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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-7848
LAZARE KAPLAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2728690
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
529 Fifth Avenue, New York, NY 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 972-9700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock ($1 par value) American Stock Exchange
Preferred Share Purchase Rights American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of August 2, 2001, 7,367,691 of the registrant's common stock were
outstanding, and the aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
closing price for the registrant's common equity on the American Stock Exchange
at that date was $35,364,917.
DOCUMENTS INCORPORATED BY REFERENCE
2001 definitive proxy statement to be filed with the Commission -
incorporated by reference into Part III.
2001 Annual Report to Stockholders for the fiscal year ended May 31,
2001 to be filed with the Commission-incorporated by reference into Parts II and
IV.
Part 1
Item 1. Description of Business
The Company
Lazare Kaplan International Inc. ("the Company") was incorporated in
1972 under the laws of the state of Delaware as the successor to a business
which was founded by Mr. Lazare Kaplan in 1903. The Company is engaged in the
cutting, polishing and selling of ideally proportioned diamonds which it markets
internationally under the brand name "Lazare Diamonds'r'". Ideally proportioned
diamonds are distinguished from non-ideal cut ("commercial") diamonds by the
symmetrical relationship of their facets, which maximizes brilliance, sparkle
and fire. Due to these characteristics, Lazare Diamonds command a premium in the
marketplace. The Company believes there are only a few other companies worldwide
engaged primarily in the production of ideally proportioned diamonds and that it
is the largest U.S. producer of ideal cut diamonds which are cut and polished at
its facility in Puerto Rico. In addition, through a cooperative agreement with
the largest Russian diamond mining company, the Company cuts and polishes
commercial diamonds at three diamond cutting facilities in Russia which it
markets to wholesalers, distributors and, to a growing extent, retail jewelers.
All rough stones purchased by the Company are either selected for manufacturing
or resold as rough diamonds in the marketplace. The Company believes that the
combination of its cutting and polishing operations and its trading operations
enables the Company to purchase larger quantities of rough diamonds from which
it may select those rough diamonds best suited for the Company's current needs.
The Company's marketing strategy in the selling of Lazare Diamonds is
directed primarily toward quality conscious consumers throughout the United
States, South America, the Far East and Europe. The Company focuses its
distribution efforts for Lazare Diamonds on selectivity with a view towards
helping retailers who carry the product maintain a competitive advantage. Lazare
Diamonds can be found at some of the most prestigious jewelry stores around the
world, including those with international reputations and those known only in
their communities as being the highest quality retail jewelers. This strategy
helps ensure that the Company's product is presented in an environment
consistent with its superior quality and image. The Company also sells to
certain jewelry manufacturers and diamond wholesalers. The Company has developed
a comprehensive grading system which, when coupled with the "ideal cut"
standard, allows jewelers to order inventory by category rather than through the
more cumbersome process of visual selection. In addition, the Company designs,
manufactures (through independent contractors) and sells a line of high quality
jewelry which features Lazare Diamonds.
An important element of the Company's strategy is the promotion of the
Lazare Diamond brand name. Every Lazare Diamond bears a laser inscription on its
outer perimeter, invisible to the naked eye, containing the Lazare Kaplan logo
and an identification number unique to the stone. The laser signature also
allows consumers to register their Lazare Diamonds with the Company under its
program, The Lazare Diamond Registry'r', thereby providing proof of ownership in
case of loss or theft.
One of the Company's important suppliers of rough diamonds is the
Diamond Trading Company ("DTC"), an affiliate of De Beers Centenary AG, a Swiss
company ("De Beers"). Based on published reports, the Company believes that the
DTC sells approximately 60% of the value of current world rough diamond output.
The Company has been a client of the DTC for more than 60 years. In order to
diversify its sources of rough diamond supply, the Company has an office in
Antwerp to supplement its rough diamond needs by secondary market purchases and
has entered into relationships with other primary source suppliers. The Company
believes that its success in maintaining quantities and qualities of polished
inventory that best meet its customers' needs is achieved through its ability to
fully integrate its diverse rough and polished diamond sources.
The Company currently operates four manufacturing facilities. The
Company's domestic manufacturing operation, located in Puerto Rico, is believed
by the Company to be the largest diamond cutting facility in the United States.
The Company believes its work force in Puerto Rico is the most highly skilled in
the world producing ideal cut diamonds. This facility generally produces
polished diamonds having weights of 1/5 of a carat and greater. The Company
operates three manufacturing facilities in Russia. These facilities are
conducted pursuant to agreements with AK ALROSA of Russia. Two of the facilities
are located in Moscow and the third in Barnaul. All three facilities are
currently operational.
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Diamond Supply
The Company's overall revenues are, in part, dependent upon the
availability of rough diamonds, the world's known sources of which are highly
concentrated. Based upon published reports, the Company believes that Angola,
Australia, Botswana, Brazil, Canada, Ghana, Guinea, Ivory Coast, Namibia,
Republic of the Congo, Russia, Sierra Leone and South Africa account for more
than 90% of present world rough gem diamond production. The Diamond Trading
Company ("DTC"), which is affiliated with De Beers, is the primary world-wide
marketing mechanism of the rough diamond industry. The DTC historically has
sought to maintain an orderly and stable market for diamonds by regulating the
quantity and selection of rough diamonds that reach the market. This was
achieved either by directly owning diamond mines, entering into multi-year
purchase agreements with host governments, or by purchasing rough diamonds in
the secondary market. Sales for the DTC are made in London to a select group of
clients ("sightholders") which, according to published reports, number
approximately 125, including the Company. Based upon published reports, the
Company believes that approximately 60% of the world's current rough diamond
output is sold by the DTC and its affiliated companies. In order to maintain
their purchasing relationship, the DTC's clients have traditionally been
expected to purchase all of the diamonds offered to them by the DTC. Companies
that are not sightholders must either purchase their requirements from
sightholders or seek access to that portion of the world supply not marketed by
the DTC.
The DTC has been and continues to be an important supplier of rough
diamonds to the Company. The DTC periodically invites its clients to submit
their requirements as to the amount and type of stones they wish to purchase.
Employees of the Company attend offerings of rough diamonds ("sights") held by
the DTC periodically during the year in London. At sights, the Company
purchases, at the DTC's stated price, an assortment of rough diamonds known as a
"series", the composition of which attempts to take into account the qualitative
and quantitative requirements of the Company based on requests submitted to the
DTC by the Company. The Company has been a sightholder for more than 60 years.
The loss of its status as a sightholder could have a material adverse effect on
the Company.
Throughout 1999 and 2000, the DTC conducted a strategic review of its
overall business model. In July 2000, the DTC announced significant changes in
its approach to rough diamond marketing. In brief, the DTC stated that it will
stop open market purchases and alter its market control and pricing policies.
Henceforth, the DTC has said it will focus on selling its own mining productions
through its "supplier of choice" marketing programs. These policy changes are
intended to modernize business practices within the industry, shorten channels
of distribution, lower working diamond stocks, supply clients with downstream
distribution and encourage additional investment in marketing and advertising
programs. The Company believes it is well positioned to benefit from these
changes in the DTC's approach to diamond marketing. However, there can be no
assurance that this policy change will not have a material adverse effect on the
Company's operations.
In August 2001 the European Commission issued a statement of objections
which identify a number of restrictions and trading conditions in the Supplier
of Choice agreement which appear to violate European competition law, and which
can therefore not benefit from exemption under Article 81(3). A Statement of
Objections is a preliminary step in antitrust proceedings which does not
prejudge the Commission's final decision. At this point, no conclusion can be
reached by the Company as to the ultimate outcome of the Commission's ruling.
In order to diversify its sources of supply, the Company has entered
into arrangements with other primary source suppliers and manufacturers. The
Company also has established an office in Antwerp to supplement its rough and
polished diamond needs by making purchases in the secondary market.
In December 1994, the Company reached an agreement with the Empresa
Nacional de Diamantes de Angola ("Endiama"), Angola's national diamond mining
company, pursuant to which the Company was granted a license to purchase rough
diamonds from local Angolan miners and export such rough diamonds for resale. At
the time, this was one of three such licenses granted by the Government of
Angola. The agreement entitled the Company to establish buying offices
throughout Government controlled areas of Angola, the first of which was set up
during 1995 in Luanda, the capital of Angola. The agreement had a term of five
years ending on December 31,
3
1999. The agreement has not been renewed and operations have ceased.
In March 1999, the Company announced that a newly formed, wholly-owned
subsidiary, Pegasus Overseas Ltd. ("POL") had entered into an exclusive ten-year
agreement with a wholly-owned subsidiary of General Electric Company ("GE")
under which POL will market natural diamonds that have undergone a new GE
process. The process is permanent and irreversible and it does not involve
treatments such as irradiation, laser drilling, surface coating or fracture
filling and is conducted before the final cutting and polishing by the Company.
The process is designed to improve the color of qualifying diamonds without
reducing their all-natural content. The process, which was developed by GE, will
be used only on a select, limited range of natural diamonds with qualifying
colors, sizes and clarities for both round and fancy cuts. The estimated number
of gemstones with characteristics suitable for this process is a small fraction
of the overall diamond market. POL will sell only diamonds that have undergone
the new GE process. Each diamond sold by POL will be laser inscribed with a
unique brand name and identification number. In December 1999, POL completed the
test marketing of these diamonds in the United States. After careful study, a
brand name, Bellataire'TM', was selected for the consumer launch. The Bellataire
diamond is being offered for sale to U.S. retailers as of June 2000.
The Company believes that it has good relations with its suppliers,
that its trade reputation and established customer base will continue to assure
access to primary sources of diamonds and that its sources of supply are
sufficient to enable the Company to meet its present and foreseeable needs.
However, the Company's sources of supply could be affected by political and
economic developments in producing countries over which the Company has no
control. While the Company believes that alternative sources of supply may be
available, any significant disruption of the Company's access to its primary
source suppliers could have a material adverse effect on its ability to purchase
rough diamonds.
The Company has rough diamond supply arrangements in Russia for the
cutting and polishing of diamonds in Russia. See "Cutting and Polishing".
As a concerned member of the diamond industry and global community at
large, the Company fully supports a policy which prohibits the purchase of
diamonds illicitly seized and sold by rebel forces in Angola, Sierra Leone, and
the Democratic Republic of the Congo. As it has in the past, the Company will
continue to condemn trading in illicit diamonds, a position which reflects the
Company's leadership in the industry. Furthermore, the Company fully complies
with and supports the resolutions adopted by the United Nations as well as
concerned regional and international governments and various industry trade
associations in attempting to isolate and eliminate the trade in illicit stones.
Cutting and Polishing
The Company's first factory in Russia was announced in July 1996 when
the Company reached an agreement (the "ALROSA I Agreement"), for a term of ten
years, with AK ALROSA of Russia for the cutting, polishing and marketing of
large rough gem diamonds. According to published reports, ALROSA is the largest
producer of rough diamonds in Russia with annual production in excess of $1.6
billion, accounting for approximately 20% of the world's supply of diamonds.
Under the terms of the ALROSA I Agreement, the Company has equipped a diamond
cutting factory which was completed in February 1997 within the ALROSA facility
in Moscow. This facility is staffed by Russian technicians and managed and
supervised by Company personnel. Under the ALROSA I Agreement, ALROSA has agreed
to supply a minimum of $45 million per year (at rough diamond cost) of large
rough gem diamonds selected by the Company as being suitable for processing in
this facility. The Company received its first shipment of polished stones
produced at this facility during November 1997. In March 1999 (in furtherance of
a Memorandum of Understanding signed by the Export-Import Bank of the United
States ("Eximbank"), ALROSA and the Company) the Company and ALROSA entered into
a second agreement (the "ALROSA II Agreement") to expand their relationship in
the cutting, polishing and marketing of rough gem diamonds. Under the terms of
the ALROSA II Agreement, the Company and ALROSA agreed to refurbish two
additional diamond cutting facilities (both of which are now fully operational).
These facilities are staffed by Russian technicians and jointly managed and
supervised by the Company and ALROSA personnel. ALROSA has agreed to supply up
to $100 million per year (at rough diamond cost) for ten years of rough gem
diamonds selected by the Company as being suitable for processing in these
facilities. The Company received its first test shipment of
4
polished stones produced at these facilities during the fourth quarter of
fiscal 1999. These facilities have the capacity to cut and polish in excess of
$150 million (at rough diamond cost) per year of rough gem diamonds. Under
both the ALROSA I and the ALROSA II agreements, the Company sells the resulting
polished diamonds through its worldwide distribution network. The proceeds from
the sale of these polished diamonds, after deduction of rough diamond cost,
generally will be shared equally with ALROSA. These agreements do not require
the Company to advance funds for the purchase of rough diamonds. The ALROSA I
Agreement served as a long-term off-take arrangement to secure the repayment of
$62 million of financing which ALROSA received from a United States commercial
bank guaranteed by the Export-Import Bank of the United States ("Eximbank") for
the purchase by ALROSA of U.S. manufactured mining equipment. This equipment was
used by ALROSA to increase production in its diamond mines. Eximbank has stated
that this agreement was the first transaction approved under Eximbank's General
Project Incentive Agreement with the Ministry of Finance and the Central Bank of
the Russian Federation signed in December 1993. The ALROSA II Agreement will
enable ALROSA to receive additional loan guarantees from Eximbank for an
additional several hundred million dollars. The first tranche of Eximbank
financing secured by the ALROSA II agreement was closed in May 2001. These
guaranties will allow ALROSA to continue purchasing U.S. manufactured mining
equipment and expand mining production.
The Company believes that its factory in Puerto Rico is the largest
cutting and polishing facility in the United States. Each rough diamond received
in Puerto Rico is evaluated against strict management standards designed to
maximize its potential economic contribution to the Company. Expert technicians,
assisted by proprietary computer software, determine whether to cut the rough
diamond to ideal or commercial proportions or resell the rough diamond. The
shape of the rough diamond, its color, clarity, size, potential profitability
and salability are among the criteria used in making such determinations. The
Company's production workers are compensated principally on a piece rate basis.
The Company has an incentive program that rewards its factory managers and
supervisors for maximizing the manufactured results based on the following
criteria: gross margin, yield (rough weight to polished weight conversion) and
efficiency.
Rough diamonds selected for cutting are analyzed and where desirable
are sorted for sawing or cleaving to achieve the desired shape and to eliminate
imperfections. They are then cut and polished into finished gems. Each finished
ideal cut diamond (weighing .18 carats and larger) which is marketed as a Lazare
Diamond is then inscribed with the Lazare Kaplan logo and its own identification
number by the Company's patented laser inscription process. All of these
operations are performed by the Company's employees. The Company believes its
work force in Puerto Rico is the most highly skilled in the diamond industry.
The Company has undertaken a worker training program at its facility in Puerto
Rico to ensure a constant flow of skilled labor to satisfy its needs for further
growth.
The Company believes that it is recognized in the diamond industry for
the high quality and brilliance of the gems it cuts and that it also enjoys a
reputation as an imaginative and innovative cutter of large and difficult
diamonds.
Pricing
Rough Diamond Prices
Through its control of approximately 60% of the value of the current
world rough diamond output, the DTC can exert significant control over the
pricing of rough and polished diamonds by adjusting the quantity and pricing of
rough diamonds it supplies to the marketplace. Rough diamond prices established
by the DTC have been characterized historically by steady increases over the
long term; however, prices in the secondary market have experienced a greater
degree of volatility, particularly during the late 1970's. Traditionally, the
Company has been able to pass along such price increases to its customers. From
time to time, however, the Company has absorbed these price increases in the
short term to maintain an orderly pricing relationship with its customers. This
has, in the past, caused temporary adverse effects on the Company's earnings.
However, a large rapid increase in rough diamond prices could materially
adversely affect the Company's revenue and operating margins if the increased
cost of rough diamonds could not be passed along to its customers in a timely
manner.
According to published reports, during 1995 there was an emergence of a
two-tier market for rough
5
diamonds. The first tier is comprised of better quality rough diamonds, for
which the DTC attempts to maintain an orderly market. The Company conducts its
cutting and polishing operations almost exclusively in this segment of the
market. The second tier is comprised of small, less expensive, imperfect rough
diamonds. The prices for these diamonds are determined principally by supply and
demand. Consequently, there has been considerable volatility in the prices of
less expensive diamonds since 1995. Because the Company focuses primarily on
better quality rough diamonds, this volatility has not had a significant effect
on the Company. However, a significant decrease in the price of better quality
rough diamonds could materially adversely affect the Company's revenues,
operating margins and inventory value.
Polished Diamond Prices
Over the past 60 years, increases in the price of rough diamonds have
generally resulted in a corresponding increase in the price of polished
diamonds. However, during periods of economic uncertainty, there may be a time
lag before the Company is able to increase polished diamond prices. During the
period of high inflation in the late 1970's, investors speculated in hard
assets, driving polished diamond prices to exceptionally high levels which in
turn caused significant increases in the cost of rough diamonds. However, the
moderation of inflation during the early 1980's resulted in a sudden and massive
shift of investments from hard assets to financial instruments, resulting in
dramatic price declines for polished diamonds which caused a market liquidity
crisis as prices of some categories of polished diamonds fell below the
inventory costs of such diamonds. Since this period in the early 1980's, the
Company believes the pricing of polished diamonds has returned to its historical
pattern of responding to increases in the pricing of rough diamonds. However,
there can be no assurance that volatility in the price of polished diamonds
could not occur again. Any rapid decrease in the price of polished diamonds
could have a material adverse effect on the Company in terms of inventory
reserves, lower sales and lower margins.
The Company has broadened its sales base and implemented strict
inventory, pricing and purchasing controls which it believes could lessen the
impact of fluctuations in the price of rough and polished diamonds. These
include computerized rough diamond evaluation programs and inventory utilization
programs.
Marketing, Sales and Distribution
Marketing Strategy
The Company's sales strategy is directed primarily toward quality
conscious consumers throughout the United States, South America, the Far East,
the Middle East and Europe. The Company focuses its distribution efforts for
Lazare Diamonds on selectivity with a view to helping retailers who carry the
product maintain a competitive advantage. Lazare Diamonds can be found at some
of the most prestigious jewelry stores around the world, including both those
with international reputations and those recognized only in their local
communities as being the highest quality retail jewelers. This strategy helps
ensure that the Company's product is presented in an environment consistent with
its superior quality and image.
The Company also sells to certain jewelry manufacturers and diamond
wholesalers. The Company has developed a comprehensive grading system for its
diamonds which, when coupled with the "ideal cut" standard, allows jewelers to
order inventory by category rather than through the more cumbersome process of
visual selection. In addition, the Company designs, manufactures (through
independent contractors) and sells a line of high quality jewelry that features
Lazare Diamonds.
A key element of the Company's strategy is the promotion of the Lazare
Diamond brand name directly to consumers. The Company is able to market its
diamonds under a brand name to retailers because (a) the ideal cut
differentiates the Company's diamonds from commercial diamonds in the
marketplace and (b) each Lazare Diamond is inscribed with the Company's logo and
identification number using the Company's patented laser inscription process,
thus authenticating the diamonds. The Company holds domestic and various
international patents for this process. In addition, in August 1999, a U.S.
patent was issued to the Company for a new and improved laser inscription
process. The Company also has international patents-pending for this process.
6
The Company's decision to pursue the brand name strategy is reinforced
by two factors - a rising trend among informed consumers to purchase quality,
brand name products, and the need among upscale jewelers to set themselves apart
in an increasingly competitive market by carrying and promoting a highly
differentiated product.
Building awareness and acceptance of the Lazare Diamond brand name is
accomplished through a comprehensive marketing program which includes sales
training, cooperative advertising, sales promotion and public relations. A wide
assortment of sales promotion materials has been designed to facilitate
jewelers' sales of the Company's diamonds and fine jewelry line to consumers.
Public relations events are offered which help build traffic in retail stores.
The Company has begun a new program to build both free standing and in-counter
boutiques in the stores of a select group of its retail clients. The Company
believes these marketing programs have been and will continue to be instrumental
in increasing sales. The Company has no current plans to sell its diamonds
directly to consumers and intends to continue concentrating its marketing
efforts towards the quality retail jeweler.
The Lazare Diamond Registry program has been established by the Company
to enable consumers to register their Lazare Diamonds with the Company using the
laser inscribed identification number, thereby providing proof of ownership in
case of loss or theft.
The Company has developed its own E-commerce site. This site directly
links the Company to its retailers, which serves to significantly strengthen the
ties with its retail client base.
Sales and Distribution
While the purchase and sale of rough diamonds is concentrated among
relatively few parties, industry wide retailing of polished diamonds occurs
through over 40,000 jewelry stores in the United States, over 25,000 retailers
in Japan and over 60,000 retail stores in Europe. The Company's sales efforts
for its polished diamonds are directed primarily toward the fine quality segment
of these retailers (the majority of which are independently owned and operated),
wholesalers and distributors and, to a lesser extent, to jewelry manufacturers.
Full time regional sales representatives located throughout the United States,
Hong Kong and Europe, are compensated on a commission basis and handle sales
throughout their respective territories.
The Company's U.S. sales force is supported by a New York based
in-house sales and service department. Sales to certain of the Company's largest
accounts are handled by headquarters personnel. Most of the Company's major
accounts are customers of long standing.
The Company has been actively working to expand its foreign business
activities, particularly in the Far East countries of Japan, Hong Kong,
Singapore, Taiwan, Korea and Malaysia and recently throughout Latin America,
Italy and the Middle East.
After working with its former distributor for over 25 years, in 1999,
the Company changed the nature of its distribution in Japan by assuming control
of distribution of its products and opening its own office. In this way, the
Company realigned its position with its retail and wholesale customers and
shortened its channels of distribution. In addition, this realignment enabled
the Company, without interruption, to assume control of the expansion and
maintenance of the Lazare Diamond brand name in Japan. As part of the
realignment, the Company retained experienced Japanese staff, giving it
immediate and direct access to important customers as well as in depth industry
knowledge. The Company believes that this realignment was necessary in order to
compete effectively in Japan (the world's second largest market for diamonds and
diamond jewelry) in the years to come.
The Company uses a comprehensive sorting and inventory classification
system for grading color and clarity of its ideal cut polished diamonds. This
system, combined with the fact that the Company's stones are uniformly cut to
ideal proportions, reduces and in some cases eliminates the need for customers
to view diamonds before placing orders. The system enables customers to
standardize their inventories, order by mail or telephone and minimize their
inventory investment.
7
The percentages of the Company's total domestic and foreign net sales
to its customers, which include a combination of both rough diamonds and
polished diamonds sales taken together, for the past three fiscal years are set
forth below:
Years ended May 31,
-------------------------------
2001 2000 1999
---- ---- ----
Percentage of Net Sales to Customers
United States 28% 23% 31%
Far East 9% 8% 8%
Europe, Israel & other 63% 69% 61%
---- ----- ----
100% 100% 100%
==== ==== ====
The world's rough diamond trading markets are primarily located in
Belgium, India, and Israel; therefore, the majority of the Company's rough
diamond sales have been transacted with foreign customers. In 1999, due to an
increase in demand in the United States combined with weaker markets in the Far
East, the Company sold a greater percentage of its polished diamonds
domestically than it had in prior years. In addition, the Company's sales to
customers in Europe, Israel & other, which consisted primarily of rough
diamonds, were lower as a percentage of total sales in 1999 as compared to 2000
and in 2000 as compared to 2001.
The Company believes that due to the possible international resale of
diamonds by its customers, the above percentages may not represent the final
location of retail sales of its product. All of the Company's foreign sales,
other than those made in Japan, are denominated in United States dollars. The
profitability of foreign sales of either polished or rough diamonds is
consistent with that of domestic sales of similar merchandise.
Competition
The polished and rough diamond business is highly competitive. While
the Company believes that it has achieved a reputation as a leading cutter and
distributor of high quality diamonds, it faces competition in sales to its
customers in the United States and abroad from many other suppliers. In
addition, the Company sells rough diamonds in the competitive world market. A
substantial number of cutters and polishers and traders, some of which the
Company believes to be larger or to have greater financial resources than the
Company, sell diamonds of all qualities to the Company's customers.
The Company believes there are significant barriers to entry by
potential competitors into the business of manufacturing and distributing
ideally proportioned diamonds. Among the most important of these barriers are
the need for significant working capital to purchase rough diamonds and hold
polished inventory, the long-term relationships required to have access to
adequate supplies of rough diamonds, the limited number of persons with the
skills necessary to consistently cut significant amounts of ideally proportioned
diamonds, the difficulty in obtaining access to upscale channels of
distribution, the importance of public recognition of an established brand name
and the establishment of computer systems to report on and monitor the
manufacturing and distribution network.
Employees
At July 31, 2001, the Company had 205 full-time employees including 7
regional sales representatives. The Company maintains an apprenticeship program
at its facility in Puerto Rico, through which it trains its cutters, who are
highly skilled workers. The Company provides paid vacations, sick leave, group
life, disability, hospitalization and medical insurance for its employees. The
Company has a 401(k) retirement plan for its U.S. and Puerto Rico employees. The
Company believes that it has satisfactory relationships with its employees. None
of the Company's employees is represented by a union.
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Item 2. Properties
The Company leases office space, a portion of which is devoted to sales
rooms, at 529 Fifth Avenue, New York City, for a term expiring September 30,
2003 at an annual rental rate of approximately $278,000 (subject to
escalations). The Company also subleases space at the same address to Leon
Tempelsman & Son for a like term at a rental rate per square foot which is the
same as the Company is paying to the landlord.
The Company also owns a manufacturing facility in Caguas, Puerto Rico.
The Caguas facility consists of approximately 12,650 square feet.
The Company leases office space in Antwerp, Belgium for a term expiring
May 31, 2003 at an annual rental rate of 1,500,000 Belgian francs (approximately
$35,000) .
The Company owns a 330 square meter office in Antwerp, Belgium, a
portion of which is devoted to sales rooms.
The Company leases office space in Hong Kong for a term expiring April
30, 2002 at an annual rental rate of 481,200 Hong Kong dollars (approximately
$62,000).
The Company leases office space in Tokyo for a term expiring August 31,
2002 at an annual rental rate of 18,200,000 Japanese Yen (approximately
$170,000).
The Company believes that its facilities are fully equipped and
adequate to fulfill its operating and manufacturing needs.
Item 3. Legal Proceedings
The Company is not involved in any significant legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Company
The following table sets forth information regarding executive officers
of the Company.
NAME POSITION AGE
- ---- -------- ---
Maurice Tempelsman Chairman of the Board 72
Leon Tempelsman Vice Chairman of the 45
Board and President
Robert Speisman Senior Vice President - Sales 47
William H. Moryto Vice President and
Chief Financial Officer 43
All officers were elected by the Board of Directors at its meeting
following the Annual Meeting of Stockholders held in November 2000. All officers
hold office until the Board of Directors meeting following the next Annual
Meeting of Stockholders and until their respective successors have been duly
elected and qualified.
Maurice Tempelsman is the Chairman of the Board and a director of the
Company and a general partner of Leon Tempelsman & Son ("LTS"), a partnership
with interests in the international diamond and mining industries.
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He has held these positions since 1984. Maurice Tempelsman is the father of Leon
Tempelsman and the father-in-law of Robert Speisman.
Leon Tempelsman is the Vice Chairman of the Board, the President and a
director of the Company and a general partner of Leon Tempelsman & Son. He has
held these positions since 1984. Leon Tempelsman is the son of Maurice
Tempelsman and the brother-in-law of Robert Speisman.
The Company believes that neither the Tempelsmans nor LTS currently
engages directly or indirectly in any activities competitive with those of the
Company.
Robert Speisman has been the Senior Vice President - Sales of the
Company since January 1999. He was Vice President - Sales of the Company from
April 1986 until January 1999. Mr. Speisman has been a director of the Company
since 1989. Mr. Speisman is the son-in-law of Maurice Tempelsman and the
brother-in-law of Leon Tempelsman.
William H. Moryto has been Vice President and Chief Financial Officer
since May 2000. Prior to joining the Company in May 2000, he was Vice President
and Chief Financial Officer of Calvin Klein Underwear & Accessories Inc., an
apparel company. From 1997 through 1999 he was Vice President and Chief
Financial Officer of Guerlain Inc., a fragrance and cosmetics company. From 1996
through July 1997 he served as Chief Financial Officer of Von Holtzbrinck
Publishing Inc., a publishing company. Prior thereto, Mr. Moryto was a senior
manager with Ernst & Young LLP, an auditing and consulting firm, where he was
employed from 1983 through 1995.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock (par value $1 per share) is traded on the
American Stock Exchange.
Market prices and other information with respect to the Company's
common stock are hereby incorporated by reference to the Company's Annual
Report.
Item 6. Selected Financial Data
Selected financial data are hereby incorporated by reference to the
Company's Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis of financial condition and results
of operations is hereby incorporated by reference to the Company's Annual
Report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
At May 31, 2001, the Company had borrowings totaling approximately
$51.1 million outstanding under various credit agreements. The interest
rates on these borrowings are variable and therefore the general level of
U.S. and foreign interest rates affects interest expense. Increases in interest
expense resulting from an increase in interest rates could impact the Company's
results of operations. The Company's policy is to take actions that would
mitigate such risk when appropriate.
Item 8. Financial Statements and Supplementary Data
(a) The following financial statements and supplementary data are
hereby incorporated by reference to the Company's Annual Report.
(i) Report of Ernst & Young LLP
(ii) Consolidated Statements of Operations for each of the three
years in the period ended May 31, 2001.
(iii) Consolidated Balance Sheets as at May 31, 2001 and May 31,
2000.
10
(iv) Consolidated Statements of Stockholder's Equity for each of
the three years in the period ended May 31, 2001.
(v) Consolidated Statements of Cash Flows for each of the three
years in the period ended May 31, 2001.
(vi) Notes to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
Part III
Except for information regarding Executive Officers of the Company,
which, in accordance with Instruction G to Form 10-K, is included in Part I
hereof, the information called for by Part III (Items 10, 11, 12 and 13) is
incorporated by reference herein to the Company's definitive proxy statement to
be filed with the Commission within 120 days after the close of its fiscal year
ended May 31, 2001.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. The response to this portion of Item 14 is set forth in Item
8 of Part II hereof.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for each of
the three years in the period ended May 31, 2001.
All other schedules are omitted because they are not
applicable, or not required, or because the required
information is included in the consolidated financial
statements or notes thereto.
11
LAZARE KAPLAN INTERNATIONAL INC.
AND SUBSIDIARIES
-----------------
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
---------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
-----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other accounts Deductions end
Description of period expenses describe describe of period
----------- ---------- ---------- -------------- ---------- ----------
YEAR ENDED MAY 31, 2001:
Allowance for doubtful accounts $1,065,118 $382,000 $ - $344,118(A) $1,103,000
---------- -------- ---- -------- ----------
YEAR ENDED MAY 31, 2000:
Allowance for doubtful accounts $ 202,056 $874,000 $ - $ 10,938(A) $1,065,118
---------- -------- ---- -------- ----------
YEAR ENDED MAY 31, 1999:
Allowance for doubtful accounts $ 143,120 $ 60,000 $ - $ 1,064(A) $ 202,056
---------- -------- ---- -------- ----------
(A) Amounts written off.
12
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(continued)
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the fourth quarter of the fiscal year ending May 31, 2001.
(c) Exhibits
(3) Articles of Incorporation and Bylaws
(a) Certificate of Incorporation, as amended - incorporated herein
by reference to Exhibit 3(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1987 filed with
the Commission on August 26, 1987, as amended on January 14,
1988.
(b) Certificate of Amendment of Certificate of Incorporation filed
with the Secretary of State of the State of Delaware on
November 1, 1990 - incorporated herein by reference to Exhibit
(3)(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1992 filed with the Commission on
August 28, 1992.
(c) Certificate of Amendment of the Certificate of Incorporation
filed with the Secretary of State of the State of Delaware on
November 6, 1997 - incorporated by reference to Exhibit 4.1(a)
(iii) to Company's Registration Statement for the Lazare
Kaplan International Inc. 1997 Long Term Stock Incentive Plan
on Form S-8 filed with the Commission on November 14, 1997.
(d) Certificate of Designations of Series A Junior Participating
Preferred Stock filed with the Secretary of State of the State
of Delaware on November 6, 1997 - incorporated by reference to
Exhibit 4.1(b) to the Company's Registration Statement on Form
S-8 filed with the Commission on November 14, 1997.
(e) By-laws, as amended - incorporated herein by reference to
Exhibit 3(b) to the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1987 filed with the Commission
on August 26, 1987, as amended on January 14, 1988.
(10) Material Contracts
(a) Lazare Kaplan International Inc. Amended and Restated 1988
Stock Option Incentive Plan - incorporated herein by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-8 filed with the Commission on November 5, 1990.
(b) Lazare Kaplan International Inc. 1997 Long Term Stock
Incentive Plan - incorporated herein by reference to Exhibit A
to the Company's proxy statement for its Annual Meeting of
Stockholders held on November 5, 1997 filed with the
Commission on September 17, 1997.
(c) Form of Incentive Stock Option Agreement for options granted
pursuant to the Lazare Kaplan International Inc. 1997 Long
Term Stock Incentive Plan - incorporated herein by reference
to Exhibit 4.5(a) to the Company's Registration Statement on
Form S-8 filed with the Commission on November 14, 1997.
(d) Form of Non-Qualified Stock Option Agreement for options
granted pursuant to the Lazare Kaplan International Inc. 1997
Long Term Stock Incentive Plan - incorporated herein by
reference to Exhibit 4.5(a) to the Company's Registration
Statement on Form S-8 filed with the Commission on November
14, 1997.
(e) Loan Agreement, dated May 14, 1996 among the Company, Fleet
Bank, N.A. and Bank Leumi Trust Company of New York -
incorporated herein by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1996 filed with the Commission on August 28, 1996.
13
(f) Amendment No. 1, dated as of November 29, 1996, to Loan
Agreement, dated May 14, 1996, among the Company, Fleet Bank,
N.A. and Bank Leumi Trust Company of New York - incorporated
herein by reference to Exhibit 10(1) to Amendment No. 2 to the
Company's Registration Statement on Form S-2 filed with the
Commission on December 11, 1996.
(g) Amendment No. 2, dated as of May 30, 1997, to Loan Agreement,
dated May 14, 1996, among the Company, Fleet Bank, N.A. and
Bank Leumi Trust Company of New York - incorporated herein by
reference to Exhibit 10(n) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1997 filed with
the Commission on August 28, 1997.
(h) Third Amendment and Agreement to Loan Agreement, dated
December 8, 1999, of the Loan Agreement, dated May 14, 1996,
among Lazare Kaplan International Inc., Fleet Bank, N.A. and
Bank Leumi USA.
(i) Fourth Amendment and Agreement to Loan Agreement, dated June
2, 2000, to the Loan Agreement, dated May 14, 1996, among
Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank
Leumi USA.
(j) Fifth Amendment and Agreement to Loan Agreement, dated August
31, 2000, to the Loan Agreement, dated May 14, 1996, among
Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank
Leumi USA.
(k) Sixth Amendment and Agreement to Loan Agreement, dated
November 2, 2000, to the Loan Agreement, dated May 14, 1996,
among Lazare Kaplan International Inc., Fleet Bank, N.A. and
Bank Leumi USA.
(l) Agreement, dated as of December 14, 2000, between Antwerpse
Diamantbank NV and Lazare Kaplan Belgium, N.V. relating to
$30,000,000 (U.S.) facility.
(m) Agreement, dated as of December 14, 2000, between Antwerpse
Diamantbank NV and Lazare Kaplan Belgium, N.V. relating to
$10,000,000 (U.S.) facility.
(n) Guaranty, dated as of September 2, 1999, from Lazare Kaplan
International Inc. in favor of Antwerpse Diamantbank NV.
Incorporated herein by reference to Exhibit 10(p) to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 2000 filed with the Commission on August 28, 2000.
(o) Letter Agreement, dated as of June 5, 2000, between Fleet
Bank, N.A. and Lazare Kaplan International Inc. regarding
Interest Rate Swap. Incorporated herein by reference to
Exhibit 10(t) to the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 2000 filed with the
Commission on August 28, 2000.
(p) Credit Facility Agreement, dated as of November 29, 2000,
between ABN Amro Bank N.V., Tokyo branch, Lazare Kaplan Japan
Inc., and Lazare Kaplan International Inc.
(q) Cooperation Agreement, dated July 15, 1996 between the Company
and AK Almazi Rossii Sakha - incorporated herein by reference
to Exhibit (2) to the Company's Current Report on Form 8-K/A
filed with the Commission on November 18, 1996 (certain
portions of this agreement have been omitted pursuant to a
request for confidential treatment).
(r) Cooperation Agreement, dated March 23, 1999 between the
Company and AK Almazi Rossii Sakha - incorporated herein by
reference to Exhibit 10(n) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1999 filed with
the Commission on August 27, 1999 (certain portions of this
agreement have been omitted pursuant to a request for
confidential treatment).
(s) Processing Agreement, dated as of February 20, 1999, between
Pegasus Overseas Ltd. and a wholly-owned subsidiary of General
Electric Company - incorporated herein by reference to Exhibit
10(o) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1999 filed with the Commission on
August 27, 1999 (certain portions of this agreement have been
omitted
14
pursuant to a request for confidential treatment).
(t) Rights Agreement, dated as of July 31, 1997, between the
Company and ChaseMellon Shareholder Services, LLC -
incorporated herein by reference to Exhibit 99.1 to the
Company's Form 8-A filed with the Commission on August 26,
1997.
(u) Leon Tempelsman Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(o) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997 filed with the Commission on
August 28, 1997.
(v) Robert Speisman Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(q) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997 filed with the Commission on
August 28, 1997.
(13) 2001 Annual Report to Security Holders - incorporated herein by
reference to the Company's 2001 Annual Report to Stockholders to be
filed with the Commission.
(21) Subsidiaries
(23) Consent of Ernst & Young LLP
15
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LAZARE KAPLAN INTERNATIONAL INC.
By /s/ William H. Moryto
----------------------
William H. Moryto, Vice President
and Chief Financial Officer
Dated: August 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Maurice Tempelsman Chairman of the August 28, 2001
- ---------------------------- Board of Directors
(Maurice Tempelsman)
/s/ Leon Tempelsman Vice Chairman of the August 28, 2001
- ---------------------------- Board of Directors and
(Leon Tempelsman) President (principal
executive officer)
/s/ Lucien Burstein Director August 28, 2001
- ----------------------------
(Lucien Burstein)
/s/ Myer Feldman Director August 28, 2001
- ----------------------------
(Myer Feldman)
/s/ Robert A. Del Genio Director August 28, 2001
- ----------------------------
(Robert A. Del Genio)
/s/ Robert Speisman Director August 28, 2001
- ----------------------------
(Robert Speisman)
/s/ William H. Moryto Vice President and August 28, 2001
- ---------------------------- Chief Financial Officer
(William H. Moryto) (principal financial
and accounting officer)
16
EXHIBIT INDEX
10(h) Third Amendment and Agreement to Loan Agreement, dated
December 8, 1999, of the Loan Agreement, dated May 14, 1996,
among Lazare Kaplan International Inc., Fleet Bank, N.A. and
Bank Leumi USA.
10(i) Fourth Amendment and Agreement to Loan Agreement, dated June
2, 2000, to the Loan Agreement, dated May 14, 1996, among
Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank
Leumi USA.
10(j) Fifth Amendment and Agreement to Loan Agreement, dated August
31, 2000, to the Loan Agreement, dated May 14, 1996, among
Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank
Leumi USA.
10(k) Sixth Amendment and Agreement to Loan Agreement, dated
November 2, 2000, to the Loan Agreement, dated May 14, 1996,
among Lazare Kaplan International Inc., Fleet Bank, N.A. and
Bank Leumi USA.
10(l) Agreement, dated as of December 14, 2000, between Antwerpse
Diamantbank NV and Lazare Kaplan Belgium, N.V. relating to
$30,000,000 (U.S.) facility.
10(m) Agreement, dated as of December 14, 2000, between Antwerpse
Diamantbank NV and Lazare Kaplan Belgium, N.V. relating to
$10,000,000 (U.S.) facility.
10(p) Credit Facility Agreement, dated as of November 29, 2000,
between ABN Amro Bank N.V., Tokyo branch, Lazare Kaplan Japan
Inc., and Lazare Kaplan International Inc.
(13) 2001 Annual Report to Security Holders - incorporated herein by
reference to the Company's 2001 Annual Report to Stockholders to be
filed with the Commission.
(21) Subsidiaries
(23) Consent of Ernst & Young LLP
17
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as............................... 'TM'
The registered trademark symbol shall be expressed as.................... 'r'
The Japanese Yen sign shall be expressed as.............................. 'Y'