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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, 2004
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.)
19 West 44th Street 10036
(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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes No X
--- ---
As of July 31, 2004, 8,488,494 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 $22,530,966.
DOCUMENTS INCORPORATED BY REFERENCE
2004 definitive proxy statement to be filed with the Commission -
incorporated by reference into Part III.
2004 Annual Report to Stockholders for the fiscal year ended May 31,
2004 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 optimize the balance of
brilliance, sparkle and fire in a polished diamond. 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 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 ("De
Beers"). Based on published reports, the Company believes that more than half of
the world's current rough diamond output is sold by the DTC. 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.
2
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 DTC 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 80, including the Company.
Based upon published reports, the Company believes that more than half 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.
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
drive consumer demand for diamond jewelry by fostering the development of
efficient distribution networks that stimulate demand, support the emergence of
internationally recognized brands to meet consumer needs, supply clients with a
consistent supply of rough diamonds and encourage and support additional
investment in marketing and advertising programs with the goal of developing an
industry led by advertising and marketing support.
In June 2003, the Company was notified that it was selected by the DTC
to become a Sightholder under the Supplier of Choice Program. 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.
During the third quarter of fiscal 2004 the Company signed a
cooperation agreement with NamGem for the cutting and polishing of diamonds in
Namibia. NamGem is Namibia's flagship venture in the international diamond
polishing industry. Under the terms of the agreement the Company provides
marketing and technical manufacturing assistance to NamGem. The Company
purchases rough diamonds and supervises the manufacturing of those deemed
suitable to cut and polish. The Company pays NamGem for manufacturing on a fee
for services basis. All rough and polished diamonds are bought and sold by the
Company for its account.
During the fourth quarter of fiscal 2004 the Company signed a four year
technical cooperation agreement regarding the marketing of rough diamonds with
SODIAM, the government entity responsible for the development and marketing of
diamonds produced in Angola. The Company began active Angolan buying operations
during the first quarter of fiscal 2005.
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.
Through February 2009, the Company's wholly-owned subsidiary, Pegasus
Overseas Ltd. ("POL") has an
3
exclusive agreement with a formerly wholly-owned subsidiary of General Electric
Company ("GE") under which POL could market natural diamonds that have undergone
a new high pressure, high temperature (HPHT) 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 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. After careful study, a brand name,
Bellataire'r', was selected for the consumer launch.
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 international diamond industry and global
community at large, the Company fully supports and complies with policies which
prohibit the trade in conflict diamonds, prevent money laundering and combat the
financing of terrorism, a position which reflects the Company's leadership in
the industry. The Company fully complies with clean diamond trading and
anti-money laundering legislation adopted by the United States Government such
as the USA Patriot Act and the Clean Diamond Trade Act, and supports relevant
resolutions of concerned regional governments and international organizations
including the OECD and the United Nations. The Company is a founding member of
the United Nations Global Compact which was launched in 2000 to "initiate a
global compact of shared values and principles which will give a human face to
the global market". The Company will continue to join various industry and trade
associations in condemning and combating the trade in illicit diamonds and to
comply fully with World Diamond Congress resolutions for industry
self-regulation in respect of the Kimberley Process Certification Scheme,
including implementation of the prescribed System of Warranties and Code of
Conduct. Furthermore, the Company long ago adopted the highest professional and
ethical standards in every aspect of our business and is fully compliant with
the DTC's recently developed Diamond Best Practices Principles.
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 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 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 for
up to $100 million a year. 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. Under both the ALROSA I and the ALROSA II agreements, the Company
sells the resulting polished
4
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 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. Pursuant to the ALROSA II Agreement,
ALROSA has borrowed approximately $40 million backed by loan guarantees from
Eximbank and could apply for additional financing. These guaranties will allow
ALROSA to continue purchasing U.S. manufactured mining equipment and expand
mining production. Any interruption in the supply of diamonds from Russia could
have a material adverse effect on the Company.
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 more than half 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.
5
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
6
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 Lazare Diamond'r'
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 markets high quality commercial cut diamonds and diamond
jewelry through its worldwide distribution network to wholesalers, distributors
and retailer jewelers.
In addition, the Company markets Bellataire'r' diamonds and jewelry
through upscale retailers and select distributors throughout the world.
Bellataire diamonds are all natural diamonds that have been restored to their
intrinsic beauty through a patented high pressure, high temperature (HPHT)
process that improves the color of a limited group of gem diamonds.
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 generally compensated, in whole
or in part, on a commission or incentive basis and handle sales throughout the
respective territories in which they operate.
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:
7
--------------------------------------------------
2004 2003 2002
--------------------------------------------------
United States 30% 36% 42%
Far East 9% 9% 11%
Europe, Israel & Other 61% 55% 47%
-------------------------------------------------
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 high
quality cut 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 high quality cut diamonds,
the difficulty in obtaining access to upscale channels of distribution, the
importance of public recognition of an established brand name, a reputation for
diamond cutting excellence, and the procurement of computer systems to report on
and monitor the manufacturing and distribution network.
Employees
At July 31, 2004, the Company had 199 full-time employees including 9
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
In June 2003, the Company entered into a lease for 17,351 square feet
of office space, a portion of which will be devoted to sales rooms, at 19 West
44th Street, New York City, for a term expiring September 30, 2015 at an annual
rental rate of approximately $594,000 (subject to escalations). This location
will serve as the Company's new Corporate headquarters.
The Company also owns a manufacturing facility in Caguas, Puerto Rico.
The Caguas facility consists of approximately 12,650 square feet.
8
The Company leases office space in Antwerp, Belgium for a term expiring
May 31, 2015 at an annual rental rate of approximately $50,000. The Company has
the right to terminate the lease on May 31, 2006, 2009, and 2012.
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, 2005 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,
2006 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 has been apprised of the filing of a lawsuit alleging,
among other things, restraint of trade entitled "W.B. David & Co., Inc.
plaintiff, against De Beers Centenary A. G., et al., defendants," United States
District Court, Southern District of New York, in which approximately 100
individuals and entities, including De Beers Centenary A. G., certain of its
principals and allegedly related companies, and various "sightholders" of
De Beers, including the Company, are named as defendants. The Company has not
been served and does not know if it will be served in this matter. If the
Company is served it will deny all allegations of wrongdoing and vigorously
contest the lawsuit.
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 75
Leon Tempelsman Vice Chairman of the 48
Board and President
William H. Moryto Vice President and
Chief Financial Officer 46
All officers were elected by the Board of Directors at its meeting
following the Annual Meeting of Stockholders held in November 2003. 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
9
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 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, 2004, the Company had borrowings totaling approximately
$41.6 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, 2004.
(iii) Consolidated Balance Sheets as at May 31, 2004 and May 31,
2003.
(iv) Consolidated Statements of Stockholder's Equity for each of
the three years in the period ended May 31, 2004.
(v) Consolidated Statements of Cash Flows for each of the three
years in the period ended May 31, 2004.
(vi) Notes to Consolidated Financial Statements.
10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
Item 9a. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
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, 13 and 14) 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, 2004.
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. The response to this portion of Item 15 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,
2004.
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, 2004:
Allowance for doubtful accounts $ 523,000 $(44,000) $ - $114,000(A) $365,000
---------- --------- -------- -------- --------
YEAR ENDED MAY 31, 2003:
Allowance for doubtful accounts $ 424,000 $179,000 $ - $ 80,000(A) $523,000
---------- -------- -------- -------- --------
YEAR ENDED MAY 31, 2002:
Allowance for doubtful accounts $1,103,000 $(49,000) $ - $630,000(A) $424,000
---------- --------- -------- -------- --------
(A) Amounts written off.
12
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K (continued)
(b) None.
(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 - incorporated herein by reference to
exhibit 10(e) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2002 filed with the Commission on August
28, 2002.
13
(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 Lenders - incorporated herein by
reference to exhibit 10(f) to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 2002 filed with the
Commission on August 28, 2002.
(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 Lenders - incorporated herein by
reference to exhibit 10(g) to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 2002 filed with the
Commission on August 28, 2002.
(h) Credit Facility Agreement, dated as of November 29, 2002, between
ABN Amro Bank N.V., Tokyo branch, Lazare Kaplan Japan Inc., and
Lazare Kaplan International Inc. - incorporated herein by reference
to exhibit 10(h) to the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 2003 filed with the Commission on
August 26, 2003.
(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
14
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.
(r) Lease Agreement between EBS Forty-Fourth Property Associates LLC
and Lazare Kaplan International Inc. dated June 6, 2003. -
incorporated herein by reference to exhibit 10(r) to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 2003,
filed with the Commission on August 26, 2003.
(s) Amendment to the Revolving Credit Agreement, dated May 28, 2003, 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- incorporated herein by reference to
exhibit 10(r) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 2003, filed with the Commission on August
26, 2003.
(t) Amendment to the Revolving Credit Agreement, dated November 24,
2003, 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
(u) Cooperation Agreement, dated January 9, 2004, between Lazare Kaplan
International Inc. and NamGem Diamond Manufacturing Company (PTY)
Ltd. and Namdeb Diamond Corporation (PTY) Ltd. (certain portions of
this agreement have been omitted pursuant to a request for
confidential treatment).
(v) Agreement dated April 29, 2004 between Lazare Kaplan International
Inc. and Sociedade de Comercializacao de Diamantes de Angola, SARL
(SODIAM) (certain portions of this agreement have been omitted
pursuant to a request for confidential treatment).
(w) Amendment to the Credit Facility Agreement, dated December 1, 2003,
between ABN AMRO Bank N.V., Tokyo Branch, Lazare Kaplan Japan Inc.,
and Lazare Kaplan International Inc.
(13) 2004 Annual Report to Security Holders - incorporated herein by
reference to the Company's 2004 Annual Report to Stockholders to be
filed with the Commission.
(14) Code of Conduct for the President and senior financial officers of the
Company
(21) Subsidiaries
(23) Consent of Ernst & Young, LLP
(31.1) Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(99.1) Amended and restated Audit Committee Charter.
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 26, 2004
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 26, 2004
- ---------------------------- Board of Directors
(Maurice Tempelsman)
/s/ Leon Tempelsman Vice Chairman of the August 26, 2004
- ---------------------------- Board of Directors and
(Leon Tempelsman) President (principal
executive officer)
/s/ Lucien Burstein Director August 26, 2004
- ----------------------------
(Lucien Burstein)
/s/ Richard A. Berenson Director August 26, 2004
- ----------------------------
(Richard A. Berenson)
/s/ Myer Feldman Director August 26, 2004
- ----------------------------
(Myer Feldman)
/s/ Robert A. Del Genio Director August 26, 2004
- ----------------------------
(Robert A. Del Genio)
/s/ William H. Moryto Vice President and August 26, 2004
- ---------------------------- Chief Financial Officer
(William H. Moryto) (principal financial
and accounting officer)
16
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as ................... 'r'
The degree symbol shall be expressed as ................................. [d]