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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-27415
THE TOPAZ GROUP, INC.
(Exact name of registrant as specified in its charter)
NEVADA 91-1762285
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
126/1 KRUNGTHONBURI ROAD
BANGLAMPOO LANG, KLONGSARN
BANGKOK 10600 THAILAND
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code)
COPIES TO:
MITCHELL S. NUSSBAUM, ESQ.
LOEB & LOEB LLP
345 PARK AVENUE
NEW YORK, NEW YORK 10154-0037
TEL: (212) 407-4159; FAX: (212) 407-4990
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or for such shorter period that
the registrant was required to file such report(s)), and (2) has been subject to
the filing requirements for the past ninety (90) days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|.
The aggregate market value of the common stock held by non-affiliates of
the registrant was approximately $4,981,963.80 based on the average bid and
asked prices of the common stock as of March 15, 2002.
As of March 15, 2002 2,134,886 shares of common stock, $.001 par value, of
the registrant were issued and outstanding.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
that involve
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.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT 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 Don's Wholesale 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:
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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 American Stock Exchange under the trading
symbol "TPZ". 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 1999, 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.
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
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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.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
We operate in only one business segment, the manufacture and distribution
of fine jewelry products and gemstones.
(c) 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.
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
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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 for all
hours that the reactor is operated at full power. 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.
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.
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 300
rural villages in 16 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. It is the
highest-powered university research reactor in the world and by its design and
operating performance contributes very significantly to the world's 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.
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 18% and 14.5%, respectively, of our total
raw material purchases; but there are
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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 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.
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 year ended December 31,
2001.
<Table>
<Caption>
TOTAL
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Gemstone sales 38% Jewelry Sales 62% : 100%
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Topaz products 73% Other products 27% : 100%
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Low-end products 83% High-end products 17% : 100%
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</Table>
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 patronage program or the Thai government's Royal Sponsored program or
The North Rural Young Women Development Foundation Program and other rural
working group. 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
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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.
CUSTOMERS
We have a broad customer base including over 350 individual
purchasers. Our four largest customers are, Goldmine Enterprises, Colibri, Home
Shopping Network, and QVC which accounted for approximately 36% of all net sales
in the year ended December 31, 2001, with Goldmine Enterprises accounting for
approximately 14%. 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, 2001 were $320,000 compared to
$2,200,000 as of December 31, 2000. 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
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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.
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 40% of our Topaz products include blue topaz
stones colored at this reactor. If we are 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.
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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.
EMPLOYEES
As of December 31, 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-exempt 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.
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:
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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 affects 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.
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 Topaz
revenues. Although we have entered into an
11
<Page>
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 the 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.
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
12
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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.
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
13
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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.
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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 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.
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<Page>
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 39% of net sales. During our 2001 Christmas selling season net
sales were approximately $9,600,000.
WE ARE SUSCEPTIBLE TO FLUCTUATIONS IN THE PRICE OF GEMS AND PRECIOUS METALS.
We are subject to other supply risks, including fluctuations in the
prices of precious gems and metals. Presently, we do not engage in any
activities to hedge against possible fluctuations in the prices of precious gems
and metals. If fluctuations in these prices are unusually large or rapid and
result in prolonged higher or lower prices, we cannot assure that the necessary
retail price adjustments can be made quickly enough to prevent us from being
adversely affected.
RISKS RELATED TO OWNERSHIP OF OUR SECURITIES
THE MARKET PRICE FOR OUR COMMON STOCK HAS BEEN HISTORICALLY VOLATILE AND IT MAY
BE DIFFICULT TO PREDICT THE FUTURE PRICE OF OUR COMMON STOCK.
From time to time, there has been and may continue to be significant
volatility in the market price for our common stock. Quarterly operating
results, changes in general conditions in the Thailand economy, the U.S.
economy, financial markets, natural disasters or other developments could cause
the market price of our common stock to fluctuate substantially.
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
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outstanding series A and series B preferred stock and controls approximately 92%
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.
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. PROPERTIES
We operate three fully integrated facilities in various parts of
Thailand totaling 92,400 square feet. Our corporate, marketing, administrative
facilities are located in the Topaz Tower, a 15 story tower at 126/1
Krungthonburi Road, Banglampoo Lang, Klongsan, 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 $3,600 per month. We have manufacturing facilities located at Mae
Sai, Thailand, which we occupy subject to a lease that expires August 15, 2002
and January 15, 2004 at a cost of approximately $900 per month, and, Phayao,
Thailand, which we occupy subject to a lease that expires January 14, 2004 at a
cost of approximately $560 per month. The factory at Mae Sai 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
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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 $5,900 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 are located in this office.
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 3. LEGAL PROCEEDINGS
Neither Topaz Group nor any of its subsidiaries is a party to, nor
is any of their respective properties the subject of, any material pending legal
or arbitration proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed in the American Stock Exchange under the
symbol "TPZ". There is no established public trading market on our series A
preferred stock and series B preferred stock.
As of December 31, 2001, we had 2,134,886 shares of common stock
outstanding held by 566 stockholders of record. The number of shares of our
common stock which can be sold pursuant to Rule 144 under the Securities Act is
962,474 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
3,917,563 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 the
voting privileges of the Series B preferred shares from 1 vote per share to 20
votes per share.
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The following table sets forth the range of high and low bid prices
of our common stock for the fiscal quarters of 2000 and 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.
<Table>
<Caption>
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---------- -------- --------- -------- --------- -------- --------- ---------
2000 1.25 .38 1.03 .42 .75 .36 1.55 .31
2001 1.25 .70 2.70 1.25 3.80 1.70 2.59 1.85
</Table>
We have not paid common stock dividends.
RECENT SALES OF UNREGISTERED SECURITIES
We issued the following unregistered securities during the
three-year period ended December 31, 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:
<Table>
<Caption>
NAME COMMON SHARES ISSUABLE
- -------------------------- ----------------------
Timothy Matula 4,933
Terrance C. Cuff 12,179
Herbert H. Wax 15,772
</Table>
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
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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 6. SELECTED 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 annual report. The consolidated statements of operations data for the years
ended December 31, 2001, 2000 and 1999 are derived from our consolidated
financial statements that have been audited by Grant Thornton LLP, independent
auditors, included elsewhere in this annual report on Form 10-K. The
consolidated statements of operations data for the years ended December 31, 1998
and 1997 and the consolidated balance sheet data as of December 31, 1998 and
1997 are derived from unaudited financial statements that are not included in
this annual report, 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."
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<Table>
<Caption>
Year Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
Sales $24,600,429 $ 32,483,043 $19,881,283 $ 18,886,737 $17,622,804
Cost of Goods Sold 18,954,344 23,488,062 11,025,824 10,976,881 12,937,673
----------- ------------ ----------- ------------ -----------
Gross Profit 5,646,085 8,994,981 8,855,459 7,909,856 4,685,131
Selling, General &
Administrative Expenses 4,349,697 4,136,931 4,346,100 4,154,545 4,220,181
----------- ------------ ----------- ------------ -----------
Earnings from operations 1,296,388 4,858,050 4,509,359 3,755,311 464,950
Other Income (expense) 324,476 (782,017) 1,826,234 884,299 4,845,289
----------- ------------ ----------- ------------ -----------
Earnings (loss) before 1,620,864 4,076,033 6,335,593 4,639,610 5,310,239
extraordinary item
Extraordinary item-gain on -- 803,589 -- --
debt Restructuring ----------- ------------ ----------- ------------ -----------
Net Earnings (loss) 1,620,864 4,076,033 7,139,182 4,639,610 5,310,239
Preferred stock dividends -- (2,734,610) (12,270,00) --
----------- ------------ -----------
Net Earnings (loss) 1,620,864 $ 4,076,033 $ 4,404,572 $ (7,630,930) $ 5,310,239
available to common
stockholders
Weighted average shares of 1,399,092 829,727 763,000 763,000 763,000
Common Stock
Common stock and potential 6,035,867 5,639,419 5,498,680 -- 5,498,680
issuable common stock
Net earnings (loss) Basic $ 1.16 $ 4 91 $ 5 77 (10 00) $ 6 96
Per share available Diluted $ 0.27 $ 0 72 $ 0 80 $ (10 00) $ 0 97
To common
Stockholders
</Table>
<Table>
<Caption>
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
Cash and Cash Equivalents 351,565 321,734 574,439 1,782,897 293,002
Working Capital 19,289,623 17,941,917 14,632,923 5,483,459 12,314,174
Total Assets 27,965,362 26,662,838 24,374,159 23,846,301 20,491,681
Total Liabilities 11,066,909 11,345,249 13,232,603 16,186,882 5,772,247
Total Stockholders' Equity 16,898,453 15,277,589 11,141,556 7,659,419 14,719,254
</Table>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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
FISCAL YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
SALES. Total sales were $24,600,429 in fiscal 2001 compared to
$32,483,043 in fiscal 2000, a decrease of 24.3%. The decrease in sales is
primarily attributed to uncertainties surrounding the events which occurred on
September 11, 2001 causing the delay and cancellation of planned Christmas
orders in addition to overall softness in the general U.S. economy. The retail
market in the US represented approximately 70% of the Company's annual revenues
for fiscal 2001.
COST OF GOODS SOLD. Cost of goods sold was $18,954,344 in fiscal
2001, representing approximately 77% of sales, compared to $23,488,062 in fiscal
2000, which represented 72% of sales for fiscal 2000. The increase in cost of
goods sold is due in part to a large sale of raw stones of approximately $3.6
million in the fourth quarter of fiscal 2001. Sale of raw stones resulted in a
9% gross margin because little or no processing had occurred to the stones
between purchase and sale.
OPERATING COSTS. Operating costs were $4,349,697 in fiscal 2001,
17.7% of revenues, compared to $4,136,931 in fiscal 2000, 12.8% of revenues.
This increase is due in part to an increase in staffing in the marketing and
finance departments, resulting in an increase in selling, general and
administrative expenses of approximately $209,000. The increase was also due to
increased professional fees relating to the Company's listing on the American
Stock Exchange.
OPERATING PROFIT. Operating profit for fiscal 2001 was $1,296,388
compared to operating profit of $4,858,050, a decrease of 73.4%. The decrease is
due to a reduction in sales and gross margins and an increase in selling and
administrative expenses.
OTHER INCOME. Other income and (expense) was $324,476 in fiscal 2001
compared to ($782,017) in fiscal 2000, an increase of 141.5%. The change is 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.
22
<Page>
NET EARNINGS. We reported net earnings of $1,620,864 for fiscal 2001
compared to $4,076,033 for fiscal 2000, a decrease of 60.3%. The difference is
attributed to a decrease in revenues of 24.3% caused by the events which
occurred on September 11, 2001 and the overall weakness in the U.S. economy, a
decrease in gross margin percentage of 4.7% due in part to the raw stone sales
in the fourth quarter and increased selling and administrative expenses.
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.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of working capital is income from operations,
borrowings under our revolving credit facilities and short-term loans from a
company affiliate. At December
23
<Page>
31, 2001, we had a cash and cash equivalent balance of $351,565 and working
capital of $19,289,623.
Our operating activities provided (used) cash of ($952,280) for the
year ended December 31, 2001 and $951,618 for the year ended December 31, 2000.
The decrease in cash provided by operating activities resulted primarily from a
net decrease in cash flow from net earnings of $2,455,169 and an increase in
accounts receivables of $2,573,150 due to increased sales to existing customers
on credit terms and a decrease in accounts payable of $1,840,538 due to in part
to increased borrowings under the lines of credit. This decrease in cash
provided from operating activities is offset by a decrease in inventories of
$1,621,702.
The net cash provided by (used in) financing activities for the year
ended December 31, 2001 was $1,279,536 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 an increase in borrowings under a line of credit of $504,374.
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 (8.25%
December 31, 2001); the U.S. line bears interest at prime plus 1.25% (6% at
December 31, 2001). 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 December 31, 2001,
approximately $1,225,000 was available for borrowing under both 1999 and 2000
lines. As of December 31, 2001, approximately $862,000 was available for
borrowing under the U.S. line. As of December 31, 2000 and December 31, 2001,
the outstanding balances under all lines of credit were $775,162 and $2,054,698,
respectively.
The effects on liquidity of carrying large values of inventory can
be referenced by days of sales in inventory. On average, for the years ended
December 31, 2000 and 2001, inventory would remain on the books 236 and 387,
respectively, until 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.
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 some of our topaz products,
inventory growth in the second and third quarters are customary. 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. This darker stone preference has
continued to show strength through fiscal year end 2001. The result of this
shift in buying
24
<Page>
preference causes longer decay periods resulting in higher quantities in
inventory processing. 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 consumer preference is inherent in the semi-precious stone and
related jewelry business. Retailers and wholesalers continue to demand shorter
lead-times for orders which in turn causes higher carrying values of finished
stones to meet the customer orders on time. Our efforts to address the inventory
issue can be seen in our annual inventory turns. For fiscal year end 2001 our
inventory turned just over one time. In examining our material and production
flows it appears that the turns should be closer to two times per year.
Obviously this figure is materially impacted by consumer preferences for darker
Topaz hues and our ability to source stones in the market. In working capital
dollars this one additional turn represents roughly $10 million in excess
working capital tied to slower moving inventory. The company is currently
implementing a consumption program to track inventory usage and address this
issue. However, consumer preferences in this industry change rapidly and we
cannot guarantee that the inventory we purchase today will be in demand in
twelve months. Our success in implementing this system will be impacted by our
ability to source stones timely in the market.
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.
ITEM 7A. 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
25
<Page>
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 31, 2001, the average daily interbank exchange rate
for the Baht was trading at 44.19 Baht to the US dollar. The exchange rate in
Thailand has shown signs of stability in late 2001 and anticipated through mid
2002. Weakening in the Baht may come from the gap between the U.S. and Thai
interest rates giving a further boost to exports. Regions of Thailand continue
to promote exports to strengthen their economies. 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
<Table>
<Caption>
2001 2000
High Low Average High Low Average
---- --- ------- ---- --- -------
Fourth quarter 45.07 43.37 44.40 44.49 41.88 43.44
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
</Table>
We expect that the currency exchange rate for Thailand will
strengthen through mid 2002 and weaken the second half of the year. We expect
the weakening in the Baht to come from the continued strength in the exports.
Other Asian countries are showing overall weakness in exports and large tech
industries with the exception of Japan. Japan's problem are primarily domestic.
Asian countries overall will weaken with some support domestically by China and
India. We do not anticipate Thailand to be effected by Japan's economic downturn
and that of surrounding Asian regions.
We anticipate the cost of raw materials, which includes precious and
non-precious metals, are expected to show moderate cost increases in the
short-term with long-term stability.
2. 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.
26
<Page>
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.
3. FOREIGN CURRENCY RISK
As of December 31, 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 December 31, 2000
and 2001 are $(831,288) and $(444,707).
5. INTEREST RATE FLUCTUATIONS
Our interest expenses and income are sensitive to changes in
interest rates. We had interest-bearing obligations of $2,054,698 for the period
ended December 31, 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.
27
<Page>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 3
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF EARNINGS 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
<Page>
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, 2000 and 2001 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 2000 and 2001 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ GRANT THORNTON LLP
Seattle, Washington
March 25, 2002
F-3
<Page>
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(U.S. Dollars)
<Table>
<Caption>
ASSETS
December 31,
-------------------------------
2000 2001
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 321,734 $ 351,565
Accounts receivable, net of allowance of $923,474 and $788,369 3,299,161 5,891,767
Receivables from related parties 19,456 --
Inventories 20,626,502 19,004,800
Prepaid expenses and deposits 196,376 372,285
----------- -----------
Total current assets 24,463,229 25,620,417
PROPERTY AND EQUIPMENT - NET 2,127,733 2,308,017
OTHER ASSETS 31,876 36,928
----------- -----------
Total assets $26,622,838 $27,965,362
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 775,162 $ 2,054,698
Accounts payable 4,401,675 2,559,005
Accrued liabilities 473,177 1,171,030
Payables to related party 871,298 546,061
----------- -----------
Total current liabilities 6,521,312 6,330,794
REDEEMABLE ORDINARY SHARES 4,823,937 4,736,115
COMMITMENTS -- --
STOCKHOLDERS' EQUITY
Class A preferred stock, liquidation preference of $10,153,954 and $8,130,570 4,827,477 3,555,511
Class B preferred stock, liquidation preference of $2,541,646 and $2,811,193 1,007 1,007
Common stock 1,025 2,135
Additional paid in capital 402,474 1,673,330
Retained earnings 10,045,606 11,666,470
----------- -----------
15,277,589 16,898,453
----------- -----------
Total liabilities and stockholders' equity $26,622,838 $27,965,362
=========== ===========
</Table>
The accompanying notes are an integral part of these statements.
F-4
<Page>
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
(U.S. Dollars)
<Table>
<Caption>
1999 2000 2001
------------ ------------ ------------
Sales $ 19,881,283 $ 32,483,043 $ 24,600,429
Cost of goods sold 11,025,824 23,488,062 18,954,344
------------ ------------ ------------
Gross profit 8,855,459 8,994,981 5,646,085
Selling, general and administrative expenses 4,346,100 4,136,931 4,349,697
------------ ------------ ------------
Earnings from operations 4,509,359 4,858,050 1,296,388
Other income (expense)
Exchange rate gain (loss) 320,075 86,164 (88,295)
Interest expense (79,399) (101,256) (84,510)
Interest income 18,224 4,114 2,560
Gain (loss) on remeasurement 1,455,855 (831,288) 444,707
Other, net 111,479 60,249 50,014
------------ ------------ ------------
1,826,234 (782,017) 324,476
------------ ------------ ------------
Earnings before extraordinary item 6,335,593 4,076,033 1,620,864
Extraordinary item - gain on debt restructuring 803,589 -- --
------------ ------------ ------------
Net earnings 7,139,182 4,076,033 1,620,864
Preferred stock dividends (2,734,610) -- --
------------ ------------ ------------
NET EARNINGS AVAILABLE TO
COMMON STOCKHOLDERS $ 4,404,572 $ 4,076,033 $ 1,620,864
============ ============ ============
Earnings per share available to common
stockholders before extraordinary item:
Basic $ 4.72 $ 4.91 $ 1.16
============ ============ ============
Diluted $ 0.66 $ 0.72 $ 0.27
============ ============ ============
Net earnings per share available to common stockholders:
Basic $ 5.77 $ 4.91 $ 1.16
============ ============ ============
Diluted $ 0.80 $ 0.72 $ 0.27
============ ============ ============
</Table>
The accompanying notes are an integral part of these statements.
F-5
<Page>
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(U.S. Dollars)
Years ended December 31, 1999, 2000 and 2001
<Table>
<Caption>
Thai Class A Class B Subscriptions
Preferred Stock Preferred Stock Preferred Stock Receivable
--------------- --------------- --------------- ----------
Balance at January 1, 1999 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 -- (1,271,966) -- --
Net earnings for the year -- -- -- --
----------- ----------- ------ -----------
Balance at December 31, 2001 $ -- $ 3,555,511 $1,007 $ --
=========== =========== ====== ===========
<Caption>
Additional
Ordinary Common Paid-In Retained
Shares Stock Capital Earnings Total
--------- ------ ----------- --------- -----
Balance at January 1, 1999 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 April 30, 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 -- 1,110 1,270,856 -- --
Net earnings for the year -- -- -- 1,620,864 1,620,864
----------- ------ ---------- ------------ ------------
Balance at December 31, 2001 $ -- $2,135 $1,673,330 $ 11,666,470 $ 16,898,453
=========== ====== ========== ============ ============
</Table>
The accompanying notes are an integral part of this statement.
F-6
<Page>
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(U.S. Dollars)
<Table>
<Caption>
Increase (Decrease) in Cash and Cash Equivalents 1999 2000 2001
----------- ----------- -----------
Cash flows from operating activities
Net earnings (loss) $ 7,139,182 $ 4,076,033 $ 1,620,864
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Depreciation and amortization 161,605 145,307 117,141
Remeasurement of redeemable ordinary shares (2,302,249) (752,760) (87,822)
Warrants granted for services 40,000 60,000 --
Changes in assets and liabilities:
Receivables 1,015,271 (323,835) (2,573,150)
Inventories (8,483,736) (2,137,554) 1,621,702
Prepaid expenses and deposits/other assets 730,997 57,236 (180,961)
Payables 294,217 (476,890) (1,840,538)
Accrued liabilities 5,886 304,081 370,484
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,398,827) 951,618 (952,280)
Cash flows from investing activities
Purchases of property and equipment, net (146,931) (242,538) (297,425)
----------- ----------- -----------
Net cash used in investing activities (146,931) (242,538) (297,425)
Cash flows from financing activities
Payment on notes payable, net (493,890) (1,736,947) --
Borrowings (payments) on lines of credit, net -- 775,162 1,279,536
Proceeds from issuance of share capital 6,916,511 -- --
Dividends paid (6,085,321) -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities 337,300 (961,785) 1,279,536
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,208,458) (252,705) 29,831
Cash and cash equivalents at the beginning of period 1,782,897 574,439 321,734
----------- ----------- -----------
Cash and cash equivalents at the end of period $ 574,439 $ 321,734 $ 351,565
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period
Interest $ 79,279 $ 93,576 $ 84,510
=========== =========== ===========
Noncash Financing Activities:
Settlement of related party receivable in lieu of
payment of declared and accrued
dividends $ 4,986,478 $ -- $ --
=========== =========== ===========
</Table>
The accompanying notes are an integral part of these statements.
F-7
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
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. Except as otherwise disclosed all amounts are in
U.S. dollars.
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 I). 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 EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company
maintains its cash accounts primarily in several Thai financial
institutions. The Company has not experienced any losses in connection
with its deposits.
F-8
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
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, 1999, 2000 and 2001 totaled
approximately $93,000, $341,000 and $332,000, respectively.
7. FUNCTIONAL CURRENCY AND REMEASUREMENT.
The Company's Thai subsidiaries maintain their books and records in Thai
Baht. However, their functional currency is the US dollar. Monetary assets
and liabilities and related income and expense items are remeasured using
current rates. Certain nonmonetary assets (notably property and equipment)
are remeasured at historical rates. Other nonmonetary balance sheet items
and related revenues, expenses, gains and losses are remeasured using
average exchange rates. Gains or losses on remeasurement to U.S. dollars
from Thai Baht are included in the consolidated statements of earnings.
8. SEGMENT INFORMATION
The Company currently operates in one segment. Information related to the
Company's operations by geographic areas is presented in Note M.
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 dilutive effect of outstanding preferred shares using
the "if-converted" method, and outstanding stock warrants using the
"treasury stock" method.
F-9
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The components of basic and diluted earnings per share were as follows:
<Table>
<Caption>
Year ended December 31,
------------------------------------------
1999 2000 2001
----------- ---------- ----------
BASIC
Net earnings before extraordinary item $ 6,335,593 $4,076,033 $1,620,864
Preferred stock dividends (2,734,610) -- --
----------- ---------- ----------
Net earnings available to common
stockholders before extraordinary item 3,600,983 4,076,033 1,620,864
Extraordinary item 803,589 -- --
----------- ---------- ----------
Net earnings available to common
stockholders after extraordinary item $ 4,404,572 $4,076,033 $1,620,864
=========== ========== ==========
Weighted average outstanding shares of
common stock 763,000 829,727 1,399,092
Net earnings per share available to
common stockholders before
extraordinary item $ 4.72 $ 4.91 $ 1.16
=========== ========== ==========
Net earnings per share available to
common stockholders $ 5.77 $ 4.91 $ 1.16
=========== ========== ==========
DILUTED
Net earnings available to common
stockholders before extraordinary item $ 3,600,983 $4,076,033 $1,620,864
Impact of assumed conversion of preferred stock 2,734,610 -- --
----------- ---------- ----------
Net earnings available to common
stockholders before extraordinary item
(including effect of assumed conversion) 6,335,593 4,076,033 1,620,864
Extraordinary item 803,589 -- --
----------- ---------- ----------
Net earnings available to common
stockholders after extraordinary item
(including effect of assumed conversion) $ 7,139,182 $4,076,033 $1,620,864
=========== ========== ==========
Weighted average outstanding shares of
common stock 763,000 829,727 1,399,092
Dilutive effect of preferred shares (1) 4,735,680 4,809,692 4,636,775
----------- ---------- ----------
Common stock and potentially issuable
common stock 5,498,680 5,639,419 6,035,867
Net earnings per share available to common
stockholders before extraordinary item $ 1.15 $ 0.72 $ 0.27
=========== ========== ==========
Net earnings per share available to common
stockholders $ 1.30 $ 0.72 $ 0.27
=========== ========== ==========
</Table>
(1) The dilutive effect of warrants outstanding during each of the
presented periods was immaterial to these computations.
F-10
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
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 receivable, accounts payable,
accrued expenses, and lines of credit, 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 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 SFAS 142 will have no impact on the
Company's consolidated financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. SFAS 144 supersedes SFAS 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF, and the accounting and reporting provisions of APB Opinion
30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, and EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for segments of a business
to be disposed of. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company is currently evaluating the potential
effect of the initial application of the SFAS 144 on its consolidated
financial statements.
12. USE OF ESTIMATES
In preparing the Company's consolidated financial statements, management
is required to make estimates and assumptions that affect the reported
amounts of assets, liabilities and equity, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-11
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
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 2000 financial statements were adjusted to retroactively reflect the
January 25, 2001 recapitalization.
NOTE C - INVENTORIES
Inventories consist of the following:
<Table>
<Caption>
December 31,
-----------------------------
2000 2001
----------- -----------
Raw materials $ 2,860,174 $ 981,139
Finished stones 17,087,679 17,200,314
Finished jewelry 678,649 823,347
----------- -----------
$20,626,502 $19,004,800
=========== ===========
</Table>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<Table>
<Caption>
December 31,
-------------------------
2000 2001
---------- ----------
Land and land improvements $1,352,813 $1,352,821
Buildings and improvements 381,014 375,743
Machinery and equipment 1,125,657 1,263,953
Office furniture and equipment 441,712 542,715
Vehicles 283,011 283,147
---------- ----------
3,584,207 3,818,379
Less accumulated depreciation and amortization 1,456,474 1,510,362
---------- ----------
$2,127,733 $2,308,017
========== ==========
</Table>
F-12
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE E - RELATED PARTY RECEIVABLES AND PAYABLES
Payables to related parties consist of the following:
<Table>
<Caption>
December 31,
---------------------
2000 2001
-------- --------
Due to directors $543,929 $282,675
Accrued rent 327,369 263,386
-------- --------
$871,298 $546,061
======== ========
</Table>
Related party accrued rent is owed to companies that are controlled by the
Company's president.
NOTE F - LINES OF CREDIT
The Company has two line of credit arrangements with two Thai financial
institutions entered into in October 1999 (1999 Line) and April 2000 (2000
Line) for $1,000,000 each. 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
(8.136% and 8.25% as of December 31, 2000 and 2001, 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 2001 approximately $836,000 and
$322,000, respectively, was available for borrowing under the 1999 Line.
The interest rate on the 2000 line is the same as on the 1999 line. It is
also guaranteed by two of the Company's directors and secured by a deed on
a real estate property owned by a related party. As of December 31, 2000
and 2001, approximately $493,000 and $903,000, respectively, was available
for borrowing under the 2000 Line.
In October 2001, the Company entered into a $2,000,000 line of credit with
a U.S. financial institution which expires in September 2002. The line of
credit bears interest at prime plus 1.25% (6% at December 31, 2001) and is
secured by inventory and eligible 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. This line is subject to
various financial and non-financial covenants. As of December 31, 2001,
approximately $862,000 was available for borrowing under this line of
credit.
F-13
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE G - 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 H - 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, 2000 and
2001.
Series A Preferred $0.001 par value - 26,000,000 shares designated,
4,021,050 and 2,911,050 shares issued and outstanding as of December 31,
2000 and 2001. Each share of preferred stock has liquidation preferences
which are determined by a formula that takes into account, amongst other
things, total stockholder's equity on a date of liquidation. 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. 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,
2001.
On July 20, 2001, the Company filed with the State of Nevada an amendment
to its Articles of Incorporation to amend the provisions pertaining to the
conversion of the Series B preferred stock. Under the amended provision,
Series B preferred shares are subject to mandatory conversion into the
Company's common stock on a one-to-one basis upon a sale of all or
substantially all of the assets of the Company or upon a sale of all of
the capital stock of the Company or a merger into another surviving
company. The Series B Preferred Stock have voting rights equal to twenty
votes per share.
COMMON STOCK - $0.001 par value - 100,000,000 authorized; 1,024,886 and
2,134,886 shares issued and outstanding as of December 31, 2000 and 2001,
respectively. The voting rights are one vote per share.
F-14
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE H - STOCKHOLDERS' EQUITY - Continued
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, 2000,
the Company had granted 32,884 warrants, resulting in $60,000 in
additional expenses for the year ended December 31, 2000. The warrants
expire on July 27, 2005 and have strike prices varying from $2.50 to $5.16
per share.
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. The options
are expected to be granted with exercise prices at or near the underlying
stock's fair market value on the date of grant. The options generally will
expire five years from the date of grant and are expected to vest in five
equal tranches of 20% of the total options granted. No options have been
granted.
A roll forward of shares issued and outstanding is as follows:
<Table>
<Caption>
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 (1,110,000) -- 1,110,000
----------- --------- ---------
Balance at December 31, 2001 2,911,050 1,006,513 2,134,886
=========== ========= =========
</Table>
(1) represents previously issued and outstanding common shares of
Chancellor
F-15
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE I - 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, 2000 and 2001.
NOTE J - 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:
<Table>
<Caption>
Year ended December 31,
------------------------------------------
1999 2000 2001
----------- ----------- --------
Tax expense (benefit) computed
at federal statutory rate $ 2,427,000 $ 1,386,000 $551,000
Non U.S. income exempt
from tax (2,427,000) (1,520,000) (602,000)
Valuation allowance -- 134,000 48,000
----------- ----------- --------
$ -- $ -- $ --
=========== =========== ========
</Table>
F-16
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE J - INCOME TAXES - Continued
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:
<Table>
<Caption>
December 31,
-----------------------
2000 2001
--------- --------
Deferred asset
Net operating losses $ 114,000 $ 66,000
Warrants 20,000 20,000
Valuation allowance (134,000) (86,000)
--------- --------
Net deferred tax asset $ -- $ --
========= ========
</Table>
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. As of December 31, 2000 and 2001, the Company recorded
valuation allowances of $134,000 and $86,000, respectively. The decrease
in the valuation allowance of $68,000 is due, primarily, to a decrease in
NOL resulting from applying prior losses against the 2001 income.
NOTE K - 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.
<Table>
<Caption>
Year ending December 31, Third Party Related Party Total
------------------------ ----------- ------------- -----
2002 $ 73,956 $ 74,663 $ 96,063
2003 70,286 74,663 91,308
2004 54,727 74,663 74,663
2005 55,812 74,663 74,663
2006 32,926 74,663 74,663
Thereafter -- 311,095 311,095
----------- ------------ ------------
$ 287,707 $ 684,410 $ 722,455
=========== ============ ============
</Table>
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, 1999, 2000 and 2001, was approximately $77,000, $72,000 and $95,000,
respectively.
F-17
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE K - COMMITMENTS - Continued
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, 2000 and 2001, the
reserve balance was $490,800, and was included in the Company's retained
earnings.
NOTE L - 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, 2000 and 2001 balances of two customers represented 12%
and 8%, 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 February 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.
F-18
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE M - GEOGRAPHIC AREAS AND CONCENTRATIONS
1. REVENUE (thousands)
<Table>
<Caption>
Year ended December 31,
-------------------------------------
1999 2000 2001
------- ------- -------
United States $16,972 $28,347 $15,304
Thailand 2,909 4,136 9,296
</Table>
2. LONG-LIVED ASSETS
<Table>
<Caption>
December 31,
-------------------------------
2000 2001
---------- ----------
US $ -- $ 15,545
Thailand 2,127,733 2,184,651
---------- ----------
Total $2,127,733 $2,200,196
========== ==========
</Table>
3. MAJOR CUSTOMERS
Details of individual customers accounting for more than 10% of the
Company's sales are as follows:
<Table>
<Caption>
Sales (thousands)
Year ended December 31,
------------------------------
1999 2000 2001
------ ------ ------
Goldmine Enterprises, Inc. $4,579 $4,215 $3,487
Helen Andrews 3,960 2,862 257
Home Shopping Network -- 591 1,268
</Table>
4. MAJOR SUPPLIERS (thousands)
Details of individual suppliers accounting for more than 10% of the
Company's purchases are as follows:
<Table>
<Caption>
Year ended December 31,
----------------------------------
1999 2000 2001
------ ------ ------
Gold Corporation $3,271 $3,657 $1,889
Little Rock 1,798 2,667 1,525
TDC Gold -- -- 1,320
</Table>
19
<Page>
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001
NOTE N - SELECTED QUARTERLY DATA (UNAUDITED)
<Table>
<Caption>
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 ENDED DECEMBER 31, 2001
Net sales $ 4,586,282 $ 4,899,963 $ 5,525,989 $ 9,588,195
Gross profit 1,305,985 1,513,345 1,623,897 1,202,864
Earnings from operations 467,203 475,030 705,861 (351,706)
Net earnings 1,242,292 975,269 706,618 (1,303,315)
Earnings per share from operations
Basic $ 0.40 $ 0.36 $ 0.49 $ (0.18)
Diluted $ 0.08 $ 0.08 $ 0.12 $ (0.18)
Net earnings per share
Basic $ 1.06 $ 0.74 $ 0.49 $ (0.66)
Diluted $ 0.21 $ 0.16 $ 0.12 $ (0.66)
</Table>
F-20
<Page>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our directors and executive officers and their present positions
with us are as follows:
<Table>
<Caption>
NAME AGE POSITION
Jeremy F. Watson 61 Chairman of the Board of Directors
Dr. Aphichart Fufuangvanich 51 Director and President
Thammatinna Thammaradi 42 Director and Executive Vice President
Terrance C. Cuff 39 Director and Chief Financial officer
Timothy Matula 41 Director and Treasurer
Leonard T. Orrin 55 Director and Director of Sales
Thiti Fufuangvanich 24 Director and Director of Research and Development
David Dikinis 49 Independent Director
Alson Lee 74 Independent Director
Jason Sugarman 30 Independent Director
</Table>
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.
29
<Page>
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.
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.
30
<Page>
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 11. 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, 1999, 2000 and 2001. No officers received compensation in excess of
$100,000 during such years.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---- ---------------------------------- ------------------------ ------------
RESTRICTED SECURITIES
FISCAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
- --------------------------- ---- ---------- ----- ------------ ------ ------- ------------
Jeremy F. Watson
Chief Executive Officer 2001 0 0 0 0 0 0
Kasem Chitmunchaitham,
------ ----- ---- ------- ---- ----
President and 2000 29,653 0 0 0 0 0
Chief Executive Officer 1999 31.710 0 0 0 0 0
</Table>
We did not grant stock options in 2001.
No executive officer held stock options during the 2001 fiscal year.
As of the date of this report, no executive officer holds stock options.
ITEM 12. 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 December 31, 2001 by:
o each person known by us to beneficially own more than 5% of
the outstanding shares of common stock, preferred stock or
series B preferred stock;
o each of our directors and named executive officers; and
o our directors and executive officers as a group.
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<Page>
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.
<Table>
<Caption>
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) 206,133 9.7% -- -- -- ---
Thiti Fufuangvanich -- -- -- -- -- ---
Alson Lee -- -- -- -- -- ---
Jason Sugarman -- -- -- -- -- ---
All officers and directors as a
group (ten (10) persons, including
the foregoing) 642,312 30.1% -- -- -- ---
</Table>
- ----------
(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.
ITEM 13. 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.
32
<Page>
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, $282,675 of which remains due and payable to Ms. Sae-Fa as of December 31,
2001. The loans from Ms. Sae-Fa have no term and do not bear interest. The debts
are classified as a current liability and are expected to be paid within the
fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
1. TABLE OF CONTENTS TO FINANCIAL STATEMENTS APPEARS ON PAGE F-
2. SCHEDULES
3. EXHIBITS
33
<Page>
Item 14. 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
- ----------
* Incorporated by reference from our registration statement on Form 10 filed
with the Securities and Exchange Commission on October 30, 2001.
** Filed with Amendment No. 1 to our registration statement on Form 10 as
filed with the Securities and Exchange Commission on December 19, 2001.
34
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
THE TOPAZ GROUP, INC.
Date: March 31, 2002 By: /s/ Jeremy F. Watson
-----------------------
Jeremy F. Watson
Chairman of the Board
Pursuant to the requirements of the Securities Exchange of 1934,
this report has been signed below by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ Jeremy F. Watson
- --------------------------------
Jeremy F. Watson Chairman of the Board March 31, 2002
/s/ Dr. Alphichart Fufuangvanich
- --------------------------------
Dr. Alphichart Fufuangvanich Director and President March 31, 2002
/s/ Thammatinna Thammaradi
- --------------------------------
Thammatinna Thammaradi Director and Executive
Vice President March 31, 2002
/s/ Terrance C. Cuff
- --------------------------------
Terrance C. Cuff Director and Chief
Financial Officer March 31, 2002
/s/ Timothy Matula
- --------------------------------
Timothy Matula Director and Treasurer March 31, 2002
/s/ Leonard T. Orrin
- --------------------------------
Leonard T. Orrin Director and Director
Of Sales March 31, 2002
35
<Page>
/s/ Thiti Fufuangvanich
- --------------------------------
Thiti Fufuangvanich Director and Director of
Of Research and
Development March 31, 2002
/s/ David Dikinis
- --------------------------------
David Dikinis Independent Director March 31, 2002
/s/ Alson Lee
- --------------------------------
Alson Lee Independent Director March 31, 2002
/s/ Jason Sugarman
- --------------------------------
Jason Sugarman Independent Director March 31, 2002