-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HyboZk4td/+0auGMkxCNxtqdWAxl7iuhIB0pWo7YvMK40JpblDLciQ1L37hPNCa0 MJBXdx6GdExpBIdAfgHU2w== 0000910680-01-500767.txt : 20020413 0000910680-01-500767.hdr.sgml : 20020413 ACCESSION NUMBER: 0000910680-01-500767 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20011219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOPAZ GROUP INC CENTRAL INDEX KEY: 0001059280 STANDARD INDUSTRIAL CLASSIFICATION: JEWELRY, PRECIOUS METAL [3911] IRS NUMBER: 911762285 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27415 FILM NUMBER: 1817251 BUSINESS ADDRESS: STREET 1: CONTINENTAL PLAZA STREET 2: 550 KIRKLAND WAY #200 CITY: KIRKLAND STATE: WA ZIP: 98033 BUSINESS PHONE: 4153328880 MAIL ADDRESS: STREET 1: CONTINENTAL PLZ STREET 2: 555 KIRKLAND WAY #200 CITY: KIRKLAND STATE: WA ZIP: 98033 FORMER COMPANY: FORMER CONFORMED NAME: CHANCELLOR CORP/NV DATE OF NAME CHANGE: 19980407 10-12G/A 1 form101201.txt FORM 10 - DATED 12/01 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON December 19, 2001 REGISTRATION NO. U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 THE TOPAZ GROUP, INC. (Name of Issuer in its charter) Nevada 91-1762285 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) --------------------------- 126/1 KRUNGTHONBURI ROAD BANGLAMPOO LANG, KLONGSARN BANGKOK 10600 THAILAND ----------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) ----------------------- (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) COPIES TO: MITCHELL S. NUSSBAUM, ESQ. JENKENS & GILCHRIST PARKER CHAPIN LLP THE CHRYSLER BUILDING 405 LEXINGTON AVENUE NEW YORK, NEW YORK 10174 TEL: (212) 704-6426; FAX: (212) 704-6288 Securities to be registered under Section 12(b) of the Act: Title of each class Name of each exchange on which to be so registered each class is to be registered None None Securities to be registered under Section 12(g) of the Act: COMMON STOCK, PAR VALUE $ 0.001 PER SHARE (TITLE OF CLASS) TABLE OF CONTENTS Item Page Number ITEM 1. DESCRIPTION OF BUSINESS.............................................2 ITEM 2. FINANCIAL INFORMATION..............................................13 ITEM 3. DESCRIPTION OF PROPERTY............................................19 ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....19 ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS...................................20 ITEM 6. EXECUTIVE COMPENSATION.............................................22 ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................25 ITEM 8. LEGAL PROCEEDINGS..................................................25 ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS...............................25 ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES............................26 ITEM 11. DESCRIPTION OF SECURITIES..........................................26 ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS..........................29 ITEM 13. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS......................29 i EXPLANATORY NOTE The Topaz Group, Inc. is filing this registration statement on Form 10 in order to become a reporting company under the Securities Exchange Act of 1934 or "Exchange Act". Topaz is currently traded on the Pink Sheets quotation service under the symbol "TPAZ". Under current NASD rules, we must become a reporting company under the Exchange Act in order to have our stock traded on the OTC Bulletin Board. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This registration statement on Form 10 contains forward-looking statements that involve risks and uncertainties that address: o business and growth strategies; o financial condition and results of operations; o forecasts; and o trends, including growth, in the gem and jewelry markets. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "intends," "plans," "should," "seeks," "pro forma," "anticipates," "estimates," "continues," or other variations thereof (including their use in the negative), or by discussions of strategies, opportunities, plans or intentions. Such statements include but are not limited to statements under the captions "Risk Factors, " "Management's Discussion and Analysis of Financial Condition and Results of Operations, " "Business," as well as captions elsewhere in this document. A number of factors could cause results to differ materially from those anticipated by such forward-looking statements, including those discussed under "Risk Factors" and "Business." In addition, such forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in such forward-looking statements are reasonable, we cannot guarantee that our plans, intentions or expectations will be achieved. The information contained in this registration statement, including the section discussing risk factors, identifies important factors that could cause such differences. -1- ITEM 1. DESCRIPTION OF BUSINESS The Topaz Group, Inc. and its subsidiaries (collectively referred thereto as The Topaz Group) is a vertically integrated manufacturing company engaged in manufacturing and selling fine jewelry products and a broad array of gemstones, including topaz, rubies, sapphires, emeralds, amethysts and a large variety of other semi-precious stones. Our jewelry products are sold throughout the world, with the United States representing our primary market. Our products are sold by department stores such as Sears, J.C. Penny, TJ Maxx and Marshalls, discount chains such as K-Mart, Wal-Mart, television marketers such as QVC and Home Shopping Network, large wholesalers such as Helen Andrews and Colibri, and e-tailers. Our strengths in sourcing, cutting and polishing gemstones and our ability to design, craft and produce jewelry strategically position us to be a significant source of virtually any gem and jewelry product. However, our production capacity is largely focused on producing topaz stones due to our ability to control the entire manufacturing process from the acquisition of raw gemstones through the final phases of production. This process includes: o the sourcing of the highest quality materials directly from mines in various locations, including, primarily, Brazil, Africa and Sri Lanka; o specialty gem cutting and polishing for mass production; and o the treatment of the cut gemstones through an irradiation process through our exclusive licensing agreement with the University of Missouri for the use of its nuclear reactor. Background Our History The Topaz Group, Inc. and its subsidiaries or the "Topaz Group" is a Nevada corporation listed on the Pink Sheets Service under the trading symbol "TPAZ". We were originally incorporated in Utah as H&H Energy Corporation. After several name changes, we changed domicile by merging into Technivision, Inc., a Nevada corporation, in June 1996. In November 1996, Technivision changed its name to Chancellor Corporation. In November 1998, Chancellor changed its name to The Topaz Group, Inc. In April 1999, we entered into two separate exchange agreements with Best Worth Agents, Ltd., a British Virgin Islands corporation or "Best Worth", to acquire all of the issued and outstanding preferred shares of Creative Gems and Jewelry Co., Ltd. and Advance Gems and Jewelry Co., Ltd., both Thai corporations. According to the terms of the exchange agreements, we acquired 99.7% of the voting and dividend participation rights in each Thai company from Best Worth in consideration for which Topaz issued 25,459,000 shares of series A convertible voting and participating preferred stock to Best Worth. On September 29, 2000, we authorized a "one for five" reverse stock split. The split did not affect our common stock's par value or the number of shares of our authorized common stock. On January 22, 2001, we amended our articles of incorporation to re-designate 50,000,000 of authorized preferred shares to create a new class of preferred stock, the series B preferred. On January 25, 2001, we announced an exchange of 20,130,250 series A preferred (representing five of each six shares of common stock outstanding per each series A holder) into 1,006,513 shares of the series B preferred. All share amounts have been adjusted to retroactively reflect the January 25, 2001 recapitalization. Our principal operating business of manufacturing and selling fine jewelry and gemstones are conducted through our three subsidiaries, Creative Gems and Jewelry Co., Ltd. or "Creative", Advance Gems and Jewelry Manufacturing Company or "Advance Manufacturing" and Advance Gems and Jewelry Co., Ltd. or "Advance". We have engaged in our principal operating business since approximately 1970. Creative primarily engages in manufacturing jewelry. Advance and Advance Manufacturing primarily engage in cutting, polishing and manufacturing gemstones. Advance Manufacturing was formed in 2000 to enable us to apply and qualify for tax-exempt status under a Thai governmental program designed to promote local employment. -2- MARKET OVERVIEW Our primary market, the United States jewelry market, is a diverse retail environment. Retail outlets served include independent jewelry stores, chain store operations, discount giants, television marketers, department stores, and e-tailers. We are a supplier to a large segment of each of these markets and we sell our products at many levels of distribution. Our gemstone division is the main source of materials to our jewelry-manufacturing subsidiary which, in turn, sells finished jewelry products to wholesalers, importers and retailers. NARRATIVE DESCRIPTION OF BUSINESS We source a wide variety of raw gemstones, cut and polish them and then professionally enhance the quality and color of the stones with different treatments depending on the stone type. These treatments range from heating the stones to treating them under high pressure and irradiation. After treatment, the stones move to our jewelry-manufacturing subsidiary where our highly skilled craftsmen and craftswomen design, mould, cast, file, polish and assemble fine jewelry products. We provide a broad range of fashionable jewelry targeted at a wide customer base, and direct our marketing efforts at retail customers who are likely to purchase jewelry at frequent intervals as fashions and styles change. The most significant volume of our business is based upon the sale of topaz gemstones and jewelry. However, we also produce jewelry incorporating other gemstones. We, through our subsidiary Creative, have entered into a joint venture agreement with Muthama Gemstones (Kenya) Limited, or MGK, for the sole supply of ruby material from the John Saul Mine located in East Africa which we believe has one of the largest ruby deposits in the world. Under our joint venture agreement, Creative and MGK, who are equal shareholders in the joint venture, agree to purchase rough ruby stones at a twenty-five percent (25%) discount from Rockland Kenya Limited or "Rockland", an entity which operates the John Saul Mine with funds provided equally by Creative and MGK. Under this agreement, Creative shall receive the rough ruby stones for cooking and cutting, respectively. The cost of which shall be borne equally by Creative and MGK and at a fixed rate of $135 per kilogram for cooking and $0.60 per carat cutting, respectively. MGK guarantees that it will procure the stones from Rockland as and when required. MGK also confirms that Rockland has the capability to produce four (4) "parcels" or shipments of stones of varying qualities sufficient to total approximately U.S. $250,000 per calendar quarter. Creative has a right of first refusal to purchase the stones at a price to be set by Creative and MGK. If the stones are sold to a third party purchaser, Creative is entitled to a twenty percent (20%) commission. Either Creative or MGK may terminate the joint venture agreement without cause by sending sixty (60) days written notice. As we receive no intangible rights in this joint venture, it does not impact our accounting. For accounting purposes no costs were capitalized under this agreement. Advance Manufacturing purchases all of the raw gemstones used by us including white topaz from mines in Africa, Sri Lanka and Brazil, and imports the raw gemstones into Thailand where they are cut and polished at our factories in Bangkok, MaeSai, Lop Buri, and Payao. After the stones have been cut and polished, Advance Manufacturing sells some of the stones to local customers and exports the bulk of the stones to the Topaz Group in the United States, where the stones are irradiated and treated for color enhancement. The stones are irradiated in a nuclear research reactor, a particle accelerator, or both, depending upon the color desired. Irradiation of the topaz in a particle accelerator is a necessary step in the enhancement of blue topaz stones. Our topaz stones are irradiated by Iotron Technologies Inc. or "Iotron" which processes our stones in an accelerator that it operates in Canada. Iotron's irradiation service is subcontracted through Creative's contact Quali-Tech. We currently do not have a written agreement with Iotron or Quali-Tech. After Iotron receives a shipment of stones to be irradiated from us, Iotron sends us an invoice for the irradiation and/or storage service it provides for each shipment of stones. In order to produce stones with darker coloring, the clear topaz must first be processed through a nuclear research reactor. We have also entered into an exclusive license agreement with The Curators of the University of Missouri contracting on behalf of the University of Missouri-Columbia Research Reactor Center or the "University" to irradiate our white stones in their nuclear research reactor. Under our license agreement, the University has agreed to provide to us its irradiation service or capacity to irradiate topaz gemstones contained in specialized irradiation containers. The license agreement is effective for four (4) years, from March 1, 2001 to February 28, 2005. Once the initial four (4) year term is completed, the agreement may be extended upon mutual consent. The fee for the University's irradiation capacity is calculated based upon a rate of $15.38 per hour and on minimum and maximum hours of irradiation exposure. The University also charges a fee for handling irradiation containers based upon a $300 per container/per irradiation charge. Currently, there are very few reactor facilities in the world capable of enhancing topaz stones to dark hues, and the University's facility has been set up to color topaz stones in massive quantities. As a result, we believe that our exclusive license agreement is valuable for us in our efforts to continue to succeed in the topaz market, both today and in the future. -3- After the colorization process is complete and the required half-life has elapsed, the stones are shipped to Creative who sells the finished topaz stones into the industry or incorporates them into our jewelry. The half-life period varies based upon the color of the stones. For the lightest colored stones, called "Baby Blue", the half-life or decay period is generally up to one hundred twenty (120) days depending upon the size of the stones. For slightly darker stones, called "Swiss Blue", the half-life or decay period is generally up to one hundred eighty (180) days depending upon the size of the stones. For the darkest stones, called "London Blue", the half-life or decay period is generally up to two hundred forty (240) days depending upon the size of the stones. We intend to capitalize on the expected expansion of the jewelry industry by promoting our lines of jewelry and cut stone through electronic distribution channels, further developing existing customer relationships by providing special services, and taking aggressive steps to expand into new mass distribution channels throughout the world. PRODUCTS We manufacture a comprehensive selection of quality jewelry and gemstone products including rings, pendants, earrings, bracelets, necklaces, pins, and men's jewelry. Currently, we categorize our products into amounts of gemstone sales as opposed to jewelry sales, Topaz products as opposed to other products and low-end products as opposed to high-end products. The percentages below illustrate the revenues by product group for the fiscal period ended December 31, 2000. Total ----- Gemstone sales 42% Jewelry Sales 58%: 100% ---------------------------------------------------------------------- Topaz products 60% Other products 40%: 100% ---------------------------------------------------------------------- Low-end products 80% High-end products 20%: 100% MANUFACTURING PROCESS Our principal manufacturing and assembly operations are performed by our subsidiaries, Advance and Creative, at their factories in Bangkok, Mae Sai, Lop Buri, and Payao, Thailand. We believe that Advance and Creative have the largest facilities in Thailand coupling jewelry manufacturing and stone cutting, employing 2,000 production workers, plus 800 participants in Her Majesty the Queen's and the Thai government's Royal Sponsored Women's program or "Royal Sponsored Women's Program". The Royal Sponsored Women's Program is a government program promoting local job creation and employment in economically depressed areas in Thailand and provides tax-exempt incentives to eligible participating companies. Participating companies are granted exemption from payment of corporate income taxes in Thailand for a period of 8 years. By participating in this program, we gain flexibility in meeting our production needs. Individuals who participate in the program are not our employees. We have access to an additional 1,700 independent contractors on an "as needed" basis who have been trained to meet our manufacturing specifications and perform the work from their homes. The employees perform a range of tasks from processing raw materials to the cutting and polishing of stones to jewelry design. The manufacturing of jewelry is performed by skilled workers under the supervision of technicians according to set specifications. We implement quality control measures at each level of production which include inspecting the raw materials prior to cutting and polishing the gemstones and producing our jewelry as well as inspecting the finished product. CUTTING AND POLISHING STONES Currently large amounts of gemstones are cut and polished in Thailand. We are currently producing in excess of 2,000,000 carats of loose stones each month. We utilize a semi-mechanized process that we created which allows multiple stonecutters to produce an unlimited number of identical stones without incurring the prohibitive costs of a fully mechanized process. Our technicians designed an instrument called the "angle controller" which allows stonecutters to set up and control the cutting and angle of a stone or gem being cut. The angle controller is positioned on a vertical dowel which is positioned 90 degrees from an abrasive turntable. The gem stone end is then applied to an abrasive turntable to achieve the desired cut. This process enables us to take advantage of low labor costs while producing quality identical pieces of jewelry on a large scale. -4- In addition, we have established an "art of producing gemstones" program to train local villagers in the art of cutting and polishing stones in conjunction with the Thai Department of Industrial Promotion and the Royal Sponsored Women's Program. This program is currently in place in more than 500 rural villages in 28 provinces of Thailand. To date, approximately 1,500 individuals have been trained under this program and 800 are participants in the program. Through this program we gain additional capacity on a variable basis while contributing to and supporting rural communities throughout Thailand. THE COLORING PROCESS The coloring of topaz stones requires that the clear topaz stones be irradiated to differing degrees in order to achieve specific hues. We have relationships with two entities to irradiate the topaz stones. We have the stones irradiated at a particle accelerator operated by Iotron and/or at the University, depending upon the color desired for the stones. After the stones are radiated, they are held in protective storage for a period of time until the natural radioactive decay process or "cooling" or half-life period for each type of stone has elapsed. The half-life period varies based upon the color of the stones. For the lightest colored stones, called "Baby Blue", the half-life or decay period is generally up to one hundred twenty (120) days depending upon the size of the stones. For slightly darker stones, called "Swiss Blue", the half-life or decay period is generally up to one hundred eighty (180) days depending upon the size of the stones. For the darkest stones, called "London Blue", the half-life or decay period is generally up to two hundred forty (240) days depending upon the size of the stones. After the stones are radiated and "cooled", we ship them to Creative to complete the cutting and polishing. Iotron processes approximately 60% of the stones while the remainder is processed by MURR, this being due to the present color fashion. The Missouri University Research Reactor or "MURR" is a nuclear research reactor licensed by the Nuclear Regulatory Commission, and it is the largest capacity reactor dedicated to the colorization of topaz stones. MURR uses a two-step process to color the stones. The first step is the irradiation of the stones in the research reactor. The second step is the storage of the stones during the process of radioactive decay during which the stones take on the desired color. Through our licensing agreement with the University, we control the entire process of colorization at MURR including the cool-down holding facility. QUALITY CONTROL As part of our commitment to maintaining high standards of quality, we employ specially trained quality control teams to check every step of production using state-of-the-art electronic testing and repair equipment. Upon completion of the manufacturing process, each individual piece is inspected for defects in workmanship and materials and only after an item has passed a final inspection is it shipped to our customer. In March 2001, we received version 2000 ISO 9001 certification for gem and jewelry production and design process. MANUFACTURING PLANTS We operate four factories located in Bangkok, Mae Sai, Lop Buri, and Payao with production areas of 90,800 square feet, 11,000 square feet, 8,600 square feet and 5,250 square feet, respectively. Each factory is dedicated to the cutting and polishing of stones, with our factory in Bangkok also serving as our primary jewelry production facility. RAW MATERIALS AND SOURCES OF SUPPLY We purchase gemstones and other raw materials from over 200 vendors. Our two largest vendors are Gold Corporation (Thailand) Ltd. and Little Rock Co., Ltd., that supply approximately 13% and 10%, respectively, of our total raw material purchases; but there are diversified sources and multiple vendors of raw materials available. On September 6, 1999 we, through our subsidiary Creative, signed a joint venture agreement with MGK for the supply of rough ruby stones from a ruby mine in Kenya East Africa. Under our joint venture agreement, Creative and MGK, who are equal shareholders in the joint venture, agree to purchase rough ruby stones at a twenty-five percent (25%) discount from Rockland Kenya Limited or "Rockland", an entity which operates the John Saul Mine with funds provided equally by Creative and MGK. MGK guarantees that it will procure the stones from Rockland as and when required. MGK also confirms that Rockland has the capability to produce four (4) "parcels" or shipments of stones of varying qualities sufficient to total approximately U.S. $250,000 per calendar quarter. Creative has a right of first -5- refusal to purchase the stones at a price to be set by Creative and MGK. If the stones are sold to a third party purchaser, Creative is entitled to a twenty percent (20%) commission. Either Creative or MGK may terminate the joint venture agreement without cause by sending sixty (60) days written notice. The joint agreement stipulates that MGK is required to supply, upon request, four (4) parcels per annum with a capacity of $250,000 per quarter. Current volume under this agreement is at capacity. Management believes that if we are unable to purchase raw materials from any source, adequate alternative sources of raw materials are available so that our operations or production capacity will not be materially affected. CUSTOMERS We have a broad customer base including over 350 individual purchasers. Our four largest customers are, Goldmine Enterprises, Helen Andrews (the wholesale distributor to K-Mart, QVC and TJ Maxx), Wal-Mart and Sears, which accounted for approximately 33% of all net sales in the year ended December 31, 2000, with Goldmine Enterprises accounting for approximately 13%. No other single customer accounted for 10% or more of net sales. Although the loss of one or more large customers could have a material adverse effect on our operating results, we maintain good relationships with our customers and do not currently anticipate the loss of any major customer. BACKLOG Backlog orders as of December 31, 2000 were $2,200,000 compared to $1,900,000 as of December 31, 1999. In the past, we allowed dealers to submit estimated orders to guarantee shipment times. Now all orders are expected to be filled and shipped as ordered and considered firm. We do, however, allow modifications or cancellations of orders up to the time the product is loaded for shipment, although a cancellation at such a late stage is subject to a monetary penalty and is rare. We recognize revenue when goods are shipped as opposed to when ordered. Therefore, receipt of blank orders does not impact our revenue recognition. SALES AND MARKETING Historically, our sales and marketing efforts have been modest because the demand for our products is outpacing our ability to supply our products. Our sales and marketing efforts focus on customer service and generating repeat business. Sales and marketing towards our U.S. based customers is carried out both from our Issaquah, Washington office and our Bangkok office, while our sales staff in Bangkok handles sales efforts directed at our non-U.S. customers. In addition to direct sales and customer support, we are an active participant in the major jewelry trade shows held each year in Orlando and Las Vegas, USA, Hong Kong and Bangkok, Thailand. COMPETITION The jewelry manufacturing industry is highly competitive worldwide. Our competitors include domestic and foreign jewelry manufacturers, wholesalers and importers who operate on an international, national, regional or local scale. However, the number of jewelry manufacturers that combine stone and jewelry production is small, though still unquantifiable. We believe that competition in the jewelry manufacturing business is based primarily on price, quality, design and customer service. The range of retail prices available for various product lines makes our products affordable to a wide range of customers. Additionally, as a vertically integrated operation, we believe we are able to deliver quality products faster and at a lower cost than competitors using outside resources. There can be no assurance that our competitors, many of which may have greater financial, personnel, technical, and other resources, will not have a material adverse effect on future financial results of our operations. INTELLECTUAL PROPERTY We currently hold no patents, licenses or franchises. We own the Savanna trademark in the European Common Union. We have been granted the "CJ" trademark in the European Common Union, which is used in the jewelry and is stamped next to the karat to identify the source, Creative Jewelry. We do not consider our intellectual property rights to be material to our business. -6- ENVIRONMENTAL MATTERS We are subject to Thai national, provincial and local environmental protection regulations. Thai environmental laws currently impose a graduated schedule of fees and possible plant closures for the improper discharge or cure of certain behavior causing environmental damage. Based upon our experience and information currently available to us, we believe that our environmental protection facilities and systems are in compliance with existing national and local environmental protection regulations in all material respects. However, there can be no assurance that Thai national or local authorities will not impose additional regulations, which would require additional expenditures on environmental matters in the future or have a material adverse effect on our financial condition, results of operations or liquidity. We are also subject to environmental regulations in the United States. The United States Nuclear Regulatory Commission has established and oversees regulations governing the operation of a nuclear reactor and the storage of radioactive material. These regulations govern our topaz colorization process at MURR. If MURR is found to be in violation of the NRC's regulations either in the operation of the reactor, or in its storage of radioactive materials, and those violations result in MURR having to cease operations, such a finding could have a material adverse effect on our sales and operations. If the MURR ceases operations, we will no longer be able to color our blue topaz stones at this reactor. Currently 60% of our products include blue topaz stones. If we unable to color our blue topaz stones at MURR, our contingency plan would include locating an alternate facility, such as in Malaysia, to color the topaz stones. However, we may not be able to locate such a facility or reach terms satisfactory to us for the use of such an alternate facility. In the event of such an occurrence, we would experience a period of "no production" caused by locating a new facility, staffing the facility, purchasing the proper equipment to process the stones and training the staff to process the stones correctly based upon the desired coloration. Our products are subject to the regulations promulgated by the Nuclear Regulatory Commission and the U.S. Department of Transportation for the handling, storage and transportation of our products. We are exposed to any and all risks and liabilities typically associated with the handling, storage and transportation of materials that have been irradiated. However, we have retained a nuclear regulatory consultant to oversee this process and have received a letter of regulatory compliance from the company that transports and handles our radioactive materials. Also, the consultant has confirmed that upon sample testing of our products on reentry into the United States market, the radioactive levels were below the regulatory licensing limits required under the U.S. Nuclear Regulatory Commission. STRATEGY Our strategy is to continue to expand our position within the gemstones and jewelry market. This strategy includes, furthering our position as a producer of topaz jewelry and topaz stones in all market segments. Implementation of our strategy includes focus in four primary areas: increasing production and production efficiencies, broadening distribution channels, expanding ruby sales and the growth of the U.S. sales and marketing teams. INCREASE PRODUCTION. We intend to obtain financing to increase production of our products by building additional production facilities or purchasing additional jewelry manufacturers. BROADEN DISTRIBUTION CHANNELS. We seek to expand our distribution channels by entering into strategic alliances or acquisitions to be able to obtain access to more "mom and pop" shops. EXPAND RUBY SALES. We intend to expand our ruby sales by increasing purchases on an as-needed basis from various suppliers worldwide. EXPAND U.S. SALES AND MARKETING TEAM. We intend to expand our U.S. sales and marketing team so that we can increase sales made to existing U.S. customers which have domestic budgets. Many of our customers have both international and domestic budgets and most of our sales are made within their international budgets. We believe that an expanded U.S. sales and marketing team will allow us to increase sales by allowing our U.S. customers to purchase products within their domestic regions. -7- EMPLOYEES As of June 1, 2001, we had approximately 2,000 employees plus 800 individual participants under the Royal Sponsored Women's Program. The Royal Sponsored Women's Program is a government program promoting local job creation employment in economically depressed areas in Thailand. As a participant in this program, member companies receive tax-exempt incentives for payment of corporate income taxes in Thailand. The tax-emempt incentives are distributed in 8-year terms under this program, participating companies can re-apply for this program in successive terms. Our employees include designers, technicians, management, administrative personnel, marketing, sales, and factory personnel. All of our employees are "at will" employees. Our employees are not currently members of a trade union. We have not experienced any strikes or other labor disputes that have interfered with our operations and we believe that our relations with our employees are good. LEGAL PROCEEDINGS Neither the Topaz Group nor any of its subsidiaries is a party to, nor is any of their respective properties the subject of, any material pending legal or arbitration proceeding. RISK FACTORS RISKS RELATED TO OUR BUSINESS WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY RESULTS. Our operating results have varied significantly from quarter to quarter in the past and may continue to vary significantly from quarter to quarter in the future due to a variety of factors. Many of these factors are out of our control. These factors include: o fluctuations in the jewelry and gemstone market; o seasonality of the jewelry industry; o unexpected delays in importing gemstones or the manufacturing process; o changes in consumer jewelry purchasing patterns from purchasing light stones to dark stones could result in delays because of the extended decay period required for the darker stones; o changes in supply or availability of stones; o new competitors; o a decline in economic conditions which effects people's discretionary spending; and o increases in expenses, whether related to sales and marketing, maintenance or repair costs, or administration. We will continue to determine our investment and expense levels based on our expected future revenues, which may not grow at historical rates in future periods, if at all. A significant portion of our expenses is not variable in the short term and cannot be quickly reduced to respond to decreases in revenues. Therefore, if our revenues are below expectations, our operating results and net income are likely to be adversely affected. In addition, we may reduce our prices or accelerate our development activities in response to competitive pressures or to pursue new market opportunities. Any one of these activities may further limit our ability to adjust spending in response to revenue fluctuations. -8- IF DEMAND FOR TOPAZ JEWELRY AND GEMSTONES DECLINES, WE COULD EXPERIENCE A MATERIAL DECLINE IN RESULTS OF OPERATIONS. Sales generated by topaz stones and topaz based jewelry will continue to account for a major portion of our revenues. Accordingly, our business and results of operations are dependent on the demand for this single product and any decrease in the demand for such product, whether as a result of competition, changes in fashion, economic conditions in Thailand, the United States and around the world or other factors, or restrictions on our ability to market this product for any reason, would have a material adverse effect on our business, financial condition and results of operations. WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS. We depend on a limited number of suppliers for the raw materials used in the production of our topaz jewelry, specifically precious metals and topaz stones. We have no guaranteed supply arrangements with any supplier, other than MGK. Any interruption in the supply of key materials and components for our products, which cannot be quickly remedied, could have a material adverse effect on our business, financial condition or results of operations. IF WE ARE UNABLE TO CONTINUE OUR RELATIONSHIP WITH MURR, WE WILL NOT BE ABLE TO PRODUCE CERTAIN COLORS OF TOPAZ STONES. We depend on the Missouri University Research Reactor or "MURR" to irradiate clear topaz stones in its nuclear research reactor to produce deeply colored topaz stones, sales of which account for approximately 40% of our revenues. Although we have entered into an exclusive license agreement with MURR to continue using its research reactor for the purpose of irradiating topaz stones, there can be no assurance that we will not be forced to cease using MURR for reasons beyond our control. If we are unable to continue irradiating stones at MURR, it may not be possible to find another entity willing or able to provide the same service. A decision by the University to discontinue its irradiation program would prevent us from fulfilling our orders and would have an immediate material adverse effect on our operating results, even though we might have recourse against University in a court of law for such an action. Further, if MURR were forced to cease operations for an extended period of time for any reason, our results of operations could be adversely affected. CLAIMS BY INJURED EMPLOYEES COULD SUBSTANTIALLY INCREASE OUR EXPENSES BECAUSE WE DO NOT CARRY WORKERS COMPENSATION INSURANCE. Our business exposes us to potential liability risks that are inherent in the manufacturing process. Although we maintain product liability coverage, we do not maintain workers compensation insurance with respect to our factories, which is consistent with industry practice in Thailand. Historically, we have not experienced any workers compensation claims. However, we can give no assurance that personal injury claims would not have a direct material impact on our expenses. WE DEPEND ON THE SERVICES OF OUR CHAIRMAN, JEREMY F. WATSON, OUR PRESIDENT, DR. APHICHART FUFUANGVANICH, AND OUR EXECUTIVE OFFICERS. In 1999, we appointed Jeremy F. Watson as chairman of our board of directors and we have retained or recruited a number of other senior executives and other key employees. We are dependent on these personnel, who have been instrumental in designing and implementing our recent initiatives and are involved in the strategies for our future growth and profitability. The loss of services of Mr. Watson, Dr. Aphichart or our executive officers could have a material adverse effect on all aspects of our operations and have a significant negative impact on our financial condition. We can give no assurance that we will be able to attract and retain additional qualified personnel as needed in the future. We do not maintain key-man life insurance on our senior executives or other key employees. -9- RISKS RELATING TO OUR OPERATIONS IN THAILAND ENFORCEMENT OF CIVIL LIABILITIES. The vast majority of our assets are located in Thailand. There is doubt that the courts of Thailand would enforce, either in an original action or in an action for enforcement of judgments of United States courts, liabilities, which are predicated upon the securities laws of the United States. OUR OPERATIONS ARE DEPENDENT UPON THE STABILITY OF THE THAI POLITICAL STRUCTURE AND THE CONTINUED STRENGTH OF THE THAI ECONOMY. Our results of operations and financial condition may be influenced by the political situation in Thailand and by the general state of the Thai economy. The political situation in Thailand has been unstable from time to time in recent years and future political and economic instability in Thailand could have an adverse effect on our business and results of operations. Any potential investor in our securities should pay particular attention to the fact that we are governed in Thailand by a political, economic, legal and regulatory environment that may differ significantly from that which prevails in other countries. Thailand is a constitutional monarchy. Under the constitution, the King is Head of State, Commander of the Armed Forces and Patron of all Religions. Executive power is vested in the cabinet while the elected bicameral national assembly exercises legislative power. Thailand has experienced several changes of government and changes in its political system since World War II. A new constitution became effective on October 11, 1997. There can be no assurance that Thailand's current government or political system will continue unchanged for the foreseeable future. Additionally, there can be no assurance that any future change in the government will be the result of democratic processes. THE THAI ECONOMY HAS A RECENT HISTORY OF INSTABILITY. Although Thailand's economy has been characterized in the past decade by high growth rates, in 1996 and particularly in 1997, economic growth slowed significantly in relation to historical levels. In late 1996 and throughout 1997, Thailand experienced significant economic weakness, resulting primarily from declines in the property and finance industries, a sharp reduction in financial liquidity and a general deterioration in investor confidence. In addition, the country has had recurring trade balance and current account deficits. The government of Thailand also agreed on August 5, 1997, to accept the austerity measures of the International Monetary Fund or "IMF" aimed at rehabilitating and restructuring the economy as a condition to receipt of IMF-led loans and financial assistance in the billions of dollars. International credit rating agencies, including Moody's Investors Service, Inc. and Standard & Poor's Corporation, had downgraded Thai sovereign as well as various Thai corporate and financial institutions' debt ratings. Between January 3, 1996 and December 31, 1997, the Stock Exchange of Thailand Index fell from 1,323.43 to 372.69. On December 8, 1997, the Thai government terminated the operations of 56 of the 91 finance companies in Thailand. There can be no assurance that our operations will not adversely be affected by: o the economy in Thailand and in Southeast Asia generally; o the interest rates and inflation in Thailand and other Southeast Asian countries; o the lack of liquidity and stability in the Thai and other Southeast Asian finance industries; or o other factors including measures taken by the government of Thailand in response to economic conditions. Instability in the Thai economy could affect our ability to finance our working capital needs, collect on receivables for goods shipped or build market share internationally or in Thailand. Further, we can give no assurance that the economies of Thailand and Southeast Asia will not materially worsen. -10- THE THAI GOVERNMENT CONTROLS THE CURRENCY CONVERSION RATES AND SETS LIMITS ON THE AMOUNT OF CASH THAT A THAI ENTITY MAY MAINTAIN IN U.S. DOLLARS. On January 6, 1998, the Thai Cabinet approved the issuance of a Ministry of Finance regulation to limit the U.S.$ holding period for exporters in an effort to curtail currency speculation and increase the U.S.$ supply in the local economy. Previously, exporters were required to be paid within 180 days and to sell or deposit the proceeds in a foreign currency account with an authorized bank in Thailand within 15 days of receiving such proceeds. However, according to the January 1998 regulation, exporters must now be paid within 120 days, after which they have seven days in which to sell or deposit the proceeds in a foreign currency account in Thailand. This requirement applies to all export proceeds earned by a Thai company outside Thailand. A Thai entity may open a foreign currency account under the following conditions: o the account must be with an authorized bank in Thailand and the funds must originate from abroad; o remittance abroad of funds deposited in such an account for payment of ordinary business transactions would require submission of supporting evidence and approval of the Bank of Thailand; and o the total amount of daily outstanding balances in such an account must not exceed U.S.$5 million, otherwise, such excess amount would be required to be converted to Baht. An exemption to these regulations allows a depositor to keep deposits in U.S.$ up to an amount not to exceed the depositor's obligations to foreign creditors and the international banking facilities of Thailand commercial banks payable within the next three months. Funds deposited in a foreign currency account may be withdrawn for, inter alia, payment of interest and principal due on offshore debt repayments. Proof that the payment of interest is required must be submitted with the bank in which the currency is deposited each and every time an application to withdraw and repatriate foreign currency is made. As a general matter, the outward remittance from Thailand of dividends, interest or capital gains from the transfer of securities after payment of any applicable Thai taxes, if any, may be made if the amount does not exceed U.S.$5,000 per remittance, beyond which amount, a report must be made to the Bank of Thailand. Parties may apply for an exemption or relaxation from the "strict observance" of the above requirements. We were able to obtain waivers from the Bank of Thailand which would allow us to keep certain U.S.$ amounts of export earnings offshore in certain accounts for an amount not to exceed U.S.$130 million each year through the redemption of certain notes and debentures. Additionally, we were also granted an approval from the Bank of Thailand which would allow us to keep U.S.$ amounts in excess of U.S.$5 million in accounts in Thailand for an amount not to exceed our obligations in foreign currencies payable within three months from the date of deposit. Any excess amount of foreign currencies must be converted into Baht. Such conversion would require us to bear exchange rate risks as many of our obligations are U.S.$ denominated. If we are unable to maintain these waivers and are required to convert such revenue into Baht, any devaluation of the Baht against the U.S.$ could have an adverse effect on our results of operations and could materially impair our ability to repay our U.S.$ obligations. BECAUSE WE HAVE SIGNIFICANT BAHT DENOMINATED ASSETS AND LIABILITIES, WE ARE SUBJECT TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES. Prior to July 1997, the Bank of Thailand determined the value of the Baht based on a "basket," the composition of which was not made public but of which the U.S.$ was the principal component. Prior to July 1997, the Baht had a history of stability, trading in a narrow range of 24.47 Baht to 25.97 Baht to the U.S.$1.00, as a result of frequent intervention by the Bank of Thailand through purchases and sales of U.S.$. However, on July 2, 1997, under substantial market pressure, the Thai government floated the Baht and effectively ceased such intervention, and the value of the Baht, as reflected in the Noon Buying Rate, declined from 24.52 Baht per U.S.$1.00 on July 1, 1997 to 56.10 Baht per U.S.$1.00 on January 12, 1998 and stood at 39.15 Baht to U.S.$1.00 on May 15, 1998. We can give no assurance that the value of the Baht will not decline further, increase or continue to fluctuate widely against other currencies in the future. Adverse economic conditions in Thailand and the region incidental to the devaluation of the -11- Baht may also reduce some of our customers' ability to pay, and we can give no assurance that such reduced demand will not have an adverse effect on us. Our functional currency is the U.S. dollar, however, we have significant Baht denominated assets and liabilities. Therefore, fluctuations in the value of the Baht relative to the U.S.$ may cause us to recognize material foreign exchange gains or losses which could adversely affect our results of operations and financial condition. Although we had not done this in the past, in the future, we may decide to hedge our currency positions to attempt to avert any adverse consequences of exchange rate fluctuations. We can give no assurance that we will be able to successfully hedge our exchange rate exposure or that we will be able to hedge such exposure at a satisfactory cost. WE ARE SUBJECT TO THE THAI LEGAL SYSTEM IN WHICH CASE OUTCOMES AND THE APPLICATION OF LAW ARE UNPREDICTABLE. The Thai legal system is based on written statutes and is a system, unlike common law systems, in which decided legal cases have little precedential value. The Thai system is similar to civil law systems in this regard. The basic laws, such as the Civil and Commercial Code, the Civil Procedures Code, and the Criminal Procedures Code are derived from similar codified laws in continental Europe. RISKS ASSOCIATED WITH THE JEWELRY BUSINESS IF GENERAL ECONOMIC CONDITIONS WORSEN, PURCHASES OF JEWELRY AND GEMSTONES ARE LIKELY TO DECLINE. Jewelry purchases are discretionary for consumers and may be particularly affected by adverse trends in the general economy. The success of our operations depends to a significant extent upon a number of factors relating to discretionary consumer spending in markets where we operate. Some of the factors that impact consumer spending include economic conditions in the regions we serve, employment, wages and salaries, business conditions, interest rates, availability of credit and taxation. We can give no assurance that consumer spending will not be adversely affected by general economic conditions and negatively impact our results of operations or financial conditions. Any significant deterioration in general economic conditions or increases in interest rates may inhibit consumers' use of credit and cause a material adverse affect on our net sales and profitability. Furthermore, any downturn in general or local economic conditions in the markets in which we operate could materially adversely affect our collection of outstanding customer accounts receivables. THE JEWELRY BUSINESS IS HIGHLY SEASONAL. We greatly depend on the success of our Christmas "selling season" for our success. The success of our Christmas season depends on many factors beyond our control, including general economic conditions and industry competition. Sales during the Christmas selling season typically account for approximately 40% of net sales and 45% of annual earnings. During our 2000 Christmas selling season net sales were $14,227,438. WE ARE SUSCEPTIBLE TO FLUCTUATIONS IN THE PRICE OF GEMS AND PRECIOUS METALS. We are subject to other supply risks, including fluctuations in the prices of precious gems and metals. Presently, we do not engage in any activities to hedge against possible fluctuations in the prices of precious gems and metals. If fluctuations in these prices are unusually large or rapid and result in prolonged higher or lower prices, we cannot assure that the necessary retail price adjustments can be made quickly enough to prevent us from being adversely affected. -12- RISKS RELATED TO OWNERSHIP OF OUR SECURITIES THE MARKET PRICE FOR OUR COMMON STOCK HAS BEEN HISTORICALLY VOLATILE AND IT MAY BE DIFFICULT TO PREDICT THE FUTURE PRICE OF OUR COMMON STOCK. From time to time, there has been and may continue to be significant volatility in the market price for our common stock. Quarterly operating results, changes in general conditions in the Thailand economy, the U.S. economy, financial markets, natural disasters or other developments could cause the market price of our common stock to fluctuate substantially. BECAUSE THE MARKET FOR OUR COMMON STOCK LACKS LIQUIDITY, IT MAY BE DIFFICULT TO PURCHASE OR SELL OUR STOCK ON THE PUBLIC MARKET. Our common stock currently trades on the Pink Sheet Service. We have applied to have our common stock listed on the American Stock Exchange. We also intend to contact an authorized OTC Bulletin Board market-maker for sponsorship of our common stock on the OTC Bulletin Board after this registration statement clears the comment and review process of the United States Securities and Exchange Commission. Although we have applied to list our common stock on the American Stock Exchange, there can be no assurance that an active public market for our common stock will be created and sustained. Accordingly, investors may not be able to sell their common stock should they desire to do so, or may be able to do so only at lower than desired prices. While no prediction can be made as to the effect, if any, that future sales of shares of our common stock, or the availability of additional shares for future sales, will have on the market price of our common stock prevailing from time to time, sales of substantial amounts of our common stock or the perception that such sales could occur, would likely adversely affect the market price for our common stock. YOU WILL BE UNABLE TO EXERCISE ANY CONTROL OVER OUR MANAGEMENT BECAUSE A SINGLE STOCKHOLDER CONTROLS 80% OF THE VOTING CONTROL OF THE TOPAZ GROUP. Ms. Jariya Sae-Fa, an officer and director of one of our subsidiaries and sister of Dr. Apichart, is the principal stockholder of Best Worth. Best Worth beneficially owns all of our outstanding series A and series B preferred stock and controls approximately 95% of all stockholder votes primarily as a result of its ownership of all of the 3,721,050 outstanding shares of our series A preferred stock and all of the 1,006,513 outstanding shares of our series B preferred stock, which entitles the holder to 20 votes per share. Accordingly, Ms. Sae-Fa, as managing member of Best Worth, is in a position to elect all of our directors and to direct stockholder approval upon all issues to be voted upon by our stockholders. OUR OFFICERS AND DIRECTORS ARE GRANTED LIMITED LIABILITY FOR THEIR ACTIONS BY OUR ARTICLES OF INCORPORATION AND BY-LAWS. Our articles of incorporation and by-laws contain provisions limiting the liability of our directors for monetary damages to the fullest extent permissible under Nevada law. This is intended to eliminate personal liability of a director for monetary damages in an action brought by us or in our right for breach of a director's duties to us or to our stockholders except in certain limited circumstances. In addition, the articles of incorporation and by-laws contain provisions requiring us to indemnify our directors, officers, employees and agents serving at our request against expenses, judgments (including derivative actions), fines and amounts paid in settlement. This indemnification is limited to actions taken in good faith in the reasonable belief that the conduct was lawful and in or not opposed to our best interests. Our articles of incorporation and by-laws provide for the indemnification of directors and officers in connection with civil, criminal, administrative or investigative proceedings when acting in their capacities as agents for us. The foregoing provisions may reduce the likelihood of derivative litigation against directors and officers and may discourage or deter stockholders or management from suing directors or officers for breaches of their duties to us, even though such an action, if successful, might otherwise benefit us and our stockholders. -13- FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. Future sales of shares of common stock by existing stockholders under Rule 144 of the Securities Act of 1933, as amended or the "Securities Act", could materially adversely affect the market price of our common stock. A material reduction in the market price of our common stock could materially impair our future ability to raise capital through an offering of equity securities. A substantial number of shares of common stock are available for sale under Rule 144 in the public market or will become available for sale in the near future. ITEM 2. FINANCIAL INFORMATION SELECTED CONSOLIDATED FINANCIAL DATA The tables that follow present portions of our consolidated financial statements and are not complete. You should read the following selected consolidated financial information in conjunction with our consolidated financial statements and related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this registration statement. The consolidated statements of operations data for the years ended December 31, 1999 and 2000 are derived from our consolidated financial statements that have been audited by Grant Thornton LLP, independent auditors, which are included elsewhere in this registration statement. The consolidated statements of operations data for the years ended December 31, 1996 and 1997 and the consolidated balance sheet data as of December 31, 1996, 1997 and 1998 are derived from unaudited financial statements that are not included in this registration statement, which in our opinion reflect all adjustments necessary to present fairly our financial position and results of operations for the periods presented. The statement of operations data and balance sheet data for the nine months ended September 30, 2000 and September 30, 2001 are derived from unaudited financial statements, which in our opinion reflect all adjustments necessary to present fairly our financial position and results of operations for the periods presented. The historical results presented below are not necessarily indicative of the results to be expected for any future year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Nine Months Ended Year Ended December 31, September 30, ------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 2001 2000 Sales $ 32,483,043 $ 19,881,283 $ 18,886,737 $ 17,622,804 $ 24,309,947 $15,012,234 $ 18,255,605 Cost of Goods Sold 23,488,062 11,025,824 10,976,881 12,937,673 21,654,240 10,569,007 12,933,902 ------------ ------------ ------------ ------------ ------------ ----------- ------------ Gross Profit 8,994,981 8,855,459 7,909,856 4,685,131 2,655,707 4,443,227 5,321,703 Selling, General & Administrative Expenses 4,136,931 4,346,100 4,154,545 2,636,375 4,220,181 2,795,133 3,139,574 ------------ ------------ ------------ ------------ ------------ ----------- ------------ Earnings from operations 4,858,050 4,509,359 3,755,311 464,950 19,332 1,648,094 2,182,129 Other Income (expense) (782,017) 1,826,234 884,299 (4,768,083) 4,845,289 1,276,085 (103,660) ------------ ------------ ------------ ------------ ------------ ----------- ------------ Earnings (loss) before 4,076,033 6,335,593 4,639,610 5,310,239 (4,748,751) 2,924,179 2,078,469 extraordinary item Extraordinary item-gain on debt Restructuring -- 803,589 -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ----------- ------------ Net Earnings (loss) 4,076,033 7,139,182 4,639,610 5,310,239 (4,748,751) $ 2,924,179 2,078,469 Preferred stock dividends -- (2,734,610) (12,270,00) -- -- -- -- ------------ ------------ ------------ ------------ ------------ ----------- ------------ -14- Net Earnings (loss) available to common stockholders $ 4,076,033 $ 4,404,572 $ (7,630,930) $ 5,310,239 $ (4,748,751) $ 2,294,179 $ 2,078,469 Weighted average shares of 829,727 763,000 763,000 763,000 763,000 1,213,489 763,959 Common Stock Common stock and potential 5,639,419 5,498,680 -- 5,498,680 -- 6,052,449 5,500,723 issuable common stock Net earnings (loss) Basic $ 4.91 $ 5.77 $ (10.00) $ 6.96 $ (6.22) $ 2.41 $ 2.72 per share available Diluted to common Stockholders $ 0.72 $ 0.80 $ (10.00) $ 0.97 $ (6.22) $ 0.48 $ 0.38
December 31, June 30, 2001 ------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 2001 2000 BALANCE SHEET DATA Cash and Cash Equivalents 321,734 574,439 1,782,897 293,002 842,078 653,213 409,226 Working Capital 17,941,917 14,632,923 5,483,459 12,314,174 4,113,516 19,908,169 15,314,224 Total Assets 26,662,838 24,374,159 23,846,301 20,491,681 16,846,513 29,631,858 27,867,783 Total Liabilities 11,345,249 13,232,603 16,186,882 5,772,247 9,851,553 12,136,708 15,786,577 Total Stockholders' Equity 15,277,589 11,141,556 7,659,419 14,719,254 6,994,960 17,495,150 12,081,206
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains certain forward-looking statements that involve risk and uncertainties. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, risks and uncertainties related to the need for additional funds, the rapid growth of the operations and our ability to operate profitably after the initial growth period is completed. We undertake no obligation to publicly release the results of any revisions to those forward-looking statements that may be made to reflect any future events or circumstances. RESULTS OF OPERATIONS THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000 SALES. Total sales for the first nine months ended September 30, 2001 were $15,012,234 compared to $18,255,605 for the nine months ended September 30, 2000, a decrease of 17.8%. The decrease in sales is primarily attributed to decrease in consumer spending in the U.S. COST OF GOODS SOLD. Cost of goods sold was $10,569,007 or 70.4% of sales for the nine months ended September 30, 2001 as compared to $12,933,902 or 70.8% of sales during the nine months ended September 30, 2000. The decrease in cost of sales is due to a decrease in operating revenues and to lower stone purchasing costs. OPERATING COSTS. Operating costs were $2,795,133 for the nine months ended September 30, 2001, compared to $3,139,574 for the nine months ended September 30, 2000. The decrease is largely attributed to a bad debt expense incurred during the nine months ended in September 30, 2000 of $184,842 plus remeasurement baht devaluation for the first nine months of 2001 of approximately $125,000. This devaluation is applied to Baht Sales General and Administrative expenses when remeasured to US dollars. EARNINGS FROM OPERATIONS. Earnings from operations for the nine months ended September 30, 2001 were $1,648,094 compared to $2,182,129 for the nine months ended September 30, 2000. This decrease is attributed to a reduction in year to date revenues of $3,243, 371 and a corresponding drop in gross profit of $878,476 offset by a reduction in selling, general and administrative expenses of $344,441. -15- OTHER INCOME. Other income and (expense) was $1,276,085 for the nine months ended September 30, 2001 compared to ($103,660) for the nine months ended September 30, 2000. The increase in other income is primarily attributed to a net increase in the Currency Exchange Rate Gain and Remeasurement Gain of $1,370,491. Our Thai subsidiaries maintain their books and records in Thai Baht. However, their functional currency is the U.S. dollar. Monetary assets and liabilities and related income and expense items are remeasured at historical rates. Other non-monetary balance sheet items and related revenues, expenses, gains and losses are remeasured using average exchange rates. NET EARNINGS. We reported net earnings of $2,924,179 for the nine months ended September 30, 2001 compared to $2,078,469 for the nine months ended September 30, 2000. The difference is largely attributed to favorable currency movements and a net decrease in selling, general and administrative expenses that offset a reduction in gross profit from decreasing revenues. FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 SALES. Total sales were $32,483,043 in fiscal 2000 compared to $19,881,283 in fiscal 1999, an increase of 63.4%. The increase in sales is primarily attributed to increased sales of jewelry to existing customers, aggressive promotion of lower priced jewelry lines to new customers and the addition of new customers due to increased participation in jewelry shows in the United States and Hong Kong. Sales increased due to jewelry manufactured with lower grade stones. Such sales carried lower profit margins, resulting in an overall revenue increase from 1999 to 2000 without increases to gross margin. COST OF GOODS SOLD. Cost of goods sold was $23,488,062 in fiscal 2000, 72.3% of sales, compared to $11,025,824 in fiscal 1999, 55.4% of sales. The increase in cost of goods sold is due in part to increased incentive programs for new customers and lower gross margin sales of jewelry manufactured with lower grade stones. OPERATING COSTS. Operating costs were $4,136,931 in fiscal 2000, 12.7% of revenues, compared to $4,346,100 in fiscal 1999, 21.8% of revenues. This decrease is due in part to reduced overtime pay for staff employees of approximately $105,153, and to a Baht devaluation when applying the 1999 exchange rate to our year 2000 expenses. OPERATING PROFIT. Operating profit for fiscal 2000 was $4,858,050 compared to 1999 operating profit of 4,509,359 an increase of 7.7%. The increase is due primarily to reduced selling, general and administrative expenses. OTHER INCOME. Other income and (expense) were ($782,017) in fiscal 2000 compared to $1,826,234 in fiscal 1999, due to gains (losses) resulting from currency fluctuations. Our Thai subsidiaries maintain their books and records in Thai Baht. However, their functional currency is the U.S. dollar. Monetary assets and liabilities and related income and expense items are remeasured using the current rates. Certain non-monetary assets (notably property and equipment) are remeasured at historical rates. Other nonmonetary balance sheet items and related revenues, expenses, gains and losses are remeasured using average exchange rates. NET EARNINGS. We reported net earnings of $4,076,033 for fiscal 2000 compared to $7,139,182 for fiscal 1999, a decrease of 42.9%. The difference between operating profit and net earnings is largely attributed to currency fluctuations and an extraordinary gain on debt restructuring that occurred during the year ended December 31, 1999. FISCAL YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 SALES. Total sales were $19,881,283 in fiscal 1999 compared to $18,886,737 in fiscal 1998, an increase of 5.3%. The fiscal 1999 increase in revenue is primarily attributed to increased sales of jewelry to existing customers. -16- COSTS GOODS SOLD. Cost of goods sold was $11,025,824 in fiscal 1999 compared to $10,976,881 in fiscal 1998, an increase of 0.4%, due in part to reduced raw stone purchasing costs. OPERATING COSTS. Operating costs were $4,346,100 in fiscal 1999 compared to $4,154,544 in fiscal 1998, an increase of 4.6%. This resulted from increased Baht valuation in the fiscal 1999. In addition, increased salaries of approximately $159,759 also affected operating expenses. OPERATING PROFIT. Operating profit for fiscal 1999 was $4,509,359 compared to 1998 operating profit of $3,755,311 an increase of 20.1%, in part from an increase in gross profit margin from 1998 to 1999 of 2.6%. OTHER INCOME. Other income and (expense) were $1,826,234 in fiscal 1999 compared to $884,299 in fiscal 1998, an increase of 106.5%, resulting in part to a net increase in the currency exchange rate gain and a remeasurement gain of $917,753 or 106.9%. Our Thai subsidiaries maintain their books and records in Thai Baht. However, their functional currency is the U.S. dollar. Monetary assets and liabilities and related income and expense items are remeasured using the current rates. Certain non-monetary assets (notably property and equipment) are remeasured at historical rates. Other non-monetary balance sheet items and related revenues, expenses, gains and losses are remeasured using average exchange rates. EXTRAORDINARY ITEM. On July 30, 1999, Advance completed debt restructuring with an investor that purchased the rights to the debt from a failed financial institution, resulting in an extraordinary gain of $803,589. The debt restructuring occurred as a result of the failure of the financial institution and not Advance's ability to service the debt. NET EARNINGS. We reported net earnings of $7,139,182 for fiscal 1999 compared to $4,639,610 for fiscal 1998, an increase of 53.9%. The difference in operating income from net income is largely attributed to currency fluctuations and extraordinary gain on debt restructuring for fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES Our principal source of working capital is income from operations, borrowings under our revolving credit facilities and short-term loans from a company affiliate. At September 30, 2001, we had a cash and cash equivalent balance of $284,497 and working capital of $20,512,747. Our operating activities provided (used) cash of ($539,926) for nine months ended September 30, 2001 and $915,618 for the year ended December 31, 2000. The decrease in cash provided by operating activities resulted primarily from a net increase in inventory growth of $1,464,957 for nine months ended September 30, 2001. The net cash provided by financing activities for the nine months ended September 30, 2001 was $692,294 compared to ($961,785) for the period ended December 31, 2000. This increase is due primarily to $1,736,947 in payments on notes payable accounted for during the twelve months ended December 31, 2000 and absent during the period ended September 30, 2001. Our principal business is seasonal in nature with fourth quarter sales representing as much as 40% of annual sales. As a result of this seasonality and the decay periods inherent in our topaz products, inventory growth in the second and third quarters are customary. As of September 30, 2001 inventory was $24,229,013 compared to December 31, 2000 of $20,626,502, an increase of $3,602,511. The net effect directly impacts our cash flow as a decrease in cash flow from operating activities. In addition to seasonal build up, inventory growth can be attributed to two other factors: anticipated fourth quarter sales growth with changes in consumer buying trends and lengthy decay periods for the radiated stones coupled with short lead times on customer orders. The decay periods for the topaz stones can range from 120 to 240 days depending upon the hue. For darker hues the decay periods are longer. At the end of the first quarter the consumer-buying trend was to move from the lighter topaz hues to the darker colors. As a result of the decay periods, our production included significant -17- levels of lighter hues preparing for the seasonal revenues. The consumer buying preference shifted to a darker stone, which included a longer decay period. As a result, our inventory levels continue to build with darker stones while the lighter topaz stones are showing slowing demand trends. This change in trends causes increased inventory levels. In addition, retailers and wholesalers continue to demand shorter lead-times for orders which in turn causes higher carrying values of finished stones to meet customer orders on time. At September 30, 2001 we carried approximately $1,852,753 in pre-form (in production) lighter color stones and $384,233 in finished lighter hue stones. We believe that the carrying values of these stones, under current demand levels, should approximate $200,000 to $300,000. We anticipate that the excess levels will be consumed within a 12-month period. We have two line of credit arrangements with two Thai financial institutions and one U.S. financial institution entered into in October 1999, April 2000 and October 2001. The Thai lines are renewable automatically on a yearly basis and the U.S. line expires on September 2002; the lines are subject to the banks' periodic reviews resulting in adjustment of our credit limit. The Thai lines bear interest at a rate equal to LIBOR plus two percent (8.208% December 31, 2000); the U.S. line bears interest at prime plus 1.25%; the 1999 line is personally guaranteed by two of our directors and collateralized by various real estate properties belonging to us and one of our directors. The 2000 line is also guaranteed by two of our directors and secured by a deed on a real estate property owned by a related party. The U.S. line is secured personally by one of our directors and by our U.S. receivables and inventory and by a lien on various Thai real estate properties and fixed assets of a related party. As of September 30, 2001, approximately $690,518 was available for borrowing under both 1999 and 2000 lines. As of November 30, 2001, approximately $1,158,634 was available for borrowing under the U.S. line. As of December 31, 1999 and 2000 and September 30, 2001, the outstanding balance under both lines of credit was $0, $775,162 and $1,467,456, respectively. As of November 30, 2001 the outstanding balance under the U.S. line was approximately $841,366. Our principal source of working capital is income from operations, borrowings under our revolving credit facilities and short-term loans from a company affiliate. At December 31, 2000, we had a cash and cash equivalent balance of $321,734 and working capital of $17,941,917 compared to $574,439 of cash and cash equivalents and working capital of $14,632,923 at December 31 1999. Our operating activities provided (used) cash of $951,618 and ($1,398,827) for fiscal 2000 and 1999. The increase in cash provided by operating activities resulted primarily from our fiscal 2000 profit of $4,076,033, less inventory growth of $2,137,554 and a non-cash gain of $752,760 on the remeasurement of redeemable ordinary shares. Operating cash flow increased from fiscal 1999 to 2000 because of a reduction in inventory growth when compared to 1999 inventory. Sales growth from 1999 to 2000 was 63.4% while inventories increased by only 11.6%. Selling, general and administrative expenses also decreased by $209,169 causing an increase in operating income. This increase is offset by a reduction in gross margin from 44.5% for fiscal 1999 to 27.7% for fiscal 2000. The reduction in gross margin is a result of lower profit jewelry sales manufactured with lower grade stones in fiscal 2000. The decrease in net cash provided by financing activities for 2000 and 1999 was $1,299,085, due primarily to $1,736,947 in payments on notes payable offset by $775,162 in additional net borrowings on our lines of credit. We have two line of credit arrangements with two Thai financial institutions entered into in October 1999 and April 2000. Both lines are renewable automatically on a yearly basis and are subject to the banks' periodic reviews resulting in adjustment of our credit limit. The 1999 and 2000 lines bear interest at a rate equal to LIBOR plus two percent (8.208% December 31, 2000); the 1999 line is personally guaranteed by two of our directors and collateralized by various real estate properties belonging to us and one of our directors. The 2000 line is also guaranteed by two of our directors and secured by a deed on a real estate property owned by a related party. As of December 31, 2000, approximately $836,000 and $493,000 were available for borrowing under the 1999 and 2000 line, respectively. As of December 31, 2000, the outstanding balance under both lines of credit was $775,162. The effects on liquidity of carrying large values of inventory can be referenced by days of sales in inventory. On average, for the 12 months ended September 30, 2001, December 31, 2000 and 1999 inventory would remain on the books 387, 236 days and 378 days respectively until it is sold. During this period the inventory is classified as a current asset on the balance sheet but restricts the use of working capital until the inventory is sold. -18- Inventory is valued by applying a moving average method for valuation. Under this method of valuation, generally, the finished stone inventory does not progressively devalue with age and the prices per carat remain relatively stable. The average cost includes the raw cost of the product plus any additional costs to bring it to its current condition including processing, transportation, insurance and holding costs. Variances in valuation under the moving average cost method occur when stone prices, overhead cost and other related costs, which make up the value of the inventory, vary significantly up or down within the fiscal period. As such, material variances in the inventory costs are identified and valued separately to reflect true value. Our business can be classified into two major groups including sale of finished jewelry and finished stones, to a lesser degree. Most of our finished jewelry is made to order and is shipped when completed. (Inventory valuations include the lesser of manufactured cost or market valuation per unit times the quantities on hand.) Lower of cost or market is referenced by recent sale prices of the finished stones compared to the cost to produce or acquire such stones. If recent sales of an existing stone are not available, current market price samples in the selling market will dictate the lower of cost or market for valuation purposes. Management believes we have the ability to meet our current and anticipated financing needs for the next twelve months with the facilities in place and funds from operations, however, given our growth prospects, we may need to seek increases in our credit facilities during the upcoming year to sustain further revenue growth. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CURRENCY FLUCTUATIONS 1. EXCHANGE RATE INFORMATION Our Consolidated Financial Statements are prepared in U.S. dollars. The financial statements of our foreign subsidiaries are remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52. Fluctuations in the value of foreign currencies cause U.S. dollar amounts to change in comparison with previous periods and, accordingly, we cannot quantify in any meaningful way, the effect of such fluctuations upon future income. This is due to the constantly changing exposure in the Thai Baht for our Thai subsidiaries. As of December 4, 2001, the interbank exchange rate for the Baht is trading at 43.97 Baht to the US dollar. The exchange rate in Thailand is showing signs of stability in 2001 with gradual recovery anticipated in early 2002. We anticipate that the economies of the Asian countries are continuing to recover which will further strengthen the Baht, however, the regions of Thailand are promoting exports to strengthen their economies. An attempt to control the valuation of the Baht is likely to come from easing exports, not imposing tight restrictions. We are unable to predict whether the trends noted above would have a material effect on our future financial condition or the results of operations and, if so, whether such an effect will be positive or negative. 2. EXCHANGE RATE FLUCTUATION Thai Baht 2001 2000 High Low Average High Low Average Third Quarter 45.87 43.92 44.98 42.77 39.10 40.97 Second quarter 45.85 44.68 45.45 39.45 37.72 38.67 First quarter 45.00 42.19 43.29 38.30 36.71 37.96 2000 1999 High Low Average High Low Average Fourth quarter 44.44 41.88 43.43 40.90 37.35 38.86 We expect that the exchange rate of the currency of certain countries in Asia including Thailand will stabilize by the end of 2001. The stabilization and recovery of the Thai Baht is anticipated to show continued improvement with the recovery of the economy through 2002. We anticipate the cost of raw materials, which includes precious and non-precious metals, are expected to show slight cost increases in the short-term with long-term stability. -19- 3. FORWARD-LOOKING STATEMENTS From time to time, we may make certain statements that contain "forward-looking" information. Words such as "anticipate", "estimate", "project", "believe" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of the Financial Information or Management's Discussion and Analysis or Plan of Operations and as part of other sections of this registration statement. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including without limiting those identified below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. 4. FOREIGN CURRENCY RISK As of September 30, 2001, we had no open forward-contracts. Our Thai subsidiaries keep their books in the Thai Baht currency. As such, the Thai balances are exposed to currency gains and losses depending upon the currency rate fluctuations when compared to the US dollar for the respective periods. The currency and remeasurement gains and losses for periods ended September 30, 2001 and 2000 are $1,283,430 and $(87,061). 5. INTEREST RATE FLUCTUATIONS Our interest expenses and income are sensitive to changes in interest rates. We had interest-bearing obligations of $1,467,456 for the period ended September 30, 2001 bearing various interest rates, and any fluctuation in the interest rate will have a direct impact on our interest expenses, cash flow and results of operations. ITEM 3. DESCRIPTION OF PROPERTY We operate four fully integrated facilities in various parts of Thailand totaling 101,000 square feet. Our headquarters, administrative facilities and primary manufacturing facilities are located in the Topaz Tower, a 15 story tower at 126/1 Krungthonburi Road, Banglampoo Lang, Klongsarn, Bangkok, Thailand that encompasses approximately 90,800 square feet. We occupy 74,000 square feet of this space subject to a lease that expires February 28, 2011 at a cost of approximately $3,200 per month and we lease the remaining 16,800 square feet on a month to month basis. We also have manufacturing facilities located at Mai Sai, Thailand, which we occupy subject to a lease that expires August 15, 2004 at a cost of approximately $200 per month, Lop Buri, Thailand, which we occupy subject to a lease that expires April 19, 2002 at a cost of approximately $760 per month, and Prayao, Thailand, which we lease on a month to month basis. The factory at Mai Sai encompasses approximately 11,000 square feet, the factory at Lop Buri encompasses approximately 8,600 square feet and the factory at Prayao encompasses approximately 5,250 square feet. We expect that we will be able to renew our leases when they expire. If, however, we are unable to renew any of our leases, we believe that there is widely available commercial space for leasing in each of our locations and that we would be able to relocate our capital equipment into a new space without experiencing a material adverse impact on our results from operations or operating expenses. We lease offices located in Issaquah, Washington which are subject to a lease that provides for monthly rent of approximately $5,300 per month and include 2,171 square feet with a termination date of August 31, 2006. Our office is located at 1180 NW Maple Street, Suite 180, Issaquah, Washington 98027. Our telephone number is 425-392-3144. The operations that are performed at this location include: U.S. accounting activities, preparation of quarterly and annual reports, financing and capital-raising activities, credit, collections and U.S. sales and customer support services. Our chief financial officer, treasurer and U.S. sales staff is located in this office. -20- Our subsidiaries are located as follows: Creative Gems & Jewelry Co., Ltd., 57/7 Moo 4, Tambol Thasala, Amphur Muang, Lopbur, Thailand 15000; Advance Gems & Jewelry Co., Ltd., 57/31 Moo 4, Tambol Thasala, Amphur Muang, Lopburi, Thailand 15000; and Advance Gems Manufacturing Co., Ltd., 399 Moo 4 Tambol Yuan, Amphur Chiangkam, Payao, Thailand 56110. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of our common stock and series A and series B preferred stock as of November 30, 2001 by: o each person known by us to beneficially own more than 5% of the outstanding shares of common stock, preferred stock or series B preferred stock; o each of our directors and named executive officers; and o our directors and executive officers as a group. Each share of common stock and series A preferred stock is entitled to one vote per share while each share of series B preferred stock is entitled to twenty votes per share. The shares of series A preferred are convertible into shares of common stock at any time. The shares of series B preferred stock are convertible into shares of common stock upon specified events. Series A Series B Common Stock Preferred Stock Preferred Stock ------------ --------------- --------------- Percent Percent Percent NAME AND ADDRESS OF No. of No. Of No. of BENEFICIAL OWNER (1) Shares Class Shares Class Shares Class ---------- --------- ---------- --------- ---------- ------- Best Worth Agents, Ltd. (2) --- --- 2,911,050 100% 1,006,513 100% U.S. Heritage Capital Corp. 133,000 6.2% --- --- --- --- 5770 Wulff Run Road Cincinnati, OH 45233 Jeremy F. Watson 200,000 9.4% --- --- --- --- Thammatinna Thammaradi --- --- --- --- --- --- Leonard Orrin --- --- --- --- --- --- David Dikinis --- --- --- --- --- --- Dr. Aphichart Fufuangvanich 24,000 1.1% --- --- --- --- Terrance C. Cuff (3) 212,179 9.9% --- --- --- --- Timothy Matula (3) 206,183 9.6% --- --- --- --- Thiti Fufuangvanich --- --- --- --- --- --- Alson Lee --- --- --- --- --- --- Jason Sugarman --- --- --- --- --- --- All officers and directors 642,362 29.8% --- --- --- --- as a group (ten (10) persons, including the foregoing) - -------------------- -21- (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 5. DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers and their present positions with us are as follows: NAME AGE POSITION Jeremy F. Watson 60 Chairman of the Board of Directors Dr. Aphichart Fufuangvanich 51 Director and President Thammatinna Thammaradi 40 Director and Executive Vice President Terrance C. Cuff 38 Director and Chief Financial officer Timothy Matula 40 Director and Treasurer Leonard T. Orrin 53 Director and Director of Sales Thiti Fufuangvanich 22 Director and Director of Research and Development David Dikinis 48 Independent Director Alson Lee 74 Independent Director Jason Sugarman 29 Independent Director
Jeremy F. Watson has served as Chairman of the Board of Directors since September 1999. From March 1996 to February 1998, he served as Regional Vice President for Fritz Gegauf, A.G. From October 1973 to February 1996, Mr. Watson served in various positions at The Singer Company, the last being Managing Director of China Operations. He is a Fellow of the Institute of Chartered Accountants in England and Wales. Dr. Aphichart Fufuangvanich has served us as president and as a director since February 2001. He has worked within the manufacturing and sales business for over 30 years. Dr. Aphichart Fufuangvanich has extensive experience within this field and has spent the last five years consulting to various stone manufacturing and sales companies, including Topaz Group. Dr. Apichart is the father of director Thiti Fufuangvanich. Thammatinna Thammaradi has served as an executive vice president since February 2000 and a director since September 1999, and has served as a director of Topaz Group since September 1999. She has been involved in the jewelry industry for over 10 years. She received an MBA in finance from the University of Denver and a Bachelors Degree in Economics from Thammasat University, Bangkok. Terrance C. Cuff has served us as chief financial officer and as a director since February 2001. From January 1994 to February 2000, he was the President and a shareholder of Business Exchange Center, Inc., a merger & acquisitions firm. Prior to holding the President position he served as senior valuation analyst, from 1989 to 1994 with the same firm. Timothy Matula has served us as treasurer and as a director since February 2001. He is currently a principal in Quantum Capital Advisors, a money management and corporate advisory firm. He is also currently a member of the Board of Directors at Eat at Joe's, Inc. From 1994 to 1997, Mr. Matula served as Assistant Vice President of Quantum Portfolio Manager at Prudential Securities. Leonard T. Orrin has served as director of sales and as a director for Topaz Group since September 1999 and the Director of Sales for Topaz Group's subsidiaries since August 1995. Previously, he provided consulting services to various stone manufacturing and sales firms. -22- Thiti Fufuangvanich has served as a director and the director of research and development since February 2001. From 1996 to 1999, he was a member of the Faculty of Engineering at Chulalongkorn University. He was the President of Student Government at Chulalongkorn University in 1999. Thiti Fufuangvanich is the son of director Dr. Aphichart Fufuangvanich. David Dikinis has served us as an independent director since February 2001. He is the founder of Gemstones.com, Amulet, Gemstone and Jewelry Catalog and Talisman Catalog each of which he established 1985. Mr. Dikinis is a Gemologist (GIA) and former board member of the American Gem Trade Association (AGTA). Alson Lee has served us as an independent director since February 2001. He served in various functions within The Singer Company, including Vice President Pacific Region. Since retiring from The Singer Company, he has worked as a volunteer executive with the International Executive Service Corps with project assignments in Estonia from November 1993 to December 1993, Russia from May 1996 to June 1996, and Kazakhstan from September 1997 to October 1997. Mr. Lee also is a certified public accountant in the State of New York and the District of Columbia. Jason Sugarman has served us an independent director since September 2001. Mr. Sugarman is a principal of MKA Capital, a privately held real estate fund located in Orange County, California. He started at MKA in March 2000. Prior to this position Mr. Sugarman was the president of Cardinal Mortgage from February 1999 to March 2000. From 1994 to 2000, Mr. Sugarman was a principal of Patriot Homes, a land development and homebuilding company. He has a BA degree in economics from Stanford University. Election of officers and directors All of our directors hold office until the next annual meeting of shareholders and until their successors have been elected and qualified. Our officers are elected by the board of directors at the first board of directors' meeting after each annual meeting of shareholders and hold office until their death, until they resign or until they have been removed from office. ITEM 6. EXECUTIVE COMPENSATION The following table provides certain summary information concerning the compensation that will be paid on an annualized basis to our chief executive officer and the three (3) other most highly paid executive officers for all services to be rendered in all capacities to us during the fiscal years ended December 31, 1998, 1999 and 2000. No officers received compensation in excess of $100,000 during such years.
SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation --------------------------------- --------------------------------- Restricted Securities Fiscal Other Annual Stock Underlying All Other Name and Principal Position Year Salary ($) Bonus Compensation Awards Options Compensation - --------------------------- ---- ---------- ----- ------------ ------ ------- ------------ Kasem Chitmunchaitham, 2000 29,653 0 0 0 0 0 President and 1999 31,710 0 0 0 0 0 Chief Executive Officer 1998 8,743 0 0 0 0 0
We did not grant stock options in 2000. No executive officer held stock options during the 2000 fiscal year. As of the date of this registration statement, no executive officer holds stock options. 2001 STOCK OPTION PLAN Our board of directors adopted our stock option plan on May 15, 2001. Options granted under the plan may include those qualified as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended -23- or the "Code", as well as non-qualified options. Employees as well as other individuals, such as our outside directors and consultants who are expected to contribute to our future growth and success, are eligible to participate in the plan. However, incentive stock options may only be granted to persons who are our employees or employees of certain of our affiliates on the date of grant. As of July 30, 2001 no options had been granted under the plan. The following summary of the plan is qualified in its entirety by reference to the text of the plan, a copy of which is filed as an exhibit to this registration statement. TYPES OF GRANTS AND AWARDS The plan permits the grant of options which are intended to either be "incentive stock options" within the meaning of Section 422 of the Code, or "non-qualified stock options", which do not meet the requirements of Section 422 of the Code. ELIGIBILITY All employees (including officers), directors and consultants of us and our affiliated corporations are eligible to be granted options under the plan. We currently have 2,000 employees. Participants under the Royal Sponsored Women's Program or outside subcontractors are not eligible for options. STOCK SUBJECT TO THE PLAN The total number of shares of common stock for which options may be granted under the plan may not exceed 1,000,000, subject to possible adjustment in the future, including adjustments in the event of a recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction affecting our common stock. Any shares of common stock subject to any option, which for any reason expires, is canceled or is terminated unexercised will again become available for granting of options under the plan. However, once this registration statement becomes effective, none of our employees may be granted options individually with respect to more than 2,000,000 shares of common stock during any calendar year. ADMINISTRATION Once this registration statement becomes effective, the plan will be administered by a committee of the board of directors of two directors, each of whom is a "non-employee director" within the meaning of regulations promulgated by the United States Securities and Exchange Commission and an "outside director," within the meaning of regulations promulgated by the U.S. Department of the Treasury. The stock option plan committee has the authority under the plan to determine the terms of options granted under the plan, including, among other things, the individuals who will receive options, the times when they will receive them, whether an incentive stock option and/or non-qualified option will be granted, the number of shares to be subject to each option, the date or dates each option will become exercisable (including whether an option will become exercisable upon certain reorganizations, mergers, sales and similar transactions involving The Topaz Group, Inc.), and the date or dates upon which each option will expire. The stock option plan committee has the authority, subject to the provisions of the plan, to construe the terms of option agreements and the plan; to prescribe, amend and rescind rules and regulations relating to the plan; and to make all other determinations in the judgment of the stock option plan committee necessary or desirable for the administration of the plan. EXERCISE PRICE The exercise price of options granted under the plan is determined by the stock option plan committee, but in the case of an incentive stock option may not be less than: o 100% of the fair market value of the common stock on the date the incentive stock option is granted; and -24- o 110% of such fair market value in the case of incentive stock options granted to an optionee who owns or is deemed to own stock possessing more than 10% of the total combined voting power of all classes of stock of the Topaz Group. The exercise price is payable by delivery of cash or a check to the order of The Topaz Group, Inc. in an amount equal to the exercise price of such options, or by any other means (including, without limitation, cashless exercise), which the board of directors determines are consistent with the purpose of the plan and with applicable laws and regulations. TERMS AND CONDITIONS Options granted to employees and consultants may be granted for such terms as are established by the stock option plan committee, provided that, the term will be for a period not exceeding ten years from the date of the grant, and further provided that incentive stock options granted to a stockholder who is the beneficial owner of 10% of our common stock will be for a period not exceeding five years from the date of grant. Except to the extent otherwise determined by the stock option plan committee at the time of grant of a non-qualified stock option, if an optionee's relationship with the Topaz Group is terminated for any reason other than "disability" or death, the option may be exercised at any time within three months thereafter to the extent exercisable on the date of termination. However, in the event that the termination of such relationship is either (a) for cause, or (b) otherwise attributable to a breach by the optionee of an employment or confidentiality or non-disclosure agreement, such option will terminate immediately. Except to the extent otherwise determined by the stock option plan committee at the time of grant of a non-qualified stock option, in the event of the death of an optionee while an employee of, or consultant or advisor to the Topaz Group, within three months after the termination of such relationship (unless such termination was for cause or without the consent of the Topaz Group) or within one year following the termination of such relationship by reason of the optionee's "disability", the option may be exercised, to the extent exercisable on the date of his or her death, by the optionee's legal representatives at any time within one year after death, but not thereafter and in no event after the date the option would otherwise have expired. An option may not be transferred other than by will or the laws of descent and distribution and may be exercised during the lifetime of the optionee only by the optionee. The stock option plan committee may accelerate the date or dates on which an option may be exercised, or extend the dates during which an option may be exercised, provided, that no such acceleration or extension with cause any option intended to be an incentive stock option to fail to qualify as an incentive stock option, or cause the plan or any option granted thereunder to fail to comply with applicable short-swing profit rules promulgated by the United States Securities and Exchange Commission. The stock option plan committee may include additional provisions in option agreements, including without limitation, restrictions on transfer, repurchase rights, rights of first refusal, commitments to pay cash bonuses or to make, arrange for or guaranty loans or to transfer other property to optionees upon exercise of options, provided, that such additional provisions will not be inconsistent with the requirements of applicable law and such additional provisions will not cause any option intended to be an incentive stock option to fail to qualify as an incentive stock option. EMPLOYMENT AGREEMENTS As of the date of this registration statement, we have no employment agreements with any of our executive officers. DIRECTOR COMPENSATION There is no compensation for directors either on an annual basis or for attendance at board meetings. -25- Our board is also comprised of an Audit Committee which has the following three members, all of whom are independent directors: David Dikinis, Jason Sugarman and Alson Lee who serves as the Chairman of the Audit Committee. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the fiscal year ended December 31, 1999, we exchanged an aggregate of $905,369 of gemstones from Calibration of Gems Factory Co., Ltd., Well Gems & Jewelry Co., Ltd. and Trillion Royal Grand Company Limited, companies controlled by Dr. Aphichart Fufuangvanich. Dr. Aphichart is one of our directors. These transactions were negotiated at arm's length and the prices paid for the gemstones were no less favorable than those we could have obtained from independent parties on the open market. Ms. Jariya Sae-Fa, a director of our wholly owned subsidiary Creative through January 2001 and the managing member of Best Worth Agents, Ltd., had loaned to us the cumulative amount of $543,929 as of December 31, 2000, $380,406 of which remains due and payable to Ms. Sae-Fa as of June 30, 2001. The loans from Ms. Sae-Fa have no term and do not bear interest. The debts are classified as a current liability and are expected to be paid within the fiscal year. ITEM 8. LEGAL PROCEEDINGS We are not presently a party to any litigation material to our ongoing business operations or financial condition. ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the Pink Sheets Service under the symbol "TPAZ". The Pink Sheets Service or the "Pink Sheets" is a quotation service operated by the National Quotation Bureau, LLC, a paper quotation medium printed weekly and distributed to brokers/dealers. The Pink Sheets does not impose listing standards or requirements, does not provide automatic trade executions, and does not maintain relationships with quoted issuers. Issuers whose securities are quoted on the Pink Sheets may experience a loss of market makers, a lack of readily available "bid" and "asked" prices for their securities, a greater spread between the "bid" and "asked" price for their securities, and a general loss of liquidity in their securities. As of October 23, 2001, we had 1,624,886 shares of common stock outstanding held by 562 stockholders of record. The number of shares of our common stock which can be sold pursuant to Rule 144 under the Securities Act is 941,807 shares. The number of shares of our common stock which are subject to issuance upon conversion of the series A or series B preferred stock is 4,427,563 shares. The number of shares of our common stock which is subject to issuance upon the exercise of any outstanding warrants is 32,884 shares. On January 16, 2001 we filed with the Secretary of State of Nevada to increase voting privileges of the Series B preferred shares from 1 vote per share to 20 votes per share. The following table sets forth the range of high and low bid prices of our common stock for the fiscal quarters of 1998, 1999 and 2000, and for the fiscal quarters ended March 31 and June 30, 2001. The quotations represent prices between dealers in securities, do not include retail mark-ups, markdowns or commissions and do not necessarily represent actual transactions. 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. HIGH LOW HIGH LOW HIGH LOW HIGH LOW 1998 5.00 2.38 2.88 .34 1.19 .38 .63 .16 1999 1.06 .25 3.75 .56 1.19 .38 .75 .38 2000 1.25 .38 1.03 .42 .75 .36 1.55 .31 2001 1.25 .70 2.70 1.25 N/A N/A N/A N/A
-26- We have not paid common stock dividends. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES We issued the following unregistered securities during the three-year period ended June 30, 2001. In April 1999, we entered into two separate exchange agreements with Best Worth Agents, Ltd., a British Virgin Islands corporation, to acquire all of the issued and outstanding preferred shares of Creative Gems and Jewelry Co., Ltd. and Advance Gems and Jewelry Co., Ltd., both Thai corporations. According to the terms of the exchange agreements, Topaz acquired 99.7% of the voting and dividend participation rights in each Thai company from Best Worth in consideration for which Topaz issued to Best Worth all shares of series A convertible voting and participating preferred stock. The terms of the preferred stock provide Best Worth with the right to one vote for each share of preferred stock on all matters voted on by holders of our common stock, as well as the right to receive dividends paid to preferred shareholders by us. We issued shares of our preferred stock to Best Worth in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. We believe that the exemption afforded by Section 4(2) of the Securities Act is applicable to the Best Worth Transaction because it was a sale of securities by an issuer not involving a public offering, and the shares were offered to a single accredited investor in an offering not involving a general solicitation. In September 2000, we issued warrants to purchase an aggregate of 32,884 shares of common stock to three consultants as compensation for services rendered to us. The names of the persons to whom these securities were issued and the number of shares of our common stock issuable to each person upon exercise of the warrants by such person are as follows: NAME COMMON SHARES ISSUABLE Timothy Matula 4,933 Terrance C. Cuff 12,179 Herbert H. Wax 15,772 We issued these warrants to each consultant in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933. We believe that the exemption afforded by Section 4(2) of the Securities Act is applicable to this placement because it was a sale of securities by an issuer not involving a public offering, and the shares were offered to three accredited or sophisticated investors in an offering not involving a general solicitation. On May 5, 1999, we issued 210,000 shares of common stock each to Jim Fain and Sakon, Ltd. In consideration for services rendered in connection with the share exchange between Topaz Group and Best Worth Agents, Ltd. Both sales were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. ITEM 11. DESCRIPTION OF SECURITIES The authorized capital stock of the Topaz Group consists of one hundred million shares of common stock, 1,324,886 of which were outstanding as of June 25, 2001, and held of record by approximately 562 shareholders, and fifty million shares of preferred stock. Of the preferred stock, we have authorized 26,000,000 shares of series A and 10,000,000 shares of series B, of which 3,721,050 and 1,006,513 shares, respectively, were issued and outstanding as of June 25, 2001. The following summaries of certain provisions of the common stock and certain of the rights and privileges of the preferred stock do not purport to be complete and are subject to, and qualified in their entirety by, the provisions of our restated articles of incorporation, bylaws, and the certification of designation of series A preferred stock and series B preferred stock, each of which is included as an exhibit to this registration statement, as well as and by the provisions of applicable law. -27- COMMON STOCK The holders of our common stock: are entitled to one vote per share on all matters to be voted on by stockholders generally, including the election of directors; do not have cumulative voting rights; do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights applicable thereto; are entitled to dividends and other distributions as may be declared from time to time by the board of directors out of any funds legally available for that purpose; and, will, upon the liquidation, dissolution or winding up of the Topaz Group, share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all of the our liabilities and the payment of the liquidation preference of any outstanding preferred stock, if such stock is at any time authorized, issued and outstanding. All shares of our common stock now outstanding are fully paid and non-assessable. Reference is made to the our articles of incorporation, by-laws and the applicable statutes of the State of Nevada for a more complete description of the rights and liabilities of the holders of our common stock. SERIES A AND SERIES B PREFERRED STOCK Our board of directors has authorized the issuance of two series of preferred stock, designated as series A preferred stock, consisting of 26,000,000 shares, par value $.001 per share and series B preferred stock, consisting of 10,000,000 shares, par value $.001 per share. A certificate of designation filed with the secretary of state of Nevada governs the terms and conditions of the series A and series B preferred stock. The following is a brief description of key terms of the preferred stock. DIVIDENDS The holders of shares of the preferred stock shall be entitled to receive, when, as and if declared by the board of directors, out of our assets legally available therefore, non-cumulative dividends on a pro rata basis with all other holders of preferred stock (as adjusted for any stock dividends, combinations or splits with respect to such stock). Each fractional share of preferred stock outstanding shall be entitled to a ratably proportionate amount of any dividends or other distributions made with respect to each outstanding share of preferred stock, and all such distributions shall be payable in the same manner and at the same time as distributions on each outstanding share of preferred stock. PREFERENCES ON LIQUIDATION. In the event of any dissolution, liquidation or winding up of the Topaz Group, whether voluntary or involuntary, the holders of preferred stock shall be entitled to receive out of our assets, for each share of preferred stock then outstanding, before any payment or distribution shall be made in respect of our common stock, cash in an amount equal to (i) $0.001 (as adjusted for any stock dividend, split, combination, recapitalization or similar transaction with respect to the capital stock of the Topaz Group), plus an amount equal to all accrued or declared but unpaid dividends thereon to the date of such payment, and (ii) the pro rata share of any proceeds, treating the preferred stock as if converted into shares of common stock. If upon our liquidation, dissolution, or winding up, our assets available for distribution to our stockholders shall be insufficient to pay the holders of the preferred stock the full liquidation preference, the holders of the preferred stock shall all share in any distribution of assets, each getting a relative share of the distribution based on their relative holdings of the preferred stock. CONVERSION RIGHTS Each share of series A preferred stock shall be convertible, at the option of the holder thereof and without the payment of additional consideration by the holder thereof, at any time, into one share of common stock. -28- FORCED CONVERSION We may force a conversion of the series A preferred stock if we sell our common stock in a public offering at a price to the public of at least $4.00 per share and in which we receive more than $5,000,000 in gross proceeds or if we sell all or substantially all of our assets or capital stock to another entity. The series B preferred stock will automatically convert into common stock on a one-to-one basis immediately prior to either the sale of all of our capital stock to a third party or the merger of the Topaz Group into another surviving company. VOTING RIGHTS Except as otherwise required by applicable law, the holders of preferred stock shall be entitled to vote on all matters on which the holders of common stock shall be entitled to vote, in the same manner and with the same effect as the holders of common stock, voting together with the holders of common stock as a single class. For this purpose, the holders of preferred stock shall be given notice of any meeting of stockholders as to which the holders of common stock are given notice in accordance with our bylaws. As to any matter on which the holders of preferred stock shall be entitled to vote, each holder of series A preferred stock shall have a number of votes per share equal to the number of shares of common stock into which such share of preferred stock is convertible. As to any matter on which the holders of preferred stock shall be entitled to vote, each holder of series B preferred stock shall have a number of votes per share of series B preferred stock equal to twenty (20) times the number of shares of common stock into which such share of series B preferred stock is convertible. So long as any shares of preferred stock are outstanding, we will not (a) alter or change any of the powers preferences, privileges, or rights of the series A or series B preferred stock; or (b) amend the provisions of the certificate of designation changing the seniority, liquidation, conversion or other rights of the series A or series B preferred stock, without first obtaining the approval of the holders of at least a majority of the outstanding shares of series A or series B preferred stock, as applicable. ANTI-TAKEOVER EFFECTS The following provisions in our articles of incorporation may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. o Authorized But Unissued Shares. The authorized but unissued shares of common stock are available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock could render more difficult or discourage an attempt to gain control of us by means of a proxy contest, tender offer, merger or otherwise. The following provisions in the certificate of designation of our series A preferred stock and series B preferred stock provide for mandatory conversion of our series A and series B preferred stock upon the occurrence of certain events in order to prevent a change of control. -29- o Mandatory Conversion of Series A Preferred Stock. The series A preferred stock will be automatically converted into common stock: (i) if we sell our common stock in a public offering at a price to the public of at least $4.00 per share and in which we receive more than $5,000,000 in gross proceeds; or (ii) if we sell all or substantially all of our assets or capital stock to another entity. o Mandatory Conversion of Series B Preferred Stock. The series B preferred stock will be automatically converted into common stock on a one-to-one basis immediately prior to either the sale of all of our capital stock to a third party or the merger of our company into another surviving company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Transfer Online, Inc. and is located at 227 SW Pine Street, Suite 300, Portland Oregon 97204. ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS LIMITATION ON DIRECTOR'S LIABILITY Under Nevada Revised Statutes Section 78.7502 and 78.751, our articles of incorporation and by-laws provide us with the power to indemnify any of our directors, officers, employees or agents. The director, officer, employ or agent must have conducted himself in good faith and reasonably believe that his conduct was in, or not opposed to our best interests. In a criminal action the director, officer, employee or agent must not have had a reasonable cause to believe his conduct was unlawful. Advances for expenses may be made if the director affirms in writing that he believes he has met the standards and that he will personally repay the expense if it is determined he did not meet the standards. We will not indemnify a director or officer adjudged liable due to his negligence or willful misconduct toward us, adjudged liable to us, or if he improperly received personal benefit. Indemnification in a derivative action is limited to reasonable expenses incurred in connection with the proceeding. We have agreed to indemnify each of our directors and certain officers against certain liabilities, including liabilities under the Securities Act of 1933. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the provisions described above, or otherwise, we have been advised that in the opinion of the United States Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered for resale, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. ITEM 13. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS None -30- CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS C O N T E N T S Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS F-4 CONSOLIDATED STATEMENTS OF EARNINGS F-5 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 Report of Independent Certified Public Accountants -------------------------------------------------- Board of Directors The Topaz Group, Inc. We have audited the accompanying consolidated balance sheets of The Topaz Group, Inc. and Subsidiaries as of December 31, 1999 and 2000 and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Topaz Group, Inc. and Subsidiaries as of December 31, 1999 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ GRANT THORNTON LLP Seattle, Washington March 14, 2001 (except for note P as to which the date is December 12, 2001) The Topaz Group, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (U.S. Dollars)
ASSETS December 31, ----------------------------------- September 30, 1999 2000 2001 -------------- ------------- ------------- CURRENT ASSETS (unaudited) Cash and cash equivalents $ 574,439 $ 321,734 $ 284,497 Accounts receivable, net of allowance of $606,384, $923,474, and $781,012 2,089,413 3,299,161 2,486,353 Receivables from related parties 905,369 19,456 -- Inventories 18,488,948 20,626,502 24,229,013 Prepaid expenses and deposits 230,660 196,376 787,447 ----------- ----------- ----------- Total current assets 22,288,829 24,463,229 27,787,310 PROPERTY AND EQUIPMENT - NET 2,030,502 2,127,733 2,206,324 OTHER ASSETS 54,828 31,876 183,265 ----------- ----------- ----------- Total assets $24,374,159 $26,622,838 $30,176,899 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ -- $ 775,162 $ 1,467,456 Accounts payable 5,000,979 4,401,675 3,111,886 Accrued liabilities 301,711 473,177 1,603,558 Payables to related party 616,269 871,298 1,091,663 Notes payable 1,736,947 -- -- ----------- ----------- ----------- Total current liabilities 7,655,906 6,521,312 7,274,563 REDEEMABLE ORDINARY SHARES 5,576,697 4,823,937 4,700,568 COMMITMENTS -- -- -- STOCKHOLDERS' EQUITY Class A preferred stock, liquidation preference of $9,252,879, $10,153,954 and $11,627,229 5,127,654 4,827,477 4,139,971 Class B preferred stock, liquidation preference of $0, $2,541,646 and $2,910,423 -- 1,007 1,007 Common stock 763 1,025 1,625 Additional paid in capital 43,052 402,474 1,089,380 Retained earnings 5,970,087 10,045,606 12,969,785 ----------- ----------- ----------- 11,141,556 15,277,589 18,201,768 ----------- ----------- ----------- Total liabilities and stockholders' equity $24,374,159 $26,622,838 $30,176,899 =========== =========== ===========
The accompanying notes are an integral part of these statements. F-1 The Topaz Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS (U.S. Dollars)
1998 1999 2000 ---------------- ------------ ------------ Sales $ 18,886,737 $ 19,881,283 $ 32,483,043 Cost of goods sold 10,976,881 11,025,824 23,488,062 ------------ ------------ ------------ Gross profit 7,909,856 8,855,459 8,994,981 Selling, general and administrative expenses 4,154,545 4,346,100 4,136,931 ------------ ------------ ------------ Earnings from operations 3,755,311 4,509,359 4,858,050 Other income (expense) Exchange rate gain (loss) (3,722,629) 320,075 86,164 Interest expense (235,932) (79,399) (101,256) Interest income 153,434 18,224 4,114 Gain (loss) on remeasurement 4,580,806 1,455,855 (831,288) Other, net 108,620 111,479 60,249 ------------ ------------ ------------ 884,299 1,826,234 (782,017) ------------ ------------ ------------ Earnings before extraordinary item 4,639,610 6,335,593 4,076,033 Extraordinary item - gain on debt restructuring -- 803,589 -- ------------ ------------ ------------ Net earnings 4,639,610 7,139,182 4,076,033 Preferred stock dividends (12,270,000) (2,734,610) -- ------------ ------------ ------------ Net earnings (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (7,630,390) $ 4,404,572 $ 4,076,033 ============ ============ ============ Earnings (loss) per share available to common stockholders before extraordinary item: Basic $ (10.00) $ 4.72 $ 4.91 ============ ============ ============ Diluted $ (10.00) $ 0.66 $ 0.72 ============ ============ ============ Net earnings (loss) per share available to common stockholders: Basic $ (10.00) $ 5.77 $ 4.91 ============ ============ ============ Diluted $ (10.00) $ 0.80 $ 0.72 ============ ============ ============ Nine months ended September 30, ---------------------------------------------- 2000 2001 -------------------- --------------------- (unaudited) (unaudited) Sales $ 18,255,605 $ 15,012,234 Cost of goods sold 12,933,902 10,569,007 ------------ ------------ Gross profit 5,321,703 4,443,227 Selling, general and administrative expenses 3,139,574 2,795,133 ------------ ------------ Earnings from operations 2,182,129 1,648,094 Other income (expense) Exchange rate gain (loss) 248,718 (35,633) Interest expense (63,378) (54,817) Interest income 783 712 Gain (loss) on remeasurement (335,779) 1,319,063 Other, net 45,995 46,759 ------------ ------------ (103,660) 1,276,085 ------------ ------------ Earnings before extraordinary item 2,078,469 2,924,179 Extraordinary item - gain on debt restructuring -- -- ------------ ------------ Net earnings 2,078,469 2,924,179 Preferred stock dividends -- -- ------------ ------------ Net earnings (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 2,078,469 $ 2,924,179 ============ ============ Earnings (loss) per share available to common stockholders before extraordinary item: Basic $ 2.72 $ 2.41 ============ ============ Diluted $ 0.38 $ 0.48 ============ ============ Net earnings (loss) per share available to common stockholders: Basic $ 2.72 $ 2.41 ============ ============ Diluted $ 0.38 $ 0.48 ============ ============
The accompanying notes are an integral part of these statements. F-2 The Topaz Group, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (U.S. Dollars) Years ended December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2001 (unaudited)
Thai Class A Class B Subscriptions Preferred Stock Preferred Stock Preferred Stock Receivable --------------- --------------- --------------- ---------- Balance at January 1, 1998 $ -- $ -- $ -- $(2,118,651) Subscriptions received -- -- -- (1,883,729) Dividends -- -- -- -- Issuance of Class B Preferred and Ordinary shares 2,404,920 -- -- -- totaling 9,800,000 and 200,000, respectively Net earnings for the year -- -- -- -- ----------- ----------- ------ ----------- Balance at December 31, 1998 2,404,920 -- -- (4,002,380) Issuance of Thai Preferred and Ordinary shares totaling 9,800,000 and 200,000, respectively, on February 19, 1999 2,593,080 -- -- -- Issuance of Thai Preferred and Ordinary shares totaling 490,000 and 510,000, respectively on March 1, 1999 129,654 -- -- -- Payment of subscription receivable -- -- -- 4,002,380 Share exchange agreement on April 30, 1999 (5,127,654) 5,127,654 -- -- Warrants issued for services -- -- -- -- Dividends -- -- -- -- Net earnings for the year -- -- -- -- ----------- ----------- ------ ----------- Balance at December 31, 1999 -- 5,127,654 -- -- Conversion of preferred stock into common -- (299,684) -- -- Issuance of additional preferred shares under exchange agreement -- 514 -- -- Re-designation of preferred shares -- (1,007) 1,007 -- Warrants issued for services -- -- -- -- Net earnings for the year -- -- -- -- ----------- ----------- ------ ----------- Balance at December 31, 2000 -- 4,827,477 1,007 -- Conversion of preferred stock into common -- (687,506) -- -- Net earnings for nine months ended -- -- -- -- September 30, 2001 ----------- ----------- ------ ----------- Balance at September 30, 2001 $ -- $ 4,139,971 $1,007 $ -- =========== =========== ====== ===========
Ordinary Common Additional Retained Shares Stock Paid-In Capital Earnings Total ------ ----- --------------- -------- ----- Balance at January 1, 1998 $ 7,642,284 $ -- $ -- $ 9,195,905 $ 14,719,538 Subscriptions received -- -- -- -- (1,883,729) Dividends -- -- -- (12,270,000) (12,270,000) Issuance of Class B Preferred and Ordinary shares 49,080 -- -- -- 2,454,000 totaling 9,800,000 and 200,000, respectively Net earnings for the year -- -- -- 4,639,610 4,639,610 ----------- ------ ---------- ------------ ------------ Balance at December 31, 1998 7,691,364 -- -- 1,565,515 7,659,419 Issuance of Thai Preferred and Ordinary shares totaling 9,800,000 and 200,000, respectively, on February 19, 1999 52,840 -- -- -- 2,645,920 Issuance of Thai Preferred and Ordinary shares totaling 490,000 and 510,000, respectively on March 1, 1999 134,742 -- -- -- 264,396 Payment of subscription receivable -- -- -- -- 4,002,380 Share exchange agreement on May 1, 1999 (7,878,946) 763 3,052 -- (7,875,131) Warrants issued for services -- -- 40,000 -- 40,000 Dividends -- -- -- (2,734,610) (2,734,610) Net earnings for the year -- -- -- 7,139,182 7,139,182 ----------- ------ ---------- ------------ ------------ Balance at December 31, 1999 -- 763 43,052 5,970,087 11,141,556 Conversion of preferred stock into common -- 262 299,422 -- -- Issuance of additional preferred shares under exchange agreement -- -- -- (514) -- Re-designation of preferred shares -- -- -- -- -- Warrants issued for services -- -- 60,000 -- 60,000 Net earnings for the year -- -- -- 4,076,033 4,076,033 ----------- ------ ---------- ------------ ------------ Balance at December 31, 2000 -- 1,025 402,474 10,045,606 15,277,589 Conversion of preferred stock into common -- 600 686,906 -- -- Net earnings for nine months ended -- -- -- 2,924,179 2,924,179 September 30, 2001 ----------- ------ ---------- ------------ ------------ Balance at September 30, 2001 $ -- $1,625 $1,089,380 $ 12,969,785 $ 18,201,768 =========== ====== ========== ============ ============
The accompanying notes are an integral part of this statement. F-3 The Topaz Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. Dollars)
Year ended December 31, ----------------------- 1998 1999 2000 ---- ---- ---- Increase (Decrease) in Cash and Cash Equivalents Cash flows from operating activities Net earnings (loss) $ 4,639,610 $ 7,139,182 $ 4,076,033 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 163,685 161,605 145,307 Remeasurement of redeemable ordinary shares -- (2,302,249) (752,760) Warrants granted for services -- 40,000 60,000 Changes in assets and liabilities: Receivables (508,830) 1,015,271 (323,835) Inventories (5,454,770) (8,483,736) (2,137,554) Prepaid expenses and deposits/other assets 2,378 730,997 57,236 Payables 1,608,092 294,217 (476,890) Accrued liabilities (46,803) 5,886 304,081 ----------- ----------- ----------- Net cash provided by (used in) operating activities 403,362 (1,398,827) 951,618 Cash flows from investing activities Purchases of property and equipment -- (146,931) (242,538) ----------- ----------- ----------- Net cash used in investing activities -- (146,931) (242,538) Cash flows from financing activities Payment on notes payable, net 516,262 (493,890) (1,736,947) Borrowings (payments) on line of credit, net -- -- 775,162 Proceeds from issuance of share capital 2,454,000 6,916,511 -- Subscriptions received (1,883,729) -- -- Dividends paid -- (6,085,321) -- ----------- ----------- ----------- Net cash provided by (used in) financing activities 1,086,533 337,300 (961,785) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,489,895 (1,208,458) (252,705) Cash and cash equivalents at the beginning of period 293,002 1,782,897 574,439 ----------- ----------- ----------- Cash and cash equivalents at the end of period $ 1,782,897 $ 574,439 $ 321,734 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period Interest $ -- $ 79,279 $ 93,576 =========== =========== =========== Noncash Financing Activities: Settlement of related party receivable in lieu of payment of declared and accrued dividends $ 3,932,811 $ 4,986,478 $ -- =========== =========== ===========
Nine months ended September 30, ---------------------------------------------------- 2000 2001 ----------------------- ----------------------- (unaudited) (unaudited) Cash flows from operating activities Net earnings (loss) $ 2,078,469 $ 2,924,179 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Depreciation and amortization 84,591 111,014 Remeasurement of redeemable ordinary shares (639,846) (123,369) Warrants granted for services 60,000 -- Changes in assets and liabilities: Receivables (934,204) 832,264 Inventories (3,842,000) (3,602,511) Prepaid expenses and deposits/other assets (174,964) (742,460) Payables (594,744) (1,833,718) Accrued liabilities 4,134,846 1,894,675 ----------- ----------- Net cash provided by (used in) operating activities 172,148 (539,926) Cash flows from investing activities Purchases of property and equipment (196,721) (189,605) ----------- ----------- Net cash used in investing activities (196,721) (189,605) Cash flows from financing activities Payment on notes payable, net (1,736,947) -- Borrowings (payments) on line of credit, net 1,861,580 692,294 Proceeds from issuance of share capital -- -- Subscriptions received -- -- Dividends paid -- -- ----------- ----------- Net cash provided by (used in) financing activities 124,633 692,294 ----------- ----------- Net increase (decrease) in cash and cash equivalents 100,060 (37,237) Cash and cash equivalents at the beginning of period 574,439 321,734 ----------- ----------- Cash and cash equivalents at the end of period $ 674,499 $ 284,497 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period Interest $ 59,508 $ 54,817 =========== =========== Noncash Financing Activities: Settlement of related party receivable in lieu of payment of declared and accrued dividends $ -- $ -- =========== ===========
The accompanying notes are an integral part of these statements F-4 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Topaz Group, Inc. (the Company) is a Nevada corporation which, through its subsidiaries, is involved in the manufacture and sale of jewelry and the polishing, cutting, and selling of precious and semi-precious gemstones, principally topaz gemstones. Sales are primarily to companies within the United States of America. A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows. 1. Basis of Presentation --------------------- The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned Thailand subsidiaries, Creative Gems & Jewelry Limited (Creative), Advance Gems & Jewelry Limited (Advance) and Advance Gems Manufacturing Co., Ltd (Advance Manufacturing) (collectively, the Subsidiaries). All significant intercompany accounts and transactions have been eliminated. Best Worth Agents Limited (Best Worth) owned 100% of the issued and outstanding preferred stock of Creative and Advance, which constituted 99.7% of the voting and dividend rights of Creative and Advance. On April 30, 1999 Best Worth entered into a share exchange agreement that was consummated on September 1, 1999. On September 1, 1999, Best Worth transferred 100% of its preferred shares in Advance and Creative in exchange for 100% (22,375,000 shares) of the voting convertible preferred stock of Chancellor Corporation (Chancellor), a non operating public shell company. Chancellor subsequently changed its name to The Topaz Group, Inc. The transaction resulted in the Company becoming the accounting acquirer, whereby Creative and Advance become subsidiaries of the Company and the historical financial statements of Creative and Advance become those of The Topaz Group, Inc. and Subsidiaries. Ordinary shares of Creative and Advance, representing 0.3% voting rights, remain outstanding to individual stockholders of those companies (see note J). On September 29, 2000, the Company issued an additional 3,084,000 shares of Class A Preferred Stock to Best Worth as called for under the terms of the original exchange agreement. During August 2000, the Company formed Advanced Gems Manufacturing Co., Ltd. The wholly-owned subsidiary of Advance was formed for Thailand statutory tax purposes. 2. Revenue Recognition ------------------- Revenue is recognized when goods are shipped to customers. 3. Cash and Cash Equivalent ------------------------ The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company maintains its cash accounts in several Thai financial institutions. The Company has not experienced any losses in connection with its deposits. F-5 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 4. Inventories ----------- Inventories are stated at the lower of cost or market. Cost is determined using a moving average method. 5. Property and Equipment ---------------------- Property and equipment are stated at cost. Depreciation and amortization is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, which range from five to twenty years. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. 6. Advertising Expenses -------------------- The Company expenses the cost of advertising as it occurs. Advertising expenses for the years ended December 31, 1998, 1999 and 2000 totaled approximately $114,000, $93,000 and $341,000, respectively. Advertising expenses for the nine months ended September 30, 2000 and 2001, were $229,894 and $234,056, respectively. 7. Functional Currency and Remeasurement. -------------------------------------- The Company's Thai subsidiaries maintain their books and records in Thai Baht. However, their functional currency is the US dollar. Monetary assets and liabilities and related income and expense items are remeasured using current rates. Certain nonmonetary assets (notably property and equipment) are remeasured at historical rates. Other nonmonetary balance sheet items and related revenues, expenses, gains and losses are remeasured using average exchange rates. Gains or losses on remeasurement to U.S. dollars from Thai Baht are included in the consolidated statements of earnings. 8. Segment Information ------------------- The Company has adopted Statement of Financial Accounting Standard No. 131, Disclosures About Segments of an Enterprise and Related Information, (SFAS 131) which requires companies to present financial information on individual segments. The Company currently operates in one segment, and therefore, the adoption had no effect on the Company's financial statements except for the inclusion of geographic areas information. 9. Earnings Per Share ------------------ Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding preferred shares using the "if-converted" method, and outstanding stock warrants using the "treasury stock" method. F-6 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The components of basic and diluted earnings per share were as follows:
Year ended December 31, Nine months ended September 30, ------------------------------------------- -------------------------------- 1998 1999 2000 2000 2001 ----------- ---------- --------- --------- ----------- BASIC Net earnings (loss) before extraordinary item $ 4,639,610 $ 6,335,593 $ 4,076,033 $ 2,078,469 $2,924,179 Preferred stock dividends (12,270,000) (2,734,610) -- -- -- ------------ ----------- --------------- -------------- ---------- Net earnings (loss) available to common stockholders before extraordinary item $ (7,630,390) $ 3,600,983 $ 4,076,033 $ 2,078,469 $2,924,179 Extraordinary item -- 803,589 -- -- -- ------------ ----------- --------------- -------------- ---------- Net earnings (loss) available to common stockholders after extraordinary item $ (7,630,390) $ 4,404,572 $ 4,076,033 $ 2,078,469 $2,924,179 ============ =========== =============== ============== ========== Weighted average outstanding shares of common stock 763,000 763,000 829,727 763,959 1,213,489 Net earnings (loss) per share available to common stockholders before extraordinary item $ (10.00) $ 4.72 $ 4.91 $ 2.72 $ 2.41 ============ =========== =============== ============== ========== Net earnings (loss) per share available to common stockholders $ (10.00) $ 5.77 $ 4.91 $ 2.72 $ 2.41 ============ =========== =============== ============== ========== DILUTED Net earnings (loss) available to common stockholders before extraordinary item $ (7,630,390) $ 3,600,983 $ 4,076,033 $ 2,078,469 $2,924,179 Impact of assumed conversion of preferred stock -- 2,734,610 -- -- -- ------------ ----------- --------------- -------------- ---------- Net earnings (loss) available to common stockholders before extraordinary item (including effect of assumed conversion) $ (7,630,390) $ 6,335,593 $ 4,076,033 $ 2,078,469 $2,924,179 Extraordinary item -- 803,589 -- -- -- ------------ ----------- --------------- -------------- ---------- Net earnings (loss) available to common stockholders after extraordinary item (including effect of assumed conversion) $ (7,630,390) $ 7,139,182 $ 4,076,033 $ 2,078,469 $2,924,179 ============ =========== =============== ============== ========== Weighted average outstanding shares of common stock 763,000 763,000 829,727 763,959 1,213,489 Dilutive effect of preferred shares (1) -- 4,735,680 4,809,692 4,736,764 4,838,960 ------------ ----------- --------------- -------------- ---------- Common stock and potentially issuable common stock 763,000 5,498,680 5,639,419 5,500,723 6,052,449 Net earnings (loss) per share before extraordinary item $ (10.00) $ 1.15 $ 0.72 $ 0.38 $ 0.48 ============ =========== =============== ============== ========== Net earnings (loss) per share $ (10.00) $ 1.30 $ 0.72 $ 0.38 $ 0.48 ============ =========== =============== ============== ==========
(1) The dilutive effect of warrants outstanding during each of the presented periods was immaterial to these computations. F-7 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 10. Fair Value of Financial Instruments ----------------------------------- In assessing the fair value of financial instruments, the Company has used a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at that time. For all financial instruments, including cash, accounts payable, accrued expenses, and notes payable, it was estimated that the carrying amount approximated fair value for these financial instruments because of their short maturities. 11. New Authoritative Accounting Pronouncements ------------------------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133). SFAS 133 (as amended by SFAS 138 in June 2000) establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. In July 1999, the Financial Account Standards Board issued SFAS No. 137 (SFAS 137), Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of SFAS 133. SFAS 137 deferred the effective date of SFAS 133 until the first quarter of fiscal years beginning after June 15, 2000. The Company does not currently hold derivative instruments or engage in hedging activities. The Company expects the adoption of SFAS 133, SFAS 137 and SFAS 138 will not have a material impact on its financial statements and related disclosures. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying accounting principles generally accepted in the United States to revenue recognition in financial statements and is effective in the fourth quarter of all fiscal years beginning after December 15, 1999. The Company's accounting policies are consistent with the requirements of SAB 101, so the implementation of SAB 101 did not have an impact on the Company's operating results. In April 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 is effective for transactions occurring after July 1, 2000. The application of FIN 44 did not have an impact on the Company's consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. SFAS 141 applies to all business combinations initiated after June 30, 2001. The Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The adoption of SFAS 141 did not have an impact on the Company's consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001 with earlier application permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim financial statements have not previously been issued. The statement is required to be applied at the beginning of the entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements to that date. The initial application of the SFAS 142 will have no impact on the Company's consolidated financial statements. F-8 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 12. Use of Estimates ---------------- In preparing the Company's consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 13. Interim Financial Information ----------------------------- The interim consolidated financial statements of the Company as of September 30, 2001 and for the nine months ended September 30, 2000 and 2001, included herein, have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC on a basis consistent with the audited consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations relating to the interim financial statements. In the opinion of the management, the accompanying interim consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position, results of the Company's operations and its cash flows in accordance with generally accepted accounting principles. The accompanying unaudited interim consolidated financial statements are not necessarily indicative of full year results. NOTE B - STOCK SPLITS AND OTHER CHANGES TO COMPOSITION OF EQUITY On September 29, 2000, the Company authorized a "one for five" reverse split of its voting common stock. The split did not affect stock's par value and the number of authorized common stock shares. All references to number of shares in the financial statements have been adjusted to reflect this reverse stock split on a retroactive basis. On January 22, 2001, the Company amended its Articles of Incorporation to re-designate 50,000,000 authorized preferred shares to create a new class of preferred stock, Series B Preferred. On January 25, 2001, the Company announced an exchange of 20,130,250 Series A preferred shares (representing five of each six shares outstanding per each Series A holder) into 1,006,513 shares of the Series B preferred stock. The accompanying financial statements were adjusted to retroactively reflect January 25, 2001 recapitalization. NOTE C - INVENTORIES Inventories consist of the following: December 31, September 30, -------------------------- --------------------- 1999 2000 2001 ---- ------ ------- Raw materials $ 2,271,893 $ 2,860,174 $ 3,466,768 Finished stones 14,648,674 17,087,679 20,158,266 Finished jewelry 1,568,381 678,649 603,979 ----------- ----------- ----------- $18,488,948 $20,626,502 $24,229,013 =========== =========== =========== F-9 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE D - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, September 30, -------------------------- ------------------- 1999 2000 2001 ---------- ---------- ----------- Land and land improvements $1,350,218 $1,352,813 $1,352,823 Buildings and improvements 362,709 381,014 375,743 Machinery and equipment 965,294 1,125,657 1,242,083 Office furniture and equipment 400,904 441,712 520,016 Vehicles 262,049 283,011 283,147 ---------- ---------- ---------- ---------- 3,341,174 3,584,207 3,773,812 Less accumulated depreciation and amortization 1,310,672 1,456,474 1,567,488 ---------- ---------- ---------- ---------- $2,030,502 $2,127,733 $2,206,324 ========== ========== ==========
NOTE E - RELATED PARTY RECEIVABLES AND PAYABLES The related party receivable as of December 31, 1999, consists principally of amounts advanced to a related company and was collateralized by precious and semi-precious gemstones. The related company has a common director with Creative. This balance was settled in 2000 when the Company acquired the collateral. Payables to related parties consist of the following:
December 31, ------------ September 30, 1999 2000 2001 ----------------------- ---------------------- --------------------------- Due to directors $ 345,310 $ 543,929 $ 784,856 Accrued rent 194,754 327,369 306,701 Other 76,205 - 106 ----------------------- ---------------------- --------------------------- $ 616,269 $ 871,298 $ 1,091,663 ======================= ====================== ===========================
Related party accrued rent is owed to companies that are controlled by the Company's president. NOTE F - LINES OF CREDIT As of September 30, 2001, the Company had two line of credit arrangements with two Thai financial institutions entered into in October 1999 (1999 Line) and April 2000 (2000 Line). Both lines are renewable automatically on a yearly basis and are subject to the banks' periodic review resulting in adjustment of the Company's credit limit. The 1999 line bears interest at a rate equal to LIBOR plus two percent (8.208% and 8.136% as of December 31, 2000 and 1999, respectively), is personally guaranteed by two of the Company's directors and collateralized by various real estate properties belonging to the Company and one of the directors. As of December 31, 2000 and September 30, 2001 approximately $836,000 and $116,139, respectively, was available for borrowing under the 1999 Line. F-10 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE F - LINES OF CREDIT - Continued The interest rate on the 2000 line is the same as on the 1999 line. It is also guaranteed by two of the Company's directors and secured by a deed on a real estate property owned by a related party. As of December 31, 2000 and September 30, 2001, approximately $493,000 and $574,379, respectively, was available for borrowing under the 2000 Line. As of December 31, 1999 and 2000, and September 30, 2001, outstanding balance under both lines of credit was $0, $775,162 and $1,467,456, respectively. NOTE G - NOTES PAYABLE Notes payable consist of the following:
December 31, ------------ September 30, 1999 2000 2001 ---------------------- --------------------- ---------------------- Debt restructuring $ 685,893 $ - $ - Notes payable - related party 989,402 - - Note payable to bank 61,652 - - ---------------------- --------------------- -------------------- $ 1,736,947 $ - $ - ====================== ===================== ====================
Notes payable to related party were due to directors, without interest or fixed terms of repayment and were repaid during the year ended December 31, 2000. NOTE H - EXTRAORDINARY ITEM On July 30, 1999, Advance completed a debt restructuring with an investor that purchased the rights to the debt from a failed financial institution. The debt restructuring occurred as a result of the failure of the financial institution and not Advance's inability to service the debt. The debt restructuring was accomplished through the reduction of the face amount of the debt and accrued interest. The result was a gain on restructuring totaling approximately $804,000, which is reflected as an extraordinary item in the Consolidated Statements of Earnings. The remaining principal and interest of $610,470 was paid in full during January 2000. The debt restructuring was accounted for in accordance with Statement of Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. The net effect of the gain on the debt restructuring on basic and diluted earnings per share for the years ended December 31, 1999 was $1.06 and $0.15, respectively. NOTE I - STOCKHOLDERS' EQUITY The Company has the following types of equity securities authorized and outstanding: Preferred stock - 50,000,000 shares authorized as of December 31, 1999 and 2000, and June 30, 2001. Series A Preferred (see note B) $0.001 par value - 26,000,000 shares authorized, 22,375,000, 4,021,050, and 3,421,050 shares issued and outstanding as of December 31, 1999 and 2000, and September 30, 2001. Each share of preferred F-11 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE I - STOCKHOLDERS' EQUITY - Continued stock has liquidation preferences, and each preferred shareholder is entitled to one vote per share. General conversion provisions entitle each preferred share to be converted into one common stock share at the election of the holder. At any time after one year from the date of issuance, the preferred stock is subject to mandatory conversion at the rate of one share of preferred stock for one share of common stock, upon the undertaking by the Company of a public offering of its securities pursuant to the Securities Act of 1933, as amended. Holders of preferred stock are entitled to receive dividends from funds legally available, concurrent with the declaration of dividends on the Company's common stock. Series B Preferred (see note B) $0.001 par value - 10,000,000 shares authorized, 1,006,513 shares issued and outstanding as of December 31, 2000 and September 30, 2001. Series B preferred has the same rights, preferences, privileges and priority as Series A, except for voting rights which are twenty votes per each Series B preferred share. Common stock - $0.001 par value - 100,000,000 authorized; 763,000, 1,024,886, and 1,624,886 shares issued and outstanding as of December 31, 1999 and 2000, and September 30, 2001, respectively. The voting rights are one vote per share. Common stock warrants - On September 1, 1999, the Company authorized common stock warrants to be granted to three consultants in connection with future services. The warrants were granted monthly from September 1999 through June 2000. The number of the warrants issued in each tranche was determined as the fair value of the services provided (set at $10,000 total for each month) divided by the fair value of the underlying stock as determined on the date of each grant. The warrants' strike price on each grant date was equal to the fair value of the underlying stock on the date of each grant but not less than $2.50 per share. As of December 31, 1999 and 2000, the Company granted 14,759 and 32,884 warrants, respectively, resulting in $40,000 and $60,000 in additional expenses for the years ended December 31, 1999 and 2000, respectively. The warrants expire on July 27, 2005 and have strike prices varying from $2.50 to $5.16. Stock options - On May 15, 2001, the Board of Directors approved the 2001 Stock Option Plan and approved 1,000,000 common stock options to be granted to employees and directors of the consolidated entity. No options have been granted. A roll forward of shares issued and outstanding is as follows:
Class A Class B Preferred Preferred Common Stock Stock Stock ---------------------- -------------------- ----------------- Shares issued as part of April 30, 1999 exchange agreement 22,375,000 - 763,000 (1) ---------------------- -------------------- ----------------- Balance at December 31, 1999 22,375,000 - 763,000 Conversion of preferred stock (1,307,700) - 261,886 Issuance of additional preferred stock under April 30, 1999 exchange agreement 3,084,000 - - Shares issued in recapitalization (20,130,250) 1,006,513 - ---------------------- -------------------- ------------------ Balance at December 31, 2000 4,021,050 1,006,513 1,024,886 Conversion of preferred stock (600,000) - 600,000 ---------------------- -------------------- ------------------ Balance at September 30, 2001 3,421,050 1,006,513 1,624,886 ====================== ==================== ==================
(1) represents previously issued and outstanding common shares of Chancellor F-12 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE J - REDEEMABLE ORDINARY SHARES Advance and Creative have 10,710,000 ordinary shares issued and outstanding to related parties. Certain of these related parties are preferred stockholders of the Company. The voting rights of the ordinary shares, with respect to Advance and Creative, are one vote per share or 0.3% of the total outstanding voting shares. The Company controls the remaining 99.7% of Advance and Creative as a result of the share exchange consummated on April 30, 1999 (as discussed in note A). The ordinary shares are not publicly traded and are eligible to receive dividends in proportion to their voting rights. Since the ordinary shares do not represent equity of the Company and the Company has an obligation to repurchase the ordinary shares they have been accounted for as redeemable equity of the Thai subsidiaries. Accordingly the redeemable ordinary shares of the subsidiaries have been remeasured into U.S. dollars at the current rate as of December 31, 1999 and 2000, and September 30, 2001. NOTE K - INCOME TAXES The Subsidiaries have received a promotional privilege from the Thai Board of Investment under certificates dated May 30, 2000 (Creative) and September 8, 2000 (Advance Manufacturing) relating to the manufacture of gemstones and jewelry. The promotional privilege for Advance expired during 2000 and Advance is now inactive. Under this privilege, the Subsidiaries have received exemption from certain Thai taxes and duties including Thai corporate income tax on income derived from the promoted activities for a period of eight years commencing from the date that the Subsidiaries have income derived from those activities. The Subsidiaries are required to comply with the terms and conditions specified in the promotional certificate. Management does not believe it will ever utilize the net operating loss (NOL) of the predecessor company, Chancellor Corporation, due to limitations on change of ownership. The income tax expenses reconciled to the tax computed at the U.S. statutory rate were approximately as follows:
Year ended December 31, Nine months ended September 30, --------------------------------------------------- --------------------------------------- 1998 1999 2000 2000 2001 --------------- --------------- ---------------- ---------------- ------------------ Tax expense (benefit) computed at federal statutory rate $1,577,000 $2,427,000 $ 1,386,000 $ 707,000 $ 994,000 Non U.S. income exempt from tax (1,577,000) (2,427,000) (1,520,000) (778,000) (1,094,000) Valuation allowance - - 134,000 71,000 100,000 --------------- --------------- ---------------- ---------------- ------------------ $ - $ - $ - $ - $ - =============== =============== ================ ================ ==================
Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded for deferred tax assets when it is more likely than not that such deferred tax assets will not be realized. Deferred income taxes reflect the net tax effects of temporary differences between the consolidated carrying amounts of assets and liabilities for financial reporting purposes and the respective amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows: F-13 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE K - INCOME TAXES - Continued December 31, September 30, 2000 2001 --------------- --------------- Deferred asset Net operating losses $ 114,000 $ 214,000 Warrants 20,000 20,000 Valuation allowance (134,000) (234,000) --------------- --------------- Net deferred tax asset $ - $ - =============== =============== Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). As a result of these provisions, utilization of the NOL and tax credit carryforwards may be limited. NOTE L - COMMITMENTS 1. Operating Lease Agreements -------------------------- The Company conducts its operations in leased facilities under operating leases expiring through February 2011. The Company has the option of extending the lease terms beyond the current expiration date. The following is a schedule by year of approximate minimum rental payments under such operating leases.
Year ending December 31, Third Party Related Party Total - ------------------------------- ----------------------- ------------------------- -------------------- 2001 $ 21,400 $ 74,663 $ 96,063 2002 21,400 74,663 96,063 2003 16,645 74,663 91,308 2004 - 74,663 74,663 2005 - 74,663 74,663 Thereafter - 385,758 385,758 ----------------------- ------------------------- -------------------- $ 59,445 $ 759,073 $ 818,518 ======================= ========================= ====================
Certain of the above leases provide for payment of taxes and other expenses by the Company. Rent expense for the leased facilities for the years ended December 31, 1998, 1999 and 2000 and the nine months ended September 30, 2000 and 2001, was approximately $65,000, $77,000 and $72,000, $64,000, and $62,000, respectively. 2. Legal Reserve ------------- Under the provisions of Thailand's Civil and Commercial Code, the Subsidiaries are required to set aside a legal reserve of at least five percent of their net earnings at each dividend declaration until the reserve reaches ten percent of the contributed capital. The reserve is not available for dividend distribution. As of December 31, 1999 and 2000, and September 30, 2001 the reserve balance was $490,800, and was included in the Company's retained earnings. F-14 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE M - RISK AND UNCERTAINTIES 1. Country Risk ------------ A significant volume of the Company's operations are conducted in Thailand. Accordingly, the Company's business, financial position and results of operations may be influenced by the political, economic and legal environments in Thailand and the Pacific Rim region (PRR), and by the general state of the Thailand and Pacific Rim economies. The Company's operations in the Pacific Rim are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRR, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. 2. Concentration of Credit Risk ---------------------------- As of December 31, 1999 and 2000, and September 30, 2001 balances of two customers represented 13% and 12%, 12% and 8%, 10% and 7%, respectively, of the total accounts receivable. The Company performs ongoing credit evaluation of each customer's financial condition and maintains reserves for potential credit losses. Such losses, in the aggregate, have not exceeded management's projections. 3. Dependence on a Limited Number of Irradiation Treatment Facilities ------------------------------------------------------------------ The Company negotiated a contract with the University of Missouri to utilize the University's nuclear reactor for the irradiation (coloration) of topaz gemstones. The contract gives the Company exclusive use of the reactor for the coloration of gemstones through March 2005 and may be extended on an annual basis upon mutual agreement of both parties. Management believes that there are fewer than five known facilities in the world that are capable of providing similar irradiation processing. NOTE N - GEOGRAPHIC AREAS AND CONCENTRATIONS 1. Revenue (thousands) -------------------
Year ended December 31, Nine months ended September 30, --------------- --- -------------- ---- --------------- ---------------- --- --------------------- 1998 1999 2000 2000 2001 --------------- -------------- ---- --------------- ---------------- --------------------- United States $ 15,808 $ 16,972 $ 28,347 $ 15,929 $ 10,523 Thailand 3,079 2,909 4,136 2,326 4,489
2. Long-lived assets -----------------
December 31, ------------------------------------------------------ September 1999 2000 2001 ------------------------ ------------------------- -------------------------- US $ - $ - $ 135 Thailand 2,030,502 2,127,733 2,206,189 ------------------------ ------------------------- -------------------------- Total $ 2,030,502 $ 2,127,733 $ 2,206,324 ======================== ========================= ==========================
F-15 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE N - GEOGRAPHIC AREAS AND CONCENTRATIONS - Continued 3. Major customers --------------- Details of individual customers accounting for more than 10% of the Company's sales are as follows:
Sales (thousands) Year ended December 31, Nine months ended September 30, ------------------------------------------------------ ----------------------------------- 1998 1999 2000 2000 2001 -------------- --------------- --------------- --------------- -------------- Goldmine Enterprises, Inc. $ 2,441 $ 4,579 $ 4,215 $ 3,100 $ 2,009 Helen Andrews 3,225 3,960 2,862 1,995 265 Home Shopping Network - - 591 418 1,112
4. Major suppliers (thousands) --------------------------- Details of individual suppliers accounting for more than 10% of the Company's purchases are as follows:
Year ended December 31, Nine months ended September 30, ------------------------------------------------------ ----------------------------------- 1998 1999 2000 2000 2001 -------------- -------------- -------------- --------------- -------------- Gold Corporation $ 2,455 $ 3,271 $ 3,657 $ 2,893 $ 1,454 Little Rock 174 1,798 2,667 888 1,461
F-16 The Topaz Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 (unaudited) NOTE O - SELECTED QUARTERLY DATA (UNAUDITED)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter -------------- ------------- -------------- --------------- Year ended December 31, 1999 - ---------------------------- Net sales $ 3,716,087 $ 5,058,649 $ 5,935,431 $ 5,171,116 Gross profit 1,709,400 2,630,498 3,027,070 1,488,491 Earnings from operations 831,196 1,607,517 2,035,068 35,578 Net earnings (loss) before extraordinary item 2,781,833 1,627,997 2,129,701 (203,938) Extraordinary item - - 803,589 - Net earnings (loss) 2,781,833 1,627,997 2,933,290 (203,938) Earnings (loss) per share from operations Basic $ (2.49) $ 2.11 $ 2.67 $ 0.05 Diluted $ (2.49) $ 0.29 $ 0.37 $ 0.01 Net earnings (loss) per share before extraordinary item Basic $ 0.06 $ 2.13 $ 2.79 $ (0.27) Diluted $ 0.01 $ 0.30 $ 0.39 $ (0.27) Net earnings (loss) per share Basic $ 0.06 $ 2.13 $ 3.84 $ (0.27) Diluted $ 0.01 $ 0.30 $ 0.53 $ (0.27) Year ended December 31, 2000 - ---------------------------- Net sales $ 4,466,439 $ 5,989,268 $ 7,799,898 $ 14,227,438 Gross profit 1,161,274 1,976,458 2,183,971 3,673,278 Earnings from operations 47,526 1,041,967 1,092,637 2,675,921 Net earnings (loss) (272,932) 1,152,582 1,198,819 1,997,564 Earnings per share from operations Basic $ 0.06 $ 1.37 $ 1.43 $ 3.23 Diluted $ 0.01 $ 0.19 $ 0.20 $ 0.48 Net earnings (loss) per share Basic $ (0.36) $ 1.51 $ 1.57 $ 2.41 Diluted $ (0.36) $ 0.21 $ 0.22 $ 0.35 Year ending December 31, 2001 - ----------------------------- Net sales $ 4,586,282 $ 4,899,963 $5,525,989 Gross profit 1,305,985 1,513,345 1,623,897 Earnings from operations 467,203 475,030 705,861 Net earnings 1,242,292 975,269 706,618 Earnings per share from operations Basic $ 0.40 $ 0.36 $ 0.49 Diluted $ 0.08 $ 0.08 $ 0.12 Net earnings per share Basic $ 1.06 $ 0.74 $ 0.49 Diluted $ 0.21 $ 0.16 $ 0.12
NOTE P - SUBSEQUENT EVENT (UNAUDITED) On July 20, 2001, the Company filed with the State of Nevada to change the convertibility provisions of the Series B preferred stock. Under the new provisions, Series B preferred shares are only convertible into the Company's common stock in the events specified in the Amended and Restated Certificate of Designation of the Topaz Group, Inc. In October 2001, the Company entered into a $2,000,000 line of credit with a U.S. financial institution. The line of credit bears interest at prime plus 1.25% and is secured by inventory and accounts receivable in the United States, a second position on certain real estate and fixed assets in Thailand and by one of the Company's directors. F-17 Index to Exhibits ----------------- *2.1 Agreement of Exchange among the Company, Best Worth Agents, Ltd and Advance Gems & Jewelry Co., Ltd., dated April 30, 1999 *2.2 Agreement of Exchange among the Company, Best Worth Agents, Ltd and Creative Gems & Jewelry Co., Ltd., dated April 30, 1999 *3(i)(a) Amended and Restated Articles of Incorporation of the Company, dated November 17, 1998 *3(i)(b) Certificate of Change in the Number of Outstanding Shares of Common Stock, dated November 16, 2000 *3(ii) Bylaws of the Company, dated June 5, 1996 *4.1 Amended and Restated Certificate of Designation of the Company's Series A Preferred Stock and Series B Preferred Stock, filed July 20, 2001 *4.2 2001 Stock Option Plan of the Company *10.1 Contract between the Company and the Curators of the University of Missouri, dated March 1, 2001 *10.2 Joint Venture Agreement between Creative Gems & Jewelry Co., Ltd. and Muthama Gemstones (Kenya) Limited, dated September 6, 1999. *10.3 Credit Facilities Agreement between UOB Radanasin Bank Pcl and the Creative Gems & Jewelry Co. Ltd., dated April 12, 2000 *10.4 Overdraft Agreement between Thai Farmers Bank PCL and Creative Gems & Jewelry Co. Ltd., dated July 13, 2000 10.5 Business Loan Agreement between The Topaz Group, Inc. and General Bank, dated October 11, 2001 and Addendum to Loan Agreement between The Topaz Group, Inc. and General Bank, dated October 11, 2001 *21 Subsidiaries of the Registrant *24.1 Power of Attorney (Included on Signature Page) - -------------- * Incorporated by reference from our registration statement on Form 10 filed with the Securities and Exchange Commission on October 30, 2001 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Bangkok, State of Thailand, on the 19th day of December, 2001. THE TOPAZ GROUP, INC. BY: /S/ JEREMY F. WATSON Jeremy F. Watson Chief Executive Officer BY: /S/ TERRENCE C. CUFF Terrence C. Cuff Chief Financial Officer EX-10 4 ex10_5.txt EX-10.5 BUSINESS LOAN AGREEMENT
- ------------------------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call/Coll Account Officer Initials $2,000,000.00 10-11-2001 09-20-2002 242-RK _____ - -------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing ***** has been omitted due to text length limitations. Borrower: THE TOPAZ GROUP, INC. Lender: General Bank 1180 NW Maple Street, Suite 180 Kent North Branch Issaquah, WA 98027 18030 East Valley Highway Kent, WA 98032-0278 THIS BUSINESS LOAN AGREEMENT dated October 11, 2001, is made and executed between THE TOPAZ GROUP, INC. ("Borrower") and General Bank ("Lender") on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement ("Loan"). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements as set forth in this Agreement, and (B) all such Loans shall be and remain subject to the terms and conditions of this Agreement. TERM. This Agreement shall be effective as of October 11, 2001, and shall continue in full force and effect until such time as all of Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys' fees, and other fees and charges, or until September 20, 2002. ADVANCE AUTHORITY. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above: written notice of revocation of their authority: Apichart Fufuangvanich, President of THE TOPAZ GROUP, INC.; and Terrance Cuff, Chief Financial Officer of THE TOPAZ GROUP, INC. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender's Security Interests; (4) evidence of insurance as required below; (5) guaranties; (6) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender's counsel. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower BUSINESS LOAN AGREEMENT (Continued) Page 2 - -------------------------------------------------------------------------------- shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists: Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Nevada. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 1180 NW Maple Street, Suite 180, Issaquah, WA 98027. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower's state of organization or any change in Borrower's name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower's business activities. Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None. Authorization. Borrower's execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower BUSINESS LOAN AGREEMENT (Continued) Page 3 - -------------------------------------------------------------------------------- and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower's articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower's properties. Financial Information. Each of Borrower's financial statements supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financial statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years. Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower's ownership of Borrower's Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or BUSINESS LOAN AGREEMENT (Continued) Page 4 - -------------------------------------------------------------------------------- liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all of Borrower's tax returns and reports that are or were required to be filed, have been filed and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Property. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will: Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting BUSINESS LOAN AGREEMENT (Continued) Page 5 - -------------------------------------------------------------------------------- Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with the following: Annual Statements. As soon as available, but in no event later than sixty (60) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender. Interim Statements. As soon as available, but in no event later than 45 days after the end of each fiscal year, Borrower's balance sheet and profit and loss statement for the period ended, reviewed by a certified public accountant satisfactory to Lender. Tax Returns. As soon as available, but in no event later than thirty (30) days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by Borrower. Additional Requirements. See "Addendum to Loan Agreement" for additional reporting covenants requirement. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios: Working Capital Requirements. Borrower shall comply with the following working capital ratio requirements: Current Ratio. Maintain a Current Ratio in excess of 2.000 to 1.000. The term "Current Ratio" means Borrower's total Current Assets divided by Borrower's total Current Liabilities. Tangible Net Worth Requirements. Maintain a minimum Tangible Net Worth of not less than: $15,000,000.00. In addition, Borrower shall comply with the following net worth ratio requirements: BUSINESS LOAN AGREEMENT (Continued) Page 6 - -------------------------------------------------------------------------------- Debt/Worth Ratio. Maintain a ratio of Debt/Worth not in excess of 1.500 to 1.000. The ratio "Debt/Worth" means Borrower's Total Liabilities divided by Borrower's Tangible Net Worth. Other Requirements. See "Addendum to Loan Agreement" for additional financial covenants requirement. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender's loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the Insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Guaranties. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantors named below, on Lender's forms, and in the amounts and under the conditions set forth in those guaranties. Names of Guarantors Amounts ------------------- ------- Creative Gems & Jewelry Co., Ltd. $2,200,000.00 Advance Gems & Jewelry Co., Ltd. $2,200,000.00 Advance Gems Manufacturing Co., Ltd. $2,200,000.00 Apichart Fufuangvanich $2,200,000.00 BUSINESS LOAN AGREEMENT (Continued) Page 7 - -------------------------------------------------------------------------------- Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Fees, Charges and Expenses. In addition, to all other agreed upon fees, charges, and expenses, pay the following: (1)--Loan Fee $7,500.00; (2)--Documentation Fee: $250.00. Loan Proceeds. Use all Loan proceeds solely for the following specific purposes: Working capital for business operation for gem & jewelry trade. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner. Environmental Studies. Promptly conduct and complete, at Borrower's expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower. Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect of all governmental authorities applicable to the conduct of Borrower's properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to BUSINESS LOAN AGREEMENT (Continued) Page 8 - -------------------------------------------------------------------------------- post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's interest. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificates. Unless waived in writing by Lender, provide Lender within forty-five (45) days after the end of each fiscal quarter, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respect with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower's part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any BUSINESS LOAN AGREEMENT (Continued) Page 9 - -------------------------------------------------------------------------------- time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower's stock, or purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in BUSINESS LOAN AGREEMENT (Continued) Page 10 - -------------------------------------------------------------------------------- Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Payment Default. Borrower fails to make any payment when due under the Loan. Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's or any Grantor's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, BUSINESS LOAN AGREEMENT (Continued) Page 11 - -------------------------------------------------------------------------------- by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired. Insecurity. Lender in good faith believes itself insecure. Right to Cure. If any default, other than a default on indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's option, all indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's right and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of BUSINESS LOAN AGREEMENT (Continued) Page 12 - -------------------------------------------------------------------------------- any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. ADDENDUM. See "Addendum to Loan Agreement" attached hereto and made a part hereof. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Attorneys' Fees; Expenses. Borrower agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the BUSINESS LOAN AGREEMENT (Continued) Page 13 - -------------------------------------------------------------------------------- purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of Washington. This Agreement has been accepted by Lender in the State of Washington. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any of Borrower's or any Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Notices. Subject to applicable law, and except for notice required or allowed by law to be given in another manner, any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address. Subject to applicable law, and except for notice required or allowed by law to be given in another manner, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. BUSINESS LOAN AGREEMENT (Continued) Page 14 - -------------------------------------------------------------------------------- Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used in this Agreement shall include all of Borrower's subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower's subsidiaries or affiliates. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower's rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower's indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. Time is of the Essence. Time is of the essence in the performance of this Agreement. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement: Advance. The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means THE TOPAZ GROUP, INC. BUSINESS LOAN AGREEMENT (Continued) Page 15 - -------------------------------------------------------------------------------- Collateral. The word "Collateral" means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Environmental Laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human, health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1968, Pub. L. No. 99-499 "(SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. GAAP. The word "GAAP" means generally accepted accounting principles. Grantor. The word "Grantor" means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Loan. Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other BUSINESS LOAN AGREEMENT (Continued) Page 16 - -------------------------------------------------------------------------------- indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means General Bank, its successors and assigns. Loan. The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means the Note executed by THE TOPAZ GROUP, INC. in the principal amount of $2,000,000.00 dated October 11, 2001, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. Permitted Liens. The words "Permitted Liens" mean (1) liens and security interests securing indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment BUSINESS LOAN AGREEMENT (Continued) Page 17 - -------------------------------------------------------------------------------- intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organization expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total debt. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED OCTOBER 11, 2001. BORROWER: THE TOPAZ GROUP, INC. By:/s/ Terrance Cuff, CFO ---------------------------------------- Terrance Cuff, Chief Financial Officer of THE TOPAZ GROUP, INC. LENDER: GENERAL BANK - ------------------------------------ Authorized Signer [Logo] General Bank ADDENDUM TO LOAN AGREEMENT This Addendum entered into between The Topaz Group, Inc. ("Borrower") and General Bank ("Lender") and dated October 11, 2001 is attached to and a part of that certain Loan Agreement also entered into between the said parties of even date (the "Agreement"). Defined terms used but not defined herein have the respective meanings assigned to them in said Loan Agreement. In the event of any conflict between any term or provision in the said Loan Agreement and in this Addendum, this Addendum shall control. I. THE COMMITMENT WORKING CAPITAL FACILITY Aggregate Amount. Upon the terms and subject to the conditions set forth in the Agreement, Lender shall make advances (the "Advances") to Borrower as follows: Loans or working capital advances up to the Maturity Date in the maximum amount of $2,000,000 during the term of the loan. The advance is subject to a quarterly Borrowing Base of 80% of the aggregate amount of eligible accounts receivable and shall not exceed the lesser of the Borrowing Base or $2,000,000. Within the limits of the Commitment and subject to the terms and conditions of the Agreement, Borrower may borrow, prepay, repay and reborrow under this Section I from time to time during the period from the effective date of the Agreement to and including September 20, 2002 (the "Maturity Date") or the earlier date of the termination in whole of the commitment pursuant to the Agreement. II. REPAYMENTS Repayment of Working Capital. The unpaid principal amount of all advances outstanding on the Maturity Date shall be repaid in full on such Maturity Date, unless Lender has otherwise approved an extension or renewal of the credit facility. III. ADDITIONAL TERMS AND CONDITIONS A. REPORTING COVENANTS Borrower agrees, so long as Lender has any Commitment hereunder or any amount hereunder remains unpaid, to provide Lender with the following: o CPA-Audited annual business financial statements to be submitted within 60 days from each Fiscal Year End. (FYE: 12/31) o Annual business tax return or extension to be submitted within 30 days of filing. o Quarterly Interim CPA - reviewed financial statements to be submitted within 45 days from each period end; number of periods: 4. o Quarterly Compliance Certificate prepared and signed by CFO or corporate officer to be submitted within 45 days from each period end. Addendum to Loan Agreement Page 2 o Personal financial statements and tax returns of all guarantors are required annually. The following report(s) are to be submitted monthly within 25 days from each period end. o accounts receivable aging report o accounts payable report o inventory list Monthly Borrowing Base Certificate prepared and signed by CFO or corporate officer to be submitted within 25 days from each period end. The Borrowing Base excludes ineligible accounts receivable as follows: o accounts over 60 days past due date. o accounts with 50% of the balance over 60 days past due ("cross aging" accounts). o the amount of accounts in excess of 20% of total receivables after excluding factored (non-recourse) and/or insured (acceptable to Lender) portion (account concentration). o foreign open accounts, contra accounts, consignment, promotion/demo accounts, government accounts, affiliate accounts, employee accounts and credit memos. o accounts deemed by Lender as uncollectible or unacceptable for whatever reason. Should the Loans outstanding exceed the Borrowing Base (at Lender's sole determination), the excess portion shall be due and payable within 14 days of Lender's written notice to Borrower. B. FINANCIAL COVENANTS Borrower agrees, so long as Lender has any Commitment hereunder or any amount hereunder remains unpaid, that Borrower shall abide by and comply with the following: o Current Ratio. Maintain a ratio of current assets to current liabilities in excess of 2.0:1.0 (defined as total current assets divided by current liabilities). o Tangible Net Worth. Borrower must maintain a minimum Tangible Net Worth of not less than $15,000,000 (defined as stated net worth less intangibles, net loans to affiliate(s), net loans to shareholders/principals/officers, plus subordinated debt). o Net Worth Ratio. Maintain a ratio of total liabilities to tangible net worth of not more than 1.5:1:0 (defined as total liabilities less subordinated debt divided by stated net worth less intangible, net loans to affiliate(s), net loans to shareholders/principals/officers, plus subordinated debt). o Borrower will establish no new credit facilities, engage in any debt restructure, or accelerate payment of any existing debt without prior written approval from Lender. o Borrower will not engage in any bulk sale of assets without prior written approval from Lender. C. OTHER TERMS AND CONDITIONS o Accounts receivable are to be directly remitted to Lender by notice and is subject to the following specific provisions: Addendum to Loan Agreement Page 3 < Borrower shall inform all its debtors to remit all check payments directly to the designated lockbox. < All sales invoices shall be stamped to indicate that all check payments shall be directly remitted to the designated lockbox. < 50% of the lockbox proceeds shall be applied to any outstanding loan, subject to a monthly review by Lender. Lender reserves the right and option to apply up to 100% of lockbox proceeds to repay outstanding loans whenever an event of default exists. < Borrower shall not instruct its customers to change the payment method other than sending payments directly to the designated lockbox at Lender, without Lender's prior written consent. < Lender reserves the right to make direct account receivable notification and/or verification without Borrower's prior consent. < Other terms and conditions as may be specified by Lender or as stipulated in a lockbox operating agreement. o The Borrower shall maintain total depository relationship with operating checking/savings account(s) maintained at Lender; any operating account(s) established or to be established at another financial institution requires the prior written consent of Lender. o Borrower authorizes Lender to debit its operating checking account for payments and fees due under letters of credit or collections, Loan Advances and/or acceptances as they become due and payable. o Lender reserves the right to conduct on-site audit on the Borrower's accounts receivable and inventory, in addition to other books and records, no more than two times in a twelve month period by Lender's appointed auditors with the audit fee to be paid by Borrower. When deemed necessary and at Lender's sole determination, Lender may conduct additional audits at Lender's own expense. If the audit discloses findings and conclusions that Lender deems unsatisfactory, Lender reserves the right to cancel or modify the credit approval, and/or to take such corrective action as it deems appropriate, including but not limited to termination or reduction of the Commitment. IV. PRE-FUNDING CONDITIONS: o This credit approval is subject to a satisfactory pre-funding audit on the Borrower's accounts receivable and inventories. Lender will judge the audit findings and conclusions as satisfactory at its sole discretion and determination. If the audit discloses findings and conclusions that are deemed unsatisfactory, Lender reserves the right to cancel or modify the credit approval, and/or to take such corrective action as it deems appropriate, including but not limited to termination or reduction of the credit facility. V. SPECIAL TERMS & CONDITIONS o Borrower shall maintain profitable pre-tax earnings. o Borrower shall retain earnings within the company. o Borrower shall not invest its cash in securities or commodities trading. o Borrower shall pay Lender's pre-funding audit costs as well as legal expenses for Lender's counsel in Thailand. Addendum to Loan Agreement Page 4 o All accounts receivable shall be coursed through Lender's lock-box account. Accounts receivable deposited with other financial institutions require Lender's prior approval. VI. COST AND EXPENSES The "Costs and Expenses" provision set forth in the Loan Agreement is hereby deleted and shall be replaced in its entirety by the following: Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of the Agreement or in connection with the Loans made pursuant to the Agreement. Lender may pay any third parties to help collect the Loans and to enforce the Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including without limitation proceedings or efforts concerning cash collateral arrangements or motions, any proposed disclosure statement or plan, any assumption/rejection motion, or proceedings or efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Additionally, upon Lender's request, Borrower will promptly pay to Lender such fees, costs and out-of-pocket incidental expenses charged or incurred by Lender with respect to the "Loans" and/or "Commitment". Borrower authorizes Lender to charge Borrower's account for any such fees, costs and expenses. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. BORROWER: LENDER: The Topaz Group, Inc. General Bank By:/s/ Terrence Cuff, CFO By: ------------------------------ ------------------------------ Terence Cuff, CFO Authorized Officer -----END PRIVACY-ENHANCED MESSAGE-----