<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _______________
Commission file number 0-29620
LJ INTERNATIONAL INC.
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(Exact name of Registrant as specified in its charter)
LJ INTERNATIONAL INC.
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(Translation of Registrant's name into English)
BRITISH VIRGIN ISLANDS
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(Jurisdiction of incorporation or organization)
UNIT #12, 12/F, BLOCK A
FOCAL INDUSTRIAL CENTER
21 MAN LOK STREET
HUNG HOM, KOWLOON, HONG KONG
----------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
<TABLE>
<CAPTION>
Title of each Name of each exchange
class on which registered
------------- ---------------------
<S> <C>
None N/A
</TABLE>
<PAGE>
Securities registered or to be registered pursuant to Section 12(g) of the Act.
$.01 Par Value Common Stock ("Common Stock")
--------------------------------------------
(Title of Class)
Warrants to Purchase Common Stock ("Warrants")
----------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
----------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of April 30, 1998:
6,365,646 Common Stock
1,679,000 Warrants
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 Item 18 X
----- -----
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Not Applicable.
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<PAGE>
EXCHANGE RATE INFORMATION
The Company has prepared its consolidated financial statements in
accordance with Hong Kong generally accepted accounting principles consistently
applied and publishes such statements in Hong Kong dollars, the functional
currency of the Company's subsidiaries and the legal tender currency of Hong
Kong. All references to "Hong Kong dollars" or "HK$" are to Hong Kong dollars.
All references to "U.S. Dollars," "US$" or "$" are to United States dollars.
Conversion of amounts from Hong Kong dollars into United States dollars for the
convenience of the reader has been made at the exchange rate of US$1.00 =
HK$7.73.
The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods indicated:
<TABLE>
<CAPTION>
CALENDAR YEAR PERIOD END AVERAGE(2) HIGH LOW
- ------------- ---------- ---------- ---- ---
NOON BUYING RATE(1)
-------------------
(HK$PER US$)
<S> <C> <C> <C> <C>
1993 7.7280 7.7348 7.7650 7.7230
1994 7.7375 7.7290 7.7530 7.7225
1995 7.7323 7.7357 7.7665 7.7300
1996 7.7332 7.7345 7.7440 7.7310
1997 7.7456 7.7431 7.7550 7.7275
1998 (through July 31, 1998) 7.7483 7.7462 7.7497 7.7412
</TABLE>
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(1) The noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of
New York.
(2) Determined by averaging the rates on the last business day of each month
during the relevant period.
CURRENCY TRANSLATIONS
The Company's published consolidated financial statements are presented
in Hong Kong dollars ("HK$"), the lawful currency of Hong Kong. In this Annual
Report, references to "U.S. dollars", "US$" or "$" are to U.S. currency and
references to "Hong Kong dollars" or "HK$" are to Hong Kong currency. Solely for
the convenience of the reader, this Annual Report contains translations of
certain Hong Kong dollar amounts into U.S. dollars at specified rates. These
translations should not be construed as representations that the Hong Kong
dollar amounts actually represent such U.S. dollar amounts or could be converted
into U.S. dollars at the rate indicated. Unless otherwise stated, the
translations of Hong Kong dollars into U.S. dollars have been made at the rate
of HK$7.73 to US$1.00.
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<PAGE>
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 20-F and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities as well as
other capital spending, financing sources and the effects of competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to dependence on major customer, dependence
upon key personnel, control by principal shareholder, competition, material
factors relating to the operations of the business, the transfer of Hong Kong's
sovereignty, PRC considerations, dependence on China factories, limited
seasonality, general economic conditions, and lack of patent protection for
manufacturing process.
-4-
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
LJ International Inc. (the "Company") is a totally vertically
integrated producer of finished gemstones and fine quality gemstone jewelry. It
is engaged in cutting and polishing semi-precious gemstones and designing,
manufacturing, marketing and distributing gem set jewelry to fine jewelers,
department stores, national jewelry chains and electronic and specialty
retailers throughout North America and Western Europe. The Company's product
line includes all major categories that are sought by major retailers, including
earrings, necklaces, pendants, rings and bracelets. The jewelry produced by the
Company is crafted in gold, platinum and sterling silver and is set with
semi-precious stones. The average wholesale price of the jewelry produced by the
Company is approximately $100, which equates to retail prices between $100 and
$499.
The Company believes that its vertically integrated structure provides
significant advantages over its competitors. All profits from value added
processes are captured internally, rather than shared with third party
manufacturers. The result is very competitive pricing for the retailer and
enhanced profits for the Company. Innovative processes in stone cutting and
manufacturing further enhance the Company's competitive position.
The Company employs an international design team and all of its designs
and merchandising strategies are proprietary. The exclusive and innovative
concepts that are created offer brand potential. The Company's primary marketing
focus has been in North America where it has sold directly to certain high
volume customers who need specialized product development services and through a
marketing relationship with International Jewelry Connection for those customers
that need higher levels of service and training.
The Company organizes its marketing and distribution strategies by
retail distribution channel. Concepts are developed for the specific needs of
different market segments. The Company has identified fine jewelers (Ben Bridge
and Carlyle), national jewelry chains (Sterling Inc.), department stores (Macys
and J C Penney), direct mail and electronic retailers (QVC Network, Inc.) as
prime retail targets. For the fiscal years ended April 30, 1997 and 1998,
approximately 87% and 89% of sales, respectively, were in North America.
For the past three fiscal years ended April 30, the breakdown of sales
and revenue of the Company (in thousand Hong Kong Dollars) based upon geographic
markets is summarized as follows:
<TABLE>
<CAPTION>
1996 % 1997 % 1998 %
---- - ---- - ---- -
(HK$'000) (HK$'000) (HK$'000)
<S> <C> <C> <C> <C> <C> <C>
USA............................ 73,941 84.6 80,481 87.2 111,274 89.6
Hong Kong...................... 2,856 3.3 2,020 2.2 7,915 6.4
PRC............................ 143 0.2 570 0.6 58 0.0
Japan.......................... 10,378 11.9 9,187 10.0 4,952 4.0
------ ---- ------ ----- ------- -----
87,318 100.0 92,258 100.0 124,199 100.0
------ ---- ------ ----- ------- -----
------ ---- ------ ----- ------- -----
</TABLE>
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<PAGE>
BACKGROUND AND ORGANIZATION
The Company was incorporated as an international business company under
the International Business Companies Act of the British Virgin Islands on
January 30, 1997. The Company owns all of the issued share capital in Lorenzo
Jewelry Manufacturing (Hong Kong) Limited ("Lorenzo"), a company incorporated in
Hong Kong on February 20, 1987. Lorenzo owns all of the issued share capital in
Shantou S.E.Z. Lorenzo Gems & Craft Factory Co., Limited, Shantou Lorenzo
Jewelry Manufacturing, and 60% of the issued share capital in Lorenzo Marketing
Co., Limited. Pursuant to a cooperative joint venture agreement between Lorenzo
and Guangdong Province Shantou Artcrafts Imports and Exports Co., the Company
controls the operating and financial activities of Shantou Lorenzo Jewelry
Manufacturing and is responsible for all of its profits and losses. In addition,
the Company owns all of the issued share capital in Precious Gem Trading Limited
(which owns all of the issued share capital in Lorenzo Gems (Shenzhen) Co.,
Limited) and all of the issued share capital in Golden Horizon Trading Limited
(which owns all of the issued share capital in Lorenzo Jewelry (Shenzhen) Co.,
Limited).
The following diagram illustrates the Company's corporate structure.
The respective country of organization/incorporation is shown in brackets.
<TABLE>
<CAPTION>
<S><C>
LJ INTERNATIONAL INC.
(British Virgin Islands)
--------------------------------------------------------------------------
100% 100% 100%
LORENZO JEWELRY MFG. PRECIOUS GEM GOLDEN HORIZON
(H.K.) LTD. TRADING LTD. TRADING LTD.
(Hong Kong) (B.V.I.) (B.V.I.)
100% 100%
100% SHANTOU S.E.Z. LORENZO LORENZO GEMS LORENZO JEWELRY
GEMS & CRAFT FACTORY (SHENZHEN) CO., LTD. (SHENZHEN) CO., LTD.
CO., LTD. (P.R.C.) (P.R.C.)
(P.R.C.)
100% SHANTOU LORENZO
JEWELRY MFG.
(P.R.C.)
60% LORENZO MARKETING
CO., LTD.
(Hong Kong)
</TABLE>
-6-
<PAGE>
INDUSTRY OVERVIEW
The jewelry industry is comprised of two major groups that distribute
finished jewelry to retailers in the United States: a small number of
manufacturers that make and distribute their production directly to retailers
and a large number of wholesalers and distributors who purchase products or
portions of products from third parties and resell those items to retailers.
Management believes that vertically integrated companies which control costs by
performing all value added processes enjoy a distinct competitive advantage over
wholesalers and distributors who pay premium acquisition prices for items that
they intend to resell. Management further believes that large retailers want to
rely upon prime manufacturers because they trust that prime manufacturers are
reliable, low cost producers who can accommodate the large quantities of
production that large retailers commonly purchase.
BUSINESS STRATEGY
The Company's business strategy is to increase its market share of
moderately priced high-quality gem-set jewelry by capitalizing on its unique
vertically integrated manufacturing processes to produce high volume,
high-quality products. The Company also intends to further develop its existing
customer relationships with its specialized services and to aggressively expand
into new distribution channels, particularly in the United States and throughout
Western Europe.
The Company is aggressively developing new product lines in exotic
stones, which have high perceived values in semi-precious stones. They include
tanzanite, aquamarine, imperial topaz, green tourmaline, pink tourmaline and
mandarine garnet.
Management also plans to expand into new product categories. The
Company believes that there is an opportunity to manufacture and sell and has
begun test-marketing a brand of sterling silver. These are typically
merchandised with a retail price range of $30.00 to $150.00. The Company will
also offer a new branded collection of cultured pearl jewelry with a retail
price range of $99.00 to $999.00.
MANUFACTURING CAPABILITY
The Company has established two sophisticated factories located in the
PRC that perform stone cutting and polishing and jewelry manufacturing. The
factories are located in the cities of Shantou and Shenzhen in Guangdong
Province. Each manufacturing operation is separated to allow for the specialized
needs of each process. The Shantou facility is the older of the two facilities.
It consists of 26,000 square feet and has been operating for eight years. The
Shenzhen facility has been operating for less than one year and has 50,000
square feet of manufacturing space. The Company currently employs over 1,700
skilled gemstone cutters and manufacturing personnel and is producing over 4
million carats of cut gemstones and 1 million pieces of finished fine jewelry
annually.
The Company imports choice rough gemstone material from mines located
in Africa, China and South America, especially concentrated in Brazil. Gemstone
craftsmen are trained and managed by Hong Kong personnel to insure that the
highest levels of cutting and polishing quality are achieved. The professional
skills possessed by the Company's cutters are applied to a wide variety of
shapes and sizes, maximizing the yield and value of the rough material that the
Company purchases. By performing internally the value added processes of cutting
and polishing, the Company maximizes quality control and dramatically increases
its profitability. The Company specializes in a wide range of popular and exotic
semi-precious gemstones ranging from amethyst, aquamarine and peridot to
tanzanite and tourmaline.
-7-
<PAGE>
The Company employs specialized manufacturing processes that deliver
large quantities of high quality finished jewelry. The Company is currently
producing over 60,000 pieces of finished jewelry per month from its two
facilities and employs in excess of 800 skilled craftsmen in jewelry
manufacturing. Each piece of jewelry receives hand made attention, resulting
in fine quality finishing at popular prices.
SALES AND MARKETING
The Company's merchandising strategy is to provide unique and
differentiated products that are enhanced by the favorable pricing that
results from its vertically integrated structure. The Company invests
significant effort in design and model making to produce items which are
distinctly different from its competitors. The Company intends to devote its
effort towards brand development and utilize marketing concepts to enhance
the saleability of its production. The Company recognizes that certain retail
price points are favored by retailers. As part of its product development
strategy, the Company attempts to align its wholesale prices to match
retailers' target prices as a means of achieving these popular price targets.
The Company's sales and marketing team is located in the Company's
executive offices in Hong Kong. The Company's marketing and distribution
strategy is to identify the strongest retail customers in each distribution
channel and to focus design and sales efforts towards the largest and fastest
growing retailers. The Company maintains a broad base of customers and
concentrates its efforts on five major jewelry market segments: fine jewelers
like Ben Bridge and Carlyle; national jewelry chains like Helzberg and Fred
Meyer; department stores like Macys; electronic retailers like QVC Network,
Inc.; and specialty retailers like Fortunoff's. The Company will introduce
new product divisions selling cultured pearls and sterling silver during the
Fall 1998 season.
The Company's single largest customer is QVC Network, Inc. which
accounted for approximately 55% of the Company's sales during fiscal 1998.
The Company does not sell to QVC Network, Inc. pursuant to any formal or
long-term contracts but only on a purchase order basis. Although the Company
has developed and maintained a good and longstanding relationship with QVC
Network, Inc., the loss of QVC Network, Inc. as a customer or a significant
reduction in its orders would have a materially adverse effect on the Company.
In addition to its direct sales to QVC Network, Inc. and other
retailers, the Company also sells its products to retailers through
International Jewelry Connection, a national network of independent sales
representatives who sell jewelry through direct contact with retail accounts.
The principal focus of International Jewelry Connection is on major U.S.
department stores and jewelry retailers, who require specialized levels of
marketing, service and training. These sales representatives are paid on a
commission-only basis.
Sales promotion efforts by the Company include attendance by Company
representatives at U.S. and international trade shows and conventions,
including Las Vegas, Orlando, New York, Basel, Switzerland, Hong Kong and
Japan. In addition, the Company actively advertises in trade journals and
related industry publications.
DESIGN AND PRODUCT DEVELOPMENT
The Company has seven internationally trained designers who work
from the Hong Kong executive office and a growing team of six designers who
work in a designated area within the Shenzhen
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<PAGE>
manufacturing facility. The PRC-based designers are closely supervised by the
Hong Kong design director and the most experienced Hong Kong design staff.
The PRC designers have already begun to create designs that have been
accepted by the Company's various clients worldwide. The Hong Kong design
team attends trade fairs worldwide to gather product ideas and monitor the
latest product trends. The Company produces over 250 new models per month to
support its business growth objectives.
The Company seeks to provide its customers with a broad selection of
high-quality 10 and 14 karat gold, platinum and sterling silver jewelry
products that incorporate traditional yet fashionable styles and designs. The
Company currently offers approximately 5,000 different styles of rings,
bracelets, necklaces, earrings, pendants and matching sets that are
contemporary and desirable in the market.
The Company studies product trends that are emerging in the
international market and adapts these trends to the needs of its retail
customers. The jewelry offered for sale considers color, fabric and fashion
trends which are projected over a two year period. The Company markets its
products as lifestyle inspired.
MANUFACTURING PROCESS
The Company manufactures its products at its facilities in Shantou and
Shenzhen, PRC. Its manufacturing processes combine vertical integration, modern
technology, mechanization and handcraftsmanship to produce contemporary and
fashionable jewelry. Its manufacturing operations basically involve cutting and
polishing semi-precious gemstones from rough, combining pure gold, platinum and
sterling silver with other metals to produce jewelry, and finishing operations
such as cleaning, polishing and setting, resulting in high quality finished
jewelry.
The Company has developed a process of cost-effectively producing
quality, gem-set jewelry. The Company believes it has a substantial
competitive advantage due to its unique, vertically integrated manufacturing
process. The Company utilizes the lost-wax method of jewelry manufacturing to
produce high-quality gold rings, earrings, pendants and bracelets. This is
based on an investment casting process used in the jewelry manufacturing
industry. It entails creating wax duplicates of the items which are encased
in a plaster mold. The plaster is hardened in an oven while the heat melts
away the wax, leaving a hollow mold which is then injected with gold. After
the casting process, the stones are mounted in the jewelry and the jewelry
undergoes a series of cleaning and polishing stages before being labeled with
the retailer's price tag and bar codes and shipped.
The gem cutting process generally starts with cobbing and sawing of
large rough gemstones into smaller pieces. The gemstones are then preformed
and semi-calibrated to required sizes and shapes. The final procedures
include fine cutting and polishing of the gemstones. The finished faceted
gemstones are then sent to the jewelry factory for assembling. The jewelry
manufacturing process includes waxing, casting, filing (assembling of gold
parts), cleaning, gem setting, trimming and polishing.
The manufacturing process in the jewelry industry results in great
volumes of gold scrap. The Company has strict controls to minimize waste.
Management believes that its manufacturing processes reduce the handling of
the end jewelry product and accordingly, the quantity of jewelry scrap is
greatly reduced. The scrap in the form of chips, filings, grindings and
sweepings are recovered by the Company and sent to refiners to recover the
gold content.
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<PAGE>
SUPPLY
The Company manufactures and cuts its own semi-precious stones. The
Company imports most of its rough gemstones from South America, Africa and the
PRC. South America is the major source of ametrine, amethyst, aquamarine,
imperial topaz, tourmaline and white topaz whereas Africa is the main source of
tanzanite, mandarine garnet, garnet aquamarine and topaz. The Company also
imports aquamarine, peridot and topaz from the PRC. The Company buys the rough
gemstones directly from a number of miners based on quality, pricing and
available quantities. The Company believes it has good relationships with its
suppliers, most of whom have supplied the Company for many years. The stones are
either delivered by air or by sea to the Company depending on volume and types
of rough stones.
The Company purchases its gold from banks, gold refiners and commodity
dealers who supply substantially all of its gold needs which management believes
is sufficient to meet the Company's requirements.
Gold acquired for manufacture is at least .995 fine and is combined
with other metals to produce 10 and 14 karat gold. The term "karat" refers to
the gold content of alloyed gold, measured from a maximum of 24 karats (100%
fine gold). Varying quantities of metals such as silver, copper, nickel and zinc
are combined with fine gold to produce 14 karat gold of different colors. These
alloys are in abundant supply and are readily available to the Company.
The Company does not presently engage in hedging activities with
respect to possible fluctuations in the price of gold. The Company believes the
risk of not engaging in such activities is minimal, since the Company purchases
its gold requirements after each significant purchase order is received. The
Company believes that a downward trend in the price of gold would have little,
if any, impact on the valuation of the Company's inventories.
The Company purchases supplies and raw materials from a variety of
suppliers and it does not believe the loss of any of the suppliers would have a
material adverse effect on its business. Alternative sources of supply for raw
materials for production of jewelry are readily available.
SECURITY
The Company has installed certain measures at its Shantou and Shenzhen,
PRC manufacturing as well as its Hong Kong administrative facilities to protect
against loss, including multiple alarm systems, infrared motion detectors and a
system of closed circuit television cameras which provide surveillance of all
critical areas of the Company's premises.
The Company carefully inspects all materials sent and received from
outside suppliers, monitors the location and status of all inventory, and has
strict internal control procedures of all jewelry as it proceeds through the
manufacturing process. A complete physical inventory of gold and gemstones is
taken at the Company's manufacturing and administrative facilities on an annual
basis.
INSURANCE
The Company maintains primary all-risk insurance, with limits in
excess of the Company's current inventory levels, to cover thefts and damage
to inventory located on the Company's premises. The Company also maintains
insurance covering thefts and damage to Company owned inventory located
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<PAGE>
off-site. The amount of coverage available under such policies is limited and
may vary by location, but generally is in excess of the value of the gold and
gemstones supplied by the Company. The Company carries transit insurance
which coverage includes the transportation of jewelry outside of the
Company's office.
COMPETITION
The jewelry manufacturing industry is highly competitive, and the
Company's competitors include domestic and foreign jewelry manufacturers,
wholesalers, and importers who may operate on a national, regional and local
scale. The Company's competitive strategy is to provide competitively priced,
high-quality products to the high volume retail jewelry market. According to
management, competition is based on pricing, quality, service and established
customer relationships. The Company believes that it has positioned itself as
a low cost producer without compromising its quality. The Company's ability
to conceive, design and develop products consistent with the requirements of
each retail distribution channel represents a competitive advantage.
The Company believes that few competitors have the capacity and
manufacturing skill to be effective competitors. Management believes that its
vertically integrated manufacturing capabilities distinguish it from most of
its competitors and enables it to produce very competitively priced, high
quality and consistent products.
In North America, the market, although highly fragmented, does
contain a number of major competitors, many of whom import much of their
product from the Far East and many of whom sell higher priced items. The key
United States competitors include PAJ, Inc., Aurafin, I. Kurgin, Andin
International Inc., Oroamerica, Inc., and Michael Anthony Jewelers Inc.
International competitors include Pranda International and Beauty Gems
Limited. Most of these manufacturers/wholesalers have been successful vendors
for many years and enjoy good relations with their clients. Although it may
be difficult for a newcomer to break into established relationships, the
Company already has made substantial inroads in the North American jewelry
market and it believes it can remain competitive based on its vertically
integrated low-cost, high-volume and high-quality manufacturing process.
EMPLOYEES
At August 1, 1998, the Company employed over 1,500 persons on a
full-time basis, of whom approximately 830 are involved in manufacturing of
jewelry and 610 are engaged in gemstone cutting and polishing. The remaining
60 persons, including the Company's management and executive staff, work in
the Company's Hong Kong office. None of the Company's employees is
represented by a labor union and the Company believes that its employees'
relations are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal executive offices are located at Units #11
and #12, 12/F, Block A, Focal Industrial Center, 21 Man Lok Street, Hung Hom,
Kowloon, Hong Kong. The Company owns approximately 4,800 square feet of
office, showroom and manufacturing space at this location.
The Company's first jewelry production facility consists of 10,000
square feet of building space which it owns in the Yubao Industrial Building,
Longhu, Shantou Special Economic Zone, Guangdong
-11-
<PAGE>
Province, PRC. The Company leases the adjacent 16,000 square feet on the same
floor of that building as one of its gem cutting facilities at a rental rate
of HK$24,085 (US$3,116) per month until July 2002.
The Company's recently completed second production facility in
Shenzhen, PRC consists of 50,000 square feet of building space. This facility
is located in the Shatoujiao Free Trade Zone, Shenzhen. The Company leases
this space from an unaffiliated third party at a rental rate of HK$59,120
(US$7,648) per month until November 2002.
The Company owns two warehouse facilities in Kowloon, Hong Kong
consisting of 5,432 square feet and 2,897 square feet, respectively. The
Company also owns additional properties in Sai Kung, Hong Kong and Aberdeen,
Hong Kong which it leases to non-affiliated third parties.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings, nor
are there any material legal proceedings pending with respect to any property
of the Company, and the Company is not aware of any legal proceedings
contemplated by any governmental authorities involving either the Company or
its property. No director, officer or affiliate of the Company, or any
associate of a director, officer or affiliate of the Company, is an adverse
party in any legal proceedings involving the Company or its subsidiaries, or
has an interest in any such proceeding which is adverse to the Company or its
subsidiaries.
ITEM 4. CONTROL OF REGISTRANT.
(a) As far as is known to management of the Company, the Company is
not directly or indirectly owned or controlled by another corporation or by
any foreign government.
(b) The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of September 1, 1998
(i) by each person who is known by the Company to own beneficially more than
10% of the outstanding Common Stock, (ii) by each executive officer and
director of the Company and (iii) by all directors and executive officers as
a group. Except as set forth below, to the knowledge of the Company, the
Company is not directly or indirectly owned or controlled by any other
corporation or by any foreign government.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL HOLDER NUMBER PERCENT
- ------------------------- SHARES BENEFICIALLY OWNED
---------------------------
<S> <C> <C>
Yu Chuan Yih................................................... 3,787,200(1) 59.5%
Jeffrey W. Taraschi............................................ 0
Debora Mu Yong Yih(2).......................................... 600,000 9.4%
Ka Man Au...................................................... 0
Joseph Tuszer.................................................. 0
Hon Tak Ringo Ng............................................... 0
Kui Shing Andy Lai............................................. 0
Lionel C. Wang................................................. 0
All directors and executive officers as a group (7 persons).... 3,787,200 59.5%
</TABLE>
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<PAGE>
(1) Of these shares, 1,500,000 shares are owned of record by Pacific
Growth Developments Ltd., a British Virgin Islands corporation
which is owned by Mr. Yih (60%), his wife Tammy Yih (20%) and an
adult daughter, Bianca Tzu Hsiu Yih (20%). In addition, Mr. Yih is
the sole shareholder of the following three British Virgin Islands
corporations which own shares of the Company as follows: Welgram
International Limited 236,000 shares; Sunflower Gold Holdings
Limited 235,000 shares; and Panama Gold Holdings Limited 235,000
shares.
(2) Debora Mu Yong Yih is an adult daughter of Mr. Yih.
(c) To the knowledge of the Company, there are no arrangements known to
the Company, the operation of which may at a subsequent date result in a change
of control of the Company.
ITEM 5. NATURE OF TRADING MARKET.
The Common Stock is traded in the over-the-counter market and is quoted
on The Nasdaq National Market under the symbol "JADEF." The following table sets
forth, on a quarterly basis, the high and low sales prices for the Common Stock
since its listing on The Nasdaq National Market on April 15, 1998:
<TABLE>
<CAPTION>
QUARTER ENDED: HIGH LOW
------------- ----- -----
<S> <C> <C>
April 30, 1998 $7.50 $5.75
July 31, 1998 $7.50 $4.50
</TABLE>
The Warrants are traded in the over-the-counter market and are
quoted on The Nasdaq National Market under the symbol "JADWF." The following
table sets forth, on a quarterly basis, the high and low sales prices for the
Warrants since their listing on The Nasdaq National Market on April 15, 1998:
<TABLE>
<CAPTION>
QUARTER ENDED: HIGH LOW
------------- ----- -----
<S> <C> <C>
April 30, 1998 $1.625 $0.625
July 31, 1998 $1.656 $0.625
</TABLE>
The Company does not believe that there is any principal non-United
States trading market for the Common Stock or the Warrants. The Company
believes that a substantial majority of the outstanding Common Stock and
Warrants are held in the United States by Cede & Co. as record holder.
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<PAGE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
There are no material British Virgin Islands laws that impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest or other payments to nonresident holders of the Company's capital
stock. British Virgin Islands law and the Company's Memorandum of Association
and Articles of Association impose no limitations on the right of nonresident or
foreign owners to hold or vote the Common Stock.
ITEM 7. TAXATION.
The following is a summary of certain anticipated material U.S.
federal income and British Virgin Islands tax consequences of an investment
in the Common Stock. The summary does not deal with all possible tax
consequences relating to an investment in the Common Stock and does not
purport to deal with the tax consequences applicable to all categories of
investors, some of which (such as dealers in securities, insurance companies
and tax-exempt entities) may be subject to special rules. In particular, the
discussion does not address the tax consequences under state, local and other
national (e.g., non-U.S. and non-British Virgin Islands) tax laws.
Accordingly, each prospective investor should consult its own tax advisor
regarding the particular tax consequences to it of an investment in the
Common Stock. The following discussion is based upon laws and relevant
interpretations thereof in effect as of the date of this Prospectus, all of
which are subject to change.
UNITED STATES FEDERAL INCOME TAXATION
The following discussion addresses only the material U.S. federal
income tax consequences to a U.S. person (i.e., a U.S. citizen or resident, a
U.S. corporation, or an estate or trust subject to U.S. federal income tax on
all of its income regardless of source) making an investment in the Common Stock
(a "U.S. Investor"). For taxable years beginning after December 31, 1996, a
trust will be a U.S. person only if (i) a court within the United States is able
to exercise primary supervision over its administration and (ii) one or more
United States persons have the authority to control all of its substantial
decisions. In addition, the following discussion does not address the tax
consequences to a person who holds (or will hold), directly or indirectly, 10%
or more of the Common Stock (a "10% Shareholder"). Non-U.S. persons and 10%
Shareholders are advised to consult their own tax advisors regarding the tax
considerations incident to an investment in the Common Stock.
A U.S. Investor receiving a distribution with respect to the Common
Stock will be required to include such distribution in gross income as a taxable
dividend, to the extent of the Company's current or accumulated earnings and
profits as determined under U.S. federal income tax principles. Any
distributions in excess of such earnings and profits of the Company will first
be treated, for U.S. federal income tax purposes, as a nontaxable return of
capital, to the extent of the U.S. Investor's adjusted tax basis in the Common
Stock, and then as gain from the sale or exchange of a capital asset, provided
that the Common Stock constitutes a capital asset in the hands of the U.S.
Investor. U.S. corporate shareholders will not be entitled to any deduction for
distributions received as dividends on the Common Stock.
Gain or loss on the sale or exchange of the Common Stock will be
treated as capital gain or loss if the Common Stock is held as a capital asset
by the U.S. Investor. Such capital gain or loss will be
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<PAGE>
long-term capital gain or loss if the U.S. Investor has held the Common Stock
for more than one year at the time of the sale or exchange, and will be taxed
at the lowest rates applicable to capital gains if the U.S. Investor has held
the Common Stock for more than eighteen months at such time.
A holder of Common Stock may be subject to "backup withholding" at the
rate of 31% with respect to dividends paid on such Common Stock if such
dividends are paid by a paying agent, broker or other intermediary in the United
States or by a U.S. broker or certain United States-related brokers to such
holder outside the United States. In addition, the proceeds of the sale,
exchange or redemption of Common Stock may be subject to backup withholding, if
such proceeds are paid by a paying agent, broker or other intermediary in the
United States.
Backup withholding may be avoided by the holder of Common Stock if such
holder (i) is a corporation or comes within certain other exempt categories or
(ii) provides a correct taxpayer identification number, certifies that such
holder is not subject to backup withholding and otherwise complies with the
backup withholding rules. In addition, holders of Common Stock who are not U.S.
persons ("non-U.S. holders") are generally exempt from backup withholding,
although such holders may be required to comply with certification and
identification procedures in order to prove their exemption.
Any amounts withheld under the backup withholding rules from a payment
to a holder will be refunded (or credited against the holder's U.S. federal
income tax liability, if any) provided that amount withheld is claimed as
federal taxes withheld on the holder's U.S. federal income tax return relating
to the year in which the backup withholding occurred. A holder who is not
otherwise required to file a U.S. income tax return must generally file a claim
for refund (or, in the case of non-U.S. holders, an income tax return) in order
to claim refunds of withheld amounts.
BRITISH VIRGIN ISLANDS TAXATION
Under the International Business Companies Act of the British Virgin
Islands ("BVI") as currently in effect, a holder of Common Stock who is not a
resident of the BVI is exempt from BVI income tax on dividends paid with respect
to the Common Stock and all holders of Common Stock are not liable to BVI income
tax on gains realized during that year on sale or disposal of such shares; the
BVI does not impose a withholding tax on dividends paid by a company
incorporated under the International Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by the BVI
on companies incorporated under the International Business Companies Act. In
addition, the Common Stock is not subject to transfer taxes, stamp duties or
similar charges.
There is no income tax treaty or convention currently in effect between
the United States and the BVI.
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<PAGE>
ITEM 8. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
(HONG KONG DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected consolidated financial data with respect to each
of the years in the three-year period ended April 30, 1998 have been derived
from the Company's audited consolidated financial statements. The data with
respect to the year ended April 30, 1994 have been derived from the Company's
unaudited consolidated financial statements. The following selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
The Company prepares its Consolidated Financial Statements in
accordance with Hong Kong GAAP, which differs in certain significant respects
from US GAAP. For a discussion of the significant differences between Hong Kong
GAAP and US GAAP, see Note 15 of Notes To And Forming Part Of The Financial
Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------
1994 1995 1996 1997 1998 1998
-------- -------- --------- -------- --------- -----------
HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Operating revenues....................... 45,968 48,365 87,318 92,258 124,199 16,067
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Operating income...................... 400 1,863 13,828 21,930 31,540 4,080
Other income (expense)................ (3,905) (5,930) (5,693) (3,999) (6,964) (901)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes..... (3,505) (4,067) 8,135 17,931 24,576 3,179
Income taxes.......................... (613) (27) (620) (2,210) (2,120) (274)
-------- -------- -------- -------- -------- --------
Net income (loss)..................... (4,118) (4,094) 7,515 15,721 22,456 2,905
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Dividends per share................... 0.57
Earnings (loss) per share............. (0.94) (0.93) 1.71 3.58 4.95 0.64
Weighted average number of shares
outstanding (thousands)............. 4,387 4,387 4,387 4,387 4,539 4,539
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<PAGE>
Amounts in accordance with US GAAP
Operating revenues....................... 45,968 48,365 87,318 92,258 124,199 16,067
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Operating income (loss) before
income taxes........................ (3,505) (4,639) 7,563 16,599 14,325 1,852
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net income (loss)..................... (4,118) (4,666) 6,943 14,389 12,205 1,578
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Dividends per share................... 0.55
Earnings (loss) per shar.............. (0.91) (1.03) 1.53 3.18 2.65 0.34
Weighted average number of shares
outstanding (thousands)............ 4,530 4,530 4,530 4,530 4,601 4,601
BALANCE SHEET DATA:
<CAPTION>
AS OF APRIL 30,
--------------------
1994 1995 1996 1997 1998 1998
-------- -------- --------- -------- --------- -----------
HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Working capital....................... (15,793) (22,877) (15,092) (2,757) 39,090 5,056
Total assets.......................... 67,681 65,160 64,763 82,879 154,616 20,002
Long-term obligations................. 14,383 9,338 13,913 13,006 10,544 1,364
Total shareholders' equity............ 296 (3,750) 1,260 16,981 90,257 11,676
Amounts in accordance with US GAAP
Working capital....................... (15,793) (22,877) (15,092) (2,757) 39,090 5,056
Total assets.......................... 67,606 64,513 63,544 78,533 142,307 18,410
Long-term obligations................. 14,383 9,338 13,913 13,006 10,544 1,364
Total shareholders' equity............ 221 (4,403) 41 12,635 77,948 10,084
</TABLE>
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<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the financial statements and notes to the financial statements appearing
elsewhere herein. The amounts reflected in the following discussion are in Hong
Kong Dollars (HK$), the functional currency of the Company's subsidiaries and
the legal tender currency of Hong Kong Special Administrative Region of China.
The average exchange rate adopted for the periods presented is US$1 = HK$7.73
and unless otherwise indicated is the rate used in the discussion herein.
OVERVIEW
LJ International Inc. ("LJI" or the "Company") owns 100% of the equity
of Lorenzo Jewelry Manufacturing (Hong Kong) Limited ("Lorenzo"), Shantou S.E.Z.
Lorenzo Gems & Craft Factory Co., Ltd., Shantou Lorenzo Jewelry Manufacturing,
Precious Gem Trading Ltd., Lorenzo Gems (Shenzhen) Co., Ltd., Golden Horizon
Trading Ltd., Lorenzo Jewelry (Shenzhen) Co., Ltd. and 60% of the issued share
capital in Lorenzo Marketing Co., Ltd. Collectively, these entities are referred
to as "the Company." LJI is a British Virgin Islands ("BVI") holding company and
substantially all of LJI's operating assets are held by its subsidiaries, which
are located in Hong Kong and/or China. While Lorenzo has operated since 1987,
LJI was incorporated in January 1997, and had subsequently merged with Lorenzo
and its subsidiaries.
LJ International Inc. is a totally vertically integrated producer of
finished gemstones and fine quality gemstone jewelry. It is engaged in cutting
and polishing semi-precious gemstones and designing, manufacturing, marketing
and distributing gem set jewelry to fine jewelers, department stores, national
jewelry chains and electronic and specialty retailers throughout North America
and Western Europe. The Company's product line includes all major categories
that are sought by major retailers, including earrings, necklaces, pendants,
rings and bracelets. The jewelry produced by the Company is crafted in gold,
platinum and sterling silver and is set with semi-precious stones. The average
wholesale price of the jewelry produced by the Company is approximately $100,
which equates to retail prices between $100 and $499.
The Company believes that its vertically integrated structure
provides significant advantages over its competitors. All profits from value
added processes are captured internally, rather than shared with third party
manufacturers. The result is very competitive pricing for the retailer and
enhanced profits for the Company. Innovative processes in stone cutting and
manufacturing further enhance the Company's competitive position.
The Company employs an international design team and all of its
designs and merchandising strategies are proprietary. The exclusive and
innovative concepts that are created offer brand potential. The Company's
primary marketing focus has been in North America where it has sold directly
to certain high volume customers who need specialized product development
services and through a marketing relationship with IJC (International Jewelry
Connection) for those customers that need higher levels of service and
training.
The Company organizes its marketing and distribution strategies by
retail distribution channel. Concepts are developed for the specific needs of
different market segments. The Company has identified fine jewelers (Ben
Bridge and Caryle), national jewelry chains (Sterling Inc.), department
stores (Macys and J C Penney), direct mail and electronic retailers (QVC
Network, Inc.) as prime retail targets. For
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<PAGE>
the fiscal years ended April 30, 1997 and 1998, approximately 87% and 89% of
sales, respectively, were in North America.
During fiscal 1998, the Company completed its initial public
offering and raised gross proceeds of HK$58,051,000 (US$7,510,000) from the
sale of common stock and warrants. Additional amounts were received after
year-end from the exercise of the over-allotment in the offering. The
completion of this offering was a very significant development for the
Company and required substantial management time away from the normal
operations of the Company. In 1999, management is looking forward to
re-focusing all its energy to the operation of the Company's primary business
with the goal of further increasing sales and operating performance.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Net sales for fiscal 1998 totaled HK$124,199,000 (US$16,067,000),
compared to HK$92,258,000 (US$11,935,000) in fiscal 1997, an increase of
HK$31,941,000 (US$4,132,000) or 34.6%. This increase resulted from an
increase of over 900% in sales through International Jewelry Connection
("IJC") in the United States from HK$1,392,000 (US$180,000) in fiscal 1997 to
HK$14,152,000 (US$1,831,000) in fiscal 1998. IJC is a network of sales
professionals which sell LJI products to fine jewelry retailers, national
jewelry chains and department stores (see "Business-Sales and Marketing").
Sales to the Company's largest customer, QVC Network, Inc., also rose by 8%,
and represented 55% of sales in fiscal 1998 compared to 69% in 1997.
GROSS PROFIT
Gross profit for fiscal 1998 was HK$60,906,000 (US$7,879,000),
compared to HK$44,205,000 (US$5,719,000) in fiscal 1997, an increase of
HK$16,701,000 (US$2,161,000) or 37.8%, whereas gross profit margin increased
to 49.0% from 47.9% in fiscal 1997. This increase was mainly due to increased
sales of higher margin products and better production efficiency and control
linked to utilization of new production equipment in the Shantou facility.
The increase in gross margin was impacted by the sales of
HK$10,142,000 (US$1,312,000) in gems stone rough inventory to another
company. Gross margin on this sale was only 10%. The Company liquidates the
inventory by selling to other companies while it is not a regular occurrence.
The Company may periodically utilize this strategy to reduce excess gems
stone inventory when it is considered beneficial to the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for fiscal 1998 were
HK$33,545,000 (US$4,340,000), an increase of 41.8% as compared with
HK$23,657,000 (US$3,060,000) in fiscal 1997. HK$4,255,000 (US$550,000) was
directly related to startup costs associated with the new Shenzhen factory
which included personnel and training costs.
Selling expenses were increased by HK$2,464,000 (US$319,000) from
HK$6,484,000 (US$839,000) or 7% of sales in fiscal 1997 to HK$8,948,000
(US$1,158,000) or 7% of sales in fiscal 1998 basically due to commission,
overseas travelling expenses and bonus payment for contracted sales force as
well as increased marketing and promotional expenses associated with increase
in sales.
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<PAGE>
General and administrative expenses increased by HK$7,424,000
(US$960,000) from HK$17,173,000 (US$2,221,600) in fiscal 1997 to
HK$24,597,000 (US$3,182,000) in fiscal 1998. The increase was mainly due to
expansion in management and administrative staff, increase in wage level, as
well as various office and administrative expenses associated with increase
in sales.
OTHER INCOME/EXPENSES
Net other expenses totaled HK$2,785,000 (US$360,000) during fiscal
1998 as compared to a net other expense of HK$2,617,000 (US$339,000) in
fiscal 1997 and consisted principally of interest expense and rental income.
Interest expenses increased by HK$2,965,000 (US$384,000) from
HK$3,999,000 (US$517,000) in fiscal 1997 to HK$6,964,000 (US$901,000) in
fiscal 1998. This 74% increase was principally due to general increase in
interest rate level and additional borrowings to fund business growth and
establish a new jewelry factory in Shenzhen.
Net rental income for fiscal 1998 was HK$1,273,000 (US$165,000) as
compared with net rental income of HK$1,280,000 (US$166,000) in fiscal 1997.
There was no material change between the two periods.
During fiscal 1998, the Company sold an investment property for
HK$3,800,000 (US$492,000) to Mr. Yu Chuan Yih and had a gain of HK$2,904,000
(US$376,000). The consideration of the property was based on a valuation
report prepared by an independent professional appraiser. Accounting
treatment for this transaction is different under US GAAP (see
"Reconciliation to US GAAP").
INCOME TAXES
The Company was incorporated in the British Virgin Islands and,
under current law of the British Virgin Islands, is not subject to tax on
income or on capital gains.
For the Company's subsidiaries in Hong Kong, prevailing corporate
income tax rate is 16%.
The Company's subsidiaries in the PRC are registered to qualify as
Foreign Investment Enterprises in the PRC and are eligible for certain tax
holidays and concessions. Accordingly, certain of the PRC subsidiaries are
exempted from PRC income tax for two years starting from their first profit
making years, followed by a 50% reduction of tax for next three years. These
subsidiaries have sustained losses for the PRC income tax purpose. As a
result, the Company has not recorded any PRC income tax expense. PRC income
tax in the future will be calculated at the applicable rates relevant to the
PRC subsidiaries which currently are 15%.
For fiscal 1998, income taxes decreased by HK$90,000 (US$12,000) to
HK$2,120,000 (US$274,000) from HK$2,210,000 (US$286,000) in fiscal 1997.
Despite increase in profit during the year which is attributable to the full
operation of the PRC subsidiaries, income tax actually decreased as the
result of restructuring of the intra-group pricing policy.
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<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES
Net sales increased by HK$4,940,000 (US$639,000), or 5.7% from
HK$87,318,000 (US$11,296,000) in fiscal year 1996, to HK$92,258,000
(US$11,935,000) in fiscal year 1997. This increase was due to increased sales
to existing customers, a moderate shift in the Company's product mix toward
high value- added products and improved pricing.
GROSS PROFIT
In fiscal year 1997, total gross profit increased by 40.6% to
HK$44,205,000 (US$5,719,000) from HK$31,423,000 (US$4,065,000) in fiscal 1996
while gross profit margin increased to 47.9% from 36% in fiscal 1996. This
increase was basically due to increased sales and improved production
efficiency as a result of improvement in the Shantou facility in the aspects
of fully-trained skilled craftsman and well developed production technology.
Since mid-1996, all jewelry products were assembled by the Company which also
improved gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the fiscal year ended April
30, 1997 were HK$23,657,000 (US$3,060,000), an increase of 21.7% as compared
with HK$19,433,000 (US$2,514,000) in fiscal year 1996.
Selling expenses increased by HK$1,201,000 (US$155,000) from
HK$5,283,000 (US$683,000) in fiscal year 1996 to HK$6,484,000 (US$839,000) in
fiscal year 1997 basically due to commission and bonus payment to contracted
sales force who referred customers to the Company on a commission basis.
Other marketing expenses also increased with the increase in sales.
General and administrative expenses increased by HK$3,023,000
(US$391,000) from HK$14,150,000 (US$1,831,000) in fiscal year 1996 to
HK$17,173,000 (US$2,222,000) in fiscal year 1997. The increase was
principally due to expansion in workforce, an increase in wage levels, as
well as various office and administrative expenses associated with increase
in sales.
OTHER INCOME/EXPENSES
Other income/expenses during fiscal 1997 consisted of interest
expenses, rental income and minority interest. Net other expense totaled
HK$2,617,000 (US$339,000) during the year as compared to HK$3,855,000
(US$499,000) in fiscal 1996.
Interest expenses decreased by HK$1,694,000 (US$219,000) from
HK$5,693,000 (US$736,000) in fiscal 1996 to HK$3,999,000 (US$517,000) in
fiscal 1997. This 29.8% decrease was basically due to reduction in general
interest rate levels, better trade financing terms and increased use of gold
loans for financing gold purchases which cost was substantially less than
normal financing (see "Liquidity and Capital Resources").
Net rental income decreased by HK$544,000 (US$70,000) from
HK$1,824,000 (US$236,000) in fiscal 1996 to HK$1,280,000 (US$166,000) in
fiscal 1997. This 30% decrease in net rental income
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<PAGE>
was principally attributable to the several months' vacant period for the
Company's investment properties when the original tenancy agreements expired
and the Company was seeking new tenants.
Minority interest for the Company, which was HK$102,000 (US$13,000)
in fiscal 1997, reflected the loss of Lorenzo Marketing Co., Ltd. as a result
of unfavorable market conditions in Japan.
INCOME TAXES
Income taxes increased by 256% from approximately HK$620,000
(US$80,000) in fiscal 1996 to HK$2,210,000 (US$286,000) in fiscal 1997. The
increase in income taxes was attributable to the increase in the taxable
earnings of the Company.
LIQUIDITY AND CAPITAL RESOURCES
LJI has no direct business operations other than its ownership of
its subsidiaries. Its ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from its operating
subsidiaries. There currently are no known restrictions on LJI's subsidiaries
to pay dividends to LJI; however, LJI does not have current intent of paying
dividends to its shareholders.
The primary sources of the Company's cash for working capital and
capital expenditure have been net cash flows from operating activities,
capital lease financing and borrowings. Seasonal working capital needs have
been met through short-term borrowing under a revolving line of credit.
For the fiscal year ended April 30, 1998, as a result of
HK$31,455,000 (US$4,069,000) cash provided by financing activities and
HK$1,545,000 (US$200,000) and HK$19,454,000 (US$2,517,000) used by operating
and investing activities, respectively, cash and cash equivalents increased
by HK$10,456,000 (US$1,353,000) during the year.
Net cash used by operating activities in fiscal 1998 was
HK$1,545,000 (US$200,000) as compared with net cash of HK$1,361,000
(US$176,000) provided by operating activities in fiscal 1997. Negative cash
flows from operating activities are principally the result of improved
operating results, offset by increased working capital requirement
attributable to the increase in accounts receivable and inventory levels.
As of April 30, 1998, accounts receivable increased by HK$22,615,000
(US$2,926,000) to HK$31,068,000 (US$4,019,000) from HK$8,453,000
(US$1,094,000) as of April 30, 1997. The increase is mainly due to increase
in sales for the period, in particular the sales to new customers who are
generally offered a 60-day credit period. Based upon the historical
collectability of its receivables and the nature of the companies with which
it engages, the Company has experienced excellent collection history.
Inventory increased by HK$9,801,000 (US$1,268,000) from
HK$37,193,000 (US$4,812,000) as of April 30, 1997 to HK$46,994,000
(US$6,079,000) as of April 30, 1998. The increase was due to management's
anticipation of significant increase in sales for the first and second
quarters of the new fiscal year.
For the fiscal year ended April 30, 1998, net cash used in
investment activities was HK$19,454,000 (US$2,517,000), an increase of
HK$18,219,000 (US$2,357,000) as compared with HK$1,235,000 (US$160,000) in
fiscal 1997. The net cash used in investment activities during fiscal 1998
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<PAGE>
included HK$22,728,000 (US$2,940,000) for the establishment of the new
manufacturing facility in Shenzhen and the purchase of new machinery for the
Shenzhen and Shantou facilities; HK$525,000 (US$68,000) of organization
costs, offset by net proceeds of HK$3,800,000 (US$492,000) received from the
sale of an investment property to a related party.
As of April 30, 1998, the Company had various letters of credit
under banking facilities which aggregated HK$32,100,000 (US$4,153,000) as of
April 30, 1998. The Company had HK$17,622,000 (US$2,280,000) and
HK$16,495,000 (US$2,134,000) outstanding under its letters of credit as of
April 30, 1997 and 1998, respectively. Under its letters of credit, the
Company is required to maintain certain cash balance which totaled
HK$3,036,000 (US$393,000) and HK$3,111,000 (US$402,000) as of April 30, 1997
and 1998, respectively.
The Company has also secured gold loan facilities with various banks
in Hong Kong. Due to lower interest rates charged for gold loans and
declining prices of gold, the cost to the Company through its gold loan
program has been substantially less than the costs that would be incurred if
the Company were to finance the purchase of all of its gold requirements with
borrowings under its letter of credit facility or other credit arrangements.
The gold loan, however, does expose the Company to certain market risks
associated with potential future increases in the price of gold, and the
Company currently does not hedge against such risks. Under the gold loan
arrangements, the Company may defer the purchase until such time as the
Company decides appropriate, the price being paid will be the current market
price at time of payment. The Company had outstanding loans to purchase 2,300
ounces of gold as of April 30, 1997 and 1998, with the related balances being
HK$6,376,000 (US$825,000) and HK$5,810,000 (US$752,000), respectively.
Interest rates for these loans were 3.3% to 3.6% as of April 30, 1998.
Unrealized gain on the unsettled gold loans as of April 30, 1997 and 1998
were HK$474,000 (US$61,000) and HK$566,000 (US$73,000), respectively.
Long-term mortgage loans on the Company's investment properties
aggregated HK$15,217,000 (US$1,969,000) and HK$13,847,000 (US$1,791,000) as
of April 30, 1997 and 1998, respectively. Substantially all properties of the
Company are pledged as collateral for its banking facilities.
On October 17, 1997, the Company completed the sale of promissory
notes amounting to HK$6,049,000 (US$783,000). These notes beared interest of
7% and the note holders were repaid in full from the proceeds of the initial
public offering of the Company and, in addition, received 156,500 shares of
the Company's common stock upon completion of the public offering. As of
April 30, 1998, the Company had outstanding promissory notes amounting to
HK$2,184,000 (US$283,000), which were repaid after year end.
In April 1998, the Company completed an initial public offering in
which it sold 1,460,000 shares of common stock and 1,679,000 warrants. The
Company realized gross proceeds of HK$58,051,000 (US$7,510,000) from this
offering. The Company may realize additional proceeds from the exercise of
the warrants, although there can be no assurance that such warrants will be
exercised. After year end, the Company received gross proceeds of
HK$8,464,000 (US$1,095,000) from the sale of 219,000 shares of Common Stock
pursuant to an over-allotment option granted in the offering.
The Company anticipates that cash flow from operations, as well as
borrowings available under the Company's existing credit line and gold loan
arrangement, will be sufficient to satisfy the Company's capital needs for
the next twelve months.
-23-
<PAGE>
RECONCILIATION TO US GAAP
The Company prepares its financial statements under Generally
Accepted Accounting Principles (GAAP) as practiced in Hong Kong (HK GAAP).
There are certain differences between HK GAAP and GAAP as practiced in the
United States (US GAAP). In consideration of US GAAP, certain adjustments
would have been provided.
In connection with the bridge financing associated with the
Company's public offering, the Company was required under SEC accounting
rules to record for US GAAP purposes additional costs associated with the
issuance of 156,500 shares of the Company's common stock to the holders of
the Promissory Notes for no additional consideration. The value associated
with these shares is HK$6,049,000 (US$783,000) based on the common stock
price associated with the offering, which was amortized as an additional
interest expense for the period from October 1997 to April 1998. Similar
costs are not expected to be re-occurring in the future.
Under US GAAP, for the fiscal year ended April 30, 1998, HK$547,000
(US$71,000) would be recorded as depreciation expense on investment
properties. Also, certain deferred costs with total amount of HK$898,000
(US$116,000) would be expensed based on US GAAP. In October 1997, the Company
sold an investment property to its major shareholder and recognized a gain of
HK$2,904,000 (US$376,000). Under US GAAP, such gain would be recorded as a
capital contribution while HK$76,000 (US$10,000) in relation to the
depreciation previously charged on this investment property would be credited
as additional income for fiscal 1998. In addition, HK$64,000 (US$8,000) for
the amortization of certain offering costs and HK$7,000 (US$1,000) in
relation to the amortization of goodwill would also be credited since the
related deferred costs had already been expensed under US GAAP in the
previous year. As a result, net income of the Company for the year ended
April 30, 1998 under US GAAP would be HK$12,205,000 (US$1,578,000).
For the fiscal year ended April 30, 1997, depreciation on investment
properties would be increased by HK$572,000 (US$74,000) and certain deferred
costs with total amount of HK$760,000 (US$98,000) would have been expensed
based on US GAAP. As a result, net income of the Company for the fiscal year
ended April 30, 1997 under US GAAP would be HK$14,389,000 (US$1,862,000).
IMPACT OF RECENTLY ISSUED US GAAP ACCOUNTING STANDARDS.
Statement of Financial Accounting Standards 130, "Reporting
Comprehensive Income", and Statement of Financial Accounting Standards 131,
"Disclosures About Segments of an Enterprise and Related Information."
Statement 130 establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among other
disclosures, Statement 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that displays with the same
prominence as other financial statements. Statement 131 supersedes Statement
of Financial Accounting Standards 14, "Financial Reporting for Segments of a
Business Enterprise". Statement 131 establishes standards on the way that
public companies report financial information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the
public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. Statement 131 defines
operating segments as components of a company about which separate financial
information is available
-24-
<PAGE>
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
Statements 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
that the standards may have on the future financial statement disclosures.
Results of operations and financial position, however, will be unaffected by
implementation of these standards.
INFLATION
The Company does not consider inflation to have had a material
impact on its results of operations over the last three years.
FOREIGN EXCHANGE
More than 89% of the Company's sales are denominated in U.S. Dollars
whereas the other sales are basically denominated in Hong Kong Dollars. The
largest portion of the Company's expenses are denominated in Hong Kong
Dollars, followed by U.S. Dollars and Renminbi. The exchange rate of the Hong
Kong Dollar is currently pegged to the U.S. Dollar, but during the past
several years the market exchange rate has fluctuated within a narrow range.
The PRC government principally sets the exchange rate between the Renminbi
and all other currencies. As a result, the exchange rates between the
Renminbi and the U.S. Dollar and the Hong Kong Dollar have fluctuated in the
past and may fluctuate in the future. If the value of the Renminbi or the
Hong Kong Dollar decreases relative to the U.S. Dollar, such fluctuation may
have a positive effect on the Company's results of operations. If the value
of the Renminbi or the Hong Kong Dollar increases relative to the U.S.
Dollar, such fluctuation may have a negative effect on the Company's results
of operations. The Company does not currently hedge its foreign exchange
positions.
YEAR 2000 ISSUE
The Company has begun to address possible remedial efforts in
connection with computer software that could be affected by the Year 2000
problem. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company has been informed by the suppliers of
substantially all of the Company's software that all of those suppliers'
software that is used by the Company is Year 2000 compliant. The software
from these suppliers is used in major areas of the Company's operations such
as for financial, sales, warehousing and administrative purposes. The Company
has no internally generated software. After reasonable investigation, the
Company has not yet identified any Year 2000 problem but will continue to
monitor the issue. However, there can be no assurances that Year 2000 problem
will not occur with respect to the Company's computer systems. The Year 2000
problem may impact other entities with which the Company transacts business,
and the Company cannot predict the effect of the Year 2000 problem on such
entities.
-25-
<PAGE>
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Yu Chuan Yih...................... 59 Chairman of the Board of Directors
Jeffrey W. Taraschi............... 46 President, Chief Executive Officer and Director
Ka Man Au......................... 34 Executive Vice President, Secretary and Director
Joseph Tuszer..................... 52 Vice President Product Development
Hon Tak Ringo Ng.................. 38 Chief Financial Officer
Kui Shing Andy Lai................ 49 Non-Executive Director
Lionel C. Wang.................... 42 Non-Executive Director
</TABLE>
None of the directors and officers was selected pursuant to any
agreement or understanding with any other person. There is no family
relationship between any director or executive officer and any other director
or executive officer.
MR. YIH established the business of Lorenzo Jewelry Mfg. (HK) Ltd.
and has served as its President and Managing Director since 1987. Mr. Yih is
primarily responsible for business development and overall Company
management. He has over 20 years of experience in semi-precious stone
production and marketing. Mr. Yih has been a gemstone trader in Brazil and
has extensive experience and relationships in gem sourcing and jewelry
design. Mr. Yih is also president of the Hong Kong branch of the Gemological
Institute of America (GIA), the nonprofit educational organization for the
jewelry industry.
MR. TARASCHI has served as a director of the Company since September
1997 and as President and Chief Executive Officer of the Company since June
1998. He received his Bachelor of Arts degree in economics from Rutgers
University in 1974. From 1986 to 1996, Mr. Taraschi has served in senior
executive positions at Town & Country, QVC Inc. and R.H. Macy Inc. with
responsibilities for business marketing and product development. In December
1996, he formed International Business Partners, a consulting company which
formulates and administers business, marketing and product plans for major
manufacturers and retailers worldwide.
MS. AU has served as a director of Lorenzo Jewelry Mfg. (HK) Ltd.
since its incorporation in 1987. Ms. Au is primarily responsible for the
general administration, human resources, operations and management of the
Company.
MR. TUSZER has served as vice president - product development of the
Company since November 1997. From 1989 to 1991, he served as executive vice
president - product development for M. Fabrikant & Sons, New York. From 1992 to
1993, Mr. Tuszer served as a consultant for product development for William
Schneider, Inc., Miami. From 1993 to 1996, he served as vice president - product
development for Samuel Aaron & Sons, New York. Mr. Tuszer has substantial
experience in the jewelry trade,
-26-
<PAGE>
including manufacturing and production, knowledge of colored stones, product
development and marketing.
MR. NG has served as chief financial officer of the Company since
September 1997. He received his Bachelor of Science degree in civil engineering
from the University of London in 1984 and his Master of Commerce in Accounting
and Commercial Administration from the University of New South Wales in 1994.
From 1992 to 1994, Mr. Ng was employed by Perfect Data Pty. Ltd. Sydney as a
technician. From July 1994 through September 1997, he was an audit senior with
Moores Rowland C.A., Certified Public Accountants. Mr. Ng is a certified
practicing accountant of the Australian Society of CPAs.
MR. LAI has served as a non-executive director of the Company since
September 1997. He received his Bachelor of Arts degree and his Masters of
Business Administration from The Chinese University of Hong Kong. From 1988 to
1992, Mr. Lai served as president of Toplus Development Ltd., a company engaged
in investment and business development. Since 1993, he has served as president
of International Asset Management Ltd., an organization which focuses on project
and business development, investment opportunity and consultancy services to
major corporations in the U.S. and China.
MR. WANG has served as a non-executive director of the Company since
June 1998. He received his Bachelor of Commerce from Tamkung University, Taipei,
Taiwan in 1978, his Master of Business Administration from California State
Polytechnic University in 1980 and his Master of Science from Stanford
University in 1981. From 1984 to 1990, Mr. Wang served as marketing research
analyst and senior strategic planning analyst for The Gillette Company, Boston,
Massachusetts. From 1990 to 1995, he served as associate director and then
director of product development for Information Resources, Inc., Waltham,
Massachusetts. From 1995 to 1996, Mr. Wang served as vice-president as Nielsen
North America with responsibility for analytical and modeling projects on Kraft
Foods/White Plains account. Since 1996, Mr. Wang has served as director of
analytical services for The NPD Group, Inc., Port Washington, New York.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee, which
consists of Messrs. Yih, Lai and Wang. The functions of the Audit Committee are
to recommend annually to the Board of Directors the appointment of the
independent public accountants of the Company, discuss and review the scope and
the fees of the prospective annual audit and review the results thereof with the
independent public accountants, review and approve non-audit services of the
independent public accountants, review compliance with existing accounting and
financial policies of the Company, review the adequacy of the financial
organization of the Company and review management's procedures and policies
relative to the adequacy of the Company's internal accounting controls and
compliance with federal and state laws relating to financial reporting.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
The aggregate compensation paid by the Company to all directors and
executive officers of the Company as a group with respect to its fiscal year
ended April 30, 1998 on an accrual basis, for services in all capacities, was
HK$2,582,000 (US$334,000). During the fiscal year ended April 30, 1998, the
Company contributed an aggregate amount of HK$31,000 (US$4,000) toward the
pension plans of the directors and executive officers.
-27-
<PAGE>
EXECUTIVE SERVICE CONTRACT
The Company had entered into an employment agreement with Mr. Yu Chuan
Yih effective October 1, 1997 pursuant to which he serves the Company for a
period of three years at an annual salary of HK$1,600,000 (US$207,000). Mr.
Yih's remuneration package includes benefits with respect to a motor car. In
addition, Mr. Yih will be entitled to an annual management bonus of a sum to be
determined by the Board at its absolute discretion having regard for the
operating results of the Company and the performance of Mr. Yih during the
relevant financial year. The amount payable to Mr. Yih will be decided by
majority decision of the members of the Board present in the meeting called for
that purpose, provided that Mr. Yih shall abstain from voting and not be counted
in the quorum in respect of the resolution regarding the amount so payable to
him.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
Effective June 1, 1998, the Board of Directors adopted and approved the
1998 Stock Compensation Plan (the "1998 Plan"). The purpose of the 1998 Plan is
to encourage ownership of the Common Stock of the Company by officers,
directors, employees and advisors of the Company in order to provide additional
incentive for such persons to promote the success and the business of the
Company and to encourage them to remain in the employ of the Company by
providing such persons an opportunity to benefit from any appreciation of the
Common Stock of the Company through the issuance of stock options to such
persons in accordance with the terms of the 1998 Plan. Options granted pursuant
to the 1998 Plan constitute either incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code of 1986, as amended (the
"Code"), or options which constitute nonqualified options at the time of
issuance of such options. The 1998 Plan provides that incentive stock options
and/or nonqualified stock options may be granted to certain officers, directors,
employees and advisors of the Company or its subsidiaries, if any, selected by
the Compensation Committee. Approval of the 1998 Plan is subject to shareholder
approval. If approved, a total of 2,000,000 shares of Common Stock will be
authorized and reserved for issuance under the 1998 Plan, subject to adjustment
to reflect changes in the Company's capitalization in the case of a stock split,
stock dividend or similar event. The 1998 Plan is administered by the
Compensation Committee which has the sole authority to interpret the 1998 Plan
and make all determinations necessary or advisable for administering the 1998
Plan. The exercise price for any incentive option must be at least equal to the
fair market value of the shares covered thereby as of the date of grant of such
option. Upon the exercise of the option, the exercise price thereof must be paid
in full either in cash, shares of stock of the Company or a combination thereof.
If and to the extent that any option to purchase reserved shares shall not be
exercised by an optionee for any reason or if such option to purchase shall
terminate as provided by the 1998 Plan, such shares which have not been so
purchased thereunder shall again become available for the purposes of the 1998
Plan unless the 1998 Plan shall have been terminated.
As of this date, the Company has not granted any options under the 1998
Plan.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
Yu Chuan Yih, President and Chairman of the Company, is a director and
principal shareholder of Gemological Institute of America, Hong Kong Limited;
Italon Limited; Lorenzo Consultant & Investment (China) Limited; and Hong Kong
Brasil Lapidary Limited. During the fiscal years ended April 30, 1996, 1997 and
1998, Mr. Yih and the foregoing affiliated companies received unsecured advances
-28-
<PAGE>
from, and made unsecured advances to, the Company which were interest free and
repayable on demand. In addition, the Company purchased gold from Mr. Yih at a
fixed price of HK$93/gram. As of April 30, 1996 and 1997, the market price of
gold was HK$96.06/gram and HK$84.17/gram, respectively. Subsequent to the fiscal
year ended April 30, 1997, this arrangement has been terminated. Further, the
Company had subcontracted with Italon Limited for the manufacture of the
Company's jewelry pending completion of the Company's new manufacturing plant.
During the fiscal year ended April 30, 1997, the Company completed construction
of its manufacturing plant in the PRC, and all further subcontracting with
Italon Limited was discontinued thereafter. For further information, please see
the Financial Statements.
During the fiscal year ended April 30, 1998, the Company sold an
investment property to Mr. Yih at its appraised value of HK$3,800,000
(US$492,000), resulting in a gain to the Company of HK$2,904,000 (US$376,000).
The sale price of the property was based on a valuation report prepared by an
independent professional property valuer.
-29-
<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) USE OF PROCEEDS
(1) The effective date of the Securities Act registration
statement for which the use of proceeds is being
disclosed is April 15, 1998, Commission file number
333-7912.
(2) The date of commencement of the offering was
April 17, 1998.
(3) The offering did not terminate before any
securities were sold.
(4) (i) The offering has terminated and did not
terminate before the sale of all securities
registered.
(ii) The managing underwriter was Barron Chase
Securities, Inc.
(iii) The title of each class of securities
registered is $.01 par value common stock
("Common Stock") and warrants to purchase
Common Stock ("Warrants").
(iv) The Company registered 1,679,000 shares of
Common Stock and 1,679,000 Warrants for its
account; the aggregate offering price of the
Common Stock was $8,395,000 and the
aggregate offering price of the Warrants was
$209,875. All of the foregoing shares of
Common Stock and Warrants were sold as of
the date hereof, aggregating $8,604,875.
-30-
<PAGE>
(v) From the effective date of the Securities
Act registration statement (April 15, 1998)
through August 31, 1998, the actual amount
of expenses incurred for the Company's
account in connection with the issuance and
distribution of the securities registered
for underwriting discounts and commissions,
finder's fees, expenses paid to or for
underwriters, and other expenses were:
<TABLE>
<S> <C>
$860,488 - Underwriting discounts and commissions
0 - Finders' fees
258,146 - Expenses paid to or for underwriters
927,128 - Other expenses - legal, accounting, printing,
travel, promotion, underwriter financial
advisory fee, etc.
132,150 - Debt issuance costs
-------------------------------------
$2,177,912 - Total expenses
</TABLE>
Of the above payments, $151,304 were direct
or indirect payments to directors, officers,
general partners or their associates,
persons owning 10% or more of any class of
equity securities of the Company and
affiliates of the Company. The balance were
direct or indirect payments to others.
(vi) The net offering proceeds to the Company
after deducting the total expenses of
$2,177,912 described in (v) above were
$6,426,963.
(vii) From the effective date of the Securities
Act registration statement (April 15, 1998)
through August 31, 1998, the actual amount
of net offering proceeds to the Company for
which at least $100,000 has been used are as
follows:
<TABLE>
<CAPTION>
Direct/Indirect Payment Direct/Indirect Payment
To Affiliates To Others
----------------------- ------------------------
<S> <C> <C>
Construction of plant, building
and facilities $ 0 $ 1,534,146
Purchase and installation of
machinery and equipment $ 0 $ 1,033,990
Purchases of real estate $ 0 $ 0
Acquisition of other business(es) $ 0 $ 0
Repayment of indebtedness $ 0 $ 814,396
Working capital - gold $ 0 $ 776,197
Upgrading Shantou facility $ 0 $ 450,000
-31-
<PAGE>
Purchase computer equipment $ 0 $ 147,043
Temporary investments $ 0 $ 1,671,191
</TABLE>
(viii) The Company does not believe that the use of
proceeds set forth in (vii) above represents
a material change in the use of proceeds
described in the April 15, 1998 Prospectus.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
See the Consolidated Financial Statements listed in Item 19 hereof and
filed as a part of this Annual Report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following financial statements are being filed as part of this
Annual Report on Form 20-F:
Report of Independent Certified Public Accountants
Consolidated statements of operations for the years ended April 30,
1996, 1997 and 1998 Consolidated balance sheets at April 30, 1997 and
1998 Consolidated statements of shareholders' equity for the years
ended April 30, 1996, 1997
and 1998
Consolidated statements of cash flows for the years ended April 30,
1996, 1997 and 1998 Notes to and forming part of the financial
statements
(b) The following exhibits are being filed as part of this Annual
Report on Form 20-F:
none.
-32-
<PAGE>
LJ INTERNATIONAL INC.
REPORTS AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED
30TH APRIL 1998
<PAGE>
LJ INTERNATIONAL INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated statements of operations for the years ended April 30, 1996, 1997 and 1998
F-3
Consolidated balance sheets as of April 30, 1997 and 1998 F-4
Consolidated statements of shareholders' equity for the years ended
April 30, 1996, 1997 and 1998 F-5
Consolidated statements of cash flows for the years ended April 30, 1996, 1997 and 1998 F-6
Notes to and forming part of the financial statements F-7 - F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
LJ International Inc.
We have audited the accompanying consolidated balance sheets of
LJ International Inc. and its subsidiaries (the Company) as of April 30, 1997
and 1998 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three year period ended
April 30, 1998. These 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 Hong Kong which do not differ in any material respect from those in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements, prepared on the
basis of presentation as set out in notes 1 and 2 to the financial statements,
present fairly, in all material respects, the consolidated financial position of
the Company as of April 30, 1997 and 1998 and the consolidated results of its
operations and cash flows for each of the years in the three year period ended
April 30, 1998, in conformity with accounting principles generally accepted in
Hong Kong (which differ in certain material respects from generally accepted
accounting principles in the United States - See note 15).
/s/ Moores Rowland
MOORES ROWLAND
CHARTERED ACCOUNTANTS
CERTIFIED PUBLIC ACCOUNTANTS, HONG KONG
Dated: 31 AUG 1998
F-2
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended April 30
-------------------------------------------------------------------------
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Operating revenue 87,318 92,258 124,199 16,067
Costs of goods sold (55,895) (48,053) (63,293) (8,188)
--------- --------- --------- ---------
Gross profit 31,423 44,205 60,906 7,879
Selling, general and administrative
Expenses (19,433) (23,657) (33,545) (4,340)
--------- --------- --------- ---------
Operating income 11,990 20,548 27,361 3,539
Other income and expenses:
Net interest expenses (5,693) (3,999) (6,964) (901)
Rental income, net 1,824 1,280 1,273 165
Minority interests 14 102 2 -
Gain on disposal of land and building
to related party - - 2,904 376
--------- --------- --------- ---------
Income before income taxes 8,135 17,931 24,576 3,179
Income taxes (620) (2,210) (2,120) (274)
--------- --------- --------- ---------
Net income 7,515 15,721 22,456 2,905
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share - Basic 1.71 3.58 4.95 0.64
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of shares
Outstanding - Basic 4,387,200 4,387,200 4,539,128 4,539,128
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
As of April 30
------------------------------------------------------
1997 1998 1998
---- ---- ----
Notes HK$ HK$ US$
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents 296 10,752 1,391
Restricted cash 3,036 3,111 402
Accounts receivable, net of HK$798 allowance
for doubtful accounts as of April 30, 1997 and 1998 8,453 31,068 4,019
Inventories 2(e) 37,193 46,994 6,079
Prepayments and other current assets 724 549 71
------ ------- ------
TOTAL CURRENT ASSETS 49,702 92,474 11,962
Property, plant and equipment, net 4 8,319 30,021 3,884
Investment properties, net 21,580 28,150 3,642
Due from related parties 9 1,795 2,655 343
Deferred offering cost 601 - -
Organization costs, net 805 1,245 161
Goodwill 75 68 9
Other investments 2 3 1
------ ------- ------
TOTAL ASSETS 82,879 154,616 20,002
------ ------- ------
------ ------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft 8,639 1,049 136
Notes payable, current portion 5 7,854 4,158 538
Letters of credit and gold loan 23,998 22,305 2,886
Promissory notes - 2,184 283
Accounts payable 7,514 18,873 2,441
Accrued expenses 1,219 1,266 164
Due to related party 9 - 48 6
Capitalized lease obligations, current 6 405 429 55
Income taxes payable 2,830 3,072 397
------ ------- ------
TOTAL CURRENT LIABILITIES 52,459 53,384 6,906
Notes payable, non-current portion 5 12,008 9,689 1,253
Capitalized leased obligations, non-current 6 998 855 111
------ ------- ------
TOTAL LIABILITIES 65,465 63,928 8,270
------ ------- ------
------ ------- ------
Minority interests 433 431 56
------ ------- ------
SHAREHOLDERS' EQUITY
Common stocks, par value US$0.01 each, authorized - 100 million shares,
issued and outstanding -
4,387,200 shares as of April 30, 1997,
6,146,646 shares as of April 30, 1998 8 339 475 61
Share premium 8 - 41,597 5,381
Warrant reserve 8 - 1,622 210
Investment properties revaluation reserve - 7,465 966
Retained earnings 16,642 39,098 5,058
------ ------- ------
TOTAL SHAREHOLDERS' EQUITY 16,981 90,257 11,676
------ ------- ------
------ ------- ------
TOTAL LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY 82,879 154,616 20,002
------ ------- ------
------ ------- ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Investment
Common stock Retained properties
------------ earnings Share Warrant revaluation
Shares Par value (deficit) premium reserve reserve Total Total
------ --------- --------- ------- ------- ----------- ----- -----
HK$ HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of May 1, 1995 4,387,200 339 (4,094) - - - (3,755) (486)
Net income - - 7,515 - - - 7,515 972
Dividend - - (2,500) - - - (2,500) (323)
--------- --- ------ ------ ----- ----- ------ ------
Balance as of April 30,
1996 4,387,200 339 921 - - - 1,260 163
Net income - - 15,721 - - - 15,721 2,034
--------- --- ------ ------ ----- ----- ------ ------
Balance as of April 30,
1997 4,387,200 339 16,642 - - - 16,981 2,197
New issue of shares 1,460,000 113 - 41,620 - - 41,733 5,398
Shares issued in Deen
merger 142,946 11 - (11) - - - -
Shares issued to note
holders 156,500 12 - (12) - - - -
New issue of warrants - - - - 1,622 - 1,622 210
Surplus arising on
revaluation - - - - - 7,465 7,465 966
Net income - - 22,456 - - - 22,456 2,905
--------- --- ------ ------ ----- ----- ------ ------
Balance as of April 30,
1998 6,146,646 475 39,098 41,597 1,622 7,465 90,257 11,676
--------- --- ------ ------ ----- ----- ------ ------
--------- --- ------ ------ ----- ----- ------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998
The accompanying notes are an integral part of these financial statements.
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended April 30
------------------------------------------------------------
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 7,515 15,721 22,456 2,905
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:-
Depreciation of property, plant and 928 1,049 1,345 174
equipment
Provision for slow moving inventory 160 (60) - -
Amortization of deferred expenditures 10 10 85 11
Amortization of goodwill - - 7 1
Loss on disposal of fixed assets - 119 - -
Gain on disposal of land and building - - (2,904) (376)
Bad debt 866 1,295 - -
Minority interests (14) (102) (2) -
Changes in operating assets and liabilities:
Accounts receivable, net 8,380 (3,994) (22,615) (2,925)
Inventories (4,397) (11,316) (9,801) (1,268)
Prepayments and other current assets 373 230 175 23
Due from related parties (1,483) (1,612) (860) (111)
Accounts payable (5,502) 1,409 11,359 1,469
Accrued expenses (1,016) (583) 47 6
Letters of credit (4,804) (599) (1,127) (146)
Due to related parties 79 (2,462) 48 6
Income tax receivables (46) 46 - -
Income tax payables 491 2,210 242 31
--------- ---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 1,540 1,361 (1,545) (200)
--------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Organization costs - (746) (525) (68)
Purchase of fixed assets (1,899) (588) (22,728) (2,940)
Proceeds on disposals of fixed assets - 100 3,800 492
Purchase of bonds (1) (1) (1) -
--------- ---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (1,900) (1,235) (19,454) (2,516)
--------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs - (601) (14,095) (1,822)
Bank overdrafts 294 (44) (7,590) (982)
Dividend paid (2,500) - - -
Net proceeds from issue of shares/warrants - - 58,051 7,509
Net proceeds from sale of promissory notes - - 2,184 283
Loan acquired 14,186 4,021 1,434 185
Repayment of loan (9,126) (2,858) (8,016) (1,037)
Repayment of capitalized leases - - (438) (57)
Restricted cash (2,000) (1,036) (75) (10)
--------- ---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 854 (518) 31,455 4,069
--------- ---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 494 (392) 10,456 1,353
CASH AND CASH EQUIVALENTS, AS OF BEGINNING OF YEAR 194 688 296 38
--------- ---------- ---------- ---------
CASH AND CASH EQUIVALENTS, AS OF END OF YEAR 688 296 10,752 1,391
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS
Cash and equivalents 688 296 10,752 1,391
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
OTHER CASH TRANSACTIONS:
Cash paid for interest 5,723 4,137 7,176 928
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Cash paid(refunded) for taxes 174 (46) 1,877 243
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
NON-CASH TRANSACTIONS:
Purchase of equipment under capitalized leases - 1,403 320 41
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
LJ International Inc. and its subsidiaries (Company) are
involved in the design, manufacture , marketing and sale of
semi-precious gemstones jewelry. While the Company is based in Hong
Kong, its manufacturing operations are in the People's Republic of
China (PRC) and most of its sales are currently in the United States.
The Company also owns certain commercial and residential properties
located in Hong Kong, which are held primarily for investment purposes.
During the year, LJ International Inc. (LJI) merged with
Lorenzo Jewelry Mfg. (H.K.) Limited (Lorenzo). LJI was incorporated as
a British Virgin Islands (BVI) Company on January 30, 1997 and prior to
the merger it had no significant operations, but had incurred certain
organization and deferred offering costs. The merger has been accounted
for by the purchase method of accounting under HK GAAP and reflects
operations for each period presented herein on the basis that the
merger took place at April 30, 1994. In connection with this
reorganization, HK$75,000 was recorded as goodwill. Under US GAAP such
reorganization would be accounted for as if it were a pooling of
interest as there exists common ownership between the companies. A
reconciliation to this method of accounting is set out in note 15. The
capital structure reflected in the financial statements is that of LJI,
which is holding company after the merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF ACCOUNTING
The financial statements are presented in Hong Kong dollars and
have been prepared in accordance with the requirements of the Hong
Kong Companies Ordinance and the accounting principles generally
accepted in Hong Kong which have been applied consistently
throughout the relevant periods. These requirements differ in
certain material respects from generally accepted accounting
principles in the United States (US GAAP) - see note 15.
The financial statements have been prepared under the historical
cost convention. Cost in relation to assets represents the cash
amount paid, the fair value of the asset or the shares given in
exchange, as appropriate.
(b) PRINCIPLES OF COMBINATION AND CONSOLIDATION
The consolidated financial statements include the financial
information of LJI and Lorenzo, Precious Gems Trading Limited
(Precious Gems) & Golden Horizon Trading Limited (Golden
Horizon). Lorenzo has three subsidiaries, two of which are
incorporated in the PRC, Shantou Lorenzo Jewelry Mfg. (Shantou
Lorenzo Jewelry) and Shantou S.E.Z. Lorenzo Gems & Craft Factory
Co., Ltd. (Shantou Lorenzo Gems). Lorenzo also has a 60% owned
subsidiary, Lorenzo Marketing Co., Limited which is incorporated
in Hong Kong. Precious Gems is incorporated in BVI and has one
subsidiary which is incorporated in the PRC, Lorenzo Gems
Manufacturing (Shenzhen) Co. Ltd. Golden Horizon is incorporated
in BVI and has one subsidiary which is incorporated in the PRC,
Lorenzo Jewellery (Shenzhen) Co. Ltd.
F-7
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b) PRINCIPLES OF COMBINATION AND CONSOLIDATION (CONTINUED)
The consolidated financial statements have been prepared on the
assumption that the current corporate structure was in existence
throughout the relevant periods where applicable after making such
adjustments as were considered necessary.
The results of subsidiaries acquired or disposed of during the
year are consolidated from or to their effective dates of
acquisition or disposal respectively.
All material intercompany balances and transactions have been
eliminated on consolidation.
(c) GOODWILL ON CONSOLIDATION
Goodwill arising on consolidation being the excess of the purchase
consideration payable at the time of acquisition of the
subsidiaries over the fair values of the net underlying assets
acquired, is amortized over a period of 10 years commencing from
the year of acquisition.
(d) STATEMENT OF CASH FLOWS
For the purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with an original
maturity within three months or less to be cash equivalents.
(e) INVENTORIES
Inventories are stated at the lower of cost or net realizable
value. Cost includes cost of purchase of materials, determined
generally on the first-in, first-out basis, and in the case of
work in progress and finished goods, direct labour and an
appropriate proportion of production overheads. Net realizable
value is determined on the basis of anticipated sales proceeds
less estimated selling expenses or management estimates on
prevailing market conditions. Inventories consisted of the
following:
<TABLE>
<CAPTION>
As of April 30
-------------------------------------------------------
(In Thousands)
1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Raw materials 22,442 22,140 2,864
Work-in-progress 7,211 14,281 1,847
Finished goods 8,740 11,773 1,523
Less: Provision for slow moving stocks (1,200) (1,200) (155)
----------- ----------- -----------
37,193 46,994 6,079
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) INVENTORIES (CONTINUED)
Work-in-progress consists primarily of cut-stones, which generally
could be sold to third parties, however, it is the Company's
intent to manufacture these stones into finished jewelry.
(f) FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost less accumulated depreciation. The
cost of an asset consists of its purchase price and any directly
attributable costs of bringing the asset to its present working
condition and location for its intended use. Expenditure incurred
after the fixed assets have been put into operation, such as
repairs and maintenance, is charged to the profit and loss account
in the period in which it is incurred. In situations where it can
be clearly demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be obtained
from the use of the fixed assets, the expenditure is capitalized.
When assets are sold or retired, their costs or valuation and
accumulated depreciation are removed from the accounts and any
gain or loss resulting from their disposal is included in the
profit and loss account.
Depreciation is calculated on a straight line method at the
following annual rates:
<TABLE>
<CAPTION>
Land and buildings 2% or over the unexpired term of leases
<S> <C>
Furniture, fixtures and equipment 20%
Motor vehicles 20%
Plant and machineries 10%
Leasehold improvements 10%
</TABLE>
(g) INVESTMENT PROPERTIES
Investment properties are interests in land and buildings in
respect of which construction works and development have been
completed and which are intended to be held on long-term basis for
their investment potential.
As of April 30, 1998, investment properties are stated in the
balance sheet at their open market values on basis of professional
valuation carried out by CB Richard Ellis Limited and Prudential
Surveyors International Ltd., independent property valuers. In
prior years, investment properties were stated at historical cost.
Under accounting principles practiced in Hong Kong, investment
properties were adjusted to market value when the Company became a
public reporting entity. This change had no effect on the profit
and loss account, but did result in an increase to investment
properties offset by an increase within shareholders' equity.
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) INVESTMENT PROPERTIES (CONTINUED)
No amortization and depreciation is provided in respect of
investment properties because their unexpired term of underlying
land leases are over 20 years. Prior to 1995, these properties
were classified as land and buildings and HK$1,178,000 of
accumulated depreciation had previously been recorded.
Changes in the values of investment properties are dealt with as
movements in the investment properties revaluation reserve. If the
total of the attributable reserve is insufficient to cover a
deficit, on a portfolio basis, the excess of the deficit is
charged to the profit and loss account. Where a deficit has
previously been charged to the profit and loss account and a
revaluation surplus subsequently arises, this surplus is credited
to the profit and loss account to the extent of the deficit
previously charged.
Upon disposal of an investment property, the relevant surplus or
deficit of the investment property revaluation reserve realized in
respect of previous valuations is released to the profit and loss
account.
(h) DEFERRED OFFERING COSTS
In connection with the private and public offerings, the Company
incurred certain costs associated with these offerings. In
connection with the private offering of debt, these costs were
amortized as additional interest expenses during the year ended
April 30, 1998.
The costs associated with the public offering were offset against
the proceeds of the offering.
(i) ORGANIZATION COSTS
Organization costs comprise of professional fees paid to third
parties in connection with the organization of the Company.
Amortization is calculated over 10 years using straight line
basis.
(j) DEFERRED TAXATION
Provision for deferred taxation is calculated under the liability
method for all material differences to the extent that there is a
reasonable probability that these will be reversed within the
foreseeable future.
(k) OPERATING LEASES
Leases where substantially all the rewards and risks of ownership
of assets remain with the leasing company are accounted for as
operating leases. Rentals payable under operating leases are
recorded in operations on a straight line basis over the lease
term.
F-10
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(l) CAPITALIZED LEASE OBLIGATIONS
Where assets are acquired under capitalized leases, the amounts
representing the outright purchase price of such assets are
included in fixed assets and the corresponding liabilities, net of
finance charges, are recorded as obligations under capitalized
lease obligations. Depreciation is provided on the cost of the
assets on a straight line basis over their estimated useful lives
as set out in note 2(f) above. Finance charges implicit in the
purchase payments are charged to operations over the periods of
the contracts so as to produce an approximately constant periodic
rate of charge on the remaining balances of the obligations for
each accounting period.
(m) RELATED COMPANY
Parties are considered to be related if one party has the ability
to control the other party or exercise significant influence over
the other party in making financial and operating decisions.
(n) REVENUE RECOGNITION
(i) Sales of goods
Sales are recognized when goods are delivered and title
passed to customers.
(ii) Others
Interest income is recognized on a time proportion basis.
Rental income relating to operating leases is recognized on
a straight line basis over the lease term.
(o) FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the
approximate rates of exchange on the dates of transactions.
Monetary assets and liabilities denominated in foreign currencies
are translated at approximate rates ruling at the balance sheet
date. Exchange differences are recorded within the statement of
operations.
Assets and liabilities of overseas subsidiaries are translated at
the approximate exchange rates ruling at the balance sheet date.
All exchange differences arising on the consolidation are recorded
within equity. Historically, foreign exchange transactions have
not been material to the financial statements.
For the purpose of these financial statements, the exchange rate
adopted for the presentations of financial information as of and
for the year ended April 30, 1998 has been made at HK$7.73 to
US$1.00.
(p) GOLD LOANS
Gold loan balances are translated at the gold price prevailing at
the close of business on the balance sheet date. Profits and
losses arising on translation are dealt with in the profit and
loss account.
F-11
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(q) EARNINGS PER SHARE
Earnings per share is based on net income attributable to
shareholders and the weighted average number of ordinary shares
outstanding during the year.
Fully diluted earnings per share is not shown because the impact
of any dilution is not material.
(r) USES OF ESTIMATES
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes. Actual amounts could differ from those
estimates.
3. OPERATING RISKS
(a) CONCENTRATIONS OF CREDIT RISKS
The Company derived revenues from the following major customers,
which accounted for over 10% of net revenues.
<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------------------------
Customer 1996 1997 1998
-------- ---- ---- ----
<S> <C> <C> <C>
QVC Network Inc. 56% 69% 55%
Tocantins Minerals Mining &
Science Corp. - - 13%
</TABLE>
Accounts receivable related to the Company's major customers were
HK$16,476,000 as of April 30, 1998.
Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or counterparties when
there are similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected
by changes in economic or other conditions. The major
concentration of credit risk arises from the Company's
receivables. Even though the Company does have major customers,
it does not consider itself exposed to significant credit risk
with regards to collection of the related receivables. Historical
losses have not been significant.
F-12
<PAGE>
3. OPERATING RISKS (CONTINUED)
(b) COUNTRY RISKS
The Company may also be exposed to certain risks as a result of
its manufacturing operation being located in the PRC and its
investment properties in Hong Kong which are not typically
associated with companies operating 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 PRC, 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. The Company's management does not believe these risks to
be significant. There can be no assurance, however, that changes
in political, social and other conditions will not result in any
adverse impact.
(c) CASH AND TIME DEPOSITS
The Company maintains its cash balances and investments in time
deposits with various banks and financial institutions located in
Hong Kong. In common with local practice, such amounts are not
insured or otherwise protected should the financial institutions
be unable to meet their liabilities.
There has been no history of credit losses.
F-13
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
As of April 30
---------------------------------------------------------
(In Thousands)
1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Land and buildings
Cost 2,471 2,470 320
Accumulated depreciation (486) (576) (75)
----------- ----------- ----------
Net book value 1,985 1,894 245
----------- ----------- ----------
----------- ----------- ----------
Leasehold improvements
Cost 2,074 14,218 1,839
Accumulated depreciation (665) (865) (112)
----------- ----------- ----------
Net book value 1,409 13,353 1,727
----------- ----------- ----------
----------- ----------- ----------
Furniture, fixtures and equipments
Cost 3,803 6,231 806
Accumulated depreciation (3,137) (3,525) (456)
----------- ----------- ----------
Net book value 666 2,706 350
----------- ----------- ----------
----------- ----------- ----------
Plant and machineries
Cost 3,819 11,862 1,535
Accumulated depreciation (1,124) (1,471) (190)
----------- ----------- ----------
Net book value 2,695 10,391 1,345
----------- ----------- ----------
----------- ----------- ----------
Motor vehicles
Cost 1,670 2,101 272
Accumulated depreciation (106) (424) (55)
----------- ----------- ----------
Net book value 1,564 1,677 217
----------- ----------- ----------
----------- ----------- ----------
Total net property, plant and
equipment 8,319 30,021 3,884
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
F-14
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
5. BANKING FACILITIES AND OTHER LOANS
The Company has various letters of credit under banking facilities
which aggregated HK$32,100,000 as of April 30, 1998. The Company had
HK$17,622,000 and HK$16,495,000 outstanding under its letters of credit
as of April 30, 1997 and 1998 respectively. These letters of credit
also collaterized the Company's gold loan discuss below. In addition,
the Company had HK$13,500,000 of cash overdraft protection under its
banking facilities as of April 30, 1998. The amount outstanding under
this arrangement aggregated HK$8,639,000 and HK$1,049,000 as of April
30, 1997 and 1998, respectively. Interest charges range from Hong Kong
Dollars prime plus 1% to 3%. (11% to 13% as of April 30, 1998) on these
loans. Under the Company's banking facilities arrangements, the Company
is required to maintain certain cash balances based on the amount of
cash overdraft protection given. These balances are reflected as
restricted cash in the accompanying financial statements.
The Company had outstanding loans to purchase 2,300 oz of gold as of
April 30, 1997 and 1998 with the related balances being HK$6,376,000
and HK$5,810,000 respectively. These loans are due within the next
year, however, have been historically renewed. These loans bear
interest at 3.30% to 3.60% as of April 30, 1998. These loans can be
repaid in cash at the current exchange rate of gold any time prior to
maturity. The Company adjusts the outstanding loan balance to the
current market rate of gold as of the balance sheet date. Due to
changing prices of gold, this adjustment has resulted in additional
income of HK$474,000 and HK$566,000 for the years ended April 30, 1997
and 1998 respectively. As the Company does not hedge for changes in the
future price of gold, the Company is exposed to certain market risks,
which may result from potential future increases in the price of gold.
The Company also had repaid all the unsecured loans from individuals of
HK$4,645,000 as of April 30, 1998.
The Company also had long-term mortgage loans which are related to the
Company's investment properties. These loans aggregated HK$15,217,000
and HK$13,847,000 as of April 30, 1997 and 1998 respectively. Interest
charges on these loans range from Hong Kong Dollars prime plus 1.5% to
2% (11.50% to 12.00% as of April 30, 1998).
On October 17, 1997, the Company completed the sale of promissory notes
amounting to HK$6,049,000. The proceeds from this private offering were
used primarily to pay for the cost of the Initial Public Offering.
These notes beared interest at 7% and note holders were partially
repaid from proceeds of the Initial Public Offering and received
156,500 shares of common stock upon the public offering. As of April
30, 1998, the Company had outstanding promissory notes amounting to
HK$2,184,000, which were repaid after year end. In connection with this
loan, origination costs, totalling HK$765,000 were expensed during the
year ended April 30, 1998.
F-15
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
5. BANKING FACILITIES AND OTHER LOANS (CONTINUED)
Expected maturities based on year end interest rate are as follows:
<TABLE>
<CAPTION>
In Thousands In Thousands
------------ ------------
HK$ US$
<S> <C> <C>
1999 4,158 538
2000 3,054 395
2001 3,005 388
2002 3,011 390
2003 619 80
---------- ---------
13,847 1,791
---------- ---------
---------- ---------
</TABLE>
The Company's banking facilities are collaterized by investment
properties, restricted cash deposits and personal guarantees of certain
directors.
6. CAPITALIZED LEASE OBLIGATION
The Company leases certain equipment under agreements classified as
capital leases. Equipment under these leases has a cost of HK$1,785,000
and accumulated amortization of approximately HK$314,000 as of April
30, 1998. The following is a schedule of future minimum lease payments
under capital leases as of April 30, 1998.
<TABLE>
<CAPTION>
(In Thousands) (In Thousands)
HK$ US$
<S> <C> <C>
Future minimum lease payments 1,610 208
Less: Amount representing interest (326) (42)
--------- ---------
Present value of net minimum lease payments 1,284 166
Less: Current portion (429) (55)
--------- ---------
855 111
--------- ---------
--------- ---------
</TABLE>
7. CONTINGENT LIABILITIES
As of April 30, 1997 and 1998, the Company had sold a receivable with
recourse amounting to HK$1,992,000 and HK$Nil respectively
F-16
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
8. SHARE CAPITAL, WARRANT RESERVE AND SHARE PREMIUM
As of April 15, 1998, LJI issued 1,460,000 shares of common stock to
the public in the Initial Public Offering and had raised HK$52,056,000.
The merger with the Deen Technology, Corp (Deen), which was committed
to in December 1996 was completed by the issue of 142,946 shares of its
common stock at nil consideration on October 6, 1997, with the Company
being the legal surviving entity. Deen had no significant assets or
liabilities, but did have a large number of U.S. shareholders.
As agreed with the US$782,500 promissory note holders in respect of the
bridge loan financing before the Initial Public Offering, the Company
issued 156,500 shares of common stock to note holders on the effective
date of the Initial Public Offering, without any additional
consideration.
The Representative of the Initial Public Offering (Representative), has
exercised their right to purchase 219,000 shares of common stock and
219,000 redeemable common stock purchase warrant ("purchase warrants"
or "warrants"). The Company received the net over-allotment shares
proceeds of HK$7,364,000 subsequent to the year end.
In the Initial Public Offering, the Company also issued 1,460,000
warrants. Including the 219,000 over-allotment warrants discussed
above, each purchase warrant entitles the holders to purchase one share
of common stock at a price of US$5.75 per share through April 15, 2003.
Prior to year end, the Company has received all proceeds from the issue
of 1,679,000 warrants totalling HK$1,622,000 which was recorded in the
Company's warrant reserve account. The Representative also received
warrants to purchase 146,000 shares of common stock at US$8.25. These
warrants are exercisable from April 15, 1998 and expire on April 14,
2003.
9. RELATED PARTY TRANSACTIONS
(a) Names and relationship of related parties
<TABLE>
<CAPTION>
Existing relationships with the Company
---------------------------------------
<S> <C>
Yih Yu Chuan Director and major shareholder of LJI
Gemological Institute of America, Common directors and major shareholders
Hong Kong Limited
Italon Limited Common directors and major shareholders
Lorenzo Consultant & Investment (China) Common directors and major shareholders
Limited
Hong Kong Brasil Lapidary Limited Common director and major shareholder
</TABLE>
F-17
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
(b) Summary of related party transactions
<TABLE>
<CAPTION>
As of April 30
------------------------------------------------------
(In Thousands)
Note 1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C> <C>
Due from related parties:
Gemological Institute of America,
Hong Kong Limited (i) 1,776 2,418 313
Lorenzo Consultant & Investment
(China) Limited (i) 19 23 3
Hong Kong Brasil Lapidary Limited (i) - 214 27
---------- ---------- ---------
1,795 2,655 343
---------- ---------- ---------
---------- ---------- ---------
Due to related party:
Yih Yu Chuan - Director (ii) - 48 6
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------------------------------
(In Thousands)
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Sales:
Hong Kong Brasil Lapidary Limited - - 254 33
Yih Yu Chuan - 197 - -
---------- --------- ------------ ---------
- 197 254 33
---------- --------- ------------ ---------
---------- --------- ------------ ---------
Purchases:
Italon Limited - 861 - -
Yih Yu Chuan (iii) 1,071 1,862 - -
---------- --------- ------------ ---------
1,071 2,723 - -
---------- --------- ------------ ---------
---------- --------- ------------ ---------
Sub-contracting charge:
Italon Limited (iv) 3,122 1,394 - -
---------- --------- ------------ ---------
---------- --------- ------------ ---------
Rental income:
Gemological Institute of
America, Hong Kong Limited 300 300 275 36
Italon Limited 300 275 - -
---------- --------- ------------ ---------
600 575 275 36
---------- --------- ------------ ---------
---------- --------- ------------ ---------
Gain on sale of building:
Yih Yu Chuan (v) - - 2,904 376
---------- --------- ------------ ---------
---------- --------- ------------ ---------
</TABLE>
F-18
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
(i) The amounts due from related parties represent unsecured
advances which are interest free and repayable on demand.
(ii) The amount due to related party represents unsecured
advances which is interest free and repayable on demand.
(iii) Prior to the year ended April 30, 1997, the Company had
purchased gold from Yih Yu Chuan at a fixed price of
HK$93/gram. During the year, such arrangement has been
terminated.
(iv) The Company subcontracted with Italon for the manufacture
of the Company's jewelry. During the year ended April 30,
1997, the Company completed construction of its
manufacturing plant in the PRC and subcontracting to Italon
has been discontinued.
(v) During the year, Yih Yu Chuan purchased for cash an
investment property from the Company at appraised value.
The Company recognized a gain in this sale of HK$2,904,000.
10. OPERATING LEASES COMMITMENTS
As of April 30, 1998, the Company had commitments under non-cancellable
operating leases in respect of land and buildings of HK$2,540,000 which
expires in 1999. Total lease expense for the years ended April 30,
1996, 1997 and 1998 was HK$356,000, HK$490,000 and HK$1,398,000
respectively.
11. PENSION COSTS
The Company operates a defined contribution retirement plan (Plan)
which is optional for all qualified employees. The assets of the Plan
are held separately from those of the Company in a provident fund
managed by an independent trustee. The pension cost charge represents
contributions payable to the fund by the Company at rates specified in
the rules of the Plan. Where employees leave the Plan prior to vesting
fully in the contribution payable by the Company is reduced by the
amount of forfeited contribution.
The pension expense for the years ended April 30, 1996, 1997 and 1998
was HK$105,000, HK$148,000 and HK$248,000 respectively. The amount of
forfeitures for the years ended April 30, 1996, 1997 and 1998 was
HK$22,000, HK$14,000 and HK$16,000 respectively.
F-19
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
Reconciliation to the expected statutory tax rate in Hong Kong of
16% (1997 and 1996: 16.5%) is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
% % %
<S> <C> <C> <C>
Statutory rate 16.5 16.5 16.0
Tax effect of net operating losses (7.4) - 1.0
Non taxable PRC profit (2.9) (3.0) (8.8)
Others 1.4 (1.2) 0.4
-------- --------- -----------
Effective rate 7.6 12.3 8.6
-------- --------- -----------
-------- --------- -----------
</TABLE>
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
Year Ended April 30
------------------------------------------------------------------
(In Thousands)
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Current taxes 620 2,210 2,120 274
Deferred taxes - - - -
----------- ----------- ---------- ----------
Income tax expense 620 2,210 2,120 274
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
The Company is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdiction in which it is
domiciled and operates.
LJI is incorporated under the International Business Companies Act of
the British Virgin Islands and, accordingly, is exempted from payment
of the British Virgin Islands income tax. The Hong Kong subsidiaries
are subject to Hong Kong profits tax at a rate of 16% (1997 and 1996 :
16.5%).
PRC subsidiaries are registered to qualify as Foreign Investment
Enterprises in the PRC and are eligible for certain tax holidays and
concessions. Accordingly, certain of the PRC subsidiaries were exempted
from PRC income tax for two years starting from their first profit
making years (which has not been occurred yet), followed by a 50%
reduction of tax for next three years. These subsidiaries have
sustained losses for the PRC income tax purpose. As a result, the
Company has not recorded any PRC income tax expense. PRC income tax in
the future will be calculated at the applicable rates relevant to the
PRC subsidiaries which currently are 15%.
Deferred taxes comprise of the excess of tax depreciation allowances
over accounting depreciation expenses. The deferred tax liability as of
April 30, 1997 and 1998 was not significant.
F-20
<PAGE>
LJ INTERNATIONAL INC
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)
13. REPORT ON SEGMENT INFORMATION
The Company has operations in the following geographical area:
<TABLE>
<CAPTION>
Year Ended April 30
--------------------------------------------------------------
(In Thousands)
1996 1997 1998 1998
HK$ HK$ HK$ US$
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Sales to customers outside the Company
- United States of America & Canada 73,941 80,481 111,274 14,395
- Hong Kong 1,991 919 2,248 291
- Europe and other countries 865 1,101 5,667 733
- PRC 143 570 58 7
- Japan 10,378 9,187 4,952 641
---------- --------- ---------- ----------
87,318 92,258 124,199 16,067
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Segment profit
- Hong Kong 13,184 19,583 15,415 1,994
- PRC 24 137 14,005 1,812
Interest income (expenses), net (5,693) (3,999) (6,964) (901)
---------- --------- ---------- ----------
Net income 7,515 15,721 22,456 2,905
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
As of April 30
----------------------------------------------------
(In Thousands)
1997 1998 1998
HK$ HK$ US$
--------- ---------- ---------
<S> <C> <C> <C>
Segment assets
- Hong Kong 57,445 97,626 12,629
- PRC 25,434 56,990 7,373
--------- ---------- ---------
82,879 154,616 20,002
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The Company operates in two segments: the manufacture of jewelry and
holding of investment properties. Information regarding these segments
is as follows:
<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------------------------------
(In Thousands)
1996 1997 1998 1998
HK$ HK$ HK$ US$
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
- Manufacture of jewelry 87,318 92,258 124,199 16,067
- Holding of investment properties 1,824 1,280 1,273 165
---------- ----------- ----------- ---------
89,142 93,538 125,472 16,232
---------- ----------- ----------- ---------
---------- ----------- ----------- ---------
Segment profit
- Manufacture of jewelry 5,800 14,570 18,394 2,379
- Holding of investment properties 1,715 1,151 4,062 526
---------- ----------- ----------- ---------
7,515 15,721 22,456 2,905
---------- ----------- ----------- ---------
---------- ----------- ----------- ---------
</TABLE>
F-21
<PAGE>
LJ INTERNATIONAL INC
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)
13. REPORT ON SEGMENT INFORMATION (CONTINUED)
All of the Company's depreciation expense and capital expenditures
during the three years ended April 30, 1998 relate to the manufacture
of jewelry.
<TABLE>
<CAPTION>
As of April 30
-----------------------------------------------
(In Thousands)
1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Segment assets
- Manufacture of jewelry 61,224 126,398 16,351
- Holding of investment properties 21,580 28,150 3,642
- Unallocated - goodwill 75 68 9
---------- ----------- ------------
82,879 154,616 20,002
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
14. SUBSEQUENT EVENTS
Subsequent to the Initial Public Offering of 1,460,000 shares of common
stock on April 15, 1998, an 219,000 additional shares of common stock
were issued on June 1, 1998 to cover the over-allotment. As of the date
of this report, the Company totally has 6,365,646 shares of common
stock.
On June 1, 1998, the Board of Directors adopted and approved the 1998
Stock Compensation Plan (the "1998 Plan"). The 1998 Plan provides that
incentive stock options, which are within the meaning of Section 422 of
the United States Internal Revenue Code of 1986, as amended (the
"Code"), and/or nonqualified stock options may be granted to certain
officers, directors, employees and advisors of the Company or its
subsidiaries, if any, selected by the Compensation Committee. Approval
of the Plan is subject to shareholder approval. If approved a total of
2,000,000 shares of Common Stock will be authorized and reserved for
issuance under the 1998 Plan, subject to adjustment to reflect changes
in the Company's capitalization in the case of a stock split, stock
dividend or similar event. The 1998 Plan shall be administered by the
full Board of Directors or by a Compensation Committee ("Committee")
appointed by the Board of Directors, which Committee shall consist
solely of not less than two non-employee Directors. All options must be
granted within ten years from the date the 1998 Plan is adopted. Each
option granted shall in no event be exercisable either in whole or in
part after the expiration of ten years from the date grant; provided,
however, if an incentive option is granted to a 10% Shareholder, such
incentive option shall not be exercisable more than five years from the
date of grant thereof. The exercise price for any incentive option must
be at least equal to the fair market value of the shares covered
thereby as of the date of grant of such option. Upon the exercise of
the option, the exercise price thereof must be paid in full either in
cash, share of stock of the Company or a combination thereof.
As of the date of this report, the Company has not granted any options
under the 1998 Plan.
F-22
<PAGE>
LJ INTERNATIONAL INC
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)
15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The Company's financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) as practiced in Hong
Kong (HK GAAP), which differ in certain significant respects from GAAP,
including certain accounting interpretations of the Securities and
Exchange Commission (SEC) as practiced in the United States (US GAAP).
The significant differences relate principally to the following items
and the adjustments necessary to restate operating income and
shareholders' equity in accordance with US GAAP are shown in the tables
set out below.
(a) BUSINESS COMBINATIONS
Under HK GAAP, the reorganization of companies under common
control involving the acquisition by the merger of LJI and Lorenzo
was accounted for by the purchase method of accounting. The
consideration given by the Company was recorded at fair value and
the excess over the fair value of net assets acquired was treated
as goodwill. The accompanying financial statements have been
presented on a consolidated basis, which effectively reflect this
reorganization as of April 30, 1994, even though the merger
occurred on May 6, 1997. Under US GAAP this would be recorded as a
reorganization of companies under common control similar to a
pooling of interest. The effect of this difference is that no
goodwill would be recorded on such combination.
(b) SHARE CAPITAL TRANSACTIONS
The Company completed a bridge loan financing on October 17, 1997,
where it raised HK$6,049,000 (US$782,500). As of April 30, 1998,
there still had an outstanding balance amounting to HK$2,280,000
(principal plus accrued interest) which had been repaid in the
subsequent month after the year end. As agreed, the Company issued
156,500 shares of its unregistered common stock at no additional
cost to the note holders after the Company completed its public
offering on April 15, 1998. Under US GAAP the Company is required
to fair value such shares. The value associated with these shares
is HK$6,049,000 based on the price associated with the offering,
which has been amortized as an additional interest expense during
the year.
As of April 30, 1998, the Company did not have a common stock
option plan nor any common stock options outstanding. To the
extent the Company grants common stock options, common stock or
other equity instrument to employees, it will be required under US
GAAP to record compensation expense for any difference between the
price at which the equity instrument is granted and then current
market price of the Company's trading common stock. It will
further be required to disclose in the footnotes to the financial
statements certain fair value information and proforma effects of
such issuances. Transaction in equity instruments with
non-employees for goods and services must be accounted for at fair
value as specified under US GAAP.
In connection with the public offering, the Company paid the
Representative HK$835,000 (US$108,000) for future financial
consulting. Under HK GAAP such amount was offset against the
proceeds of the offering. Under US GAAP such amount would be
deferred and recognized as an expense over the period the services
are expected to be performed on an accelerated basis over the next
three years. No expense would be recorded in 1998 as the offering
closed near year-end.
F-23
<PAGE>
LJ INTERNATIONAL INC
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)
15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(c) CAPITALIZED DEFERRED COSTS
During the year, the Company merged with Deen. Approximately
HK$640,000 and HK$193,000 of costs were incurred in connection
with the merger for each of the years ended April 30, 1997 and
1998 respectively. Under HK GAAP these costs have been capitalised
as organization costs and will be amortized over ten years. As
Deen has no significant assets or substantive operations, other
than a large shareholder base, these costs, under US GAAP, would
be expensed as incurred.
The Company also has incurred certain indirect costs paid to
current directors associated with its public offering. Under HK
GAAP, these costs which totaled HK$120,000 and HK$589,000 for each
of the years ended April 30, 1997 and 1998 have been deferred as
offering costs and offset against share premium upon completion of
the public offering. In addition, during the year, the Company has
incurred indirect costs amounting to HK$116,000 with a consultant
associated with its public offering. Under US GAAP these amounts
would be expensed as incurred.
(d) EARNINGS PER SHARE
Under HK GAAP, basic earnings per share is based on the weighted
average number of common shares on issue during each period. Fully
diluted weighted average number of common shares are calculated on
a time weighted basis and operating income is adjusted to include
the assumed income, net of tax, from placing the proceeds from the
exercise of outstanding share options.
Under US GAAP, earnings per share is presented in accordance with
the provisions of Statement of Financial Accounting Standards No.,
128, EARNINGS PER SHARE (SFAS 128). SFAS 128 replaced the
presentation of primary and fully diluted earnings per share
(EPS), with a presentation of basic EPS and diluted EPS. Under
SFAS 128, basic EPS excludes dilution for common stock equivalents
and is computed by dividing income or loss available to common
shareholders by the weighted average number common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock
and resulted in the issuance of common stock. Shares issued in
connection with Deen merger, however, are reflected as outstanding
for all periods as they were issued for nominal consideration. In
accordance with SFAS 128 prior periods share have been restated in
the US GAAP reconciliation table.
Under US GAAP, fully diluted earnings per share for the year ended
April 30, 1998 is not shown as common stock equivalents were
anti-dilutive.
F-24
<PAGE>
LJ INTERNATIONAL INC
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)
15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values for financial instruments are determined
at discrete points in time based on relevant market information.
These estimated involve uncertainties and cannot be determined
with precision. Under US GAAP the estimated fair value are to be
disclosed if they are materially different from the underlying
historical cost basis. The Company has the following financial
instruments and investments, where the fair value may be different
from historical costs.
i) Investment properties - The fair value of the investment
properties held by the Company as of April 30, 1998 is
estimated to be HK$28,150,000 on the market value basis. The
market valuations are generally performed by third parties at
varing dates during the year and adjusted internally by
management to year-end amounts.
ii) Related party transactions - The Company has receivables from
affiliated companies, which are non-interest bearing and
unsecured. The fair value of these financial instruments may
be different from the historical cost basis, but due to the
related party nature of the transaction, this difference
cannot be estimated. (As discussed below, there are other
differences between US GAAP and HK GAAP in the treatment and
classification of these related party advances).
iii) Cash and cash equivalents, trade receivables and trade
payables - The carrying amounts approximate fair value because
of the short maturity of those instruments.
(f) INVESTMENT PROPERTIES
Under HK GAAP investment properties are included in the balance
sheet at their open market values, based on a year end valuation.
Under US GAAP investment properties are recorded at their
historical costs. This would have reduced the carrying values by
HK$7,465,000 as of April 30, 1998 with no related income tax
effect. Under HK GAAP investment properties have not been
depreciated since 1995, at which time accumulated depreciation was
HK$1,178,000. Under US GAAP depreciation would have continued to
be recorded over an estimated useful life of 40 years based
historical costs. This would have increased depreciation expense
for the years ended 1996, 1997 and 1998 by HK$572,000, HK$572,000
and HK$547,000 (US$71,000) with no related income tax effect.
F-25
<PAGE>
LJ INTERNATIONAL INC
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS(CONTINUED)
15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(g) RELATED PARTY TRANSACTIONS
Under US GAAP significant related party advances are recorded as a
reduction to equity as opposed to an asset.
In October 1997, the Company sold a building to its major
shareholder and recognized a gain of HK$2,904,000. Under US GAAP,
such gain would be recorded as a capital contribution.
Accordingly, there would be no effect on the shareholders' equity
under US GAAP.
(h) DEFERRED TAXES
Under HK GAAP provision for deferred taxes is calculated under the
liability method for all material differences to the extent that
there is a reasonable probability that these will be reversed
within the foreseeable future. Under US GAAP provision for
deferred taxes requires the recognition of deferred tax assets and
liabilities for the estimated future tax effects attributable to
temporary differences without regard to the probability of future
reversal. As the temporary differences are considered as not
material, no provision for deferred taxes has been made under the
US GAAP.
(i) SHARE PREMIUM
The Company created a share premium of HK$41,597,000 following the
public offering of 1,460,000 shares of common stocks. Under US
GAAP these amounts would be termed additional paid-in capital,
however, no adjustment would be required to total shareholders'
equity.
F-26
<PAGE>
15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The following table summarized the effect on net income of differences
between HK GAAP and US GAAP.
<TABLE>
<CAPTION>
Year Ended April 30
--------------------------------------------
(In Thousands)
1996 1997 1998 1998
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Net income as reported under HK GAAP 7,515 15,721 22,456 2,905
US GAAP material adjustments:
- Depreciation on investment properties (572) (572) (547) (71)
- Capitalized deferred costs - (760) (898) (116)
- Amortization of costs for shares issuable
to note holders - - (6,049) (783)
- Gain on disposal of an investment property
to a related party - - (2,904) (376)
- Additional gain on disposal of an
investment property - - 76 10
- Amortization of Deen Merger costs - - 64 8
- Amortization of goodwill - - 7 1
- Income tax effects - - - -
----- ------ ------ -----
Net income under US GAAP 6,943 14,389 12,205 1,578
----- ------ ------ -----
----- ------ ------ -----
Proforma earnings per share under
US GAAP
- Basic 1.53 3.18 2.65 0.34
----- ------ ------ -----
----- ------ ------ -----
Weighted average number of shares outstanding
(thousand) under HK GAAP 4,387 4,387 4,539 4,539
Affected weighted average number of shares
Calculation - - 62 62
Shares (thousand) for Deen Merger 143 143 - -
----- ------ ------ -----
Weighted average number of shares outstanding
(thousand) under US GAAP 4,530 4,530 4,601 4,601
----- ------ ------ -----
----- ------ ------ -----
</TABLE>
F-27
<PAGE>
15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The following table summarized the effect on shareholders' equity of the
differences between HK GAAP and US GAAP.
<TABLE>
<CAPTION>
As of April 30
---------------------------------
(In Thousands)
1997 1998 1998
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Shareholders' equity as reported
under HK GAAP 16,981 90,257 11,676
Cumulative effect of depreciation
on investment properties (1,716) (2,263) (293)
Capitalized deferred costs (760) (769) (99)
Reduction for related company advance (1,795) (2,655) (343)
Increase for future financial consulting
paid to the Representative in the
public offering - 835 108
Reduction for goodwill recorded
on the merger of LJI and Lorenzo (75) (68) (9)
Additional gain on disposal of an
investment property - 76 10
Amortization of costs for shares
issuable to note holders - - -
Surplus arising on revaluation of
investment properties - (7,465) (966)
------ ------ ------
Shareholders' equity under US GAAP 12,635 77,948 10,084
------ ------ ------
------ ------ ------
</TABLE>
F-28
<PAGE>
15. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
IMPACT OF RECENTLY ISSUED US GAAP ACCOUNTING STANDARDS
Statement of Financial Accounting Standards 130, reporting Comprehensive
Income" and Statement of Financial Accounting Standards 131 disclosures
About Segments of an Enterprise and Related Information". Statement 130
establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments
by owners and distributions to owners. Among other disclosures,
Statement 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income
be reported in a financial statement that displays with the same
prominence as other financial statements. Statement 131 supersedes
Statement of Financial Accounting Standards 14 financial Reporting for
Segments of a Business Enterprise". Statement 131 establishes standards
on the way that public companies report financial information about
operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. Statement 131 defines operating segments as components of a
company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
Statements 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Because of the recent
issuance of these standards, management has been unable to fully
evaluate the impact, if any, the standards may have on the future
financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of these
standards.
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements
for filing on Form 20-F and has duly caused this annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LJ INTERNATIONAL INC.
(Registrant)
Date: September 25, 1998 By: /s/ Yu Chuan Yih
------------------ --------------------------------
Yu Chuan Yih
Chairman
