVERVIEW
Our primary market, the United States jewelry market, is a diverse retail
environment. Retail outlets served include independent jewelry stores, chain
store operations, discount giants, television marketers, department stores,
and e-tailers. We are a supplier to a large segment of each of these markets
and sells its products at many levels of distribution. Our gemstone division
is the main source of materials to our jewelry-manufacturing subsidiary which,
in turn, sells finished jewelry products to wholesalers, importers and
retailers.
NARRATIVE DESCRIPTION OF BUSINESS
We source a wide variety of raw gemstones, cuts and polishes them and then
professionally enhances the quality and color of the stones with different
treatments depending on the stone type. These treatments range from heating
the stones to treating them under high pressure and irradiation. After
treatment, the stones move to our jewelry-manufacturing subsidiary where our
highly skilled craftsmen and craftswomen design, mould, cast, file, polish and
assemble fine jewelry products. We provide a broad range of fashionable
jewelry targeted at a wide customer base, and direct our marketing efforts at
retail customers who are likely to purchase jewelry at frequent intervals as
fashions and styles change. The most significant volume of our business is
based upon the sale of topaz gemstones and jewelry. However, we also produce
jewelry incorporating other gemstones, and we have entered into a joint
venture agreement with Muthama Gemstones (Kenya) Limited, or MGK, for the sole
supply of ruby material from the John Saul Mine, which we believe has one of
the largest ruby deposits in the world.
Advance Manufacturing purchases all of the raw gemstones used by us
including white topaz from mines in Africa, Sri Lanka and Brazil, and imports
the raw gemstones into Thailand where they are cut and polished at our
factories in Bangkok, MaeSai, Lop Buri, and Payao. After the stones have been
cut and polished, Advance Manufacturing sells some of the stones to local
customers and exports the bulk of the stones to The Topaz Group, Inc. in the
United States, where the stones are irradiated and treated for color
enhancement.
The stones are irradiated in a nuclear research reactor, a particle
accelerator, or both, depending upon the color desired. Irradiation of the
topaz in a particle accelerator is a necessary step in the enhancement of blue
topaz stones. We have our topaz stones irradiated by Iotron Technologies Inc.,
which processes our stones in an accelerator that it operates in Canada. In
order to produce stones with darker coloring, the clear topaz must first be
processed through a nuclear research reactor.
We have also entered into an exclusive agreement with the Missouri
University Research Reactor (MURR) to irradiate our white stones in their
nuclear research reactor. Currently, there are very few reactor facilities in
the world capable of enhancing topaz stones to dark hues, and MURR's facility
has been set up to color topaz stones in massive quantities. As a result, we
believe that our exclusive agreement with MURR is valuable for us in our
efforts to continue to succeed in the topaz market, both today and in the
future.
After the colorization process is complete and the required half-life has
elapsed, the stones are shipped to Creative who sells the finished topaz
stones into the industry or incorporates them into our jewelry.
We intend to capitalize on the expected expansion of the jewelry industry
by promoting our lines of jewelry and cut stone through electronic
distribution channels, further developing existing customer relationships by
providing special services, and taking aggressive steps to expand into new
mass distribution channels throughout the world.
PRODUCTS
We manufacture a comprehensive selection of quality jewelry and gemstone
products including rings, pendants, earrings, bracelets, necklaces, pins, and
men's jewelry. Currently, we categorize our products into amounts of gemstone
sales as opposed to jewelry sales, Topaz products as opposed to other products
and low-end products as opposed to high-end products:
Gemstone sales 42% Jewelry Sales 58%
Topaz products 60% Other products 40%
Low-end products 80% High-end products 20%
MANUFACTURING PROCESS
Our principal manufacturing and assembly operations are performed by our
subsidiaries, Advance and Creative, at their factories in Bangkok, Mae Sai,
Lop Buri, and Payao, Thailand. We believe that Advance and Creative have the
largest facilities in Thailand coupling jewelry manufacturing and stone
cutting, employing 2,000 2
production workers, plus 800 "at will" full time contract employees under Her
Majesty the Queen's and the Thai government's Royal Sponsored Women's program.
We have access to an additional 1,700 independent contractors on an "as needed"
basis who have been trained to meet our manufacturing specifications and
perform the work from their homes. The employees perform a range of tasks from
processing raw materials to the cutting and polishing of stones to jewelry
design. The manufacturing of jewelry is performed by skilled workers under the
supervision of technicians according to set specifications. We implement
quality control measures at each level of production which include inspecting
the raw materials prior to cutting and polishing the gemstones and producing
our jewelry as well as inspecting the finished product.
CUTTING AND POLISHING STONES
Currently large amounts of gemstones are cut and polished in Thailand, and
we are one of the largest gemstone producers in Thailand, producing in excess
of 2,000,000 carats of loose stones each month.
We utilize a semi-mechanized process that we created which allows multiple
stonecutters to produce an unlimited number of identical stones without
incurring the prohibitive costs of a fully mechanized process. This process
enables us to take advantage of low labor costs while producing quality
identical pieces of jewelry on a large scale.
In addition, we have established an "art of producing gemstones" program
to train local villagers in the art of cutting and polishing stones in
conjunction with the Thai Department of Industrial Promotion and Her Majesty
the Queen's Royal Sponsored Women's Program. This program is currently in
place in more than 500 rural villages in 28 provinces of Thailand. To date,
approximately 1,500 individuals have been trained under this program and 800
are "at will" employees. Through this program we gain additional capacity on a
variable basis while contributing to and supporting rural communities
throughout Thailand.
THE COLORING PROCESS
The coloring of topaz stones requires that the clear topaz stones be
irradiated to differing degrees in order to achieve specific hues. We have
relationships with two entities with the facilities to irradiate the topaz
stones. We have the stones irradiated at a particle accelerator operated by
Iotron Inc. and/or at Missouri University Research Reactor, or MURR, depending
upon the color desired for the stones. After the stones are radiated and
"cooled", we ship them to Creative to complete the cutting and polishing.
Iotron processes approximately 60% of the stones while the remainder is
processed by MURR, this being due to the present color fashion.
MURR is a nuclear research reactor licensed by the Nuclear Regulatory
Commission, and it is the largest capacity reactor dedicated to the
colorization of topaz stones. MURR uses a two-step process to color the
stones. The first step is the irradiation of the stones in the research
reactor. The second step is the storage of the stones during the process of
radioactive decay during which the stones take on the desired color. Through
our licensing agreement with the University, we control the entire process of
colorization at MURR including the cool down holding facility.
QUALITY CONTROL
As part of our commitment to maintaining high standards of quality, we
employ specially trained quality control teams to check every step of
production using state-of-the-art electronic testing and repair equipment.
Upon completion of the manufacturing process, each individual piece is
inspected for defects in workmanship and materials and only after an item has
passed a final inspection is it shipped to our customer. In March 2001 the
company received version 2000 ISO 9001 certification for gem and jewelry
production and design process.
MANUFACTURING PLANTS
We operate four factories located in Bangkok, Mae Sai, Lop Buri, and Payao
with production areas of 90,800 square feet, 11,000 square feet, 8,600 square
feet and 5,250 square feet, respectively. Each factory is dedicated
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to the cutting and polishing of stones, with our factory in Bangkok also
serving as our primary jewelry production facility.
RAW MATERIALS AND SOURCES OF SUPPLY
We purchase gemstones and other raw materials from over 200 vendors. Our
two largest vendors are Gold Corporation (Thailand) Ltd. and Little Rock Co.,
Ltd., that supply approximately 13% and 10%, respectively, of our total raw
material purchases; but there are diversified sources and multiple vendors of
raw materials available. On September 6, 1999 the company signed a joint
venture agreement with MGK for the supply of rough ruby stones from a ruby
mine in Kenya East Africa. The joint agreement stipulates that MGK is required
to supply, upon request, four (4) parcels per annum with a capacity of
$250,000 per quarter. Current volume under this agreement is at capacity.
Management believes if the company is unable to purchase raw materials from
any source, adequate alternative sources of raw materials are available so
that our operations or production capacity will not be materially affected.
CUSTOMERS
We have a broad customer base including over 350 individual purchasers.
Our four largest customers are, Goldmine Enterprises, Helen Andrews, (the
wholesale distributor to K-Mart, QVC and TJ Maxx), Wal-Mart and Sears, which
accounted for approximately 33% of all net sales in the year ended December
31, 2000, with Goldmine Enterprises accounting for approximately 13%. No other
single customer accounted for 10% or more of net sales. Although the loss of
one or more large customers could have a material adverse effect on our
operating results, we maintain good relationships with our customers and do
not currently anticipate the loss of any major customer.
BACKLOG
Backlog orders as of December 31, 2000 were $2,200,000 compared to
$1,900,000 as of December 31, 1999. In the past, we allowed dealers to submit
blank orders to guarantee shipment times. Now all orders are expected to be
filled and shipped as ordered and considered firm. We do, however, allow
modifications or cancellations of orders up to the time the product is loaded
for shipment, although a cancellation at such a late stage is subject to a
monetary penalty and is rare.
SALES AND MARKETING
Sales and marketing efforts are modest because the demand for our products
exceeds our ability to meet working capital requirements for inventory
purchases and growth. Our sales and marketing efforts focus on customer
service and generating of repeat business. Sales and marketing towards our US
based customers is carried out both from our Bellevue, Washington office and
our Bangkok office, while our sales staff in Bangkok handles sales efforts
directed at our non-US customers. In addition to direct sales and customer
support, we are an active participant in the major jewelry trade shows held
each year in Orlando and Las Vegas, USA, Hong Kong and Bangkok, Thailand.
COMPETITION
The jewelry manufacturing industry is highly competitive worldwide. Our
competitors include domestic and foreign jewelry manufacturers, wholesalers
and importers who operate on an international, national, regional or local
scale. However, the number of jewelry manufacturers that combine stone and
jewelry production is small, though still unquantifiable. We believe we are
one of the largest manufacturers of topaz jewelry in the world and that our
coloring process gives us a competitive advantage in the market place by
enabling us to produce quality products at competitive prices. We believe that
competition in the jewelry manufacturing business is based primarily on price,
quality, design and customer service. The range of retail prices available for
various product lines makes our products affordable to a wide range of
customers. Additionally, as a vertically integrated operation, we believe we
are able to deliver quality products faster and at a lower cost than
competitors using outside resources. There can be no assurance that our
competitors, many of which may have greater financial, personnel, technical,
and other resources, will not have a material adverse effect on future
financial results of our operations.
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INTELLECTUAL PROPERTY
We currently hold no patents, licenses or franchises. We own the Savanna
trademark in the European Common Union. We have been granted the "CJ"
trademark in the European Common Union, which is used in the jewelry and is
stamped next to the karat to identify the source, Creative Jewelry. We do not
consider our intellectual property rights to be material to our business.
ENVIRONMENTAL MATTERS
We are subject to Thai national, provincial and local environmental
protection regulations. Thai environmental laws currently impose a graduated
schedule of fees and possible plant closures for the improper discharge or
cure of certain behavior causing environmental damage. Based upon our
experience and information currently available to us, we believe that our
environmental protection facilities and systems are in compliance with
existing national and local environmental protection regulations in all
material respects. However, there can be no assurance that Thai national or
local authorities will not impose additional regulations, which would require
additional expenditures on environmental matters in the future or have a
material adverse effect on our financial condition, results of operations or
liquidity.
We are also subject to environmental regulations in the United States. The
United States Nuclear Regulatory Commission has established and oversees
regulations governing the operation of a nuclear reactor and the storage of
radioactive material. These regulations govern our topaz colorization process
at MURR. If MURR is found to be in violation of the NRC's regulations either
in the operation of the reactor, or in its storage of radioactive materials,
and those violations result in MURR having to cease operations, such a finding
could have a material adverse effect on our sales and operations.
STRATEGY
Our strategy is to strengthen our position as one of the leading sources
of colored stones and jewelry containing colored stones in the world. This
strategy includes, furthering our position as a leading producer of topaz
jewelry and topaz stones in all market segments. Implementation of our
strategy includes focus in four primary areas: increasing production and
production efficiencies, broadening distribution channels, expanding ruby
sales and the growth of the U.S. sales and marketing teams.
INCREASE PRODUCTION. We intend to obtain financing to increase production
of our products by building additional production facilities or purchasing
additional jewelry manufacturers.
BROADEN DISTRIBUTION CHANNELS. We seek to expand our distribution channels
by entering into strategic alliances or acquisitions to be able to obtain
access to more "mom and pop" shops.
EXPAND RUBY SALES. We intend to obtain financing so that we can exercise
our rights under our joint venture agreement with the John Saul Mine in Kenya,
one of the largest ruby mines in the world, so that we can exercise our right
of first refusal to purchase all ruby stones produced by the mine. We believe
that this will allow us to source a significant percentage of the world's
supply of ruby stones.
EXPAND U.S. SALES AND MARKETING TEAM. We intend to expand our U.S. sales
and marketing team so that we can increase sales made to existing U.S.
customers which have domestic budgets. Many of our customers have both
international and domestic budgets and most of our sales are made within their
international budgets. We believe that an expanded U.S. Sales and Marketing
Team will allow us to increase sales by allowing our U.S. customers to
purchase products within their domestic budgets.
EMPLOYEES
As of June 1, 2001, the Topaz Group had approximately 2,000 employees plus
800 employees under the Queen's and the Thai government's Royal Sponsored
Program. Our employees include designers, technicians, management,
administrative personnel, marketing, sales, and factory personnel. All of our
employees are "at will" employees.
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Our employees are not currently members of a trade union. We have not
experienced any strikes or other labor disputes that have interfered with its
operations and we believe that our relations with our employees are good.
LEGAL PROCEEDINGS
Neither Topaz Group nor any of its subsidiaries is a party to, nor is any
of their respective properties the subject of, any material pending legal or
arbitration proceeding.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY RESULTS.
Our operating results have varied significantly from quarter to quarter in
the past and may continue to vary significantly from quarter to quarter in the
future due to a variety of factors. Many of these factors are out of our
control. These factors include:
Fluctuations in the jewelry and gemstone market;
Seasonality of the jewelry industry;
Unexpected delays in importing gemstones or the manufacturing process;
New competitors;
A decline in economic conditions which effects people's discretionary
spending; and
Increases in expenses, whether related to sales and marketing, maintenance
or repair costs, or administration.
We will continue to determine our investment and expense levels based on
our expected future revenues, which may not grow at historical rates in future
periods, if at all. A significant portion of our expenses is not variable in
the short term and cannot be quickly reduced to respond to decreases in
revenues. Therefore, if our revenues are below expectations, our operating
results and net income are likely to be adversely affected. In addition, we
may reduce our prices or accelerate our development activities in response to
competitive pressures or to pursue new market opportunities. Any one of these
activities may further limit our ability to adjust spending in response to
revenue fluctuations.
IF DEMAND FOR TOPAZ JEWELRY AND GEMSTONES DECLINES, WE COULD EXPERIENCE A
MATERIAL DECLINE IN RESULTS OF OPERATIONS.
Sales generated by topaz stones and topaz based jewelry will continue to
account for a major portion of our revenues. Accordingly, our business and
results of operations are dependent on the demand for this single product and
any decrease in the demand for such product, whether as a result of
competition, changes in fashion, economic conditions in Thailand, the United
States of America and around the world or other factors, or restrictions on
our ability to market this product for any reason, would have a material
adverse effect on the our business, financial condition and results of
operations.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS.
We depend on a limited number of suppliers for the raw materials used in
the production of our topaz jewelry, specifically precious metals and topaz
stones. We have no guaranteed supply arrangements with any supplier, other
than MGK. Any interruption in the supply of key materials and components for
our products, which cannot be quickly remedied, could have a material adverse
effect on our business, financial condition or results of operations.
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IF WE ARE UNABLE TO CONTINUE OUR RELATIONSHIP WITH MURR, WE WILL NOT BE ABLE TO
PRODUCE CERTAIN COLORS OF TOPAZ STONES.
We depend on the Missouri University Research Reactor to irradiate clear
topaz stones in its nuclear research reactor to produce deeply colored topaz
stones, sales of which account for approximately 40% of revenues. Although we
have entered into an exclusive agreement with MURR to continue using its
research reactor for the purpose of irradiating topaz stones, there can be no
assurance that we will not be forced to cease using MURR for reasons beyond
our control. If we are unable to continue irradiating stones at MURR, it may
not be possible to find another entity willing or able to provide the same
service. A decision by the MURR to discontinue its irradiation program would
prevent us from fulfilling our orders and would have an immediate material
adverse effect on our operating results, even though we might have recourse
against MURR in a court of law for such an action. Further, if MURR were
forced to cease operations for an extended period of time for any reason, our
results of operations could be adversely affected.
CLAIMS BY INJURED EMPLOYEES COULD SUBSTANTIALLY INCREASE OUR EXPENSES BECAUSE WE
DO NOT CARRY WORKERS COMPENSATION INSURANCE.
Our business exposes us to potential liability risks that are inherent in
the manufacturing process. Although we maintain product liability coverage, we
do not maintain workers compensation insurance with respect to our factories,
which is consistent with industry practice in Thailand. Historically, we have
not experienced any workers compensation claims. However, there can be no
assurance that personal injury claims would not have a direct material impact
on our expenses.
WE DEPEND ON THE SERVICES OF OUR CHAIRMAN, JEREMY F. WATSON, OUR PRESIDENT, DR.
APHICHART FUFUANGVANICH, AND OUR EXECUTIVE OFFICERS.
In 1999, we appointed Jeremy F. Watson as chairman of our board of
directors and we have retained or recruited a number of other senior
executives and other key employees. We are dependent on these personnel, who
have been instrumental in designing and implementing our recent initiatives
and are involved in the strategies for our future growth and profitability.
The loss of services of Mr. Watson, Dr. Aphichart or our executive officers
could have a material adverse effect on all aspects of our operations and have
a significant negative impact on our financial condition. There can be no
assurance that we will be able to attract and retain additional qualified
personnel as needed in the future. We do not maintain key-man life insurance
on our senior executives or other key employees.
RISKS RELATING TO OUR OPERATIONS IN THAILAND
ENFORCEMENT OF CIVIL LIABILITIES.
The vast majority of our assets are located in Thailand. There is doubt
that the courts of Thailand would enforce, either in an original action or in
an action for enforcement of judgments of United States courts, liabilities,
which are predicated upon the securities laws of the United States.
OUR OPERATIONS ARE DEPENDENT UPON THE STABILITY OF THE THAI POLITICAL STRUCTURE
AND THE CONTINUED STRENGTH OF THE THAI ECONOMY.
Our results of operations and financial condition may be influenced by the
political situation in Thailand and by the general state of the Thai economy.
The political situation in Thailand has been unstable from time to time in
recent years and future political and economic instability in Thailand could
have an adverse effect on our business and results of operations. Any
potential investor in our securities should pay particular attention to the
fact that we are governed in Thailand by a political, economic, legal and
regulatory environment that may differ significantly from that which prevails
in other countries.
Thailand is a constitutional monarchy. Under the constitution, the King is
Head of State, Commander of the Armed Forces and Patron of all Religions.
Executive power is vested in the cabinet while the elected bicameral
7
National Assembly exercises legislative power. Thailand has experienced
several changes of government and changes in its political system since World
War II. A new constitution became effective on October 11, 1997. There can be
no assurance that Thailand's current government or political system will
continue unchanged for the foreseeable future. Additionally, there can be no
assurance that any future change in the government will be the result of
democratic processes.
THE THAI ECONOMY HAS A RECENT HISTORY OF INSTABILITY.
Although Thailand's economy has been characterized in the past decade by
high growth rates, in 1996 and particularly in 1997, economic growth slowed
significantly in relation to historical levels. In late 1996 and throughout
1997, Thailand experienced significant economic weakness, resulting primarily
from declines in the property and finance industries, a sharp reduction in
financial liquidity and a general deterioration in investor confidence. In
addition, the country has had recurring trade balance and current account
deficits. The government of Thailand also agreed on August 5, 1997, to accept
the austerity measures of the International Monetary Fund aimed at
rehabilitating and restructuring the economy as a condition to receipt of
IMF-led loans and financial assistance in the billions of dollars.
International credit rating agencies, including Moody's Investors Service,
Inc. and Standard & Poor's Corporation, had downgraded Thai sovereign as well
as various Thai corporate and financial institutions' debt ratings. Between
January 3, 1996 and December 31, 1997, the Stock Exchange of Thailand Index
fell from 1,323.43 to 372.69. On December 8, 1997, the government terminated
the operations of 56 of the 91 finance companies in Thailand.
There can be no assurance that our operations will not adversely be
affected by:
o the economy in Thailand and in Southeast Asia generally;
o the interest rates and inflation in Thailand and other Southeast Asian
countries;
o the lack of liquidity and stability in the Thai and other Southeast Asian
finance industries; or
o other factors including measures taken by the government of Thailand in
response to economic conditions.
Instability in the Thai economy could affect our ability to finance our
working capital needs, collect on receivables for goods shipped or build
market share internationally or in Thailand. Further, there can be no
assurance that the economies of Thailand and Southeast Asia will not
materially worsen.
THE THAI GOVERNMENT CONTROLS THE CURRENCY CONVERSION RATES AND SETS LIMITS ON
THE AMOUNT OF CASH THAT A THAI ENTITY MAY MAINTAIN IN U.S. DOLLARS.
On January 6, 1998, the Thai Cabinet approved the issuance of a Ministry
of Finance regulation to limit the U.S.$ holding period for exporters in an
effort to curtail currency speculation and increase the U.S.$ supply in the
local economy. Previously, exporters were required to be paid within 180 days
and to sell or deposit the proceeds in a foreign currency account with an
authorized bank in Thailand within 15 days of receiving such proceeds.
However, according to the January 1998 Regulation, exporters must now be paid
within 120 days, after which they have seven days in which to sell or deposit
the proceeds in a foreign currency account in Thailand. This requirement
applies to all export proceeds earned by a Thai company outside Thailand.
A Thai entity may open a foreign currency account under the following
conditions:
o the account must be with an authorized bank in Thailand and the funds must
originate from abroad;
o remittance abroad of funds deposited in such an account for payment of
ordinary business transactions would require submission of supporting
evidence and approval of the Bank of Thailand; and
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o the total amount of daily outstanding balances in such an account must not
exceed U.S.$5 million, otherwise, such excess amount would be required to
be converted to Baht.
An exemption to these regulations allows a depositor to keep deposits in
U.S.$ up to an amount not to exceed the depositor's obligations to foreign
creditors and the international banking facilities of Thailand commercial
banks payable within the next three months. Funds deposited in a foreign
currency account may be withdrawn for, inter alia, payment of interest and
principal due on offshore debt repayments. Proof that the payment of interest
is required must be submitted with the bank in which the currency is deposited
each and every time an application to withdraw and repatriate foreign currency
is made. As a general matter, the outward remittance from Thailand of
dividends, interest or capital gains from the transfer of securities after
payment of any applicable Thai taxes, if any, may be made if the amount does
not exceed U.S.$5,000 per remittance, beyond which amount, a report must be
made to the Bank of Thailand.
Parties may apply for an exemption or relaxation from the "strict
observance" of the above requirements. We were able to obtain waivers from the
Bank of Thailand which would allow us to keep certain U.S.$ amounts of export
earnings offshore in certain accounts for an amount not to exceed U.S.$130
million each year through the redemption of certain notes and debentures.
Additionally, we were also granted an approval from the Bank of Thailand which
would allow us to keep U.S.$ amounts in excess of U.S.$5 million in accounts
in Thailand for an amount not to exceed our obligations in foreign currencies
payable within three months from the date of deposit.
Any excess amount of foreign currencies must be converted into Baht. Such
conversion would require us to bear exchange rate risks as many of our
obligations are U.S.$ denominated. If we are unable to maintain these waivers
and are required to convert such revenue into Baht, any devaluation of the
Baht against the U.S.$ could have an adverse effect on our results of
operations and could materially impair our ability to repay our U.S.$
obligations.
BECAUSE WE HAVE SIGNIFICANT BAHT DENOMINATED ASSETS AND LIABILITIES, WE ARE
SUBJECT TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES.
Prior to July 1997, the Bank of Thailand determined the value of the Baht
based on a "basket," the composition of which was not made public but of which
the U.S.$ was the principal component. Prior to July 1997, the Baht had a
history of stability, trading in a narrow range of 24.47 Baht to 25.97 Baht to
the U.S.$1.00, as a result of frequent intervention by the Bank of Thailand
through purchases and sales of U.S.$. However, on July 2, 1997, under
substantial market pressure, the Government floated the Baht and effectively
ceased such intervention, and the value of the Baht, as reflected in the Noon
Buying Rate, declined from 24.52 Baht per U.S.$1.00 on July 1, 1997 to 56.10
Baht per U.S.$1.00 on January 12, 1998 and stood at 39.15 Baht to U.S.$1.00 on
May 15, 1998. There can be no assurance that the value of the Baht will not
decline further, increase or continue to fluctuate widely against other
currencies in the future. Adverse economic conditions in Thailand and the
region incidental to the devaluation of the Baht may also reduce some of our
customers' ability to pay, and there can be no assurance that such reduced
demand will not have an adverse effect on us.
Our functional currency is the U.S. Dollar, however, we have significant
Baht denominated assets and liabilities. Therefore, fluctuations in the value
of the Baht relative to the U.S.$ may cause us to recognize material foreign
exchange gains or losses which could adversely affect our results of
operations and financial condition. Although we had not done this in the past,
in the future, we may decide to hedge our currency positions to attempt to
avert any adverse consequences of exchange rate fluctuations. There can be no
assurance that we will be able to successfully hedge our exchange rate
exposure or that we will be able to hedge such exposure at a satisfactory
cost.
WE ARE SUBJECT TO THE THAI LEGAL SYSTEM IN WHICH CASE OUTCOMES AND THE
APPLICATION OF LAW ARE UNPREDICTABLE.
The Thai legal system is based on written statutes and is a system, unlike
common law systems, in which decided legal cases have little precedential
value. The Thai system is similar to civil law systems in this regard. The
basic laws, such as the Civil and Commercial Code, the Civil Procedures Code,
and the Criminal Procedures Code are derived from similar codified laws in
continental Europe.
9
RISKS ASSOCIATED WITH THE JEWELRY BUSINESS
IF GENERAL ECONOMIC CONDITIONS WORSEN, PURCHASES OF JEWELRY AND GEMSTONES ARE
LIKELY TO DECLINE.
Jewelry purchases are discretionary for consumers and may be particularly
affected by adverse trends in the general economy. The success of our
operations depends to a significant extent upon a number of factors relating
to discretionary consumer spending in markets where we operate. Some of the
factors that impact consumer spending include economic conditions in the
regions we serve, employment, wages and salaries, business conditions,
interest rates, availability of credit and taxation. There can be no assurance
that consumer spending will not be adversely affected by general economic
conditions and negatively impact our results of operations or financial
conditions.
Any significant deterioration in general economic conditions or increases
in interest rates may inhibit consumers' use of credit and cause a material
adverse affect on our net sales and profitability. Furthermore, any downturn
in general or local economic conditions in the markets in which we operate
could materially adversely affect our collection of outstanding customer
accounts receivables.
THE JEWELRY BUSINESS IS HIGHLY SEASONAL.
We greatly depend on the success of our "Christmas Selling Season" for our
success. The success of our Christmas season depends on many factors beyond
our control, including general economic conditions and industry competition.
Sales during the Christmas selling season typically account for approximately
40% of net sales and 45% of annual earnings. During our 2000 Christmas selling
season net sales were $14,227,438.
WE ARE SUSCEPTIBLE TO FLUCTUATIONS IN THE PRICE OF GEMS AND PRECIOUS METALS.
We are subject to other supply risks, including fluctuations in the prices
of precious gems and metals. Presently, we do not engage in any activities to
hedge against possible fluctuations in the prices of precious gems and metals.
If fluctuations in these prices are unusually large or rapid and result in
prolonged higher or lower prices, we cannot assure that the necessary retail
price adjustments can be made quickly enough to prevent us from being
adversely affected.
RISKS RELATED TO OWNERSHIP OF OUR SECURITIES
THE MARKET PRICE FOR OUR COMMON STOCK HAS BEEN HISTORICALLY VOLATILE AND IT MAY
BE DIFFICULT TO PREDICT THE FUTURE PRICE OF OUR COMMON STOCK.
From time to time, there has been and may continue to be significant
volatility in the market price for our common stock. Quarterly operating
results, changes in general conditions in the Thailand economy, the U.S.
economy, financial markets, natural disasters or other developments could
cause the market price of our common stock to fluctuate substantially.
BECAUSE THE MARKET FOR OUR COMMON STOCK LACKS LIQUIDITY, IT MAY BE DIFFICULT TO
PURCHASE OR SELL OUR STOCK ON THE PUBLIC MARKET.
Our common stock currently trades on the Pink Sheet Service and we expect
to apply to have our shares traded on the OTC Bulletin Board after this
registration statement clears the comment and review process of the United
States Securities and Exchange Commission. Although we will apply to list our
common stock on the NASDAQ Small Cap Market or American Stock Exchange, there
can be no assurance that an active public market for our common stock will be
created and sustained. Accordingly, investors may not be able to sell their
common stock should they desire to do so, or may be able to do so only at
lower than desired prices. While no prediction can be made as to the effect,
if any, that future sales of shares of our common stock, or the availability
of additional shares for future sales, will have on the market price of our
common stock prevailing from time to time, sales of substantial amounts of our
common stock or the perception that such sales could occur, would likely
adversely affect the market price for our common stock.
10
YOU WILL BE UNABLE TO EXERCISE ANY CONTROL OVER OUR MANAGEMENT BECAUSE A SINGLE
STOCKHOLDER CONTROLS 80% OF THE VOTING CONTROL OF TOPAZ GROUP, INC.
Ms. Jariya Sae-Fa, an officer and director of one of our subsidiaries and
sister of Dr. Apichart, is the principal stockholder of Best Worth. Best Worth
beneficially owns all of our outstanding series A and series B preferred stock
and controls approximately 95% of all stockholder votes primarily as a result
of its ownership of all of the 3,721,050 outstanding shares of our series A
and all of the 1,006,513 outstanding shares of our series B preferred stock,
which entitles the holder to 20 votes per share. Accordingly, Ms. Sae-Fa, as
Managing Member of Best Worth, is in a position to elect all of our directors
and to direct stockholder approval upon all issues to be voted upon by our
stockholders.
OUR OFFICERS AND DIRECTORS ARE GRANTED LIMITED LIABILITY FOR THEIR ACTIONS BY
OUR ARTICLES OF INCORPORATION AND BY-LAWS.
Our Articles of Incorporation and By-laws contain provisions limiting the
liability of our directors for monetary damages to the fullest extent
permissible under Nevada law. This is intended to eliminate personal liability
of a director for monetary damages in an action brought by or in the right of
Topaz Group, Inc. for breach of a director's duties to The Topaz Group, Inc.
or its stockholders except in certain limited circumstances. In addition, the
Articles of Incorporation and By-laws contain provisions requiring The Topaz
Group, Inc. to indemnify directors, officers, employees and agents of The
Topaz Group, Inc. serving at its request against expenses, judgments
(including derivative actions), fines and amounts paid in settlement. This
indemnification is limited to actions taken in good faith in the reasonable
belief that the conduct was lawful and in or not opposed to the best interests
of The Topaz Group, Inc. The Articles of Incorporation and By-laws provide for
the indemnification of directors and officers in connection with civil,
criminal, administrative or investigative proceedings when acting in their
capacities as agents for Topaz Group, Inc. The foregoing provisions may reduce
the likelihood of derivative litigation against directors and officers and may
discourage or deter stockholders or management from suing directors or
officers for breaches of their duties to Topaz Group Incorporated, even though
such an action, if successful, might otherwise benefit Topaz Group, Inc. and
its stockholders.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Future sales of shares of common stock by existing stockholders under Rule
144 of the Securities Act of 1933, as amended, could materially adversely
affect the market price of our common stock. A material reduction in the
market price of our common stock could materially impair our future ability to
raise capital through an offering of equity securities. A substantial number
of shares of common stock are available for sale under Rule 144 in the public
market or will become available for sale in the near future.
11
ITEM 2. SELECTED FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
The tables that follow present portions of our consolidated financial
statements and are not complete. You should read the following selected
consolidated financial information in conjunction with our consolidated
financial statements and related notes and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this registration statement. The consolidated statements of operations data
for the years ended December 31, 1998, 1999 and 2000 and the consolidated
balance sheet data as of December 31, 1999 and 2000 are derived from our
consolidated financial statements that have been audited by Grant Thornton
LLP, independent auditors, which are included elsewhere in this registration
statement. The consolidated statements of operations data for the years ended
December 31, 1996 and 1997 and the consolidated balance sheet data as of
December 31, 1996, 1997 and 1998 are derived from unaudited financial
statements that are not included in this registration statement, which in our
opinion reflect all adjustments necessary to present fairly our financial
position and results of operations for the periods presented. The statement of
operations data and balance sheet data for the three months ended March 31,
2000 and March 31, 2001 are derived from unaudited financial statements, which
in our opinion reflect all adjustments necessary to present fairly our
financial position and results of operations for the periods presented. The
historical results presented below are not necessarily indicative of the
results to be expected for any future year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Three Months Ended
Year Ended December 31, March 31,
--------------------------------------------------------------------- ----------------------------
2000 1999 1998 1997 1996 2001 2000
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Sales 32,483,043 19,881,283 18,886,737 17,622,804 24,309,947 4,586,043 4,466,439
Cost of Sales 23,672,904 11,025,824 10,976,881 12,937,673 21,654,240 3,280,297 3,305,165
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Profit 8,810,139 8,855,459 7,909,856 4,685,131 2,655,707 1,305,985 1,161,274
Selling, General &
Administrative Expenses 3,952,089 4,346,100 4,154,545 4,220,181 2,636,375 838,782 1,113,748
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating (Loss)Income 4,858,050 4,509,359 3,755,311 464,950 19,332 467,203 47,526
Other Income and expense Net (782,017) 1,826,234 884,299 4,845,289 (4,768,083) 775,089 (320,458)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before
extraordinary item 4,076,033 6,335,593 4,639,610 5,310,239 (4,748,751) 1,242,292 (272,932)
Extraordinary item-gain on
debt Restructuring -- 803,589 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Earnings (loss) 4,076,033 7,139,182 4,639,610 5,310,239 (4,748,751) 1,242,292 (272,932)
Preferred stock dividends -- (2,734,610) (12,270,000) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Earnings (loss) available
to common shareholders $ 4,076,033 $ 4,404,572 $(7,630,930) $ 5,310,239 $(4,748,751) $1,174,886 $ (272,932)
Weighted average shares of
Common Stock 829,727 763,000 763,000 763,000 763,000 1,171,974 763,000
Common stock and potentially
issuable common stock 5,639,419 5,498,680 -- 5,498,680 -- 6,052,449 --
Net earnings (loss) per share
Basic $ 4.91 $ 5.77 $ (10.00) $ 6.96 $ (5.47) $ 1.06 $ (0.36)
Diluted $ 0.72 $ 1.30 $ (10.00) $ 0.97 $ (5.47) $ 0.21 $ (0.36)
12
December 31, March 31, 2001
------------------------------------------------------------------- -------------------------
2000 1999 1998 1997 1996 2001 2000
---- ---- ---- ---- ---- ---- -----
(Unaudited) (Unaudited) (Unaudited) (unaudited)
Balance Sheet Data
Cash and Cash Equivalents 321,734 574,439 1,782,897 293,002 842,078 163,469 399,987
Working Capital 17,941,917 14,632,923 5,483,459 12,314,174 4,113,516 18,981,401 14,315,077
Total Assets 26,622,838 24,374,159 23,846,301 20,491,681 16,846,513 26,768,989 23,428,840
Total Liabilities 11,345,249 13,232,603 16,186,882 5,772,247 9,851,553 10,249,108 9,168,487
Total Stockholders' Equity 15,277,589 11,141,556 7,659,419 14,719,254 6,994,960 16,519,881 14,260,353
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of the financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes thereto. The following discussion contains
certain forward-looking statements that involve risk and uncertainties. Our
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not
limited to, risks and uncertainties related to the need for additional funds,
the rapid growth of the operations and our ability to operate profitably after
the initial growth period is completed. We undertake no obligation to publicly
release the results of any revisions to those forward-looking statements that
may be made to reflect any future events or circumstances.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
SALES. Total sales for the first three months ended March 31, 2001 were
$4,586,282 compared to $4,466,439 ended March 31, 2000, an increase of 2.68%.
The increase in sales is primarily attributed to increased sales of existing
jewelry lines to previous customers. The company realizes a significant amount
of seasonal sales and the first quarter sales are historically the quarter
that posts the lowest quarterly sales volume. Compared to the fourth quarter,
sales represent approximately 40% of total annual revenues.
COST OF GOODS SOLD. Cost of goods sold was $3,280,297 or 71.5% of sales
for the three months ended March 31, 2001 as compared to $3,305,165 or 74% of
sales during the three months ended March 31, 2000. The decrease in cost of
goods sold is due to reduced stone purchasing costs.
OPERATING COSTS. Operating costs were $838,782 for the three months ended
March 31, 2001, compared to $1,113,748 for the three months ended March 31,
2000. The decrease is largely attributed to a provision for bad debt expense
of $184,842 included in our March 21, 2000 operating costs and Baht
devaluation for calendar 2000 to calendar 2001.
OPERATING PROFIT. Operating profit for the three months ended March 31,
2001 was $467,203 compared to $47,526 for the three months ended March 31,
2000. This increase in profit is largely attributed to a reduction in selling,
general and administrative expenses.
OTHER INCOME. Other income and (expense) was $775,089 for the three months
ended March 31, 2001 compared to ($320,458) for the three months ended March
31, 2000. The increase in other income is attributed to a net increase in the
Currency Exchange Rate Gain and Remeasurement Gain of $1,099,693. Of the total
gain $882,402 relates to remeasurement of the redeemable ordinary shares
(liability). Our Thai subsidiaries maintain their books and records in Thai
Baht. However, their functional currency is the US dollar. Monetary assets and
liabilities and related income and expense items are remeasured using the
current rates. Certain non-monetary assets (notably property and equipment)
are remeasured at historical rates. Other nonmonetary balance sheet items and
related revenues, expenses, gains and losses are remeasured using average
exchange rates.
NET EARNINGS. We reported net earnings (loss) of $1,242,292 for the three
months ended March 31, 2001 compared to ($272,932) for the three months ended
March 31, 2000. The difference is largely attributed to a reduction in
selling, general and administrative expenses plus currency exchange rate and
remeasurement gain.
FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
SALES. Total sales were $32,483,043 in fiscal 2000 compared to $19,881,283
in fiscal 1999, an increase of 63.4%. The increase in sales is primarily
attributed to increased sales of jewelry to existing customers, aggressive
promotion of lower priced jewelry lines to new customers and the addition of
new customers due to increased participation in jewelry shows in the United
States of America and Hong Kong.
COST OF GOODS SOLD. Cost of goods sold was $23,488,062 in fiscal 2000,
72.3% of sales, compared to $11,025,824 in fiscal 1999, 55.4% of sales. The
increase in Cost of Goods Sold is due in part to increased incentive programs
for new customers and lower gross margin sales of jewelry manufactured with
lower grade stones.
OPERATING COSTS. Operating costs were $4,136,931 in fiscal 2000, 12.7% of
revenues, compared to $4,346,100 in fiscal 1999, 21.8% of revenues. This
decrease is due in part to reduced overtime pay for staff employees of
approximately $105,153, and to a Baht devaluation when applying the 1999
exchange rate to our year 2000 expenses.
OPERATING PROFIT. Operating profit for fiscal 2000 was $4,858,050 compared
to 1999 operating profit of 4,509,359 an increase of 7.7%. The increase is due
primarily to reduced selling, general and administrative expenses.
OTHER INCOME. Other income and (expense) were ($782,017) in fiscal 2000
compared to $1,826,234 in fiscal 1999, due to gains (losses) resulting from
currency fluctuations. Our Thai subsidiaries maintain their books and records
in Thai Baht. However, their functional currency is the US dollar. Monetary
assets and liabilities and related income and expense items are remeasured
using the current rates. Certain non-monetary assets (notably property and
equipment) are remeasured at historical rates. Other nonmonetary balance sheet
items and related revenues, expenses, gains and losses are remeasured using
average exchange rates.
NET EARNINGS. We reported net earnings of $4,076,033 for fiscal 2000
compared to $7,139,182 for fiscal 1999, a decrease of 42.9%. The difference
between operating profit and net earnings is largely attributed to currency
fluctuations and an extraordinary gain on debt restructuring that occurred
during the year ended December 31, 1999.
13
FISCAL PERIODS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
SALES. Total sales were $19,881,283 in fiscal 1999 compared to $18,886,737
in fiscal 1998, an increase of 5.3%. The fiscal 1999 increase in revenue is
primarily attributed to increased sales of jewelry to existing customers.
COSTS GOODS SOLD. Cost of goods sold was $11,025,824 in fiscal 1999
compared to $10,976,881 in fiscal 1998, an increase of 0.4%, due in part to
reduced raw stone purchasing costs.
OPERATING COSTS. Operating costs were $4,346,100 in fiscal 1999 compared
to $4,154,544 in fiscal 1998, an increase of 4.6%. This resulted from
increased Baht valuation in the fiscal 1999. Plus increased salaries of
approximately $159,759 also affected operating expenses.
OPERATING PROFIT. Operating profit for fiscal 1999 was $4,509,359 compared
to 1998 operating profit of $3,755,311 an increase of 20.1%, in part from an
increase in gross profit margin from 1998 to 1999 of 2.6%.
OTHER INCOME. Other income and (expense) were $1,826,234 in fiscal 1999
compared to $884,299 in fiscal 1998, an increase of 106.5%, resulting in part
to a net increase in the Currency Exchange Rate Gain and a Remeasurement Gain
of $917,753 or 106.9%. Our Thai subsidiaries maintain their books and records
in Thai Baht. However, their functional currency is the US dollar. Monetary
assets and liabilities and related income and expense items are remeasured
using the current rates. Certain non-monetary assets (notably property and
equipment) are remeasured at historical rates. Other non-monetary balance
sheet items and related revenues, expenses, gains and losses are remeasured
using average exchange rates.
EXTRAORDINARY ITEM. On July 30, 1999, Advance completed debt restructuring
with an investor that purchased the rights to the debt from a failed financial
institution, resulting in an extraordinary gain of $803,589. The debt
restructuring occurred as a result of the failure of the financial institution
and not Advance's ability to service the debt.
NET EARNINGS. We reported net earnings of $7,139,182 for fiscal 1999
compared to $4,639,610 for fiscal 1998, an increase of 53.9%. The difference
in operating income from net income is largely attributed to currency
fluctuations and extraordinary gain on debt restructuring for fiscal 1999.
14
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of working capital is income from operations,
borrowings under our revolving credit facilities and short-term loans from a
company affiliate. At December 31 2000, we had a cash and cash equivalent
balance of $321,734 and working capital of $17,941,917 compared to $574,439 of
cash and cash equivalents and working capital of $14,632,923 at December 31
1999.
Our operating activities provided (used) cash of $951,618 and ($1,398,827)
for fiscal 2000 and 1999. The increase in cash provided by operating
activities resulted primarily from our fiscal 2000 profit of $4,076,033, less
inventory growth of $2,137,554 and a non-cash gain of $752,760 on the
remeasurement of redeemable ordinary shares. Operating cash flow increased
from fiscal 1999 to 2000 because of a reduction in inventory growth when
compared to 1999 inventory. Sales growth from 1999 to 2000 was 63.4% while
inventories increased by only 11.6%. Selling, general and administrative
expenses also decreased by $209,169 causing an increase in operating income.
This increase is offset by a reduction in gross margin from 44.5% for fiscal
1999 to 27.7% for fiscal 2000. The reduction in gross margin is a result of
lower profit jewelry sales manufactured with lower grade stones in fiscal
2000. The decrease in net cash provided by financing activities for 2000 and
1999 was $1,299,085, due primarily to $1,736,947 in payments on notes payable
offset by $775,162 in additional net borrowings on our lines of credit. We
have two line of credit arrangements with two Thai financial institutions
entered into in October 1999 and April 2000. Both lines are renewable
automatically on a yearly basis and are subject to the banks' periodic reviews
resulting in adjustment of our credit limit.
The 1999 and 2000 lines bear interest at a rate equal to LIBOR plus two
percent (8.208% December 31, 2000), The 1999 line is personally guaranteed by
two of our directors and collateralized by various real estate properties
belonging to us and one of our directors. The 2000 line is also guaranteed by
two of our directors and secured by a deed on a real estate property owned by
a related party. As of December 31, 2000, approximately $836,000 and $493,000
were available for borrowing under the 1999 and 2000 line, respectively. As of
December 31, 2000, the outstanding balance under both lines of credit was
$775,162.
Management believes we have the ability to meet our current and
anticipated financing needs for the next twelve months with the facilities in
place and funds from operations, however, given our growth prospects, we may
need to seek increases in our credit facilities during the upcoming year to
sustain further revenue growth.
Item 3. Description of Property
Topaz operates four fully integrated facilities in various parts of
Thailand totaling 101,000 square feet.
15
Our headquarters, administrative facilities and primary manufacturing
facilities are located in the Topaz Tower, a 15 story tower at 126/1
Krungthonburi Road, Banglampoo Lang, Klongsarn, Bangkok, Thailand that
encompass approximately 90,800 square feet. We occupy 74,000 square feet of
this space subject to a lease that expires February 28, 2011 at a cost of
approximately $3,200 per month and we lease the remaining 16,800 square feet
on a month to month basis. We also have manufacturing facilities located at
Mai Sai, Thailand, which we occupy subject to a lease that expires August 15,
2004 at a cost of approximately $200 per month, Lop Buri, Thailand, which we
occupy subject to a lease that expires April 19, 2002 at a cost of
approximately $760 per month, and Prayao, Thailand, which we lease on a month
to month basis. The factory at Mai Sai encompasses approximately 11,000 square
feet, the factory at Lop Buri encompasses approximately 8,600 square feet and
the factory at Prayao encompasses approximately 5,250 square feet. We expect
that we will be able to renew our leases when they expire. If, however, we are
unable to renew any of our leases, we believe that there is widely available
commercial space for leasing in each of our locations and that we would be
able to relocate our capital equipment into a new space without experiencing a
material adverse impact on our results from operations or operating expenses.
We lease offices located in Bellevue, Washington which are subject to a
lease that provides for monthly rent of $3,000, the offices are approximately
1,500 useable square feet with a termination date of September 1, 2001. We
intend to lease approximately 2,100 square feed of office space for a term of
five years in Issaquah, Washington.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common stock and series A and series B preferred
stock as of July 31, 2001 by:
o each person known by us to beneficially own more than 5% of the
outstanding shares of common stock, preferred stock or series B
preferred stock;
o each of our directors and named executive officers; and
o our directors and executive officers as a group.
16
Each share of common stock and series A preferred stock is entitled to one
vote per share while each share of series B preferred stock is entitled to
twenty votes per share. The shares of series A preferred are convertible into
shares of common stock at anytime. The shares of series B preferred stock are
convertible into shares of common stock upon specified events.
Series A Series B
Common Stock Preferred Stock Preferred Stock
------------ --------------- ---------------
Name and Address of Percent Percent Percent
Beneficial Owner (1) No. of No. of No. of
Shares Class Shares Class Shares Class
------ ----- ------ ----- ------ -----
Best Worth Agents, Ltd. (2) -- -- 3,721,050 100% 1,006,513 100%
U.S. Heritage Capital Corp. 148,000 11.17% -- -- -- --
5770 Wulff Run Road
Cincinnati, OH 45233
Ray L. Sloan 120,000 9.06% -- -- -- --
8728 CR 1016
Burleson, TX 76028
Jeremy F. Watson 100,000 7.55% -- -- -- --
Thammatinna Thammaradi -- -- -- -- -- --
Leonard Orrin -- -- -- -- -- --
David Dikinis -- -- -- -- -- --
Dr. Aphichart Fufuangvanich 27,000 2.04% -- -- -- --
Terrance C. Cuff 100,000 7.55% -- -- -- --
Timothy Matula 101,250 7.64% -- -- -- --
Thiti Fufuangvanich -- -- -- -- -- --
Alson Lee -- -- -- -- -- --
All Officers and Directors 328,250 24.78% -- -- -- --
as a group (nine (9)
persons,including the
foregoing)
<FN>
- --------------------
(1) Unless otherwise indicated, the address of each beneficial owner is the
care of Topaz Group Incorporated, Inc., 126/1 Krungthonburi Road,
Banglampoo Lang, Klongsarn, Bangkok 10600 Thailand.
(2) Jariya Sae-Fa is the beneficial owner of Best Worth Agents, Ltd. and
the sister of Dr. Aphichart Fufuangvanich, who is also one of our
directors.
</FN>
17
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their present positions with us
are as follows:
NAME AGE POSITION
Jeremy F. Watson 60 Chairman of the Board of Directors
Dr. Aphichart Fufuangvanich 51 Director and President
Thammatinna Thammaradi 40 Director and Executive Vice President
Terrance C. Cuff 38 Director and Chief Financial Officer
Timothy Matula 40 Director and Treasurer
Leonard T. Orrin 53 Director and Director of Sales
Thiti Fufuangvanich 22 Director and Director of Research
and Development
David Dikinis 48 Independent Director
Alson Lee 74 Independent Director
JEREMY F. WATSON has served as Chairman of the Board of Directors since
September 1999. From March 1996 to February 1998, he served as Regional Vice
President for Fritz Gegauf, A.G. From October 1973 to February 1996, Mr.
Watson served in various positions at The Singer Company, the last being
Managing Director of China Operations. He is a Fellow of the Institute of
Chartered Accountants in England and Wales.
DR. APHICHART FUFUANGVANICH has served us as president and as a director
since February 2001. He has worked within the manufacturing and sales business
for over 30 years. Dr. Aphichart Fufuangvanich has extensive experience within
this field and has spent the last five years consulting to various stone
manufacturing and sales companies, including Topaz Group. Dr. Apichart is the
father of director Thiti Fufuangvanich.
THAMMATINNA THAMMARADI has served as an executive vice president since
February 2000 and a director since September 1999, and has served as a
director of Topaz Group since September 1999. She has been involved in the
jewelry industry for over 10 years. She received an MBA in finance from the
University of Denver and a Bachelors Degree in Economics from Thammasat
University, Bangkok.
TERRANCE C. CUFF has served us as chief financial officer and as a
director since February 2001. From January 1994 to February 2000, he was the
President and a shareholder of Business Exchange Center, Inc., a merger &
acquisitions firm. Prior to holding the President position he served as senior
valuation analyst, from 1989 to 1994 with the same firm.
TIMOTHY MATULA has served us as treasurer and as a director since February
2001. He is currently a principal in Quantum Capital Advisors, a money
management and corporate advisory firm. He is also currently a member of the
Board of Directors at Eat at Joe's, Inc. From 1994 to 1997, Mr. Matula served
as Assistant Vice President of and Quantum Portfolio Manager at Prudential
Securities.
LEONARD T. ORRIN has served as director of sales and as a director for
Topaz Group since September 1999 and the Director of Sales for Topaz Group's
subsidiaries since August 1995. Previously, he provided consulting services to
various stone manufacturing and sales firms.
THITI FUFUANGVANICH has served as a director and the director of research
and development since February 2001. From 1996 to 1999, he was a member of the
Faculty of Engineering at Chulalongkorn University. He was the President of
Student Government at Chulalongkorn University in 1999. Thiti Fufuangvanich is
the son of director Dr. Aphichart Fufuangvanich.
DAVID DIKINIS has served us as an independent director since February
2001. He is the founder of Gemstones.com, Amulet, Gemstone and Jewelry Catalog
and Talisman Catalog each of which he established 1985. Mr. Dikinis is a
Gemologist (GIA) and former board member of the American Gem Trade Association
(AGTA).
18
ALSON LEE has served us as an independent director since February 2001. He
served in various functions within The Singer Company, including Vice
President Pacific Region. Since retiring from The Singer Company, he has
worked as a volunteer executive with the International Executive Service Corps
with project assignments in Estonia from November 1993 to December 1993,
Russia from May 1996 to June 1996, and Kazakhstan from September 1997 to
October 1997. Mr. Lee also is a certified public accountant in the State of
New York and the District of Columbia.
ELECTION OF OFFICERS AND DIRECTORS
All of our directors hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified. Our
officers are elected by the Board of Directors at the first Board of
Directors' meeting after each annual meeting of shareholders and hold office
until their death, until they resign or until they have been removed from
office.
ITEM 6. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation that will be paid on an annualized basis to the our chief
executive officer and the three (3) other most highly paid executive officers
for all services to be rendered in all capacities to us during the fiscal
years ended December 31, 1998, 1999 and 2000.
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Other Restricted Securities
Name and Principal Fiscal Salary Annual Stock Underlying All Other
Position Year ($) Bonus Compensation Awards Options Compensation
- ------------------ ------ ------ ------- ------------ ---------- ---------- ---------
Kasem 2000 29,653 0 0 0 0 0
Chitmunchaitham, 1999 31,710 0 0 0 0 0
President and Chief 1998 8,743 0 0 0 0 0
Executive Officer
(1)
We did not grant stock options in 2000.
No executive officer held stock options during the 2000 fiscal year. As of
the date of this registration statement, no executive officer holds stock
options.
2001 STOCK OPTION PLAN
Our board of directors adopted our stock option plan on May 15, 2001.
Options granted under the plan may include those qualified as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended, as
well as non-qualified options. Employees as well as other individuals, such as
outside directors and consultants of Topaz Group (and our affiliated
corporations) who are expected to contribute to our future growth and success
are eligible to participate in the plan. However, incentive stock options may
only be granted to persons who are employees of Topaz Group or certain of our
affiliates on the date of grant. As of July 30, 2001 no options had been
granted under the plan.
19
and/or non-qualified option will be granted, the number of shares to be
subject to each option, and the date or dates each option will become
exercisable.
The following summary of the plan is qualified in its entirety by
reference to the text of the plan, a copy of which is filed as an exhibit to
this registration statement.
TYPES OF GRANTS AND AWARDS
The plan permits the grant of options which are intended to either be
"incentive stock options" within the meaning of Section 422 of the Code, or
"non-qualified stock options", which do not meet the requirements of Section
422 of the Code.
ELIGIBILITY
All employees (including officers), directors and consultants of Topaz
Group and our affiliated corporations are eligible to be granted options under
the plan. We currently have 2,000 employees. Employees under the Queen's
Sponsored Program or outside subcontractors are not eligible for options.
STOCK SUBJECT TO THE PLAN
The total number of shares of common stock for which options may be
granted under the plan may not exceed 1,000,000, subject to possible
adjustment in the future, including adjustments in the event of a
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction affecting our common stock. Any shares of
common stock subject to any option, which for any reason expires, is canceled
or is terminated unexercised will again become available for granting of
options under the plan. However, once this registration statement becomes
effective, none of our employees may be granted options individually with
respect to more than 2,000,000 shares of common stock during any calendar
year.
ADMINISTRATION
Once this registration statement becomes effective, the plan will be
administered by a committee of the board of directors of two directors, each
of whom is a "Non-Employee Director" within the meaning of regulations
promulgated by the Securities and Exchange Commission and an "Outside
Director," within the meaning of regulations promulgated by the U.S.
Department of the Treasury. The stock option plan committee has the authority
under the plan to determine the terms of options granted under the plan,
including, among other things, the individuals who will receive options, the
times when they will receive them, whether an incentive stock option and/or
non-qualified option will be granted, the number of shares to be subject to
each option, the date or dates each option will become exercisable (including
whether an option will become exercisable upon certain reorganizations,
mergers, sales and similar transactions involving The Topaz Group, Inc.),
and the date or dates upon which each option will expire. The stock option
plan committee has the authority, subject to the provisions of the plan, to
construe the terms of option agreements and the plan; to prescribe, amend and
rescind rules and regulations relating to the plan; and to make all other
determinations in the judgment of the stock option plan committee necessary or
desirable for the administration of the plan.
EXERCISE PRICE
The exercise price of options granted under the plan is determined by the
stock option plan committee, but in the case of an incentive stock option may
not be less than:
o 100% of the fair market value of the common stock on the date the
incentive stock option is granted; and
o 110% of such fair market value in the case of incentive stock options
granted to an optionee who owns or is deemed to own stock possessing more
than 10% of the total combined voting power of all classes of stock of
Topaz Group.
20
The exercise price is payable by delivery of cash or a check to the order
of The Topaz Group in an amount equal to the exercise price of such options,
or by any other means (including, without limitation, cashless exercise),
which the board of directors determines are consistent with the purpose of the
plan and with applicable laws and regulations.
TERMS AND CONDITIONS
Options granted to employees and consultants may be granted for such terms
as are established by the stock option plan committee, provided that, the
term will be for a period not exceeding ten years from the date of the
grant, and further provided that incentive stock options granted to a
stockholder who is the beneficial owner of 10% of our common stock will be
for a period not exceeding five years from the date of grant.
Except to the extent otherwise determined by the stock option plan
committee at the time of grant of a non-qualified stock option, if an
optionee's relationship with Topaz Group is terminated for any reason
other than "disability" or death, the option may be exercised at any time
within three months thereafter to the extent exercisable on the date of
termination. However, in the event that the termination of such
relationship is either (a) for cause, or (b) otherwise attributable to a
breach by the optionee of an employment or confidentiality or
non-disclosure agreement, such option will terminate immediately.
Except to the extent otherwise determined by the stock option plan
committee at the time of grant of a non-qualified stock option, in the
event of the death of an optionee while an employee of, or consultant or
advisor to Topaz Group, within three months after the termination of such
relationship (unless such termination was for cause or without the consent
of Topaz Group) or within one year following the termination of such
relationship by reason of the optionee's "disability", the option may be
exercised, to the extent exercisable on the date of his or her death, by
the optionee's legal representatives at any time within one year after
death, but not thereafter and in no event after the date the option would
otherwise have expired.
An option may not be transferred other than by will or the laws of descent
and distribution and may be exercised during the lifetime of the optionee
only by the optionee.
The stock option plan committee may accelerate the date or dates on which
an option may be exercised, or extend the dates during which an option may
be exercised, provided, that no such acceleration or extension with cause
any option intended to be an incentive stock option to fail to qualify as
an incentive stock option, or cause the plan or any option granted
thereunder to fail to comply with applicable short-swing profit rules
promulgated by the Securities and Exchange Commission.
The stock option plan committee may include additional provisions in
option agreements, including without limitation, restrictions on transfer,
repurchase rights, rights of first refusal, commitments to pay cash bonuses or
to make, arrange for or guaranty loans or to transfer other property to
optionees upon exercise of options, provided, that such additional provisions
will not be inconsistent with the requirements of applicable law and such
additional provisions will not cause any option intended to be an incentive
stock option to fail to qualify as an incentive stock option.
EMPLOYMENT AGREEMENTS
As of the date of this registration statement, Topaz Group has no
employment agreements with any of its executive officers.
DIRECTOR COMPENSATION
There is no compensation for directors either on an annual basis or for
attendance at board meetings.
21
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended December 31, 1999, we exchanged an aggregate
of $905,369 of gemstones from Calibration of Gems Factory Co., Ltd., Well Gems
& Jewelry Co., Ltd. and Trillion Royal Grand Company Limited, companies
controlled by Dr. Aphichart Fufuangvanich. Dr. Aphichart is a director of the
Topaz Group. These transactions were negotiated at arms length and the prices
paid for the gemstones were no less favorable than those we could have
obtained from independent parties on the open market.
Ms. Jariya Sae-Fa, a director of our wholly owned subsidiary Creative
through January 2001 and the managing member of Best Worth Agents, Ltd., had
loaned The Topaz Group the cumulative amount of $543,929 as of December 31,
2000, $460,300 of which remains due and payable to Ms. Sae-Fa as of March 31,
2001. The loans from Ms. Sae-Fa have no term and do not bear interest. The
debts are classified as a current liability and expected to be paid within the
fiscal year.
ITEM 8. LEGAL PROCEEDINGS
We are not presently a party to any litigation material to our ongoing
business operations or financial condition.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS
EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Pink Sheets Service under the symbol
"TPAZ". The Pink Sheets Service is a quotation service operated by the
National Quotation Bureau, LLC, a paper quotation medium printed weekly and
distributed to brokers/dealers. The "Pink Sheets" does not impose listing
standards or requirements, does not provide automatic trade executions, and
does not maintain relationships with quoted issuers. Issuers whose securities
are quoted on the "Pink Sheets" may experience a loss of market makers, a lack
of readily available "bid" and "asked" prices for their securities, a greater
spread between the "bid" and "asked" price for their securities, and a general
loss of liquidity in their securities.
As of July 27, 2001, we had 1,324,886 shares of common stock outstanding
held by 562 stockholders of record.
The following table sets forth the range of high and low bid prices of our
common stock for the fiscal quarters of 1998, 1999 and 2000, and for the
fiscal quarters ended March 31 and June 30, 2001. The quotations represent
prices between dealers in securities, do not include retail mark-ups,
markdowns or commissions and do not necessarily represent actual transactions.
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
1998 5.00 2.38 2.88 .34 1.19 .38 .63 .16
1999 1.06 .25 3.75 .56 1.19 .38 .75 .38
2000 1.25 .38 1.03 .42 .75 .36 1.55 .31
2001 1.25 .70 2.70 1.25 N/A N/A N/A N/A
The Topaz Group has not paid common stock dividends.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
We issued the following unregistered securities during the three-year
period ended June 30, 2001.
22
In April 1999, we entered into two separate exchange agreements with Best
Worth Agents, Ltd., a British Virgin Islands corporation, to acquire all of
the issued and outstanding preferred shares of Creative Gems and Jewelry Co.,
Ltd. and Advance Gems and Jewelry Co., Ltd., both Thai corporations. According
to the terms of the exchange agreements, Topaz acquired 99.7% of the voting
and dividend participation rights in each Thai company from Best Worth in
consideration for which Topaz issued to Best Worth all shares of series A
convertible voting and participating preferred stock. The terms of the
preferred stock provide Best Worth with the right to one vote for each share
of preferred stock on all matters voted on by holders of our common stock, as
well as the right to receive dividends paid to preferred shareholders by The
Topaz Group Incorporated. We issued shares of our preferred stock to Best
Worth in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933. We believe that the exemption afforded by
Section 4(2) of the Securities Act is applicable to the Best Worth Transaction
because it was a sale of securities by an issuer not involving a public
offering, and the shares were offered to a single accredited investor in an
offering not involving a general solicitation.
In September 2000, we issued warrants to purchase an aggregate of 32,884
shares of common stock to three consultants as compensation for services
rendered to us. The names of the persons to whom these securities were issued
and the number of shares of our common stock issuable to each person upon
exercise of the warrants by such person are as follows:
NAME COMMON SHARES ISSUABLE
Timothy Matula 4,933
Terrance C. Cuff 12,179
Herbert H. Wax 15,772
We issued these warrants to each consultant in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. We
believe that the exemption afforded by Section 4(2) of the Securities Act is
applicable to this placements because it was a sale of securities by an issuer
not involving a public offering, and the shares were offered to three
accredited or sophisticated investors in an offering not involving a general
solicitation.
On May 5, 1999, we issued 210,000 shares of common stock each to Jim Fain
and Sakon, Ltd. In consideration for services rendered in connection with the
share exchange between Topaz Group Incorporated and Best Worth Agents, Ltd.
Both sales were made in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.
ITEM 11. DESCRIPTION OF SECURITIES
The authorized capital stock of the Topaz Group consists of one hundred
million shares of common stock, 1,324,886 of which were outstanding as of June
25, 2001, and held of record by approximately 562 shareholders, and fifty
million shares of preferred stock. Of the preferred stock, we have authorized
26,000,000 shares of Series A and 10,000,000 shares of Series B, of which
3,721,050 and 1,006,513 shares, respectively, were issued and outstanding as
of June 25, 2001. The following summaries of certain provisions of the common
stock and certain of the rights and privileges of the preferred stock do not
purport to be complete and are subject to, and qualified in their entirety by,
the provisions of our Restated Articles of Incorporation, Bylaws, and the
Certification of Designation of series A preferred stock and series B
preferred stock, each of which is included as an exhibit to this registration
statement, as well as and by the provisions of applicable law.
23
COMMON STOCK
The holders of our common stock:
are entitled to one vote per share on all matters to be voted on by
stockholders generally, including the election of directors;
do not have cumulative voting rights;
do not have preemptive, subscription or conversion rights and there are no
redemption or sinking fund provisions or rights applicable thereto;
are entitled to dividends and other distributions as may be declared from
time to time by the board of directors out of any funds legally available
for that purpose; and,
will, upon the liquidation, dissolution or winding up of Topaz Group
Incorporated, share ratably in the distribution of all of our assets
remaining available for distribution after satisfaction of all of the our
liabilities and the payment of the liquidation preference of any
outstanding preferred stock, if such stock is at any time authorized,
issued and outstanding.
All shares of our common stock now outstanding are fully paid and
non-assessable. Reference is made to the our Articles of Incorporation,
By-Laws and the applicable statutes of the State of Nevada for a more complete
description of the rights and liabilities of the holders of our common stock.
SERIES A AND SERIES B PREFERRED STOCK
Our Board of Directors has authorized the issuance of two series of
preferred stock, designated as series A preferred stock, consisting of
26,000,000 shares, par value $.001 per share and series B preferred stock,
consisting of 10,000,000 shares, par value $.001 per share. A certificate of
designation filed with the secretary of state of Nevada governs the terms and
conditions of the series A and series B preferred stock. Except as otherwise
provided herein, the series A preferred stock and the series B preferred stock
shall rank on a parity with each other, shall have the same rights,
preferences and privileges, and shall collectively referred to herein as the
"preferred stock." The following is a brief description of key terms of the
preferred stock.
DIVIDENDS.
The holders of shares of the preferred stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of our assets
legally available therefore, non-cumulative dividends on a pro rata basis
with all other holders of preferred stock (as adjusted for any stock
dividends, combinations or splits with respect to such stock).
Each fractional share of preferred stock outstanding shall be entitled to
a ratably proportionate amount of any dividends or other distributions
made with respect to each outstanding share of preferred stock, and all
such distributions shall be payable in the same manner and at the same
time as distributions on each outstanding share of preferred stock.
PREFERENCES ON LIQUIDATION.
In the event of any dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, the holders of preferred
stock shall be entitled to receive out of our assets, for each share of
preferred stock then outstanding, before any payment or distribution shall
be made in respect of our common stock, cash in an amount equal to (i)
$0.001 (as adjusted for any stock dividend, split, combination,
recapitalization or similar transaction with respect to the capital stock
of the Corporation), plus an amount equal to all accrued or declared but
unpaid dividends thereon to the date of such payment, and (ii) the pro
rata share of any proceeds, treating the preferred stock as if converted
into shares of common stock.
24
If upon our liquidation, dissolution, or winding up, our assets available
for distribution to our stockholders shall be insufficient to pay the
holders of the preferred stock the full liquidation preference, the
holders of the preferred stock shall all share in any distribution of
assets, each getting a relative share of the distribution based on their
relative holdings of the preferred stock.
CONVERSION RIGHTS
Each share of series A preferred stock shall be convertible, at the option
of the holder thereof and without the payment of additional consideration by
the holder thereof, at any time, into one share of common stock.
FORCED CONVERSION
We may force a conversion of the series A preferred stock if we sell our
common stock in a public offering at a price to the public of at least
$4.00 per share and in which we receive more than $5,000,000 in gross
proceeds or if we sell all or substantially all of our assets or capital
stock to another entity. The series B preferred stock will automatically
convert into common stock on a one-to-one basis immediately prior to
either the sale of all of our capital stock to a third party or the merger
of The Topaz Group into another surviving company.
VOTING RIGHTS
Except as otherwise required by applicable law, the holders of preferred
stock shall be entitled to vote on all matters on which the holders of common
stock shall be entitled to vote, in the same manner and with the same effect
as the holders of common stock, voting together with the holders of common
stock as a single class. For this purpose, the holders of preferred stock
shall be given notice of any meeting of stockholders as to which the holders
of common stock are given notice in accordance with our bylaws.
As to any matter on which the holders of preferred stock shall be entitled
to vote, each holder of series A preferred stock shall have a number of votes
per share equal to the number of shares of common stock into which such share
of preferred stock is convertible.
As to any matter on which the holders of preferred stock shall be entitled
to vote, each holder of series B preferred stock shall have a number of votes
per share of series B preferred stock equal to twenty (20) times the number of
shares of common stock into which such share of series B preferred stock is
convertible.
So long as any shares of preferred stock are outstanding, we will not
(a) alter or change any of the powers preferences, privileges, or
rights of the series A or series B preferred stock; or
(b) amend the provisions of the certificate of designation changing
the seniority, liquidation, conversion or other rights of the
series A or series B preferred stock, without first obtaining
the approval of the holders of at least a majority of the
outstanding shares of series A or series B preferred stock, as
applicable.
ANTI-TAKEOVER EFFECTS OF OUR ARTICLES OF INCORPORATION AND BY-LAWS
Some provisions of our Articles of Incorporation and By-Laws may be deemed
to have an anti-takeover effect and may delay, defer or prevent a tender offer
or takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by our stockholders. These provisions include:
Authorized But Unissued Shares. The authorized but unissued shares of
common stock are available for future issuance without stockholder
approval. These additional shares may be utilized for a variety of
corporate purposes including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence
of authorized but unissued and unreserved
25
common stock could render more difficult or discourage an attempt to gain
control of us by means of a proxy contest, tender offer, merger or
otherwise.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Transfer Online,
Inc. and is located at 227 SW Pine Street, Suite 300, Portland Oregon 97204.
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS
LIMITATION ON DIRECTOR'S LIABILITY
Under Nevada Revised Statutes Section 78.7502 and 78.751, our articles of
incorporation and bylaws provide us with the power to indemnify any of our
directors, officers, employees or agents. The director, officer, employ or
agent must have conducted himself in good faith and reasonably believe that
his conduct was in, or not opposed to our best interests. In a criminal action
the director, officer, employee or agent must not have had a reasonable cause
to believe his conduct was unlawful. Advances for expenses may be made if the
director affirms in writing that he believes he has met the standards and that
he will personally repay the expense if it is determined he did not meet the
standards.
We will not indemnify a director or officer adjudged liable due to his
negligence or willful misconduct toward us, adjudged liable to us, or if he
improperly received personal benefit. Indemnification in a derivative action
is limited to reasonable expenses incurred in connection with the proceeding.
We have agreed to indemnify each of our directors and certain officers
against certain liabilities, including liabilities under the Securities Act of
1933.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling
persons pursuant to the provisions described above, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than our payment of expenses
incurred or paid by our director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered for resale, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
ITEM 13. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
26
CONSOLIDATED FINANTIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF EARNINGS F-5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
F-2
Report of Independent Certified Public Accountants
Board of Directors
The Topaz Group, Inc.
We have audited the accompanying consolidated balance sheets of The Topaz
Group, Inc. and Subsidiaries as of December 31, 1999 and 2000 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. These
consolidated financial statements 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Topaz
Group, Inc. and Subsidiaries as of December 31, 1999 and 2000 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton LLP
- ----------------------
Seattle, Washington
March 14, 2001 (except for note N as to which the
date is July 9, 2001)
F-3
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, March 31,
---------------------------- -------------
1999 2000 2001
------------- ------------- -------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 574,439 $ 321,734 $ 163,469
Accounts receivable, net of
allowance of
$606,384, $923,474, and
$788,037 2,089,413 3,299,161 2,745,612
Receivables from related
parties 905,369 19,456 210,135
Inventories 18,488,948 20,626,502 21,013,738
Prepaid expenses and deposits 230,660 196,376 451,353
----------- ----------- -----------
Total current assets 22,288,829 24,463,229 24,584,307
PROPERTY AND EQUIPMENT - NET 2,030,502 2,127,733 2,151,429
OTHER ASSETS 54,828 31,876 33,253
----------- ----------- -----------
Total assets $24,374,159 $26,622,838 $ 26,768,989
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ -- $ 775,162 $ 493,425
Accounts payable 5,000,979 4,401,675 3,846,763
Accrued liabilities 301,711 473,177 513,727
Payables to related party 616,269 871,298 748,991
Notes payable 1,736,947 -- --
----------- ----------- -----------
Total current 7,655,906 6,521,312 5,602,906
liabilities
REDEEMABLE ORDINARY SHARES 5,576,697 4,823,937 4,646,202
COMMITMENTS -- -- --
STOCKHOLDERS' EQUITY
Class A preferred stock,
liquidation preference of
$9,252,879, $10,153,954
and $10,979,292 5,127,654 4,827,477 4,483,724
Class B preferred stock,
liquidation preference of -- 1,007 1,007
$0, $2,541,646 and
$2,748,237
Common stock 763 1,025 1,325
Additional paid in capital 43,052 402,474 745,927
Retained earnings 5,970,087 10,045,606 11,287,898
----------- ----------- -----------
11,141,556 15,277,589 16,519,881
----------- ----------- -----------
Total liabilities and $ 24,374,159 $26,622,838 $ 26,768,989
stockholders' equity ============= ============= =============
The accompanying notes are an integral part of these statements.
F-4
The Topaz Group, Inc. and Subsidiaries (Loss)
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31, Three months ended March 31,
-------------------------------------------- ----------------------------
1998 1999 2000 2000 2001
------------- ------------- ------------- ------------- ------------
(unaudited) (unaudited)
Sales $ 18,886,737 $ 19,881,283 $ 32,483,043 $ 4,466,439 $ 4,586,282
Cost of goods sold 10,976,881 11,025,824 23,488,062 3,305,165 3,280,297
------------ ------------ ------------ ------------ ------------
Gross profit 7,909,856 8,855,459 8,994,981 1,161,274 1,305,985
Selling, general and 4,154,545 4,346,100 4,136,931 1,113,748 838,782
administrative expenses
------------ ------------ ------------ ------------ ------------
Earnings from operations 3,755,311 4,509,359 4,858,050 47,526 467,203
Other income (expense)
Exchange rate gain (loss) (3,722,629) 320,075 86,164 10,850 93,357
Interest expense (235,932) (79,399) (101,256) (14,054) (14,603)
Interest income 153,434 18,224 4,114 -- --
Gain (loss) on remeasurement 4,580,806 1,455,855 (831,288) (335,521) 681,665
Other, net 108,620 111,479 60,249 18,267 14,670
------------ ------------ ------------ ------------ ------------
884,299 1,826,234 (782,017) (320,458) 775,089
------------ ------------ ------------ ------------ ------------
Earnings (loss) before 4,639,610 6,335,593 4,076,033 (272,932) 1,242,292
extraordinary item
Extraordinary item - gain on debt -- 803,589 -- -- --
restructuring
------------ ------------ ------------ ------------ ------------
Net earnings (LOSS) $ 4,639,610 $ 7,139,182 $ 4,076,033 $ (272,932) $ 1,242,292
============ ============ ============ ============ ============
Earnings (loss) per share before
extraordinary item:
Basic $ (10.00) $ 4.71 $ 4.91 $ (0.36) $ 1.06
============ ============ ============ ============ ============
Diluted $ (10.00) $ 1.15 $ 0.72 $ (0.36) $ 0.21
============ ============ ============ ============ ============
NET EARNINGS (LOSS) PER SHARE:
Basic $ (10.00) $ 5.77 $ 4.91 $ (0.36) $ 1.06
============ ============ ============ ============ ============
Diluted $ (10.00) $ 1.30 $ 0.72 $ (0.36) $ 0.21
============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
F-5
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2001 (unaudited)
Thai Class A Class B Additional
Preferred Preferred Preferred Subscriptions Ordinary Common Paid-In
Stock Stock Stock Receivable Shares Stock Capital
---------- --------- --------- ------------- --------- --------- -----------
Balance at January 1, 1998 $- $- $- $ (2,118,651) $ 7,642,284 $ -- $ --
Subscriptions received -- -- -- (1,883,729) -- -- --
Dividends -- -- -- -- -- -- --
Issuance of Class B
Preferred and
Ordinary shares
totaling 9,800,000
and 200,000,
respectively 2,404,920 -- -- -- 49,080 -- --
Net earnings for the
year -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ----------- ------------
Balance at December 31, 2,404,920 -- -- (4,002,380) 7,691,364 -- --
1998
Issuance of Thai
Preferred and
Ordinary shares
totaling 9,800,000
and 200,000,
respectively, on
February 19, 1999 2,593,080 -- -- -- 52,840 -- --
Issuance of Thai
Preferred and
Ordinary shares
totaling 490,000 and
510,000, respectively
on March 1, 1999 129,654 -- -- -- 134,742 -- --
Payment of subscription
receivable -- -- -- 4,002,380 -- -- --
Share exchange
agreement on May 1, 1999 (5,127,654) 5,127,654 -- -- (7,878,946) 763 3,052
Warrants issued for
services -- -- -- -- -- -- 40,000
Dividends -- -- -- -- -- -- --
Net earnings for the
year -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ----------- ------------
Balance at December 31, -- 5,127,654 -- -- -- 763 43,052
1999
Conversion of preferred
stock into common -- (299,684) -- -- -- 262 299,422
Issuance of additional
preferred shares
under exchange
agreement -- 514 -- -- -- -- --
Re-designation of
preferred shares -- (1,007) 1,007 -- -- -- --
Warrants issued for
services -- -- -- -- -- -- 60,000
Net earnings for the
year -- -- -- -- -- -- --
Balance at December 31,
2000 -- 4,827,477 1,007 -- -- 1,025 402,474
------------ ------------ ------------ -------------- ------------ ------------ ------------
Conversion of Preferred
Stock into Common -- (343,753) -- -- -- 300 343,453
Net earnings for the
three months -- -- -- -- -- -- --
------------ ------------ ------------ -------------- ------------ ------------ ------------
Balance at March 31, $ -- $ 4,483,724 $ 1,007 $ -- $ -- $ 1,325 $ 745,927
2001 ============ ============ ============ ============== ============ ============ ============
F-6
Retained
Earnings Total
-------- -----
Balance at January 1, 1998 $ 9,195,905 $ 14,719,538
Subscriptions received -- (1,883,729)
Dividends (12,270,000) (12,270,000)
Issuance of Class B
Preferred and
Ordinary shares
totaling 9,800,000
and 200,000,
respectively -- 2,454,000
Net earnings for the
year 4,639,610 4,639,610
------------ ------------
Balance at December 31, 1998 1,565,515 7,659,419
Issuance of Thai
Preferred and
Ordinary shares
totaling 9,800,000
and 200,000,
respectively, on
February 19, 1999 -- 2,645,920
Issuance of Thai
Preferred and
Ordinary shares
totaling 490,000 and
510,000, respectively
on March 1, 1999 -- 264,396
Payment of subscription
receivable -- 4,002,380
Share exchange
agreement on May 1, 1999 -- (7,875,131)
Warrants issued for
services -- 40,000
Dividends (2,734,610) (2,734,610)
Net earnings for the
year 7,139,182 7,139,182
------------ ------------
Balance at December 31, 1999 5,970,087 11,141,556
Conversion of preferred
stock into common -- --
Issuance of additional
preferred shares
under exchange
agreement (514) --
Re-designation of
preferred shares -- --
Warrants issued for
services -- 60,000
Net earnings for the
year 4,076,033 4,076,033
------------ ------------
Balance at December 31, 2000 10,045,606 15,277,589
Conversion of Preferred
Stock into Common -- --
Net earnings for the
three months 1,242,292 1,242,292
------------ ------------
Balance at March 31, 2001 $ 11,287,898 $ 16,519,881
============ ============
The accompanying notes are an integral part of this statement.
F-6
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, Three months ended March 31,
----------------------------------------- --------------------------
Increase (Decrease) in Cash and Cash 1998 1999 2000 2000 2001
Equivalents ------------ ------------ ------------- ------------ ------------
Cash flows from operating activities
Net earnings $ 4,639,610 $ 7,139,182 $ 4,076,033 $ (272,932) $ 1,242,292
Adjustments to reconcile net
earnings to net
cash provided by (used in)
operating activities
Depreciation and amortization 163,685 161,605 145,307 37,329 32,634
Remeasurement of redeemable -- (2,302,249) (752,760) (48,093) (177,735)
ordinary shares
Warrants granted for services -- 40,000 60,000 30,000 --
Changes in assets and liabilities:
Receivables (508,830) 1,015,271 (323,835) 296,965 362,870
Inventories (5,454,770) (8,483,736) (2,137,554) (1,619,534) (387,236)
Prepaid expenses and 2,378 730,997 57,236 8,211 (256,354)
deposits/other assets
Payables 1,608,092 294,217 (476,890) (1,158,005) (1,425,847)
Accrued liabilities (46,803) 5,886 304,081 423,468 789,178
Net cash provided by (used 403,362 (1,398,827) 951,618 (2,302,591) 179,802
in) operating activities
Cash flows from investing activities
Purchases of property and equipment -- (146,931) (242,538) (118,979) (56,330)
Net cash used in investing -- (146,931) (242,538) (118,979) (56,330)
activities
Cash flows from financing activities
Payment on notes payable, net 516,262 (493,890) (1,736,947) 1,869,823 --
Borrowings (payments) on line of -- -- 775,162 377,295 (281,737)
credit, net
Proceeds from issuance of share 2,454,000 6,916,511 -- -- --
capital
Subscriptions received (1,883,729) -- -- -- --
Dividends paid -- (6,085,321) -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used 1,086,533 337,300 (961,785) 2,247,118 (281,737)
in) financing activities
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and 1,489,895 (1,208,458) (252,705) (174,452) (158,265)
cash equivalents
Cash and cash equivalents at the 293,002 1,782,897 574,439 574,439 321,734
beginning of period
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at the end $ 1,782,897 $ 574,439 $ 321,734 $ 399,987 $ 163,469
of period =========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest $ -- $ 79,279 $ 93,576 $ 14,000 $ 14,500
=========== =========== =========== =========== ===========
Noncash Financing Activities:
Settlement of related party
receivable in lieu of
payment of declared and
accrued dividends $ 3,932,811 $ 4,986,478 $ -- $ -- $ --
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-7
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Topaz Group, Inc. (the Company) is a Nevada corporation which, through its
subsidiaries, is involved in the manufacture and sale of jewelry and the
polishing, cutting, and selling of precious and semi-precious gemstones,
principally topaz gemstones. Sales are primarily to companies within the
United States of America.
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned Thailand subsidiaries, Creative Gems & Jewelry
Limited (Creative), Advance Gems & Jewelry Limited (Advance) and Advance Gems
Manufacturing Co., Ltd (Advance Manufacturing) (collectively, the
Subsidiaries). All significant intercompany accounts and transactions have
been eliminated.
Best Worth Agents Limited (Best Worth) owned 100% of the issued and
outstanding preferred stock of Creative and Advance, which constituted 99.7%
of the voting and dividend rights of Creative and Advance. On May 1, 1999,
Best Worth entered into a share exchange agreement that was consummated on
September 1, 1999. On September 1, 1999, Best Worth transferred 100% of its
preferred shares in Advance and Creative in exchange for 100% (22,375,000
shares) of the voting convertible preferred stock of Chancellor Corporation, a
non operating public shell company. Chancellor subsequently changed its name
to Topaz Group, Inc. The transaction resulted in the Company becoming the
accounting acquirer, whereby Creative and Advance become subsidiaries of the
Company and the historical financial statements of Creative and Advance become
those of The Topaz Group, Inc. and Subsidiaries. Ordinary shares of Creative
and Advance, representing 0.3% voting rights, remain outstanding to individual
shareholders of those companies (see note J).
During August 2000, the Company formed Advanced Gems Manufacturing Co., Ltd.
The wholly-owned subsidiary of Advance was formed for Thailand statutory tax
purposes.
2. REVENUE RECOGNITION
Revenue is recognized when goods are shipped to customers.
3. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company maintains
its cash accounts in several Thai financial institutions. The Company has not
experienced any losses in connection with its deposits.
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using a moving average method.
5. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization is
provided for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives, which range from five to twenty
years. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
F-8
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
6. ADVERTISING EXPENSES
The Company expenses the cost of advertising as it occurs. Advertising
expenses for the years ended December 31, 1998, 1999 and 2000 totaled
approximately $114,000, $93,000 and $341,000, respectively. Advertising
expenses for the three months ended March 31, 2000 and 2001, were $56,000 and
$78,000, respectively.
7. FUNCTIONAL CURRENCY AND REMEASUREMENT.
The Company's Thai subsidiaries maintain their books and records in Thai Baht.
However, their functional currency is the US dollar. Monetary assets and
liabilities and related income and expense items are remeasured using current
rates. Certain nonmonetary assets (notably property and equipment) are
remeasured at historical rates. Other nonmonetary balance sheet items and
related revenues, expenses, gains and losses are remeasured using average
exchange rates. Gains or losses on remeasurement to U.S. dollars from Thai
Baht are included in the Consolidated Statements of Earnings.
8. SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standard No. 131,
Disclosures About Segments of an Enterprise and Related Information, (SFAS
131) which requires companies to present financial information on individual
segments. The Company currently operates in one segment, and therefore, the
adoption had no effect on the Company's financial statements except for the
inclusion of geographic areas information.
9. EARNINGS PER SHARE
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
effect of outstanding preferred shares using the "if-converted" method, and
outstanding stock warrants using the "treasury stock" method.
The components of basic and diluted earnings per share were as follows:
Year ended December 31, Three months ended
March 31,
-------------------------------------- -----------------------
1998 1999 2000 2000 2001
---------- ---------- ----------- ---------- -----------
BASIC
Net earnings (loss)
before
extraordinary item $4,639,610 $6,335,593 $4,076,033 $(272,932) $1,242,292
Preferred stock
dividends (12,270,000) (2,734,610) - - -
---------- ---------- ----------- ---------- -----------
Net earnings (loss)
available to
common shareholders
before extraordinary
item $(7,630,390) $3,600,983 $4,076,033 $(272,932) $1,242,292
Extraordinary item - 803,589 - - -
---------- ---------- ----------- ---------- -----------
Net earnings (loss)
available to
common shareholders
after extraordinary
item $(7,630,390) $4,404,572 $4,076,033 $(272,932) $1,242,292
========== ========== =========== ========== ===========
Weighted average
outstanding
shares of common
stock 763,000 763,000 829,727 763,000 1,174,886
F-9
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Three months ended
Year ended December 31, March 31,
---------------------------------- -----------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ----------- ----------
Net earnings (loss)
per share before
extraordinary item $ (10.00) $ 4.71 $ 4.91 $ (0.36) $ 1.06
========== ========== ========== =========== ==========
Net earnings (loss)
per share $ (10.00) $ 5.77 $ 4.91 $ (0.36) $ 1.06
========== ========== ========== =========== ==========
DILUTED
Net earnings (loss)
available to
common shareholders
before extraordinary
item $(7,630,390) $3,600,983 $4,076,033 $ (272,932) $1,242,292
Impact of assumed
conversion of
preferred stock -- 2,734,610 -- -- --
---------- ---------- ---------- ----------- ----------
Net earnings (loss)
available to common
shareholders before
extraordinary item
(including effect of
assumed conversion) $(7,630,390) $6,335,593 $4,076,033 $ (272,932) $1,242,292
Extraordinary item -- 803,589 -- -- --
---------- ---------- ---------- ----------- ----------
Net earnings (loss)
available to common
shareholders after
extraordinary item
(including effect of
assumed conversion) $(7,630,390) $7,139,182 $4,076,033 $ (272,932) $1,242,292
========== ========== ========== =========== ==========
Weighted average
outstanding
shares of common
stock 763,000 763,000 829,727 763,000 1,174,886
Dilutive effect of
preferred shares (1) -- 4,735,680 4,809,692 -- 4,877,563
---------- ---------- ---------- ----------- ----------
Common stock and
potentially issuable
common stock 763,000 5,498,680 5,639,419 763,000 6,052,449
Net earnings (loss)
per share before
extraordinary item $ (10.00) $ 1.15 $ 0.72 $ (0.36) $ 0.21
========== ========== ========== =========== ==========
Net earnings (loss)
per share $ (10.00) $ 1.30 $ 0.72 $ (0.36) $ 0.21
========== ========== ========== =========== ==========
(1) The dilutive effect of warrants outstanding during each of the presented
periods was immaterial to these computations.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
In assessing the fair value of financial instruments, the Company has used a
variety of methods and assumptions, which are based on estimates of market
conditions and risks existing at that time. For all financial instruments,
including cash, accounts payable, accrued expenses, and notes payable, it was
estimated that the carrying amount approximated fair value for these financial
instruments because of their short maturities.
F-10
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
11. NEW AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133). SFAS 133 (as amended by SFAS
138 in June 2000) establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statement of financial
position, and that the corresponding gains or losses be reported either in the
statement of operations or as a component of comprehensive income, depending
on the type of hedging relationship that exists. In July 1999, the Financial
Account Standards Board issued SFAS No. 137 (SFAS 137), Accounting for
Derivative Instruments and Hedging Activities-Deferral of Effective Date of
SFAS 133. SFAS 137 deferred the effective date of SFAS 133 until the first
quarter of fiscal years beginning after June 15, 2000. The Company does not
currently hold derivative instruments or engage in hedging activities. The
Company expects the adoption of SFAS 133, SFAS 137 and SFAS 138 will not have
a material impact on its financial statements and related disclosures.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements and is effective in the fourth quarter of all fiscal years
beginning after December 15, 1999. The Company's accounting policies are
consistent with the requirements of SAB 101, so the implementation of SAB 101
did not have an impact on the Company's operating results.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 is
effective for transactions occurring after July 1, 2000. The application of
FIN 44 did not have an impact on the Company's consolidated financial
statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. SFAS
141 applies to all business combinations initiated after June 30, 2001. The
Statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001, or later.
The adoption of SFAS 141 did not have an impact on the Company's consolidated
financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other
Intangible Assets. The provisions of SFAS 142 are required to be applied
starting with fiscal years beginning after December 15, 2001 with earlier
application permitted for entities with fiscal years beginning after March 15,
2001 provided that the first interim financial statements have previously been
issued. The statement is required to be applied at the beginning of the
entity's fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements to that date. The initial
application of the SFAS 142 will have no impact on the Company's consolidated
financial statements.
12. USE OF ESTIMATES
In preparing the Company's consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets, liabilities and equity, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from those estimates.
F-11
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
13. INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements of the Company as of March 31,
2001 and for the three months ended March 31, 2000 and 2001, included herein,
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the SEC on a basis consistent with the audited consolidated
financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations relating to the interim financial statements.
In the opinion of the management, the accompanying interim consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position,
results of the Company's operations and its cash flows in accordance with
generally accepted accounting principles. The accompanying unaudited interim
consolidated financial statements are not necessarily indicative of full year
results.
NOTE B - STOCK SPLITS AND OTHER CHANGES TO COMPOSITION OF EQUITY
On September 29, 2000, the Company authorized a "one for five" reverse split
of its voting common stock. The split did not affect stock's par value and the
number of authorized common stock shares. All references to number of shares
in the financial statements have been adjusted to reflect this reverse stock
split on a retroactive basis.
On January 22, 2001, the Company amended its Articles of Incorporation to
re-designate 50,000,000 authorized preferred shares to create a new class of
preferred stock, Series B Preferred. On January 25, 2001, the Company
announced an exchange of 20,130,250 Series A preferred shares (representing
five of each six shares outstanding per each Series A holder) into 1,006,513
shares of the Series B preferred stock.
The accompanying financial statements were adjusted to retroactively reflect
January 25, 2001 recapitalization.
NOTE C - INVENTORIES
Inventories consist of the following:
December 31, March 31,
-------------------------- ------------
1999 2000 2001
------------ ------------ ------------
Raw materials $2,271,893 $2,860,174 $3,057,839
Finished stones 14,648,674 17,087,679 17,259,081
Finished jewelry 1,568,381 678,649 696,818
------------ ------------ ------------
$18,488,948 $20,626,502 $21,013,738
============ ============ ============
F-12
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, March 31,
-------------------------- ------------
1999 2000 2001
---------- ---------- ----------
Land and land improvements $1,350,218 $1,352,813 $1,352,813
Buildings and improvements 362,709 381,014 387,193
Machinery and equipment 965,294 1,125,657 1,161,735
Office furniture and equipment 400,904 441,712 455,785
Vehicles 262,049 283,011 283,011
---------- ---------- ----------
3,341,174 3,584,207 3,640,537
Less accumulated depreciation and 1,310,672 1,456,474 1,489,108
amortization ---------- ---------- ----------
$2,030,502 $2,127,733 $2,151,429
========== ========== ==========
NOTE E - RELATED PARTY RECEIVABLES AND PAYABLES
The related party receivable as of December 31, 1999, consists principally of
amounts advanced to a related company and was collateralized by precious and
semi-precious gemstones. The related company has a common director with
Creative. This balance was settled in 2000 when the Company acquired the
collateral.
Payables to related parties consist of the following:
December 31, March 31,
-------------------------- ------------
1999 2000 20001
---------- ---------- ----------
Due to directors $ 345,310 $ 543,929 $ 460,300
Accrued rent 194,754 327,369 288,691
Other 76,205 - -
------------ ------------ ------------
$ 616,269 $ 871,298 $ 748,991
========= ========= =========
Related party accrued rent is owed to companies that are controlled by the
Company's president.
NOTE F - LINES OF CREDIT
The Company has two line of credit arrangements with two Thai financial
institutions entered into in October 1999 (1999 Line) and April 2000 (2000
Line). Both lines are renewable automatically on yearly basis and are subject
to the banks' periodic review resulting in adjustment of the Company's credit
limit.
The 1999 line bears interest at a rate equal to LIBOR plus two percent (8.208%
and 8.136% as of December 31, 2000 and 1999, respectively), is personally
guaranteed by two of the Company's directors and collateralized by various
real estate properties belonging to the Company and one of the directors. As
of December 31, 2000 and March 31, 2001 approximately $836,000 and $791,000,
respectively, was available for borrowing under the 1999 line.
The interest rate on the 2000 line is the same as on the 1999 line. It is also
guaranteed by two of the Company's directors and secured by a deed on a real
estate property owned by a related party. As of December 31, 2000 and March
31, 2001, approximately $493,000 and $505,000, respectively, was available for
borrowing under the 2000 Line.
F-13
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
As of December 31, 1999 and 2000, and March 31, 2001, outstanding balance
under both lines of credit was $0, $775,162 and $493,425, respectively.
NOTE G - NOTES PAYABLE
Notes payable consist of the following:
December 31, March 31,
------------------------ -----------
1999 2000 2001
----------- ----------- -----------
Debt restructuring $ 685,893 $ - $ -
Notes payable - 989,402 - -
related party
Note payable to bank 61,652 - -
----------- ----------- -----------
$1,736,947 $ - $ -
=========== =========== ===========
Notes payable to related party were due to directors, without interest or
fixed terms of repayment and were repaid during the year ended December 31,
2000.
NOTE H - EXTRAORDINARY ITEM
On July 30, 1999, Advance completed a debt restructuring with an investor that
purchased the rights to the debt from a failed financial institution. The debt
restructuring occurred as a result of the failure of the financial institution
and not Advance's inability to service the debt. The debt restructuring was
accomplished through the reduction of the face amount of the debt and accrued
interest. The result was a gain on restructuring totaling approximately
$804,000, which is reflected as an extraordinary item in the Consolidated
Statements of Earnings. The remaining principal and interest of $610,470 was
paid in full during January 2000. The debt restructuring was accounted for in
accordance with Statement of Financial Accounting Standards No. 15, Accounting
by Debtors and Creditors for Troubled Debt Restructurings. The net effect of
the gain on the debt restructuring on basic and diluted earnings per share for
the years ended December 31, 1999 was $1.06 and $0.15, respectively.
NOTE I - STOCKHOLDERS' EQUITY
The Company has the following types of equity securities authorized and
outstanding:
PREFERRED STOCK - 50,000,000 shares authorized as of December 31, 1999 and 2000,
and March 31, 2001.
Series A Preferred (see note B) $0.001 par value - 26,000,000 shares
authorized, 22,375,000, 4,021,050, and 3,721,050 shares issued and outstanding
as of December 31, 1999 and 2000, and March 31, 2001. Each share of preferred
stock has liquidation preferences, and each preferred shareholder is entitled
to one vote per share. General conversion provisions entitle each preferred
share to be converted into one common stock share at the election of the
holder. At any time after one year from the date of issuance, the preferred
stock is subject to mandatory conversion at the rate of one share of preferred
stock for one share of common stock, upon the undertaking by the Company of a
public offering of its securities pursuant to the Securities Act of 1933, as
amended. Holders of preferred stock are entitled to receive dividends from
funds legally available, concurrent with the declaration of dividends on the
Company's common stock.
Series B Preferred (see note B) $0.001 par value - 10,000,000 shares
authorized, 1,006,513 shares issued and outstanding as of December 31, 1999
and 2000, and March 31, 2001. Series B preferred has the same rights,
preferences, privileges and priority as Series A, except for voting rights
which are twenty votes per each Series B preferred share.
F-14
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
COMMON STOCK - $0.001 par value - 100,000,000 authorized; 763,000, 1,024,886,
and 1,324,886 shares issued and outstanding as of December 31, 1999 and 2000,
and March 31, 2001, respectively. The voting rights are one vote per share.
COMMON STOCK WARRANTS - On September 1, 1999, the Company authorized common
stock warrants to be granted to three consultants in connection with future
services. The warrants were granted monthly from September 1999 through June
2000. The number of the warrants issued in each tranche was determined as the
fair value of the services provided (set at $10,000 total for each month)
divided by the fair value of the underlying stock as determined on the date of
each grant. The warrants' strike price on each grant date was equal to the
fair value of the underlying stock on the date of each grant but not less than
$2.50 per share. As of December 31, 1999 and 2000, the Company granted 14,759
and 32,884 warrants, respectively, resulting in $40,000 and $60,000 in
additional expenses for the years ended December 31, 1999 and 2000,
respectively. The warrants expire on July 27, 2005 and have strike prices
varying from $2.50 to $5.16.
A rollforward of shares issued and outstanding is as follows:
Class A Class B
Preferred Preferred Common
Stock Stock Stock
-------------- ----------- ----------
Shares issued as part of
May 1, 1999 exchange agreement 22,375,000 -- 763,000
----------- --------- ---------
Balance at December 31, 1999 22,375,000 -- 763,000
Conversion of preferred stock (1,307,700) -- 261,886
Issuance of additional preferred
stock under May 1, 1999 exchange 3,084,000 -- --
agreement
Shares issued in recapitalization (20,130,250) 1,006,513 --
----------- --------- ---------
Balance at December 31, 2000 4,021,050 1,006,513 1,024,886
Conversion of Preferred Stock (300,000) -- 300,000
----------- --------- ---------
Balance at March 31, 2001 3,721,050 1,006,513 1,324,886
=========== ========= =========
NOTE J- REDEEMABLE ORDINARY SHARES
Advance and Creative have 10,710,000 ordinary shares issued and outstanding to
related parties. Certain of these related parties are preferred shareholders
of the Company. The voting rights of the ordinary shares, with respect to
Advance and Creative, are one vote per share or 0.3% of the total outstanding
voting shares. The Company controls the remaining 99.7% of Advance and
Creative as a result of the share exchange consummated on May 1, 1999 (as
discussed in note A). The ordinary shares are not publicly traded and are
eligible to receive dividends in proportion to their voting rights. Since the
ordinary shares do not represent equity of the Company and the Company has an
obligation to repurchase the ordinary shares they have been accounted for as
redeemable equity of the Thai subsidiaries. Accordingly the redeemable
ordinary shares of the subsidiaries have been remeasured into U.S. dollars at
the current rate as of December 31, 1999 and 2000, and March 31, 2001.
NOTE K- INCOME TAXES
The Subsidiaries have received a promotional privilege from the Thai Board of
Investment under certificates dated May 30, 2000 (Creative) and September 8,
2000 (Advance Manufacturing) relating to the manufacture of gemstones and
jewelry. The promotional privilege for Advance expired during 2000 and Advance
is now inactive. Under this privilege, the Subsidiaries have received
exemption from certain Thai taxes and duties including Thai corporate income
tax on income derived from the promoted activities for a period of eight years
commencing from the date
F-15
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
that the Subsidiaries have income derived from those activities. The
Subsidiaries are required to comply with the terms and conditions specified in
the promotional certificate. Management does not believe it will ever utilize
the net operating loss (NOL) of the predecessor company, Chancellor
Corporation, due to limitations on change of ownership.
The income tax expenses reconciled to the tax computed at the U.S. statutory
rate were approximately as follows:
Year ended December 31, Three months ended March 31,
---------------------------------------- ----------------------------
1998 1999 2000 2000 2001
------------ ------------ ----------- ------------ ------------
Tax expense
(benefit)
computed at $1,577,000 $2,427,000 $1,386,000 $ (93,000) $ 86,000
federal
statutory rate
Non U.S. income
exempt
from tax (1,577,000) (2,427,000) (1,520,000) - (94,000)
Valuation
allowance - - 134,000 93,000 8,000
------------ ------------ ----------- ------------ ------------
$ - $ - $ - $ - $ -
============ ============ =========== ============ ============
Deferred tax assets and liabilities are measured using enacted tax rates that
are expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded for deferred tax assets when it is more likely than not that such
deferred tax assets will not be realized. Deferred income taxes reflect the
net tax effects of temporary differences between the consolidated carrying
amounts of assets and liabilities for financial reporting purposes and the
respective amounts used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows:
December 31, March 31,
2000 2001
------------- ------------
Deferred asset
Net operating losses $ 114,000 $ 122,000
Warrants 20,000 20,000
Valuation allowance (134,000) (142,000)
------------- ------------
Net deferred tax
asset $ - $ -
============= ============
Internal Revenue Code Section 382 places a limitation on the amount of taxable
income that can be offset by carryforwards after a change in control
(generally greater than a 50% change in ownership). As a result of these
provisions, utilization of the NOL and tax credit carryforwards may be
limited.
NOTE L - COMMITMENTS
1. OPERATING LEASE AGREEMENTS
The Company conducts its operations in leased facilities under operating
leases expiring through February 2011. The Company has the option of extending
the lease terms beyond the current expiration date. The following is a
schedule by year of approximate minimum rental payments under such operating
leases.
F-16
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
Year ending December 31, Third Party Related Party Total
- ------------------------ ------------ ------------- -----------
2001 $ 21,400 $ 74,663 $ 96,063
2002 21,400 74,663 96,063
2003 16,645 74,663 91,308
2004 - 74,663 74,663
2005 - 74,663 74,663
Thereafter - 385,758 385,758
------------ ------------- -----------
$ 59,445 $ 759,073 $818,518
============ ============= ===========
Certain of the above leases provide for payment of taxes and other expenses by
the Company. Rent expense for the leased facilities for the years ended
December 31, 1998, 1999 and 2000 and the three months ended March 31, 2000 and
2001, was approximately $65,000, $77,000 and $72,000, $18,000 and $19,000,
respectively.
2. LEGAL RESERVE
Under the provisions of Thailand's Civil and Commercial Code, the Subsidiaries
are required to set aside a legal reserve of at least five percent of their
net earnings at each dividend declaration until the reserve reaches ten
percent of the contributed capital. The reserve is not available for dividend
distribution. As of December 31, 1999 and 2000, and March 31, 2001 the reserve
balance was $490,800, and was included in the Company's retained earnings.
NOTE M - RISK AND UNCERTAINTIES
1. COUNTRY RISK
A significant volume of the Company's operations are conducted in Thailand.
Accordingly, the Company's business, financial position and results of
operations may be influenced by the political, economic and legal environments
in Thailand and the Pacific Rim region (PRR), and by the general state of the
Thailand and Pacific Rim economies.
The Company's operations in the Pacific Rim are subject to special
considerations and significant risks not typically associated with companies
in North America and Western Europe. These include risks associated with,
among others, the political, economic and legal environments and foreign
currency exchange. The Company's results may be adversely affected by changes
in the political and social conditions in the PRR, and by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
2. CONCENTRATION OF CREDIT RISK
As of December 31, 1999 and 2000, and March 31, 2001 balances of two customers
represented 13% and 12%, 13% and 8%, 11% and 6%, respectively, of the total
accounts receivable.
The Company performs ongoing credit evaluation of each customer's financial
condition and maintains reserves for potential credit losses. Such losses, in
the aggregate, have not exceeded management's projections.
3. DEPENDENCE ON A LIMITED NUMBER OF IRRADIATION TREATMENT FACILITIES
The Company negotiated a contract with the University of Missouri to utilize
the University's nuclear reactor for the
F-17
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
irradiation (coloration) of topaz gemstones. The contract gives the Company
exclusive use of the reactor for the coloration of gemstones through March
2005 and may be extended on an annual basis upon mutual agreement of both
parties. Management believes that there are fewer than five known facilities
in the world that are capable of providing similar irradiation processing.
NOTE N - GEOGRAPHIC AREAS AND CONCENTRATIONS
a. Revenue (thousands)
Three months
Year ended December 31, ended March 31,
--------------------------------- --------------------
1998 1999 2000 2000 2001
---------- ---------- --------- -------- ----------
United States $15,808 $16,972 $28,347 $ 3,874 $ 3,623
Thailand 3,079 2,909 4,136 592 963
b. Long-lived assets
December 31, March 31,
--------------------------- ------------
1999 2000 2001
------------- ------------ ------------
US $ - $ - $ -
Thailand 2,030,502 2,127,733 2,151,429
------------- ------------ ------------
Total $2,030,502 $2,127,733 $2,151,429
============= ============ ============
c. Major customers
Details of individual customers accounting for more than 10% of the Company's
sales are as follows:
Sales (thousands)
------------------------------------------------------
Three months
Year ended December 31, ended March 31,
--------------------------------- -------------------
1998 1999 2000 2000 2001
---------- --------- ---------- --------- --------
---------- --------- ---------- --------- --------
Goldmine Enterprises, $ 2,441 $4,579 $ 4,215 $ 969 $ 870
Inc.
Helen Andrews 3,225 3,960 2,862 275 132
d. Major suppliers (thousands)
Details of individual suppliers accounting for more than 10% of the Company's
purchases are as follows:
Three months
Year ended December 31, ended March 31,
--------------------------------- -------------------
1998 1999 2000 2000 2001
--------- --------- ---------- -------- --------
--------- --------- ---------- -------- --------
Gold Corporation $ 2,455 $3,271 $ 3,657 $ 618 $ 437
Little Rock 174 1,798 2,667 686 223
F-18
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
NOTE O - SELECTED QUARTERLY DATA (UNAUDITED)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ------------ ------------ ------------
Year ended December 31, 1999
- ----------------------------
Net sales $3,716,087 $5,058,649 $5,935,431 $ 5,171,116
Gross profit 1,709,400 2,630,498 3,027,070 1,488,491
Earnings from operations 831,196 1,607,517 2,035,068 35,578
Net earnings (loss) before 2,781,833 1,627,997 2,129,701 (203,938)
extraordinary item
Extraordinary item - - 803,589 -
Net earnings (loss) 2,781,833 1,627,997 2,933,290 (203,938)
Earnings (loss) per share from
operations
Basic $ (2.49) $ 2.11 $ 2.67 $ 0.05
Diluted $ (2.49) $ 0.29 $ 0.37 $ 0.01
Net earnings (loss) per share
before
extraordinary item
Basic $ 0.06 $ 2.13 $ 2.79 $ (0.27)
Diluted $ 0.01 $ 0.30 $ 0.39 $ (0.27)
Net earnings (loss) per share
Basic $ 0.06 $ 2.13 $ 3.84 $ (0.27)
Diluted $ 0.01 $ 0.30 $ 0.53 $ (0.27)
Year ended December 31, 2000
- ----------------------------
Net sales $4,466,439 $5,989,268 $7,799,898 $14,227,438
Gross profit 1,161,274 1,976,458 2,183,971 3,673,278
Earnings from operations 47,526 1,041,967 1,092,637 2,675,921
Net earnings (loss) (272,932) 1,152,582 1,198,819 1,997,564
Earnings per share from
operations
Basic $ 0.06 $ 1.37 $ 1.43 $ 3.23
Diluted $ 0.01 $ 0.19 $ 0.20 $ 0.48
Net earnings (loss) per share
Basic $ (0.36) $ 1.51 $ 1.57 $ 2.41
Diluted $ (0.36) $ 0.21 $ 0.22 $ 0.35
Year ending December 31, 2001
- ----------------------------
Net sales $4,586,282
Gross profit 1,305,985
Earnings from operations 467,203
Net earnings 1,242,292
Earnings per share from
operations
Basic $ 0.40
Diluted $ 0.08
Net earnings per share
Basic $ 1.06
Diluted $ 0.21
NOTE P - SUBSEQUENT EVENTS (UNAUDITED)
On May 15, 2001, the Board of Directors approved the 2001 Stock Option Plan
and approved 1,000,000 common stock options to be granted to employees and
directors of the consolidated entity.
F-19
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and the
three months ended March 31, 2000 and 2001 (unaudited)
On July 20, 2001, the Company filed with the State of Nevada to change the
convertibility provisions of the Series B preferred stock. Under the new
provisions, Series B preferred shares are only convertible into the Company's
common stock in the events specified in the amended Series B Preferred
agreement.
F-20
INDEX TO EXHIBITS
2.1 Agreement of Exchange among the Company, Best Worth Agents, Ltd
and Advance Gems & Jewelry Co., Ltd., dated April 30, 1999
2.2 Agreement of Exchange among the Company, Best Worth Agents, Ltd
and Creative Gems & Jewelry Co., Ltd., dated April 30, 1999
3(i)(a) Amended and Restated Articles of Incorporation of the Company, dated
November 17, 1998
3(i)(b) Certificate of Change in the Number of Outstanding Shares of
Common Stock, dated November 16, 2000
3(ii) Bylaws of the Company, dated June 5, 1996
4.1 Amended and Restated Certificate of Designation of the Company's
Series A Preferred Stock and Series B Preferred Stock, dated July
20, 2001
4.2 2001 Stock Option Plan of the Company
10.1 Contract between the Company and the Curators of the University of
Missouri, dated March 1, 2001
10.2 Joint Venture Agreement between Creative Gems & Jewelry Co., Ltd.
and Muthama Gemstones (Kenya) Limited, dated September 6, 1999.
10.3 Credit Facilities Agreement between UOB Radanasin Bank Pcl and the
Creative Gems & Jewelry Co. Ltd., dated April 12, 2000
21 Subsidiaries of the Registrant
24.1 Power of Attorney (Included on Signature Page)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Bangkok, State of Thailand, on the 27th day of July, 2001.
THE TOPAZ GROUP INCORPORATED
BY:/s/ Jeremy F. Watson
------------------------
Jeremy F. Watson
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Jeremy F. Watson and Terrance
C. Cuff and each of them with power of substitution, as his attorney-in-fact,
in all capacities, to sign amendments to this registration statement
(including post-effective amendments) and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-facts or their substitutes may do or cause to be done by virtue
hereof
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
NAME TITLE DATE
- ---- ----- ----
/s/ Jeremy F. Watson Chairman and Chief July 27, 2001
- -------------------------- Executive Officer
Jeremy F. Watson
/s/ Aphichart Fufuangvanich Director and President July 23, 2001
- ---------------------------
Aphichart Fufuangvanich
/s/ Thammatinna Thammaradi Director and Executive July 27, 2001
- -------------------------- Vice President
Thammatinna Thammaradi
/s/ Leonard Orrin Director and Director of July 27, 2001
- -------------------------- Marketing
Leonard Orrin
/s/ Timothy Matula Director and Treasurer July 24, 2001
- --------------------------
Timothy Matula
/s/ Terrance C. Cuff Director and Chief July 27, 2001
- -------------------------- Financial Officer
Terrance C. Cuff
/s/ Thiti Fufuangvanich Director and Director of July 27, 2001
- -------------------------- Research and Development
Thiti Fufuangvanich
/s/ Alson Lee Director July 24, 2001
- --------------------------
Alson Lee
/s/ David Dikinis Director July 25, 2001
- --------------------------
David Dikinis