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UNITED STATES
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, 2002
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. [ X ]
As of August 24, 2002, 8,704,860 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 $54,840,618.
DOCUMENTS INCORPORATED BY REFERENCE
2002 definitive proxy statement to be filed with the Commission -
incorporated by reference into Part III.
2002 Annual Report to Stockholders for the fiscal year ended May 31, 2002
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 companies worldwide
engaged primarily in the production of ideally proportioned diamonds and that it
is the largest U.S. provider of ideal cut diamonds. In addition, through a
cooperative agreement with the largest Russian diamond mining company, the
Company cuts and polishes commercial diamonds at several 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 operates various 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
diamond industry. This facility generally produces polished diamonds having
weights of 1/5 of a carat and greater. The Company also operates manufacturing
facilities in Moscow and Barnaul, Russia. The facilities in Russia are operated
pursuant to agreements with AK ALROSA of Russia.
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. 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 substantially 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. 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 March 1999, the Company announced that its 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 could market natural diamonds that have undergone a new process
to improve the color of certain all-natural gem diamonds without reducing their
all-natural content. 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 by GE before the final cutting and polishing
by the Company. The process 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 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. U.S. retail sales of Bellataire'TM' diamonds commenced in 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
- ---------------------
Commencement of the Company's operations 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 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. 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 believed by the Company to be 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 additional
diamond cutting facilities. At present, the Company's operations in Russia are
consolidated in two facilities, both of which are 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
believed by the Company to be suitable for processing in these facilities. 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 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 diamond to ideal or
commercial proportions or resell the diamond. The shape of the 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 and
efficiency.
Rough diamonds selected for cutting are analyzed and where desirable are
sorted for sawing 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 inscribed with the Lazare Kaplan logo and its own identification number by
the Company's patented laser inscription process. 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 diamonds. The first tier is comprised of better
quality rough diamonds, where supply and demand appear to be in balance. 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 have been considerably
more volatile 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
significant 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. 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. 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.
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.
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 (www.lazarediamonds.com).
This site directly links
the Company to its retailers, which serves to further 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,
Latin America, Japan, 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.
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.
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,
--------------------------
2002 2001 2000
---- ---- ----
Percentage of Net Sales to Customers
United States 42% 28% 23%
Far East 11% 9% 8%
Europe, Israel & other 47% 63% 69%
---- ---- ----
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.
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, 2002, the Company had 187 full-time employees including 8
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.
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 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,
2004 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,
2004 at an annual rental rate of 18,200,000 Japanese Yen (approximately
$150,000).
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 73
Leon Tempelsman Vice Chairman of the 46
Board and President
William H. Moryto Vice President and 44
Chief Financial Officer
All officers were elected by the Board of Directors at its meeting
following the Annual Meeting of Stockholders held in November 2001. 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. He has held
these positions since 1984. Maurice Tempelsman is the father of Leon Tempelsman.
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.
The Company believes that neither the Tempelsmans nor LTS currently engages
directly or indirectly in any activities competitive with those of the Company.
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, 2002, the Company had borrowings totaling approximately $12.1
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. These actions include staggering the term and rate of its
borrowings to match anticipated cash flow.
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, 2002.
(iii) Consolidated Balance Sheets as at May 31, 2002 and May 31,
2001.
(iv) Consolidated Statements of Stockholder's Equity for each of
the three years in the period ended May 31, 2002.
(v) Consolidated Statements of Cash Flows for each of the three
years in the period ended May 31, 2002.
(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,
2002.
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, 2002.
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.
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, 2002:
Allowance for doubtful accounts $ 1,103,000 $ (49,000) $ - $630,000(A) $ 424,000
----------- ---------- --------- ----------- ----------
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
--------- -------- --------- ----------- ----------
(A) Amounts written off.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(continued)
- ----------
(b) Reports on Form 8-K - Form 8-K as filed on January 28, 2002.
(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) Revolving Credit Agreement, dated as of August 14, 2002, by and among
the Company, as Borrower, ABN AMRO Bank N.V., as Administrative Agent
and Arranger, and ABN AMRO Bank N.V. and Bank Leumi USA, as Bank
Lenders.
(f) Agreement, dated as of October 12, 2001, between Antwerpse
Diamantbank NV and Lazare Kaplan International Inc. relating to
$25,000,000 (U.S.) facility.
(g) Agreement, dated as of October 12, 2001, between Antwerpse
Diamantbank NV and Lazare Kaplan Belgium, N.V. relating to $15,000,000
(U.S.) facility.
(h) Credit Facility Agreement, dated as of November 29, 2001, between ABN
Amro Bank N.V., Tokyo branch, Lazare Kaplan Japan Inc., and Lazare
Kaplan International Inc.
(i) 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).
(j) 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).
(k) 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 pursuant to a request for
confidential treatment).
(l) 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.
(m) 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.
(n) Stock Purchase Agreement by and between Fifth Avenue Group, LLC and
the Company dated as of January 18, 2002 - incorporated by reference
to Exhibit (w) to the Company's Current Report on Form 8-K filed with
the Commission on January 28, 2002.
(o) Shareholders Agreement by and among Maurice Tempelsman, Leon
Tempelsman and Fifth Avenue Group, LLC dated as of January 18, 2002 -
incorporated herein by reference to Exhibit (x) to the Company's
Current Report on Form 8-K filed with the Commission on January 28,
2002.
(p) Form of Irrevocable Proxy from Fifth Avenue Group, LLC to Maurice
Tempelsman and Leon Tempelsman - incorporated herein by reference to
Exhibit (y) to the Company's Current Report on Form 8-K filed with the
Commission on January 28, 2002.
(q) Amendment to Rights Agreement dated as of January 17, 2002 between the
Company and
Mellon Investor Services LLC - incorporated herein by reference to
Exhibit (z) to the Company's Current Report on Form 8-K filed with the
Commission on January 28, 2002.
(13) 2002 Annual Report to Security Holders - incorporated herein by
reference to the Company's 2002 Annual Report to Stockholders to be
filed with the Commission.
(21) Subsidiaries
(23) Consent of Ernst & Young, LLP
(99.1) Certification of Leon Tempelsman, Vice Chairman of the Board and
President, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(99.2) Certification of William H. Moryto, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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, 2002
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, 2002
- ------------------------- Board of Directors
(Maurice Tempelsman)
/s/ Leon Tempelsman Vice Chairman of the August 28, 2002
- ------------------------- Board of Directors and
(Leon Tempelsman) President (principal
executive officer)
/s/ Lucien Burstein Director August 28, 2002
- -------------------------
(Lucien Burstein)
/s/ Myer Feldman Director August 28, 2002
- -------------------------
(Myer Feldman)
/s/ Robert A. Del Genio Director August 28, 2002
- -------------------------
(Robert A. Del Genio)
/s/ William H. Moryto Vice President and August 28, 2002
- ------------------------- Chief Financial Officer
(William H. Moryto) (principal financial
and accounting officer)
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as ................. 'r'
The trademark symbol shall be expressed as............................. 'TM'