<PAGE>
PROSPECTUS Filed Pursuant to Rule 424b(3)
Registration No. 333-7912
LJ INTERNATIONAL INC.
1,679,000 Warrants to Purchase Shares of Common Stock
and
1,679,000 Shares of Common Stock Upon Exercise of the Warrants
In our April 1998 initial public offering, we sold 1,679,000 shares of
common stock and 1,679,000 warrants to purchase 1,679,000 shares of common
stock. Each warrant entitles the holder to purchase one share of common stock
at $5.75 per share through April 15, 2003.
In addition to these 1,679,000 warrants and 1,679,000 underlying shares
of common stock, this prospectus covers the sale of 292,000 shares of common
stock underlying the following securities which we sold to the underwriter
and/or persons related to the underwriter:
. stock purchase options to purchase up to 146,000 shares of common stock;
and
. warrant purchase options to purchase up to 146,000 warrants to purchase
shares of common stock.
No minimum number of warrants must be exercised, and all funds received
by us upon exercise of the warrants and the underwriter warrants will be used
for general corporate purposes. As of September 22, 1999, all 1,679,000 warrants
and all of the underwriter warrants were outstanding. The common stock covered
by this prospectus which is issuable upon exercise of the underwriter warrants
is to be sold from time to time by or for the account of certain selling
shareholders. None of the proceeds from the sale of the underwriter warrants and
underlying common stock will be received by us.
See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying our common stock and warrants.
Our common stock and warrants are traded on The Nasdaq National Market
under the symbols "JADE" and "JADEW." On September 22, 1999, the last sale
prices for the common stock and the warrants were $4.25 per share of common
stock and $1.50 per warrant.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Underwriting Gross
Price to Discounts and Proceeds to
Public Commissions Us
Per share of common stock on exercise of warrant.. US$5.75 US$0.00 US$5.75
Total............................................. US$9,654,250 US$0.00 US$9,654,250
</TABLE>
This information excludes estimated total expenses of this offering of
approximately US$32,000 payable by us. It also does not include 292,000 shares
of common stock registered for the account of selling shareholders to be offered
from time to time in the market.
The date of this prospectus is October 8, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Currency Translations......................................................................................................... 3
Prospectus Summary............................................................................................................ 4
Risk Factors.................................................................................................................. 6
Forward-Looking Statements.................................................................................................... 11
Use of Proceeds............................................................................................................... 11
Nature of Trading Market...................................................................................................... 11
Dividend Policy............................................................................................................... 12
Exchange Rates................................................................................................................ 12
Selected Consolidated Financial Data.......................................................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 15
Our Business.................................................................................................................. 25
Our Management................................................................................................................ 36
Certain Transactions.......................................................................................................... 39
Principal Shareholders........................................................................................................ 40
Selling Shareholders.......................................................................................................... 41
Description of Securities..................................................................................................... 42
Taxation...................................................................................................................... 46
Plan of Distribution.......................................................................................................... 48
Legal Matters................................................................................................................. 48
Experts....................................................................................................................... 48
Additional Information........................................................................................................ 48
Index to Consolidated Financial Statements.................................................................................... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
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<PAGE>
CURRENCY TRANSLATIONS
Our published consolidated financial statements are presented in Hong
Kong dollars, the lawful currency of Hong Kong. In this prospectus, 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 prospectus contains translations of various 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. See
"Exchange Rates" for historical information regarding the exchange rate.
-3-
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes appearing elsewhere in this
prospectus. Unless otherwise indicated, information in this prospectus assumes
that there has been no exercise of the 1,679,000 warrants or the underwriter
warrants.
The Company
We are a totally vertically integrated producer of finished gemstones
and fine quality gemstone jewelry. We cut and polish semi-precious gemstones and
design, manufacture, market and distribute gem set jewelry to fine jewelers,
department stores, national jewelry chains and electronic and specialty
retailers throughout North America and Western Europe. Our product line includes
all major categories that are sought by major retailers, including earrings,
necklaces, pendants, rings and bracelets. Our jewelry is crafted in gold,
platinum and sterling silver and is set with semi-precious stones. The average
wholesale price of our jewelry is approximately $100, which equates to retail
prices between $100 and $499.
We believe that our vertically integrated structure provides significant
advantages over our 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 us.
Innovative processes in stone cutting and manufacturing further enhance our
competitive position.
Our principal executive offices are located at Unit #12, 12/F, Block A,
Focal Industrial Center, 21 Man Lok Street, Hung Hom, Kowloon, Hong Kong,
telephone 011 (852) 2764-3622.
The Offering
Securities offered by us .... 1,679,000 warrants and 1,679,000 shares of common
stock underlying the warrants. Each warrant
entitles the holder to purchase one share of
common stock at $5.75 per share until April 15,
2003. The warrants are not exercisable unless, at
the time of exercise, we have a current
prospectus under the Securities Act covering the
shares of common stock issuable upon exercise of
the warrants and such shares have been
registered, qualified or deemed to be exempt
under the securities laws of the states of
residence of the exercising holders of the
warrants. The warrants are subject to redemption
by us.
Securities offered by selling
shareholders................. 292,000 shares of common stock underlying the
underwriter warrants.
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<PAGE>
Use of Proceeds............. We will not receive any proceeds from the sale of
the underwriter warrants or the underlying common
stock. All funds received by us upon the exercise
of the warrants and the underwriter warrants will
be used for general corporate purposes.
Risk Factors................ Please read the Risk Factors section of this
prospectus since an investment in our common
stock or warrants involves a high degree of risk
and could result in a loss of your entire
investment.
Nasdaq National Market symbols
Common Stock........ JADE
Purchase Warrants... JADEW
-5-
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks and uncertainties described below and the other information
in this prospectus before deciding whether to invest in shares of our common
stock. If any of these risks occur, our business, results of operations and
financial condition could be adversely affected. This could cause the trading
price of our common stock to decline, and you might lose part or all of your
investment.
We depend upon QVC Network, Inc. for a large portion of our sales and we cannot
be certain that these sales will continue. If they do not, our revenues will
likely decline.
Although we sell to a large number of customers in a variety of markets,
the bulk of our sales involve rings to one volume customer, QVC Network, Inc.
For the fiscal years ended April 30, 1998 and 1999, QVC Network, Inc. accounted
for approximately 55% and 57% of our sales. Although we have maintained a good
and longstanding relationship with this customer, we do not have any long-term
contracts with QVC Network, Inc., who orders only on a "purchase order" basis.
The loss of QVC Network, Inc. as a customer or a significant reduction in its
orders would have a materially adverse effect. We cannot assure that QVC
Network, Inc. will continue to use us for the design and manufacture of a
portion of their jewelry requirements.
We depend upon certain key personnel to manage our company.
Our ability to successfully carry out our business plans continues to be
largely dependent upon the efforts of our current management, particularly our
Chairman, Yu Chuan Yih. Although we have entered into an employment agreement
with Mr. Yih, the loss of his services would have a material adverse effect on
our ability to achieve our business objectives. We maintain key-person life
insurance in the amount of US$2,000,000 on Mr. Yih's life, with the proceeds of
such insurance payable to us.
Our principal shareholder controls all matters requiring shareholder approval.
Yu Chuan Yih, our Chairman, and members of his family beneficially own
approximately 67.2% of our outstanding voting securities and, accordingly,
continue to be able to elect a majority of our directors and to determine the
disposition of all matters submitted to a vote of our shareholders.
We face significant competition from larger competitors.
The manufacture and distribution of jewelry is a highly competitive
industry characterized by a diversity and sophistication of product. We compete
with major domestic and international companies with substantially greater
financial, technical and marketing resources and personnel than us. While we
believe that our vertically integrated low-cost, high-volume and quality
manufacturing process provides us with a competitive edge, there can be no
assurance other jewelry manufacturers will not similarly develop low-cost, high-
volume production capability or an even better process, providing greater
competition for us and materially affecting our business prospects.
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<PAGE>
Material factors relating to the operations of the business could affect our
success.
As a manufacturer and merchandiser of low-cost, high-quality gem-set
jewelry, our existing and future operations are and will be influenced by
several factors, including:
. technological developments in the mass production of jewelry;
. our ability to efficiently meet the design and production requirements of
our customers; and
. the market acceptance of our customers' jewelry.
Further factors impacting the success of our operations are:
. increases in expenses associated with continued sales growth;
. our ability to control costs;
. our management's ability to evaluate the public's taste and new orders to
target satisfactory profit margins;
. our capacity to develop and manage the introduction of new designed
products; and
. competition.
Quality control is also essential to our operations, since customers demand
compliance with design and product specifications and consistency of production.
We cannot assure that the revenue growth will be sustained on a quarterly or
annual basis.
Our sales and marketing operations are performed principally at our executive
offices which are located in Hong Kong. As a result, our results of operations
and financial condition may be influenced by the political situation in Hong
Kong and by the general state of the Hong Kong economy.
On July 1, 1997, sovereignty over Hong Kong was transferred from the United
Kingdom to China, and Hong Kong became a Special Administrative Region of China,
an SAR. As provided in the Sino-British Joint Declaration on the Question of
Hong Kong, the "Joint Declaration", and the Basic Law of the Hong Kong SAR of
China, the "Basic Law", the Hong Kong SAR is to have a high degree of autonomy
except in foreign and defense affairs. Under the Basic Law, the Hong Kong SAR is
to have its own legislature, legal and judicial system and full economic
autonomy for 50 years. Based on the current political conditions and our
understanding of the Basic Law, we do not believe that the transfer of
sovereignty over Hong Kong will have an adverse impact on our financial and
operating environment. We cannot assure, however, that changes in political or
other conditions will not result in such an adverse impact.
Our manufacturing facilities are located in the PRC. Our results of operations
and financial condition may therefore be influenced by the economic, political,
legal and social conditions in the PRC.
Since 1978, the PRC government has been reforming, and is expected to
continue to reform, the PRC's economic and political systems. Such reforms have
resulted in significant social progress. Other political, economic and social
factors could also lead to further readjustment of the reform measures. This
refinement and readjustment process may not always have a positive effect on our
operations in the PRC. At times, we may also be adversely affected by changes
in policies of the PRC's government such as changes in laws and regulations or
their interpretation, the introduction of additional measures to control
inflation, changes in the rate or method of taxation and imposition of
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<PAGE>
additional restrictions on currency conversion and remittances abroad. Our
management believes that because of the broad support for the reform process and
the fact that the economic system in the PRC has already undergone extensive
changes as a result of the success of such reforms, the basic principles
underlying the reforms will continue to provide an acceptable framework for the
PRC's political and economic systems.
Our products are currently manufactured at our factories located in Shantou and
Shenzhen, China. However, firefighting and disaster relief or assistance in
China are primitive by Western standards.
We have obtained fire, casualty and theft insurance aggregating
approximately $7.5 million covering various of our stock in trade, goods and
merchandise, furniture and equipment and factory buildings in China. The
proceeds of such insurance may not be sufficient to cover material damage to, or
the loss of, our factories due to fire, severe weather, flood or other cause,
and such damage or loss would have a material adverse effect on our financial
condition, business and prospects. Consistent with the customary practice among
enterprises in China, we do not carry any business interruption insurance.
Sales of our jewelry to retailers are generally stronger between June and
January of each year due to the importance of the holiday selling season.
The approximately 57% of our sales during the fiscal year ended April 30,
1999 to our largest customer, QVC Network, Inc., were not seasonal in nature. It
has been our management's experience that the remaining 43% of our total sales
are seasonally sensitive.
Although our sales and net income have been steadily growing, retail jewelry
sales are sensitive to fluctuations in the economic cycle.
Unfavorable general economic conditions have an adverse effect on consumer
spending and, therefore, on our business. We believe our growth and products
are less sensitive to economic downturns due to our mass manufacturing
capabilities, merchandising, and low-cost products which are more impulse
purchase items. We cannot assure that unfavorable general economic conditions
or a downturn in consumer confidence would not in the future have an adverse
effect on consumer spending preferences and, therefore, on our business.
We lack patent protection for our manufacturing process.
We believe that one of our most competitive advantages is our vertically
integrated manufacturing structure that produces high quality jewelry in large
quantities and at favorable prices. However, the general concepts of such high
volume production are known in the industry and the ability of others to build
upon the basic processes and develop similar, if not better, applications to
high volume production could have an adverse competitive impact.
Our holding company structure creates restrictions on the payment of dividends.
We have no direct business operations, other than our ownership of our
subsidiaries. While we have no current intention of paying dividends, should we
decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of
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<PAGE>
dividends or other payments from our operating subsidiaries and other holdings
and investments. In addition, our operating subsidiaries, from time to time, may
be subject to restrictions on their ability to make distributions to us,
including as a result of restrictive covenants in loan agreements, restrictions
on the conversion of local currency into U.S. dollars or other hard currency and
other regulatory restrictions.
It may be difficult to serve us with legal process or enforce judgments against
us or our management.
We are a British Virgin Islands holding company, and all or a substantial
portion of our assets are located in China and Hong Kong. In addition, all but
one of our directors and officers are non-residents of the United States, and
all or a substantial portion of the assets of such non-residents are located
outside the United States. As a result, it may not be possible to effect
service of process within the United States upon such persons. Moreover, there
is doubt as to whether the courts of the British Virgin Islands, China or Hong
Kong would enforce:
. Judgments of United States courts against us, our directors or our officers
based on the civil liability provisions of the securities laws of the
United States or any state; or
. In original actions brought in the British Virgin Islands, China or Hong
Kong, liabilities against us or non-residents based upon the securities
laws of the United States or any state.
Non-registration of the warrants and the underlying common stock in certain
jurisdictions may make them worthless.
The warrants are not exercisable unless, at the time of the exercise, we
have a current prospectus covering the shares of common stock issuable upon
exercise of the warrants, and such shares are registered, qualified or deemed to
be exempt under the securities laws of the states of residence of the exercising
holders of the warrants. For the life of the warrants, we will attempt to
maintain a current effective registration statement relating to the shares of
common stock issuable upon exercise of the warrants. If we are unable to
maintain a current registration statement because the costs render it
uneconomical, or because the value of the shares of common stock underlying the
warrants is less than the exercise price, or any number of other reasons, the
warrant holders will be unable to exercise the warrants and the warrants may
become valueless.
Although the warrants will not knowingly be sold to purchasers in juris-
dictions in which the securities are not registered or otherwise qualified for
sale, purchasers may buy warrants in the after-market or may move to
jurisdictions in which the shares underlying the warrants are not registered or
qualified during the period that the warrants are exercisable. In this event, we
would be unable to issue shares of common stock to those persons desiring to
exercise their warrants, whether in response to a redemption notice or
otherwise, unless and until the shares could be qualified for sale in the
jurisdictions in which such purchasers reside, or exemptions exist in such
jurisdictions from such qualification. Warrant holders would have no choice but
to attempt to sell the warrants or allow them to expire unexercised.
-9-
<PAGE>
There are risks related to the unavailability of information due to exemptions
under the Exchange Act for a foreign private issuer.
We are a foreign private issuer within the meaning of the rules under the
Exchange Act. As such, we are exempt from certain provisions applicable to
United States public companies, including:
. the rules under the Exchange Act requiring the filing with the Securities
and Exchange Commission of quarterly reports on Form 10-Q or current
reports on Form 8-K;
. the sections of the Exchange Act regulating the solicitation of proxies,
consents or authorizations in respect of a security registered under the
Exchange Act; and
. the sections of the Exchange Act requiring insiders to file public reports
of their stock ownership and trading activities and establishing insider
liability for profits realized from any "short-swing" trading transaction.
Because of these exemptions, investors are not provided the same information
generally available to investors in public companies organized in the United
States.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements that are based
on beliefs and assumptions of our management. Often, you can recognize these
statements because we use words such as "believe", "anticipate", "intend",
"estimate" and "expect" in the statements. Our actual performance in 1999 and
beyond could differ materially from the forward-looking statements contained in
this prospectus. However, we are not obligated to release publicly any
revisions to the forward-looking statements contained in this prospectus.
USE OF PROCEEDS
We presently anticipate that the proceeds from the exercise of the warrants
and the underwriter warrants will be applied and allocated to our working
capital for general corporate purposes. If the proceeds are not used
immediately, they may be invested in short-term interest bearing, investment
grade securities.
NATURE OF TRADING MARKET
Our common stock is traded in the over-the-counter market and is quoted on
The Nasdaq National Market under the symbol "JADE." 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
October 31, 1998 $ 6.00 $3.88
January 31, 1999 $ 7.00 $4.00
April 30, 1999 $11.50 $4.31
July 31, 1999 $ 7.13 $4.00
</TABLE>
The warrants are traded in the over-the-counter market and are quoted on
The Nasdaq National Market under the symbol "JADEW." 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
October 31, 1998 $1.516 $0.563
January 31, 1999 $2.813 $ 1.00
April 30, 1999 $ 8.25 $ 1.75
July 31, 1999 $3.938 $ 1.75
</TABLE>
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<PAGE>
We do not believe that there is any principal non-United States trading
market for the common stock or the warrants. We believe that a substantial
majority of the outstanding common stock and warrants are held in the United
States by Cede & Co. as record holder.
DIVIDEND POLICY
We do not intend to pay dividends on our common stock in the foreseeable
future. Instead, we will retain our earnings to support our growth strategy and
for general corporate purposes. As a holding company, our ability to pay
dividends depends upon our receipt of dividends or other payments from our
subsidiaries and other holdings and investments. In addition, our operating
subsidiaries from time to time may be subject to restrictions on their ability
to make distributions to us, including as a result of restrictive covenants in
loan agreements, restrictions on the conversion of local currency into U.S.
dollars or other currency and other regulatory restrictions. Any determination
to pay dividends in the future will be at the discretion of our board of
directors and will depend upon our results of operations, financial condition,
contractual restrictions and other factors. Any dividends paid in the future on
the common stock may be paid in either U.S. dollars or Hong Kong dollars.
EXCHANGE RATES
We have prepared our consolidated financial statements in accordance with
Hong Kong generally accepted accounting principles consistently applied and
publish such statements in Hong Kong dollars, which is the functional currency
of our subsidiaries and the legal tender currency of Hong Kong. All references
to "Hong Kong dollars" or "HK$" are to Hong Kong dollars. All references to
"U.S. Dollars," "dollars" or "$" 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$7.73.
The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods indicated. It
represents the noon buying rate in New York for cable transfers payable in
foreign currencies as certified for customs purposes by the Federal Reserve Bank
of New York. The average noon buying rate is determined by averaging the rates
on the last business day of each month during the relevant period.
<TABLE>
<CAPTION>
Calendar Year Period End Average High Low
- ------------- ---------- -------- ------ ------
Noon Buying Rate
----------------
(HK$per US$)
<S> <C> <C> <C> <C>
1994 7.7375 7.7290 7.7530 7.7225
1995 7.7323 7.7357 7.7665 7.7300
1996 7.7332 7.7345 7.7440 7.7310
1997 7.7456 7.7431 7.7550 7.7275
1998 7.7471 7.7476 7.7497 7.7412
1999 (through August 31, 1999) 7.7660 7.7638 7.7638 7.7486
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Hong Kong dollars in thousands, except per share amounts)
The following selected consolidated financial data with respect to each of
the years in the five-year period ended April 30, 1999 have been derived from
our audited consolidated financial statements. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes included elsewhere in this
prospectus.
We prepare our consolidated financial statements in accordance with Hong
Kong GAAP, which differs in certain significant respects from US GAAP. For a
discussion of the significant differences between Hong Kong GAAP and US GAAP,
see Note 16 of Notes To And Forming Part Of The Financial Statements.
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------------------------------------------
1995 1996 1997 1998 1999 1999
-------- -------- ------- -------- -------- -------
HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Operating revenues........................ 48,365 87,318 92,258 124,199 195,219 25,255
======= ====== ====== ======= ======= ======
Operating income........................ 1,863 13,828 21,930 31,540 39,723 5,139
Interest expense, net................... (5,930) (5,693) (3,999) (6,964) (5,186) (671)
------- ------ ------ ------- ------- ------
Income (loss) before income
taxes................................. (4,067) 8,135 17,931 24,576 34,537 4,468
Income taxes............................ (27) (620) (2,210) (2,120) (380) (49)
------ ------ ------ ------- ------- ------
Net income (loss)....................... (4,094) 7,515 15,721 22,456 34,157 4,419
====== ====== ====== ======= ======= ======
Dividends per share..................... --- 0.57 --- --- --- ---
Weighted average number of
shares outstanding - basic
(thousands)........................... 4,387 4,387 4,387 4,539 6,347 6,347
Effect of dilutive potential
ordinary shares:
Warrants.............................. -- -- -- 5 -- --
Stock options......................... -- -- -- -- 1 1
------ ------ ------ ------- ------- ------
Weighted average number of
shares outstanding - diluted
(thousands)........................... 4,387 4,387 4,387 4,544 6,348 6,348
Earnings (loss) per share -
basic................................. (0.93) 1.71 3.58 4.95 5.38 0.70
Earnings (loss) per share -
diluted............................... (0.93) 1.71 3.58 4.94 5.38 0.70
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with US
GAAP
Operating revenues........................ 48,365 87,318 92,258 124,199 195,219 25,255
======= ====== ====== ======= ======= ======
Operating income (loss) before
income taxes........................ (4,639) 7,563 16,599 14,325 33,738 4,364
======= ====== ====== ======= ======= ======
Net income (loss)..................... (4,666) 6,943 14,389 12,205 33,358 4,315
======= ====== ====== ======= ======= ======
Dividends per share................... --- 0.55 --- --- --- ---
Earnings (loss) per share............. (1.03) 1.53 3.18 2.65 5.26 0.68
Weighted average number of
shares outstanding
(thousands)......................... 4,530 4,530 4,530 4,601 6,347 6,347
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
As of April 30,
-----------------------------------------------------------
1995 1996 1997 1998 1999 1999
-------- -------- ------- -------- -------- -------
HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Working capital....................... (22,877) (15,092) (2,757) 39,090 75,645 9,785
Total assets.......................... 65,160 64,763 82,879 154,616 222,875 28,831
Long-term obligations................. 9,338 13,913 13,006 10,544 9,028 1,168
Total shareholders' equity............ (3,750) 1,260 16,981 90,257 128,428 16,614
Amounts in accordance with US
GAAP
Working capital....................... (22,877) (15,092) (2,757) 39,090 75,645 9,785
Total assets.......................... 64,513 63,544 78,533 142,307 213,020 27,556
Long-term obligations................. 9,338 13,913 13,006 10,544 9,028 1,168
Total shareholders' equity............ (4,403) 41 12,635 77,948 118,573 15,339
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our financial statements and notes to the financial statements appearing
elsewhere. The amounts reflected in the following discussion are in Hong Kong
Dollars, the functional currency of our 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 this discussion.
Overview
We own 100% of the equity of Lorenzo Jewelry Mfg. (H.K.) Limited, Shantou
S.E.Z. Lorenzo Gems & Craft Factory Co., Ltd., Shantou Lorenzo Jewelry Mfg.,
Precious Gems Trading Ltd., Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.,
Golden Horizon Trading Ltd., Lorenzo Jewelry (Shenzhen) Co., Ltd., Fine Gift
Enterprises Ltd. and Lorenzo Diamond Jewelry Mfg. Co., Ltd. We also own 60% of
the issued share capital in Lorenzo Marketing Co., Ltd. Collectively, these
entities are referred to as us. We are a British Virgin Islands holding company
and substantially all of our operating assets are held by our subsidiaries,
which are located in Hong Kong and/or China. While Lorenzo Jewelry has operated
since 1987, we were incorporated in January 1997, and subsequently merged with
Lorenzo Jewelry and its subsidiaries. Lorenzo Diamond was recently created in
July 1999 to focus on our diamond jewelry business.
We are a totally vertically integrated producer of finished gemstones and
fine quality gemstone jewelry. We cut and polish semi-precious gemstones and
design, manufacture, market and distribute gem set jewelry to fine jewelers,
department stores, national jewelry chains and electronic and specialty
retailers throughout North America and Western Europe. Our product line
includes all major categories that are sought by major retailers, including
earrings, necklaces, pendants, rings and bracelets. Our jewelry is crafted in
gold, platinum and sterling silver and is set with semi-precious stones. The
average wholesale price of the jewelry produced by us is approximately $100,
which equates to retail prices between $100 and $499.
During fiscal 1998, we completed our 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 during the year ended April 30, 1999
from the exercise of the over-allotment of common stock in the offering. The
completion of this offering was a very significant development for us and
required substantial management time away from our normal operations. In 1999,
we re-focused all of our energy to the operation of our primary business with
the goal of further increasing sales and operating performance.
Fiscal 1999 compared to Fiscal 1998
Net Sales
Net sales increased 57% to HK$195,219,000 (US$25,255,000) in 1999 from
HK$124,199,000 (US$16,067,000) in 1998. This increase is primarily driven by
volume increases in sales to existing
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<PAGE>
customers, including International Jewelry Connection and QVC Network, Inc. In
addition, our new sterling silver product line was introduced to the market
during the year.
Gross Profit
The gross profit margin remained at 49% compared to the same period of last
year as our vertical integration assures tight controls over the quality of the
whole manufacturing processes, including cutting and processing, and minimizes
wastage during the manufacturing processes. There was no material fluctuation
in the sales price of our products during the current year and we expect there
will not be material fluctuation in the sales price of our products in the
foreseeable future.
We expect the cost of the rough gem stone will rise slightly in the next
two years; hence, we deliberately purchased more rough gem stone in 1999 to take
advantage of the expected rise in selling price.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 70% to HK$56,880,000
(US$7,358,000) or 29% of net sales in 1999 compared with HK$33,545,000
(US$4,340,000) or 27% of net sales in 1998.
The increase is mainly attributable to the operation of our Shenzhen
factory newly set-up in February 1998, which has over 50,000 square feet floor
area with over 1,500 staff and workers employed. In addition, our management
and administrative staff in the Hong Kong headquarter also increased to cope
with our increased sales volume and to provide us with administrative support.
Other Income/Expenses
Other expenses, net of income, which principally consisted of interest
expenses, rental income and gain on disposal of property, plant and equipment,
increased to HK$4,439,000 (US$575,000) in 1999 from HK$2,785,000 (US$360,000) in
1998.
Net interest expenses decreased 25.5% to HK$5,186,000 (US$671,000) in 1999
from HK$6,964,000 (US$901,000) in 1998. The proceeds from the IPO and issuance
of warrants during the year provided us with working capital and the level of
borrowings dropped during the year.
Rental income decreased 62.7% to HK$474,000 (US$61,000) in 1999 from
HK$1,273,000 (US$165,000) in 1998, which is mainly due to one of the properties
has been used as an office to provide administrative support instead of being
sub-let out for rental.
In addition, we sold an investment property in 1998 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"). No disposal of
property was made in 1999.
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<PAGE>
Income Taxes
We were incorporated in the British Virgin Islands and, under current law
of the British Virgin Islands, are not subject to tax on income or on capital
gains.
For our subsidiaries in Hong Kong, prevailing corporate income tax rate is
16%.
Our 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 our PRC subsidiaries are exempt from PRC
income tax for two years starting from their first profit making year, followed
by a 50% reduction of tax for the next three years. These subsidiaries have
sustained losses for the PRC income tax purposes. As a result, we have 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%.
Income tax decreased 82% to HK$380,000 (US$49,000) in 1999 from
HK$2,120,000 (US$274,000) in 1998. Despite increase in profit during the year
which is attributable to the full operation of the PRC subsidiaries, income tax
actually decreased as a result of the restructuring of the intra-group pricing
policy.
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 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 our products to
fine jewelry retailers, national jewelry chains and department stores. Sales to
our 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%. We liquidate the inventory by selling to other
companies while it is not a regular occurrence. We may periodically utilize
this strategy to reduce excess gems stone inventory when it is considered
beneficial to us.
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<PAGE>
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.
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.
Net 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.
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, we 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.
Income Taxes
We were incorporated in the British Virgin Islands and, under current law
of the British Virgin Islands, are not subject to tax on income or on capital
gains.
For our subsidiaries in Hong Kong, prevailing corporate income tax rate is
16%.
Our 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
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<PAGE>
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,
we have 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 our PRC subsidiaries, income tax actually decreased as the result
of restructuring of the intra-group pricing policy.
Liquidity and Capital Resources
We have no direct business operations other than our ownership of our
subsidiaries. Our ability to pay dividends and meet other obligations depends
upon our receipt of dividends or other payments from our operating subsidiaries.
There currently are no known restrictions on our subsidiaries to pay dividends
to us; however, we do not currently intend to pay dividends to our shareholders.
The primary sources of our 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 revolving lines of credit.
For the fiscal year ended April 30, 1999, as a result of HK$4,896,000
(US$633,000) cash provided by financing activities and HK$6,220,000 (US$804,000)
and HK$7,802,000 (US$1,009,000) used by operating and investing activities, cash
and cash equivalents decreased by HK$9,126,000 (US$1,180,000).
Net cash used by operating activities in fiscal 1999 was HK$6,220,000
(US$804,000) as compared with net cash of HK$1,545,000 (US$200,000) in fiscal
1998. 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, 1999, net accounts receivable increased by HK$18,564,000
(US$2,401,000) to HK$49,632,000 (US$6,420,000) from HK$31,068,000 (US$4,019,000)
as of April 30, 1998. The increase is mainly due to an advance of HK$15,460,000
(US$2,000,000) being made to one of our principal gem stone suppliers in order
to secure the first right and steady gem stone supplies. The advance was
included in the balance of the accounts receivable as at April 30, 1999. The
sales to customers are generally offered a 60-day credit period.
Inventory increased by HK$46,642,000 (US$6,034,000) from HK$46,994,000
(US$6,079,000) as of April 30, 1998 to HK$93,636,000 (US$12,113,000) as of April
30, 1999. The increase was due to our management's anticipation of significant
increase in sales for the first and second quarters of the new fiscal year,
increase in the cost of rough gem stone, and to maintain sufficient inventory
for block-orders.
For the fiscal year ended April 30, 1999, net cash used in investing
activities was HK$7,802,000 (US$1,009,000), a decrease of HK$11,652,000
(US$1,508,000) as compared with HK$19,454,000 (US$2,517,000) in fiscal 1998.
The net cash used in investing activities during fiscal
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<PAGE>
1999 was mainly for the establishment of the new manufacturing facility in
Shenzhen and the purchase of new machinery for the Shenzhen and Shantou
facilities.
As of April 30, 1999, we had various letters of credit under banking
facilities which aggregated HK$38,125,000 (US$4,932,000). We had HK$16,495,000
(US$2,134,000) and HK$34,193,000 (US$4,423,000) outstanding under letters of
credit as of April 30, 1998 and 1999. Under our letters of credit, we are
required to maintain certain cash balance which totaled HK$3,111,000
(US$402,000) and HK$15,185,000 (US$1,964,000) as of April 30, 1998 and 1999.
We have 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,
our cost through our gold loan program has been substantially less than the
costs that would be incurred if we were to finance the purchase of all of our
gold requirements with borrowings under our letter of credit facility or other
credit arrangements. The gold loan, however, does expose us to certain market
risks associated with potential future increases in the price of gold, and we
currently do not hedge against such risks. Under the gold loan arrangements, we
may defer the purchase until such time as we decide appropriate, the price being
paid will be the current market price at time of payment. We had outstanding
loans to purchase 2,300 and 4,300 ounces of gold as of April 30, 1998 and 1999,
with the related balances being HK$5,810,000 (US$752,000) and HK$9,500,000
(US$1,229,000). Interest rates for these loans were 3.1% to 3.3% as of April
30, 1999 (1998: 3.3% to 3.6%). Unrealized gain on the unsettled gold loans as
of April 30, 1998 and 1999 were HK$566,000 (US$73,000) and HK$630,000
(US$82,000).
Long-term mortgage loans on our properties aggregated HK$13,847,000
(US$1,791,000) and HK$13,923,000 (US$1,801,000) as of April 30, 1998 and 1999.
Substantially all of our properties are pledged as collateral for our banking
facilities.
On October 17, 1997, we completed the sale of promissory notes amounting to
HK$6,049,000 (US$783,000). These notes provided for interest of 7% and the note
holders were repaid in full from the proceeds of our initial public offering.
In addition, they received 156,500 shares of our common stock upon completion of
the public offering. As of April 30, 1998, we had outstanding promissory notes
amounting to HK$2,184,000 (US$283,000), which were repaid during the year ended
April 30, 1999.
In April 1998, we completed an initial public offering in which we sold
1,460,000 shares of common stock and 1,679,000 warrants. We realized gross
proceeds of HK$58,051,000 (US$7,510,000) from this offering. We may realize
additional proceeds from the exercise of the warrants, although there can be no
assurance that such warrants will be exercised. During the fiscal year ended
April 30, 1999, we 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.
We anticipate that cash flow from operations, as well as borrowings
available under our existing credit line and gold loan arrangement, will be
sufficient to satisfy our capital needs for the next twelve months.
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Reconciliation to US GAAP
We prepare our financial statements under Generally Accepted Accounting
Principles as practiced in Hong Kong, which we refer to as HK GAAP. There are
certain differences between HK GAAP and GAAP as practiced in the United States,
which we refer to as US GAAP. In consideration of US GAAP, certain adjustments
would have been provided.
In connection with the bridge financing associated with our public
offering, we were required under SEC accounting rules to record for US GAAP
purposes additional costs associated with the issuance of 156,500 shares of our
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, 1999, HK$472,000
(US$61,000) would be recorded as depreciation expenses on properties and
investment properties and HK$417,000 (US$54,000) would be recorded as
amortization of financial consulting fee for the IPO. In addition, HK$83,000
(US$10,000) in relation to 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 previous years. As a result, our net income for the year ended April
30, 1999 under US GAAP would be HK$33,358,000 (US$4,315,000).
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) and
amortization of costs for shares issuable to noteholders of HK$6,049,000
(US$783,000) would be expensed based on US GAAP. In October 1997, we sold an
investment property to our 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, our
net income 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, our net income for the fiscal year ended April 30,
1997 under US GAAP would be HK$14,389,000 (US$1,862,000).
Stock-based compensation
Under HK GAAP, there are no specific requirements to recognize the
compensation cost arising from stock options granted to employees on the
financial statements.
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<PAGE>
Under US GAAP, we adopted the provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS
123). As permitted by SFAS 123, we have chosen to account for stock-based
compensation using the intrinsic value method. Accordingly, because the
exercise price of our stock options is same to the market price of the
underlying stock on the date of grant, no compensation expense has been
recognized for our stock-based compensation plan. Had compensation expense for
the stock option plan been determined based on the fair value at the date of
grant, consistent with the provisions of SFAS 123, our net income and earnings
per share would have been reported as follows:
<TABLE>
<CAPTION>
Year Ended April 30
-------------------
1999 1999
---- ----
HK $ US$
<S> <C> <C>
Pro forma net income 32,970,000 4,265,000
========== ==========
Pro forma earnings per share
Basic 5.19 0.67
========== ==========
Diluted 5.19 0.67
========== ==========
</TABLE>
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
Expected dividend yield Nil
Expected stock price volatility 60%
Risk-free interest rate 5.85%
Expected life of options 3 years
The weighted average fair value of options granted is US$2.25 per share.
Our stock option activities and related information for the years ended
April 30, 1997, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
Year ended April 30
---------------------------------------------------------
1997 1998 1999
---- ---- ----
Exercise Exercise Exercise
price price price
Options US$ Options US$ Options US$
<S> <C> <C> <C> <C> <C> <C>
Outstanding as
of May 1 -- -- -- -- -- --
Granted -- -- -- -- 1,285,000 5.0
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
------- -------- ------- -------- --------- --------
Outstanding
as of April 30 -- -- 1,285,000
======= ======= =========
</TABLE>
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<PAGE>
Impact of recently issued US GAAP accounting standards.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
established methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. We currently do not hold or issue derivative financial instruments
in the normal course of business. Accordingly, adoption of SFAS No. 133 is not
expected to affect our financial statements.
During the year, Statement of Position 98-5 has been introduced which
require costs of start-up activities be expensed as incurred. It is effective
for fiscal years beginning after December 15, 1998. As of April 30, 1999, the
organization costs in relation to start-up activities capitalized under both HK
and US GAAP are HK$399,000. Had this statement been adopted in the current
year, the unamortized costs of HK$399,000 would need to be expensed in the
current year, being the first year of application of this statement. The net
income and earnings per share under US GAAP would have been reported as follows:
<TABLE>
<CAPTION>
Year Ended April 30
-------------------
1999 1999
---- ----
HK $ US$
<S> <C> <C>
Adjusted net income 32,959,000 4,263,000
========== ==========
Adjusted earnings per share
Basic 5.19 0.67
========== ==========
Diluted 5.19 0.67
========== ==========
</TABLE>
Inflation
We do not consider inflation to have had a material impact on our results
of operations over the last three years.
Foreign Exchange
More than 89% of our sales are denominated in U.S. Dollars whereas the
other sales are basically denominated in Hong Kong Dollars. The largest portion
of our 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 our 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 our results of
operations. We do not currently hedge our foreign exchange positions.
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Year 2000 Issue
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.
We have completed our assessment in January 1999 of the specific systems
critical to our ongoing operations and preparation of financial information,
including application systems, operating systems and hardware, as well as other
non-financial computing system on which we rely on its operations, to establish
the impact which the Year 2000 will have on the accuracy of their calculations,
processing and reporting.
Based upon the accomplishments to date, we believe that adequate plans
and/or design changes are in place to enhance our computer and other systems
which we understand are required that should ensure that the impact of the Year
2000 issue will not create significant errors in accounting records or adversely
impact our business operations or customer service.
We are revising our existing business interruption contingency plans to
address internal and external issues specific to the Year 2000 problem, to the
extent practicable. Such revisions are expected to be completed by October
1999. These plans, which are intended to enable us to continue to operate to
the extent that we can do so safely, include performing certain processes
manually; repairing or obtaining replacement systems; changing suppliers; and
reducing or suspending operations.
We believe, however, that due to the widespread nature of potential Year
2000 issues, the contingency planning process is an ongoing one which will
require not only our own internal systems and equipment, but also the status of
third party Year 2000 readiness.
Although we believe that adequate plans and/or design changes are in place
and we have not received any adverse notification from any significant customer,
supplier or service provider to the effect that they are not, or will not be,
Year 2000 compliant, there can be no assurances that Year 2000 problem will not
occur with respect to our computer systems or that third parties' Year 2000
readiness could not have an adverse effect on us.
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OUR BUSINESS
We are a totally vertically integrated producer of finished gemstones and
fine quality gemstone jewelry. We cut and polish semi-precious gemstones and
design, manufacture, market and distribute gem set jewelry to fine jewelers,
department stores, national jewelry chains and electronic and specialty
retailers throughout North America and Western Europe. Our product line
includes all major categories that are sought by major retailers, including
earrings, necklaces, pendants, rings and bracelets. Our jewelry is crafted in
gold, platinum and sterling silver and is set with semi-precious stones. The
average wholesale price of our jewelry is approximately $100, which equates to
retail prices between $100 and $499.
We believe that our vertically integrated structure provides significant
advantages over our competitors. All profits from value added processes are
captured internally, rather than shared with third party manufacturers. This
results in very competitive pricing for the retailer and enhanced profits for
us. Innovative processes in stone cutting and manufacturing further enhance our
competitive position.
We employ an international design team and all of our designs and
merchandising strategies are proprietary. Our exclusive and innovative concepts
that are created offer brand potential. Our primary marketing focus has been in
North America where we have 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.
We organize our marketing and distribution strategies by retail
distribution channel. Concepts are developed for the specific needs of
different market segments. We have identified the following as prime retail
targets:
. fine jewelers such as Ben Bridge and Carlyle;
. national jewelry chains such as Sterling Inc., Helzberg and Fred Meyer;
. department stores such as Macys and J C Penney;
. electronic retailers such as QVC Network, Inc.; and
. specialty stores such as Fortunoff's.
For the fiscal years ended April 30, 1998 and 1999, approximately 89% and
92% of sales were in North America.
Background and Organization
We were incorporated as an international business company under the
International Business Companies Act of the British Virgin Islands on January
30, 1997. We own all of the issued share capital in Lorenzo Jewelry Mfg. (H.K.)
Ltd., a company incorporated in Hong Kong on February 20, 1987. Lorenzo Jewelry
owns all of the equity in Shantou S.E.Z. Lorenzo Gems & Craft Factory Co.,
Limited and Shantou Lorenzo Jewelry Mfg., and 60% of the issued share capital in
Lorenzo Marketing Co., Limited. Under a cooperative joint venture agreement
between Lorenzo Jewelry and Guangdong Province Shantou Artcrafts Imports and
Exports Co., we control the operating and financial activities of Shantou
Lorenzo Jewelry Mfg. and are responsible for all of its profits and losses. In
addition, we own all of the issued share capital in Precious Gems Trading
Limited, which owns all of the equity in
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Lorenzo Gems (Shenzhen) Co., Limited, all of the issued share capital in Golden
Horizon Trading Limited, which owns all of the equity in Lorenzo Jewelry
(Shenzhen) Co., Limited and all of the issued share capital in Fine Gift
Enterprises Ltd., which owns all of the issued share capital in Lorenzo Diamond
Mfg. Co. Ltd.
The following diagram illustrates our corporate structure. The respective
country of organization/incorporation is shown in brackets.
LJ INTERNATIONAL INC.
(British Virgin Islands)
<TABLE>
<CAPTION>
100% 100% 100% 100%
<S> <C> <C> <C>
Lorenzo Jewelry Mfg. Precious Gems Fine Gift Golden Horizon
(H.K.) Ltd. Trading Ltd. Enterprises Ltd. Trading Ltd.
(Hong Kong) (B.V.I.) (B.V.I.) (B.V.I.)
100% 100% 100%
100% Shantou S.E.Z. Lorenzo Lorenzo Gems Lorenzo Diamond Lorenzo Jewelry
Gems & Craft Factory Manufacturing Jewelry Mfg. (Shenzhen) Co., Ltd.
Co., Ltd. (Shenzhen) Co., Ltd. Co. Ltd. (P.R.C.)
(P.R.C.) (P.R.C.) (Hong Kong)
100% Shantou Lorenzo
Jewelry Mfg.
(P.R.C.)
60% Lorenzo Marketing
Co., Ltd.
(Hong Kong)
</TABLE>
Our Industry
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
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. a large number of wholesalers and distributors who purchase products or
portions of products from third parties and resell those items to
retailers.
We believe 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. We further believe 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.
Our Business Strategy
Our business strategy is:
. to increase our market share of moderately priced high-quality gem-set
jewelry by capitalizing on our unique vertically integrated manufacturing
processes to produce high volume, high-quality products;
. to further develop our existing customer relationships with our specialized
services; and
. to aggressively expand into new distribution channels, particularly in the
United States and throughout Western Europe.
We are 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.
We also plan to expand into new product categories:
. We have begun marketing a brand of sterling silver. These are typically
merchandised with a retail price range of $30.00 to $150.00.
. We offer a new branded collection of cultured pearl jewelry with a retail
price range of $99.00 to $999.00.
. We recently began shipping diamond jewelry in August 1999 from our newly
created diamond division. We took over operations of a local competitor
and purchased most of their existing diamond samples at cost. We also
hired eight of their former employees, who bring with them an expertise in
diamond jewelry design and sales, as well as most of their client base. We
also intend to expand this new business to our current client base by
simply adding diamonds to some of our settings as well as offering newly
designed jewelry.
Our Manufacturing Capability
We have 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
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26,000 square feet and has been operating for eight years. The Shenzhen
facility has been operating for less than two years and has 50,000 square feet
of manufacturing space. We currently employ over 2,500 skilled gemstone cutters
and manufacturing personnel and are producing over four million carats of cut
gemstones and one million pieces of finished fine jewelry annually.
We import choice rough gemstone material from mines located in Africa,
China and South America, especially concentrated in Brazil. Gemstone craftsmen
are trained and managed by our Hong Kong personnel to insure that the highest
levels of cutting and polishing quality are achieved. The professional skills
possessed by our cutters are applied to a wide variety of shapes and sizes,
maximizing the yield and value of the rough material that we purchase. By
performing internally the value added processes of cutting and polishing, we
maximize quality control and dramatically increase our profitability. We
specialize in a wide range of popular and exotic semi-precious gemstones ranging
from amethyst, aquamarine and peridot to tanzanite and tourmaline.
We employ specialized manufacturing processes that deliver large quantities
of high quality finished jewelry. We are currently producing over 80,000 pieces
of finished jewelry per month from our two facilities. Each piece of jewelry
receives hand made attention, resulting in fine quality finishing at popular
prices.
Sales and Marketing
Our merchandising strategy is to provide unique and differentiated products
that are enhanced by the favorable pricing that results from our vertically
integrated structure. We invest significant effort in design and model making
to produce items which are distinctly different from our competitors. We intend
to devote our efforts towards brand development and utilize marketing concepts
to enhance the saleability of our production. We recognize that certain retail
price points are favored by retailers. As part of our product development
strategy, we attempt to align our wholesale prices to match retailers' target
prices as a means of achieving these popular price targets. We introduced new
product divisions selling cultured pearls and sterling silver during the Fall
1998 season and diamonds in August 1999.
Our sales and marketing team is located in our executive offices in Hong
Kong. Our 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. We maintain a broad
base of customers and concentrate our efforts on five major jewelry market
segments:
. fine jewelers like Ben Bridge and Carlyle;
. national jewelry chains like Sterling, Inc., Helzberg and Fred Meyer;
. department stores like Macys and JC Penney;
. electronic retailers like QVC Network, Inc.; and
. specialty retailers like Fortunoff's.
Our single largest customer is QVC Network, Inc. which accounted for
approximately 57% of our sales during fiscal 1999 and 55% of our sales during
fiscal 1998. We do not sell to QVC Network, Inc. pursuant to any formal or
long-term contracts but only on a purchase order basis. Although we have
developed and maintained a good and longstanding relationship with QVC
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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 us.
In addition to direct sales to QVC Network, Inc. and other retailers, we
also sell our 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.
Our sales promotion efforts include attendance by our representatives at
U.S. and international trade shows and conventions, including Las Vegas,
Orlando, New York, Basel, Switzerland, Hong Kong and Japan. In addition, we
actively advertise in trade journals and related industry publications.
E-Commerce
On June 15, 1999, we launched our e-commerce jewelry web site,
www.THEGEMS.com. Our newly designed web site features the latest technologies
available today, including electronic shopping cart, guaranteed encrypted credit
card transaction processing, e-mail notification system and UPS(R) on line
tracking of orders. Our strategy is to channel more of our direct response
business through the Internet. Our cost of sales on the Internet are
significantly lower than our traditional distribution channels and we are
continuing to strategically position ourselves to take advantage of e-commerce.
Our website has been registered with 200 worldwide search engines and there
are three keywords for search engine positioning:
. jewelry
. gift
. gems
Design and Product Development
We have seven internationally trained designers who work from our Hong Kong
executive office and a growing team of twelve designers who work in a designated
area within the Shenzhen 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 our various clients worldwide. The Hong Kong design
team attends trade fairs worldwide to gather product ideas and monitor the
latest product trends. We produce over 250 new models per month to support our
business growth objectives.
We seek to provide our 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. We currently offer
approximately 5,000 different styles of rings, bracelets, necklaces, earrings,
pendants and matching sets that are contemporary and desirable in the market.
We study product trends that are emerging in the international market and
adapt these trends to the needs of our retail customers. The jewelry offered
for sale considers color, fabric and fashion trends which are projected over a
two year period. We market our products as lifestyle inspired.
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Manufacturing Process
We manufacture our products at our facilities in Shantou and Shenzhen, PRC.
Our manufacturing processes combine vertical integration, modern technology,
mechanization and handcraftsmanship to produce contemporary and fashionable
jewelry. Our 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.
We have developed a process of cost-effectively producing quality, gem-set
jewelry. We believe that we have a substantial competitive advantage due to our
unique, vertically integrated manufacturing process. We utilize 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.
Gem cutting generally involves the following processes:
. It 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, which is assembling of gold parts;
. cleaning;
. gem setting;
. trimming; and
. polishing.
Supply
We manufacture and cut our own semi-precious stones. We import most of our
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. We also import aquamarine, peridot and topaz from
the PRC. We buy the rough gemstones directly from a number of miners based on
quality, pricing and available quantities. We believe that we have good
relationships with our suppliers, most
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of whom have supplied us for many years. The stones are delivered to us either
by air or by sea depending on volume and types of rough stones.
We purchase our gold from banks, gold refiners and commodity dealers who
supply substantially all of our gold needs which we believe is sufficient to
meet our 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, which is
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 us.
We do not presently engage in hedging activities with respect to possible
fluctuations in the price of gold. We believe the risk of not engaging in such
activities is minimal, since we purchase our gold requirements after each
significant purchase order is received. We believe that a downward trend in the
price of gold would have little, if any, impact on the valuation of our
inventories.
We purchase supplies and raw materials from a variety of suppliers and we
do not believe the loss of any of the suppliers would have a material adverse
effect on our business. Alternative sources of supply for raw materials for
production of jewelry are readily available.
Security
We have installed certain measures at our Shantou and Shenzhen, PRC
manufacturing as well as our 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 our premises.
We carefully inspect all materials sent and received from outside
suppliers, monitor the location and status of all inventory, and have 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 our manufacturing and administrative facilities on an annual basis.
Insurance
We maintain primary all-risk insurance, with limits in excess of our
current inventory levels, to cover thefts and damage to inventory located on our
premises. We also maintain insurance covering thefts and damage to our owned
inventory located 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 us. We carry transit insurance
which coverage includes the transportation of jewelry outside of our office.
Competition
The jewelry manufacturing industry is highly competitive, and our
competitors include domestic and foreign jewelry manufacturers, wholesalers, and
importers who may operate on a national, regional and local scale. Our
competitive strategy is to provide competitively priced, high-quality products
to the high volume retail jewelry market. According to our management,
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competition is based on pricing, quality, service and established customer
relationships. We believe that we have positioned ourselves as a low cost
producer without compromising our quality. Our ability to conceive, design and
develop products consistent with the requirements of each retail distribution
channel represents a competitive advantage.
We believe that few competitors have the capacity and manufacturing skill
to be effective competitors. We believe that our vertically integrated
manufacturing capabilities distinguish us from most of our competitors and
enables us 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:
. E.E.A.C. Inc.;
. Aurafin;
. I. Kurgin; and
. PACE Enterprises.
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, we already
have made substantial inroads in the North American jewelry market and we
believe we can remain competitive based on our vertically integrated low-cost,
high-volume and high-quality manufacturing process.
Employees
As of August 31, 1999, we employed over 2,500 persons on a full-time basis,
of whom approximately 1,300 are involved in manufacturing of jewelry and 1,140
are engaged in gemstone cutting and polishing. The remaining 60 persons,
including our management and executive staff, work in our Hong Kong office.
None of our employees is represented by a labor union and we believe that our
employees' relations are good.
Properties
Our 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. We own approximately 4,800 square feet of office, showroom and
manufacturing space at this location.
Our first jewelry production facility consists of 10,000 square feet of
building space which we own in the Yubao Industrial Building, Longhu District,
Shantou Special Economic Zone, Guangdong Province, PRC. We lease the adjacent
16,000 square feet on the same floor of that building as one of our gem cutting
facilities at a rental rate of HK$24,085 (US$3,116) per month until July 2002.
Our 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. We
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lease this space from an unaffiliated third party at a rental rate of HK$59,120
(US$7,648) per month until November 2002.
We own two warehouse facilities in Kowloon, Hong Kong consisting of 5,432
square feet and 2,897 square feet. We also own additional properties in Sai
Kung, Hong Kong and Aberdeen, Hong Kong which we lease to non-affiliated third
parties.
Legal Proceedings
We are not a party to any material legal proceedings and there are no
material legal proceedings pending with respect to our property. We are not
aware of any legal proceedings contemplated by any governmental authorities
involving either us or our property. None of our directors, officers or
affiliates is an adverse party in any legal proceedings involving us or our
subsidiaries, or has an interest in any proceeding which is adverse to us or our
subsidiaries.
Enforceability of Civil Liabilities and Certain Foreign Issuer Considerations
We are a British Virgin Islands holding company, and all of our assets are
located in the People's Republic of China and/or Hong Kong. In addition, all of
our directors and officers except Lionel C. Wang are non-residents of the United
States, and all or a substantial portion of their assets are located outside the
United States. As a result, investors may be unable to effect service of
process within the United States upon these non-residents or to enforce against
them judgments obtained in United States courts, including judgments based upon
the civil liability provisions of the securities laws of the United States or
any state. There is uncertainty as to whether courts of the People's Republic
of China, the British Virgin Islands or Hong Kong would enforce:
. Judgments of United States courts obtained against us or these non-
residents based on the civil liability provisions of the securities laws of
the United States or any state; or
. In original actions brought in the People's Republic of China, the British
Virgin Islands or Hong Kong, liabilities against us or these non-residents
based on the securities laws of the United States or any state.
We have designated CT Corporation, 1633 Broadway, New York, New York 10019
as our agent for service of process in the United States with respect to this
offering.
There are no treaties between the People's Republic of China and the United
States, between the British Virgin Islands and the United States, nor between
Hong Kong and the United States providing for the reciprocal enforcement of
foreign judgments. However, the courts of the People's Republic of China, the
British Virgin Islands and Hong Kong may accept a foreign judgment as evidence
of a debt due. An action may be commenced in the People's Republic of China,
the British Virgin Islands or Hong Kong for recovery of this debt. However, a
Chinese, British Virgin Islands or Hong Kong court will only accept a foreign
judgment as evidence of a debt due, if:
. The judgment is for a liquidated amount in a civil matter;
. The judgment is final and conclusive and has not been stayed or satisfied
in full;
. The judgment is not directly or indirectly for the payment of foreign
taxes, penalties, fines or charges of a like nature. In this regard, a
Chinese, British Virgin Islands or Hong Kong court is unlikely to accept a
judgment of an amount obtained by doubling, trebling or otherwise
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multiplying a sum assessed as compensation for the loss or damages
sustained by the person in whose favor the judgment is given;
. The judgment was not obtained by actual or constructive fraud or duress;
. The foreign court has taken jurisdiction on grounds that are recognized by
the private international law rules in the People's Republic of China as to
conflict of laws in the People's Republic of China or common law rules as
to conflict of laws in the British Virgin Islands or Hong Kong;
. The proceedings in which the judgment was obtained were not contrary to the
concept of fair adjudication;
. The proceedings in which the judgment was obtained, the judgment itself and
the enforcement of the judgment are not contrary to the public policy of
the People's Republic of China, the British Virgin Islands or Hong Kong;
. The person against whom the judgment is given is subject to the
jurisdiction of the Chinese, the British Virgin Islands or the Hong Kong
courts; and
. The judgment is not on a claim for contribution in respect of damages
awarded by a judgment that does not satisfy the above requirements.
Enforcement of a foreign judgment in the People's Republic of China, the
British Virgin Islands or Hong Kong also may be limited or otherwise affected by
applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or
similar laws relating to or affecting creditors' rights generally and will be
subject to a statutory limitation of time within which proceedings may be
brought.
Under United States law, majority and controlling shareholders generally
have certain fiduciary responsibilities to minority shareholders. Shareholder
action must be taken in good faith and actions by controlling shareholders that
are obviously unreasonable may be declared null and void. While we believe
there are no material differences between the protection afforded to minority
shareholders of a company organized as an international business company under
the law of the British Virgin Islands from those generally available to
shareholders of corporations organized in the United States, there may be
circumstances where the British Virgin Islands law protecting the interests of
minority shareholders may not be as protective as the law protecting minority
shareholders in United States jurisdictions. Under British Virgin Islands law,
a shareholder of a company organized as an international business company under
the laws of the British Virgin Islands may bring an action against a company,
even if other shareholders do not wish to bring an action and even though no
wrong has been done to the shareholder personally. This is a representative
action, that is, an action on the shareholder's own behalf and on behalf of
other persons in his class, or similarly situated. Instances where
representative actions may be brought include:
. To compel a company to act in a manner consistent with its Memorandum of
Association and Articles of Association;
. To restrain directors from acting on resolutions, where notice of a
shareholders' meeting failed adequately to inform shareholders of a
resolution proposed at the meeting;
. To restrain a company, where it proposes to perform an act not authorized
by the Memorandum of Association and the Articles of Association or to seek
damages from a director to compensate a company from the consequences of
such an unauthorized act, or to recover property of a company disposed of
due to such unauthorized act;
. To restrain a company from acting upon a resolution that was not made in
good faith and for the benefit of shareholders as a whole;
. To redress where a resolution passed at a shareholders' meeting was not
properly passed, for instance, if it was not passed with the necessary
majority;
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. To restrain a company from performing an act which is contrary to law; and
. To restrain a company from taking any action in the name and for the
benefit of a company.
Such an action also may be brought against directors and promoters who have
breached their fiduciary duties to a company, although acts amounting to a
breach of a fiduciary duty can be ratified by a general meeting of shareholders,
in the absence of fraud. Such actions against directors and promoters only may
be taken, however, if such directors and promoters have power to influence the
action taken by a general meeting by means of, for instance, their votes as
shareholders, which would prevent a company from suing them in the company's
name. Although British Virgin Islands law does permit a shareholder of a
British Virgin Islands company to sue its directors representatively or
derivatively, the circumstances in which any such action may be brought as set
forth above may result in the rights of shareholders of a British Virgin Islands
company being more limited than those of shareholders in a United States
company.
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OUR MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Yu Chuan Yih.................. 60 Chairman of the Board of Directors, President
and Chief Executive Officer
Ka Man Au..................... 35 Executive Vice President, Secretary and Director
Joseph Tuszer................. 53 Vice President Product Development
Hon Tak Ringo Ng.............. 39 Chief Financial Officer
Kui Shing Andy Lai............ 50 Non-Executive Director
Lionel C. Wang................ 43 Non-Executive Director
</TABLE>
None of our directors and officers was selected due to any agreement or
understanding with any other person. There is no family relationship between
any of our directors or executive officers and any other director or executive
officer.
Mr. Yih established the business of Lorenzo Jewelry Mfg. (HK) Ltd. and has
served as 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.
Ms. Au has served as a director of Lorenzo Jewelry Mfg. (HK) Ltd. since its
incorporation in 1987. Ms. Au is primarily responsible for our general
administration, human resources, operations and management.
Mr. Tuszer has served as our vice president - product development 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, including manufacturing and production,
knowledge of colored stones, product development and marketing.
Mr. Ng has served as our chief financial officer 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.,
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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 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 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
We have established an audit committee, which consists of Messrs. Yih, Lai
and Wang. Its functions are to:
. recommend annually to the board of directors the appointment of our
independent public accountants;
. discuss and review the scope and the fees of the prospective annual audit
and review the results with the independent public accountants;
. review and approve non-audit services of the independent public
accountants;
. review compliance with our existing accounting and financial policies;
. review the adequacy of our financial organization; and
. review our management's procedures and policies relative to the adequacy of
our internal accounting controls and compliance with federal and state laws
relating to financial reporting.
Compensation of Directors and Executive Officers
The aggregate compensation paid by us to all of our directors and executive
officers as a group for the fiscal year ended April 30, 1999 on an accrual
basis, for services in all capacities, was HK$4,038,000 (US$522,000). During the
fiscal year ended April 30, 1999, we contributed an aggregate amount of
HK$55,000 (US$7,000) toward the pension plans of our directors and executive
officers.
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Executive Service Contract
We entered into an employment agreement with Mr. Yu Chuan Yih effective
October 1, 1997 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 our operating results 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 payable to him.
The 1998 Stock Compensation Plan
Effective June 1, 1998, we adopted and approved the 1998 Stock Compensation
Plan. The purpose of the plan is to encourage ownership of our common stock by
our officers, directors, employees and advisors to provide additional incentive
for them to promote our success and our business and to encourage them to remain
in our employ by providing them an opportunity to benefit from any appreciation
of our common stock through the issuance of stock options. Options constitute
either incentive stock options within the meaning of Section 422 of the United
States Internal Revenue Code of 1986, as amended, or options which constitute
nonqualified options at the time of issuance of such options. The plan provides
that incentive stock options and/or nonqualified stock options may be granted to
our officers, directors, employees and advisors selected by the compensation
committee. A total of 2,000,000 shares of common stock are authorized and
reserved for issuance during the term of the plan which expires in June 2008.
The compensation committee has the sole authority to interpret the plan and make
all determinations necessary or advisable for administering the plan. The
exercise price for any incentive option must be at least equal to the fair
market value of the shares as of the date of grant. Upon the exercise of the
option, the exercise price must be paid in full either in cash, shares of our
stock or a combination. If any option is not exercised for any reason, such
shares shall again become available for the purposes of the plan.
As of April 30, 1999, we granted a total of 1,285,000 options exercisable
at $5.00 per share anytime until April 11, 2009, including an aggregate of
575,000 options to our officers and directors as a group.
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CERTAIN TRANSACTIONS
Yu Chuan Yih, our president and chairman, 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, 1997, 1998 and 1999,
Mr. Yih and these affiliated companies received unsecured advances from, and
made unsecured advances to, us which were interest free and repayable on demand.
During the fiscal year ended April 30, 1998, we sold an investment property
to Mr. Yih at its appraised value of HK$3,800,000 (US$492,000), resulting in a
gain to us 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.
During the fiscal year ended April 30, 1999, we sold finished goods of
HK$74,000 (US$10,000) to Gemological Institute of America, Hong Kong Limited and
Hong Kong Brasil Lapidary Limited, which were made according to the published
prices and conditions offered to our major customers. In addition, we provided
a guarantee to a bank in respect of mortgage loans granted to Yu Chuan Yih to
the extent of HK$4,882,000 (US$632,000).
-39-
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of our common stock as of September 1, 1999 by:
. each person who is known by us to own beneficially more than 10% of the
outstanding common stock,
. each of our executive officers and directors, and
. all directors and executive officers as a group.
Except as set forth below, to our knowledge, we are 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 59.5%
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 (6 persons).. 3,787,200 59.5%
</TABLE>
___________
Of Mr. Yih's 3,787,200 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 our
common stock as follows: Welgram International Limited - 236,000 shares;
Sunflower Gold Holdings Limited - 235,000 shares; and Panama Gold Holdings
Limited - 235,000 shares.
-40-
<PAGE>
SELLING SHAREHOLDERS
In addition to our warrants and the underlying common stock being offered
by this prospectus, we are registering 292,000 shares of common stock underlying
the underwriter warrants on behalf of the beneficial owners. We have agreed to
bear all expenses other than underwriting or selling commissions or any fees and
disbursements of counsel to the selling shareholders in connection with the
registration of these securities.
The underwriter warrants were acquired by the selling shareholders in
connection with the underwriter's acting as the underwriter of our initial
public offering of common stock and warrants in April 1998.
The common stock underlying the underwriter warrants is to be sold from
time to time by or for the account of the following selling shareholders, none
of whom are affiliated with us nor have been within the past three years. None
of the proceeds from the sale of either the underwriter warrants or the common
stock underlying them will be received by us. The selling shareholders will pay
all brokerage discounts or commissions attributable to the sale for their
account. We are not aware of any existing agreement with any broker with
respect to the sale of the underwriter warrants or underlying common stock.
The following table sets forth the name of each selling shareholder and the
number of shares of common stock to be offered for each selling shareholder's
account.
<TABLE>
<CAPTION>
Name Number of Shares of Common Stock
---- --------------------------------
<S> <C>
Robert T. Kirk 232,800
Marie Lima 10,000
Michael Morrisett 10,000
Brian Herman 10,000
David A. Carter 14,600
Wendy Tand Gusrae 14,600
-------
TOTAL 292,000
</TABLE>
The sale of these securities may be effected from time to time in
transactions which may include block transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the common
stock, or a combination of such methods of sale, at fixed prices which may be
changed, at market prices prevailing at the time of sale, or at negotiated
prices. The selling shareholders may effect such transactions by selling the
securities directly to purchasers or to or through broker-dealers which may act
as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions, or commissions from the selling shareholders
and/or the purchasers of the securities for which such broker-dealers may act as
agents or to whom they sell as principal, or both. The compensation as to a
particular broker-dealer might be in excess of customary commissions. The
selling shareholders and any broker-dealers that act in connection with the sale
of the securities might be deemed to be underwriters within the meaning of
Section 2(11) of the Securities Act.
-41-
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.01 par value per share, of which 6,365,646 shares are outstanding as
of the date of this prospectus. Each share of common stock is entitled to one
vote on all matters submitted to a vote by shareholders, including the election
of directors. There are no cumulative voting rights in the election of
directors. All shares of common stock are equal to each other with respect to
liquidation and dividend rights and are entitled to receive dividends if and
when we declare them out of funds legally available under British Virgin Islands
law. Upon our liquidation, all assets available for distribution are
distributable among shareholders according to their holdings. There are no
preemptive rights to purchase any additional, unissued shares of common stock.
All the outstanding common stock is, and the common stock offered by this
prospectus will be, when issued against the consideration set forth in this
prospectus, duly authorized, validly issued, fully paid and nonassessable.
Warrants
Each warrant entitles the holder to purchase at any time through April 15,
2003 one share of common stock at $5.75 per share. After April 15, 2003, the
warrants expire.
A warrant may be exercised by surrendering it to the transfer and warrant
agent, with the subscription form on the reverse side properly completed and
executed, together with payment of the exercise price.
The warrants are subject to redemption by us, at our option, at $0.25 per
warrant upon 30 days' prior written notice. The closing bid price, as reported
on the Nasdaq National Market, of the common stock for 30 consecutive trading
days ending within ten days of the notice of redemption of the warrants must
average in excess of $10.00 per share. We are required to maintain an effective
registration statement covering the common stock underlying the warrants prior
to their redemption. If we redeem the warrants, they will be exercisable until
the close of business on the date for redemption fixed in such notice. If any
warrant called for redemption is not exercised by such time, it will cease to be
exercisable and the holder will be entitled only to the redemption price.
Redemption of the warrants could force the holder either to:
. exercise the warrants and pay the exercise price at a time when it may be
less advantageous to do so; or
. accept the redemption price in cancellation of the warrant, which could be
substantially less than the market value at the time of redemption.
The exercise price of the warrants bears no relation to any objective
criteria of value and should not be regarded as an indication of its future
market price.
We have authorized and reserved for issuance a sufficient number of shares
of common stock to permit the exercise of all warrants. All shares of common
stock issued upon exercise of the warrants, if exercised in accordance with
their terms, will be fully paid and non-assessable.
-42-
<PAGE>
The warrants are subject to adjustment upon the occurrence of various
events, including stock dividends, stock splits, combinations or
reclassification of the common stock, or our sale of common stock at a price per
share below the exercise price of the warrants or the then-current market price
of the common stock. Additionally, an adjustment would be made if we
reclassified or exchanged common stock, consolidated or merged with another
corporation, or sold all or substantially all of our assets.
Underwriter Warrants
We issued to the underwriter and/or persons related to the underwriter the
common stock underwriter warrants to purchase up to 146,000 shares of common
stock and the warrant underwriter warrants to purchase up to 146,000 warrants.
The common stock underwriter warrants and the warrant underwriter warrants are
exercisable through April 15, 2003 at $8.25 per share. The warrant underwriter
warrant is exercisable at $.20625 per warrant. Each underlying warrant is
exercisable through April 15, 2003 at $8.25 per share.
The warrants provide for adjustment in the event of any merger,
consolidation, recapitalization, reclassification, stock dividend, stock split
or similar transaction. The warrants contain net issuance provisions permitting
exercise in whole or in part and instructing us to withhold from the securities
issuable upon exercise, a number of securities, valued at the current fair
market value on the date of exercise, to pay the exercise price. Such net
exercise provision has the effect of requiring us to issue shares of common
stock without a corresponding increase in capital. A net exercise of the
warrants will have the same dilutive effect on the interests of our shareholders
as will a cash exercise. The warrants do not entitle the holders to any rights
as a shareholder until they are exercised and shares of common stock are
purchased.
Shares Eligible for Future Sale
Yu Chuan Yih and Debora Mu Yong Yih own an aggregate of 4,280,553 shares of
common stock and have agreed not to sell these shares before April 15, 2000
without the prior written consent of the underwriter. Of our 6,365,646 shares
of common stock outstanding, 4,426,835 shares are "restricted securities", as
defined under Rule 144 under the Securities Act. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144. Sales of restricted securities in the public
market, or the availability of such securities for sale, could adversely affect
the market price of the common stock.
In general, under Rule 144, a person who has beneficially owned restricted
securities for at least one year is entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
. One percent of the number of shares of common stock then outstanding, which
equals 63,656 shares as of this date; or
. The average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 also are subject to certain requirements relating to
the manner of sale, notice and availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has
-43-
<PAGE>
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without complying with the limitations of Rule 144
described above.
Sales of substantial amounts of our common stock under Rule 144 or
otherwise, or even the potential of such sales, could depress the market price
of the common stock and could impair our ability to raise capital through the
sale of our equity securities.
Transfer and Warrant Agent
The transfer agent for our common stock and the warrant agent for our
warrants is American Securities Transfer & Trust, Incorporated, Denver,
Colorado.
Exchange Controls and Other Limitations Affecting Shareholders
There are no material British Virgin Islands laws that impose foreign
exchange controls on us or that affect our payment of dividends, interest or
other payments to nonresident holders of our capital stock. British Virgin
Islands law and our 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.
Differences in Corporate Law
Under the laws of most jurisdictions in the US, majority and controlling
shareholders generally have certain "fiduciary" responsibilities to the minority
shareholders. Shareholder action must be taken in good faith and actions by
controlling shareholders which are obviously unreasonable may be declared null
and void. BVI law protecting the interests of minority shareholders may not be
as protective in all circumstances as the law protecting minority shareholders
in US jurisdictions.
While BVI law does permit a shareholder of a BVI company to sue its
directors derivatively, that is, in the name of and for the benefit of our
company and to sue a company and its directors for his benefit and for the
benefit of others similarly situated, the circumstances in which any such action
may be brought, and the procedures and defenses that may be available in respect
of any such action, may result in the rights of shareholders of a BVI company
being more limited than those of shareholders of a company organized in the US.
Our directors have the power to take certain actions without shareholder
approval, including an amendment of our Memorandum of Association or Articles of
Association or an increase or reduction in our authorized capital, which would
require shareholder approval under the laws of most US jurisdictions. In
addition, the directors of a BVI corporation, subject in certain cases to court
approval but without shareholder approval, may, among other things, implement a
reorganization, certain mergers or consolidations, the sale, transfer, exchange
or disposition of any assets, property, part of the business, or securities of
the corporation, or any combination, if they determine it is in the best
interests of the corporation, its creditors, or its shareholders. Our ability
to amend our Memorandum of Association and Articles of Association without
shareholder approval could have the effect of delaying, deterring or preventing
a change in our control without any further action by the shareholders,
including a tender offer to purchase our common stock at a premium over then
current market prices.
-44-
<PAGE>
As in most US jurisdictions, the board of directors of a BVI corporation is
charged with the management of the affairs of the corporation. In most US
jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, under which directors must properly
apprise themselves of all reasonably available information, and a duty of
loyalty, under which they must protect the interests of the corporation and
refrain from conduct that injures the corporation or its shareholders or that
deprives the corporation or its shareholders of any profit or advantage. Many US
jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under BVI law,
liability of a corporate director to the corporation is primarily limited to
cases of willful malfeasance in the performance of his duties or to cases where
the director has not acted honestly and in good faith and with a view to the
best interests of the corporation. However, under our Articles of Association,
we will be authorized to indemnify any director or officer who is made or
threatened to be made a party to a legal or administrative proceeding by virtue
of being one of our directors or officers, provided such person acted honestly
and in good faith and with a view to our best interests and, in the case of a
criminal proceeding, such person had no reasonable cause to believe that his
conduct was unlawful. Our Articles of Association also enable us to indemnify
any director or officer who was successful in such a proceeding against expense
and judgments, fines and amounts paid in settlement and reasonably incurred in
connection with the proceeding.
The above description of certain differences between BVI and US corporate
laws is only a summary and does not purport to be complete or to address every
applicable aspect of such laws. However, we believe that all material
differences are disclosed above.
-45-
<PAGE>
TAXATION
The following is a summary of 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 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 discussion below is based upon laws and relevant
interpretations 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, defined as 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. For
taxable years beginning after December 31, 1996, a trust will be a U.S. person
only if:
. A court within the United States is able to exercise primary supervision
over its administration; and
. 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, which we refer to as 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 of the common stock will be
required to include such distribution in gross income as a taxable dividend, to
the extent of our current or accumulated earnings and profits as determined
under U.S. federal income tax principles. Any distributions in excess of our
earnings and profits 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 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.
A holder of common stock may be subject to "backup withholding" at the rate
of 31% with respect to dividends paid on our common stock if the 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
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<PAGE>
the 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:
. Is a corporation or comes within other exempt categories; or
. 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 are generally
exempt from backup withholding, although they 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 as currently in effect, a holder of common stock who is not a resident
of 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 for BVI income tax
on gains realized during that year on sale or disposal of such shares; 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 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 British Virgin Islands.
-47-
<PAGE>
PLAN OF DISTRIBUTION
If the underwriter and any other soliciting broker-dealer solicit warrant
exercises and have not been granted an exemption by the SEC, they will be
prohibited from engaging in any market-making activities with respect to our
securities for either two or nine business days, depending on the market price
of the common stock, prior to any solicitation activity for the exercise of
warrants until the later of the termination of such solicitation activity or the
termination of any right to receive a fee for the exercise of warrants following
such solicitation. As a result, the underwriter or any other soliciting broker-
dealer may be unable to provide a market for our securities, should they desire
to do so, during certain periods while the warrants are exercisable.
LEGAL MATTERS
Certain legal matters have been passed upon for us as to U.S. law by Andrew
N. Bernstein, P.C., Greenwood Village, Colorado. The validity of our shares of
common stock and our warrants offered by this prospectus and certain other legal
matters have been passed on for us by Harney Westwood & Riegels as to British
Virgin Islands law.
EXPERTS
Our audited consolidated financial statements as of April 30, 1998 and 1999
and for each of the three years ended April 30, 1999 included in this prospectus
have been audited by Moores Rowland, Hong Kong, independent auditors, as
indicated in their report with respect thereto, and are included in reliance
upon the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form F-1 under the Securities Act covering the warrants, the
underwriter warrants and the underlying shares of common stock being offered.
This prospectus does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission.
We are subject to the informational requirements of the Exchange Act as
they apply to a foreign private issuer and are required to file reports and
other information with the Commission. As a foreign private issuer, we are
exempt under the Exchange Act from, among other things, the rules prescribing
the furnishing and content of proxy statements and annual reports to
shareholders, and our officers, directors and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions set forth in
Section 16 of the Exchange Act. In addition, we are not required under the
Exchange Act to file periodic reports and financial statements with the
Commission as frequently or as promptly as United States companies whose
securities are registered under the Exchange Act.
Any reports we file, including the registration statement, including all
exhibits, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Chicago, Illinois 60601 upon payment of prescribed
rates.
-48-
<PAGE>
LJ INTERNATIONAL INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-2
Consolidated statements of operations for the years ended April 30, 1997, 1998
and 1999 F-3
Consolidated balance sheets as of April 30, 1998 and 1999 F-4
Consolidated statements of shareholders' equity for the years ended
April 30, 1997, 1998 and 1999 F-5
Consolidated statements of cash flows for the years ended April 30, 1997, 1998
and 1999 F-6
Notes to and forming part of the financial statements F-7 - F-35
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
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 as of April 30, 1998 and 1999 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, 1999.
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, 1998 and 1999 and the consolidated results of its
operations and cash flows for each of the years in the three year period ended
April 30, 1999, 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 16).
/s/ Moores Rowland
Moores Rowland
Chartered Accountants
Certified Public Accountants, Hong Kong
Dated: 10 Sep 1999
F-2
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year ended April 30
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Notes 1997 1998 1999 1999
---- ---- ---- ----
HK$ HK$ HK$ US$
Operating revenue 92,258 124,199 195,219 25,255
Costs of goods sold (48,053) (63,293) (99,363) (12,854)
------------------ --------------- -------------- --------------
Gross profit 44,205 60,906 95,856 12,401
Selling, general and administrative
Expenses (23,657) (33,545) (56,880) (7,358)
------------------ --------------- -------------- --------------
Operating income 20,548 27,361 38,976 5,043
Other income and expenses:
Interest income 138 212 1,690 219
Interest expenses (4,137) (7,176) (6,876) (890)
Rental income 1,280 1,273 474 61
Minority interests 102 2 273 35
Gain on disposal of land and
building to related party 10 - 2,904 - -
------------------ --------------- -------------- --------------
Income before income taxes 17,931 24,576 34,537 4,468
Income taxes 13 (2,210) (2,120) (380) (49)
------------------ --------------- -------------- --------------
Net income 15,721 22,456 34,157 4,419
================== =============== ============== ==============
Number of shares:
Weighted average number of shares 4,387,200 4,539,128 6,347,046 6,347,046
used in calculating basic earnings
per share
Effect of dilutive potential ordinary
shares:
Warrants - 4,854 - -
Stock options - - 514 514
------------------ --------------- -------------- --------------
Weighted average number of shares
used in calculating diluted earnings
per share 4,387,200 4,543,982 6,347,560 6,347,560
================== =============== ============== ==============
Earnings per share:
Basic 2(p) 3.58 4.95 5.38 0.70
================== =============== ============== ==============
Diluted 2(p) 3.58 4.94 5.38 0.70
================== =============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
As of April 30
--------------------------------------------------------------
1998 1999 1999
------------- ------------- -------------
Notes HK$ HK$ US$
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 10,752 1,626 211
Restricted cash 3,111 15,185 1,964
Accounts receivable, net of allowance for doubtful
accounts (1998: HK$798, 1999: HK$1,919) 31,068 49,632 6,420
Inventories 2(e) 46,994 93,636 12,113
Prepayments and other current assets 549 827 106
------------------ --------------- ---------------
Total current assets 92,474 160,906 20,814
Property, plant and equipment, net 4 30,021 35,737 4,622
Investment properties, net 28,150 22,300 2,885
Due from related parties 10 2,655 2,752 356
Due from director - 31 4
Organization costs, net of accumulated amortization 1,245 1,085 141
(1998: HK$128, 1999: HK$288)
Goodwill, net of accumulated amortization 68 61 8
(1998: HK$7, 1999: HK$14)
Other investments 3 3 1
------------------ --------------- ---------------
Total assets 154,616 222,875 28,831
================== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft 5 1,049 8,447 1,093
Notes payable, current portion 5 4,158 5,569 720
Letters of credit, gold and other loans 5 22,305 44,858 5,803
Promissory notes 2,184 - -
Accounts payable 18,873 20,757 2,685
Accrued expenses 1,266 4,570 591
Due to related party 10 48 - -
Capitalized lease obligations, current 6 429 540 70
Income taxes payable 13 3,072 520 67
------------------ --------------- ---------------
Total current liabilities 53,384 85,261 11,029
Notes payable, non-current portion 5 9,689 8,354 1,081
Capitalized leased obligations, non-current 6 855 674 87
------------------ --------------- ---------------
Total liabilities 63,928 94,289 12,197
================== =============== ===============
Minority interests 431 158 20
------------------ --------------- ---------------
Shareholders' equity
Common stocks, par value US$0.01 each,
Authorized - 100 million shares,
Issued and outstanding -
6,146,646 shares as of April 30, 1998,
6,365,646 shares as of April 30, 1999 8 475 492 64
Share premium 8 41,597 48,944 6,332
Warrant reserve 8 1,622 1,622 210
Investment property revaluation reserve 7,465 4,115 532
Retained earnings 39,098 73,255 9,476
------------------ --------------- ---------------
Total shareholders' equity 90,257 128,428 16,614
================== =============== ===============
Total liabilities, minority interests and
shareholders' equity 154,616 222,875 28,831
================== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Common stock
------------
Par Share Warrant
Notes Shares value premium reserve
-------- --------- -------- -------- -------
HK$ HK$ HK$
<S> <C> <C> <C> <C> <C>
Balance as of May 1, 1996 4,387,200 339 - -
Net income - - - -
--------- -------- -------- -------
Balance as of April 30, 1997 4,387,200 339 - -
New issue of shares 8(a) 1,460,000 113 41,620 -
Shares issued in Deen Merger 8(a) 142,946 11 (11) -
Shares issued to note holders 8(a) 156,500 12 (12) -
New issue of warrants 8(c) - - - 1,622
Surplus arising on revaluation - - - -
Net income - - - -
--------- -------- -------- -------
Balance as of April 30, 1998 6,146,646 475 41,597 1,622
Deficit arising on revaluation - - - -
Net income - - - -
Over-allotment of shares 8(b) 219,000 17 7,347 -
--------- -------- -------- -------
Balance as of April 30, 1999 6,365,646 492 48,944 1,622
========= ======== ======== =======
<CAPTION>
Investment
property
revaluation Retained
reserve earnings Total Total
-------- -------- -------- -------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Balance as of May 1, 1996 - 921 1,260 163
Net income - 15,721 15,721 2,034
--------- -------- -------- -------
Balance as of April 30, 1997 - 16,642 16,981 2,197
New issue of shares - - 41,733 5,398
Shares issued in Deen Merger - - - -
Shares issued to note holders - - - -
New issue of warrants - - 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 7,465 39,098 90,257 11,676
Deficit arising on revaluation (3,350) - (3,350) (434)
Net income - 34,157 34,157 4,419
Over-allotment of shares - - 7,364 953
--------- -------- -------- -------
Balance as of April 30, 1999 4,115 73,255 128,428 16,614
========= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year ended April 30
-------------------------------------------------------------------
1997 1998 1999 1999
---------- ---------- ---------- ----------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 15,721 22,456 34,157 4,419
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:-
Depreciation of property, plant and equipment 1,049 1,345 4,493 582
Provision for slow moving inventory (60) - - -
Amortization of deferred expenditures 10 85 160 21
Amortization of goodwill - 7 7 1
Loss on disposal of property, plant and equipment 119 - 562 73
Gain on disposal of land and building - (2,904) - -
Bad debt 1,295 - - -
Allowance for doubtful debts - - 1,121 144
Minority interests (102) (2) (273) (35)
Changes in operating assets and liabilities:
Accounts receivable (3,994) (22,615) (19,685) (2,547)
Inventories (11,316) (9,801) (46,642) (6,034)
Prepayments and other current assets 230 175 (278) (36)
Due from related parties (1,612) (860) (97) (13)
Due from director - - (31) (4)
Accounts payable 1,409 11,359 1,884 244
Accrued expenses (583) 47 3,304 427
Letters of credit (599) (1,127) 17,698 2,290
Due to related parties (2,462) 48 (48) (6)
Income tax receivables 46 - - -
Income tax payables 2,210 242 (2,552) (330)
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 1,361 (1,545) (6,220) (804)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Organization costs (746) (525) - -
Purchase of property, plant and equipment (588) (22,728) (7,802) (1,009)
Proceeds on disposals of property, plant and equipment 100 3,800 - -
Purchase of bonds (1) (1) - -
---------- ---------- ---------- ----------
Net cash used in investing activities (1,235) (19,454) (7,802) (1,009)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Deferred offering costs (601) (14,095) - -
Bank overdrafts (44) (7,590) 7,398 957
Net proceeds from issue of shares/warrants - 58,051 7,364 953
Net proceeds from sale of promissory notes - 2,184 (2,184) (283)
Loan acquired 4,021 1,434 9,856 1,275
Repayment of loan (2,858) (8,016) (4,925) (637)
Repayment of capitalized leases - (438) (539) (70)
Restricted cash (1,036) (75) (12,074) (1,562)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (518) 31,455 4,896 633
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (392) 10,456 (9,126) (1,180)
Cash and cash equivalents, as of beginning of year 688 296 10,752 1,391
---------- ---------- ---------- ----------
Cash and cash equivalents, as of end of year 296 10,752 1,626 211
========== ========== ========== ==========
Analysis of balances of cash and cash equivalents
Cash 296 10,752 1,626 211
========== ========== ========== ==========
Other cash transactions:
Cash paid for interest 4,137 7,176 6,876 890
========== ========== ========== ==========
Cash paid(refunded) for taxes (46) 1,877 2,932 379
========== ========== ========== ==========
Non-cash transactions:
Purchase of equipment under capitalized leases 1,403 320 469 61
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
L J INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
1. PRINCIPAL ACTIVITIES AND BASIS OF FINANCIAL STATEMENTS
LJ International Inc. (the Company) and its subsidiaries (Collectively the
Group) 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 Group also owns
certain commercial and residential properties located in Hong Kong, which
are held primarily for investment purposes.
During the year ended April 30, 1998, the Company merged with Lorenzo
Jewelry Mfg. (HK) Limited (Lorenzo). The Company 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 had been accounted
for by the purchase method of accounting under generally accepted
accounting principles in Hong Kong (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 was recorded
as goodwill. Under generally accepted accounting principles in the United
States (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 16. The
capital structure reflected in the financial statements is that of the
Company, which is a 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 HK GAAP which have been applied
consistently throughout the relevant periods. These requirements
differ in certain material respects from US GAAP - see note 16.
F-7
<PAGE>
L J INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b) Principles of combination and consolidation
The consolidated financial statements include the financial
information of the Company 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. and Shantou S.E.Z. Lorenzo Gems &
Craft Factory Co., Ltd.. Lorenzo also has a 60% owned subsidiary,
Lorenzo Marketing Co., Limited (Lorenzo Marketing) 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. All of the subsidiaries, other than 60%
owned Lorenzo Marketing, are 100% owned.
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 to be cash equivalents.
F-8
<PAGE>
L J INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Inventories
Inventories are stated at the lower of cost and net realizable value.
Cost, which comprises all costs of purchase and, where applicable,
costs of conversion and other costs that have been incurred in
bringing the inventories to their present location and condition, is
calculated using the first-in, first-out method. Net realizable value
represents the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated
costs necessary to make the sale. Inventories consisted of the
following:
<TABLE>
<CAPTION>
As of April 30
--------------------------------------------------------------
1998 1999 1999
---------------- -------------- ---------------
HK$ HK$ US$
<S> <C> <C> <C>
Raw materials 22,140 24,253 3,137
Work-in-progress 14,281 57,338 7,418
Finished goods 11,773 13,245 1,713
Less: Provision for slow moving inventories (1,200) (1,200) (155)
----------------- --------------- ----------------
46,994 93,636 12,113
================= =============== ================
</TABLE>
The amount of inventories carried at net realizable value is HK$12,045
(1998: HK$10,573), which is determined by the costs less a provision
of slow moving items.
Work-in-progress consists primarily of cut-stones, which generally
could be sold to third parties, however, it is the Group's intent to
manufacture these stones into finished jewelry.
(f) Property, plant and equipment (PPE) and depreciation
PPE is 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 assets
have been put into operation, such as repairs and maintenance, is
charged to the statement of operations 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 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 statement of
operations.
F-9
<PAGE>
L J INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Property, plant and equipment (PPE) and depreciation (Continued)
When assets are transferred between PPE and other classes of assets,
the cost of such an asset on transfer is deemed to be the carrying
amount of the asset as stated under its original classification. Any
previous revaluation reserve on the asset is frozen upon the transfer
until the retirement or disposal of the asset. On the retirement or
disposal of the asset, the frozen revaluation reserve is transferred
directly to retained earnings.
Depreciation is calculated to write off the cost of PPE over their
estimated useful lives from the date on which they become fully
operational using the straight line method at the following annual
rates:
<TABLE>
<S> <C>
Land and buildings 2% or over the unexpired term of leases
Furniture, fixtures and equipment 20%
Motor vehicles 20%
Plant and machinery 10%
Leasehold improvement 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. Investment properties are stated in the balance sheet at
their open market values on basis of professional valuation.
The investment properties were revalued close at the end of April,
1999 by CB Richard Ellis, A.G. Wilkinson & Associates and Prudential
Surveyors International Limited, independent firms of qualified
surveyors, on an open market value basis. The deficit of HK$3,350
arising on revaluation has been debited to the investment property
revaluation reserve.
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$1,080 of accumulated depreciation had previously
been recorded.
Investment properties include gross amount of HK$28,150 and HK$22,300
with no accumulated depreciation in respect of assets held for use
under operating leases as of April 30, 1998 and 1999 respectively.
F-10
<PAGE>
L J INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Investment properties (Continued)
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
statement of operations. Where a deficit has previously been charged
to the statement of operations and a revaluation surplus subsequently
arises, this surplus is credited to the statement of operations 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 statement of
operations.
(h) Organization costs
Organization costs comprise of professional fees paid to third parties
in connection with the organization of the Group. Amortization is
calculated over 10 years using straight line basis.
(i) Deferred taxation
Deferred taxation is provided, using the liability method, on all
significant timing differences to the extent it is probable that the
liability will crystallise in the foreseeable future. A deferred tax
asset is not recognised unless its realisation is assured beyond
reasonable doubt.
(j) 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 the
statement of operations on a straight line basis over the lease term.
(k) Capitalized lease obligations
Where assets are acquired under capitalized leases, the amounts
representing the outright purchase price of such assets are included
in PPE 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 the
statement of 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.
F-11
<PAGE>
L J INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) Related parties
Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party, or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they
are subject to common control or common significant influence.
(m) Revenue recognition
Revenue is recognised when it is probable that the economic benefits
will flow to the Group and when the revenue can be measured reliably,
on the following bases:
(i) sale of goods - when goods are delivered and title passed to
customers;
(ii) interest income - on a time proportion basis; and
(iii) rental income relating to operating leases - on a straight line
basis over the lease term.
(n) 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 rates of exchange 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, 1999 has been made at HK$7.73 to US$1.00.
(o) Gold loans
Gold loan balances are translated at the gold price prevailing at the
close of business on the balance sheet date. Profits or losses arising
on translation are dealt with in the statement of operations.
F-12
<PAGE>
L J INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(p) Earnings per share
The calculation of basic earnings per share is based on net income for
the year attributable to shareholders and on the weighted average
number of ordinary shares outstanding during the year.
The calculation of diluted earnings per share is based on net income
for the year attributable to shareholders and on the weighted average
number of ordinary shares outstanding during the year, adjusted for
the effects of all dilutive potential ordinary shares.
In accordance with Statement of Standard Accounting Practice No. 5
"Earnings per share" (revised) issued by the Hong Kong Society of
Accountants which has became effective during the year, as a result of
change in accounting policy the weighted average number of ordinary
shares used in calculating diluted earnings per share for prior
periods has been restated.
(q) Uses of estimates
The preparation of the Group'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 Group derived revenues from the following major customers, which
accounted for over 10% of net revenues.
<TABLE>
<CAPTION>
Year ended April 30
--------------------------------------------------------------
Customer 1997 1998 1999
-------- ---------- ------------- ----------
<S> <C> <C> <C>
QVC Network Inc. 69% 55% 57%
Tocantins Minerals Mining &
Science Corp. - 13% -
</TABLE>
Accounts receivable related to these major customers were HK$16,476 as
of April 30, 1998 and HK$13,094 as of April 30, 1999.
F-13
<PAGE>
L J INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
3. OPERATING RISKS (Continued)
(a) Concentrations of credit risks (Continued)
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
Group's receivables. Even though the Group 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.
(b) Country risks
The Group 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 Group'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 Group 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-14
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Land Furniture,
and Leasehold fixtures and Plant and Motor
Buildings improvement equipment machinery vehicles Total Total
HK$ HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C> <C>
At cost/valuation
At May 1, 1998 2,470 14,218 6,231 11,862 2,101 36,882 4,772
Addition - 2,162 3,118 2,417 574 8,271 1,070
Disposal/written off - - (414) (403) - (817) (106)
Reclassification 2,500 (107) 10 97 - 2,500 323
--------- ----------- ------------- --------- -------- ------- ------
At April 30, 1999 4,970 16,273 8,945 13,973 2,675 46,836 6,059
--------- ----------- ------------- --------- -------- ------- ------
Accumulated depreciation
At May 1, 1998 576 865 3,525 1,471 424 6,861 888
Charge for the year 140 1,488 1,123 1,233 509 4,493 582
Disposal/written off - - (164) (91) - (255) (33)
Reclassification - (31) (3) 34 - - -
--------- ----------- ------------- --------- -------- ------- ------
At April 30, 1999 716 2,322 4,481 2,647 933 11,099 1,437
--------- ----------- ------------- --------- -------- ------- ------
Net book value
At April 30, 1999 4,254 13,951 4,464 11,326 1,742 35,737 4,622
========= =========== ============= ========= ======== ======= ======
At April 30, 1998 1,894 13,353 2,706 10,391 1,677 30,021 3,884
========= =========== ============= ========= ======== ======= ======
</TABLE>
F-15
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
4. PROPERTY, PLANT AND EQUIPMENT (Continued)
(a) The net book value of the property, plant and equipment includes an
amount of HK$1,531 and HK$1,471 in respect of assets held under
capitalized leases as of April 30, 1998 and April 30, 1999
respectively. Depreciation charge in respect of these assets for the
years ended April 30, 1998 and 1999 amounted to HK$299 and HK$461
respectively.
(b) The Group has pledged all land and buildings and investment properties
to secure general banking facilities granted to the Group as of April
30, 1998 and April 30, 1999 (see note 5(b)).
5. BANKING FACILITIES AND OTHER LOANS
<TABLE>
<CAPTION>
As of April 30
--------------------------------------------------
1998 1999 1999
---- ---- ----
Notes HK$ HK$ US$
-----
<S> <C> <C> <C>
Bank overdraft (a) 1,049 8,447 1,093
============ ============ ==========
Notes payable
- current portion 4,158 5,569 720
- non-current portion 9,689 8,354 1,081
------------ ------------ ----------
(b) 13,847 13,923 1,801
============ ============ ==========
Letters of credit, gold and other loans
- letters of credit (a) 16,495 34,193 4,423
- gold loan (c) 5,810 9,500 1,229
- other loans (d) - 1,165 151
------------ ------------ ----------
22,305 44,858 5,803
============ ============ ==========
</TABLE>
F-16
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
5. BANKING FACILITIES AND OTHER LOANS (Continued)
(a) The Group had various letters of credit and overdraft under banking
facilities as follows:
<TABLE>
<CAPTION>
As of April 30
---------------------------------------------------
1998 1999 1999
------------ ------------ ------------
HK$ HK$ US$
<S> <C> <C> <C>
Facilities granted
Letters of credit 30,600 38,125 4,932
Overdrafts 13,500 10,000 1,294
============ ============ ============
Utilized
Letters of credit 16,495 34,193 4,423
Overdrafts 1,049 8,447 1,093
============ ============ ============
Unutilized facilities
Letters of credit 14,105 3,932 509
Overdrafts 12,451 1,553 201
============ ============ ============
</TABLE>
The bank overdrafts are denominated in Hong Kong dollars, bear
interest at the floating commercial bank lending rates in Hong Kong,
which ranged from 8.6% to 11.5% per annum as of April 30, 1999 (1998:
11.0% to 13.0% per annum) and are renewable annually with the consent
of the relevant banks.
Under the banking facilities arrangements, the Group is required to
maintain certain cash balances based on the amount of facilities
granted. These balances are reflected as restricted cash in the
balance sheet.
(b) The Group also had mortgage loans classified under notes payable which
are related to the Group's investment properties. These loans
aggregated HK$13,847 and HK$13,923 as of April 30, 1998 and 1999
respectively. Interest charges on these loans range from 10.09% to
10.59% per annum as of April 30, 1999 (1998: 11.50% to 12.00% per
annum).
F-17
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
5. BANKING FACILITIES AND OTHER LOANS (Continued)
(b) Expected maturities of notes payable are as follows:
<TABLE>
<CAPTION>
As of April 30, 1999
---------------------------
HK$ US$
<S> <C> <C>
2000 5,569 720
2001 4,811 622
2002 2,589 335
2003 954 124
---------- ----------
13,923 1,801
========== ==========
</TABLE>
The Group's banking facilities are collaterized by land and buildings,
investment properties (see note 4(b)), restricted cash deposits and
personal guarantees of certain directors.
(c) The Group had outstanding loans to purchase 2.3 oz and 4.3 oz of gold
as of April 30, 1998 and 1999 with the related balances being HK$5,810
and HK$9,500 respectively. These loans are due within the next year,
however, have been historically renewed. These loans bear interest at
3.1% to 3.3% as of April 30, 1999 (1998: 3.3% to 3.6%). These loans
can be repaid in cash at the current exchange rate of gold any time
prior to maturity. The Group 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$566 and HK$630 for the years ended April 30, 1998 and
1999 respectively. As the Group does not hedge for changes in the
future price of gold, the Group is exposed to certain market risks,
which may result from potential future increases in the price of gold.
(d) The Group had a three month short-term loan of HK$1,165 (1998: HK$Nil)
due to a private company as of April 30, 1999. The loan bears
interest at 2.8% per month and has been fully repaid in June 1999.
F-18
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
6. CAPITALIZED LEASE OBLIGATIONS
<TABLE>
<CAPTION>
As of April 30
---------------------------------------
1998 1999 1999
--------- --------- ---------
HK$ HK$ US$
<S> <C> <C> <C>
Capitalized lease obligation:
Within one year 429 540 70
In the second to fifth years inclusive 855 674 87
--------- --------- ---------
1,284 1,214 157
========= ========= =========
</TABLE>
The following is a schedule of future minimum lease payments under capital
leases as of April 30, 1999
<TABLE>
<CAPTION>
HK$ US$
<S> <C> <C>
Future minimum lease payments 1,561 202
Less: Amount representing interest (347) (45)
-------------- ------------
Present value of net minimum lease payments 1,214 157
Less: Current portion 540 70
-------------- ------------
674 87
============== ============
</TABLE>
7. CONTINGENT LIABILITIES
As of April 30, 1998 and 1999, the Group had contingent liabilities in
respect of bills discounted with recourse amounting to HK$Nil and HK$895
respectively.
During the year, the Group has provided a guarantee to a bank in respect of
mortgage loans granted to a director, Yih Yu Chuan to the extent of
HK$4,882 (US$632).
F-19
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
8. SHARE CAPITAL, WARRANT RESERVE AND SHARE PREMIUM
(a) As of April 15, 1998, the Company issued 1,460,000 shares of common
stock to the public in the Initial Public Offering and had raised
HK$52,056.
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$783 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.
(b) The Company had 6,365,646 shares of common stock outstanding as of
April 30, 1999 (1998: 6,146,646 shares). During the year 219,000
additional shares were issued to cover the over-allotment for the
initial public offering completed in April 1998.
(c) In the Initial Public Offering, the Company has issued 1,679,000
warrants (including 219,000 over-allotment warrants). Each warrant
entitles the holders to purchase one share of common stock at a price
of US$5.75 per share for a period of five years from the effective
date of the offering. The Company has received all proceeds from the
issue totalling HK$1,622 and was recorded in the Company's warrant
reserve account.
(d) In addition to note 8(c) above, the representative of the Initial
Public Offering received warrants to purchase 146,000 shares of common
stock at US$8.25 per share and options to purchase 146,000 warrants,
each of which also entitles the holder to purchase one share of common
stock at US$8.25 per share, at US$0.20625 per warrant. These warrants
and options are exercisable from April 15, 1998 and expire on April
14, 2003.
F-20
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
9. STOCK BASED COMPENSATION PLAN
As of June 1, 1998, the Company adopted a stock option plan (the Plan)
which was approved by the shareholders on December 9, 1998. The Plan allows
the Board of Directors, or a committee thereof at the Board's discretion,
to provide for a total of 2,000,000 stock options to officers, directors,
key employees and advisors of the Company or its subsidiaries. Out of the
stock options provided, 1,285,000 stock options were issued in accordance
with the terms of the Plan on April 12, 1999 to certain officers,
directors, key employees and advisors of the Group at an exercise price of
US$5.0 (HK$38.65) per share (the fair market value of the common stock as
of April 12, 1999) and are exercisable during the period from April 12,
1999 to April 11, 2009.
As of April 30, 1999, 1,285,000 stock options were issued and exercisable
in relation to the Plan.
10. RELATED PARTY TRANSACTIONS
(a) Names and relationship of related parties
<TABLE>
<CAPTION>
Existing relationships with the Group
-------------------------------------
<S> <C>
Yih Yu Chuan Director and major shareholder of the Company
Gemological Institute of America, Common directors and major shareholders
Hong Kong Limited
Italon Limited Common directors and major shareholders
Lorenzo Consultant & Investment Common directors and major shareholders
(China) Limited
Hong Kong Brasil Lapidary Limited Common director and major shareholder
</TABLE>
F-21
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
10. RELATED PARTY TRANSACTIONS (Continued)
(b) Summary of related party transactions
<TABLE>
<CAPTION>
As of April 30
-----------------------------------------------
Notes 1998 1999 1999
---------- --------- --------
HK$ HK$ US$
<S> <C> <C> <C> <C>
Due from related parties:
Gemological Institute of America,
Hong Kong Limited (i) 2,418 2,724 352
Lorenzo Consultant & Investment
(China) Limited (i) 23 25 3
Hong Kong Brasil Lapidary Limited (i) 214 3 1
---------- --------- --------
2,655 2,752 356
========== ========= ========
Due (to) / from related party:
Yih Yu Chuan (i) (48) 31 4
========== ========= ========
<CAPTION>
Year ended April 30
-----------------------------------------------
1997 1998 1999 1999
---------- ---------- ---------- ----------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Sales:
Hong Kong Brasil Lapidary Limited (ii) - 254 3 1
Yih Yu Chuan (ii) 197 - - -
Gemological Institute of
America, Hong Kong Limited (ii) - - 71 9
---------- ---------- ---------- ----------
197 254 74 10
========== ========== ========== ==========
Purchases:
Italon Limited (iii) 861 - - -
Yih Yu Chuan (iv) 1,862 - - -
---------- ---------- ---------- ----------
2,723 - - -
========== ========== ========== ==========
Sub-contracting charge:
Italon Limited (v) 1,394 - - -
========== ========== ========== ==========
Rental income:
Gemological Institute of
America, Hong Kong Limited (vi) 300 275 - -
Italon Limited (vi) 275 - - -
---------- ---------- ---------- ----------
575 275 - -
========== ========== ========== ==========
Gain on sale of building:
Yih Yu Chuan (vii) - 2,904 - -
========== ========== ========== ==========
</TABLE>
F-22
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
10. RELATED PARTY TRANSACTIONS (Continued)
(i) The amounts due from/to related parties represent unsecured advances
which are interest free and repayable on demand.
(ii) The sales to related parties are made according to the published
prices and conditions offered to the major customers of the Group.
(iii) The directors consider that purchase of raw materials were made
according to the published prices and conditions similar to those
offered to other customers of the suppliers.
(iv) 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.
(v) The Group subcontracted with Italon for the manufacture of the
Group's jewelry. During the year ended April 30, 1997, the Group
completed construction of its manufacturing plant in the PRC and the
subcontracting to Italon had been discontinued.
(vi) The Group had leased certain office space to related parties at HK$25
per month. The monthly charge was determined by the directors.
(vii) During the year ended April 30, 1998, Yih Yu Chuan purchased for cash
an investment property from the Group at appraised value. The Group
recognized a gain in this sale of HK$2,904.
11. OPERATING LEASES COMMITMENTS
As of April 30, 1999, the Group had outstanding commitments not provided
for under non-cancellable operating leases in respect of land and
buildings, the portion of these commitments which are payable in the
following year is as follows:
<TABLE>
<CAPTION>
As of April 30
--------------------------------------------------
1998 1999 1999
---------- ---------- ----------
HK$ HK$ US$
<S> <C> <C> <C>
Operating leases which expire:
Within one year 410 576 75
In the second to fifth years inclusive 2,130 3,118 403
---------- ---------- ----------
2,540 3,694 478
========== ========== ==========
</TABLE>
Total lease expense for the years ended April 30, 1997, 1998 and 1999 was
HK$490, HK$1,398 and HK$3,281 respectively.
F-23
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
12. PENSION COSTS
The Group operates a defined contribution retirement plan (Retirement Plan)
which is optional for all qualified employees. The assets of the Retirement
Plan are held separately from those of the Group in a provident fund
managed by an independent trustee. The pension cost charge represents
contributions payable to the fund by the Group at rates specified in the
rules of the Retirement Plan. Where employees leave the Retirement Plan
prior to vesting fully in the contributions, the contributions payable by
the Group is reduced by the amount of forfeited contributions.
The pension expense for the years ended April 30, 1997, 1998 and 1999 was
HK$148, HK$248 and HK$446 respectively. The amount of forfeitures for the
years ended April 30, 1997, 1998 and 1999 was HK$14, HK$16 and HK$22
respectively.
13. INCOME TAXES
Reconciliation to the expected statutory tax rate in Hong Kong of 16%
(1998: 16% and 1997: 16.5%) is as follows:
<TABLE>
<CAPTION>
Year ended April 30
--------------------------------------------------------------
1997 1998 1999
------------ ------------ ------------
% % %
<S> <C> <C> <C>
Statutory rate 16.5 16.0 16.0
Tax effect of net operating losses - 1.0 1.4
Non taxable PRC profit (3.0) (8.8) (15.4)
Others (1.2) 0.4 (0.9)
------------- ------------- -------------
Effective rate 12.3 8.6 1.1
------------- ------------- -------------
</TABLE>
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
Year ended April 30
-------------------------------------------------------------------------
1997 1998 1999 1999
------------- ------------- -------------- -------------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Current taxes 2,210 2,120 380 49
Deferred taxes - - - -
------------- ------------- -------------- -------------
Income tax expense 2,210 2,120 380 49
============= ============= ============== =============
</TABLE>
F-24
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
13. INCOME TAXES (Continued)
The Group 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.
The Company 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% (1998: 16% and 1997:
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 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 unprovided deferred tax liability as
of April 30, 1998 and 1999 was not significant.
F-25
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
14. REPORT ON SEGMENT INFORMATION
The Group has operations in the following geographical area:
<TABLE>
<CAPTION>
Year ended April 30
---------------------------------------------------------------------
1997 1998 1999 1999
--------- ---------- ---------- ----------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Operating revenues:
Sales to customers outside the Group
- United States of America & Canada 80,481 111,274 178,930 23,147
- Hong Kong 919 2,248 630 82
- Europe and other countries 1,101 5,667 13,467 1,742
- PRC 570 58 37 5
- Japan 9,187 4,952 2,155 279
----------- ------------ ------------ ------------
92,258 124,199 195,219 25,255
=========== ============ ============ ============
Segment profit
- Hong Kong 19,583 15,415 6,335 820
- PRC 137 14,005 33,008 4,270
Interest expenses, net (3,999) (6,964) (5,186) (671)
----------- ------------ ------------ ------------
Net income 15,721 22,456 34,157 4,419
=========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
As of April 30
----------------------------------------------------
1998 1999 1999
------------ ------------ ------------
HK$ HK$ US$
<S> <C> <C> <C>
Segment assets
- Hong Kong 97,626 89,305 11,552
- PRC 56,990 133,570 17,279
------------ ------------ ------------
154,616 222,875 28,831
============ ============ ============
</TABLE>
The Group 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
---------------------------------------------------------------------
1997 1998 1999 1999
--------- ---------- ---------- ----------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Revenues
- Manufacture of jewelry 92,258 124,199 195,219 25,255
- Holding of investment properties 1,280 1,273 474 61
--------- ---------- ---------- ----------
93,538 125,472 195,693 25,316
========= ========== ========== ==========
Segment profit
- Manufacture of jewelry 14,570 18,394 33,685 4,357
- Holding of investment properties 1,151 4,062 472 61
--------- ---------- ---------- ----------
15,721 22,456 34,157 4,418
========= ========== ========== ==========
</TABLE>
F-26
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
14. REPORT ON SEGMENT INFORMATION (Continued)
All of the Group's depreciation expense and capital expenditures during the
three years ended April 30, 1999 relate to the manufacture of jewelry.
<TABLE>
<CAPTION>
As of April 30
----------------------------------------------------
1998 1999 1999
---------- ---------- ---------
HK$ HK$ US$
<S> <C> <C> <C>
Segment assets
- Manufacture of jewelry 126,398 200,514 25,940
- Holding of investment properties 28,150 22,300 2,884
- Unallocated - goodwill 68 61 7
---------- ---------- ---------
154,616 222,875 28,831
========== ========== =========
</TABLE>
15. SUBSEQUENT EVENTS
In July 1999, a new wholly owned subsidiary, Lorenzo Diamond Jewelry (Mfg.)
Ltd,. was incorporated in Hong Kong, which is specialized to sell diamond
jewelry products to local and overseas customers.
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The Group's financial statements are prepared in accordance with HK GAAP,
which differ in certain material respects from US GAAP, including certain
accounting interpretations of the Securities and Exchange Commission (SEC)
as practiced in the United States. 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 the Company 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.
F-27
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(b) Share capital transactions
The Company completed a bridge loan financing on October 17, 1997,
where it raised HK$6,049 (US$783). As of April 30, 1998, there still
had an outstanding balance amounting to HK$2,280 (principal plus
accrued interest) which had been repaid in May 1998. 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 based on the price associated with the offering,
which has been amortized as an additional interest expense during the
year ended April 30, 1998.
In connection with the public offering, the Company paid the
Representative HK$835 (US$108) for future financial consulting. Under
HK GAAP such amount was offset against the proceeds of the offering.
Under US GAAP such amount would be deferred and recognized as an
expense over the period the services are expected to be performed on
an accelerated basis over the next three years following the
completion of the public offering.
(c) Stock-based compensation
Under HK GAAP, there are no specific requirements to recognize the
compensation cost arising from stock options granted to employees on
the financial statements.
Under US GAAP, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123 " Accounting for Stock-Based
Compensation " (SFAS 123). As permitted by SFAS 123, the Company has
chosen to account for stock-based compensation using the intrinsic
value method. Accordingly, because the exercise price of the Company's
stock options is same to the market price of the underlying stock on
the date of grant, no compensation expense has been recognized for its
stock-based compensation plan. Had compensation expense for the stock
option plan been determined based on the fair value at the date of
grant, consistent with the provisions of SFAS 123, the Company's net
income and earnings per share would have been reported as follows:
<TABLE>
<CAPTION>
Year ended April 30
---------------------------------
1999 1999
------------ -------------
HK$ US$
<S> <C> <C>
Pro forma net income 32,970 4,265
============ =============
Pro forma earnings per share
Basic 5.19 0.67
============ =============
Diluted 5.19 0.67
============ =============
</TABLE>
F-28
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(c) Stock-based compensation (Continued)
The fair value of these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions:
Expected dividend yield Nil
Expected stock price volatility 60%
Risk-free interest rate 5.85%
Expected life of options 3 years
The weighted average fair value for options granted is US$2.25 per
share.
The Company's stock option activities and related information for the
years ended April 30, 1997, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
Year ended April 30
-----------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- -------------------------- ----------------------------
Options Exercise Options Exercise Options Exercise
price price price
US$ US$ US$
<S> <C> <C> <C> <C> <C> <C>
Outstanding as - - - - - -
of May 1
Granted - - - - 1,285,000 5.0
Exercised - - - - - -
Forfeited - - - - - -
-------- ------- ---------
Outstanding as - - 1,285,000
of April 30
========== ======= =========
</TABLE>
F-29
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(d) Capitalized deferred costs
During the year ended April 30, 1998, the Company merged with Deen.
Approximately HK$640 and HK$193 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 capitalized 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 and HK$589 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 ended April 30, 1998, the Company has
incurred indirect costs amounting to HK$116 with a consultant
associated with its public offering. Under US GAAP these amounts would
be expensed as incurred.
During the year ended April 30 1999, there is no additional
capitalized deferred cost incurred.
(e) Earnings per share
There is no significant difference in calculating the earnings per
share between HK GAAP and US GAAP, except that under US GAAP shares
issued in connection with Deen Merger (see note 8(a)) are reflected as
outstanding for all periods as they were issued for nominal
consideration whereas under HK GAAP these shares are reflected as
outstanding since the date of the issue (i.e., October 6, 1997).
(f) 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
estimates involve uncertainties and cannot be determined with
precision. Under US GAAP the estimated fair values are to be disclosed
if they are materially different from the underlying historical cost
basis. The Group has the following financial instruments and
investments, where the fair values may be different from historical
costs.
i) Investment properties - The fair value of the investment
properties held by the Group as of April 30, 1999 is estimated to
be HK$22,300 on the open market value basis. The market
valuations were performed by independent qualified surveyors at
dates close to the balance sheet date.
F-30
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(f) Fair value of financial instruments (Continued)
ii) Related party transactions - The Group 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.
(g) 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$4,115 as of April
30, 1999 (1998: HK$7,465) with no related income tax effect. Under HK
GAAP investment properties have not been depreciated since 1995, at
which time accumulated depreciation was HK$1,080. Under US GAAP
depreciation would have continued to be recorded over an estimated
useful life of 40 years based on historical costs. This would have
increased depreciation expense for the years ended April 30, 1997,
1998 and 1999 by HK$572, HK$547 and HK$424 respectively with no
related income tax effect.
(h) Property, plant and equipment
During the year, an investment property which had a carrying value of
HK$2,500 has been reclassified as land and buildings due to the change
of its use. Under HK GAAP, the cost of such an asset upon transfer is
deemed to be the carrying amount of the asset as stated under its
original classification. Depreciation is then provided to write off
the carrying amount over the unexpired lease terms.
Under US GAAP, the amounts transferred are its original historical
cost of HK$4,894 and respective accumulated depreciation of HK$586, as
investment properties are recorded at their historical costs (see note
16(g)). The net effect arising from the different accounting
treatment, as aforesaid, would have increased the depreciation charge
for the year by HK$48 with no related income tax effect.
F-31
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(i) 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 Group sold a building to its major shareholder
and recognized a gain of HK$2,904. 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.
(j) Deferred taxes
Under HK GAAP provision for deferred taxes is calculated under the
liability method for all material timing differences to the extent
that it is probable that these will crystallize in 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 US GAAP.
(k) Share premium
The Company has created a share premium of HK$48,944 following the
public offering of 1,679,000 shares of common stocks. Under US GAAP
these amounts would be termed additional paid-in capital, however, no
adjustment would be required to total shareholders' equity.
(l) Comprehensive income
During the year ended April 30, 1999, the Company adopted SFAS No.
130, "Reporting Comprehensive Income" which establishes standards for
reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. There were no items
of comprehensive income as defined by SFAS No. 130 for any of the
periods presented.
F-32
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
The following table summarized the effect on net income of differences
between HK GAAP and US GAAP.
<TABLE>
<CAPTION>
Year ended April 30
-------------------------------------------------------------------------
1997 1998 1999 1999
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Net income as reported under HK GAAP 15,721 22,456 34,157 4,419
US GAAP material adjustments:
- Depreciation on investment properties (572) (547) (424) (55)
- Depreciation on property - - (48) (6)
- Capitalized deferred costs (760) (898) - -
- Amortization of costs for shares issuable
to note holders - (6,049) - -
- Gain on disposal of an investment property
to a related party - (2,904) - -
- Additional gain on disposal of an
investment property - 76 - -
- Amortization of Deen Merger costs - 64 83 10
- Amortization of goodwill - 7 7 1
- Amortization of financial consulting
fee paid to the representative in the public
offering - - (417) (54)
---------- ---------- ---------- ----------
Net income under US GAAP 14,389 12,205 33,358 4,315
========== ========== ========== ==========
Weighted average number of shares outstanding
under HK GAAP - basic 4,387,200 4,539,128 6,347,046 6,347,046
Shares for Deen Merger 142,946 61,878 - -
---------- ---------- ---------- ----------
Weighted average number of shares outstanding
under US GAAP - basic 4,530,146 4,601,006 6,347,046 6,347,046
Effect of dilutive potential ordinary shares:
- Warrants - 4,854 - -
- Stock options - - 514 514
---------- ---------- ---------- ----------
Weighted average number of shares outstanding
under US GAAP - diluted 4,530,146 4,605,860 6,347,560 6,347,560
========== ========== ========== ==========
Earnings per share under
US GAAP
- Basic 3.18 2.65 5.26 0.68
========== ========== ========== ==========
- Diluted 3.18 2.65 5.26 0.68
========== ========== ========== ==========
</TABLE>
F-33
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. 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
------------------------------------------------------------------------
1998 1999 1999
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Shareholders' equity as reported
under HK GAAP 90,257 128,428 16,614
Cumulative effect of depreciation
on investment properties (2,263) (2,122) (274)
Cumulative effect of depreciation - (537) (70)
on property
Capitalized Deen Merger costs (769) (686) (89)
Reduction for related company advance (2,655) (2,752) (356)
Deferral of future financial consulting paid
to the representative in the public offering 835 418 54
Reduction for goodwill recorded
on the merger of the Company (68) (61) (8)
and Lorenzo
Additional gain on disposal of an
investment property 76 0 0
Surplus arising on revaluation of (7,465) (4,115) (532)
investment properties
------------ ------------ -----------
Shareholders' equity under US GAAP 77,948 118,573 15,339
============ ============ ===========
</TABLE>
F-34
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
Impact of recently issued US GAAP accounting standards
Financial instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other
hedging activities. The Group currently does not hold or issue derivative
financial instruments in the normal course of business. Accordingly,
adoption of SFAS No. 133 is not expected to affect the Group's financial
statements.
Reporting on the costs of start-up activities
During the year, Statement of Position 98-5 has been introduced which
require costs of start-up activities be expensed as incurred. It is
effective for fiscal years beginning after December 15, 1998. The statement
requires the initial application should be reported as the cumulative
effect of a change in accounting principle and to disclose the effect of
adopting this statement on income before extraordinary items and on net
income (and on the related per share amounts) in the period of the change.
As of April 30, 1999, the organization costs in relation to start-up
activities capitalized under both HK and US GAAP are HK$399. Had this
statement been adopted in the current year, the unamortized costs of HK$399
would need to be expensed. The net income and earnings per share under US
GAAP would have been reported as follows:
<TABLE>
<CAPTION>
Year ended April 30
------------------------------------
1999 1999
---- ----
HK$ US$
<S> <C> <C>
Adjusted net income 32,959 4,263
======== =========
Adjusted earnings per share
Basic 5.19 0.67
======== =========
Diluted 5.19 0.67
======== =========
</TABLE>
F-35
