AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON December 19, 2001
REGISTRATION NO.
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
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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.............................................2
ITEM 2. FINANCIAL INFORMATION..............................................13
ITEM 3. DESCRIPTION OF PROPERTY............................................19
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....19
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS...................................20
ITEM 6. EXECUTIVE COMPENSATION.............................................22
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................25
ITEM 8. LEGAL PROCEEDINGS..................................................25
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS...............................25
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES............................26
ITEM 11. DESCRIPTION OF SECURITIES..........................................26
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS..........................29
ITEM 13. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS......................29
i
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 or
"Exchange Act". 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:
o business and growth strategies;
o financial condition and results of operations;
o forecasts; and
o 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. and its subsidiaries or the "Topaz Group" 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 or "Best Worth", 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. On September
29, 2000, we authorized a "one for five" reverse stock split. The split did not
affect our common stock's par value or the number of shares of our authorized
common stock. On January 22, 2001, we amended our articles of incorporation to
re-designate 50,000,000 of authorized preferred shares to create a new class of
preferred stock, the series B preferred. On January 25, 2001, we announced an
exchange of 20,130,250 series A preferred (representing five of each six shares
of common stock outstanding per each series A holder) into 1,006,513 shares of
the series B preferred. All share amounts have been adjusted to retroactively
reflect the January 25, 2001 recapitalization.
Our principal operating business of manufacturing and selling fine jewelry
and gemstones are conducted through our three subsidiaries, Creative Gems and
Jewelry Co., Ltd. or "Creative", Advance Gems and Jewelry Manufacturing Company
or "Advance Manufacturing" and Advance Gems and Jewelry Co., Ltd. or "Advance".
We have engaged in our principal operating business since approximately 1970.
Creative primarily engages in manufacturing jewelry. Advance and Advance
Manufacturing primarily engage in cutting, polishing and manufacturing
gemstones. Advance Manufacturing was formed in 2000 to enable us to apply and
qualify for tax-exempt status under a Thai governmental program designed to
promote local employment.
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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 we
sell our 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, cut and polish them and then
professionally enhance 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. We, through our subsidiary Creative, 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 located in East Africa which we
believe has one of the largest ruby deposits in the world. Under our joint
venture agreement, Creative and MGK, who are equal shareholders in the joint
venture, agree to purchase rough ruby stones at a twenty-five percent (25%)
discount from Rockland Kenya Limited or "Rockland", an entity which operates the
John Saul Mine with funds provided equally by Creative and MGK. Under this
agreement, Creative shall receive the rough ruby stones for cooking and cutting,
respectively. The cost of which shall be borne equally by Creative and MGK and
at a fixed rate of $135 per kilogram for cooking and $0.60 per carat cutting,
respectively. MGK guarantees that it will procure the stones from Rockland as
and when required. MGK also confirms that Rockland has the capability to produce
four (4) "parcels" or shipments of stones of varying qualities sufficient to
total approximately U.S. $250,000 per calendar quarter. Creative has a right of
first refusal to purchase the stones at a price to be set by Creative and MGK.
If the stones are sold to a third party purchaser, Creative is entitled to a
twenty percent (20%) commission. Either Creative or MGK may terminate the joint
venture agreement without cause by sending sixty (60) days written notice. As we
receive no intangible rights in this joint venture, it does not impact our
accounting. For accounting purposes no costs were capitalized under this
agreement.
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 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. Our topaz stones are irradiated by Iotron Technologies Inc. or "Iotron"
which processes our stones in an accelerator that it operates in Canada.
Iotron's irradiation service is subcontracted through Creative's contact
Quali-Tech. We currently do not have a written agreement with Iotron or
Quali-Tech. After Iotron receives a shipment of stones to be irradiated from us,
Iotron sends us an invoice for the irradiation and/or storage service it
provides for each shipment of stones. 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 license agreement with The Curators
of the University of Missouri contracting on behalf of the University of
Missouri-Columbia Research Reactor Center or the "University" to irradiate our
white stones in their nuclear research reactor. Under our license agreement, the
University has agreed to provide to us its irradiation service or capacity to
irradiate topaz gemstones contained in specialized irradiation containers. The
license agreement is effective for four (4) years, from March 1, 2001 to
February 28, 2005. Once the initial four (4) year term is completed, the
agreement may be extended upon mutual consent. The fee for the University's
irradiation capacity is calculated based upon a rate of $15.38 per hour and on
minimum and maximum hours of irradiation exposure. The University also charges a
fee for handling irradiation containers based upon a $300 per container/per
irradiation charge. Currently, there are very few reactor facilities in the
world capable of enhancing topaz stones to dark hues, and the University's
facility has been set up to color topaz stones in massive quantities. As a
result, we believe that our exclusive license agreement is valuable for us in
our efforts to continue to succeed in the topaz market, both today and in the
future.
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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. The half-life period
varies based upon the color of the stones. For the lightest colored stones,
called "Baby Blue", the half-life or decay period is generally up to one hundred
twenty (120) days depending upon the size of the stones. For slightly darker
stones, called "Swiss Blue", the half-life or decay period is generally up to
one hundred eighty (180) days depending upon the size of the stones. For the
darkest stones, called "London Blue", the half-life or decay period is generally
up to two hundred forty (240) days depending upon the size of the stones.
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. The percentages below
illustrate the revenues by product group for the fiscal period ended December
31, 2000.
Total
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Gemstone sales 42% Jewelry Sales 58%: 100%
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Topaz products 60% Other products 40%: 100%
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Low-end products 80% High-end products 20%: 100%
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 production workers, plus 800 participants in Her Majesty the
Queen's and the Thai government's Royal Sponsored Women's program or "Royal
Sponsored Women's Program". The Royal Sponsored Women's Program is a government
program promoting local job creation and employment in economically depressed
areas in Thailand and provides tax-exempt incentives to eligible participating
companies. Participating companies are granted exemption from payment of
corporate income taxes in Thailand for a period of 8 years. By participating in
this program, we gain flexibility in meeting our production needs. Individuals
who participate in the program are not our employees. 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. We
are currently 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. Our technicians
designed an instrument called the "angle controller" which allows stonecutters
to set up and control the cutting and angle of a stone or gem being cut. The
angle controller is positioned on a vertical dowel which is positioned 90
degrees from an abrasive turntable. The gem stone end is then applied to an
abrasive turntable to achieve the desired cut. This process enables us to take
advantage of low labor costs while producing quality identical pieces of jewelry
on a large scale.
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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 the 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 participants in the program. 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 to irradiate the topaz stones. We have the
stones irradiated at a particle accelerator operated by Iotron and/or at the
University, depending upon the color desired for the stones. After the stones
are radiated, they are held in protective storage for a period of time until the
natural radioactive decay process or "cooling" or half-life period for each type
of stone has elapsed. The half-life period varies based upon the color of the
stones. For the lightest colored stones, called "Baby Blue", the half-life or
decay period is generally up to one hundred twenty (120) days depending upon the
size of the stones. For slightly darker stones, called "Swiss Blue", the
half-life or decay period is generally up to one hundred eighty (180) days
depending upon the size of the stones. For the darkest stones, called "London
Blue", the half-life or decay period is generally up to two hundred forty (240)
days depending upon the size of 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.
The Missouri University Research Reactor or "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, we 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 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 we, through our subsidiary
Creative, signed a joint venture agreement with MGK for the supply of rough ruby
stones from a ruby mine in Kenya East Africa. Under our joint venture agreement,
Creative and MGK, who are equal shareholders in the joint venture, agree to
purchase rough ruby stones at a twenty-five percent (25%) discount from Rockland
Kenya Limited or "Rockland", an entity which operates the John Saul Mine with
funds provided equally by Creative and MGK. MGK guarantees that it will procure
the stones from Rockland as and when required. MGK also confirms that Rockland
has the capability to produce four (4) "parcels" or shipments of stones of
varying qualities sufficient to total approximately U.S. $250,000 per calendar
quarter. Creative has a right of first
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refusal to purchase the stones at a price to be set by Creative and MGK. If
the stones are sold to a third party purchaser, Creative is entitled to a
twenty percent (20%) commission. Either Creative or MGK may terminate the
joint venture agreement without cause by sending sixty (60) days written
notice. 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 that
if we are 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
estimated 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. We recognize revenue when goods are shipped as
opposed to when ordered. Therefore, receipt of blank orders does not impact our
revenue recognition.
SALES AND MARKETING
Historically, our sales and marketing efforts have been modest because the
demand for our products is outpacing our ability to supply our products. Our
sales and marketing efforts focus on customer service and generating repeat
business. Sales and marketing towards our U.S. based customers is carried out
both from our Issaquah, Washington office and our Bangkok office, while our
sales staff in Bangkok handles sales efforts directed at our non-U.S. 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 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.
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.
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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. If the MURR ceases
operations, we will no longer be able to color our blue topaz stones at this
reactor. Currently 60% of our products include blue topaz stones. If we unable
to color our blue topaz stones at MURR, our contingency plan would include
locating an alternate facility, such as in Malaysia, to color the topaz stones.
However, we may not be able to locate such a facility or reach terms
satisfactory to us for the use of such an alternate facility. In the event of
such an occurrence, we would experience a period of "no production" caused by
locating a new facility, staffing the facility, purchasing the proper equipment
to process the stones and training the staff to process the stones correctly
based upon the desired coloration.
Our products are subject to the regulations promulgated by the Nuclear
Regulatory Commission and the U.S. Department of Transportation for the
handling, storage and transportation of our products. We are exposed to any and
all risks and liabilities typically associated with the handling, storage and
transportation of materials that have been irradiated. However, we have retained
a nuclear regulatory consultant to oversee this process and have received a
letter of regulatory compliance from the company that transports and handles our
radioactive materials. Also, the consultant has confirmed that upon sample
testing of our products on reentry into the United States market, the
radioactive levels were below the regulatory licensing limits required under the
U.S. Nuclear Regulatory Commission.
STRATEGY
Our strategy is to continue to expand our position within the gemstones and
jewelry market. This strategy includes, furthering our position as a 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 expand our ruby sales by increasing
purchases on an as-needed basis from various suppliers worldwide.
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 regions.
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EMPLOYEES
As of June 1, 2001, we had approximately 2,000 employees plus 800
individual participants under the Royal Sponsored Women's Program. The Royal
Sponsored Women's Program is a government program promoting local job creation
employment in economically depressed areas in Thailand. As a participant in this
program, member companies receive tax-exempt incentives for payment of corporate
income taxes in Thailand. The tax-emempt incentives are distributed in 8-year
terms under this program, participating companies can re-apply for this program
in successive terms. Our employees include designers, technicians, management,
administrative personnel, marketing, sales, and factory personnel. All of our
employees are "at will" employees.
Our employees are not currently members of a trade union. We have not
experienced any strikes or other labor disputes that have interfered with our
operations and we believe that our relations with our employees are good.
LEGAL PROCEEDINGS
Neither the 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:
o fluctuations in the jewelry and gemstone market;
o seasonality of the jewelry industry;
o unexpected delays in importing gemstones or the manufacturing process;
o changes in consumer jewelry purchasing patterns from purchasing light
stones to dark stones could result in delays because of the extended
decay period required for the darker stones;
o changes in supply or availability of stones;
o new competitors;
o a decline in economic conditions which effects people's discretionary
spending; and
o 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.
-8-
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 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 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.
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 or "MURR" to
irradiate clear topaz stones in its nuclear research reactor to produce deeply
colored topaz stones, sales of which account for approximately 40% of our
revenues. Although we have entered into an exclusive license 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 University 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 University 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, we can give 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. We can give 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.
-9-
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 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 or "IMF" 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 Thai 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, we can give no assurance that the
economies of Thailand and Southeast Asia will not materially worsen.
-10-
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
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 Thai 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.$1.00 on May 15, 1998. We can give no assurance that the value of the Baht
will not decline further, increase or continue to fluctuate widely against other
currencies in the future. Adverse economic conditions in Thailand and the region
incidental to the devaluation of the
-11-
Baht may also reduce some of our customers' ability to pay, and we can give no
assurance that such reduced demand will not have an adverse effect on us.
Our functional currency is the U.S. dollar, however, we have significant
Baht denominated assets and liabilities. Therefore, fluctuations in the value of
the Baht relative to the U.S.$ 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. We can give 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.
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. We can give 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.
-12-
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. We have
applied to have our common stock listed on the American Stock Exchange. We also
intend to contact an authorized OTC Bulletin Board market-maker for sponsorship
of our common stock 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 have applied to list our common stock on the
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.
YOU WILL BE UNABLE TO EXERCISE ANY CONTROL OVER OUR MANAGEMENT BECAUSE A SINGLE
STOCKHOLDER CONTROLS 80% OF THE VOTING CONTROL OF THE TOPAZ GROUP.
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
preferred stock 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 us or in our right
for breach of a director's duties to us or to our stockholders except in certain
limited circumstances. In addition, the articles of incorporation and by-laws
contain provisions requiring us to indemnify our directors, officers, employees
and agents serving at our 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 our best interests. Our 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 us. 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 us, even though such an
action, if successful, might otherwise benefit us and our stockholders.
-13-
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 or the "Securities Act", 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.
ITEM 2. 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, 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 nine months ended September 30, 2000 and September 30, 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."
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 2001 2000
Sales $ 32,483,043 $ 19,881,283 $ 18,886,737 $ 17,622,804 $ 24,309,947 $15,012,234 $ 18,255,605
Cost of Goods Sold 23,488,062 11,025,824 10,976,881 12,937,673 21,654,240 10,569,007 12,933,902
------------ ------------ ------------ ------------ ------------ ----------- ------------
Gross Profit 8,994,981 8,855,459 7,909,856 4,685,131 2,655,707 4,443,227 5,321,703
Selling, General &
Administrative Expenses 4,136,931 4,346,100 4,154,545 2,636,375 4,220,181 2,795,133 3,139,574
------------ ------------ ------------ ------------ ------------ ----------- ------------
Earnings from operations 4,858,050 4,509,359 3,755,311 464,950 19,332 1,648,094 2,182,129
Other Income (expense) (782,017) 1,826,234 884,299 (4,768,083) 4,845,289 1,276,085 (103,660)
------------ ------------ ------------ ------------ ------------ ----------- ------------
Earnings (loss) before 4,076,033 6,335,593 4,639,610 5,310,239 (4,748,751) 2,924,179 2,078,469
extraordinary item
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) $ 2,924,179 2,078,469
Preferred stock dividends -- (2,734,610) (12,270,00) -- -- -- --
------------ ------------ ------------ ------------ ------------ ----------- ------------
-14-
Net Earnings (loss) available
to common stockholders $ 4,076,033 $ 4,404,572 $ (7,630,930) $ 5,310,239 $ (4,748,751) $ 2,294,179 $ 2,078,469
Weighted average shares of 829,727 763,000 763,000 763,000 763,000 1,213,489 763,959
Common Stock
Common stock and potential 5,639,419 5,498,680 -- 5,498,680 -- 6,052,449 5,500,723
issuable common stock
Net earnings (loss) Basic $ 4.91 $ 5.77 $ (10.00) $ 6.96 $ (6.22) $ 2.41 $ 2.72
per share available Diluted
to common Stockholders $ 0.72 $ 0.80 $ (10.00) $ 0.97 $ (6.22) $ 0.48 $ 0.38
December 31, June 30, 2001
-------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996 2001 2000
BALANCE SHEET DATA
Cash and Cash Equivalents 321,734 574,439 1,782,897 293,002 842,078 653,213 409,226
Working Capital 17,941,917 14,632,923 5,483,459 12,314,174 4,113,516 19,908,169 15,314,224
Total Assets 26,662,838 24,374,159 23,846,301 20,491,681 16,846,513 29,631,858 27,867,783
Total Liabilities 11,345,249 13,232,603 16,186,882 5,772,247 9,851,553 12,136,708 15,786,577
Total Stockholders' Equity 15,277,589 11,141,556 7,659,419 14,719,254 6,994,960 17,495,150 12,081,206
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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
SALES. Total sales for the first nine months ended September 30, 2001 were
$15,012,234 compared to $18,255,605 for the nine months ended September 30,
2000, a decrease of 17.8%. The decrease in sales is primarily attributed to
decrease in consumer spending in the U.S.
COST OF GOODS SOLD. Cost of goods sold was $10,569,007 or 70.4% of sales
for the nine months ended September 30, 2001 as compared to $12,933,902 or 70.8%
of sales during the nine months ended September 30, 2000. The decrease in cost
of sales is due to a decrease in operating revenues and to lower stone
purchasing costs.
OPERATING COSTS. Operating costs were $2,795,133 for the nine months ended
September 30, 2001, compared to $3,139,574 for the nine months ended September
30, 2000. The decrease is largely attributed to a bad debt expense incurred
during the nine months ended in September 30, 2000 of $184,842 plus
remeasurement baht devaluation for the first nine months of 2001 of
approximately $125,000. This devaluation is applied to Baht Sales General and
Administrative expenses when remeasured to US dollars.
EARNINGS FROM OPERATIONS. Earnings from operations for the nine months
ended September 30, 2001 were $1,648,094 compared to $2,182,129 for the nine
months ended September 30, 2000. This decrease is attributed to a reduction in
year to date revenues of $3,243, 371 and a corresponding drop in gross profit of
$878,476 offset by a reduction in selling, general and administrative expenses
of $344,441.
-15-
OTHER INCOME. Other income and (expense) was $1,276,085 for the nine months
ended September 30, 2001 compared to ($103,660) for the nine months ended
September 30, 2000. The increase in other income is primarily attributed to a
net increase in the Currency Exchange Rate Gain and Remeasurement Gain of
$1,370,491. Our Thai subsidiaries maintain their books and records in Thai Baht.
However, their functional currency is the U.S. dollar. Monetary assets and
liabilities and related income and expense items are remeasured at historical
rates. Other non-monetary balance sheet items and related revenues, expenses,
gains and losses are remeasured using average exchange rates.
NET EARNINGS. We reported net earnings of $2,924,179 for the nine months
ended September 30, 2001 compared to $2,078,469 for the nine months ended
September 30, 2000. The difference is largely attributed to favorable currency
movements and a net decrease in selling, general and administrative expenses
that offset a reduction in gross profit from decreasing revenues.
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
and Hong Kong. Sales increased due to jewelry manufactured with lower grade
stones. Such sales carried lower profit margins, resulting in an overall revenue
increase from 1999 to 2000 without increases to gross margin.
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 U.S. 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.
FISCAL YEARS 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.
-16-
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. In addition, 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 U.S. 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.
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 September 30, 2001, we had a cash and cash equivalent
balance of $284,497 and working capital of $20,512,747.
Our operating activities provided (used) cash of ($539,926) for nine months
ended September 30, 2001 and $915,618 for the year ended December 31, 2000. The
decrease in cash provided by operating activities resulted primarily from a net
increase in inventory growth of $1,464,957 for nine months ended September 30,
2001. The net cash provided by financing activities for the nine months ended
September 30, 2001 was $692,294 compared to ($961,785) for the period ended
December 31, 2000. This increase is due primarily to $1,736,947 in payments on
notes payable accounted for during the twelve months ended December 31, 2000 and
absent during the period ended September 30, 2001.
Our principal business is seasonal in nature with fourth quarter sales
representing as much as 40% of annual sales. As a result of this seasonality and
the decay periods inherent in our topaz products, inventory growth in the second
and third quarters are customary. As of September 30, 2001 inventory was
$24,229,013 compared to December 31, 2000 of $20,626,502, an increase of
$3,602,511. The net effect directly impacts our cash flow as a decrease in cash
flow from operating activities. In addition to seasonal build up, inventory
growth can be attributed to two other factors: anticipated fourth quarter sales
growth with changes in consumer buying trends and lengthy decay periods for the
radiated stones coupled with short lead times on customer orders. The decay
periods for the topaz stones can range from 120 to 240 days depending upon the
hue. For darker hues the decay periods are longer. At the end of the first
quarter the consumer-buying trend was to move from the lighter topaz hues to the
darker colors. As a result of the decay periods, our production included
significant
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levels of lighter hues preparing for the seasonal revenues. The consumer buying
preference shifted to a darker stone, which included a longer decay period. As a
result, our inventory levels continue to build with darker stones while the
lighter topaz stones are showing slowing demand trends. This change in trends
causes increased inventory levels. In addition, retailers and wholesalers
continue to demand shorter lead-times for orders which in turn causes higher
carrying values of finished stones to meet customer orders on time. At September
30, 2001 we carried approximately $1,852,753 in pre-form (in production) lighter
color stones and $384,233 in finished lighter hue stones. We believe that the
carrying values of these stones, under current demand levels, should approximate
$200,000 to $300,000. We anticipate that the excess levels will be consumed
within a 12-month period.
We have two line of credit arrangements with two Thai financial
institutions and one U.S. financial institution entered into in October 1999,
April 2000 and October 2001. The Thai lines are renewable automatically on a
yearly basis and the U.S. line expires on September 2002; the lines are subject
to the banks' periodic reviews resulting in adjustment of our credit limit. The
Thai lines bear interest at a rate equal to LIBOR plus two percent (8.208%
December 31, 2000); the U.S. line bears interest at prime plus 1.25%; 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. The U.S. line is secured
personally by one of our directors and by our U.S. receivables and inventory and
by a lien on various Thai real estate properties and fixed assets of a related
party. As of September 30, 2001, approximately $690,518 was available for
borrowing under both 1999 and 2000 lines. As of November 30, 2001, approximately
$1,158,634 was available for borrowing under the U.S. line. As of December 31,
1999 and 2000 and September 30, 2001, the outstanding balance under both lines
of credit was $0, $775,162 and $1,467,456, respectively. As of November 30, 2001
the outstanding balance under the U.S. line was approximately $841,366.
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.
The effects on liquidity of carrying large values of inventory can be
referenced by days of sales in inventory. On average, for the 12 months ended
September 30, 2001, December 31, 2000 and 1999 inventory would remain on the
books 387, 236 days and 378 days respectively until it is sold. During this
period the inventory is classified as a current asset on the balance sheet but
restricts the use of working capital until the inventory is sold.
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Inventory is valued by applying a moving average method for valuation.
Under this method of valuation, generally, the finished stone inventory does not
progressively devalue with age and the prices per carat remain relatively
stable. The average cost includes the raw cost of the product plus any
additional costs to bring it to its current condition including processing,
transportation, insurance and holding costs. Variances in valuation under the
moving average cost method occur when stone prices, overhead cost and other
related costs, which make up the value of the inventory, vary significantly up
or down within the fiscal period. As such, material variances in the inventory
costs are identified and valued separately to reflect true value.
Our business can be classified into two major groups including sale of
finished jewelry and finished stones, to a lesser degree. Most of our finished
jewelry is made to order and is shipped when completed. (Inventory valuations
include the lesser of manufactured cost or market valuation per unit times the
quantities on hand.) Lower of cost or market is referenced by recent sale prices
of the finished stones compared to the cost to produce or acquire such stones.
If recent sales of an existing stone are not available, current market price
samples in the selling market will dictate the lower of cost or market for
valuation purposes.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CURRENCY FLUCTUATIONS
1. EXCHANGE RATE INFORMATION
Our Consolidated Financial Statements are prepared in U.S. dollars. The
financial statements of our foreign subsidiaries are remeasured into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52.
Fluctuations in the value of foreign currencies cause U.S. dollar amounts to
change in comparison with previous periods and, accordingly, we cannot quantify
in any meaningful way, the effect of such fluctuations upon future income. This
is due to the constantly changing exposure in the Thai Baht for our Thai
subsidiaries.
As of December 4, 2001, the interbank exchange rate for the Baht is trading
at 43.97 Baht to the US dollar. The exchange rate in Thailand is showing signs
of stability in 2001 with gradual recovery anticipated in early 2002. We
anticipate that the economies of the Asian countries are continuing to recover
which will further strengthen the Baht, however, the regions of Thailand are
promoting exports to strengthen their economies. An attempt to control the
valuation of the Baht is likely to come from easing exports, not imposing tight
restrictions. We are unable to predict whether the trends noted above would have
a material effect on our future financial condition or the results of operations
and, if so, whether such an effect will be positive or negative.
2. EXCHANGE RATE FLUCTUATION
Thai Baht
2001 2000
High Low Average High Low Average
Third Quarter 45.87 43.92 44.98 42.77 39.10 40.97
Second quarter 45.85 44.68 45.45 39.45 37.72 38.67
First quarter 45.00 42.19 43.29 38.30 36.71 37.96
2000 1999
High Low Average High Low Average
Fourth quarter 44.44 41.88 43.43 40.90 37.35 38.86
We expect that the exchange rate of the currency of certain countries in
Asia including Thailand will stabilize by the end of 2001. The stabilization and
recovery of the Thai Baht is anticipated to show continued improvement with the
recovery of the economy through 2002. We anticipate the cost of raw materials,
which includes precious and non-precious metals, are expected to show slight
cost increases in the short-term with long-term stability.
-19-
3. FORWARD-LOOKING STATEMENTS
From time to time, we may make certain statements that contain
"forward-looking" information. Words such as "anticipate", "estimate",
"project", "believe" and similar expressions are intended to identify such
forward-looking statements. Forward-looking statements may be made by management
orally or in writing, including, but not limited to, in press releases, as part
of the Financial Information or Management's Discussion and Analysis or Plan of
Operations and as part of other sections of this registration statement.
Such forward-looking statements are subject to certain risks, uncertainties
and assumptions, including without limiting those identified below. Should one
or more of these risks or uncertainties materialize, or should any of the
underlying assumptions prove incorrect, actual results of current and future
operations may vary materially from those anticipated, estimated or projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates.
4. FOREIGN CURRENCY RISK
As of September 30, 2001, we had no open forward-contracts. Our Thai
subsidiaries keep their books in the Thai Baht currency. As such, the Thai
balances are exposed to currency gains and losses depending upon the currency
rate fluctuations when compared to the US dollar for the respective periods. The
currency and remeasurement gains and losses for periods ended September 30, 2001
and 2000 are $1,283,430 and $(87,061).
5. INTEREST RATE FLUCTUATIONS
Our interest expenses and income are sensitive to changes in interest
rates. We had interest-bearing obligations of $1,467,456 for the period ended
September 30, 2001 bearing various interest rates, and any fluctuation in the
interest rate will have a direct impact on our interest expenses, cash flow and
results of operations.
ITEM 3. DESCRIPTION OF PROPERTY
We operate four fully integrated facilities in various parts of Thailand
totaling 101,000 square feet.
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
encompasses 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 Issaquah, Washington which are subject to a
lease that provides for monthly rent of approximately $5,300 per month and
include 2,171 square feet with a termination date of August 31, 2006.
Our office is located at 1180 NW Maple Street, Suite 180, Issaquah, Washington
98027. Our telephone number is 425-392-3144. The operations that are
performed at this location include: U.S. accounting activities, preparation of
quarterly and annual reports, financing and capital-raising activities, credit,
collections and U.S. sales and customer support services. Our chief financial
officer, treasurer and U.S. sales staff is located in this office.
-20-
Our subsidiaries are located as follows: Creative Gems & Jewelry Co., Ltd.,
57/7 Moo 4, Tambol Thasala, Amphur Muang, Lopbur, Thailand 15000; Advance Gems &
Jewelry Co., Ltd., 57/31 Moo 4, Tambol Thasala, Amphur Muang, Lopburi, Thailand
15000; and Advance Gems Manufacturing Co., Ltd., 399 Moo 4 Tambol Yuan, Amphur
Chiangkam, Payao, Thailand 56110.
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
November 30, 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.
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 any time. 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
------------ --------------- ---------------
Percent Percent Percent
NAME AND ADDRESS OF No. of No. Of No. of
BENEFICIAL OWNER (1) Shares Class Shares Class Shares Class
---------- --------- ---------- --------- ---------- -------
Best Worth Agents, Ltd. (2) --- --- 2,911,050 100% 1,006,513 100%
U.S. Heritage Capital Corp. 133,000 6.2% --- --- --- ---
5770 Wulff Run Road
Cincinnati, OH 45233
Jeremy F. Watson 200,000 9.4% --- --- --- ---
Thammatinna Thammaradi --- --- --- --- --- ---
Leonard Orrin --- --- --- --- --- ---
David Dikinis --- --- --- --- --- ---
Dr. Aphichart Fufuangvanich 24,000 1.1% --- --- --- ---
Terrance C. Cuff (3) 212,179 9.9% --- --- --- ---
Timothy Matula (3) 206,183 9.6% --- --- --- ---
Thiti Fufuangvanich --- --- --- --- --- ---
Alson Lee --- --- --- --- --- ---
Jason Sugarman --- --- --- --- --- ---
All officers and directors 642,362 29.8% --- --- --- ---
as a group (ten (10) persons,
including the foregoing)
- --------------------
-21-
<FN>
(1) Unless otherwise indicated, the address of each beneficial owner is the care of Topaz Group, 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.
(3) Includes shares of common stock issuable upon exercise of warrants that
are exercisable within sixty days.
</FN>
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
Jason Sugarman 29 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 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.
-22-
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).
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.
Jason Sugarman has served us an independent director since September
2001. Mr. Sugarman is a principal of MKA Capital, a privately held real estate
fund located in Orange County, California. He started at MKA in March 2000.
Prior to this position Mr. Sugarman was the president of Cardinal Mortgage from
February 1999 to March 2000. From 1994 to 2000, Mr. Sugarman was a principal of
Patriot Homes, a land development and homebuilding company. He has a BA degree
in economics from Stanford University.
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 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. No officers received compensation in excess of
$100,000 during such years.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
--------------------------------- ---------------------------------
Restricted Securities
Fiscal Other Annual Stock Underlying All Other
Name and Principal Position Year Salary ($) Bonus Compensation Awards Options Compensation
- --------------------------- ---- ---------- ----- ------------ ------ ------- ------------
Kasem Chitmunchaitham, 2000 29,653 0 0 0 0 0
President and 1999 31,710 0 0 0 0 0
Chief Executive Officer 1998 8,743 0 0 0 0 0
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
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or the "Code", as well as non-qualified options. Employees as well as other
individuals, such as our outside directors and consultants 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 our employees or employees of certain of our affiliates on the date of
grant. As of July 30, 2001 no options had been granted under the plan.
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 us and our
affiliated corporations are eligible to be granted options under the plan. We
currently have 2,000 employees. Participants under the Royal Sponsored Women's
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 United States 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
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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 the Topaz Group.
The exercise price is payable by delivery of cash or a check to the order
of The Topaz Group, Inc. 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 the 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 the
Topaz Group, within three months after the termination of such relationship
(unless such termination was for cause or without the consent of the 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
United States 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, we have no employment
agreements with any of our executive officers.
DIRECTOR COMPENSATION
There is no compensation for directors either on an annual basis or for
attendance at board meetings.
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Our board is also comprised of an Audit Committee which has the following
three members, all of whom are independent directors: David Dikinis, Jason
Sugarman and Alson Lee who serves as the Chairman of the Audit Committee.
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 one of our directors. These
transactions were negotiated at arm's 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 to us the cumulative amount of $543,929 as of December 31, 2000, $380,406
of which remains due and payable to Ms. Sae-Fa as of June 30, 2001. The loans
from Ms. Sae-Fa have no term and do not bear interest. The debts are classified
as a current liability and are 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 or the "Pink Sheets" 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 October 23, 2001, we had 1,624,886 shares of common stock outstanding
held by 562 stockholders of record. The number of shares of our common stock
which can be sold pursuant to Rule 144 under the Securities Act is 941,807
shares. The number of shares of our common stock which are subject to issuance
upon conversion of the series A or series B preferred stock is 4,427,563 shares.
The number of shares of our common stock which is subject to issuance upon the
exercise of any outstanding warrants is 32,884 shares. On January 16, 2001 we
filed with the Secretary of State of Nevada to increase voting privileges
of the Series B preferred shares from 1 vote per share to 20 votes per share.
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
-26-
We have 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.
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 us. 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 placement 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 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.
-27-
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 the Topaz Group, 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. 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 Topaz
Group, 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 Topaz Group), 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.
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.
-28-
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
The following provisions in our articles of incorporation 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.
o 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 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.
The following provisions in the certificate of designation of our series A
preferred stock and series B preferred stock provide for mandatory conversion of
our series A and series B preferred stock upon the occurrence of certain events
in order to prevent a change of control.
-29-
o Mandatory Conversion of Series A Preferred Stock. The series A
preferred stock will be automatically converted into common stock: (i)
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 (ii) if we sell all or substantially
all of our assets or capital stock to another entity.
o Mandatory Conversion of Series B Preferred Stock. The series B
preferred stock will be automatically converted 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 our company into
another surviving company.
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 by-laws 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 United States 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
-30-
CONSOLIDATED FINANCIAL 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
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 P as to which the
date is December 12, 2001)
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(U.S. Dollars)
ASSETS
December 31,
----------------------------------- September 30,
1999 2000 2001
-------------- ------------- -------------
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 574,439 $ 321,734 $ 284,497
Accounts receivable, net of allowance of
$606,384, $923,474, and $781,012 2,089,413 3,299,161 2,486,353
Receivables from related parties 905,369 19,456 --
Inventories 18,488,948 20,626,502 24,229,013
Prepaid expenses and deposits 230,660 196,376 787,447
----------- ----------- -----------
Total current assets 22,288,829 24,463,229 27,787,310
PROPERTY AND EQUIPMENT - NET 2,030,502 2,127,733 2,206,324
OTHER ASSETS 54,828 31,876 183,265
----------- ----------- -----------
Total assets $24,374,159 $26,622,838 $30,176,899
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ -- $ 775,162 $ 1,467,456
Accounts payable 5,000,979 4,401,675 3,111,886
Accrued liabilities 301,711 473,177 1,603,558
Payables to related party 616,269 871,298 1,091,663
Notes payable 1,736,947 -- --
----------- ----------- -----------
Total current liabilities 7,655,906 6,521,312 7,274,563
REDEEMABLE ORDINARY SHARES 5,576,697 4,823,937 4,700,568
COMMITMENTS -- -- --
STOCKHOLDERS' EQUITY
Class A preferred stock, liquidation preference of
$9,252,879, $10,153,954 and $11,627,229 5,127,654 4,827,477 4,139,971
Class B preferred stock, liquidation preference of
$0, $2,541,646 and $2,910,423 -- 1,007 1,007
Common stock 763 1,025 1,625
Additional paid in capital 43,052 402,474 1,089,380
Retained earnings 5,970,087 10,045,606 12,969,785
----------- ----------- -----------
11,141,556 15,277,589 18,201,768
----------- ----------- -----------
Total liabilities and stockholders' equity $24,374,159 $26,622,838 $30,176,899
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-1
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(U.S. Dollars)
1998 1999 2000
---------------- ------------ ------------
Sales $ 18,886,737 $ 19,881,283 $ 32,483,043
Cost of goods sold 10,976,881 11,025,824 23,488,062
------------ ------------ ------------
Gross profit 7,909,856 8,855,459 8,994,981
Selling, general and administrative expenses 4,154,545 4,346,100 4,136,931
------------ ------------ ------------
Earnings from operations 3,755,311 4,509,359 4,858,050
Other income (expense)
Exchange rate gain (loss) (3,722,629) 320,075 86,164
Interest expense (235,932) (79,399) (101,256)
Interest income 153,434 18,224 4,114
Gain (loss) on remeasurement 4,580,806 1,455,855 (831,288)
Other, net 108,620 111,479 60,249
------------ ------------ ------------
884,299 1,826,234 (782,017)
------------ ------------ ------------
Earnings before extraordinary item 4,639,610 6,335,593 4,076,033
Extraordinary item - gain on debt restructuring -- 803,589 --
------------ ------------ ------------
Net earnings 4,639,610 7,139,182 4,076,033
Preferred stock dividends (12,270,000) (2,734,610) --
------------ ------------ ------------
Net earnings (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (7,630,390) $ 4,404,572 $ 4,076,033
============ ============ ============
Earnings (loss) per share available to common
stockholders before extraordinary item:
Basic $ (10.00) $ 4.72 $ 4.91
============ ============ ============
Diluted $ (10.00) $ 0.66 $ 0.72
============ ============ ============
Net earnings (loss) per share available to common stockholders:
Basic $ (10.00) $ 5.77 $ 4.91
============ ============ ============
Diluted $ (10.00) $ 0.80 $ 0.72
============ ============ ============
Nine months ended September 30,
----------------------------------------------
2000 2001
-------------------- ---------------------
(unaudited) (unaudited)
Sales $ 18,255,605 $ 15,012,234
Cost of goods sold 12,933,902 10,569,007
------------ ------------
Gross profit 5,321,703 4,443,227
Selling, general and administrative expenses 3,139,574 2,795,133
------------ ------------
Earnings from operations 2,182,129 1,648,094
Other income (expense)
Exchange rate gain (loss) 248,718 (35,633)
Interest expense (63,378) (54,817)
Interest income 783 712
Gain (loss) on remeasurement (335,779) 1,319,063
Other, net 45,995 46,759
------------ ------------
(103,660) 1,276,085
------------ ------------
Earnings before extraordinary item 2,078,469 2,924,179
Extraordinary item - gain on debt restructuring -- --
------------ ------------
Net earnings 2,078,469 2,924,179
Preferred stock dividends -- --
------------ ------------
Net earnings (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 2,078,469 $ 2,924,179
============ ============
Earnings (loss) per share available to common stockholders
before extraordinary item:
Basic $ 2.72 $ 2.41
============ ============
Diluted $ 0.38 $ 0.48
============ ============
Net earnings (loss) per share available to common stockholders:
Basic $ 2.72 $ 2.41
============ ============
Diluted $ 0.38 $ 0.48
============ ============
The accompanying notes are an integral part of these statements.
F-2
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(U.S. Dollars)
Years ended December 31, 1998, 1999 and 2000, and the nine months
ended September 30, 2001 (unaudited)
Thai Class A Class B Subscriptions
Preferred Stock Preferred Stock Preferred Stock Receivable
--------------- --------------- --------------- ----------
Balance at January 1, 1998 $ -- $ -- $ -- $(2,118,651)
Subscriptions received -- -- -- (1,883,729)
Dividends -- -- -- --
Issuance of Class B Preferred and
Ordinary shares 2,404,920 -- -- --
totaling 9,800,000 and 200,000,
respectively
Net earnings for the year -- -- -- --
----------- ----------- ------ -----------
Balance at December 31, 1998 2,404,920 -- -- (4,002,380)
Issuance of Thai Preferred and Ordinary
shares totaling 9,800,000 and 200,000,
respectively, on February 19, 1999 2,593,080 -- -- --
Issuance of Thai Preferred and Ordinary
shares totaling 490,000 and 510,000,
respectively on March 1, 1999 129,654 -- -- --
Payment of subscription receivable -- -- -- 4,002,380
Share exchange agreement on April 30, 1999 (5,127,654) 5,127,654 -- --
Warrants issued for services -- -- -- --
Dividends -- -- -- --
Net earnings for the year -- -- -- --
----------- ----------- ------ -----------
Balance at December 31, 1999 -- 5,127,654 -- --
Conversion of preferred stock into common -- (299,684) -- --
Issuance of additional preferred shares
under exchange agreement -- 514 -- --
Re-designation of preferred shares -- (1,007) 1,007 --
Warrants issued for services -- -- -- --
Net earnings for the year -- -- -- --
----------- ----------- ------ -----------
Balance at December 31, 2000 -- 4,827,477 1,007 --
Conversion of preferred stock into common -- (687,506) -- --
Net earnings for nine months ended -- -- -- --
September 30, 2001
----------- ----------- ------ -----------
Balance at September 30, 2001 $ -- $ 4,139,971 $1,007 $ --
=========== =========== ====== ===========
Ordinary Common Additional Retained
Shares Stock Paid-In Capital Earnings Total
------ ----- --------------- -------- -----
Balance at January 1, 1998 $ 7,642,284 $ -- $ -- $ 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 49,080 -- -- -- 2,454,000
totaling 9,800,000 and 200,000,
respectively
Net earnings for the year -- -- -- 4,639,610 4,639,610
----------- ------ ---------- ------------ ------------
Balance at December 31, 1998 7,691,364 -- -- 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 52,840 -- -- -- 2,645,920
Issuance of Thai Preferred and Ordinary
shares totaling 490,000 and 510,000,
respectively on March 1, 1999 134,742 -- -- -- 264,396
Payment of subscription receivable -- -- -- -- 4,002,380
Share exchange agreement on May 1, 1999 (7,878,946) 763 3,052 -- (7,875,131)
Warrants issued for services -- -- 40,000 -- 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 -- 763 43,052 5,970,087 11,141,556
Conversion of preferred stock into common -- 262 299,422 -- --
Issuance of additional preferred shares
under exchange agreement -- -- -- (514) --
Re-designation of preferred shares -- -- -- -- --
Warrants issued for services -- -- 60,000 -- 60,000
Net earnings for the year -- -- -- 4,076,033 4,076,033
----------- ------ ---------- ------------ ------------
Balance at December 31, 2000 -- 1,025 402,474 10,045,606 15,277,589
Conversion of preferred stock into common -- 600 686,906 -- --
Net earnings for nine months ended -- -- -- 2,924,179 2,924,179
September 30, 2001
----------- ------ ---------- ------------ ------------
Balance at September 30, 2001 $ -- $1,625 $1,089,380 $ 12,969,785 $ 18,201,768
=========== ====== ========== ============ ============
The accompanying notes are an integral part of this statement.
F-3
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars)
Year ended December 31,
-----------------------
1998 1999 2000
---- ---- ----
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net earnings (loss) $ 4,639,610 $ 7,139,182 $ 4,076,033
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Depreciation and amortization 163,685 161,605 145,307
Remeasurement of redeemable ordinary shares -- (2,302,249) (752,760)
Warrants granted for services -- 40,000 60,000
Changes in assets and liabilities:
Receivables (508,830) 1,015,271 (323,835)
Inventories (5,454,770) (8,483,736) (2,137,554)
Prepaid expenses and deposits/other assets 2,378 730,997 57,236
Payables 1,608,092 294,217 (476,890)
Accrued liabilities (46,803) 5,886 304,081
----------- ----------- -----------
Net cash provided by (used in) operating activities 403,362 (1,398,827) 951,618
Cash flows from investing activities
Purchases of property and equipment -- (146,931) (242,538)
----------- ----------- -----------
Net cash used in investing activities -- (146,931) (242,538)
Cash flows from financing activities
Payment on notes payable, net 516,262 (493,890) (1,736,947)
Borrowings (payments) on line of credit, net -- -- 775,162
Proceeds from issuance of share capital 2,454,000 6,916,511 --
Subscriptions received (1,883,729) -- --
Dividends paid -- (6,085,321) --
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,086,533 337,300 (961,785)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,489,895 (1,208,458) (252,705)
Cash and cash equivalents at the beginning of period 293,002 1,782,897 574,439
----------- ----------- -----------
Cash and cash equivalents at the end of period $ 1,782,897 $ 574,439 $ 321,734
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest $ -- $ 79,279 $ 93,576
=========== =========== ===========
Noncash Financing Activities:
Settlement of related party receivable in lieu of
payment of declared and accrued dividends $ 3,932,811 $ 4,986,478 $ --
=========== =========== ===========
Nine months ended September 30,
----------------------------------------------------
2000 2001
----------------------- -----------------------
(unaudited) (unaudited)
Cash flows from operating activities
Net earnings (loss) $ 2,078,469 $ 2,924,179
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Depreciation and amortization 84,591 111,014
Remeasurement of redeemable ordinary shares (639,846) (123,369)
Warrants granted for services 60,000 --
Changes in assets and liabilities:
Receivables (934,204) 832,264
Inventories (3,842,000) (3,602,511)
Prepaid expenses and deposits/other assets (174,964) (742,460)
Payables (594,744) (1,833,718)
Accrued liabilities 4,134,846 1,894,675
----------- -----------
Net cash provided by (used in) operating activities 172,148 (539,926)
Cash flows from investing activities
Purchases of property and equipment (196,721) (189,605)
----------- -----------
Net cash used in investing activities (196,721) (189,605)
Cash flows from financing activities
Payment on notes payable, net (1,736,947) --
Borrowings (payments) on line of credit, net 1,861,580 692,294
Proceeds from issuance of share capital -- --
Subscriptions received -- --
Dividends paid -- --
----------- -----------
Net cash provided by (used in) financing activities 124,633 692,294
----------- -----------
Net increase (decrease) in cash and cash equivalents 100,060 (37,237)
Cash and cash equivalents at the beginning of period 574,439 321,734
----------- -----------
Cash and cash equivalents at the end of period $ 674,499 $ 284,497
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest $ 59,508 $ 54,817
=========== ===========
Noncash Financing Activities:
Settlement of related party receivable in lieu of
payment of declared and accrued dividends $ -- $ --
=========== ===========
The accompanying notes are an integral part of these statements
F-4
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 April 30, 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 (Chancellor), a non
operating public shell company. Chancellor subsequently changed its name to The
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
stockholders of those companies (see note J). On September 29, 2000, the Company
issued an additional 3,084,000 shares of Class A Preferred Stock to Best Worth
as called for under the terms of the original exchange agreement.
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 Equivalent
------------------------
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.
F-5
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
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 nine
months ended September 30, 2000 and 2001, were $229,894 and $234,056,
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.
F-6
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The components of basic and diluted earnings per share were as follows:
Year ended December 31, Nine months ended September 30,
------------------------------------------- --------------------------------
1998 1999 2000 2000 2001
----------- ---------- --------- --------- -----------
BASIC
Net earnings (loss) before extraordinary item $ 4,639,610 $ 6,335,593 $ 4,076,033 $ 2,078,469 $2,924,179
Preferred stock dividends (12,270,000) (2,734,610) -- -- --
------------ ----------- --------------- -------------- ----------
Net earnings (loss) available to common
stockholders before extraordinary item $ (7,630,390) $ 3,600,983 $ 4,076,033 $ 2,078,469 $2,924,179
Extraordinary item -- 803,589 -- -- --
------------ ----------- --------------- -------------- ----------
Net earnings (loss) available to common
stockholders after extraordinary item $ (7,630,390) $ 4,404,572 $ 4,076,033 $ 2,078,469 $2,924,179
============ =========== =============== ============== ==========
Weighted average outstanding shares of
common stock 763,000 763,000 829,727 763,959 1,213,489
Net earnings (loss) per share available to
common stockholders before
extraordinary item $ (10.00) $ 4.72 $ 4.91 $ 2.72 $ 2.41
============ =========== =============== ============== ==========
Net earnings (loss) per share available to
common stockholders $ (10.00) $ 5.77 $ 4.91 $ 2.72 $ 2.41
============ =========== =============== ============== ==========
DILUTED
Net earnings (loss) available to common
stockholders before extraordinary item $ (7,630,390) $ 3,600,983 $ 4,076,033 $ 2,078,469 $2,924,179
Impact of assumed conversion of preferred stock -- 2,734,610 -- -- --
------------ ----------- --------------- -------------- ----------
Net earnings (loss) available to common
stockholders before extraordinary item
(including effect of assumed conversion) $ (7,630,390) $ 6,335,593 $ 4,076,033 $ 2,078,469 $2,924,179
Extraordinary item -- 803,589 -- -- --
------------ ----------- --------------- -------------- ----------
Net earnings (loss) available to common
stockholders after extraordinary item
(including effect of assumed conversion) $ (7,630,390) $ 7,139,182 $ 4,076,033 $ 2,078,469 $2,924,179
============ =========== =============== ============== ==========
Weighted average outstanding shares of
common stock 763,000 763,000 829,727 763,959 1,213,489
Dilutive effect of preferred shares (1) -- 4,735,680 4,809,692 4,736,764 4,838,960
------------ ----------- --------------- -------------- ----------
Common stock and potentially issuable
common stock 763,000 5,498,680 5,639,419 5,500,723 6,052,449
Net earnings (loss) per share before
extraordinary item $ (10.00) $ 1.15 $ 0.72 $ 0.38 $ 0.48
============ =========== =============== ============== ==========
Net earnings (loss) per share $ (10.00) $ 1.30 $ 0.72 $ 0.38 $ 0.48
============ =========== =============== ============== ==========
(1) The dilutive effect of warrants outstanding during each of the presented
periods was immaterial to these computations.
F-7
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
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 not 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.
F-8
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
13. Interim Financial Information
-----------------------------
The interim consolidated financial statements of the Company as of September 30,
2001 and for the nine months ended September 30, 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, September 30,
-------------------------- ---------------------
1999 2000 2001
---- ------ -------
Raw materials $ 2,271,893 $ 2,860,174 $ 3,466,768
Finished stones 14,648,674 17,087,679 20,158,266
Finished jewelry 1,568,381 678,649 603,979
----------- ----------- -----------
$18,488,948 $20,626,502 $24,229,013
=========== =========== ===========
F-9
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, September 30,
-------------------------- -------------------
1999 2000 2001
---------- ---------- -----------
Land and land improvements $1,350,218 $1,352,813 $1,352,823
Buildings and improvements 362,709 381,014 375,743
Machinery and equipment 965,294 1,125,657 1,242,083
Office furniture and equipment 400,904 441,712 520,016
Vehicles 262,049 283,011 283,147
---------- ---------- ----------
----------
3,341,174 3,584,207 3,773,812
Less accumulated depreciation and amortization 1,310,672 1,456,474 1,567,488
---------- ---------- ----------
----------
$2,030,502 $2,127,733 $2,206,324
========== ========== ==========
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,
------------ September 30,
1999 2000 2001
----------------------- ---------------------- ---------------------------
Due to directors $ 345,310 $ 543,929 $ 784,856
Accrued rent 194,754 327,369 306,701
Other 76,205 - 106
----------------------- ---------------------- ---------------------------
$ 616,269 $ 871,298 $ 1,091,663
======================= ====================== ===========================
Related party accrued rent is owed to companies that are controlled by the
Company's president.
NOTE F - LINES OF CREDIT
As of September 30, 2001, the Company had 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 a 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 September 30, 2001 approximately $836,000 and $116,139,
respectively, was available for borrowing under the 1999 Line.
F-10
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE F - LINES OF CREDIT - Continued
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 September
30, 2001, approximately $493,000 and $574,379, respectively, was available for
borrowing under the 2000 Line.
As of December 31, 1999 and 2000, and September 30, 2001, outstanding balance
under both lines of credit was $0, $775,162 and $1,467,456, respectively.
NOTE G - NOTES PAYABLE
Notes payable consist of the following:
December 31,
------------ September 30,
1999 2000 2001
---------------------- --------------------- ----------------------
Debt restructuring $ 685,893 $ - $ -
Notes payable - related party 989,402 - -
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 June 30, 2001.
Series A Preferred (see note B) $0.001 par value - 26,000,000 shares authorized,
22,375,000, 4,021,050, and 3,421,050 shares issued and outstanding as of
December 31, 1999 and 2000, and September 30, 2001. Each share of preferred
F-11
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE I - STOCKHOLDERS' EQUITY - Continued
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, 2000 and September
30, 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.
Common stock - $0.001 par value - 100,000,000 authorized; 763,000, 1,024,886,
and 1,624,886 shares issued and outstanding as of December 31, 1999 and 2000,
and September 30, 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.
Stock options - 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. No options have been
granted.
A roll forward of shares issued and outstanding is as follows:
Class A Class B
Preferred Preferred Common
Stock Stock Stock
---------------------- -------------------- -----------------
Shares issued as part of April 30, 1999 exchange agreement 22,375,000 - 763,000 (1)
---------------------- -------------------- -----------------
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
April 30, 1999 exchange agreement 3,084,000 - -
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 (600,000) - 600,000
---------------------- -------------------- ------------------
Balance at September 30, 2001 3,421,050 1,006,513 1,624,886
====================== ==================== ==================
(1) represents previously issued and outstanding common shares of Chancellor
F-12
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
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 stockholders 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 April 30, 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 September 30, 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 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, Nine months ended September 30,
--------------------------------------------------- ---------------------------------------
1998 1999 2000 2000 2001
--------------- --------------- ---------------- ---------------- ------------------
Tax expense (benefit) computed
at federal statutory rate $1,577,000 $2,427,000 $ 1,386,000 $ 707,000 $ 994,000
Non U.S. income exempt
from tax (1,577,000) (2,427,000) (1,520,000) (778,000) (1,094,000)
Valuation allowance - - 134,000 71,000 100,000
--------------- --------------- ---------------- ---------------- ------------------
$ - $ - $ - $ - $ -
=============== =============== ================ ================ ==================
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:
F-13
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE K - INCOME TAXES - Continued
December 31, September 30,
2000 2001
--------------- ---------------
Deferred asset
Net operating losses $ 114,000 $ 214,000
Warrants 20,000 20,000
Valuation allowance (134,000) (234,000)
--------------- ---------------
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.
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 nine months ended September 30, 2000 and 2001,
was approximately $65,000, $77,000 and $72,000, $64,000, and $62,000,
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 September 30, 2001 the reserve balance was
$490,800, and was included in the Company's retained earnings.
F-14
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
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 September 30, 2001 balances of two
customers represented 13% and 12%, 12% and 8%, 10% and 7%, 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 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
1. Revenue (thousands)
-------------------
Year ended December 31, Nine months ended September 30,
--------------- --- -------------- ---- --------------- ---------------- --- ---------------------
1998 1999 2000 2000 2001
--------------- -------------- ---- --------------- ---------------- ---------------------
United States $ 15,808 $ 16,972 $ 28,347 $ 15,929 $ 10,523
Thailand 3,079 2,909 4,136 2,326 4,489
2. Long-lived assets
-----------------
December 31,
------------------------------------------------------
September
1999 2000 2001
------------------------ ------------------------- --------------------------
US $ - $ - $ 135
Thailand 2,030,502 2,127,733 2,206,189
------------------------ ------------------------- --------------------------
Total $ 2,030,502 $ 2,127,733 $ 2,206,324
======================== ========================= ==========================
F-15
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 2000 and 2001 (unaudited)
NOTE N - GEOGRAPHIC AREAS AND CONCENTRATIONS - Continued
3. Major customers
---------------
Details of individual customers accounting for more than 10% of the Company's
sales are as follows:
Sales (thousands)
Year ended December 31, Nine months ended September 30,
------------------------------------------------------ -----------------------------------
1998 1999 2000 2000 2001
-------------- --------------- --------------- --------------- --------------
Goldmine Enterprises, Inc. $ 2,441 $ 4,579 $ 4,215 $ 3,100 $ 2,009
Helen Andrews 3,225 3,960 2,862 1,995 265
Home Shopping Network - - 591 418 1,112
4. Major suppliers (thousands)
---------------------------
Details of individual suppliers accounting for more than 10% of the Company's
purchases are as follows:
Year ended December 31, Nine months ended September 30,
------------------------------------------------------ -----------------------------------
1998 1999 2000 2000 2001
-------------- -------------- -------------- --------------- --------------
Gold Corporation $ 2,455 $ 3,271 $ 3,657 $ 2,893 $ 1,454
Little Rock 174 1,798 2,667 888 1,461
F-16
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000, and
the nine months ended September 30, 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 extraordinary item 2,781,833 1,627,997 2,129,701 (203,938)
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 $ 4,899,963 $5,525,989
Gross profit 1,305,985 1,513,345 1,623,897
Earnings from operations 467,203 475,030 705,861
Net earnings 1,242,292 975,269 706,618
Earnings per share from operations
Basic $ 0.40 $ 0.36 $ 0.49
Diluted $ 0.08 $ 0.08 $ 0.12
Net earnings per share
Basic $ 1.06 $ 0.74 $ 0.49
Diluted $ 0.21 $ 0.16 $ 0.12
NOTE P - SUBSEQUENT EVENT (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 and Restated Certificate of
Designation of the Topaz Group, Inc.
In October 2001, the Company entered into a $2,000,000 line of credit with a
U.S. financial institution. The line of credit bears interest at prime plus
1.25% and is secured by inventory and accounts receivable in the United States,
a second position on certain real estate and fixed assets in Thailand and by one
of the Company's directors.
F-17
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, filed 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
*10.4 Overdraft Agreement between Thai Farmers Bank PCL and Creative Gems &
Jewelry Co. Ltd., dated July 13, 2000
10.5 Business Loan Agreement between The Topaz Group, Inc. and General
Bank, dated October 11, 2001 and Addendum to Loan Agreement between
The Topaz Group, Inc. and General Bank, dated October 11, 2001
*21 Subsidiaries of the Registrant
*24.1 Power of Attorney (Included on Signature Page)
- --------------
* Incorporated by reference from our registration statement on Form 10 filed
with the Securities and Exchange Commission on October 30, 2001
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 19th day of December, 2001.
THE TOPAZ GROUP, INC.
BY: /S/ JEREMY F. WATSON
Jeremy F. Watson
Chief Executive Officer
BY: /S/ TERRENCE C. CUFF
Terrence C. Cuff
Chief Financial Officer