The Topaz Group, Inc. Business Information, Profile, and History

Company Perspectives:

We are now positioned to become the major leading force in the manufacture and export of semiprecious gem-set jewelry worldwide.

History of The Topaz Group, Inc.

The Topaz Group, Inc., a vertically integrated manufacturing company based in Bangkok, Thailand, is engaged in the production and selling of jewelry and such gemstones as amethysts, emeralds, rubies, sapphires, and topaz. The company is comprised of three Thailand-based subsidiaries: Creative Gems & Jewelry Co., LTD; Advance Gems and Jewelry Co., LTD; and Advance Manufacturing Co., LTD. Because the United States is its major market, accounting for 80 percent of all sales, Topaz maintains an operation in Issaquah, Washington, which combines marketing with a customer service and distribution center. The company also has offices in Canada and Brazil. By merging with an obscure U.S. corporation, Topaz has been able to gain a listing on the American Stock Exchange, a first for a Thai country. As a result, Topaz has gained access to America capital markets as part of a plan to become a major international player in the jewelry industry.

Although it is positioned to produce jewelry using any gem stone, the company concentrates on topaz stones, primarily because it is able to control the entire manufacturing process. Topaz has ties to mines in Brazil, Africa, India, and Sri Lanka, giving it a steady source of the highest quality rough stones. It also has mass production capabilities for cutting and polishing the stones cut from this material. Finally, the company has a long-term, exclusive agreement to use the nuclear research reactor at the University of Missouri to treat the cut gemstones with an irradiation process, which turns them to their signature blue color. When mined, topaz stones are white. To make them blue, they may be subjected to intense heat, but this process merely affects the surface and a scratch will reveal a white core. An accelerator process may also be used, but results are unreliable and only lighter shades of blue are attained. The only drawback to the irradiation method is that the stones must be stored until a requisite half-life has elapsed, and they are able to be safely handled. Half lives vary according to the depth of color. Baby Blues are the lightest in color and have a half-life around 120 days. Swiss Blues are slightly darker and have a half-life of 180 days. The darkest stones are the London Blues, with a half-life as long as 240 days. These topaz stones are then shipped to Creative Gems & Jewelry, where they are either sold to the industry or incorporated into the company's own jewelry.

The company product design draws its inspiration from the European and Asian jewelry making school of the 19th century, but Topaz is also keen to adapt to changing trends and fashions, and it sells jewelry that caters to all markets, from $10 silver items to platinum jewelry that might retail in excess of $10,000. Topaz sells to more than 350 customers. Accounting for approximately 46 percent of net sales are Goldmine Enterprises, Colibri, Sears Roebuck, and Wal-Mart. In addition, the company sells to Helen Andrews, the wholesale distributor to Kmart, television marketer QVC, and T.J. Maxx.

Roots of Company Date to Early 1970s

The origins of The Topaz Group are traced back to the early 1970s when several family-run Thai goldsmith operations joined forces to open a jewelry store in Bangkok. Through joint ventures with other companies, these families branched into a variety of jewelry making activities. In 1993, all of these ventures were organized under three companies: Creative Gem and Jewelry Co., Advance Gems and Jewelry Co., and Well Gems and Jewelry Co. The three entities were incorporated into a holding company named Topaz Gem Group, Inc., which as a result represented a fully integrated jewelry production and sales operation, controlling the process from the purchase of rough stones to the sale of fine finished jewelry. Over the next three years, the company took advantage of the thriving economy of the Pacific Rim and the stability of the Thai baht currency to enjoy solid growth. Topaz also benefited from the growth of the American and Japanese jewelry markets, the company's top export countries. Its largest customers during this period were Wal-Mart and Sears.

The fortunes for Topaz changed dramatically in 1997, when the baht was devalued and the Thai economy collapsed, resulting in widespread failures in every industry. Topaz was better off than most Thai companies because it had no debt, was not involved in any outside businesses, and received U.S. dollars for its exports. Nevertheless, the company was unable to receive funding from Thai financial institutions and faced the possibility that overseas customers would pull their business, fearing that Topaz, like many Asian suppliers, might be an unreliable partner because it could be adversely impacted by the devaluation of the bhat. Topaz was able, however, to convince customers that its worldwide activities were in fact based on the dollar. As a result, there was no interruption in the company's strong flow of orders. However, Topaz continued to face difficulty in arranging the financing needed to maintain inventory and provide a timely response to order placement. Because so much of the company's business involved topaz stones, which had to be stored for extended periods of time due to the irradiation process, Topaz had a need for financing to cover this period when its investment in rough stones was held in abeyance.

Economic conditions in Thailand continued to be poor in 1998 with little signs of recovery. A number of jewelry operations shut down, and the recession spread to other Asian countries. Moreover, many American buyers elected to cut back on buying trips to the region. To counteract this trend, Topaz began to actively attend jewelry shows in Hong Kong and the United States. It also cut prices on certain merchandise for over-the-counter delivery and instituted a policy of taking orders for stones and jewelry for later delivery. As a result, Topaz was able to land three new major accounts and realize growth in net income in 1998. In the meantime, the Thai government put pressure on Thai commercial banks to return to the lending market. While this action was helpful, Topaz was still frustrated by the restricted credit situation which prevented it from expanding its offerings and customer base.

Reverse Merger Engineered in 1998

Topaz now looked to its largest market, the United States, in hopes of tapping the equity markets to gain access to the kind of funding that would allow the company to realize its potential. Unable to secure an underwriter, Topaz found another way to achieve its aims by engineering a reverse merger with little-known Chancellor Corporation, which was trading on an over-the-counter basis. The company was originally incorporated in Utah as H&H Energy Corporation. After a number of name changes, it merged into a Nevada corporation, Technivision, Inc., which in 1996 became Chancellor. At this point in its meandering search for a viable business, the company was looking to mainland China, where it was involved in an attempt to establish a "Welfare Lottery" in Beijing and a world-class horse racing track and horse training facility. In spite of these grand plans, in November 1998 Chancellor agreed to the Topaz transaction, which was structured as an acquisition of Topaz by Chancellor. In reality, Topaz received enough shares of stock in the deal to gain control of Chancellor, which was subsequently renamed the Topaz Group, Inc. A month later, Chancellor's chairman, Ronald Sparks, stepped down, and interests in the social welfare lottery and race track were subsequently divested. In April 1999, Topaz Group completed a transaction that brought the three Thai subsidiaries--Creative Gems and Jewelry, Advance Gems and Jewelry, and Well Gems and Jewelry--into the fold. In the meantime, Topaz began trading on the NASDAQ bulletin board under the ticker symbol TOPZ. The company also began reporting its financial results to the SEC. For 1998, Topaz recorded sales of $18.9 million and net income of $4.64 million.

In 1999, Topaz initiated a number of moves. In September, it elected Jeremy F. Watson as chairman of the board. Watson had spent more than 20 years with The Singer Company, rising to the position of managing director of China operations. He then became regional vice-president for Fritz Gegauf, A.G., another sewing machine company, before joining Topaz. A few weeks after assuming the chairmanship, Watson announced that Topaz was entering into a joint venture with jewelry maker K PI TAK to launch a new high-end jewelry line, operating as the Thunder Jewelry Co. Ltd. and targeting affluent customers in the United States and the Middle East. It was an important step for Topaz because it completed its jewelry lineup, which for the first time extended to the upscale market, and also provided a way to enter the Middle East market. Another important development in 1999 was an agreement that subsidiary Creative Gems & Jewelry signed with the largest ruby mine in Nairobi, Kenya, to take its entire production. Topaz was now positioned to become the world's largest supplier of rubies.

Topaz began to increase its presence in the United States, announcing in early 2000 that it planned to move more of its operations to Washington state in order to better serve the all-important U.S. market, as well as to streamline administrative functions. The company's desire to take advantage of its new status as a publicly traded American company, however, was proving problematic. By this point, management felt it needed to hire an American who could help them in the transformation. The company was referred to Timothy Matula, a Seattle resident with several years of experience with Smith Barney and Prudential Securities. Under his guidance, along with colleague Terrance C. Cuff, Topaz retained Grant Thornton as its auditor and Parker Chapin as it legal counsel to provide the due diligence necessary in gaining a U.S listing. This process took close to two years to complete, at which time Topaz applied to be listed on the American Stock Exchange. During this period, Matula and Cuff became so convinced about the potential for Topaz that in May 2001 they decided to stay on. Matula became treasurer and a director of the company, while Cuff became a director and the chief financial officer.

Dr. Aphichart Fufuangvanich Named Chairman and CEO in 2002

Another major addition to the ranks of management at this time was the appointment of Dr. Aphichart Fufuangvanich to be president of Topaz. He brought with him a great deal of expertise in the jewelry industry. A Thai native, he began working with jewelry at the age of three. By the age of 19, he opened his own jewelry shop and grew to become an expert in the field. He was responsible for a number of firsts in Thailand. He was the first to introduce calibration of stones to the country's gem cutting industry, resulting in larger gems that could be mass-produced. He was also the first Thai to turn to Africa for a variety of gem stones, a step that transformed the reputation of Thailand, helping to make it known as a top gem center on the world stage. For his many years of service to the industry, he was awarded an honorary doctoral degree in marketing from Ramkamhang University. It 2002 he took on additional responsibilities with Topaz, becoming chief executive officer and chairman of the board.

In March 2002, Topaz made an offering of stock, six million shares priced at $3 each. A month later, it became the first Thai company to gain a listing on the American Stock Exchange, making it only the second Thai company to be listed on a major U.S. stock exchange. The hope was that by being able to tap the U.S. equity market, Topaz would be able to dominate the U.S. manufacturing sector and entirely bypass wholesalers in the industry. The goal was to also be in a position to become a rollup vehicle, acquiring smaller companies in the highly fragmented jewelry industry. While many companies were suffering from difficult economic conditions, Topaz was poised to take advantage of the situation and pick up valuable assets at reasonable prices. Already a dominant player in the topaz market, the company held ambitious plans for other areas of the jewelry industry.

Principal Subsidiaries: Creative Gems & Jewelry, Ltd.; Advance Gems & Jewelry Manufacturing Company; Advance Gems & Jewelry Co., Ltd.

Principal Competitors: LJ International Inc.; M Fabrikant & Sons, Inc.; Michael Anthony Jewelers, Inc.

Chronology

• Key Dates:
• 1993: Topaz Gem Group is formed.
• 1998: Reverse merger with Chancellor Group leads to the creation of The Topaz Group.
• 2001: Aphichart Fufuangvanich is named president.
• 2002: Topaz gains a listing on the American Stock Exchange.