SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended March 31, 2002
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from _______________ to _______________
Commission file number 0-27415
The Topaz Group, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada 91-1762285
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
126/1 Krungthonburi Road
Banglampoo Lang, Klongsarn
Bangkok 10600 Thailand
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code _____________________________
- N/A -
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002
(Unaudited) 2
Consolidated Statements of Earnings for the Three Months Ended March 31,
2001 and 2002 (Unaudited) 3
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 2001 and 2002 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
ITEM 2. Management Discussion and Analysis of Financial Condition and Results of 8
Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 12
ITEM 2. Changes in Securities and Proceeds 12
ITEM 3. Default Upon Senior Securities 12
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 5. Other Information 12
ITEM 6. Exhibits and Reports on Form 8-K 12
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2001 2002
--------------- ---------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 351,565 $ 317,552
Accounts receivable, net of allowance of
$788,369 and $795,831 5,891,767 6,710,573
Inventories 19,004,800 22,853,358
Prepaid expenses and deposits 372,285 626,107
--------------- ---------------
Total current assets 25,620,417 30,507,590
PROPERTY AND EQUIPMENT - NET 2,308,017 2,288,669
OTHER ASSETS 36,928 44,973
--------------- ---------------
Total assets $ 27,965,362 $ 32,841,232
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 2,054,698 $ 2,939,832
Accounts payable 2,559,005 5,630,519
Accrued liabilities 1,171,030 941,287
Payables to related party 546,061 1,095,885
--------------- ---------------
Total current liabilities 6,330,794 10,607,523
REDEEMABLE ORDINARY SHARES 4,736,115 4,807,209
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Class A preferred stock, liquidation preference of
$8,130,570 and $8,384,545 3,555,511 3,555,511
Class B preferred stock, liquidation preference of
$2,811,193 and $2,899,007 1,007 1,007
Common stock 2,135 2,135
Additional paid in capital 1,673,330 1,673,330
Retained earnings 11,666,470 12,194,517
--------------- ---------------
16,898,453 17,426,500
--------------- ---------------
Total liabilities and stockholders' equity $ 27,965,362 $ 32,841,232
=============== ===============
The accompanying notes are an integral part of these statements.
2
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
Three months ended March 31,
----------------------------------
2001 2002
--------------- --------------
Sales $ 4,586,282 $ 5,625,270
Cost of goods sold 3,280,297 4,156,397
--------------- --------------
Gross profit 1,305,985 1,468,873
Selling, general and administrative expenses 838,782 921,077
--------------- --------------
Earnings from operations 467,203 547,796
Other income (expense)
Exchange rate gain 93,357 8,359
Interest expense (14,603) (17,215)
Gain (loss) on remeasurement 681,665 (68,796)
Other, net 14,670 57,903
--------------- --------------
775,089 (19,749)
--------------- --------------
NET EARNINGS $ 1,242,292 $ 528,047
=============== ==============
NET EARNINGS PER SHARE:
Basic $ 1.06 $ 0.24
=============== ==============
Diluted $ 0.21 $ 0.08
=============== ==============
The accompanying notes are an integral part of these statements.
3
The Topaz Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended March 31,
---------------------------------
Increase (Decrease) in Cash and Cash Equivalents 2001 2002
---------------------------------
Cash flows from operating activities
Net earnings $ 1,242,292 $ 528,047
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Depreciation and amortization 32,634 37,100
Remeasurement of redeemable ordinary shares (177,735) 71,094
Changes in assets and liabilities:
Receivables 362,870 (818,807)
Inventories (387,236) (3,848,558)
Prepaid expenses, deposits and other assets (256,354) (261,867)
Accounts and related payables (1,425,847) 2,525,453
Accrued liabilities 789,178 866,142
-------------- --------------
Net cash provided by (used in) operating activities 179,802 (901,396)
Cash flows from investing activities
Purchases of property and equipment (56,330) (17,752)
-------------- --------------
Net cash used in investing activities (56,330) (17,752)
Cash flows from financing activities
Borrowings (payments) on line of credit, net (281,737) 885,135
-------------- --------------
Net cash provided by (used in) financing activities (281,737) 885,135
-------------- --------------
Net decrease in cash and cash equivalents (158,265) (34,013)
Cash and cash equivalents at the beginning of period 321,734 351,565
-------------- --------------
Cash and cash equivalents at the end of period $ 163,469 $ 317,552
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period Interest $ 14,500 $ 17,215
============== ==============
The accompanying notes are an integral part of these statements.
4
The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE A - FINANCIAL STATEMENTS
The unaudited consolidated financial statements of the Company and its
subsidiaries have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles of the United
States of America ("GAAP") have been condensed or omitted pursuant to such
rules and regulations. The results of operations for interim periods are
not necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 2002. This form 10-Q should be read in
conjunction with the form 10-K that includes audited consolidated financial
statements for the years ended December 31, 2000 and 2001, and the related
consolidated statements of earnings, stockholders' equity and cash flows
for the three years in the period ended December 31, 2001.
NOTE B - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned Thailand subsidiaries, Creative Gems
& Jewelry Limited ("Creative"), Advance Gems & Jewelry Limited
("Advance") and Advance Gems Manufacturing Co., Ltd ("Advance
Manufacturing") (collectively, the "Subsidiaries"). All significant
intercompany accounts and transactions have been eliminated. Except as
otherwise disclosed, all amounts are in U.S. dollars.
NOTE C - INVENTORIES
Inventories consist of the following:
December 31, March 31,
2001 2002
-------------- --------------
Raw materials $ 981,139 $ 1,461,396
Finished stones 17,200,314 20,597,389
Finished jewelry 823,347 794,573
-------------- --------------
$ 19,004,800 $ 22,853,358
============== ==============
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The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE D - EARNINGS PER COMMON SHARE
The components of basic and diluted earnings per share were as follows:
Three months ended March 31,
------------------------------
2001 2002
------------ -------------
BASIC
Net earnings $ 1,242,292 $ 528,047
============ =============
Weighted average outstanding
shares of common stock 1,174,886 2,134,886
Net earnings per share $ 1.06 $ 0.24
============ =============
DILUTED
Net earnings available to
common shareholders $ 1,242,292 $ 528,047
============ =============
Weighted average outstanding
shares of common stock 1,174,886 2,134,886
Dilutive effect of preferred shares (1) 4,877,563 3,917,563
------------ -------------
Common stock and potentially issuable
common stock 6,052,449 6,052,449
Net earnings per share $ 0.21 $ 0.08
============ =============
(1) The dilutive effect of warrants outstanding during each of the presented
periods was immaterial to these computations.
NOTE E - NEW AUTHORATIVE ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations.
SFAS 141 applies to all business combinations initiated after June 30,
2001. The Statement also applies to all business combinations accounted for
using the purchase method for which the date of acquisition is July 1,
2001, or later. The adoption of SFAS 141 did not have an impact on the
Company's consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other
Intangible Assets. The provisions of SFAS 142 are required to be applied
starting with fiscal years beginning after December 15, 2001 with earlier
application permitted for entities with fiscal years beginning after March
15, 2001 provided that the first interim financial statements have not
previously been issued. The statement is required to be applied at the
beginning of the entity's fiscal year and to be applied to all goodwill and
other intangible assets recognized in its financial statements to that
date. The initial application of SFAS 142 did not have an impact on the
Company's consolidated financial statements.
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The Topaz Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE E - NEW AUTHORATIVE ACCOUNTING PRONOUNCEMENTS - Continued
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS 144), ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. SFAS 144 supersedes SFAS 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF, and the accounting and reporting provisions of Accounting
Principles Board Opinion 30, REPORTING THE RESULTS OF OPERATIONS -
REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS,
for segments of a business to be disposed of. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. The initial application
of SFAS 144 did not have an impact on the Company's consolidated financial
statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes thereto. The following discussion contains certain
forward-looking statements that involve risk and uncertainties. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, risks
and uncertainties related to the need for additional funds, the rapid growth of
the operations and our ability to operate profitably after the initial growth
period is completed. We undertake no obligation to publicly release the results
of any revisions to those forward-looking statements that may be made to reflect
any future events or circumstances.
QUARTER ENDED MARCH 31, 2002 AND MARCH 31, 2001
SALES. Total sales for the quarter ended March 31, 2002 were $5,625,270
compared to $4,586,282 for the quarter ended March 31, 2001, an increase of
22.6%. The increase in sales is primarily attributed to the replenishment of
inventories by wholesalers and retailers from fourth quarter economic
uncertainties. The retail market in the US represented approximately 70% of the
Company's annual revenues for fiscal 2001.
COST OF GOODS SOLD. Cost of goods sold for the quarter ended March
31, 2002 was $4,156,397, representing 73.8% of sales, compared to $3,280,297
for the quarter ended March 31, 2001, which represented 71.5% of sales for
that quarter. The increase in cost of goods sold is due in part to increased
radiation costs per unit for the topaz products colored at the University of
Missouri. The Company is charged a base fixed fee and per unit costs to use
this reactor. The production or coloration of topaz at the University of
Missouri at less than full capacity results in the base fixed fee increasing
the cost per unit to color the topaz.
OPERATING COSTS. Operating costs were $921,077 for the quarter ended
March 31, 2002, or 16.3% of revenues, compared to $838,782 in the quarter ended
March 31, 2001, or 18.2% of revenues. This was an increase of $82,295 or 9.8%.
The increase is due in part to increased professional fees relating to the
company's listing on the American Stock Exchange.
OPERATING PROFIT. Operating profit for the quarter ended March 31, 2002
was $547,796 compared to operating profit of $467,203 for the quarter ended
March 31, 2001, which is an increase of 17.2%. The increase is due to increased
sales of 22.6% which was partially offset by a decrease in the gross profit
percentage of 2.3% and an increase in selling, general and administrative
expenses of 9.8%.
OTHER INCOME. Other income and (expense) was ($19,749) in the quarter
ended March 31, 2002 compared to $775,089 in the quarter ended March 31, 2001,
or a decrease of 102.5%. The change is almost entirely 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. The remeasurement gain (loss) was
$(68,796) in the quarter ended March 31, 2002, compared to
8
$681,665 for the comparable quarter in 2001. This was principally caused by
reduced Baht currency fluctuations relative to the US dollar in the quarter
ended March 31, 2002 compared to the same quarter for 2001. The Company
implemented a software package in June, 2001 to record the Baht transactions
in US dollars as they occur. Recording the transactions as they occur in US
dollars is intended to reduce our exposure to currency remeasurement
gains and losses.
NET EARNINGS. Net earnings was $528,047 for the first quarter ended
2002 compared to $1,242,292 for 2001, a decrease of 57.4%. The difference is
largely attributed to a decrease in currency gains (losses) resulting from
foreign currency fluctuations.
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 March 31, 2002, we had a cash and cash equivalent balance
of $317,552 and working capital of $19,900,067.
Our operating activities provided (used) cash of ($901,396) for the
quarter ended March 31, 2002 compared to $179,802 for the quarter ended March
31, 2001. The decrease in cash provided by operating activities resulted
primarily from a net decrease in cash flow from net earnings of $714,245, an
increase in inventories of $3,848,558 offset by an increase in accounts
payable of $3,071,514. The earnings decrease is caused by a reduction in
currency remeasurement gains and the increase in accounts payable caused by
the increase in inventories primarily for topaz products. The inventory
increase from year end to the first quarter end is caused by the recovery
from the economic slowdown in the fourth quarter of 2001. Inventory buildup
was significant in late February and continued through March 2002 to support
growth in revenues caused by the replenishment of inventories for wholesalers
and retailers.
The net cash provided by (used in) financing activities for the quarter
ended March 31, 2002 was $(281,787) compared to $885,135 for the quarter ended
March 31, 2001. This net increase is due primarily to increases in borrowings
under existing lines of credit.
We have line-of-credit arrangements with two Thai financial
institutions and a line of credit arrangement with a U.S. financial
institution entered into in October 1999, April 2000 and October 2001,
respectively. The Thai lines are renewable automatically on a yearly basis
and the U.S. line expires in September 2002; the lines are also 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 (9% at
March 31, 2002); the U.S. line bears interest at prime plus 1.25% (6% at
March 31, 2002). 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, 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 March 31, 2002,
approximately $1,081,249 was available for commercial draft borrowing under
both the 1999 and 2000 lines. As of March 31, 2001, approximately $72,530 was
available for borrowing under the U.S. line. As of March 31, 2002 and March
31, 2001, the outstanding balance under the Thai lines of credit was $1,012,500
and $728,389, respectively. As of March 31, 2002 the outstanding balance
under the U.S. line was approximately $1,927,500.
The effects on liquidity of carrying large values of inventory can
be referenced by days of sales in inventory. On average, for the twelve
months ended March 31, 2002 and 2001, inventory would remain on the books for
403 days and 316 days, respectively, until sold. The inventory is classified
as a current asset on the balance sheet but restricts the use of working
capital until the inventory is sold. The increase in inventory days was
caused by the build up of inventories to support the replenishment of
inventories with wholesalers and retailers.
9
Inventory is valued by applying a moving average method for valuation.
Under this method of valuation, generally, the finished stone inventory does not
progressively devalue with age and the prices per carat remain relatively
stable. The average cost includes the raw cost of the product plus any
additional costs to bring it to its current condition including processing,
transportation, insurance and holding costs. Variances in valuation under the
moving average cost method occur when stone prices, overhead cost and other
related costs, which make up the value of the inventory, vary significantly up
or down within the fiscal period. As such, material variances in the inventory
costs are identified and valued separately to reflect true value.
Our business can be classified into two major groups including sale of
finished jewelry and finished stones, to a lesser degree. Most of our finished
jewelry is made to order and is shipped when completed. Inventory valuations
include the lesser of manufactured cost or market valuation per unit times the
quantities on hand. Lower of cost or market is referenced by recent sale prices
of the finished stones compared to the cost to produce or acquire such stones.
If recent sales of an existing stone are not available, current market price
samples in the selling market will dictate the lower of cost or market for
valuation purposes.
Management believes we have the ability to meet our current and
anticipated financing needs for the next twelve months with the facilities in
place and funds from operations, however, given our growth prospects, we may
need to seek increases in our credit facilities during the upcoming year to
sustain further revenue growth.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CURRENCY FLUCTUATIONS
1. 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.
2. 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
10
future income. This is due to the constantly changing exposure in the Thai Baht
for our Thai subsidiaries.
As of March 31, 2002, the average daily interbank exchange rate for the
Baht was trading at 43.52 Baht to one US dollar. The exchange rate in Thailand
has shown signs of stability in early 2002 and we anticipate this to continue
through the latter part of 2002. Weakening in the Baht may come from the gap
between the U.S. and Thai interest rates giving a further boost to exports.
Regions of Thailand continue to promote exports to strengthen their economies.
We are unable to predict whether the trends noted above would have a material
effect on our future financial condition or the results of operations and, if
so, whether such an effect will be positive or negative.
3. EXCHANGE RATE FLUCTUATION
THAI BAHT
--------------------------------------------------------------
FIRST QTR SECOND QTR THIRD QTR FOURTH QTR
2002
High 44.57
Average 43.80
Low 43.00
2001
High 45.00 45.85 45.87 45.07
Average 43.29 45.45 44.98 44.40
Low 42.19 44.68 43.92 43.37
2000
High 38.30 39.45 42.77 44.49
Average 37.96 38.67 40.97 43.44
Low 36.71 37.72 39.10 41.88
Future volatility in the Baht may come from the continued strength
in the Thai exports. Other Asian countries are showing overall weakness in
exports and large technology industries, with the exception of Japan. Japan's
problems are primarily domestic. Asian countries overall will weaken with
some support domestically by China and India. We do not anticipate Thailand
to be effected by Japan's economic downturn and that of surrounding Asian
regions, however, there can be no assurance of this.
We anticipate the cost of raw materials, which includes precious and
non-precious metals, to show moderate cost increases in the short-term.
11
4. FOREIGN CURRENCY RISK
As of March 31, 2001, we had no open forward-contracts. Our Thai
subsidiaries keep their books in the Thai Baht currency. As such, the Thai
balances are exposed to currency gains and losses depending upon the currency
rate fluctuations when compared to the US dollar for the respective periods. The
currency and remeasurement gains and losses for periods ended March 31, 2002 and
2001 are ($60,137) and $775,022, respectively.
5. INTEREST RATE FLUCTUATIONS
Our interest expenses and income are sensitive to changes in
interest rates. We had interest-bearing obligations of $2,939,832 for the
period ended March 31, 2002 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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None.
12
SIGNATURES
Pursuant to the requirements 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.
Date: May 15, 2002 THE TOPAZ GROUP, INC.
By: /s/ Terrance C. Cuff
-------------------------------
Name: Terrance C. Cuff
Title: Chief Financial Officer
13