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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended May 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
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Common Stock ($1 par value) 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 July 31, 1995, 6,147,808 shares of the registrant's common stock were
outstanding, and the aggregate market value of common stock held by
non-affiliates of the registrant, computed by reference to the closing price for
the registrant's stock on the American Stock Exchange at that date was
$15,508,823.
DOCUMENTS INCORPORATED BY REFERENCE
1995 definitive proxy statement to be filed with the Commission-
incorporated by reference into Part III.
1995 Annual Report to Stockholders for the fiscal year ended May 31, 1995
to be filed with the Commission-incorporated by reference into Parts II and IV.
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Item 1. The Company
Lazare Kaplan International Inc., which began its business in 1903, is
principally 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
commercial cut diamonds by the symmetrical relationship of their facets, which
maximizes brilliance, sparkle and fire. Due to these characteristics, Lazare
Diamonds command a premium in the marketplace. The Company believes there are
only a few other companies worldwide engaged solely in the production of ideally
proportioned diamonds and that it is the largest producer in this segment of the
diamond industry. Additionally, the Company is engaged in the buying and selling
of rough uncut diamonds.
The Company's sales strategy is directed primarily toward quality
conscious consumers throughout the United States, the Far East and Europe. The
Company generally sells to select retail jewelers in each geographic market in
order to maintain an image of selectivity and prestige consistent with its
overall marketing strategy. The Company has developed a comprehensive grading
system for its ideal cut diamonds which allows jewelers to order inventory by
category rather than through the more cumbersome process of visual selection. In
addition, the Company designs, manufactures 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 Diamonds brand name. Every Lazare Diamond bears a laser inscription on
its outer perimeter containing the Lazare Kaplan logo and an identification
number unique to the stone. This patented laser 'signature', which is invisible
to the naked eye but visible when magnified at least ten times, serves as the
purchaser's assurance that he is buying an authentic Lazare Diamond. This laser
signature also allows consumers to register their Lazare Diamonds with the
Company under its unique program, The Lazare Diamond Registry'r', thereby
providing proof of ownership in case of loss or theft.
Each rough diamond purchased by the Company and considered for sale as
a polished diamond is evaluated against strict management standards designed to
maximize its potential economic contribution to the Company's profitability.
Expert technicians, assisted by proprietary computer software, determine whether
to cut the stone to ideal proportions, cut the stone as a commercial diamond for
sale through alternative distribution channels, or resell the stone as rough.
The shape of the rough stone, its color, clarity and overall potential economic
contribution, are among the criteria used in making such a determination.
The Company's involvement in the purchase and sale of rough diamonds,
through its Antwerp, Belgium office, provides it with the ability to dispose of
those diamonds not selected for cutting and polishing, as well as access to
supplemental sources of supply. This activity allows the Company to maintain
quantities and qualities of inventory which best meet its customers' needs.
The Company's principal stockholder is Maurice Tempelsman, the
Chairman of the Board. Mr. Tempelsman and his son, Leon Tempelsman, are the sole
general partners of Leon Tempelsman & Son ('LTS'), a New York limited
partnership. LTS is the holder of 1,528,416 shares of common stock, all of which
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are deemed to be owned indirectly by each of Leon Tempelsman and Maurice
Tempelsman. In addition, Maurice Tempelsman is the direct beneficial holder of
2,385,014 shares of common stock. The aggregate number of common shares held by
Maurice Tempelsman, directly and indirectly, is 3,913,430 constituting 63.7% of
the Company's issued and outstanding common stock.
Lazare Kaplan International Inc. was incorporated in 1972 under the
laws of the State of Delaware as the successor to a business which originated in
1903.
Diamond Supply
Rough Diamonds
The Company's business is dependent upon the availability of rough
diamonds, the world's known sources of which are highly concentrated. Angola,
Australia, Botswana, Brazil, Ghana, Guinea, Namibia, Sierra Leone, South Africa,
Russia and Zaire account for more than 90% of present world rough gem diamond
production. The Central Selling Organization (the 'CSO'), which is affiliated
with De Beers Centenary AG, a Swiss company, is the primary world-wide marketing
mechanism of the diamond industry. The CSO seeks to maintain an orderly and
stable market for diamonds by regulating the quantity and selection of diamonds
that reach the market. Sales for the CSO are made in London by the Diamond
Trading Company (the 'DTC') to a select group of clients, including the Company.
Based upon published reports, the Company believes that approximately 80% of the
world diamond output is purchased for resale by the DTC and its affiliated
companies. In order to maintain their purchasing relationship, the DTC's clients
have traditionally been expected to purchase all of the diamonds offered to them
by the DTC. Non-clients of the DTC must either purchase their requirements from
clients of the DTC or seek access to that limited portion of the world supply
not marketed by the DTC.
Historically, the Company's principal supplier of rough diamonds has
been the DTC, which 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 ('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 stones known as a 'series', the composition
of which attempts to take into account the market in which the Company operates
and the Company's quantity requirements. The Company has been a client of the
DTC for more than 50 years.
In order to diversify its sources of supply, the Company has entered
into arrangements with other primary source suppliers, and has established an
office in Antwerp to supplement its rough diamond needs by making purchases in
the secondary market. For each of the past three years ended May 31, the Company
purchased not more than 60% of its diamond purchases from the DTC.
In November 1993, the Company reached an agreement with the Ghanaian
Government, Ghana Consolidated Diamonds Limited and De Beers Centenary pursuant
to which, the parties would, subject to a feasibility study, form a new company
to acquire, expand and operate the Akwatia/Birim Diamond and Gold Concessions
now owned by Ghana Consolidated Diamonds. In June, 1995 DeBeers Centenary
announced that
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its feasibility study was complete. During the feasibility period, output at the
mine increased significantly as a result of changes made to operations and
revenue increased. The improved performance suggests that the project has the
potential to generate positive cash flows subject to further cost reductions and
the maintenance of current production levels. However, DeBeers has informed the
Company and the Ghanaian Government that it will be withdrawing from the project
later this year stating its belief that the cost of its participation will
likely outweigh the economic potential it may realize. The Company anticipates
maintaining its position as marketing agent and plans to seek another mining
company to replace DeBeers in this project, however, should the Company not be
able to maintain its position as marketing agent its ability to recoup certain
pre-operating costs may not be assured.
In 1990, the Company and the Government of the Republic of Botswana,
through its Ministry of Mineral Resources and Water Affairs, reached a long term
agreement for the establishment of a diamond cutting and polishing factory in
Botswana. In 1992, the Government issued to the Company a long term license for
the construction and operation of the facility. On August 31, 1994, the Botswana
Development Corporation ('BDC') made an investment in Lazare Kaplan Botswana
(Pty) Limited. As a result of that investment, Lazare Kaplan Botswana (Pty)
Limited is owned by the Company (60%), the Government of Botswana (5.1%) and the
Botswana Development Corporation (34.9%). Lazare Kaplan Botswana moved into its
new permanent manufacturing facility in January 1993, which it owns and operates
in Molepolole, Botswana. The factory is a state-of-the-art facility using both
automated and manual equipment, and will ultimately employ 500 skilled
employees. The facility currently operates with approximately 463 local
employee/trainees and 14 expatriates. Lazare Kaplan Botswana has been given its
own sight allocation from the DTC from which it selects rough diamonds for
manufacture in its facility. Botswana is widely regarded today as the most
important rough gem diamond producing country in the world.
In December 1994 the Company reached an agreement with the National
Diamond Company of Angola, Endiama, U.E.E., pursuant to which the Company may
purchase rough diamonds from local Angolan suppliers and export such diamonds
for resale. The agreement entitles the Company to establish buying offices in
Angola, the first of which has been set up in Luanda, the capital of Angola. The
Company intends to establish additional buying offices in the future. The
agreement will run for a renewable term of 5 years.
Polished Diamonds
In addition to its purchase of rough diamonds, the Company also
purchases polished diamonds from a number of sources. These diamonds are
purchased with the intention either to resell them or to recut them to ideal
proportions at the Company's manufacturing facility in Puerto Rico.
Availability of Sources of Supply
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
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Company's sources of supply could be affected by political and economic
developments 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.
Cutting and Polishing
The Company has two primary cutting and polishing operations: Lazare
Kaplan Puerto Rico, located in Puerto Rico and Lazare Kaplan Botswana (Pty)
Ltd., located in Botswana. In addition, the Company recently began a diamond
polishing effort in cooperation with Roskomdragmet, the Russian Government
organization responsible for diamond policy. Under this arrangement, rough
diamonds supplied by Roskomdragmet are polished by Russian technicians in
Moscow, supervised by Company technical personnel and marketed by the Company.
The diamonds, which are non-ideal cut, commercial quality diamonds, are sold
through the Company's worldwide distribution network.
The Company's factory in Puerto Rico is believed to be the largest
cutting facility in the United States. Each stone 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 stone to ideal
proportions, cut the stone as a commercial diamond or resell the stone as rough.
The shape of the rough stone, its color and clarity and overall potential
economic contribution, are among the criteria used in making such
determinations. The Company has an incentive program that rewards its factory
managers and supervisors based on maximizing the manufactured results of the
following criteria: gross margin, yield (rough weight to polished weight
conversion) and efficiency.
Rough stones selected for cutting are analyzed and where desirable are
sorted for sawing or cleaving to achieve the desired shape and to eliminate
imperfections. They are then cut and polished into finished gems. Each finished
ideal cut gemstone (weighing .18 carats and larger) which is marketed as a
Lazare Diamond is then inscribed with the Lazare Kaplan logo and its own
identification number by the Company's patented laser inscription process. All
of these operations are performed by the Company's employees. The Company
believes its work force in Puerto Rico is the most highly skilled in the diamond
industry. The Company has undertaken a worker training program at its facility
in Puerto Rico to ensure a constant flow of skilled labor to satisfy its needs
for further growth.
The Lazare Kaplan Botswana diamond cutting and polishing factory in
Molepolole, Botswana began operations in its newly constructed facility in early
1993. The factory, which is a state-of-the-art facility, uses both automated
and manual equipment and is committed to train and employ Batswana workers. The
Company expects to employ up to 500 skilled technicians at the facility. As of
July 31, 1995, there were 477 employees, of which 116 were trainees.
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This new factory cuts and polishes rough diamonds to ideal proportions
in sizes which are presently not processed by the Company's facility in Puerto
Rico. The factory, which is still in the beginning stages, is concentrating on
the manufacture of rough stones of somewhat smaller size. The size range
manufactured will be expanded as the skills of its employees are developed.
Lazare Kaplan Botswana purchases rough on its own account directly from the DTC
for manufacture in the Botswana factory.
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
stones.
Pricing
Rough Diamond Prices
Through its control of approximately 80% of the world diamond output,
the DTC can exert significant control over the pricing of rough and polished
diamonds to maintain an orderly market by adjusting supplies in 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 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.
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. 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 1980's resulted in a sudden and
massive shift of investments from hard assets to financial instruments,
resulting in dramatic price declines for polished diamonds which caused a market
liquidity crisis as prices of some categories of polished diamonds fell below
the inventory costs of such diamonds. Since this period in the early 1980's, the
Company believes the pricing of polished diamonds has returned to its historical
pattern of responding to increases in the pricing of rough diamonds. However,
there can be no assurance that volatility in the price of polished diamonds
could not occur again. Any rapid decrease in the price of polished diamonds
could have a material adverse effect on the Company in terms of inventory
losses, lower sales and lower margins.
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The Company has 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 stone
evaluation programs, automatic economic order quantity models and inventory
utilization programs.
Marketing, Sales and Distribution
Marketing Strategy
The Company's sales strategy is directed primarily toward quality
conscious consumers throughout the United States, the Pacific Rim and Europe.
The Company generally sells to select retail jewelers in each geographic market
in order to maintain an image of selectivity and prestige consistent with its
overall marketing strategy. The Company also sells to certain jewelry and
diamond manufacturers and wholesalers. The Company has developed a comprehensive
grading system for its diamonds which allows jewelers to order inventory by
category rather than through the more cumbersome process of visual selection. In
addition, the Company designs, manufactures and sells a line of high quality
jewelry which features Lazare Diamonds.
A key element of the Company's strategy is the promotion of the Lazare
Diamonds brand name directly to consumers. The Company believes that ideal
cutting presents a clear competitive advantage over other diamonds in the
marketplace by providing the Company with the opportunity to establish a brand
name and to market its diamonds under this name through retailers. 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.
Each Lazare Diamond is inscribed with the Company's logo and identification
number using the Company's unique laser inscription process, thus authenticating
the diamond as a Lazare Diamond. This 'labelling' enables the Company to pursue
the brand name diamond strategy. The Company holds various domestic and
international patents for this process.
Building awareness and acceptance of Lazare Diamonds is accomplished
through a comprehensive marketing program which includes co-op advertising,
sales promotion and public relations. The advertising includes a toll-free
number which consumers may call to receive additional information about the
product and to be referred to jewelers carrying Lazare Diamonds and Lazare
Diamond jewelry in their geographic area. 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 believes these marketing
programs have been and will continue to be instrumental in increasing sales. The
Company does not intend to sell its diamonds directly to consumers and plans 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.
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While the purchase and sale of rough diamonds is concentrated among
relatively few parties, industry wide retailing of polished diamonds occurs
through over 39,000 jewelry stores in the United States, over 26,000 retailers
in Japan and over 48,000 retail stores in Europe. The Company's 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)
and, to a lesser extent, to jewelry manufacturers and wholesalers. Full time
regional sales representatives located throughout the United States and in Hong
Kong and Antwerp, who are compensated on a commission basis, handle sales
throughout the United States, the Pacific Rim and Europe.
The Company's sales force is supported by a New York based
telemarketing 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 expanding its activities abroad, particularly in
the Pacific Rim countries of Japan, Hong Kong, Singapore, Taiwan, Thailand,
Korea, Malaysia, Indonesia and Brunei. In Japan, the Company has had a marketing
relationship since 1972 with Aiwa Co., Ltd., the Japanese importer-marketer of
Lazare Diamonds. Aiwa Co., with a distribution network of over 200 retailers and
wholesalers, is an important customer of the Company's polished diamonds.
Additionally, the Company continues to believe there is significant growth
opportunity in the European market and has expanded in this area.
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 stones 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:
<TABLE>
<CAPTION>
Years ended May 31,
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1993 1994 1995
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<S> <C> <C> <C>
Percentage of Net Sales to Customers
Domestic 16% 16% 25%
Foreign 84% 84% 75%
</TABLE>
The domestic sales increase in 1995 as compared to the prior two years
was a result of the decrease in rough diamond sales in 1995 as compared to 1994
and 1993. Historically, the majority of the Company's rough diamond sales have
been to 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. As all foreign
sales are denominated in United States dollars, the Company does not experience
any foreign currency exposure on its foreign revenue. A portion of all foreign
polished sales are accompanied by bank guarantees or are shipped on a C.O.D.
basis. The profitability of foreign sales of either polished or rough diamonds
is consistent with that of domestic sales of similar merchandise.
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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. A
substantial number of cutters and merchants, 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 also sells
rough diamonds, primarily through its Antwerp office, in the competitive world
market.
The Company believes there are significant barriers to entry by
potential competitors into the business of manufacturing ideally proportioned
diamonds. Among the most important of these barriers are the need for
significant capital, the limited number of persons with the skills necessary to
cut 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 gauge and monitor the
manufacturing and distribution network.
Employees
At July 31, 1995, the Company had 658 full-time employees, which
includes 116 trainees in Botswana. The Company also has 7 regional sales
representatives. The Company maintains an apprenticeship program at its
facilities in Caguas, Puerto Rico, through which it trains its cutters, who are
highly skilled workmen. The Company also has a program in Botswana through which
it trains cutters and polishers to work at the Company's new facility. The
Company provides paid vacations, sick leave, group life, disability,
hospitalization and medical insurance for its employees. The Company has a
401(k) 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 LTS 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 7,500 square feet.
The Company leases office space in Antwerp, Belgium for a term
expiring May 31, 2003 at an annual rental rate of approximately $53,000
(1,500,000 Belgian francs).
The Company also has a 40% ownership interest in 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, 1997 at an annual rental rate of approximately $67,000 (514,800 Hong Kong
dollars).
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The Company leases land in Botswana for a nominal amount for a term of
fifty years with the right to renew for an additional fifty years. The Company
has constructed its cutting and polishing factory on such land. The facility is
approximately 4,300 square meters.
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 Registrant
The following table sets forth information regarding executive
officers of the Company.
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---- -------- ---
<S> <C> <C>
Maurice Tempelsman Chairman of the Board 66
Leon Tempelsman Vice Chairman of the 39
Board and President
George R. Kaplan Vice Chairman of the 77
Board
Sheldon L. Ginsberg Vice President and 41
Chief Financial Officer
Robert Speisman Vice President - Sales 42
</TABLE>
All officers were elected at the Annual Meeting of the Board of
Directors held in November 1994, and hold office until the next Annual Meeting
of the Board of Directors and until their respective successors have been duly
elected and qualified.
Maurice Tempelsman, Chairman of the Board and a director of the
Company, is a general partner of Leon Tempelsman & Son, a partnership with
interests in the international diamond and mining industries, positions he has
held since 1984. Maurice Tempelsman is the father of Leon Tempelsman and the
father-in-law of Robert Speisman.
Leon Tempelsman, Vice Chairman of the Board, President and a director
of the Company, is a general partner of Leon Tempelsman & Son, positions he has
held since 1984. Leon Tempelsman is the son of Maurice Tempelsman and the
brother-in-law of Robert Speisman.
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The Company believes that neither the Tempelsmans nor LTS currently
engages directly or indirectly in any activities competitive with those of the
Company.
George R. Kaplan has been Vice Chairman of the Board since 1984 and a
director of the Company since 1972.
Sheldon L. Ginsberg has been Vice President and Chief Financial
Officer since April 1991. He was the Vice President-Finance from January 1986
until April 1991. Mr. Ginsberg has been a director of the Company since 1989.
Robert Speisman has been the Vice President - Sales of the Company
since 1986. Mr. Speisman has been a director of the Company since 1989. Mr.
Speisman is the son-in-law of Maurice Tempelsman and the brother-in-law of Leon
Tempelsman.
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters
The Registrant's common stock (par value $1 per share) is traded on
the American Stock Exchange.
Market prices and other information with respect to the Registrant's
common stock are hereby incorporated by reference from page 1 of the
Registrant's Annual Report.
Item 6. Selected Financial Data
Selected financial data are hereby incorporated by reference from page
4 of the Registrant'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 from pages 5 to 7 of
the Registrant's Annual Report.
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Item 8. Financial Statements and Supplementary Data
(a) The following financial statements and supplementary data are
hereby incorporated by reference from pages 8 to 18 of the Registrant'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, 1995.
(iii) Consolidated Statements of Stockholders' Equity for
each of the three years in the period ended May 31,
1995.
(iv) Consolidated Balance Sheets as at May 31, 1995 and May
31, 1994.
(v) Consolidated Statements of Cash Flows for each of the
three years in the period ended May 31, 1995.
(vi) Notes to Consolidated Financial Statements.
(b) Report on Financial Statements and Financial Statement Schedule of
Deloitte & Touche LLP for each of the two years in the period ended May 31,
1994.
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Lazare Kaplan International Inc.
We have audited the accompanying consolidated balance sheet of Lazare
Kaplan International Inc. and subsidiaries as of May 31, 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended May 31, 1994. Our audits also included
the financial statement schedule listed in the Index at Item 14(a)(2). These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Lazare Kaplan International
Inc. and subsidiaries at May 31, 1994, and the results of their operations and
their cash flows for each of the two years in the period ended May 31, 1994 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
July 13, 1994 (August 31, 1994 as to note 11)
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Item 9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure
During the fiscal year ended May 31, 1994, the Board of Directors of
the Company considered changing the Company's independent certified public
accountants and, effective September 16, 1994, Ernst & Young LLP was appointed
in replacement of Deloitte & Touche LLP to serve as the Company's independent
certified public accountants for the Company's fiscal year ending May 31, 1995.
In connection with the audits of the two most recent fiscal years of the Company
and all subsequent interim periods preceding such dismissal, there was no
disagreement between the Company and Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche LLP would have caused them to make reference thereto in their
report on the financial statements for such period. The reports of Deloitte &
Touche LLP for such period did not contain an adverse opinion or disclaimer of
opinion nor were they qualified as to uncertainty, audit scope, or accounting
principles. The decision to replace Deloitte & Touche LLP with Ernst & Young LLP
as the Company's independent certified accountants was unanimously approved by
the Audit Committee of the Board of Directors of the Company and ratified by the
stockholders of the Company at the 1994 Annual Meeting of Stockholders.
14
Part III
Except for information regarding Executive Officers of the Registrant,
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 from the Registrant's definitive proxy
statement to be filed with the Commission within 120 days after the close of its
fiscal year ended May 31, 1995.
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 Schedules
Report on Financial Statement Schedule and Consent of
Ernst & Young LLP for the year ended May 31, 1995
Report on Financial Statements and Financial
Statement Schedule of Deloitte & Touche LLP for each
of the two years in the period ended May 31, 1994
(included in their report filed under Item 8(b) of
this Report on Form 10-K).
Schedule VIII - Valuation and Qualifying Accounts
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.
15
<PAGE>
REPORT AND CONSENT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Lazare Kaplan
International Inc. and subsidiaries as of May 31, 1995, and for the year then
ended, and have issued our report thereon dated July 12, 1995 (August 25, 1995
as to Note 6); such consolidated financial statements and report are included in
the Company's 1995 Annual Report to Stockholders and are incorporated herein by
reference. Our audit also included the consolidated financial statement
schedule of Lazare Kaplan International Inc. and subsidiaries for the year
ended May 31, 1995, listed in the accompanying index at Item 14(a)(2). This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit. In
our opinion, this consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
We consent to the incorporation by reference in Registration Statement No.
33-20528 of Lazare Kaplan International Inc. on Form S-8, of our reports dated
July 12, 1995 (August 25, 1995 as to Note 6), with respect to the consolidated
financial statements and schedule of Lazare Kaplan International Inc. included
and incorporated by reference in the Annual Report on Form 10-K for the year
ended May 31, 1995.
Ernst & Young LLP
New York, New York
August 25, 1995
16
<PAGE>
LAZARE KAPLAN INTERNATIONAL INC.
AND SUBSIDIARIES
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
---------------------------------
(1) (2)
Balance at Charged to Charged to Balance at
beginning costs and other accounts Deductions end
Description of period expenses describe describe of period
----------- ---------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MAY 31, 1995:
Allowance for doubtful accounts .......... $ 165,169 $ 70,000 $ -- $ 15,123(C) $ 220,046
---------- ---------- ---------- ---------- ----------
Sales returns and allowances ............. $ -- $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ----------
YEAR ENDED MAY 31, 1994:
Allowance for doubtful accounts .......... $ 403,837 $ 10,000 $ -- $ 248,668(C) $ 165,169
---------- ---------- ---------- ---------- ----------
Sales returns and allowances ............. $ 268,632 $ (268,632)(B) $ -- $ -- $ --
---------- ---------- ---------- ---------- ----------
YEAR ENDED MAY 31, 1993:
Allowance for doubtful accounts .......... $ 379,364 $ 86,075 $ 169(A) $ 61,771(C) $ 403,837
---------- ---------- ---------- ---------- ----------
Sales returns and allowances ............. $ 473,781 $ (205,149)(B) $ -- $ -- $ 268,632
---------- ---------- ---------- ---------- ----------
</TABLE>
(A) Recoveries of previously written off accounts
(B) Adjustments to reserve balance
(C) Amounts written off
17
<PAGE>
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the fourth quarter of the fiscal year ended May 31, 1995.
(c) Exhibits
(3) (a) Certificate of Incorporation, as amended -
incorporated herein by reference to Exhibit
3(a) to Report on Form 10-K of the
Registrant 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 Report on Form 10-K of
the Registrant for the fiscal year ended May
31, 1992 filed with the Commission on August
28, 1992.
(c) By-laws, as amended - incorporated herein by
reference to Exhibit 3(b) to Report on Form
10-K of the Registrant 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 Registration Statement on Form S-8 of
the Registrant filed with the Commission on
November 5, 1990.
(b) Note Agreement dated as of May 15, 1991 by
and between the Registrant, Allstate Life
Insurance Company, Monumental Insurance
Company and PFL Life Insurance Company -
incorporated herein by reference to Exhibit
28 to Report on Form 8-K dated May 23, 1991
filed with the Commission on June 4, 1991.
18
<PAGE>
(c) First Amendment to Note Agreement, dated as
of February 28, 1992, by and between the
Registrant, Allstate Life Insurance Company,
Monumental Life Insurance Company and PFL
Life Insurance Company incorporated herein
by reference to Exhibit 10(d) to Report on
Form 10-K of the Registrant for the fiscal
year ended May 31, 1992 filed with the
Commission on August 28, 1992.
(d) Second Amendment to Note Agreement, dated as
of March 25, 1992 by and between the
Registrant, Allstate Life Insurance Company,
Monumental Life Insurance Company and PFL
Life Insurance Company incorporated herein
by reference to Exhibit 10(e) to Report on
Form 10-K of the Registrant for the fiscal
year ended May 31, 1992 filed with the
Commission on August 28, 1992.
(e) Third Amendment to the Note Agreement, dated
as of December 1, 1992 by and between the
Registrant, Allstate Life Insurance Company,
Monumental Life Insurance Company and PFL
Life Insurance Company incorporated herein
by reference to Exhibit 10(f) to Report on
Form 10-K of the Registrant for the fiscal
year ended May 31, 1993 filed with the
Commission on August 30, 1993.
(f) Agreement, dated December 5, 1990, by and
between the Registrant and the Government of
the Republic of Botswana - incorporated
herein by reference to Exhibit 10(f) to
Report on Form 10-K of the Registrant for
the fiscal year ended May 31, 1992 filed
with the Commission on August 28, 1992.
(g) Subscription Agreement, dated August 24,
1994 among the Registrant and the Botswana
Development Corporation incorporated herein
by reference to Exhibit 10(h) to Report on
Form 10-K of the Registrant for the fiscal
year ended May 31, 1994 filed with the
Commission on August 31, 1994.
19
<PAGE>
(13) 1995 Annual Report to Security Holders - incorporated
herein by reference to the 1995 Annual Report to Stockholders of the Registrant
to be filed with the Commission.
(21) Subsidiaries
(24)(a) Consent of Deloitte & Touche LLP
(24)(b) Consent of Ernst & Young LLP
(Included in their report filed under Item (14)(a)(2)
of this Report on Form 10-K)
20
<PAGE>
SIGNATURES
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/ Leon Tempelsman
----------------------------
Leon Tempelsman, Vice Chairman
and President (principal
executive officer)
By/s/ Sheldon L. Ginsberg
----------------------------
Sheldon L. Ginsberg, Vice President and
Chief Financial Officer (principal
financial officer)
Dated: August 29, 1995
21
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
(s) Maurice Tempelsman Chairman of the August 29, 1995
- ----------------------------- Board of Directors
(Maurice Tempelsman)
(s) Leon Tempelsman Vice Chairman of the August 29, 1995
- ----------------------------- Board of Directors
(Leon Tempelsman)
(s) George R. Kaplan Vice Chairman of the August 29, 1995
- ----------------------------- Board of Directors
(George R. Kaplan)
(s) Lucien Burstein Director August 29, 1995
- -----------------------------
(Lucien Burstein)
(s) Myer Feldman Director August 29, 1995
- -----------------------------
(Myer Feldman)
(s) Michael W. Butterwick Director August 29, 1995
- -----------------------------
(Michael W. Butterwick)
(s) Sheldon L. Ginsberg Director August 29, 1995
- -----------------------------
(Sheldon L. Ginsberg)
(s) Robert Speisman Director August 29, 1995
- -----------------------------
(Robert Speisman)
</TABLE>
22
<PAGE>
LAZARE KAPLAN INTERNATIONAL INC.
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No. 1-7848
May 31, 1995
EXHIBIT INDEX
Exhibit Page No.
------- --------
(3) (a) Certificate of Incorporation, as amended -
incorporated herein by reference to Exhibit 3(a) to
Report on Form 10-K of the Registrant 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 Report on Form 10-K of the Registrant for the
fiscal year ended May 31, 1992 filed with the
Commission on August 28, 1992.
(c) By-laws, as amended - incorporated herein by
reference to Exhibit 3(b) to Report on Form 10-K of
the Registrant 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
Registration Statement on Form S-8 of the
Registrant filed with the Commission on November 5,
1990.
23
<PAGE>
Exhibit Page No.
------- --------
(b) Note Agreement dated as of May 15, 1991 by and
between the Registrant, Allstate Life Insurance
Company, Monumental Insurance Company and PFL Life
Insurance Company - incorporated herein by
reference to Exhibit 28 to Report on Form 8-K dated
May 23, 1991 filed with the Commission on June 4,
1991.
(c) First Amendment to Note Agreement, dated as of
February 28, 1992, by and between the Registrant,
Allstate Life Insurance Company, Monumental Life
Insurance Company and PFL Life Insurance Company
incorporated herein by reference to Exhibit 10(d)
to Report on Form 10-K of the Registrant for the
fiscal year ended May 31, 1992 filed with the
Commission on August 28, 1992.
(d) Second Amendment to Note Agreement, dated as of
March 25, 1992 by and between the Registrant,
Allstate Life Insurance Company, Monumental Life
Insurance Company and PFL Life Insurance Company
incorporated herein by reference to Exhibit 10(e)
to Report on Form 10-K of the Registrant for the
fiscal year ended May 31, 1992 filed with the
Commission on August 28, 1992.
(e) Third Amendment to the Note Agreement, dated as of
December 1, 1992 by and between the Registrant,
Allstate Life Insurance Company, Monumental Life
Insurance Company and PFL Life Insurance Company
incorporated herein by reference to Exhibit 10(f)
to Report of Form 10-K of the Registrant for the
fiscal year ended May 31, 1993 filed with the
Commission on August 30, 1993.
24
<PAGE>
Exhibit Page No.
------- --------
(f) Agreement, dated December 5, 1990, by and between
the Registrant and the Government of the Republic
of Botswana - incorporated herein by reference to
Exhibit 10(f) to Report on Form 10-K of the
Registrant for the fiscal year ended May 31, 1992
filed with the Commission on August 28, 1992.
(g) Subscription Agreement, dated August 24, 1994 among
the Registrant and the Botswana Development
Corporation incorporated herein by reference to
Exhibit 10(h) to Report on Form 10-K of the
Registrant for the fiscal year ended May 31, 1994
filed with the Commission on August 31, 1994.
(13) 1995 Annual Report to Security Holders -
incorporated herein by reference to the 1995 Annual
Report to Stock holders of the Registrant to be
filed with the Commission. 26
(21) Subsidiaries 46
(24)(a) Consent of Deloitte & Touche LLP. 47
(24)(b) Consent of Ernst & Young LLP (included in their
report filed under Item (14)(a)(2) of this Report
on Form 10-K).
25
<PAGE>
[LOGO]
Lazare Kaplan International Inc.
The leader in ideal cut
diamonds for over 90 years.
[LOGO]
1995 Annual Report
<PAGE>
[LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LAZARE KAPLAN INTERNATIONAL INC. 1995 ANNUAL REPORT
Lazare Kaplan International Inc. is engaged in the cutting and polishing of
ideal cut diamonds, which it laser inscribes and distributes to quality retail
jewelers internationally under the brand name 'Lazare Diamonds'r''. Diamonds cut
and polished by Lazare Kaplan craftsmen, whatever their size, are finished to
precise proportions, bringing out all of the diamond's natural brilliance, fire
and luster. Lazare Kaplan is also engaged in the trading of uncut rough diamonds
and non-ideal cut, commercial quality diamonds.
AMERICAN STOCK EXCHANGE
The Company's common stock is traded on the American Stock Exchange under the
ticker symbol LKI.
FORM 10-K
Upon written request, a copy of the Company's Form 10-K Annual Report without
exhibits for the year ended May 31, 1995 as filed with the Securities and
Exchange Commission, will be made available to stockholders without charge.
Requests should be directed to the Controller, Ms. James, Lazare Kaplan
International Inc., 529 Fifth Avenue, New York, New York 10017.
ANNUAL MEETING
November 1, 1995
10 A.M.
The Cornell Club
Six East 44th Street
Fifth Floor, Room AB
New York, New York 10017
MARKET PRICES OF COMMON STOCK BY FISCAL QUARTER
- -----------------------------------------------
<TABLE>
<CAPTION>
FISCAL 1995
-------------------------------
HIGH LOW
-------------------------------
<S> <C> <C>
- ---------------------------------------------
FIRST 9 7/8 8 7/8
SECOND 9 3/4 8 1/2
THIRD 9 3/4 8 5/8
FOURTH 8 3/4 7 1/2
- ---------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1994
-------------------------------
High Low
-------------------------------
<S> <C> <C>
- ---------------------------------------------
First 8 3/4 5 3/4
Second 6 7/8 5 7/8
Third 9 5/8 6 7/8
Fourth 9 3/8 8 1/8
- ---------------------------------------------
</TABLE>
As of June 30, 1995 there were approximately 232 stockholders of record of the
6,147,808 issued and outstanding shares of the common stock of the Company.
<PAGE>
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TO OUR STOCKHOLDERS:
The Company reported net revenue of $178,143,000 for the fiscal year ended
May 31 compared to net revenue of $204,047,000 in the previous fiscal year. Net
loss for the period was $1,153,000 compared to net profit of $3,024,000 in the
previous year. The drop in revenue is attributable to a cutback in supply of
rough diamonds from one of the Company's primary suppliers. Rough diamond sales
decreased by 31% and polished diamond sales increased by 42% from the previous
year. Management is encouraged by the substantial increase in revenue from
polished diamond sales in the domestic and international markets. Selling,
general and administrative costs and interest charges were tightly controlled
and were in line with management projections.
The diamond industry continues to face structural changes that for the time
being bear heavily on operating margins -- with particular pressure in the
manufacturing sector. Prices for the quality of rough diamonds used by the
Company in its manufacturing operation remain firm and have increased. Demand
for the ideal cut and high quality polished diamonds remains good, but
competitive market conditions stemming principally from industry wide structural
changes are reflected in the lower gross margin obtained from manufacturing and
marketing polished diamonds. Management is attentive to these conditions, and
while addressing their short term impact on the profitability of operations,
believes that the changes taking place provide future opportunities. The Company
is strategically well positioned to benefit from these changes.
The U.S. market for diamonds and jewelry remains active, with good
nationwide demand from the quality jewelers that stock and market the ideal cut
Lazare Diamonds'r'. Management continues to focus on the need to reduce delivery
costs while maintaining the high standards of quality for its product and
service that is the hallmark of the Company's long standing relationship with
its quality jewelers. Management has reorganized its sales force, internal
support staff, and procedures in order to provide closer cooperation with, and
support to the jewelry outlets that show an increased commitment to the product.
Sales of polished diamonds in the U.S. market showed an increase of 25% over the
previous year.
The Japanese consumer market continues to be hesitant and this is reflected
in the diamond and jewelry sector. However, our sales in Japan have shown a
marked improvement and have increased over 100% from the previous year. We
continue to work closely with our distributor AIWA Co. Ltd. who has shown
remarkable resilience in adjusting to difficult conditions. We are now jointly
pursuing an aggressive marketing strategy that should enable us to increase
market share for our products.
Our marketing efforts in the Pacific Rim region continue to bear fruit. Our
sales in the region increased over 70%. We have opened a sales office in Hong
Kong to better service the region, and to enhance our ability to participate in
the many growth and expansion opportunities that continue to present themselves.
Our manufacturing operation in Puerto Rico is performing well, not only in
responding with flexibility and speed to demand shifts, but also in providing
management and technical resources for our increasingly important manufacturing
operations in Botswana and Russia from its extensive pool of exceptionally
skilled and experienced craftsmen. Puerto Rico management is constantly
reviewing state of the art technology that is being developed at an increasing
pace in various parts of the world, and is assessing its applicability to
achieve increased productivity, lower costs, and enhanced yield.
Our manufacturing facility in Botswana, now employing 477 people, 463 of
whom are local citizens, continues to increase quantity and improve the quality
of its production. The plant principally produces smaller size stones (melees),
finished to ideal cut standards. This premium product has been well received in
the market, particularly in the Pacific Rim and Japan. The melee marketing
department in New York is making good progress in coordinating production with
demand, and is working with manufacturing jewelers to increase market share. As
training continues and start up production has been increasing to
2
<PAGE>
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
commercial levels, management decided to write down previously produced melee
inventory to market value. This non-recurring charge of $1,800,000 contributed
to the loss of $1,153,000 reported for the fiscal year just ended. We have
received firm and constant support and encouragement from our partner in this
venture, the Government of Botswana, who made an equity investment of
approximately $8,000,000 through the Botswana Development Corporation, and who
are currently assisting us to secure a supply of suitable raw material on a
timely basis for the stepped up number of stones produced by the increasingly
skilled and productive Batswana work force.
In Russia, our venture with Roskomdragmet (the Russian Government
organization responsible for diamond policy and the national stockpile) has
grown substantially and is concentrating its efforts on the manufacture of
larger sizes that are marketed in all the geographic areas in which the Company
operates. We continue to provide technical, marketing, and management support
for what is an increasingly important production manufactured by skilled Russian
technicians.
On June 19, 1995, DeBeers Centenary announced that it was withdrawing from
the Birim River project in Akwatia, Ghana as the feasibility study it completed
indicated that the project was better suited for a smaller scale mining
operator. The Government of Ghana has indicated that it would like the Company
to continue as the marketing agent for the production. While the Ghana
Consolidated Diamond mine continues to operate under its existing management, we
are contacting smaller scale operators to determine whether the project can go
forward with appropriate modifications.
Our rough trading operation in Belgium continues to perform well, although
its revenue lagged because of the cutback of rough supplies from one of our
major suppliers. It is staffed by skilled and expert traders and we plan to
expand its scope.
The Company was granted a rough buying and export license by the Government
of Angola. The Company is working with the national diamond company, Endiama.
Operations have started at a very satisfactory pace. Angola is one of the major
producers of better quality rough diamonds and further expansion of our buying
offices is foreseen, as peaceful conditions are reestablished.
Though demand for diamonds in the year ended May 31, 1995 was good, it was
a difficult year for the industry and the Company. Uncertainty and continuing
pressure on operating margins were challenges that had to be addressed. Under
these circumstances, management focused on making operations as efficient as
possible, cutting costs and enhancing its strategic positioning. This could not
have been achieved without the extraordinary efforts, hard work, and commitment
of the Company's executives and employees worldwide.
<TABLE>
<S> <C>
/S/ MAURICE TEMPELSMAN /S/ LEON TEMPELSMAN
Maurice Tempelsman Leon Tempelsman
Chairman of the Board Vice Chairman and President
</TABLE>
3
<PAGE>
[LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1995 1994 1993 1992 1991
- -------------------------------------------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $178,143 $204,047 $158,075 $151,875 $133,016
(Loss)/income before income tax provision,
minority interest and extraordinary item $ (1,418) $ 2,803 $ (728) $ (2,287) $ 4,349
- -----------------------------------------------------------------------------------------------------------------
Extraordinary item, utilization of net
operating loss carryforward -- -- -- -- $ 1,821
- -----------------------------------------------------------------------------------------------------------------
Net (loss)/income $ (1,153) $ 3,024 $ (903) $ (2,951) $ 4,073
- -----------------------------------------------------------------------------------------------------------------
Net (loss)/income per share (based on the weighted
average number of shares outstanding) (1) $ (0.18) $ 0.49 $ (0.15) $ (0.48) $ 0.80
- -----------------------------------------------------------------------------------------------------------------
Fully diluted (loss)/income per share $ (0.18) $ 0.49 $ (0.15) $ (0.48) $ 0.80
- -----------------------------------------------------------------------------------------------------------------
At May 31:
Total assets $ 99,163 $ 93,178 $ 86,452 $ 77,977 $ 79,695
- -----------------------------------------------------------------------------------------------------------------
Short-term debt $ 11,410 $ 17,185 $ 12,005 $ 3,000 $ 3,000
- -----------------------------------------------------------------------------------------------------------------
Long-term debt $ 26,430 $ 25,715 $ 30,000 $ 30,000 $ 30,000
- -----------------------------------------------------------------------------------------------------------------
Working capital $ 59,290 $ 52,333 $ 53,011 $ 61,079 $ 66,565
- -----------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 37,695 $ 38,751 $ 35,671 $ 36,573 $ 39,525
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The effect on earnings per share for the utilization of net operating loss
carryforward was $.36 for 1991.
Note: No cash dividends were declared or paid by the Company during the past
five fiscal years.
4
<PAGE>
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion and analysis should be read in conjunction with the
Selected Financial Data on page 4 and the audited financial statements and
related notes of the Company commencing on page 8 of this report. In this
discussion, the years '1995', '1994' and '1993' refer to the fiscal years ended
May 31, 1995, 1994 and 1993, respectively.
RESULTS OF OPERATIONS
Net Sales
Net sales in 1995 of $178,143,000 were $25,904,000 or 13% less than net
sales of $204,047,000 in 1994.
The Company's net revenue from the sale of polished diamonds of $73,097,000
in 1995 was 42% greater than 1994 polished sales. The increase was due to
continued growth in the United States and the Pacific Rim, as well as a
strengthening in the Japanese market. The higher sales amounts also reflect
increased volume associated with the Company's cutting and polishing venture
with Roskomdragmet (the Russian Government organization responsible for diamond
policy).
Rough diamond sales decreased 31% in 1995. This decrease was a result of
industry-wide market conditions and reduced supplies of rough diamonds made
available from the Company's primary supplier. While the rough trading operation
showed revenue declines from the prior year, the Company's cutting factories
operated efficiently with adequate supplies of raw materials from either primary
or secondary sources.
Net sales in 1994 of $204,047,000 were $45,972,000 or 29% above the net
sales of $158,075,000 in 1993.
The Company's net revenue from the sale of polished diamonds of $51,484,000
in 1994 increased 18% compared to 1993 polished sales of $43,409,000. The
increase was a result of increased polished diamond sales in the United States
and Pacific Rim due to increased demand and strengthening local economies and
was partially offset by a weaker market in Japan.
During fiscal 1994, the Company changed its method of selling from using a
gross price list (allowing various discounts and allowances to be earned by its
customers) to using a net price list. While this change did not have a
significant impact on the results of operations, the Company believes that it
greatly enhanced selling efficiency and facilitated increased sales.
Rough diamond sales increased 33% in 1994. This increase was due to the
Company's continued expansion of its rough trading operation and also its
continued efforts to match the quality of its raw materials manufactured with
the requirements of its customers. Those rough diamonds not selected based on
economic or quality analysis were promptly sold in the marketplace.
Gross Profit
The Company's gross margin on net sales of polished diamonds includes all
overhead costs associated with the purchase, sale and manufacture of rough
stones (the 'Polished Diamond Gross Margin'). Polished Diamond Gross Margin for
1995 was 13%, a decrease of 11% from 1994 level of 24%. The decrease was due to
an increase in lower margined polished goods sold during the current year which
includes sales of stones cut and polished in joint venture with Roskomdragmet in
Russia, the inability of the Company to adequately increase prices and continued
pressure on margins. In addition, the Company recorded a non-recurring charge in
the third quarter of approximately $1.8 million to write down to market value
the Company's small stone polished inventory produced at its newly constructed
manufacturing facility in Botswana. While the Company is encouraged at the
results of the Botswana operation, including quantity and quality of production,
improved manufacturing efficiencies, continued lowering of production costs and
support from the Botswana Government, due to market conditions, the Company
experienced increased pressure on the selling price of these goods during the
current year which, in turn, caused the carrying value of this inventory to
exceed its selling price.
5
<PAGE>
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
The gross margin on sales of rough stones not selected for manufacturing,
including an allocation of overhead costs estimated to be associated with the
purchase and sale of rough stones, has been traditionally below 3%.
During 1995, the combined gross margin on net sales of both polished
diamonds and rough diamonds was 7.0%. This compares to 8.0% in 1994 and 7.1% in
1993.
Polished Diamond Gross Margin was 24% in 1994, an increase of 4% from the
1993 level of 20%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 1995 of $10,386,000
increased 6% or $553,000 compared with expenses of $9,833,000 in 1994. The
increase was primarily attributable to a non-recoverable insurance claim
associated with a theft of polished diamonds in the current year.
Selling, general and administrative expenses in 1994 of $9,833,000
increased 9% or $856,000 compared with expenses of $8,977,000 in 1993. The
increase was primarily due to the inclusion of expenses associated with the
Company's operations in Botswana of approximately $749,000. In 1993 these
expenses were being deferred until the commencement of full operations at that
location. On a comparable basis, excluding the costs associated with the
Botswana operation, selling, general & administrative costs were up 1% in 1994.
Interest Expense
In 1995, interest expense was $3,737,000, which was offset by $248,000 of
interest income, as compared to interest expense of $4,003,000 offset by
$256,000 of interest income in 1994 and interest expense of $3,197,000 offset by
$190,000 of interest income in 1993. The decrease in interest expense in 1995
was due primarily to lower average short-term borrowings of $9,186,000 as
compared to $14,371,000 in 1994. The increase in interest expense in 1994 was
due to higher average short-term borrowings of $14,371,000 in 1994 as compared
to $6,175,000 in 1993, and a full year of the higher interest rate charged on
the Senior Notes (See Note 6 to the Financial Statements).
(Loss)/Income Per Share
During 1995, 1994 and 1993 (loss)/income per share was computed based on
the weighted average number of shares outstanding, including the impact of
dilutive stock options during the period. For 1995, loss per share was $.18 per
share as compared to income per share of $.49 in 1994 and loss per share of $.15
in 1993.
FOREIGN OPERATIONS
International business represents a major portion of the Company's revenues
and profits. All foreign sales are denominated in U.S. dollars and all purchases
of rough diamonds worldwide are denominated in U.S. dollars. Therefore, the
Company does not experience any foreign currency exposure in connection with
these activities. In addition, the functional currency for Lazare Kaplan
Botswana (Pty) Ltd. is the U.S. dollar and this subsidiary was not materially
affected by foreign currency translation adjustments.
LIQUIDITY -- CAPITAL RESOURCES
The Company's working capital at May 31, 1995 was $59,290,000, an increase
of $6,957,000 from 1994. This increase was primarily due to the cash investment
made by the Botswana Development Corporation in Lazare Kaplan Botswana (Pty)
Ltd.
The Company's working capital at May 31, 1994 was $52,333,000, a decrease
of $677,000 from 1993. This decrease was due primarily to the reclassification
to current liabilities of the portion of the Senior Notes which were due within
one year. Without the inclusion of this item, working capital increased by
$3,608,000 reflecting higher inventory levels associated with the Company's new
operation in Botswana, and higher accounts receivable levels.
Net fixed asset additions totaled $1,578,000, $1,033,000 and $3,500,000 in
1995, 1994 and 1993,
6
<PAGE>
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
respectively. These fixed asset additions were primarily attributable to the
construction by the Company of a cutting and polishing factory and a training
facility in Botswana. The factory, completed during 1993, is a state-of-the-art
facility, using both automated and manual equipment and will ultimately be able
to employ 500 skilled workers. During 1995 and 1994, $543,000 and $735,000 of
fixed assets were placed in service in Botswana, respectively. During 1993,
$1,019,000 of fixed assets were placed in service and $2,385,000 was added to
the cost of the newly constructed building.
During August 1994, the Company completed its transaction with the Botswana
Development Corporation ('BDC') whereby the BDC invested 21.8 million pula
(approximately $8.0 million) for an equity position in Lazare Kaplan Botswana
(Pty) Ltd. The investment is in the form of common shares and cumulative,
redeemable, non-voting participating preference shares. Following this
transaction, the Company owns 60% of Lazare Kaplan Botswana (Pty) Ltd., the BDC
owns 34.9% and the Government of Botswana owns 5.1%.
The Company entered into a long-term promissory note with a bank in the
amount of $5,000,000 as of May 31, 1995. The principal is due and payable on
December 2, 1996 and interest, at the bank's prime rate, is payable monthly.
In May 1991, the Company, through a private placement, issued $30,000,000
of 9.97% Senior Notes, due May 15, 2001. These Senior Notes were amended on
December 1, 1992 to revise the consolidated fixed charge ratio and increase the
interest rate to 10.47% through the period August 31, 1994.
On August 25, 1995, these Senior Notes were again amended to eliminate the
requirements of the consolidated fixed charge ratio retroactively for the fiscal
quarters ended February 28, 1995 and May 31, 1995, to revise the consolidated
fixed charge ratio for all subsequent measurement periods through the quarter
ending May 31, 1996, and to increase the interest rate to 10.97% retroactively
to March 1, 1995.
The Company has short-term lines of credit with three banks. The loan
agreements provide that the Company may borrow up to $19.0 million, in the
aggregate. Two of the facilities, in the amounts of $3.0 million and $8.0
million, respectively, carry an interest rate of the bank's prime rate or one
and one-half percent above the London Interbank Offered Rate (LIBOR), depending
upon the method of borrowing utilized by the Company, and expire on September
30, 1995 and November 30, 1995, respectively. The third facility, in the amount
of $8.0 million, expires on October 31, 1995 and carries an interest rate of
one-eighth of a percent above the bank's prime rate or one and five-eighths
percent above LIBOR depending upon the method of borrowing utilized by the
Company. As of May 31, 1995 there was an aggregate balance outstanding on these
facilities of $4,125,000. The Company believes that each credit facility will be
extended on its respective renewal date.
The Company has a $3.0 million credit facility, payable on demand, at a
rate of one-half of one percent above the six-month London Interbank Offered
Rate for Eurodollars. At May 31, 1995, the full amount of this facility had been
drawn upon.
Management believes the Company has the ability to meet its current and
anticipated financing needs.
Stockholders' equity was $37,695,000 at May 31, 1995, $38,751,000 at May
31, 1994 and $35,671,000 at May 31, 1993. The decrease in 1995 is attributable
to the net loss incurred. The increase in 1994 is attributable to the net income
earned during the period. The decrease in 1993 is attributable to the net loss
during the period. Stockholders received no dividends in 1995, 1994 or 1993.
7
<PAGE>
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31,
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
--------------------------------------
<S> <C> <C> <C>
Net Sales (Note 1) $ 178,143 $ 204,047 $ 158,075
Cost of Sales (Note 1) 165,686 187,664 146,819
- ------------------------------------------------------------------------------------------------------------------
12,457 16,383 11,256
- ------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 10,386 9,833 8,977
Interest expense -- net of interest income of $248, $256 and $190 in
1995, 1994 and 1993, respectively 3,489 3,747 3,007
- ------------------------------------------------------------------------------------------------------------------
13,875 13,580 11,984
- ------------------------------------------------------------------------------------------------------------------
(Loss)/income before income tax provision and minority interest (1,418) 2,803 (728)
Income tax provision (Notes 1 and 3) 214 118 175
- ------------------------------------------------------------------------------------------------------------------
(Loss)/income before minority interest (1,632) 2,685 (903)
Minority interest in loss of consolidated subsidiary 479 339 -
- ------------------------------------------------------------------------------------------------------------------
NET (LOSS)/INCOME $ (1,153) $ 3,024 $ (903)
- ------------------------------------------------------------------------------------------------------------------
--------------------------------------
NET (LOSS)/INCOME PER SHARE (NOTE 1) $ (0.18) $ 0.49 $ (0.15)
- ------------------------------------------------------------------------------------------------------------------
--------------------------------------
Weighted average number of shares outstanding 6,309,071 6,226,708 6,121,680
- ------------------------------------------------------------------------------------------------------------------
--------------------------------------
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Stockholders'
(In thousands) Stock Capital Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------
<S> <C> <C> <C> <C>
Balance, May 31, 1992 $6,122 $ 25,837 $ 4,615 $36,574
Net Loss - - (903) (903)
- ---------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1993 6,122 25,837 3,712 35,671
Net Income - - 3,024 3,024
Exercise of Stock Options, 9,426 shares issued 9 47 - 56
- ---------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1994 6,131 25,884 6,736 38,751
Net Loss - - (1,153) (1,153)
Exercise of Stock Options, 16,702 shares issued 17 80 - 97
- ---------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1995 $6,148 $ 25,964 $ 5,583 $37,695
- ---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
- --------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994
- --------------------------------------------------------------------------------------------------------------------
------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,532 $ 914
Accounts receivable, less allowance for doubtful accounts ($220 and $165 in 1995 and 1994,
respectively) 22,302 23,200
Inventories (Note 1):
Rough stones 11,928 14,467
Polished stones 43,806 39,019
------------------
Total inventories 55,734 53,486
------------------
Prepaid expenses and other current assets 6,166 3,255
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 86,734 80,855
PROPERTY, PLANT AND EQUIPMENT, net (Notes 1 and 2) 6,704 6,253
OTHER ASSETS 5,725 6,070
- --------------------------------------------------------------------------------------------------------------------
$99,163 $93,178
- --------------------------------------------------------------------------------------------------------------------
------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable -- banks (Note 5) $ 4,125 $ 9,900
Notes payable -- other (Note 5) 3,000 3,000
Current portion of long-term debt (Note 6) 4,285 4,285
Accounts payable and other current liabilities (Notes 1 and 4) 16,034 11,337
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 27,444 28,522
SENIOR NOTES AND OTHER LONG-TERM DEBT (Note 6) 26,430 25,715
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 53,874 54,237
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
MINORITY INTEREST (Notes 1 and 7) 7,594 190
STOCKHOLDERS' EQUITY (Note 8)
Common stock, par value $1 per share:
Authorized, 10,000,000 shares
Outstanding, 6,147,808, 1995 and 6,131,106, 1994 6,148 6,131
Additional paid-in capital 25,964 25,884
Retained earnings 5,583 6,736
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 37,695 38,751
- --------------------------------------------------------------------------------------------------------------------
$99,163 $93,178
- --------------------------------------------------------------------------------------------------------------------
------------------
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended May 31,
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
----------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income $(1,153) $3,024 $ (903)
Adjustments to reconcile net (loss)/income to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,924 1,899 893
Provision for uncollectible accounts 55 170 86
Minority interest in loss of consolidated subsidiary (479) (339) -
Gain on sale of fixed assets (43) - -
(Increase)/decrease in assets and increase/(decrease) in liabilities:
Accounts receivable 843 (3,211) (5,138)
Inventories (2,248) (4,993) 111
Prepaid expenses and other current assets (2,911) 803 (1,061)
Other assets (488) - (4,510)
Accounts payable and other current liabilities 4,697 3,029 (405)
----------------------------
Net cash provided by (used in) operating activities 197 382 (10,927)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 79 - -
Capital expenditures (1,578) (972) (3,300)
----------------------------
Net cash used in investing activities (1,499) (972) 3,300)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in minority interest 7,883 - -
Increase (decrease) in short-term borrowings (5,775) 895 9,005
Increase in long-term borrowings 715 - -
Proceeds from exercise of stock options 97 56 -
----------------------------
Net cash provided by financing activities 2,920 951 9,005
- ---------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash 1,618 361 (5,222)
Cash at beginning of year 914 553 5,775
----------------------------
Cash at end of year $ 2,532 $ 914 $ 553
- ---------------------------------------------------------------------------------------------------------------------
----------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 3,737 $4,003 $ 3,197
Income taxes 314 239 209
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Capitalized Leases - $ 61 $ 249
Land - - 64
License fee - - 465
- ---------------------------------------------------------------------------------------------------------------------
----------------------------
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
[LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1995, 1994 and 1993
1. ACCOUNTING POLICIES
- ---------------------------------------------------------
a. The Company and its principles of consolidation
The Company and its subsidiaries are engaged in the cutting, polishing and
selling of diamonds and the trading of uncut rough diamonds. The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly owned except for Lazare Kaplan Botswana (Pty) Ltd.,
which was owned 60% by the Company at May 31, 1995 and 85% by the Company at May
31, 1994 and 1993. Minority interest represents the minority stockholders'
proportionate share of the equity of Lazare Kaplan Botswana (Pty) Ltd. All
material intercompany balances and transactions have been eliminated.
b. Sales and Accounts receivable
The Company's net sales to customers in each of the following regions for
the years ended May 31, 1995, 1994 and 1993 are set forth below:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------
--------------------
<S> <C> <C> <C>
United States 25% 16% 16%
Far East 13% 6% 10%
Europe, Israel & other 62% 78% 74%
- ---------------------------------------------------
100% 100% 100%
- ---------------------------------------------------
--------------------
</TABLE>
No single customer of the Company accounted for 10% or more of the
Company's net sales for the fiscal years ending May 31, 1995, 1994 and 1993. The
Company generally does not require collateral on its receivables.
c. Inventories
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market.
d. Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is computed using
the straight-line method over the shorter of asset lives or lease terms.
e. Deferred costs
The Company deferred the recognition of certain costs for professional
fees, travel and total staffing incurred during the construction and training
period of the Company's cutting and polishing facility in Botswana. Such costs
included only direct and incremental costs incurred during the start-up period.
These costs are being amortized over a five year period which began on June 1,
1993. All other deferred costs are amortized over their estimated useful lives
ranging from two to ten years.
f. Foreign currency
All foreign sales of the Company are denominated in U.S. dollars and all
purchases of rough diamonds worldwide are denominated in U.S. dollars.
Therefore, the Company does not experience any foreign currency exposure in
connection with these activities. In addition, the functional currency for
Lazare Kaplan Botswana (Pty) Ltd. is the U.S. dollar. Any gains or losses from
foreign currency translations relating to this subsidiary were immaterial and
are included in results of operations.
g. Income taxes
Effective June 1, 1993, the Company has provided for deferred income taxes
in accordance with Statement of Financial Accounting Standards ('SFAS') No. 109,
'Accounting for Income Taxes', whereby deferred income taxes are determined
based upon the enacted income tax rates for the years in which these taxes are
estimated to be payable or recoverable. The Company had previously accounted for
income taxes under Accounting Principles Board Opinion No. 11. The adoption of
SFAS No. 109 on June 1, 1993 did not have a material impact on the Company's
consolidated financial statements. Deferred income taxes reflect the net tax
effects of (a) temporary difference between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes, and (b) operating loss carryforwards.
For the year ended May 31, 1993, the Company and its subsidiary operating
in the United States including Puerto Rico filed a consolidated income tax
return. On November 1, 1993, the Puerto Rican subsidiary was merged into the
Company. The Company's foreign subsidiaries are not subject to Federal income
taxes and their provisions for income taxes
12
<PAGE>
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1995, 1994 and 1993
have been computed based on the effective tax rates, if any, in the foreign
countries.
There were no taxable dividends paid to the Company from foreign
subsidiaries during 1995.
h. Net (loss)/income per share
Net (loss)/income per share is computed based on the weighted average
number of shares outstanding including the impact of dilutive stock options
during each period.
2. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------------------------
Property, plant and equipment consists of (in thousands):
<TABLE>
<CAPTION>
May 31,
- -----------------------------------------------------
1995 1994
- -----------------------------------------------------
-----------------
<S> <C> <C>
Land and buildings $ 4,170 $4,126
Leasehold improvements 1,139 1,114
Machinery, tools and equipment 5,064 4,612
Furniture and fixtures 1,656 898
Computer installation 2,225 2,118
- -----------------------------------------------------
14,254 12,868
Less accumulated depreciation and
amortization 7,550 6,615
- -----------------------------------------------------
$ 6,704 $6,253
- -----------------------------------------------------
-----------------
Depreciation and amortization rates:
- -----------------------------------------------------
Buildings 2 TO 3.7%
Leasehold improvements 3.7 TO 20%
Machinery, tools and equipment 10 TO 25%
Furniture and fixtures 10 TO 20%
Computer installation 10 TO 33%
- -----------------------------------------------------
</TABLE>
Depreciation expense for 1995, 1994 and 1993 was $1,088,000, $1,094,000 and
$779,000, respectively.
3. INCOME TAXES
- ---------------------------------------------------------
The items comprising the Company's net deferred tax liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
May 31,
- -----------------------------------------------------
1995 1994
- -----------------------------------------------------
--------------------
<S> <C> <C>
Deferred tax assets:
Operating loss and other
carryforwards $ 13,200 $ 13,200
Other 400 300
Deferred tax liabilities:
Depreciation 1,100 1,500
- -----------------------------------------------------
12,500 12,000
Less: Valuation allowance (12,500) (12,000)
- -----------------------------------------------------
Net deferred tax liabilities $ 0 $ 0
- -----------------------------------------------------
--------------------
</TABLE>
The income tax provision is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year ended May 31,
- ------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------
---------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 68 $-
State and local 40 185 130
Foreign 174 70 45
- ------------------------------------------------------
214 323 175
- ------------------------------------------------------
Deferred:
Federal - (68) -
State and local - (137) -
- ------------------------------------------------------
- (205) -
- ------------------------------------------------------
$ 214 $118 $175
- ------------------------------------------------------
---------------------
</TABLE>
13
<PAGE>
[LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1995, 1994 and 1993
The tax provision is different from amounts computed by applying the
Federal income tax rate to the income before taxes as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------
-------------------------
<S> <C> <C> <C>
Tax provision (benefit) at
statutory rate $ (482) $ 953 $(247)
(Decrease)/increase in
taxes resulting from:
Differential
attributable to
foreign operations 502 764 (15)
State and local taxes,
net of Federal
benefit 26 48 130
Net operating loss
carryforward arising
in current year not
resulting in current
benefit 168 - 307
Utilization of net
operating loss
carryforwards - (1,647) -
- ------------------------------------------------------
Actual tax provision $ 214 $ 118 $ 175
- ------------------------------------------------------
-------------------------
</TABLE>
The Company has available Federal net operating losses to offset future
taxable income which expire as follows (in thousands):
<TABLE>
<CAPTION>
Net
operating
Year losses
- --------------------------------------------------------
---------
<S> <C>
1998 $12,100
1999 4,200
2000 4,300
2001 3,500
2002 500
2007 1,000
2008 1,500
2010 500
- --------------------------------------------------------
$27,600
- --------------------------------------------------------
---------
</TABLE>
In addition, the Company has New York State and New York City net operating
loss carryforwards of approximately $29,600,000 each, expiring from 1997 to
2008. The Company has Puerto Rico net operating loss carryforwards of
approximately $4,500,000 expiring from 1996 through 2002 and Botswana net
operating loss carryforwards of approximately $5,000,000 expiring from 1998
through 2000.
4. ACCOUNTS PAYABLE AND OTHER
CURRENT LIABILITIES
- ---------------------------------------------------------
Accounts payable and other current liabilities consist of (in thousands):
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------
-----------------
<S> <C> <C>
Accounts payable $ 5,377 $4,422
Accrued expenses and income taxes 10,657 6,915
- -----------------------------------------------------
$16,034 $11,337
- -----------------------------------------------------
-----------------
</TABLE>
5. LINES OF CREDIT
- ---------------------------------------------------------
The Company has unsecured lines of credit with three banks. The loan
agreements provide that the Company may borrow up to $19.0 million, in the
aggregate. Two of the facilities, in amounts of $3.0 million and $8.0 million,
carry an interest rate of the bank's prime rate (which was 9.0% on May 31, 1995)
or one and one-half percent above the London Interbank Offered Rate (LIBOR),
depending upon the method of borrowing utilized by the Company, and expire on
September 30, 1995 and November 30, 1995, respectively. The third facility, in
the amount of $8.0 million, carries an interest rate of one-eighth of a percent
above the bank's prime rate or one and five-eighths percent above LIBOR
depending upon the method of borrowing utilized by the Company. The term of this
agreement is until October 31, 1995. As of May 31, 1995 there was an aggregate
balance outstanding on these facilities of $4,125,000. The weighted average
interest rate during 1995 and 1994 on the three lines of credit was 8.12% and
6.18%, respectively.
The Company has a $3.0 million credit facility, payable on demand, at a
rate of one-half of one percent above the six-month London Interbank Offered
Rate (which was 6.56% on June 12). At May 31, 1995, the full amount of this
facility had been drawn upon. The weighted average interest rate during 1995 and
1994 on this facility was 6.20% and 4.04%, respectively.
14
<PAGE>
[LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1995, 1994 and 1993
6. SENIOR NOTES AND OTHER LONG-TERM DEBT
- ---------------------------------------------------------
In May, 1991 the Company through a private placement, issued $30,000,000 of
unsecured 9.97% Senior Notes, due May 15, 2001. Interest is payable
semi-annually every May 15 and November 15. Repayments of $4,285,000 annually
commenced on May 15, 1995 and end in 2000 with the remaining principal of
$4,290,000 payable on May 15, 2001.
Provisions of the Senior Notes require, among other things, (a) maintenance
of defined levels of consolidated tangible net worth and current working
capital, (b) limitation of borrowing levels and (c) limitations on restricted
payments, including the amount of dividends. Under the provisions of the Senior
Notes, the Company was not permitted to declare or pay any dividends either in
cash or property through August 31, 1994. Commencing September 1, 1994, this
restriction was modified to allow the declaration of dividends subject to
certain limitations set forth in the Senior Note Agreement.
On February 28, 1992, certain provisions of the Senior Notes were amended
to modify the limitations relating to the incurrence of indebtedness, the making
of restricted payments and to revise the consolidated fixed charge ratio. On
March 25, 1992, the Senior Notes were again amended to modify the level of
consolidated tangible net worth required to be maintained by the Company. On
December 1, 1992, the Senior Notes were amended to revise the consolidated fixed
charge ratio and increase the interest rate to 10.47% through the period August
31, 1994.
On August 25, 1995, the Senior Notes were again amended to eliminate the
requirements of the consolidated fixed charge ratio retroactively for the fiscal
quarters ended February 28, 1995 and May 31, 1995, to revise the consolidated
fixed charge ratio for all subsequent measurement periods through the quarter
ending May 31, 1996, and to increase the interest rate to 10.97% retroactively
to March 1, 1995.
On May 31, 1995 the Company entered into a long term promissory note with a
bank in the amount of $5,000,000. The principal is due and payable on December
2, 1996 and interest, at the bank's prime rate, is payable monthly.
7. MINORITY INTEREST
- ---------------------------------------------------------
On August 31, 1994, the Botswana Development Corporation ('BDC') invested
21.8 million pula (approximately $8.0 million) for an equity position in Lazare
Kaplan Botswana (Pty) Ltd. In exchange for its investment the BDC received
common shares and cumulative, redeemable, non-voting, participating preference
shares of this subsidiary. Following this transaction, the Company owns 60% of
Lazare Kaplan Botswana (Pty) Ltd., the BDC owns 34.9% and the Government of
Botswana owns 5.1%.
8. STOCK OPTION INCENTIVE PLANS
- ---------------------------------------------------------
A Stock Option Incentive Plan was approved by the Board of Directors on
March 11, 1988 (the '1988 Plan'). The Plan has reserved 650,000 shares of the
common stock of the Company for issuance to key employees of the Company and its
subsidiaries.
The purchase price of each share of common stock subject to an incentive
option under the 1988 Plan is not to be less than 100 percent of the fair market
value of the stock on the day the option is granted (110 percent for 10 percent
beneficial owners). The Compensation Committee determines the period or periods
of time during which an option may be exercised by the participant and the
number of shares as to which the option is exercisable during such period or
periods, provided that the option period shall not extend beyond ten years (five
years in the case of 10 percent beneficial owners) from the date the option is
granted.
15
<PAGE>
[LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1995, 1994 and 1993
A summary of the Plan's activity for each of the three years in the period
ended May 31, 1995 is as follows:
<TABLE>
<CAPTION>
Number
of shares Option price
- -------------------------------------------------------
---------------------------
<S> <C> <C>
Outstanding -- June 1,
1992 379,308 $5.000-$11.275
Options surrendered (212,117) $5.500-$11.275
Options reissued 212,117 $5.125-$ 5.638
Options canceled (3,725) $5.000-$10.875
Options issued 144,950 $6.000-$ 6.600
- -------------------------------------------------------
Outstanding -- May 31,
1993 520,533 $5.000-$ 7.625
Options issued 101,750 $6.000-$ 8.387
Options exercised (11,434) $5.000-$ 8.000
Options canceled (10,601) $5.125-$ 7.625
- -------------------------------------------------------
Outstanding -- May 31,
1994 600,248 $5.000-$ 8.387
Options issued 28,750 $8.500-$ 9.350
Options exercised (34,231) $5.000-$ 7.625
Options canceled (4,618) $6.000-$ 7.625
- -------------------------------------------------------
Outstanding -- May 31,
1995 (exercisable
454,849) 590,149 $5.000-$ 9.350
- -------------------------------------------------------
---------------------------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
- ---------------------------------------------------------
Future minimum payments under noncancelable operating leases with initial
terms of more than one year consist of the following at May 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
Operating
Year leases
- --------------------------------------------------------
---------
<S> <C>
1996 $ 582
1997 457
1998 341
1999 331
2000 331
Thereafter 1,085
- --------------------------------------------------------
$ 3,127
- --------------------------------------------------------
---------
</TABLE>
Rental expense, including additional charges paid for increase in real
estate taxes and other escalation charges for the years ended May 31, 1995, 1994
and 1993, were approximately $549,000, $565,000 and $438,000, respectively.
10. PROFIT SHARING PLAN
- ---------------------------------------------------------
The Company has a profit sharing and retirement plan subject to Section
401(k) of the Internal Revenue Code. The plan covers all full-time employees in
the United States and Puerto Rico who complete at least one year of service.
Participants may contribute up to a defined percentage of their annual
compensation through salary deductions. The Company intends to match
contributions in an amount equal to $0.50 for every pretax dollar contributed up
to the first 6% on the first $20,000 of compensation providing the Company's
pretax earnings for that fiscal year exceeds $3,500,000. The Company did not
make matching contributions for calendar years 1994, 1993 or 1992.
11. GEOGRAPHIC SEGMENT INFORMATION
- ---------------------------------------------------------
Revenue, gross profit and income/(loss) before income tax provision and
minority interest for each of the three years in the period ended May 31, 1995
and identifiable assets at the end of each of those years, classified by
geographic area which was determined by where sales originated from and where
identifiable assets are held, were as follows (in thousands):
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
UNITED ELIMI- CONSOLI-
STATES EUROPE AFRICA NATIONS DATED
- --------------------------------------------------------------------------------------------------------------------
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1995
Net sales to unaffiliated customers $123,322 $49,684 $ 5,137 $ - $178,143
Transfers between geographic areas 22,196 16,679 22,810 (61,685) -
------------------------------------------------------
Total revenue $145,518 $66,363 $27,947 $(61,685) $178,143
------------------------------------------------------
Gross profit $ 11,866 $ 561 $ 6,259 $ (6,229) $ 12,457
------------------------------------------------------
(Loss)/income before income tax provision and minority
interest $ (495) $ 100 $ (615) $ (408) $ (1,418)
------------------------------------------------------
Identifiable assets at May 31, 1995 $ 91,980 $11,536 $23,552 $(27,905) $ 99,163
- --------------------------------------------------------------------------------------------------------------------
------------------------------------------------------
Year ended May 31, 1994
Net sales to unaffiliated customers $130,070 $73,921 $ 56 $ - $204,047
Transfers between geographic areas 22,092 13,984 8,737 (44,813) -
------------------------------------------------------
Total revenue $152,162 $87,905 $ 8,793 $(44,813) $204,047
------------------------------------------------------
Gross profit $ 15,663 $ 772 $ 85 $ (137) $ 16,383
------------------------------------------------------
Income/(loss) before income tax provision and minority
interest $ 4,990 $ 420 $(2,461) $ (146) $ 2,803
------------------------------------------------------
Identifiable assets at May 31, 1994 $ 92,628 $ 8,386 $20,374 $(28,210) $ 93,178
- --------------------------------------------------------------------------------------------------------------------
------------------------------------------------------
Year ended May 31, 1993
Net sales to unaffiliated customers $106,550 $51,474 $ 51 $ - $158,075
Transfers between geographic areas 3,353 2,401 4,575 (10,329) -
------------------------------------------------------
Total revenue $109,903 $53,875 $ 4,626 $(10,329) $158,075
------------------------------------------------------
Gross profit $ 10,491 $ 711 $ 129 $ (75) $ 11,256
------------------------------------------------------
(Loss)/income before income tax provision $ (828) $ 209 $ (34) $ (75) $ (728)
------------------------------------------------------
Identifiable assets at May 31, 1993 $ 84,839 $ 3,645 $14,795 $(16,827) $ 86,452
- --------------------------------------------------------------------------------------------------------------------
------------------------------------------------------
</TABLE>
The identifiable assets which are included in the eliminations primarily
represent advances to affiliates. These advances are included therein since the
Company, which is the parent company, finances the operations of these
affiliates.
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Lazare Kaplan International Inc.
We have audited the accompanying consolidated balance sheet of Lazare
Kaplan International Inc. and subsidiaries as of May 31, 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements for each of
the two years in the period ended May 31, 1994 were audited by other auditors
whose report dated July 13, 1994 (August 31, 1994 as to Note 11) expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements for the year ended
May 31, 1995 referred to above present fairly, in all material respects, the
consolidated financial position of Lazare Kaplan International Inc. and
subsidiaries at May 31, 1995 and the consolidated results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Ernst & Young LLP
New York, New York
July 12, 1995 (August 25, 1995 as to Note 6)
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
<TABLE>
<S> <C> <C>
CORPORATE HEADQUARTERS DIRECTORS AND OFFICERS REGISTRAR AND TRANSFER AGENT
529 Fifth Avenue Maurice Tempelsman Mellon Bank N.A.
New York, New York 10017 Director; P.O. Box 444
Telephone (212) 972-9700 Chairman of the Board Pittsburgh, PA 15230
SUBSIDIARIES Leon Tempelsman COUNSEL
Director;
Lazare Kaplan (Sierra Leone) Limited Vice Chairman of the Board Warshaw Burstein Cohen
and President Schlesinger & Kuh, LLP
Lazare Kaplan Japan Inc. 555 Fifth Avenue
George R. Kaplan New York, New York 10017
Lazare Kaplan Belgium, N.V. Director;
Vice Chairman of the Board ACCOUNTANTS
Lazare Kaplan Europe Inc.
Michael W. Butterwick Ernst & Young LLP
Lazare Kaplan Africa Inc. Director; 787 Seventh Avenue
Business Consultant New York, New York 10019
Lazare Kaplan Botswana (Pty) Limited
Lucien Burstein
Lazare Kaplan Ghana Ltd. Director;
Secretary
Lazare Kaplan (Bermuda) Ltd. Partner
Warshaw Burstein Cohen
Kaplan Offshore Trading Company Schlesinger & Kuh, LLP
(attorneys)
Supreme Gems N.V.
Myer Feldman
Lazare Kaplan Belgium Jewelry N.V. Director;
Partner
Ginsburg, Feldman and Bress,
Chartered (attorneys)
Sheldon L. Ginsberg
Director;
Chief Financial Officer and
Vice President
Robert Speisman
Director;
Vice President - Sales
</TABLE>
19
<PAGE>
LAZARE KAPLAN INTERNATIONAL INC., 529 FIFTH AVENUE, NEW YORK, NY 10017
(212) 972-9700
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LIST OF SUBSIDIARIES OF
LAZARE KAPLAN INTERNATIONAL INC.
<TABLE>
<CAPTION>
NAME ORGANIZED UNDER LAWS OF
- ---- -----------------------
<S> <C>
Lazare Kaplan (Sierra Leone)
Limited Sierra Leone
Lazare Kaplan Japan Inc. Delaware
Lazare Kaplan Europe Inc. Delaware
Lazare Kaplan Belgium, N.V. Belgium
Lazare Kaplan Africa Inc. Delaware
Lazare Kaplan Botswana
(Pty) Limited Botswana
Lazare Kaplan Ghana Ltd. Bermuda
Lazare Kaplan (Bermuda) Ltd. Bermuda
Kaplan Offshore Trading Company Bermuda
Supreme Gems N.V. Belgium
Lazare Kaplan Belgium Jewelry N.V. Belgium
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-20528 of Lazare Kaplan International Inc. on Form S-8, of our report dated
July 13, 1994 (August 31, 1994 as to Note 11), incorporated by reference in the
Annual Report on Form 10-K for the year ended May 31, 1995.
Deloitte & Touche LLP
New York, New York
August 28, 1995
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as............. 'r'
