<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-7912
PROSPECTUS
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 that we sold to the underwriter and/or
persons related to the underwriter:
. stock purchase options to purchase 146,000 shares of common stock; and
. warrant purchase options to purchase 146,000 warrants to purchase shares of
common stock.
No minimum number of warrants must be exercised, and all funds that we
receive upon exercise of the warrants and the underwriter warrants will be used
for general corporate purposes. As of September 29, 2000, 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. We will not receive any of the proceeds from the sale of
the underwriter warrants and underlying common stock.
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 25, 2000, the last sale
prices for the common stock and the warrants were $3.00 per share of common
stock and $0.8125 per warrant.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
Underwriting Gross
Price to Discounts and Proceeds to
Public Commissions Us
<S> <C> <C> <C>
Per share of common stock on exercise of warrant...... US$ 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 12, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Currency Translations.................................................................. 3
Prospectus Summary..................................................................... 4
Risk Factors........................................................................... 6
Forward-Looking Statements............................................................. 12
Use of Proceeds........................................................................ 12
Nature of Trading Market............................................................... 12
Dividend Policy........................................................................ 13
Exchange Rates......................................................................... 13
Selected Consolidated Financial Data................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 18
Our Business........................................................................... 33
Our Management......................................................................... 45
Certain Transactions................................................................... 49
Principal Shareholders................................................................. 50
Selling Shareholders................................................................... 51
Description of Securities.............................................................. 53
Taxation............................................................................... 57
Plan of Distribution................................................................... 59
Legal Matters.......................................................................... 59
Experts................................................................................ 59
Additional Information................................................................. 59
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.
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<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 semi-precious
gemstones and fine quality gemstone jewelry. We primarily 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 and precious stones, including diamonds. The average wholesale price
of our jewelry is approximately $100, which equates to average 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. Our Corporate Development offices are located at
10245 East Via Linda, Suite 225, Scottsdale, Arizona, 85253, USA.
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.
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<PAGE>
Securities offered by selling
shareholders................... 292,000 shares of common stock underlying the
underwriter warrants.
Use of Proceeds................ We will not receive any proceeds from the sale
of the underwriter warrants or the underlying
common stock. All funds that we receive 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
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<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, 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, a
substantial portion of our sales involve rings to one volume customer, QVC, Inc.
For the fiscal years ended April 30, 1999 and 2000, QVC, Inc. accounted for
approximately 57% and 48% 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, Inc., who orders only on a "purchase order" basis. The loss
of QVC, Inc. as a customer or a significant reduction in its orders would have a
materially adverse effect. We cannot assure that QVC, 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 and President, Yu Chuan Yih;
. our Executive Vice President, Ka Man Au;
. our Senior Vice President, Joseph Tuszer;
. our Chief Financial Officer, Hon Tak Ringo Ng; and
. our Vice President of Corporate Development, Michael Gilburd.
We have entered into an employment agreement only with Mr. Yih, since the
loss of his services could have an adverse effect on our ability to achieve our
business objectives. We maintain key-person life insurance in the amount of
US$1,500,000 on Mr. Yih's life, with the proceeds of such insurance payable to
us.
We are controlled by one of our existing shareholders, whose interests may
differ from other shareholders.
Our largest shareholder and members of his family currently own
approximately 48.1% of our outstanding shares. Accordingly, they have
controlling influence in determining the outcome of any corporate transaction or
other matter submitted to the shareholders for approval,
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<PAGE>
including mergers, consolidations and the sale of all or substantially all of
our assets, election of directors, and other significant corporate actions. They
also have the power to prevent or cause a change in control. In addition,
without the consent of these shareholders, we could be prevented from entering
into transactions that could be beneficial to us. The interests of these
shareholders may differ from the interests of the other 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.
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
. our ability to compete.
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.
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<PAGE>
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 China. Our results of operations
and financial condition may therefore be influenced by the economic, political,
legal and social conditions in China.
Since 1978, the Chinese government has been reforming, and is expected to
continue to reform, China'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 China. At times, we may also be adversely affected by changes in
policies of the Chinese 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
additional restrictions on currency conversion and remittances abroad. Our
management believes that the basic principles underlying the reforms will
continue to provide an acceptable framework for China's political and economic
systems. This is because of the broad support for the reform process and the
fact that the economic system in China has already undergone extensive changes
as a result of the success of such reforms.
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 several 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
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<PAGE>
prospects. Consistent with the customary practice among enterprises in China and
due to the cost in relation to the benefit, we do not carry any business
interruption insurance in China.
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 48% of our sales during the fiscal year ended April 30,
2000 to our largest customer, QVC, Inc., were not seasonal in nature. It has
been our management's experience that the remaining 52% 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 that are more impulse
purchase items. Unfavorable general economic conditions or a downturn in
consumer confidence may 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 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.
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<PAGE>
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
two of our directors and officers are non-residents of the United States, and
all or substantial portions 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
jurisdictions 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.
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<PAGE>
Some information about us may be unavailable 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", "future", "plans", "will" and "expect" in the statements. Our
actual performance after April 30, 2000 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
for the last two fiscal years:
Quarter ended: High Low
----------------------- ------ -----
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
October 31, 1999 $ 5.00 $2.50
January 31, 2000 $ 8.00 $2.75
April 30, 2000 $ 6.25 $3.00
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 for
the last two fiscal years:
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<PAGE>
Quarter ended: High Low
----------------------- ------ ------
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
October 31, 1999 $ 2.00 $ 1.00
January 31, 2000 $ 2.50 $1.063
April 30, 2000 $ 2.50 $1.125
We do not believe that there is any principal non-United States trading
market for the common stock or the warrants. We believe that Cede & Co. holds a
substantial majority of the outstanding common stock and warrants in the United
States as record holder.
DIVIDEND POLICY
We do not intend to pay dividends on our common stock in the foreseeable
future. Instead, we will retain our earnings to support our growth strategy and
for general corporate purposes. As a holding company, our ability to pay
dividends depends upon our receipt of dividends or other payments from our
subsidiaries and other holdings and investments. In addition, our operating
subsidiaries from time to time may be subject to restrictions on their ability
to make distributions to us, including as a result of restrictive covenants in
loan agreements, restrictions on the conversion of local currency into U.S.
dollars or other currency and other regulatory restrictions. Any determination
to pay dividends in the future will be at the discretion of our board of
directors and will depend upon our results of operations, financial condition,
contractual restrictions and other factors. Any dividends paid in the future on
the common stock may be paid in either U.S. dollars or Hong Kong dollars.
EXCHANGE RATES
We have prepared our consolidated financial statements in accordance with
Hong Kong generally accepted accounting principles consistently applied and
publish such statements in Hong Kong dollars, which is the functional currency
of our subsidiaries and the legal tender currency of Hong Kong. All references
to "Hong Kong dollars" or "HK$" 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$7.73.
The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods indicated. It
represents the noon buying rate
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<PAGE>
in New York for cable transfers payable in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York. The average noon
buying rate is determined by averaging the rates on the last business day of
each month during the relevant period.
Calendar Year Period End Average High Low
------------- ---------- -------- ------ ------
Noon Buying Rate
----------------
(HK$per US$)
1995 7.7323 7.7357 7.7665 7.7300
1996 7.7347 7.7345 7.7440 7.7310
1997 7.7495 7.7431 7.7550 7.7275
1998 7.7476 7.7467 7.7595 7.7355
1999 7.7740 7.7594 7.7814 7.7457
2000 (through April 30, 2000) 7.7867 7.7818 7.7867 7.7765
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
The following selected consolidated financial data with respect to each of
the years in the five-year period ended April 30, 2000 have been derived from
our audited consolidated financial statements. The following selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes included elsewhere in this
prospectus.
We prepare our consolidated financial statements in accordance with Hong
Kong GAAP, which differs in certain material respects from US GAAP. For a
discussion of the significant differences between Hong Kong GAAP and US GAAP,
see Note 17 of Notes To And Forming Part Of The Financial Statements.
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Year ended April 30,
<S> <C> <C> <C> <C> <C> <C>
1996 1997 1998 1999 2000 2000
HK$ HK$ HK$ HK$ HK$ US$
Amount in accordance with Hong
Kong GAAP
Operating revenues...................... 87,318 92,258 124,199 195,219 300,901 38,926
====== ====== ======= ======= ======= ======
Operating income........................ 13,828 21,930 31,540 39,723 38,725 5,010
Interest expense, net................... (5,693) (3,999) (6,964) (5,186) (2,980) (386)
------ ------ ------- ------- ------- ------
Income before income taxes.............. 8,135 17,931 24,576 34,537 35,745 4,624
Income taxes............................ (620) (2,210) (2,120) (380) (25) (3)
------ ------ ------- ------- ------- ------
Net income ............................. 7,515 15,721 22,456 34,157 35,720 4,621
------ ------ ------- ------- ------- ------
Dividends per share .................... 0.57 - - - - -
------ ------ ------- ------- ------- ------
Numerator:
Net income used in computing basic
earnings per share..................... 7,515 15,721 22,456 34,157 35,720 4,621
Interest on 3% convertible debentures - - - - 251 32
------ ------ ------- ------- ------- ------
Adjusted net income used in
computing diluted earnings per
share.................................. 7,515 15,721 22,456 34,157 35,971 4,653
------ ------ ------- ------- ------- ------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Denominator:
Weighted average number of shares
outstanding - basic (thousands) 4,387 4,387 4,539 6,347 6,589 6,589
Effect of dilutive potential ordinary
shares:
3% convertible debentures ............. - - - - 337 337
Warrants .............................. - - 5 - 7 7
Options ............................... - - - 1 - -
------- -------- -------- -------- -------- -------
Weighted average number of shares
outstanding - diluted (thousands) 4,387 4,387 4,544 6,348 6,933 6,933
======= ======== ======== ======== ======== =======
Earnings per share - basic ......... 1.71 3.58 4.95 5.38 5.42 0.70
======= ======== ======== ======== ======== =======
Earnings per share - diluted ....... 1.71 3.58 4.94 5.38 5.19 0.67
======= ======== ======== ======== ======== =======
Year ended April 30,
1996 1997 1998 1999 2000 2000
HK$ HK$ HK$ HK$ HK$ US$
Amount in accordance with US
GAAP
Operating revenues.................. 87,318 92,258 124,199 195,219 300,901 38,926
======= ======== ======== ======== ======== =======
Operating income before income taxes 7,563 16,599 14,325 33,738 34,989 4,526
------- -------- -------- -------- -------- -------
Net income per US GAAP ............. 6,943 14,389 12,205 33,358 34,964 4,523
------- -------- -------- -------- -------- -------
Dividends per share ................ 0.55 - - - - -
------- -------- -------- -------- -------- -------
Numerator:
Net income used in computing basic
earnings per share ................ 6,943 14,389 12,205 33,358 34,964 4,523
Interest on 3% convertible debentures - - - - 251 32
------- -------- -------- -------- -------- -------
Adjusted net income used in
computing diluted earnings per
share .............................. 6,943 14,389 12,205 33,358 35,215 4,555
======= ======== ======== ======== ======== =======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Denominator:
Weighted average number of shares
outstanding under
HK GAAP - basic (thousands) 4,387 4,387 4,539 6,347 6,589 6,589
Shares for Deen Merger 143 143 62 - - -
------- -------- -------- -------- -------- -------
Weighted average number of shares
outstanding under
US GAAP - basic (thousands) 4,530 4,530 4,601 6,347 6,589 6,589
Effect of dilutive potential ordinary
shares:
3% convertible debentures ............. - - - - 337 337
Warrants .............................. - - 5 - 18 18
Options ............................... - - - 1 - -
------- -------- -------- -------- -------- -------
Weighted average number of shares
outstanding under
US GAAP - diluted (thousands) 4,530 4,530 4,606 6,348 6,944 6,944
======= ======== ======== ======== ======== =======
Earnings per share - basic ............. 1.53 3.18 2.65 5.26 5.31 0.69
======= ======== ======== ======== ======== =======
Earnings per share - diluted ....... 1.53 3.18 2.65 5.26 5.07 0.66
======= ======== ======== ======== ======== =======
Consolidated Balance Sheet Data:
As of April 30,
1996 1997 1998 1999 2000 2000
HK$ HK$ HK$ HK$ HK$ US$
Amount in accordance with
Hong Kong GAAP
Working capital ................... (15,092) (2,757) 39,090 75,645 158,795 20,543
Total assets ...................... 64,763 82,879 154,616 222,875 310,539 40,173
Long-term obligations ............. 13,913 13,006 10,544 9,028 29,472 3,813
Total shareholders' equity ........ 1,260 16,981 90,257 128,428 188,179 24,344
Amount in accordance with
US GAAP
Working capital ................... (15,092) (2,757) 39,090 75,645 158,795 20,543
Total assets ...................... 63,544 78,533 142,307 213,020 303,473 39,259
Long-term obligations ............. 13,913 13,006 10,544 9,028 29,472 3,813
Total shareholders' equity ........ 41 12,635 77,948 118,573 181,112 23,430
</TABLE>
-17-
<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 are a holding company, owning directly or indirectly 100% of the equity
of:
. Lorenzo Jewelry Mfg. (H.K.) Limited,
. Shantou SEZ 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 Jewellery (Shenzhen) Co., Ltd.,
. Fine Gift Enterprises Ltd.,
. Lorenzo Diamond Jewelry Mfg. Co., Limited, and
. Lorenzo Marketing Co. Limited, which was 60% owned until March 22,
2000, when the remaining 40% was acquired.
Collectively, these entities are referred to as us. 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.
We are a totally vertically integrated producer of finished semi-precious
gemstones and fine quality gemstone jewelry. We primarily 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 and precious stones, including diamonds. The average wholesale price
of the jewelry produced by us is approximately $100, which equates to average
retail prices between $100 and $499.
-18-
<PAGE>
During fiscal year ended 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 fiscal year ended 1999, we re-focused all of our energy to the operation of
our primary business with the goal of further increasing sales and the operating
performance. In fiscal year ended 2000, we raised gross proceeds of
HK$50,245,000 (US$6,500,000) from an issue of 3% convertible debentures. The
proceeds were allocated to working capital for general corporate purposes.
Fiscal 2000 compared to Fiscal 1999
Net Sales
Net sales increased 54% to HK$300,901,000 (US$38,926,000) in fiscal year
ended 2000 from HK$195,219,000 (US$25,255,000) in fiscal year ended 1999. This
increase is primarily driven by volume increases in sales to new and existing
customers, including QVC, Sterling Inc. and Mervyn's. We also expanded our gem
lines during the year in order to provide a complete range of jewelry to our
existing and new customers. The diamond jewelry sales accounted for 5.7% of the
total net sales in fiscal year 2000.
Gross Profit
The gross profit margin dropped from 49% in 1999 to 41% in 2000 due to:
. a change in the product mix. Previously, most of our sales are jewelry
set with semi-precious stones; in 2000, more sales are made with
precious stones and diamonds. Diamond jewelry generally has higher sales
value but much lower profit margin;
. additional model making charges incurred and expensed to build up the
diamond jewelry sample lines; and
. discounts given on certain volume sales programs for existing
customers and discounts given to new customers to induce businesses.
As the proportion of the diamond jewelry sales is expected to rise, the profit
margin is expected to drop and stabilize at around 38% in the next few years.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 43% to HK$81,617,000
(US$10,558,000) or 27% of net sales in 2000, compared with HK$56,880,000
(US$7,358,000) or 29% of net sales in 1999.
-19-
<PAGE>
The decrease of 2% is the net effect of :
. more contributions to the fixed cost even though the profit margin is
lower; and
. increased personnel in sales and marketing, design and logistics to cope
with the significant sales growth. As a result, we have leased an
additional office space of around 2,000 square feet in our Hong Kong
headquarters.
Other Income/Expenses
Other expenses, net of income, which principally consisted of interest
expenses, interest income, rental income and issuing cost for convertible
debentures, increased to HK$6,224,000 (US$805,000) in 2000 from HK$4,439,000
(US$575,000) in 1999.
Net interest expenses decreased 42.5% to HK$2,980,000 (US$386,000) in 2000
from HK$5,186,000 (US$671,000) in 1999. The proceeds from the issuance of the
convertible debentures during fiscal 2000 provided us with working capital and
level of borrowings dropped during 2000.
Rental income increased 84.6% to HK$875,000 (US$113,000) in 2000 from
HK$474,000 (US$61,000) in 1999, which is mainly due to a short-term lease of one
of the investment properties during 2000.
During 2000, we issued convertible debentures with gross proceeds of
HK$50,245,000 (US$6,500,000) and incurred HK$4,524,000 (US$585,000) issuing
expenses.
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, the prevailing corporate income tax rate
is 16%.
Our subsidiaries in China are registered to qualify as Foreign Investment
Enterprises in China and are eligible for certain tax holidays and concessions.
Accordingly, certain of our Chinese subsidiaries are exempt from Chinese income
tax for two years starting from their first profit making year, followed by a
50% reduction of tax for the next three years. Certain subsidiaries initiated
their first year of tax holidays during 2000. As a result, we have not recorded
any Chinese income tax expense. Chinese income tax in the future will be
calculated at the applicable rates relevant to the Chinese subsidiaries, which
currently are 15%.
Net income tax decreased 93% to HK$25,000 (US$3,000) in 2000 from
HK$380,000 (US$49,000) in 1999. This is the net effect of a current year Hong
Kong tax provision of
-20-
<PAGE>
HK$1,207,000 (US$156,000) and the previous years' over provision of HK$1,182,000
(US$153,000).
Fiscal 1999 compared to Fiscal 1998
Net Sales
Net sales increased 57% to HK$195,219,000 (US$25,255,000) in the fiscal
year ended April 30, 1999 from HK$124,199,000 (US$16,067,000) in the fiscal year
ended 1998. This increase was primarily driven by volume increases in sales to
existing customers, including QVC, Inc. and International Jewelry Connection, a
national network of independent sales representatives who sell jewelry through
direct contact with retail accounts. In addition, our new sterling silver
product line was introduced to the market during fiscal 1999.
Gross Profit
The gross profit margin remained at 49% in 1999 and 1998 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 1999.
We intentionally 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 was mainly attributable to the operation of our newly set-up
Shenzhen factory 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 our Hong Kong headquarters 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.
-21-
<PAGE>
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 was mainly due to using one of the
properties 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.
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, the prevailing corporate income tax rate
is 16%.
Our subsidiaries in China are registered to qualify as Foreign Investment
Enterprises in China and are eligible for certain tax holidays and concessions.
Accordingly, certain of our Chinese subsidiaries are exempt from Chinese 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 Chinese income tax purposes. As a result, we have not
recorded any Chinese income tax expense. Chinese income tax in the future will
be calculated at the applicable rates relevant to the Chinese 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 Chinese 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 the fiscal year ended April 30, 1998 totaled HK$124,199,000
(US$16,067,000), compared to HK$92,258,000 (US$11,935,000) in fiscal year 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
-22-
<PAGE>
(US$180,000) in fiscal 1997 to HK$14,152,000 (US$1,831,000) in fiscal 1998.
Sales to our largest customer, QVC, Inc., also rose by 8%, and represented 55%
of sales in fiscal 1998 compared to 69% in fiscal 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 our 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.
Selling, General and Administrative Expenses
Selling, general 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 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 commissions, overseas travelling
expenses, bonus payments for contracted sales force, and 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, and 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.
-23-
<PAGE>
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, the prevailing corporate income tax rate
is 16%.
Our subsidiaries in China are registered to qualify as Foreign Investment
Enterprises in China and are eligible for certain tax holidays and concessions.
Accordingly, certain of the Chinese subsidiaries are exempted from Chinese
income tax for two years starting from their first profit making years, followed
by a 50% reduction of tax for next three years. These subsidiaries have
sustained losses for the Chinese income tax purpose. As a result, we have not
recorded any Chinese income tax expense. Chinese income tax in the future will
be calculated at the applicable rates relevant to the Chinese 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 Chinese subsidiaries, income tax actually decreased as the
result of restructuring of our 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.
-24-
<PAGE>
Cash:
----
The primary sources of our cash for working capital and capital expenditure
for fiscal 2000 had been the net cash inflows from operating revenue and the
issue of the 3% convertible debentures. Seasonal working capital needs have
been met through short-term borrowing under revolving lines of credit.
For the fiscal year ended April 30, 2000, as a result of HK$30,161,000
(US$3,902,000) cash provided by financing activities and HK$8,738,000
(US$1,131,000) and HK$5,162,000 (US$668,000) used by operating and investing
activities, as well as HK$2,804,000 (US$363,000) net cash used for returns on
investments and servicing of finance and HK$93,000 (US$12,000) paid for income
taxes, cash and cash equivalents increased by HK$13,364,000 (US$1,728,000).
Net cash used by operating activities in fiscal 2000 was HK$8,738,000
(US$1,131,000) as compared with net cash provided of HK$1,898,000 (US$245,500)
in fiscal 1999. 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.
For the fiscal year ended April 30, 2000, net cash used in investing
activities was HK$5,162,000 (US$668,000) , a decrease of HK$2,640,000
(US$341,000) as compared with HK$7,802,000 (US$1,009,000) in fiscal 1999. The
net cash used in investing activities during fiscal 2000 was mainly for the
acquisition of the remaining 40% of the share capital of Lorenzo Marketing Co.,
Ltd., and the purchase of office equipment and decoration of the additional
office space rented in Hong Kong.
Accounts Receivable:
-------------------
As of April 30, 2000, net accounts receivable increased by HK$8,517,000
(US$1,102,000) to HK$42,689,000 (US$5,523,000) from HK$34,172,000 (US$4,421,000)
as of April 30, 1999. The increase in net accounts receivable is in line with
the increase in sales. The sales to customers are generally offered a 60-day
credit period.
Inventory:
---------
Inventory increased by HK$54,806,000 (US$7,090,000) from HK$93,636,000
(US$12,113,000) as of April 30, 1999 to HK$148,442,000 (US$19,203,000) as of
April 30, 2000. The increase was due to our management's anticipation of
significant increase in sales for the new fiscal year, increase in the cost of
rough gem stone, more sample lines of jewelry built up, and to maintain
sufficient inventory for block-orders, especially for QVC.
-25-
<PAGE>
Prepayment and Other Current Assets:
-----------------------------------
We advanced HK$15,460,000 (US$2,000,000) to one of our principal gem stone
suppliers to secure the first right and steady gem stone supplies. The advance
was included in the balance of the accounts receivable as of April 30, 1999, and
has been reclassifed retrospectively to prepayment and other current assets in
fiscal 1999 and 2000.
Letters of Credit:
-----------------
As of April 30, 2000, we had various letters of credit under banking
facilities which aggregated HK$66,500,000 (US$8,603,000). We had HK$34,193,000
(US$4,423,000) and HK$25,941,000 (US$3,356,000) outstanding under letters of
credit as of April 30, 1999 and 2000. Under our letters of credit, we are
required to maintain certain cash balance which totaled HK$15,185,000
(US$1,964,000) and HK$26,000,000 (US$3,363,000) as of April 30, 1999 and 2000.
Gold Loan Facilities:
--------------------
We have also secured "gold loan" facilities with various banks in Hong Kong
which typically bear a below-market interest rate. At the close of each
reporting period, the gold loan is "marked to market" with changes reflected on
the income statement. 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 4,300 and 4,850 ounces of gold as
of April 30, 1999 and 2000, with the related balances being HK$9,500,000
(US$1,229,000) and HK$10,259,000 (US$1,327,000). Interest rates for these loans
were 3.15% to 3.45% as of April 30, 2000 (1999: 3.1% to 3.3%). Unrealized gain
on the unsettled gold loans as of April 30, 1999 and 2000 were HK$630,000
(US$82,000) and HK$338,000 (US$44,000).
Notes Payable:
-------------
Long-term mortgage loans on our properties aggregated HK$13,923,000
(US$1,801,000) and HK$10,139,000 (US$1,311,000) as of April 30, 1999 and 2000.
Substantially all of our properties are pledged as collateral for our banking
facilities.
-26-
<PAGE>
Promissory Notes:
----------------
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.
Initial Public Offering - 1998:
------------------------------
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.
Convertible Debentures - 2000:
-----------------------------
On October 29, 1999, we entered into a Securities Purchase Agreement with
an accredited investor pursuant to which we agreed to issue and the investor
agreed to purchase up to HK$81,165,000 (US$10,500,000) of 3% convertible
debentures, as well as common stock purchase warrants. During the fiscal year
ended April 30, 2000, we received gross proceeds of HK$50,245,000 (US$6,500,000)
from the issue of the 3% convertible debentures to that investor. HK$27,055,000
(US$3,500,000) of the gross proceeds and related interest expenses have been
converted into 1,072,412 shares of our common stock as at April 30, 2000. The
remaining HK$23,190,000 (US$3,000,000) was subsequently converted into 1,233,557
shares of our common stock after the fiscal year ended April 30, 2000.
Looking Forward:
---------------
We anticipate that cash flow from operations, proceeds from the issue of
the convertible debentures, borrowings available under our existing credit line
and our gold loan arrangement will be sufficient to satisfy our capital needs
for the next twelve months.
-27-
<PAGE>
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, 2000, HK$472,000
(US$61,000) would be recorded as depreciation expenses on properties and
investment properties and HK$275,000 (US$36,000) would be recorded as
amortization of financial consulting fee for the IPO. In addition, HK$136,000
(US$18,000) of compensation cost in connection with the fair value of warrants
granted to a consultant; HK$238,000 (US$31,000) for the amortization of
discount on convertible debentures and HK$328,000 (US$42,000) of compensation
cost of the fair value of warrants granted to the convertible debentures
placement agent, would be expensed. In addition, HK$7,000 (US$1,000) in relation
to the amortization of goodwill and HK$686,000 (US$89,000) in relation to the
amortization of certain offering costs in which the related deferred costs were
expensed under US GAAP in previous years would also be credited. As a result,
our net income for the year ended April 30, 2000 under US GAAP would be
HK$34,964,000 (US$4,523,000).
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 were 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
-28-
<PAGE>
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$1,578,000).
Stock-based compensation
Under HK GAAP, there are no specific requirements to recognize the
compensation cost arising from stock options granted to employees on the
financial statements.
Under US GAAP, we adopted the provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS
123). As permitted by SFAS 123, we have chosen to account for stock-based
compensation using the intrinsic value method. Accordingly, because the
exercise price of our stock options is the same as or higher than the market
price of the underlying stock on the date of grant, no compensation expense has
been recognized for our stock-based compensation plan. Had compensation expense
for the stock option plan been determined based on the fair value at the date of
grant, consistent with the provisions of SFAS 123, our net income and earnings
per share would have been reported as follows:
<TABLE>
<CAPTION>
Year ended April 30
<S> <C> <C> <C>
1999 2000 2000
HK$ HK$ US$
Pro forma net income 11,009,000 34,124,000 4,414,000
=========== =========== =========
Pro forma earnings per share
Basic 1.73 5.18 0.67
=========== =========== =========
Diluted 1.73 4.95 0.64
=========== =========== =========
</TABLE>
-29-
<PAGE>
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:
Year ended April 30
1999 2000
Expected dividend yield Nil Nil
Expected stock price volatility 60% 19%
Risk-free interest rate 5.85% 6.49%
Expected life of options 3 years 3 years
The weighted average fair value of options granted during the year ended
April 30, 1999 and 2000 was US$2.25 and US$0.41 per share, respectively.
Our stock option activities and related information for the years ended
April 30, 1998, 1999 and 2000 are summarized as follows:
<TABLE>
<CAPTION>
Year ended April 30
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1999 2000
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
US$ US$ US$
Outstanding and
exercisable,
beginning of year - - - - 1,285,000 5.0
Granted - - 1,285,000 5.0 265,000 5.0
Exercised - - - - - -
Forfeited - - - - - -
------------- ----------------- -----------------
Outstanding and
exercisable,
end of year - - 1,285,000 5.0 1,550,000 5.0
============= ================= =================
Weighted average
remaining
contractual life - 10 years 9.13 years
============= ================= =================
</TABLE>
During the year we issued 265,000 incentive stock options to our employees
at an exercise price of US$5.0 per share for a term of ten years.
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<PAGE>
In addition, we issued to a consultant a warrant to purchase 35,000 shares
of our common stock as part of the consultancy fee. We also issued to a
placement agent two warrants to purchase 65,000 shares of our common stock for
arranging the issue of our convertible debentures during the year. Under HK
GAAP, there are no specific requirements to recognize the compensation cost
arising from these transactions. Under US GAAP, the costs associated with these
transactions are accounted for based on the fair value of the warrants at the
date of issue. Using the Black-Scholes option pricing model with the same
weighted-average assumptions as employees' stock options, the fair value of
these warrants to the consultant and the convertible debenture placement agent
are estimated as HK$136,000 (US$18,000) and HK$328,000 (US$42,000), which have
been amortized as an additional expense during the year ended April 30, 2000.
Impact of recently issued US GAAP accounting standards.
Financial Instruments
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137, "Accounting for derivative
instruments and hedging activities" which delayed the effective date of SFAS No.
133 "Accounting for derivative instruments and hedging activities" for one year.
SFAS No. 133 provides guidance for the recognition and measurement of
derivatives and hedging activities. It requires an entity to record, at fair
value, all derivatives as either assets or liabilities in the balance sheet, and
it establishes specific accounting rules for certain types of hedges. SFAS No.
133 is now effective for fiscal years beginning after June 15, 2000 and will be
adopted by us when required, if not earlier. 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.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue recognition in financial statements",
which provides guidance on applying generally accepted accounting principles for
recognizing revenue. SAB 101 is effective for fiscal years beginning after
December 15, 1999. The impact, if any, of adopting SAB 101 on our consolidated
financial position, results of operations and cash flows, has not been
determined.
Inflation
We do not consider inflation to have had a material impact on our results
of operations over the last three years.
-31-
<PAGE>
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 Chinese 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.
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 revised our existing business interruption contingency plans to address
internal and external issues specific to the Year 2000 problem, to the extent
practicable. Such revisions were completed by October 1999. All of our and our
subsidiaries' accounting, financial, functional and operational applications
were fully Year 2000 compliant. Accordingly, the Year 2000 compliance issue did
not create any material adverse impact on our business operations in any of our
functional areas.
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<PAGE>
OUR BUSINESS
We are a totally vertically integrated producer of finished semi-precious
gemstones and fine quality gemstone jewelry. We primarily 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 and precious stones, including diamonds. The average wholesale price
of our jewelry is approximately $100, which equates to average 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 (IJC) 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;
. national jewelry chains;
. department stores;
. electronic retailers; and
. specialty stores.
For the fiscal years ended April 30, 1999 and 2000, approximately 92% and
77% of sales were in North America.
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<PAGE>
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.) Limited, a company incorporated in Hong Kong on
February 20, 1987. Lorenzo Jewelry owns all of the equity in:
. Shantou SEZ Lorenzo Gems & Craft Factory Co., Ltd.
. Shantou Lorenzo Jewelry Mfg., and
. 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.
. Precious Gems Trading Ltd., which owns all of the equity in:
. Lorenzo Gems Manufacturing (Shenzhen) Co., Ltd.
. Golden Horizon Trading Ltd., which owns all of the equity in:
. Lorenzo Jewellery (Shenzhen) Co., Ltd.
. Fine Gift Enterprises Ltd., which owns all of the issued share capital in:
. Lorenzo Diamond Jewelry Mfg. Co. Limited.
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<PAGE>
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>
<S> <C> <C> <C>
100% 100% 100% 100%
Lorenzo Jewelry Mfg. Precious Gems Fine Gift Golden Horizon
(H.K.) Limited Trading Ltd. Enterprises Ltd. Trading Ltd.
(Hong Kong) (B.V.I.) (B.V.I.) (B.V.I.)
100% 100% 100%
100% Shantou SEZ Lorenzo Lorenzo Gems Lorenzo Diamond Lorenzo Jewellery
Gems & Craft Factory Manufacturing Jewelry Mfg. (Shenzhen) Co., Ltd.
Co., Ltd. (Shenzhen) Co., Ltd. Co. Limited (P.R.C.)
(P.R.C.) (P.R.C.) (Hong Kong)
100% Shantou Lorenzo
Jewelry Mfg.
(P.R.C.)
100% Lorenzo Marketing
Co., Limited
(Hong Kong)
</TABLE>
-35-
<PAGE>
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
. 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;
. further develop our existing customer relationships with our specialized
services; and
. aggressively expand into new distribution channels, particularly in the
United States and throughout Western Europe, Japan, Taiwan and China.
We are aggressively developing new product lines in exotic stones, which
have high perceived values in semi-precious stones. We also plan to expand into
new product categories by:
. marketing a line of sterling silver jewelry. These are typically
merchandised with a retail price range of $30 to $150.
. offering a new branded collection of sterling silver and 18 karat gold
jewelry with a retail price range of $199 to $999.
. offering diamond jewelry and expanding this business to our current client
base by 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 China that
perform stone cutting and polishing and jewelry manufacturing. The factories
are located in the cities of Shantou and Shenzhen in Guangdong Province, China.
Each manufacturing operation is
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<PAGE>
separated to allow for the specialized needs of each process. The Shantou
facility is the older of the two facilities. It consists of 45,000 square feet
and has been operating for nine 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 two 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 160,000
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 retailers favor
certain price points. 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.
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;
. national jewelry chains;
. department stores;
. electronic retailers; and
. specialty retailers.
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<PAGE>
Our single largest customer is QVC, Inc. which accounted for approximately
48% of our sales during fiscal 2000 and 57% of our sales during fiscal 1999. We
do not sell to QVC, 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, Inc., the loss of QVC, Inc. as a customer or
a significant reduction in its orders would have a materially adverse effect on
us.
In March 2000, our wholly-owned subsidiary Lorenzo Jewelry Mfg. (H.K.)
Limited entered into a three-year agreement with QVC, Inc. Under the terms of
the agreement, QVC has the exclusive right to promote, market, sell and
distribute all of the jewelry and watches which we manufacture, develop or sell
through direct response television programs in North America, the United Kingdom
and Germany. Upon expiration of the initial three-year term, the agreement
automatically renews for additional three-year terms if QVC issued purchase
orders to us of at least $80 million during the initial term, with certain
minimum increases in purchase orders for each succeeding three-year term. The
agreement does not, however, obligate QVC to issue any purchase orders to us.
In addition to direct sales to QVC, Inc. and other retailers, we also sell
our products to retailers through International Jewelry Connection. The
principal focus of IJC 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.
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 Hong Kong design director
and the most experienced Hong Kong design staff closely supervises the China-
based designers. The China-based designers 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,
14 and 18 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.
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<PAGE>
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.
Manufacturing Process
We manufacture our products at our facilities in Shantou and Shenzhen,
China. 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.
Supply
We manufacture and cut our own semi-precious stones. We import most of our
rough gemstones from South America, Africa and China. 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
China. 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 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, 14 and 18 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.
-39-
<PAGE>
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, China
manufacturing and 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,
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.
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<PAGE>
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; 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, 2000, we employed over 2,500 persons on a full-time basis,
of whom approximately 1,500 are involved in manufacturing of jewelry and 883 are
engaged in gemstone cutting and polishing. The remaining 117 persons include
our management and executive staff in Hong Kong and China. 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 jewelry production facility in Shantou, China 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, China. We lease
the adjacent 35,000 square feet on the same floor of that building as one of our
gem cutting facilities at a rental rate of HK$39,000 (US$5,000) per month until
July 2002.
Our second production facility in Shenzhen, China consists of 50,000 square
feet of building space. This facility is located in the Shatoujiao Free Trade
Zone, Shenzhen. We lease
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<PAGE>
this space from an unaffiliated third party at a rental rate of HK$74,120
(US$9,500) per month until August 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.
We lease an office sharing facility, which includes related office
services, in Scottsdale, Arizona, on a quarterly basis at an annual rate of
HK$92,600 (US$12,000).
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 substantially all of
our assets are located in China and/or Hong Kong. In addition, all but two of
our directors and officers 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 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 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, 111 Eighth Avenue, New York, New York
10011 as our agent for service of process in the United States with respect to
this offering.
There are no treaties between 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 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 China, the British Virgin Islands or Hong Kong for recovery of this debt.
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<PAGE>
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
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 China as to conflict of laws in
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
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 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. 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. However, 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
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<PAGE>
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;
. restrain directors from acting on resolutions, where notice of a
shareholders' meeting failed adequately to inform shareholders of a
resolution proposed at the meeting;
. 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;
. restrain a company from acting upon a resolution that was not made in good
faith and for the benefit of shareholders as a whole;
. redress where a resolution passed at a shareholders' meeting was not
properly passed, for instance, if it was not passed with the necessary
majority;
. restrain a company from performing an act which is contrary to law; and
. 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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<PAGE>
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................................ 61 Chairman of the Board of Directors, President
and Chief Executive Officer
Ka Man Au................................... 36 Executive Vice President, Secretary and Director
Joseph Tuszer............................... 54 Senior Vice President
Hon Tak Ringo Ng............................ 40 Chief Financial Officer
Michael S. Gilburd.......................... 56 Vice President, Corporate Development
Po Yee Elsa Yue............................. 36 Non-Executive Director
Lionel C. Wang.............................. 44 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 senior vice president 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.
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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 July 1994
through September 1997, he was an audit senior with Moores Rowland C.A.,
Certified Public Accountants. Mr. Ng is a certified practicing accountant of
the Australian Society of CPAs.
Mr. Gilburd became our vice president, corporate development in August
2000. Mr. Gilburd, who is based in the U.S., was the chairman and CEO of
Earnhardt Co., Inc., an investment banking and securities firm. From 1995 to
1999, he was managing director of corporate finance for two American Express
companies, and previously he was national director of corporate finance and a
member of the international corporate finance committee for BDO Seidman. Mr.
Gilburd received a Bachelor of Science degree in Accounting from Long Island
University and a Masters of Science in Taxation from Bentley College. He is a
NASD General Securities Principal, a SEC Registered Investment Advisor, an
Accredited Senior Appraiser (Business Valuation Specialty), and a CPA (New York
State - inactive). Mr. Gilburd also serves as a director of Freedom Golf
Corporation (OTC BB: FGLC).
Ms. Yue has served as a non-executive director since December 1999. She is
a graduate gemologist from the Gemology Institute of America and has served as
vice president of GIA, Hong Kong since August 1994.
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 and
Wang and Ms. Yue. 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;
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. 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, 2000 on an accrual
basis, for services in all capacities, was HK$7,122,000 (US$921,000). During the
fiscal year ended April 30, 2000, we contributed an aggregate amount of
HK$107,000 (US$14,000) toward the pension plans of our directors and executive
officers.
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
an automobile. 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 at the meeting called for
that purpose. 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;
. provide additional incentive for them to promote our success and our
business; and
. 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 4,000,000 shares of
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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 August 31, 2000, the following options to purchase shares of our
common stock under the Plan were outstanding:
. stock options to purchase 1,285,000 shares at $5.00 per share through
April 11, 2009, of which 431,000 are held by our directors and officers as
a group
. stock options to purchase 265,000 shares at $5.00 per share through
January 13, 2010, of which none are held by our directors and officers as a
group
. stock options to purchase 1,770,000 shares at $3.00 per share through May
7, 2010, of which 1,050,000 are held by our directors and officers as a
group
Other Options and Warrants Outstanding
As of August 31, 2000, the following additional options and warrants to
purchase shares of our common stock were outstanding:
. 1,679,000 common stock purchase warrants which are publicly traded and
which we issued in our April 1998 initial public offering to purchase
1,679,000 shares of common stock at $5.75 per share through April 15, 2003
. 146,000 stock purchase options to purchase 146,000 shares of common stock
at $8.25 per share through April 15, 2003 which we sold to the IPO
underwriter and/or persons related to the underwriter
. 146,000 warrant purchase options to purchase 146,000 warrants at $0.20625
per warrant to purchase shares of common stock at $8.25 per share through
April 15, 2003 which we sold to the IPO underwriter and/or persons related
to the underwriter
. options to purchase 35,000 shares at $5.00 per share through July 30, 2004
which we granted to our former financial consultant
. warrants to purchase 75,000 shares at $3.75 per share through November
30,2004 and warrants to purchase 87,500 shares at $6.9375 per share through
March 31, 2005 which we sold to two investors and our placement agent
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CERTAIN TRANSACTIONS
Yu Chuan Yih, our chairman and president, is a director and principal
shareholder of Gemological Institute of America, Hong Kong Limited; and Hong
Kong Brasil Lapidary Limited. During the fiscal years ended April 30, 1998, 1999
and 2000, 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
appraiser.
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).
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of our common stock as of August 14, 2000 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.................................................. 4,684,200(1)(2) 48.4%
Ka Man Au..................................................... 200,000(3) 2.3%
Joseph Tuszer................................................. 300,000(4) 3.3%
Hon Tak Ringo Ng.............................................. 200,000(5) 2.3%
Michael S. Gilburd............................................ 0 0%
Po Yee Elsa Yue............................................... 6,000(6) 0.1%
Lionel C. Wang................................................ 0 0%
All directors and executive officers as a group (7 persons)... 5,390,200 51.9%
</TABLE>
___________
(1) Of Mr. Yih's 4,684,200 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 British Virgin Islands corporations which own
shares of our common stock as follows: Welgram International Limited -
236,000 shares and Sunflower Gold Holdings Limited - 252,000 shares.
(2) Includes options currently exercisable to acquire 775,000 shares of common
stock held by Mr. Yih and options currently exercisable to acquire 230,000
shares of common stock held by Mr. Yih's wife.
(3) Includes options currently exercisable to acquire 200,000 shares of common
stock.
(4) Includes options currently exercisable to acquire 300,000 shares of common
stock.
(5) Includes options currently exercisable to acquire 200,000 shares of common
stock.
(6) Includes options currently exercisable to acquire 6,000 shares of common
stock.
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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. We
will not receive any of the proceeds from the sale of either the underwriter
warrants or the common stock underlying them. 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.
Name Number of Shares of Common Stock
---- --------------------------------
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
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
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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.
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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 8,671,615 shares are outstanding as
of August 14, 2000. 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.
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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.
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
Of our 8,671,615 shares of common stock outstanding, approximately
2,994,200 shares are "restricted securities", as defined under Rule 144 under
the Securities Act as of August 14, 2000. 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.
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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 86,716 shares as of August 14, 2000; 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 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
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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.
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 are 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.
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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.
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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 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.
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There is no income tax treaty or convention currently in effect between the
United States and the British Virgin Islands.
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, 1999 and 2000
and for each of the three years ended April 30, 2000 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
-59-
<PAGE>
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.
-60-
<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, 1998,
1999 and 2000 F-3
Consolidated statements of recognized gains and losses for the years ended
April 30, 1998, 1999 and 2000 F-4
Consolidated balance sheets as of April 30, 1999 and 2000 F-5
Consolidated statements of shareholders'equity for the years ended
April 30, 1998, 1999 and 2000 F-6
Consolidated statements of cash flows for the years ended
April 30, 1998, 1999 and 2000 F-7
Notes to and forming part of the financial statements F-8 - F-42
</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, 1999 and 2000 and the
related consolidated statements of operations, recognized gains and losses,
shareholders' equity and cash flows for each of the years in the three year
period ended April 30, 2000. 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, 1999 and 2000 and the consolidated results of its
operations and cash flows for each of the years in the three year period ended
April 30, 2000, 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 17).
/s/ Moores Rowland
---------------------------------------
Moores Rowland
Chartered Accountants
Certified Public Accountants, Hong Kong
Dated: August 28, 2000
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
Notes 1998 1999 2000 2000
HK $ HK $ HK $ US $
<S> <C> <C> <C> <C> <C>
Operating revenue 2(o) 124,199 195,219 300,901 38,926
Costs of goods sold (63,293) (99,363) (177,315) (22,938)
--------- ---------- ---------- ----------
Gross profit 60,906 95,856 123,586 15,988
Other revenue: 2(o)
Interest income 212 1,690 2,668 345
Rental income 1,273 474 875 113
Selling, general and administrative
expenses (33,545) (56,880) (81,617) (10,558)
Other income and expenses:
Gain on disposal of land and
building to related party 10 2,904 - - -
--------- ---------- ---------- ----------
Operating income 31,750 41,140 45,512 5,888
Finance costs 15 (7,176) (6,876) (10,172) (1,316)
Minority interests 2 273 405 52
--------- ---------- ---------- ----------
Income before income taxes 24,576 34,537 35,745 4,624
Income taxes 13 (2,120) (380) (25) (3)
--------- ---------- ---------- ----------
Net income 22,456 34,157 35,720 4,621
========= ========== ========== ==========
Numerator:
Net income used in computing basic
earnings per share 22,456 34,157 35,720 4,621
Interest on 3% convertible debentures - - 251 32
--------- ---------- ---------- ----------
Adjusted net income used in computing
diluted earnings per share 22,456 34,157 35,971 4,653
========= ========== ========== ==========
Denominator:
Weighted average number of shares
used in calculating basic earnings
per share 4,539,128 6,347,046 6,589,415 6,589,415
Effect of dilutive potential ordinary
shares:
3% convertible debentures - - 337,239 337,239
Warrants 4,854 - 6,324 6,324
Stock options - 514 - -
--------- ---------- ---------- ----------
Weighted average number of shares
used in calculating diluted earnings
per share 4,543,982 6,347,560 6,932,978 6,932,978
========= ========== ========== ==========
Earnings per share:
Basic 2(r) 4.95 5.38 5.42 0.70
========= ========== ========== ==========
Diluted 2(r) 4.94 5.38 5.19 0.67
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF RECOGNIZED GAINS AND LOSSES
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year ended April 30
1998 1999 2000 2000
HK $ HK $ HK $ US $
<S> <C> <C> <C> <C>
Net gains (losses) not recognized in
the statements of operations
Surplus (Deficit) arising on
revaluation of investment
properties 7,465 (3,350) (3,200) (414)
Net income for the year 22,456 34,157 35,720 4,621
------ -------- -------- -------
Total recognized gains 29,921 30,807 32,520 4,207
====== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
As of April 30
Notes 1999 2000 2000
HK $ HK $ US $
-------- -------- -------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents 1,626 12,888 1,667
Restricted cash 15,185 26,000 3,363
Trade receivables, net of allowance for doubtful
accounts (1999: HK$1,919, 2000: HK$2,497) 34,172 42,689 5,523
Inventories 2(g) 93,636 148,442 19,203
Prepayments and other current assets 16,287 21,664 2,803
-------- -------- -------
Total current assets 160,906 251,683 32,559
Property, plant and equipment, net 4 35,737 34,216 4,426
Investment properties, net 22,300 19,100 2,471
Due from related parties 10(b) 2,752 3,406 440
Due from director 10(b) 31 - -
Organization costs, net of accumulated amortization
(1999: HK$288, 2000: HK$Nil) 1,085 - -
Goodwill, net of accumulated amortization
(1999: HK$14, 2000: HK$21) 61 2,131 276
Other investments 3 3 1
-------- -------- -------
Total assets 222,875 310,539 40,173
======== ======== =======
Liabilities and shareholders' equity
Current liabilities:
Bank overdraft 5 8,447 6,345 821
Notes payable, current portion 5 5,569 4,070 526
Letters of credit, gold and other loans 5 44,858 36,200 4,683
Trade payables 20,757 27,004 3,493
Accrued expenses and other payables 4,417 10,370 1,342
Trade deposits received 153 7,842 1,014
Due to director 10(b) - 12 2
Capitalized lease obligations, current 6 540 593 77
Income taxes payable 13 520 452 58
-------- -------- -------
Total current liabilities 85,261 92,888 12,016
Notes payable, non-current portion 5 8,354 6,069 785
Capitalized leased obligations, non-current 6 674 213 28
3% convertible debentures - 23,190 3,000
-------- -------- -------
Total liabilities 94,289 122,360 15,829
-------- -------- -------
Minority interests 158 - -
-------- -------- -------
Shareholders' equity
Common stocks, par value US$0.01 each,
Authorized - 100 million shares,
Issued and outstanding -
6,365,646 shares as of April 30, 1999
7,438,058 shares as of April 30, 2000 8 492 575 74
Share premium 8 48,944 76,092 9,844
Warrant reserve 8 1,622 1,622 210
Investment property revaluation reserve 4,115 915 118
Retained earnings 73,255 108,975 14,098
-------- -------- -------
Total shareholders' equity 128,428 188,179 24,344
-------- -------- -------
Total liabilities, minority interests and
shareholders' equity 222,875 310,539 40,173
======== ======== =======
</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>
Investment
Common stock property
Par Share Warrant revaluation Retained
Notes Shares value premium reserve reserve earnings Total Total
HK $ HK $ HK $ HK $ HK $ HK $ US $
--------- ----- ------- ------- ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of April 30, 1997 4,387,200 339 - - - 16,642 16,981 2,197
New issue of shares 8(a) 1,460,000 113 41,620 - - - 41,733 5,398
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(b) - - - 1,622 - - 1,622 210
Surplus arising on revaluation - - - - 7,465 - 7,465 966
Net income - - - - - 22,456 22,456 2,905
--------- ----- ------- ------- ----------- -------- -------- -------
Balance as of April 30, 1998 6,146,646 475 41,597 1,622 7,465 39,098 90,257 11,676
Over-allotment of shares 8(d) 219,000 17 7,347 - - - 7,364 953
Deficit arising on revaluation - - - - (3,350) - (3,350) (434)
Net income - - - - - 34,157 34,157 4,419
--------- ----- ------- ------- ----------- -------- -------- -------
Balance as of April 30, 1999 6,365,646 492 48,944 1,622 4,115 73,255 128,428 16,614
Shares issued on conversion
of convertible debentures 8(e) 1,072,412 83 27,148 - - - 27,231 3,523
Deficit arising on revaluation - - - - (3,200) - (3,200) (414)
Net income - - - - - 35,720 35,720 4,621
--------- ----- ------- ------- ----------- -------- -------- -------
Balance as of April 30, 2000 7,438,058 575 76,092 1,622 915 108,975 188,179 24,344
========= ===== ======= ======= =========== ======== ======== =======
</TABLE>
Share premium has been set up and is dealt with as disclosed in note 8 to the
financial statements.
Warrant reserve is represented by the proceeds from the issue of the 1,679,000
warrants in the Initial Public Offering (see note 8(b)).
The investment property revaluation reserve has been set up and is dealt with in
accordance with the accounting policies adopted for investment properties.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LJ INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year ended April 30
1998 1999 2000 2000
Note HK $ HK $ HK $ US $
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Income before income taxes 24,576 34,537 35,745 4,624
Adjustments to reconcile income before income taxes
to net cash provided by (used in) operating activities:
Net interest expenses 6,964 5,186 2,980 386
Depreciation of property, plant and equipment 1,345 4,493 4,978 643
Amortization of organization costs 85 160 1,085 140
Amortization of goodwill 7 7 7 1
Issuing costs for convertible debentures - - 4,524 585
Loss on disposal of property, plant and equipment - 562 22 3
Gain on disposal of land and building (2,904) - - -
Allowance for doubtful debts - 1,121 578 75
Minority interests (2) (273) (405) (52)
Changes in operating assets and liabilities:
Trade receivables (22,615) (4,225) (9,095) (1,176)
Inventories (9,801) (46,642) (54,806) (7,090)
Prepayments and other current assets 175 (15,738) (5,377) (696)
Due from related parties (860) (97) (654) (85)
Due from director - (31) 31 4
Trade payables 11,359 1,884 6,247 808
Accrued expenses and other payables 47 3,304 13,642 1,765
Due to director - - 12 2
Letters of credit (1,127) 17,698 (8,252) (1,068)
Due to related parties 48 (48) - -
------- -------- -------- -------
Net cash provided by (used in) operating activities 7,297 1,898 (8,738) (1,131)
------- -------- -------- -------
Returns on investments and servicing of finance:
Cash received from interest 212 1,690 2,668 345
Cash paid for interest (7,176) (6,876) (5,472) (708)
------- -------- -------- -------
Net cash used in returns on
investments and servicing of finance (6,964) (5,186) (2,804) (363)
------- -------- -------- -------
Taxation
Cash paid for income taxes (1,878) (2,932) (93) (12)
------- -------- -------- -------
Cash flows from investing activities:
Organization costs (525) - - -
Purchase of bonds (1) - - -
Purchase of property, plant and equipment (22,728) (7,802) (3,477) (450)
Purchase of subsidiary 14(a) - - (1,830) (237)
Proceeds on disposals of property, plant and equipment 3,800 - 145 19
------- -------- -------- -------
Net cash used in investing activities (19,454) (7,802) (5,162) (668)
------- -------- -------- -------
Net cash used before financing activities (20,999) (14,022) (16,797) (2,174)
------- -------- -------- -------
Cash flows from financing activities: 14(b)
Net proceeds from issue of 3% convertible debentures - - 45,721 5,915
Deferred offering costs (14,095) - - -
Net proceeds from issue of shares/warrants 58,051 7,364 - -
Net proceeds from sale of promissory notes 2,184 (2,184) - -
Loans acquired 1,434 9,856 8,759 1,133
Repayment of loans (8,016) (4,925) (12,949) (1,675)
Repayment of capitalized leases (438) (539) (555) (72)
Restricted cash (75) (12,074) (10,815) (1,399)
------- -------- -------- -------
Net cash provided by (used in) financing activities 39,045 (2,502) 30,161 3,902
------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents 18,046 (16,524) 13,364 1,728
Cash and cash equivalents, as of beginning of year (8,343) 9,703 (6,821) (882)
------- -------- -------- -------
Cash and cash equivalents, as of end of year 9,703 (6,821) 6,543 846
======= ======== ======== =======
Analysis of balances of cash and cash equivalents
Cash 10,752 1,626 12,888 1,667
Bank overdrafts (1,049) (8,447) (6,345) (821)
------- -------- -------- -------
9,703 (6,821) 6,543 846
======= ======== ======== =======
Non-cash transactions:
Purchase of equipment under capitalized leases 320 469 147 19
======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
LJ 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
precious and semi-precious gemstones jewelry as well as diamond 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. (H.K.) 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 17. 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 Statements of Standard Accounting
Practice (SSAP) and Interpretations issued by the Hong Kong Society of
Accountants and HK GAAP which have been applied consistently
throughout the relevant periods. These requirements differ in certain
material respects from US GAAP - see note 17.
(b) Basis of preparation
The measurement basis used in the preparation of the financial
statements is historical cost modified by the revaluation of
investment properties as explained in the accounting policies set out
below.
F-8
<PAGE>
LJ 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)
(c) Presentation of financial statements
SSAP 1 (Revised) "Presentation of financial statements" which has been
adopted for the first time in the current year, is concerned with the
presentation and disclosure of financial information. The format of
the statement of operations and the balance sheet has been revised in
accordance with the SSAP, and a statement of recognized gains and
losses, not previously required, is included. Certain comparative
amounts have been restated in order to achieve a consistent
presentation.
(d) Principles of combination and consolidation
The consolidated financial statements mainly include the financial
information of the Company and Lorenzo, Precious Gems Trading Limited
(Precious Gems), Golden Horizon Trading Limited (Golden Horizon) and
Fine Gift Enterprises Limited (Fine Gift). Lorenzo has three
subsidiaries, two of which are incorporated in the PRC, Shantou
Lorenzo Jewelry Mfg. and Shantou SEZ Lorenzo Gems & Craft Factory Co.,
Ltd. Lorenzo also has a subsidiary, Lorenzo Marketing Co. Limited
(Lorenzo Marketing) which is incorporated in Hong Kong, and was 60%
owned by Lorenzo as of April 30 1999. It became a 100% owned
subsidiary of Lorenzo on March 22, 2000. 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. Fine Gift is
incorporated in BVI and has one subsidiary which is incorporated in
Hong Kong, Lorenzo Diamond Jewelry Mfg. Co., Limited. As of April 30,
2000, all subsidiaries 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.
(e) 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. Goodwill is periodically reviewed for impairment based on
an assessment of future operations to ensure they are appropriately
valued.
F-9
<PAGE>
LJ 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) Statement of cash flows
Cash equivalents in the statement of cash flow represent short-term
highly liquid investments which are readily convertible into known
amounts of cash and which were within three months of maturity when
acquired, less advances from banks repayable within three months from
the date of the advance.
(g) 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
1999 2000 2000
HK $ HK $ US $
<S> <C> <C> <C>
Raw materials 24,253 44,687 5,781
Work-in-progress 57,338 77,354 10,007
Finished goods 13,245 27,601 3,570
Less: Provision for slow moving inventories (1,200) (1,200) (155)
------- -------- ------
93,636 148,442 19,203
------- -------- ------
------- -------- ------
</TABLE>
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.
The amount of inventories carried at net realizable value is HK$6,795
(1999: HK$12,045), which is determined by the costs less a provision
of slow moving items.
Costs of inventories recognized as an expense for the years ended
April 30, 1998, 1999 and 2000 were HK$44,799, HK$62,022 and HK$125,702
respectively.
(h) 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 and
overhaul costs, 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 as an additional cost of the
asset.
F-10
<PAGE>
LJ 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)
(h) Property, plant and equipment (PPE) and depreciation (Continued)
When the recoverable amount of an asset has declined below its
carrying amount, the carrying amount is reduced to reflect the decline
in value. In determining the recoverable amount of assets, expected
future cash flows are not discounted to their present values.
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.
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:
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%
(i) 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 2000
by CB Richard Ellis and Jones Lang LaSalle Limited, independent firms
of qualified surveyors, on an open market value basis. The deficit of
HK$3,200 arising on revaluation has been debited to the investment
property revaluation reserve.
F-11
<PAGE>
LJ 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)
(i) Investment properties (Continued)
No amortization and depreciation is provided in respect of investment
properties because their unexpired term of underlying land leases are
over 20 years. Prior to 1995, these properties were classified as land
and buildings and HK$1,080 of accumulated depreciation had previously
been recorded.
Investment properties include gross amount of HK$22,300 and HK$19,100
with no accumulated depreciation in respect of assets held for use
under operating leases as of April 30, 1999 and 2000 respectively.
Changes in the values of investment properties are dealt with as
movements in the investment property 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.
(j) Organization costs
Organization costs comprise of professional fees paid to third parties
in connection with the organization of the Group. In prior years, it
was capitalized and amortized over 10 years using straight line basis.
The adoption of SSAP 1 (Revised), had led to a reassessment of this
accounting policy. In particular, organization costs which are not
considered to give rise on an identifiable resource from which
economic benefits are expected to flow to the Group is now recognized
as an expense in the period in which it is incurred. As the amount of
resulting adjustments relating to periods prior to May 1, 1999 was
considered by the directors to be insignificant, this change in
accounting policy has not been applied retrospectively. Accordingly,
the opening retained earnings for 1998, 1999 and 2000 have not been
restated.
(k) 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 crystallize in the foreseeable future. A deferred tax
asset is not recognized unless its realization is assured beyond
reasonable doubt.
F-12
<PAGE>
LJ 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) 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 and receivable under operating leases are
recorded in the statement of operations on a straight line basis over
the lease terms.
(m) 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(h) 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.
(n) 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.
(o) Revenue recognition
Revenue is recognized when it is probable that the economic benefits
will flow to the Group and when the revenue can be measured reliably.
Turnover and operating revenue represent sale of goods at invoiced
value to customers, net of returns and discounts, and are recognized
when goods are delivered and title is passed to customers.
Other revenue is recognized on the following basis:
(i) Interest income is accrued on a time proportion basis on the
principal outstanding and at the interest rate applicable; and
(ii) Rental income relating to operating leases is recognized in the
period in which the properties are let out and on the straight-
line basis over the lease terms.
F-13
<PAGE>
LJ 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) Foreign currencies
Transactions in foreign currencies are translated at the applicable
rates of exchange on the dates of transactions. Monetary assets and
liabilities denominated in foreign currencies are translated at
applicable 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
applicable 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, 2000 has been made at HK$7.73 to US$1.00.
(q) 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.
(r) Earnings per share
The calculation of basic earnings per share (EPS) 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 EPS 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. The dilutive effect of
convertible securities is reflected in diluted EPS by application of
the if-converted method.
(s) 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.
F-14
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
3. OPERATING RISKS
(a) Concentrations of credit risks
Details of major customers from which the Group derived operating
revenue are shown in note 16(c).
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-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
<TABLE>
<CAPTION>
Land Furniture,
and Leasehold fixtures and Plant and Motor
buildings improvement equipment machinery vehicles Total Total
At cost HK $ HK $ HK $ HK $ HK $ HK $ US $
<S> <C> <C> <C> <C> <C> <C> <C>
At May 1, 1999 4,970 16,273 8,945 13,973 2,675 46,836 6,059
Addition - 1,041 1,083 1,364 136 3,624 469
Disposal/written off - - (22) (159) - (181) (24)
Reclassification - 107 (10) (97) - - -
----- ------- ------ ------- ------ ------- ------
At April 30, 2000 4,970 17,421 9,996 15,081 2,811 50,279 6,504
----- ------- ------ ------- ------ ------- ------
Accumulated depreciation
At May 1, 1999 716 2,322 4,481 2,647 933 11,099 1,437
Charge for the year 140 1,657 1,303 1,364 514 4,978 643
Disposal/written off - - - (14) - (14) (2)
Reclassification - 31 3 (34) - - -
----- ------- ------ ------- ------ ------- ------
At April 30, 2000 856 4,010 5,787 3,963 1,447 16,063 2,078
----- ------- ------ ------- ------ ------- ------
Net book value
At April 30, 2000 4,114 13,411 4,209 11,118 1,364 34,216 4,426
===== ======= ====== ======= ====== ======= ======
At April 30, 1999 4,254 13,951 4,464 11,326 1,742 35,737 4,622
===== ======= ====== ======= ====== ======= ======
</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)
4. PROPERTY, PLANT AND EQUIPMENT (Continued)
(a) The net book value of the property, plant and equipment includes an
amount of HK$1,471 and HK$1,205 in respect of assets held under
capitalized leases as of April 30, 1999 and April 30, 2000
respectively. Depreciation charge in respect of these assets for the
years ended April 30, 1999 and 2000 amounted to HK$461 and HK$463
respectively.
(b) The Group has pledged all land and buildings and investment properties
to collaterize general banking facilities granted to the Group as of
April 30, 1999 and April 30, 2000 (see note 5).
5. BANKING FACILITIES AND OTHER LOANS
<TABLE>
<CAPTION>
As of April 30
1999 2000 2000
Notes HK $ HK $ US $
<S> <C> <C> <C> <C>
Bank overdraft (a) 8,447 6,345 821
====== ======= ======
Notes payable:
Current portion 5,569 4,070 526
Non-current portion 8,354 6,069 785
------ ------- ------
(b) 13,923 10,139 1,311
====== ======= ======
Letters of credit, gold and other loans:
Letters of credit (a) 34,193 25,941 3,356
Gold loan (c) 9,500 10,259 1,327
Other loans (d) 1,165 - -
------ ------- ------
44,858 36,200 4,683
====== ======= ======
</TABLE>
The Group's banking facilities are collaterized by land and buildings,
investment properties (see note 4(b)), restricted cash deposits, factored
receivables and personal guarantees of certain directors.
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)
(a) The Group had various letters of credit and overdraft under banking
facilities as follows:
As of April 30
1999 2000 2000
HK $ HK $ US $
Facilities granted
Letters of credit 38,125 66,500 8,603
Overdrafts 10,000 36,500 4,722
------ ------- ------
------ ------- ------
Utilized
Letters of credit 34,193 25,941 3,356
Overdrafts 8,447 6,345 821
------ ------- ------
------ ------- ------
Unutilized facilities
Letters of credit 3,932 40,559 5,247
Overdrafts 1,553 30,155 3,901
------ ------- ------
------ ------- ------
The bank overdrafts are denominated in Hong Kong dollars, bear
interest at the floating commercial bank lending rates in Hong Kong,
which ranged from 9.25% to 11% per annum as of April 30, 2000 (1999:
8.6% to 11.5% 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$13,923 and HK$10,139 as of April 30, 1999 and 2000
respectively. Interest charges on these loans range from 10.75% to
11.5% per annum as of April 30, 2000 (1999: 10.09% to 10.59% per
annum).
F-18
<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:
As of April 30, 2000
HK $ US $
2001 4,070 526
2002 3,920 507
2003 2,149 278
------ ------
10,139 1,311
------ ------
------ ------
(c) The Group had outstanding loans to purchase 4.3 oz and 4.85 oz of gold
as of April 30, 1999 and 2000 with the related balances being HK$9,500
and HK$10,259 respectively. These loans are due within the next year,
however, have been historically renewed. These loans bear interest at
3.15% to 3.45% as of April 30, 2000 (1999: 3.1% to 3.3%). 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$630 and HK$338 for the years ended April 30, 1999 and
2000 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 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-19
<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
As of April 30
1999 2000 2000
HK $ HK $ US $
Capitalized lease obligations:
Within one year 540 593 77
In the second to fifth years inclusive 674 213 28
----- ----- -----
1,214 806 105
----- ----- -----
----- ----- -----
The following is a schedule of future minimum lease payments under
capitalized leases as of April 30, 2000:
HK $ US $
Future minimum lease payments 1,027 133
Less: Amount representing interest 221 28
----- ----
Present value of net minimum lease payments 806 105
Less: Current portion 593 77
----- ----
213 28
----- ----
----- ----
Finance charges on capitalized lease obligations for the years ended 1998,
1999 and 2000 were HK$92, HK$144 and HK$147 respectively.
7. CONTINGENT LIABILITIES
As of April 30, 1999 and 2000, the Group had contingent liabilities in
respect of bills discounted with recourse amounting to HK$895 and HK$Nil
respectively.
As of April 30, 1999 and 2000, the Group provided guarantee in respect of
the following:
(a) Bank mortgage loans granted to a director, Yih Yu Chuan to the extent
of HK$4,882 (US$632) and HK$Nil respectively;
(b) Loan facility granted to a company, in which the Group has 18% equity
interest as of April 30, 2000, to the extent of HK$Nil and HK$2,319
(US$300) principal amount plus the related interests respectively.
F-20
<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) 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.
(c) In addition to note 8(b) 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.
(d) During the year ended April 30, 1999, 219,000 additional shares were
issued to cover the over-allotment for the initial public offering
completed in April 1998.
(e) On October 29, 1999, the Company entered into a Securities Purchase
Agreement with an accredited investor pursuant to which the Company
agreed to issue and the investor agreed to purchase up to
US$10,500,000 of 3% Convertible Debentures, as well as common stock
purchase warrants. The Debenture is convertible into the shares of the
Company's common stock, with an exercise price at the lesser of Fixed
Conversion Price or the Variable Conversion Price. The Fixed
Conversion Price is the greater of US$5.00 per share or 125% of the
average closing bid price of the common stock for the 15 trading days
ending on the trading day immediately before the respective Closing
Dates. The Variable Conversion Price represents 92% of the average of
the two lowest closing bid prices of the common stock during the 20
trading days immediately prior to conversion.
F-21
<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 (Continued)
(e) (Continued)
On November 5, 1999, the Company issued the first tranche of
US$3,000,000 of 3% Convertible Debentures with the date of maturity on
November 5, 2002; and Warrants for the Convertible Debenture holder to
purchase 45,000 shares of the Company's common stock at an exercise
price of US$3.75 per share with an expiration date of November 30,
2004. In addition, Warrants to purchase 30,000 shares of the
Company's common stock were issued to the placement agent as partial
compensation for its services, with the same terms as the detachable
warrants.
On March 22, 2000, the Company issued the second tranche of
US$3,500,000 of 3% Convertible Debentures with the date of maturity on
March 22, 2003; and Warrants for the Convertible Debenture holder to
purchase 52,500 shares of the Company's common stock at an exercise
price of US$6.94 per share with an expiration date of March 31, 2005.
In addition, Warrants to purchase 35,000 shares of the Company's
common stock were issued to the placement agent as partial
compensation for its services, with the same terms as the detachable
warrants.
As of April 30, 2000, all the first tranche of US$3,000,000 and
US$500,000 out of the US$3,500,000 second tranche Convertible
Debentures and related interest up to the dates of conversion, have
been exercised and converted, and 1,072,412 shares of common stock
were issued in this respect.
No other share of common stock was issued during the year. The
Company had 7,438,058 shares of common stock outstanding as of April
30, 2000 (1999: 6,365,646 shares).
(f) On July 31, 1999 the Company entered into a consulting agreement with
a consultant which providing investor relationship services to the
Company, and the Company agreed to issue a 5-year common stock
purchase warrant, with an expiration date of five years (July 30,
2004). The consulting agreement was terminated on January 31, 2000 and
a warrant to purchase 35,000 shares of common stock of the Company at
an exercise price of US$5.00 was issued.
None of the warrants as aforesaid was exercised for each of the years in
the three year period ended April 30, 2000.
F-22
<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.
Pursuant to the 1999 Annual Meeting of the Shareholders on December 15,
1999, the authorised number of stock options was increased from 2,000,000
to 4,000,000. The purchase price of the shares of the Common Stock covered
by the Plan shall be at least 100% of the fair market value per share of
such shares on the Date of Grant, with a term of ten years.
265,000 incentive stock options were issued on January 14, 2000 at an
exercise price of US$5.0 (HK$38.65) per share and for a term of ten years.
There were 1,285,000 and 1,550,000 incentive stock options issued and
exercisable as of April 30, 1999 and 2000 respectively.
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,
Hong Kong Limited Common directors and major shareholders
Lorenzo Consultant & Investment
(China) Limited Common directors and major shareholders
Hong Kong Brasil Lapidary Limited Common director and major shareholder
International Asset Management Limited Common director
</TABLE>
F-23
<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
1999 2000 2000
Notes HK $ HK $ US $
------ ------ ------
<S> <C> <C> <C> <C>
Due from related parties:
Gemological Institute of America,
Hong Kong Limited (i) 2,724 3,406 440
Lorenzo Consultant & Investment
(China) Limited (i) 25 - -
Hong Kong Brasil Lapidary Limited (i) 3 - -
------ ------ ------
2,752 3,406 440
====== ====== ======
Due (to) / from related party:
Yih Yu Chuan (i) 31 (12) (2)
====== ====== ======
Certain banking facilities granted to the
Group collateralized by properties
owned by Yih Yu Chuan and his
personal guarantee to the extent of 66,063 52,684 6,815
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended April 30
1998 1999 2000 2000
Notes HK $ HK $ HK $ US $
<S> <C> <C> <C> <C> <C>
Directors' emoluments (ii) 1,518 2,083 4,977 644
====== ====== ====== ======
Sales:
Hong Kong Brasil Lapidary Limited (iii) 254 3 - -
Gemological Institute of
America, Hong Kong Limited (iii) - 71 - -
------ ------ ------ ------
254 74 - -
====== ====== ====== ======
Rental/Management fee income:
Gemological Institute of
America, Hong Kong Limited (iv) 275 - 282 36
====== ====== ====== ======
Gain on sale of building:
Yih Yu Chuan (v) 2,904 - - -
====== ====== ====== ======
Consultancy and professional fees
paid and payable:
International Asset Management Limited (vi) 438 283 873 113
====== ====== ====== ======
</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)
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 emoluments were determined by the directors.
(iii) The sales to related parties are made according to the published
prices and conditions offered to the major customers of the Group.
(iv) During the year ended April 30, 1998, the Group had leased certain
office space to a related party at HK$25 per month. The monthly
charge was determined by the directors.
During the year ended April 30, 2000, the Group has received
management fee income from a related party. The fee was determined
by the directors.
(v) 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 (see note 17(k)).
(vi) The consultancy and professional fees were determined based on
normal commercial terms.
11. OPERATING LEASES COMMITMENTS
As of April 30, 1999 and 2000, 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:
As of April 30
1999 2000 2000
HK $ HK $ US $
Operating leases which expire:
Within one year 576 1,288 167
In the second to fifth years inclusive 3,118 1,719 222
----- ------ -----
3,694 3,007 389
----- ------ -----
----- ------ -----
Total lease expense for the years ended April 30, 1998, 1999 and 2000 was
HK$1,398, HK$3,281 and HK$3,759 respectively.
F-25
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
12. STAFF RELATED COSTS
Year ended April 30
1998 1999 2000 2000
Notes HK $ HK $ HK $ US $
Salaries, bonus and welfares 28,067 50,543 66,029 8,542
Pension expense 12(a) 248 446 483 62
------ ------- ------- ------
Total Staff Cost 28,315 50,989 66,512 8,604
====== ======= ======= ======
(a) 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 are reduced by the amount of
forfeited contributions.
The amount of forfeitures in respect of Retirement Plan for the years
ended April 30, 1998, 1999 and 2000 was HK$16, HK$22 and HK$224
respectively.
13. INCOME TAXES
Reconciliation to the expected statutory tax rate in Hong Kong of 16%
(1999: 16% and 1998: 16%) is as follows:
Year ended April 30
1998 1999 2000
% % %
Statutory rate 16.0 16.0 16.0
Tax effect of net operating losses 1.0 1.4 5.1
Non taxable PRC profits (8.8) (15.4) (16.3)
Others 0.4 (0.9) (4.7)
---- ----- -----
Effective rate 8.6 1.1 0.1
==== ===== =====
F-26
<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)
Income tax expense is comprised of the following:
Year ended April 30
1998 1999 2000 2000
HK $ HK $ HK $ US $
Current taxes:
For the year 2,094 520 1,207 156
Under (Over) provision in prior years 26 (140) (1,182) (153)
----- ----- ------- -----
2,120 380 25 3
Deferred taxes - - - -
----- ----- ------- -----
Income tax expense 2,120 380 25 3
===== ===== ======= =====
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% (1999: 16% and 1998:
16%).
PRC subsidiaries are registered to qualify as Foreign Investment
Enterprises in the PRC and are eligible for certain tax holidays and
concessions. Accordingly, certain PRC subsidiaries were exempted from PRC
income tax for two years starting from their first profit-making years,
followed by a 50% reduction of tax for next three years. Certain
subsidiaries have commenced the tax holidays during the year. 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 taxation has not been provided as the tax effect of timing
difference is insignificant at the balance sheet date.
At the balance sheet date, major components of the deferred taxation
liabilities (assets) unprovided are as follows:
As of April 30
1999 2000 2000
HK $ HK $ US $
Excess of tax allowances over depreciation 357 385 50
Tax losses carried forward (830) (923) (119)
---- ----- -----
(473) (538) (69)
==== ===== =====
F-27
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
14. NOTES TO STATEMENTS OF CASH FLOWS
(a) Purchase of subsidiary
On March 22, 2000, Lorenzo acquired the remaining shareholding (i.e.
40%) of Lorenzo Marketing for a consideration of HK$1,830.
<TABLE>
<CAPTION>
Year ended April 30
2000 2000
HK $ US $
<S> <C> <C>
Net liabilities acquired:
Property, plant and equipment 4 1
Trade receivables 125 16
Inventories 512 66
Cash and cash equivalents 99 13
Trade payables (68) (9)
Accrued expenses and other payables (1,291) (167)
------ -----
(619) (80)
Interest attributable to the Group
as of March 22, 2000 372 48
Goodwill arising from acquisition 2,077 269
------ -----
Total purchase consideration 1,830 237
====== =====
Satisfied by cash 1,830 237
====== =====
There was no acquisition for each of the year ended April 30, 1998 and 1999.
</TABLE>
(b) Analysis of changes in financing
<TABLE>
<CAPTION>
Common stocks Notes
(including payable Capitalized 3%
premium and and other lease convertible
warrant reserve) loans obligations debentures
HK $ HK $ HK $ HK $
--------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
As of April 30, 1997 339 26,239 1,402 -
Cash provided by (used in) financing 43,355 - - -
New (Repayment of) loans, net - (6,582) (438) -
Inception of capitalized lease contracts - - 320 -
--------------- --------- ----------- -----------
As of April 30, 1998 43,694 19,657 1,284 -
Cash provided by (used in) financing 7,364 - - -
New (Repayment of) loans, net - 4,931 (539) -
Inception of capitalized lease contracts - - 469 -
--------------- --------- ----------- -----------
As of April 30, 1999 51,058 24,588 1,214 -
Cash provided by (used in) financing 27,231 - - -
New (Repayment of) loans, net - (4,190) (555) 23,190
Inception of capitalized lease contracts - - 147 -
--------------- --------- ----------- -----------
As of April 30, 2000 78,289 20,398 806 23,190
=============== ========= =========== ===========
</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)
15. OTHER SUPPLEMENTARY INFORMATION
The following items are included in the consolidated statements of
operations in arriving at income before income taxes:
<TABLE>
<CAPTION>
Year ended April 30
1998 1999 2000 2000
HK $ HK $ HK $ US $
<S> <C> <C> <C> <C>
Finance costs
Interest expenses 7,176 6,876 5,648 731
Issuing costs for convertible debentures - - 4,524 585
----- ------ ------- ------
7,176 6,876 10,172 1,316
----- ------ ------- ------
----- ------ ------- ------
Direct expenses attributable to rental income 44 2 29 4
----- ------ ------- ------
----- ------ ------- ------
</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. REPORT ON SEGMENT INFORMATION
(a) The Group has operations in the following geographical areas:
<TABLE>
<CAPTION>
Year ended April 30
1998 1999 2000 2000
HK $ HK $ HK $ US $
------- -------- -------- -------
Operating revenue:
Sales to customers outside the Group:
<S> <C> <C> <C> <C>
United States of America & Canada 111,274 178,930 231,751 29,981
Hong Kong 2,248 630 20,395 2,638
Europe and other countries 5,667 13,467 45,330 5,864
PRC 58 37 2,413 312
Japan 4,952 2,155 1,012 131
------- -------- -------- -------
124,199 195,219 300,901 38,926
------- -------- -------- -------
------- -------- -------- -------
Income taxes:
Hong Kong 2,120 380 25 3
PRC - - - -
------- -------- -------- -------
2,120 380 25 3
------- -------- -------- -------
------- -------- -------- -------
Segment profit:
Hong Kong 15,415 6,335 1,557 202
PRC 14,005 33,008 37,143 4,805
Interest expenses, net (6,964) (5,186) (2,980) (386)
------- -------- -------- -------
Net income 22,456 34,157 35,720 4,621
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
As of April 30
1999 2000 2000
HK $ HK $ US $
------- -------- -------
Segment assets:
<S> <C> <C> <C>
Hong Kong 89,305 181,387 23,465
PRC 133,570 129,152 16,708
------- -------- -------
222,875 310,539 40,173
------- -------- -------
------- -------- -------
</TABLE>
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. REPORT ON SEGMENT INFORMATION (Continued)
(b) 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
1998 1999 2000 2000
HK $ HK $ HK $ US $
Revenues:
<S> <C> <C> <C> <C>
Manufacture of jewelry 124,199 195,219 300,901 38,926
Holding of investment properties 1,273 474 875 113
------- -------- -------- -------
125,472 195,693 301,776 39,039
======= ======= ======= =======
Income tax provision (credit):
Manufacture of jewelry 1,924 305 (110) (14)
Holding of investment properties 196 75 135 17
------- -------- -------- -------
2,120 380 25 3
------- -------- -------- -------
Segment profit:
Manufacture of jewelry 21,227 33,685 34,874 4,512
Holding of investment properties 1,229 472 846 109
------- -------- -------- -------
22,456 34,157 35,720 4,621
======= ======= ======= =======
</TABLE>
All of the Group's depreciation expense and capital expenditures
during the three years ended April 30, 2000 relate to the manufacture
of jewelry.
<TABLE>
<CAPTION>
As of April 30
1999 2000 2000
HK $ HK $ US $
Segment assets:
<S> <C> <C> <C>
Manufacture of jewelry 200,514 289,308 37,426
Holding of investment properties 22,300 19,100 2,471
Unallocated - goodwill 61 2,131 276
------- -------- -------
222,875 310,539 40,173
======= ======== =======
</TABLE>
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. REPORT ON SEGMENT INFORMATION (Continued)
(c) The Group derived operating revenue from the following major
customers, which accounted for over 10% of operating revenue.
Year ended April 30
1998 1999 2000
HK $ % HK $ % HK $ %
QVC Network Inc. 68,718 55 112,170 57 136,077 45
QVC - Europe 2,735 2 12,832 7 40,769 14
Tocantins Minerals Mining &
Science Corp. 15,691 13 - - - -
Accounts receivable related to these major customers were HK$15,160 as
of April 30, 1999 and HK$12,041 as of April 30, 2000.
F-32
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. 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.
(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.
F-33
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(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
incentive stock options is same to or higher than 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 incentive stock option plan been
determined based on the fair value at the date of grant and been
amortized over the period from the date of grant to the date that the
award is vested, consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been reported
as follows:
Year ended April 30
1999 2000 2000
HK $ HK $ US $
------- ------- -----
Pro forma net income 11,009 34,124 4,414
======= ======= =====
Pro forma earnings per share
Basic 1.73 5.18 0.67
======= ======= =====
Diluted 1.73 4.95 0.64
======= ======= =====
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:
Year ended April 30
1999 2000
Expected dividend yield Nil Nil
Expected stock price volatility 60% 19%
Risk-free interest rate 5.85% 6.49%
Expected life of options 3 years 3 years
The weighted average fair value per option granted during the year
ended April 30, 1999 and 2000 was US$2.25 and US$0.41 respectively.
F-34
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(c) Stock-based compensation (Continued)
The Company's stock option activities and related information for the
years ended April 30, 1998, 1999 and 2000 are summarized as follows:
<TABLE>
<CAPTION>
Year ended April 30
--------------------------------------------------------------------
1998 1999 2000
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
US $ US $ US $
<S> <C> <C> <C> <C> <C> <C>
Outstanding and
exercisable,
beginning of year - - - - 1,285,000 5.0
Granted - - 1,285,000 5.0 265,000 5.0
Exercised - - - - - -
Forfeited - - - - - -
-------- --------- ----------
Outstanding and
exercisable,
end of year - - 1,285,000 5.0 1,550,000 5.0
======== ========= ==========
Weighted average
remaining
contractual life - 10 years 9.13 years
======== ========= ==========
</TABLE>
(d) Stock-based transactions
The Company issued to a consultant a warrant to purchase 35,000 shares
of common stock as part of the consultancy fee on July 31,1999 (see
note 8(f)). In addition, the Company issued to a placement agent two
warrants to purchase an aggregate of 65,000 shares of common stock for
the services rendered in respect of the issue of the convertible
debentures on November 5, 1999 and March 22, 2000 (see note 8(e)).
Under HK GAAP, there are no specific requirements to recognize the
compensation costs arising from these transactions. Under US GAAP, the
costs associated with these transactions are accounted for based on
fair value of the warrants at the date of issue. Using the Black-
Scholes option pricing model with the same weighted-average
assumptions as employees' stock options, the fair value of these
warrants was estimated as HK$136 and HK$328 respectively and have been
recoginzed as an additional expense during the year ended April 30,
2000 and the same amount was recorded in the Company's warrant reserve
account (see note 17 (n)). Accordingly, there is no effect on the
shareholders' equity under US GAAP.
F-35
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(e) Discount on convertible debentures
In connection with the convertible debentures issued with detachable
warrants to a placement agent (see note 8(e)), there are no specific
requirements under HK GAAP to allocate any of the proceeds from
issuance of convertible debenture attributable to detachable warrants.
Under US GAAP, the proceeds from issuance of convertible debenture
with detachable warrants shall be allocated between the warrant and
the convertible debenture based on their fair values at time of
issuance. The difference between the proceeds allocated to the
debentures and the face value of the debenture should be recorded as
discount or premium. The discount or premium is amortized over the
life of the debenture, using the interest method. During the year
ended April 30, 2000, the Company recognized a sum of HK$534 as
discount on convertible debentures. The amount of discount on
convertible debentures amortized for the year ended April 30, 2000 and
unamortized balance as at April 30, 2000 are HK$238 and HK$296
respectively.
(f) 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. In previous years under HK GAAP, these costs were
capitalized as organization costs and amortized over ten years.
Following the adoption of the SSAP (Revised) in the current year, the
carrying amount of such cost amounting to HK$686 has been fully
expensed in the current year (see note 2(j)). Under US GAAP, as Deen
has no significant assets or substantive operations, other than a
large shareholder base, these costs, would be expensed as incurred.
The effect is that there is no more organization costs being
capitalized under both HK and US GAAP as of April 30, 2000.
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 and 2000, there is no additional
capitalized deferred cost incurred.
(g) Earnings per share
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-36
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(g) Earnings per share (Continued)
In addition, under HK GAAP the number of incremental shares included
in the denominator in connection with the warrants and options (see
note 8) is the weighted average number of additional ordinary shares
which would have been outstanding assuming the conversion of all
dilutive potential ordinary shares whereas under US GAAP the number of
incremental shares is determined by computing a year-to-date weighted
average number of incremental shares included in each quarterly
diluted EPS computation which is computed by using the average market
prices during the three months included in the reporting period.
(h) 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, 2000 is estimated to
be HK$19,100 on the open market value basis whereas the
historical cost of such properties is HK$16,968. The market
valuations were performed by independent qualified surveyors at
dates close to the balance sheet date.
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.
(i) 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$6,412 and HK$3,212
as of April 30, 1999 and 2000 respectively 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
F-37
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(i) Investment properties (Continued)
ended April 30, 1998, 1999 and 2000 by HK$547, HK$424 and HK$424
respectively with no related income tax effect.
(j) Property, plant and equipment
During the year ended April 30, 1999, an investment property that 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. Any previous
revaluation reserve on the asset is frozen upon the transfer until the
retirement or disposal of the assets. A debit revaluation reserve of
HK$2,297 has been frozen in this respect and included in the
investment property revaluation reserve. Depreciation is then provided
to write off the carrying amount over the unexpired lease terms.
Under US GAAP, the amounts transferred are its historical cost of
HK$4,894 and respective accumulated depreciation of HK$586 as
investment properties are recorded at their historical costs (see note
17(i)). The net effect arising from the different accounting
treatment, as aforesaid, would have increased the depreciation charge
of HK$48 for each of the years in the two year period ended April 30,
2000 with no related income tax effect.
(k) 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.
(l) 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.
(m) 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.
F-38
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (Continued)
(n) Warrant reserve
As a result of the different accounting treatments as detailed in note
17(d) and (e) in respect of the discount on convertible debentures and
stock-based transactions, effects on the warrant reserve under US GAAP
are as follows:
- the portion allocable to the detachable warrants of HK$534 is
accounted for as warrant reserve;
- the stock-based compensation cost of HK$464 arising from the issue
of warrants to a consultant was recorded in the Company's warrant
reserve.
However, no adjustment would be required to total shareholders'
equity.
(o) Operating income
Under HK GAAP, interest income of HK$212, HK$1,690 and HK$2,668 for
each of the years in the three year period ended April 30, 2000 has
been included in arriving at the operating income, while under US
GAAP, such income is excluded. Accordingly, the operating income under
US GAAP would be HK$31,538, HK$39,450 and HK$38,320 for each of the
years in the three year period ended April 30, 2000.
(p) Comprehensive income
The Company has 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.
(q) Statement of cash flows
Under US GAAP, net movements of income taxes payable is included in
arriving at the net cash flows from operating activities while under
HK GAAP, such movements are excluded and the income taxes paid for the
year is shown separately under taxation in the statement of cash
flows. In addition, under US GAAP, movements of advances from banks
repayable within three months from the date of the advance are
included under financing activities whereas under HK GAAP, such
advances are included in cash and cash equivalents and their movements
are shown as change in cash and cash equivalents.
F-39
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. 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
1998 1999 2000 2000
HK $ HK $ HK $ US $
<S> <C> <C> <C> <C>
Net income as reported under HK GAAP 22,456 34,157 35,720 4,621
US GAAP material adjustments:
- Depreciation on investment properties (547) (424) (424) (55)
- Depreciation on property - (48) (48) (6)
- Capitalized deferred costs (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 83 686 89
- Amortization of goodwill 7 7 7 1
- Amortization of financial consulting
fee paid to the representative in the public
offering - (417) (275) (36)
- Amortization of discount on convertible
debentures - - (238) (31)
- Compensation costs for consulting services - - (136) (18)
- Compensation costs for agency services - - (328) (42)
--------- ---------- ---------- ----------
Net income under US GAAP 12,205 33,358 34,964 4,523
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Numerator:
Net income used in computing basic
earnings per share under US GAAP 12,205 33,358 34,964 4,523
Interest on 3% convertible debentures - - 251 32
--------- ---------- ---------- ----------
Net income used in computing diluted
earnings per share under US GAAP 12,205 33,358 35,215 4,555
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Denominator:
Weighted average number of shares outstanding
under HK GAAP - basic 4,539,128 6,347,046 6,589,415 6,589,415
Shares for Deen Merger 61,878 - - -
--------- ---------- ---------- ----------
Weighted average number of shares outstanding
under US GAAP - basic 4,601,006 6,347,046 6,589,415 6,589,415
Effect of dilutive potential ordinary shares:
3% convertible debentures - - 337,239 337,239
Warrants 4,854 - 17,986 17,986
Stock options - 514 - -
--------- ---------- ---------- ----------
Weighted average number of shares outstanding
under US GAAP - diluted 4,605,860 6,347,560 6,944,640 6,944,640
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Earnings per share under
US GAAP
- Basic 2.65 5.26 5.31 0.69
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
- Diluted 2.65 5.26 5.07 0.66
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
F-40
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. 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
1999 2000 2000
HK $ HK $ US $
------- -------- -------
<S> <C> <C> <C>
Shareholders' equity as reported
under HK GAAP 128,428 188,179 24,344
Cumulative effect of depreciation
on investment properties (2,122) (2,546) (329)
Cumulative effect of depreciation
on property (537) (585) (76)
Capitalized Deen Merger costs (686) - -
Reduction for related company advance (2,752) (3,406) (440)
Deferral of future financial consulting paid
to the representative in the public offering 418 143 18
Unamortized discount on convertible
debentures - 296 38
Reduction for goodwill recorded
on the merger of the Company
and Lorenzo (61) (54) (7)
Surplus arising on revaluation of
investment properties (6,412) (3,212) (415)
Deficit frozen upon transfer of an investment
property to land and building 2,297 2,297 297
------- -------- -------
Shareholders' equity under US GAAP 118,573 181,112 23,430
------- -------- -------
------- -------- -------
</TABLE>
F-41
<PAGE>
LJ INTERNATIONAL INC.
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. 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 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137, "Accounting for derivative
instruments and hedging activities" which delayed the effective date of
SFAS No. 133 "Accounting for derivative instruments and hedging activities"
for one year. SFAS No. 133 provides guidance for the recognition and
measurement of derivatives and hedging activities. It requires an entity to
record, at fair value, all derivatives as either assets or liabilities in
the balance sheet, and it establishes specific accounting rules for certain
types of hedges. SFAS No. 133 is now effective for fiscal years beginning
after June 15, 2000 and will be adopted by the Group when required, if not
earlier. 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.
Revenue recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue recognition in financial
statements", which provides guidance on applying generally accepted
accounting principles for recognizing revenue. SAB 101 is effective for
fiscal years beginning after December 15, 1999. The impact, if any, of
adopting SAB 101 on the Group's consolidated financial position, results of
operations and cash flows, has not been determined.
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