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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
For the fiscal year ended MAY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
PREFERRED SHARE PURCHASE RIGHTS AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of July 31, 1998, 8,532,549 shares of the registrant's common stock
were outstanding, and the aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
closing price for the registrant's common equity on the American Stock Exchange
at that date was $49,580,179.
DOCUMENTS INCORPORATED BY REFERENCE
1998 definitive proxy statement to be filed with the
Commission-incorporated by reference into Part III.
1998 Annual Report to Stockholders for the fiscal year ended May 31,
1998 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. ("the Company") was
incorporated in 1972 under the laws of the state of Delaware as the successor to
a business which was founded by Mr. Lazare Kaplan in 1903. The Company is
engaged in the cutting, polishing and selling of ideally proportioned diamonds
which it markets internationally under the brand name "Lazare Diamonds'r'".
Ideally proportioned diamonds are distinguished from non-ideal cut
("commercial") diamonds by the symmetrical relationship of their facets, which
maximizes brilliance, sparkle and fire. Due to these characteristics, Lazare
Diamonds command a premium in the marketplace. The Company believes there are
only a few other companies worldwide engaged primarily in the production of
ideally proportioned diamonds and that it is the largest producer of ideal cut
diamonds through its facility in Puerto Rico. In addition, at its facility in
Moscow, the Company cuts and polishes commercial diamonds which it markets to
wholesalers, distributors and, to a growing extent, through retail jewelers. All
rough stones purchased by the Company are either selected for manufacturing or
resold as rough diamonds in the marketplace. The Company believes that the
combination of its cutting and polishing operations and its trading operations
enables the Company to purchase larger quantities of rough diamonds from which
it may select those rough diamonds best suited for the Company's current needs.
The Company's marketing strategy in the selling of Lazare
Diamonds is directed primarily toward quality conscious consumers throughout the
United States, South America, the Far East and Europe. The Company focuses its
distribution efforts for Lazare Diamonds on selectivity with a view to helping
retailers who carry the product maintain a competitive advantage. Lazare
Diamonds can be found at some of the most prestigious jewelry stores around the
world, including those with international reputations and those known only in
their communities as being the highest quality retail jewelers. This strategy
helps ensure that the Company's product is presented in an environment
consistent with its superior quality and image. The Company also sells to
certain jewelry manufacturers and diamond wholesalers. The Company has developed
a comprehensive grading system which, when coupled with the "ideal cut"
standard, allows jewelers to order inventory by category rather than through the
more cumbersome process of visual selection. In addition, the Company designs,
manufactures (through independent contractors) and sells a line of high quality
jewelry which features Lazare Diamonds.
An important element of the Company's strategy is the
promotion of the Lazare Diamonds brand name. Every Lazare Diamond bears a laser
inscription on its outer perimeter, invisible to the naked eye, containing the
Lazare Kaplan logo and an identification number unique to the stone. The laser
signature also allows consumers to register their Lazare Diamonds with the
Company under its program, The Lazare Diamond Registry'r', thereby providing
proof of ownership in case of loss or theft.
One of the Company's important suppliers of rough diamonds is
the Diamond Trading Company ("DTC"), an affiliate of De Beers Centenary AG, a
Swiss company ("DeBeers"). Based on published reports, the Company believes that
the DTC controls approximately 70-75% of the value of world rough diamond
output. The Company has been a client of the DTC for more than 50 years. In
order to diversify its sources of rough diamond supply, however, the Company has
broadened its purchasing capabilities throughout Africa
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and has an office in Antwerp to supplement its rough diamond needs by secondary
market purchases. The Company also has expanded its operations and entered into
relationships with other primary source suppliers. The Company believes that its
success in maintaining quantities and qualities of polished inventory that best
meet its customers' needs is achieved through its ability to fully integrate its
diverse rough diamond sources.
The Company currently has two manufacturing facilities. The
Company's domestic manufacturing operation, located in Puerto Rico, is believed
by the Company to be the largest diamond cutting facility in the United States.
The Company believes its work force in Puerto Rico is the most highly skilled in
the world producing ideal cut diamonds. This facility generally produces
polished diamonds having weights of 1/5 of a carat and greater. The second
manufacturing facility is conducted pursuant to an agreement with AK Almazi
Rossii Sakha (ALROSA) of Russia. The factory, which was equipped and staffed
during fiscal year 1997, is approaching its full anticipated manufacturing
capacity. This is expected to be in excess of $45 million (at rough diamond
cost) per year of large rough gem diamonds. During fiscal year 1998, the Company
sold its shares of Lazare Kaplan Botswana (Pty) Ltd. and no longer has an
interest in the Botswana factory. The Company's manufacturing operation which
was conducted in cooperation with the Russian Government agency responsible for
diamond exports and the Russian national stockpile has suspended production.
Diamond Supply
The Company's overall revenues are dependent upon the
availability of rough diamonds, the world's known sources of which are highly
concentrated. Based upon published reports, the Company believes that Angola,
Australia, Botswana, Brazil, Ghana, Guinea, Ivory Coast, Namibia, Republic of
the Congo, Russia, Sierra Leone and South Africa account for more than 90% of
present world rough gem diamond production. In addition, according to published
reports, diamond production is expected to commence in Canada during calendar
year 1998, and is expected to reach $500 million annually. The Central Selling
Organization ("CSO"), which is affiliated with De Beers, 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. This is achieved either by
directly owning diamond mines, entering into multi-year purchase agreements with
host governments, or by purchasing diamonds in the secondary market. Sales for
the CSO are made in London by the DTC to a select group of clients
("sightholders") which, according to published reports, number approximately
160, including the Company. Based upon published reports, the Company believes
that approximately 70-75% 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. Companies that are not sightholders
must either purchase their requirements from sightholders or seek access to that
portion of the world supply not marketed by the DTC.
Historically, an important supplier of rough diamonds to the
Company 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 of rough diamonds ("sights") held by
the DTC periodically during the year in London. At sights, the Company
purchases, at the DTC's stated price, an assortment of rough diamonds known as a
"series", the composition of which attempts to take into account the qualitative
and quantitative requirements of the Company based on requests submitted to the
DTC by the Company. The Company has been a sightholder for more than 50 years.
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In order to diversify its sources of supply, the Company has
entered into arrangements with other primary source suppliers, has expanded its
rough diamond purchasing capabilities throughout Africa, and has established an
office in Antwerp to supplement its rough diamond needs by making purchases in
the secondary market. For the three years ended May 31, 1998, 1997 and 1996,
approximately 25%, 40% and 50%, respectively, of the Company's rough diamond
purchases were from the DTC.
In December 1994 the Company reached an agreement with the
Empresa Nacional de Diamantes de Angola ("Endiama"), Angola's national diamond
mining company, pursuant to which the Company was granted a license to purchase
rough diamonds from local Angolan miners and export such diamonds for resale.
This is one of three such licenses granted by Endiama. The agreement entitles
the Company to establish buying offices throughout Angola, the first of which
was set up during 1995 in Luanda, the capital of Angola. The Company currently
has five buying offices located in Angola, including the office in Luanda, and
anticipates establishing additional buying offices in the future. The agreement
has a term of five years ending in 1999, and is subject to renewal thereafter.
In July 1996 the Company signed a five year agreement,
approved by the Government of Angola, for the supply of a portion of the rough
diamonds mined in Angola and the joint cutting, polishing and marketing of a
portion of that production. The agreement, entered into with Endiama and
Sociedade Angolana de Exploracao, Lapidacao e Commercializacao de Diamantes, a
company owned by a consortium of Angolan investors, provides for Endiama to sell
to the Company a portion of the rough diamonds mined in Angola consisting of
sizes and qualities selected by the Company as being suitable for cutting and
sale as polished diamonds, or for resale as rough diamonds. Purchases under this
arrangement began in August 1996. The Company has cut and polished the rough
diamonds at its existing facilities. After an agreed period of consistent,
uninterrupted supply of rough diamonds, a feasibility study will be undertaken
by the Company to examine the economic viability of establishing a diamond
cutting factory in Angola. In the agreement, the parties acknowledge that it is
their long-term intention to create a diamond polishing facility in Angola with
the capacity for polishing at least $40 million of rough diamonds per year.
However, the arrangement remains in an early stage and the Company has not yet
been supplied with suitable quantities of rough diamonds for cutting and
polishing.
The Company believes that it has good relations with its
suppliers, that its trade reputation and established customer base will continue
to assure access to primary sources of diamonds and that its sources of supply
are sufficient to enable the Company to meet its present and foreseeable needs.
However, the Company's sources of supply could be affected by political and
economic developments in producing countries over which the Company has no
control. While the Company believes that alternative sources of supply may be
available, any significant disruption of the Company's access to its primary
source suppliers could have a material adverse effect on its ability to purchase
rough diamonds.
The Company has rough diamond supply arrangements in Russia
for the cutting and polishing of diamonds in Russia. See "Cutting and
Polishing".
Cutting and Polishing
The Company and its subsidiaries currently have two primary
cutting and polishing operations,
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one located in Moscow, Russia and one located in Puerto Rico.
The factory in Russia was first announced in July 1996 when
the Company reached an agreement, for a term of ten years, with AK Almazi Rossii
Sakha (ALROSA) of Russia for the cutting, polishing and marketing of large rough
gem diamonds. According to published reports, ALROSA is the largest producer of
rough diamonds in Russia with annual production in excess of $1.4 billion,
accounting for over 20% of the world's supply of diamonds. Under the terms of
the agreement, the Company has equipped a diamond cutting factory which was
completed in February 1997 within the ALROSA facility in Moscow. This facility
is staffed by Russian technicians and managed and supervised by Company
personnel. ALROSA has agreed to supply a minimum of $45 million per year of
large rough gem diamonds selected by the Company as being suitable for
processing in this facility. In May 1997, the facility completed production of
its first polished stones and the Company received its first shipment of
polished stones produced at this facility during November 1997. The Company
sells the resulting polished diamonds through its worldwide distribution
network. The proceeds from the sale of these polished diamonds, after
reimbursement of costs incurred by each of the parties, generally will be shared
equally with ALROSA. The agreement does not require the Company to advance funds
for the purchase of rough diamonds. This agreement serves as a long-term
off-take arrangement to secure the repayment of the $62 million financing which
has begun to be received by ALROSA from a United States commercial bank and to
be guaranteed by the Export-Import Bank of the United States ("Eximbank") for
the purchase by ALROSA of U.S. manufactured mining equipment. This equipment is
used by ALROSA to increase production in its diamond mines. Eximbank has stated
that this agreement is the first transaction approved under Eximbank's General
Project Incentive Agreement with the Ministry of Finance and the Central Bank of
the Russian Federation signed in December 1993.
In July 1998 the Company announced the expansion of its
relationship with ALROSA. In accordance with a Memorandum of Understanding
signed by Eximbank, ALROSA and the Company, Eximbank has stated its willingness
to lend an additional several hundred million dollars to ALROSA for the
continued expansion of its mining capacity. Lazare Kaplan will act as the
off-take partner of this arrangement, and with ALROSA, has agreed to establish a
new polishing factory in Russia with an annual capacity to cut and polish up to
$150 million of rough diamonds. This factory will be in addition to the existing
facility, described above, which is equipped to cut and polish $45 million per
year of rough diamonds.
In addition, the Company had another facility located in
Moscow which was conducted in cooperation with the Russian Government
organization responsible for diamond policy and the Russian national stockpile.
Production from this facility has been suspended and there have been no diamonds
exported from this facility since the beginning of calendar year 1997, including
those that are already polished and awaiting export. The Company believes that
it will recapture lost sales once these polished diamonds are exported.
The Company believes that its factory in Puerto Rico is the
largest cutting and polishing facility in the United States. Each rough diamond
received in Puerto Rico is evaluated against strict management standards
designed to maximize its potential economic contribution to the Company. Expert
technicians, assisted by proprietary computer software, determine whether to cut
the rough diamond to ideal or commercial proportions or resell the rough
diamond. The shape of the rough diamond, its color, clarity, size, potential
profitability and salability are among the criteria used in making such
determinations. The Company's production workers are compensated principally on
a piece rate basis. The Company has an incentive program
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that rewards its factory managers and supervisors for maximizing the
manufactured results based on the following criteria: gross margin, yield (rough
weight to polished weight conversion) and efficiency.
Rough diamonds selected for cutting are analyzed and where
desirable are sorted for sawing or cleaving to achieve the desired shape and to
eliminate imperfections. They are then cut and polished into finished gems. Each
finished ideal cut diamond (weighing .18 carats and larger) which is marketed as
a Lazare Diamond is then inscribed with the Lazare Kaplan logo and its own
identification number by the Company's patented laser inscription process. All
of these operations are performed by the Company's employees. The Company
believes its work force in Puerto Rico is the most highly skilled in the diamond
industry. The Company has undertaken a worker training program at its facility
in Puerto Rico to ensure a constant flow of skilled labor to satisfy its needs
for further growth.
In March 1998, the Company completed a transaction for the
sale of its 60% interest in Lazare Kaplan Botswana (Pty) Ltd. for $11.1 million,
resulting in a gain of $3.7 million (net of $485,000 of Botswana taxes). The
Company established a cutting factory in Botswana in 1990 in partnership with
the Government of Botswana and successfully undertook intensive start-up and
training programs. The Botswana factory employed more than 500 local workers and
produced small size (melee) ideal cut diamonds. The Company intends to meet the
requirements of its customers for this product through its existing facilities
and through continued purchases of polished diamonds from Botswana.
The Company believes that it is recognized in the diamond
industry for the high quality and brilliance of the gems it cuts and that it
also enjoys a reputation as an imaginative and innovative cutter of large and
difficult diamonds.
Pricing
Rough Diamond Prices
Through its control of approximately 70-75% of the value 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 materially adversely affect the Company's
revenue and operating margins if the increased cost of rough diamonds could not
be passed along to its customers in a timely manner.
According to published reports, during 1995 there was an
emergence of a two-tier market for rough diamonds. The first tier is comprised
of better quality rough diamonds, for which the DTC continues to maintain an
orderly market. The Company conducts its cutting and polishing operations almost
exclusively in this segment of the market. The second tier is comprised of
small, less expensive, imperfect rough diamonds. The prices for these diamonds
are determined principally by supply and demand. Consequently,
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there has been considerable volatility in the prices of less expensive diamonds
since 1995. Because the Company focuses primarily on better quality rough
diamonds, this volatility has not had a significant effect on the Company.
Polished Diamond Prices
Over the past 60 years, increases in the price of rough
diamonds have generally resulted in a corresponding increase in the price of
polished diamonds. However, during periods of economic uncertainty, there may be
a time lag before the Company is able to increase polished diamond prices.
During the period of high inflation in the late 1970's, investors speculated in
hard assets, driving polished diamond prices to exceptionally high levels which
in turn caused significant increases in the cost of rough diamonds. However, the
moderation of inflation during the early 1980's resulted in a sudden and massive
shift of investments from hard assets to financial instruments, resulting in
dramatic price declines for polished diamonds which caused a market liquidity
crisis as prices of some categories of polished diamonds fell below the
inventory costs of such diamonds. Since this period in the early 1980's, the
Company believes the pricing of polished diamonds has returned to its historical
pattern of responding to increases in the pricing of rough diamonds. However,
there can be no assurance that volatility in the price of polished diamonds
could not occur again. Any rapid decrease in the price of polished diamonds
could have a material adverse effect on the Company in terms of inventory
reserves, lower sales and lower margins.
The Company has broadened its sales base and implemented
strict inventory, pricing and purchasing controls which it believes could lessen
the impact of fluctuations in the price of rough and polished diamonds. These
include computerized rough diamond evaluation programs, 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, South America, the Far
East and Europe. The Company focuses its distribution efforts for Lazare
Diamonds on selectivity with a view to helping retailers who carry the product
maintain a competitive advantage. Lazare Diamonds can be found at some of the
most prestigious jewelry stores around the world, including both those with
international reputations and those known only in their communities as being the
highest quality retail jewelers. This strategy helps ensure that the Company's
product is presented in an environment consistent with its superior quality and
image.
The Company also sells to certain jewelry manufacturers and
diamond wholesalers. The Company has developed a comprehensive grading system
for its diamonds which, when coupled with the "ideal cut" standard, allows
jewelers to order inventory by category rather than through the more cumbersome
process of visual selection. In addition, the Company designs, manufactures
(through independent contractors) and sells a line of high quality jewelry that
features Lazare Diamonds.
A key element of the Company's strategy is the promotion of
the Lazare Diamonds brand name
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directly to consumers. The Company is able to market its diamonds under a brand
name to retailers because (a) the ideal cut differentiates the Company's
diamonds from commercial diamonds in the marketplace and (b) each Lazare Diamond
is inscribed with the Company's logo and identification number using the
Company's unique laser inscription process, thus authenticating the diamonds.
The Company holds a domestic patent, which expires in 2000, and various
international patents for this process. In addition, the Company has domestic
and international patents-pending for a new and improved laser inscription
process.
The Company's decision to pursue the brand name strategy is
reinforced by two factors - a rising trend among informed consumers to purchase
quality, brand name products, and the need among upscale jewelers to set
themselves apart in an increasingly competitive market by carrying and promoting
a highly differentiated product.
Building awareness and acceptance of Lazare Diamonds is
accomplished through a comprehensive marketing program which includes sales
training, cooperative advertising, sales promotion and public relations. A wide
assortment of sales promotion materials has been designed to facilitate
jewelers' sales of the Company's diamonds and fine jewelry line to consumers.
Public relations events are offered which help build traffic in retail stores.
The Company believes these marketing programs have been and will continue to be
instrumental in increasing sales. The Company has no current plans to sell its
diamonds directly to consumers and intends to continue concentrating its
marketing efforts towards the quality retail jeweler.
The Lazare Diamond Registry program has been established by
the Company to enable consumers to register their Lazare Diamonds with the
Company using the laser inscribed identification number, thereby providing proof
of ownership in case of loss or theft.
Sales and Distribution
While the purchase and sale of rough diamonds is concentrated
among relatively few parties, industry wide retailing of polished diamonds
occurs through over 40,000 jewelry stores in the United States, over 25,000
retailers in Japan and over 60,000 retail stores in Europe. The Company's sales
efforts for its polished diamonds are directed primarily toward the fine quality
segment of these retailers (the majority of which are independently owned and
operated), wholesalers and distributors and, to a lesser extent, to jewelry
manufacturers. Full time regional sales representatives located throughout the
United States, Hong Kong and Antwerp, are compensated on a commission basis and
handle sales throughout their respective territories.
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 actively working to expand its foreign
business activities, particularly in the Far East countries of Japan, Hong Kong,
Singapore, Taiwan, Korea and Malaysia and recently throughout South America. In
October 1996, Aiwa Co., Ltd. ("Aiwa"), the Japanese distributor with whom the
Company has had a marketing relationship since 1972, announced that it entered
into an agreement in Japan with Seiko Corporation ("Seiko"), one of the world's
largest watchmakers. In connection with this agreement, the Company and Aiwa
intend that Seiko will act as the exclusive distributor in Japan for Lazare
Diamonds.
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It is anticipated that Seiko will ultimately supply Lazare Diamonds to 300-400
retailers in Japan. Seiko is generally recognized as a leader in consumer brand
marketing and has a well developed network of contacts and retailers.
The Company uses a comprehensive sorting and inventory
classification system for grading color and clarity of its ideal cut polished
diamonds. This system, combined with the fact that the Company's stones are
uniformly cut to ideal proportions, reduces and in some cases eliminates the
need for customers to view diamonds before placing orders. The system enables
customers to standardize their inventories, order by mail or telephone and
minimize their inventory investment.
The percentages of the Company's total domestic and foreign
net sales to its customers, which include a combination of both rough diamonds
and polished diamonds sales taken together, for the past three fiscal years are
set forth below:
<TABLE>
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Years ended May 31,
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1998 1997 1996
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<S> <C> <C> <C>
Percentage of Net Sales to Customers
United States 28% 22% 23%
Far East 7% 9% 8%
Europe, Israel & other 65% 69% 69%
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100% 100% 100%
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The world's rough diamond trading market is primarily located
in Belgium and Israel; therefore, the majority of the Company's rough diamond
sales have been transacted with foreign customers. In 1998, due to an increase
in demand in the United States combined with a weaker market in the Far East,
the Company sold a greater percentage of its polished diamonds domestically than
it had in prior years. In addition, due to the overall decrease in rough diamond
sales in 1998 as compared to the prior years, the Company's sales to Europe,
Israel & other were lower as a percentage of total sales in 1998.
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. The profitability of foreign
sales of either polished or rough diamonds is consistent with that of domestic
sales of similar merchandise.
Competition
The polished and rough diamond business is highly competitive.
While the Company believes that it has achieved a reputation as a leading cutter
and distributor of high quality diamonds, it faces competition in sales to its
customers in the United States and abroad from many other suppliers. In
addition, the Company sells rough diamonds in the competitive world market. A
substantial number of cutters and polishers and traders, some of which the
Company believes to be larger or to have greater financial resources than the
Company, sell diamonds of all qualities to the Company's customers.
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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 working capital to purchase rough diamonds and hold polished
inventory, the access to adequate supplies of rough diamonds, the limited number
of persons with the skills necessary to consistently cut significant amounts of
ideally proportioned diamonds, the difficulty in obtaining access to upscale
channels of distribution, the importance of public recognition of an established
brand name and the establishment of computer systems to report on and monitor
the manufacturing and distribution network.
Employees
At July 31, 1998, the Company had 165 full-time employees and
6 regional sales representatives. In March 1998, the Company sold its interest
in Lazare Kaplan Botswana (Pty) Ltd. which employed in excess of 500 local
workers. The Company maintains an apprenticeship program at its facility in
Puerto Rico, through which it trains its cutters, who are highly skilled
workmen. The Company provides paid vacations, sick leave, group life,
disability, hospitalization and medical insurance for its employees. The Company
has a 401(k) retirement plan for its U.S. and Puerto Rico employees. The Company
believes that it has satisfactory relationships with its employees. None of the
Company's employees is represented by a union.
Item 2. Properties
The Company leases office space, a portion of which is devoted
to sales rooms, at 529 Fifth Avenue, New York City, for a term expiring
September 30, 2003 at an annual rental rate of approximately $278,000 (subject
to escalations). The Company also subleases space at the same address to 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 $41,000
(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, 2000 at an annual rental rate of approximately $46,000
(354,000 Hong Kong dollars).
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.
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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 69
Leon Tempelsman Vice Chairman of the 42
Board and President
Sheldon L. Ginsberg Executive Vice President and 44
Chief Financial Officer
Robert Speisman Vice President - Sales 45
</TABLE>
All officers were elected by the Board of Directors at its meeting
following the Annual Meeting of Stockholders held in November 1997, and hold
office until the Board of Directors meeting following the next Annual Meeting of
Stockholders and until their respective successors have been duly elected and
qualified.
Maurice Tempelsman is the Chairman of the Board and a director of the
Company and a general partner of Leon Tempelsman & Son, a partnership with
interests in the international diamond and mining industries. He has held these
positions since 1984. Maurice Tempelsman is the father of Leon Tempelsman and
the father-in-law of Robert Speisman.
Leon Tempelsman is the Vice Chairman of the Board, the President and a
director of the Company and a general partner of Leon Tempelsman & Son. He has
held these positions since 1984. Leon Tempelsman is the son of Maurice
Tempelsman and the brother-in-law of Robert Speisman.
The Company believes that neither the Tempelsmans nor LTS currently
engages directly or indirectly in any activities competitive with those of the
Company.
Sheldon L. Ginsberg has been Executive Vice President and Chief
Financial Officer since February 1996. He was the Vice President and Chief
Financial Officer from April 1991 until February 1996. 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.
11
<PAGE>
<PAGE>
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 to the
Registrant's Annual Report.
Item 6. Selected Financial Data
Selected financial data are hereby incorporated by reference
to 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 to the
Registrant's Annual Report.
Item 8. Financial Statements and Supplementary Data
(a) The following financial statements and supplementary data
are hereby incorporated by reference to the Registrant's Annual Report.
(i) Report of Ernst & Young LLP
(ii) Consolidated Statements of Income for each of the three
years in the period ended May 31, 1998.
(iii) Consolidated Balance Sheets as at May 31, 1998 and May
31, 1997.
(iv) Consolidated Statements of Stockholder's Equity for each
of the three years in the period ended May 31, 1998.
(v) Consolidated Statements of Cash Flows for each of the
three years in the period ended May 31, 1998.
(vi) Notes to Consolidated Financial Statements.
12
<PAGE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
Part III
Except for information regarding Executive Officers of the
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 to 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, 1998.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a) 1. The response to this portion of Item 14 is set forth in Item 8
of Part II hereof.
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for each of the
three years in the period ended May 31, 1998.
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.
13
<PAGE>
<PAGE>
LAZARE KAPLAN INTERNATIONAL INC.
AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
-----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other accounts Deductions end
Description of period expenses describe describe of period
----------- ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MAY 31, 1998:
Allowance for doubtful accounts $162,487 $ 60,000 $ -- $ 79,367(A) $143,120
-------- -------- -------- -------- --------
YEAR ENDED MAY 31, 1997:
Allowance for doubtful accounts $281,265 $(25,000) $ -- $ 93,778(A) $162,487
-------- -------- -------- -------- --------
YEAR ENDED MAY 31, 1996:
Allowance for doubtful accounts $220,046 $ 70,000 $ -- $ 8,781(A) $281,265
-------- -------- -------- -------- --------
</TABLE>
(A) Amounts written off
14
<PAGE>
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K (continued)
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the fourth quarter of the fiscal year ended May 31, 1998.
(c) Exhibits
(3) Articles of Incorporation and Bylaws
(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) Certificate of Amendment of the Certificate of Incorporation
filed with the Secretary of State of the State of Delaware on
November 6, 1997 - incorporated by reference to Exhibit 4.1(a)
(iii) to Company's Registration Statement for the Lazare
Kaplan International Inc. 1997 Long Term Stock Incentive Plan
on Form S-8 filed with the Commission on November 14, 1997.
(d) Certificate of Designations of Series A Junior Participating
Preferred Stock filed with the Secretary of State of the State
of Delaware on November 6, 1997 - incorporated by reference to
Exhibit 4.1(b) to the Company's Registration Statement on Form
S-8 filed with the Commission on November 14, 1997.
(e) By-laws, as amended - incorporated herein by reference to
Exhibit 3(b) to 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.
15
<PAGE>
<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) Fourth Amendment to the Note Agreement, dated as of August 25,
1995 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 to Report on Form 10-Q of the Registrant for the quarterly
period ended August 31, 1995 filed with the Commission on
October 13, 1995.
(g) Loan Agreement, dated May 14, 1996 among the Registrant, Fleet
Bank, N.A. and Bank Leumi Trust Company of New York
incorporated herein by reference to Exhibit 10(i) to Report on
Form 10-K of the Registrant for the fiscal year ended May 31,
1996 filed with the Commission on August 28, 1996.
(h) Cooperation Agreement, dated July 5, 1996, among the
Registrant, Empresa Nacional de Diamantes de Angola and
Sociedade Angolana de Exploracao, Lapidacao e Commercializacao
de Diamantes - incorporated herein by reference to Exhibit (1)
to Current Report on Form 8-K of the Registrant filed with the
Commission on October 31, 1996 (certain portions of this
agreement are subject to confidential treatment).
(i) Cooperation Agreement, dated July 15, 1996 between the
Registrant and AK Almazi Rossii Sakha - incorporated herein by
reference to Exhibit (2) to Current Report on Form 8-K/A of
the Registrant filed with the Commission on November 18, 1996
(certain portions of this agreement are subject to
confidential treatment).
(j) Amendment No. 1, dated as of November 29, 1996, to Loan
Agreement, dated May 14, 1996, among the Registrant, Fleet
Bank, N.A. and Bank Leumi Trust Company of New York -
incorporated herein by reference to Exhibit 10(1) to Amendment
No. 2 to Registration Statement on Form S-2 of the Registrant
filed with the Commission on
16
<PAGE>
<PAGE>
December 11, 1996.
(k) Amendment No. 2, dated as of May 30, 1997, to Loan Agreement,
dated May 14, 1996, among the Registrant, Fleet Bank, N.A. and
Bank Leumi Trust Company of New York incorporated herein by
reference to Exhibit 10(n) to Report on Form 10-K of the
Registrant for the fiscal year ended May 31, 1997 filed with
the Commission on August 28, 1997.
(l) Rights Agreement, dated as of July 31, 1997, between the
Registrant and ChaseMellon Shareholder Services, LLC
incorporated herein by reference to Exhibit 99.1 to Form 8-A
of the Registrant filed with the Commission on August 26,
1997.
(m) Leon Tempelsman Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(o) to Report on Form 10-K of the Registrant for the fiscal
year ended May 31, 1997 filed with the Commission on August
28, 1997.
(n) Sheldon L. Ginsberg Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(p) to Report on Form 10-K of the Registrant for the fiscal
year ended May 31, 1997 filed with the Commission on August
28, 1997.
(o) Robert Speisman Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(q) to Report on Form 10-K of the Registrant for the fiscal
year ended May 31, 1997 filed with the Commission on August
28, 1997.
(13) 1998 Annual Report to Security Holders - incorporated herein by
reference to the 1998 Annual Report to Stockholders of the Registrant
to be filed with the Commission.
(21) Subsidiaries
(23) Consent of Ernst & Young LLP
(27) Financial Data Schedule
17
<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
LAZARE KAPLAN INTERNATIONAL INC.
By (s) Sheldon L. Ginsberg
----------------------------------------------
Sheldon L. Ginsberg, Executive Vice President
and Chief Financial Officer (principal financial
and accounting officer)
Dated: August 28, 1998
18
<PAGE>
<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 28, 1998
- ------------------------- Board of Directors
(Maurice Tempelsman)
(s) Leon Tempelsman Vice Chairman of the August 28, 1998
- ------------------------- Board of Directors and
(Leon Tempelsman) President (principal
executive officer)
(s) Lucien Burstein Director August 28, 1998
- -------------------------
(Lucien Burstein)
(s) Myer Feldman Director August 28, 1998
- -------------------------
(Myer Feldman)
(s) Michael W. Butterwick Director August 28, 1998
- -------------------------
(Michael W. Butterwick)
(s) Sheldon L. Ginsberg Director and Executive August 28, 1998
- ------------------------- Vice President and Chief
(Sheldon L. Ginsberg) Financial Officer (principal
financial and accounting
officer)
(s) Robert Speisman Director August 28, 1998
- -------------------------
(Robert Speisman)
</TABLE>
19
<PAGE>
<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, 1998
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Page No.
------- --------
<S> <C> <C>
(3) Articles of Incorporation and Bylaws
(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) Certificate of Amendment of the Certificate of
Incorporation filed with the Secretary of State of the
State of Delaware on November 6, 1997 -
incorporated by reference to Exhibit 4.1(a) (iii) to
Company's Registration Statement for the Lazare
Kaplan International Inc. 1997 Long Term
Stock Incentive Plan on Form S-8 filed with the
Commission on November 14, 1997.
(d) Certificate of Designations of Series A Junior Participating
Preferred Stock filed with the Secretary of State of the State
of Delaware on November 6, 1997 - incorporated by reference to
Exhibit 4.1(b) to the Company's Registration Statement on Form
S-8 filed with the Commission on November 14,
</TABLE>
20
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
1997.
(e) 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.
(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
</TABLE>
21
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
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.
(f) Fourth Amendment to the Note Agreement, dated as
of August 25, 1995 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 to Report on Form 10-Q of the Registrant
for the quarterly period ended August 31, 1995 filed
with the Commission on October 13, 1995.
(g) Loan Agreement, dated May 14, 1996 among the Registrant, Fleet
Bank, N.A. and Bank Leumi Trust Company of New York
incorporated herein by reference to Exhibit 10(i) to Report on
Form 10-K of the Registrant for the fiscal year ended May 31,
1996 filed with the Commission on August 28, 1996.
(h) Cooperation Agreement, dated July 5, 1996, among
the Registrant, Empresa Nacional de Diamantes de
Angola and Sociedade Angolana de Exploracao,
Lapidacao e Commercializacao de Diamantes -
incorporated herein by reference to Exhibit (1) to
Current Report on Form 8-K of the Registrant filed
with the Commission on October 31, 1996 (certain
portions of this agreement are subject to confidential
treatment).
(i) Cooperation Agreement, dated July 15, 1996 between the
Registrant and AK Almazi Rossii Sakha - incorporated herein by
reference to Exhibit (2) to Current Report on Form 8-K/A of
the Registrant filed with the Commission on November 18, 1996
(certain portions of this agreement are subject to
confidential treatment).
(j) Amendment No. 1, dated as of November 29, 1996,
</TABLE>
22
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
to Loan Agreement, dated May 14, 1996, among the Registrant,
Fleet Bank, N.A. and Bank Leumi Trust Company of New York -
incorporated herein by reference to Exhibit 10(1) to Amendment
No. 2 to Registration Statement on Form S-2 of the Registrant
filed with the Commission on December 11, 1996.
(k) Amendment No. 2, dated as of May 30, 1997, to
Loan Agreement, dated May 14, 1996, among the
Registrant, Fleet Bank, N.A. and Bank Leumi Trust
Company of New York incorporated herein by
reference to Exhibit 10(n) to Report on Form 10-K
of the Registrant for the fiscal year ended May 31,
1997 filed with the Commission on August 28, 1997.
(l) Rights Agreement, dated as of July 31, 1997, between the
Registrant and ChaseMellon Shareholder Services, LLC -
incorporated herein by reference to Exhibit 99.1 to Form 8-A
of the Registrant filed with the Commission on August 26,
1997.
(m) Leon Tempelsman Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(o) to Report on Form 10- K of the Registrant for the fiscal
year ended May 31, 1997 filed with the Commission on August
28, 1997.
(n) Sheldon L. Ginsberg Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(p) to Report on Form 10- K of the Registrant for the fiscal
year ended May 31, 1997 filed with the Commission on August
28, 1997.
(o) Robert Speisman Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(q) to Report on Form 10-K of the Registrant for the fiscal
year ended May 31, 1997 filed with the Commission on August
28, 1997.
</TABLE>
23
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
(13) 1998 Annual Report to Security Holders - incorporated herein by
reference to the 1998 Annual Report to Stockholders of the Registrant
to be filed with the Commission. 25
(21) Subsidiaries 51
(23) Consent of Ernst & Young LLP 52
(27) Financial Data Schedule 53
</TABLE>
24
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as ........................... 'TM'
The registered trademark symbol shall be expressed as ................ 'r'
<PAGE>
<PAGE>
LAZARE KAPLAN INTERNATIONAL INC.
[Front cover contains a "Photograph of the letters "L", "K", and "I" set in
diamonds and suspended by a platinum chain."]
[LOGO]
The leader in ideal cut diamonds for over 90 years.
1998 ANNUAL REPORT
<PAGE>
<PAGE>
Cover photo: Diamond Alphabets'TM' were introduced by Lazare Kaplan
International Inc. in June 1998 with Isaac Mizrahi as part of the Fine Jewelry
Collection. Designed by award winning fashion designer Isaac Mizrahi and
featured at his show in April 1998, each letter and number features Lazare
Diamonds'r' and is exclusively distributed by Lazare Kaplan International Inc.
<PAGE>
<PAGE>
[Logo]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LAZARE KAPLAN INTERNATIONAL INC. 1998 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,
whatever their size, which are cut and polished by Lazare Kaplan craftsmen, are
finished to precise proportions, bringing out all of the diamond's natural
brilliance, fire and luster. In addition, Lazare Kaplan also cuts and polishes
non-ideal cut (commercial) diamonds. These stones are sold through wholesalers
and distributors and, to a growing extent, through retail jewelers, Lazare
Kaplan's traditional channel of distribution. Lazare Kaplan is also engaged in
the selling of uncut rough 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, 1998 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 4, 1998
10 A.M.
The Cornell Club
Six East 44th Street
Fifth Floor, Fall Creek Room
New York, New York 10017
MARKET PRICES OF COMMON
STOCK BY FISCAL QUARTER
- -------------------------------------
<TABLE>
<CAPTION>
FISCAL 1998
---------------
HIGH LOW
- -------------------------------------
<S> <C> <C>
FIRST 18 1/4 15 1/2
SECOND 17 14 1/8
THIRD 14 1/4 10
FOURTH 12 5/8 10 1/16
- -------------------------------------
<CAPTION>
Fiscal 1997
-----------------
High Low
- -------------------------------------
<S> <C> <C>
First 16 1/2 12 1/2
Second 21 7/8 16 1/2
Third 19 3/8 16 5/8
Fourth 18 3/8 13 1/4
- -------------------------------------
</TABLE>
As of July 31, 1998 there were 1,791 stockholders of record of the 8,532,549
issued and outstanding shares of the common stock of the Company, including CEDE
& Co. and other institutional holders who held an aggregate of 4,731,436 shares
of common stock as nominees for an undisclosed number of beneficial holders. The
Company estimates that it has in excess of 2,300 beneficial holders.
1
<PAGE>
<PAGE>
[LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996 1995 1994
- -------------------------------------------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $222,617 $259,797 $266,321 $178,143 $204,047
- -----------------------------------------------------------------------------------------------------------------
Income/(loss) from continuing operations before income
tax provision and minority interest $ 2,295 $ 8,248 $ 7,149 $ (1,418) $ 2,803
- -----------------------------------------------------------------------------------------------------------------
Income/(loss) from continuing operations $ 2,724 $ 12,100 $ 7,013 $ (1,153) $ 3,024
- -----------------------------------------------------------------------------------------------------------------
Net income/(loss) $ 2,724 $ 11,482 $ 7,013 $ (1,153) $ 3,024
- -----------------------------------------------------------------------------------------------------------------
Basic earnings/(loss) per share from continuing
operations (based on the weighted average number of
shares) $ 0.32 $ 1.69* $ 1.14 $ (0.19) $ 0.49
- -----------------------------------------------------------------------------------------------------------------
Basic earnings/(loss) per share (based on the weighted
average number of shares) $ 0.32 $ 1.61* $ 1.14 $ (0.19) $ 0.49
- -----------------------------------------------------------------------------------------------------------------
Diluted earnings/(loss) per share from continuing
operations (based on the weighted average number of
shares) $ 0.31 $ 1.63* $ 1.12 $ (0.18) $ 0.49
- -----------------------------------------------------------------------------------------------------------------
Diluted earnings/(loss) per share (based on the weighted
average number of shares) $ 0.31 $ 1.54* $ 1.12 $ (0.18) $ 0.49
- -----------------------------------------------------------------------------------------------------------------
At May 31:
Total assets $142,330 $130,079 $105,066 $ 99,163 $ 93,178
- -----------------------------------------------------------------------------------------------------------------
Long-term debt $ 23,560 $ 17,145 $ 34,155 $ 26,430 $ 25,715
- -----------------------------------------------------------------------------------------------------------------
Working capital $111,752 $105,291 $ 74,069 $ 59,290 $ 52,333
- -----------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 93,460 $ 90,544 $ 44,870 $ 37,695 $ 38,751
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: No cash dividends were declared or paid by the Company during the past
five fiscal years.
* Reflects the impact of the issuance of 2,130,000 additional shares of common
stock during 1997.
4
<PAGE>
<PAGE>
[Logo]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Annual Report contains, in addition to historical information, certain
forward-looking statements that involve significant risks and uncertainties.
Such forward-looking statements are based on management's belief as well as
assumptions made by, and information currently available to, management pursuant
to the 'safe harbor' provisions of the Private Securities Litigation Reform Act
of 1995. The Company's actual results could differ materially from those
expressed in or implied by the forward-looking statements contained herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed herein and in Item 1 -- 'Description of Business'
and elsewhere in the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1998. The Company undertakes no obligation to release publicly the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date of this Annual Report or to
reflect the occurrence of other unanticipated events.
This discussion and analysis should be read in conjunction with the
Selected Financial Data and the audited consolidated financial statements and
related notes of the Company contained elsewhere in this report. In this
discussion, the years '1998', '1997' and '1996' refer to the fiscal years ended
May 31, 1998, 1997 and 1996, respectively.
RESULTS OF OPERATIONS
Net Sales
Net sales in 1998 of $222,617,000 were 14% lower than net sales of
$259,797,000 in 1997.
The Company's net revenue from the sale of polished diamonds of $84,058,000
in 1998 was 12% lower than 1997 polished sales. The decrease in polished diamond
sales was primarily due to the Company not receiving its first shipments of
polished stones from its new factory in Russia until late November 1997, six
months into the Company's fiscal year. On a comparative basis, the Company
experienced larger shipments during the prior year from its older Russian
facility which has currently suspended production. Also, adverse economic
conditions caused lower sales in Japan and Southeast Asia. Both of these items
were partially offset by increased sales volume in the United States market.
Rough diamond sales were $138,559,000 in 1998 compared to $164,643,000 in
1997, a decrease of 16%. This decrease was partially attributable to continued
lower sales of better quality rough diamonds to the marketplace by DeBeers as
well as the Company closing its rough diamond buying operation in the Republic
of the Congo (formerly Zaire) in early calendar year 1997 (i.e. fiscal 1997).
The decrease was partially offset by increased rough sales volume associated
with the Company's restructuring and expansion of its rough diamond buying
operations in Angola during the year.
Net sales in 1997 of $259,797,000 were $6,524,000 or 2% lower than net
sales of $266,321,000 in 1996.
The Company's net revenue from the sale of polished diamonds of $95,154,000
in 1997 was 6% greater than 1996 polished sales. The increase was due to
continued growth in the United States market as well as increased volume in
Southeast Asia. The increase in 1997 was partially offset by a decrease in sales
of polished stones produced at the Company's older facility in Russia. Due to
internal Russian Government delays, no diamonds were officially exported from
Russia since the beginning of calendar 1997, therefore the Company did not
received any shipment of polished diamonds produced at this facility during the
second half of fiscal 1997.
Rough diamond sales decreased 7% to $164,643,000 in 1997 compared to 1996.
This decrease was attributable to lower overall sales of better quality rough
diamonds to the marketplace by DeBeers during the second half of the year
thereby reducing the volume of rough stones available for trading. Additionally,
due to the unstable political situation, the Company suspended its rough diamond
buying operation in the Republic of the Congo.
5
<PAGE>
<PAGE>
[LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
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
1998 was 11% as compared to 17% in 1997. In 1998 the Polished Diamond Gross
Margin was impacted by increased costs of rough diamonds which the Company has
yet to reflect in the selling price of its polished diamonds. In addition, the
economic environment in Southeast Asia and Japan during the latter half of 1998
has impacted the Company's sales of larger, better quality stones, which carry
higher margins. The gross margin on sales of rough stones not selected for
manufacturing and sales of rough stones from the rough trading operation,
including an allocation of overhead costs estimated to be associated with the
purchase and sale of rough stones, has traditionally been approximately 3%.
During 1998, the overall gross margin on net sales of both polished
diamonds and rough diamonds was 6.2%. This compares to 9.1% in 1997 and 8.5% in
1996. The decrease in 1998 was primarily attributable to the decrease in the
Polished Diamond Gross Margin.
Polished Diamond Gross Margin for 1997 was 17%, an increase of 1 percentage
point from the 1996 level of 16%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 1998 of $13,721,000 (6.2%
of net sales) increased 11% or $1,355,000 compared with expenses of $12,366,000
(4.8% of net sales) in 1997. The increase was attributable to increases in
selling commissions and benefits in 1998, as well as an increase in
legal/consulting services and international travel associated with the
evaluation of new business opportunities in the current year.
Selling, general and administrative expenses in 1997 of $12,366,000 (4.8%
of net sales) increased 8% or $927,000 compared with expenses of $11,439,000
(4.3% of net sales) in 1996. The increase was attributable to increases in legal
and consulting services associated with the evaluation of expansion
opportunities in 1997.
Sale of Interest in Lazare Kaplan Botswana (Pty) Ltd.
In March 1998, the Company completed a transaction for the sale of its
interest in Lazare Kaplan Botswana (Pty) Ltd. for $11.1 million and recorded a
gain of approximately $3.7 million (net of $485,000 of Botswana taxes) on the
transaction. The Botswana factory employed more than 500 local workers and
produced small size (melee) ideal cut diamonds. The Company intends to meet the
requirements of its customers for this product through its existing facilities
and through continued purchases of polished diamonds from Botswana.
Interest Expense
Net interest expense was $2,062,000, $3,112,000 and $4,048,000 in 1998,
1997 and 1996, respectively. The decrease in 1998 was due to lower average
balances outstanding on the Company's lines of credit of $4.2 million as
compared to $15.1 million in 1997. In addition, interest expense on the
Company's Senior Notes decreased by approximately $430,000 during 1998 due to
the reduction of the outstanding balance. The decrease in 1997 was primarily due
to a decrease in interest expense of $750,000 related to both the reduction in
the interest rate charged and the reduction of the outstanding balance of the
Company's Senior Notes combined with an increase in interest income earned
during the year. During 1997, the Company completed a secondary offering of its
common stock and used a portion of the proceeds from the offering to repay its
revolving bank loan and invested the balance of the proceeds in a money market
fund. (See Note 6 to the Financial Statements and Liquidity -- Capital Resources
below).
Income Taxes
During the fourth quarter of 1997 the Company recorded a tax benefit of
$3,375,000 related to the reversal of the valuation allowance that had been
provided against the Company's deferred tax assets
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
that arose primarily from net operating loss carryforwards.
Discontinued Operation
During the fourth quarter of 1997 the Company discontinued its efforts to
organize and participate in the privatization of the mining of the Akwatia and
Birim deposits owned and operated by Ghana Consolidated Diamonds Ltd., in Ghana.
The nature of these deposits, consisting of small size low quality stones which
continued to be in oversupply and under price pressure in the marketplace, the
continued decline in monthly production, and the inability towards the end of
the fiscal year to reach agreement with the Ghanaian Government on the terms of
future marketing rights were the primary reasons for this decision. The
write-off of unamortized costs (net of tax benefit of $13,000) was $618,000 in
fiscal 1997.
Earnings/(Loss) Per Share
In 1998 the Company adopted Statement of Financial Accounting Standards
No. 128 'Earnings per Share' (SFAS 128). This statement replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Basic earnings per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings per share includes the
impact of dilutive stock options. All earnings per share amounts for all periods
have been presented and, where necessary, restated to conform to SFAS 128
requirements.
During 1998, 1997 and 1996 basic earnings per share was $0.32, $1.61 and
$1.14, respectively. Diluted earnings per share was $0.31, $1.54 and $1.12 in
1998, 1997 and 1996, respectively. In 1997, basic and diluted earnings per share
included a loss of $.08 and $.09 per share, respectively, from a discontinued
operation.
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. (interest sold in March 1998) was the U.S.
dollar and this subsidiary was not materially affected by foreign currency
fluctuations during the year.
IMPACT OF YEAR 2000
During fiscal year 1998 the Company commenced the implementation of a new,
fully integrated computer system which will be Year 2000 compliant. In addition,
the Company will initiate formal communications with all of its significant
suppliers and other third parties to determine the extent to which the Company's
operations are vulnerable to the failure of those third parties to remediate
their own Year 2000 issues. The Company is utilizing both internal and external
resources to renovate and test its software and hardware and anticipates
substantially completing the project during the first half of calendar year
1999. The total cost of the new computer system is expected to be approximately
$2.0 million.
The costs of the project and the time frame in which the Company believes
it will complete installation of its new computer system, including the Year
2000 compliance, are based on management's best estimates; however, there can be
no assurance that these estimates will be achieved and actual results could
differ materially from those anticipated.
LIQUIDITY -- CAPITAL RESOURCES
The Company's working capital at May 31, 1998 was $111,752,000, an increase
of $6,461,000 from 1997. This increase was primarily related to higher
inventories and accounts receivable partially offset by an increase in accounts
payable and other current liabilities and a decrease in cash and cash
equivalents.
In the fourth quarter of 1998, the Company completed the sale of its
interest in Lazare Kaplan Botswana (Pty) Ltd. for $11.1 million in cash. The
7
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
Company used the proceeds to repay its outstanding non-current bank loans.
In the third quarter of 1997, the Company completed an offering of
2,130,000 shares of its common stock at a price of $17.00 per share. The net
proceeds, after offering expenses, were $33,572,000. The Company used a portion
of the net proceeds to repay its outstanding revolving bank loans.
The Company's working capital at May 31, 1997 was $105,291,000, an increase
of $31,222,000 from 1996. This increase was primarily related to the increase in
current assets resulting from the completion of the secondary offering of the
Company's common stock.
Fixed asset additions totaled $2,600,000, $805,000 and $1,797,000 in 1998,
1997 and 1996, respectively. In 1998, the fixed asset additions related
primarily to new laser inscription equipment. In addition, in 1998 the Company
commenced the design and implementation of a new, fully integrated computer
system which is Year 2000 compliant. The Company expects to incur an additional
$900,000 during the upcoming fiscal year in order to complete this project. In
1997 and 1996, the fixed asset additions related primarily to machinery and
equipment to be used in the Company's manufacturing facilities and buying
offices.
In May 1996 the Company entered into a long-term unsecured, revolving loan
agreement with two banks. The agreement, as amended, provides that the Company
may borrow up to $40,000,000 in the aggregate, at an interest rate of any of a)
one-eighth of one percent above the bank's prime rate, b) 160 basis points above
the London Interbank Offered Rate (LIBOR), or c) 160 basis points above the
bank's cost of funds rate. The applicable interest rate was contingent upon the
method of borrowing selected by the Company. The term of the loan is through
September 1, 2002. As of May 31, 1998 there was an aggregate balance outstanding
of $10,700,000 under this agreement. The proceeds of this facility are available
for the Company's working capital needs and to fund its future annual
installments due under the Senior Note Agreement. The Company was not in
compliance with the capital expenditure covenant (due to expenditures related
to its new, Year 2000 compliant computer system) and the annual cash flow
covenant under the revolving loan agreement for the year ended May 31, 1998.
The banks have given a waiver to the Company with respect to these covenants
for the year ended May 31, 1998 and have amended such covenants for the fiscal
1999 measurement periods.
The Company had a $3.0 million credit facility, payable on demand, at a
rate of one-half of one percent above the six-month LIBOR which was fully repaid
during 1998.
In May 1991, the Company, through a private placement, issued $30,000,000
of 9.97% Senior Notes, due May 15, 2001.
Management believes the Company has the ability to meet its current and
anticipated financing needs for the next twelve months with the facilities in
place and funds from operations.
Stockholders' equity was $93,460,000 at May 31, 1998, $90,544,000 at May
31, 1997 and $44,870,000 at May 31, 1996. The increase in 1998 was attributable
to the net income earned during the year. The increase in 1997 was attributable
to the completion of an offering of 2,130,000 shares of common stock at a price
of $17.00 per share, as well as the net income earned during the year.
Stockholders received no dividends in 1998, 1997 or 1996.
BUSINESS DEVELOPMENTS
Under the terms of its agreement with AK Almazi Rossii Sakha (ALROSA) of
Russia, the Company equipped a diamond cutting factory which was completed in
February 1997 within the ALROSA facility in Moscow. This facility is staffed by
Russian technicians and managed and supervised by Company personnel. ALROSA has
agreed to supply a minimum of $45 million per year of large rough gem diamonds
selected by the Company as being suitable for processing at this facility. In
May 1997, the facility completed the production of its first polished stones and
the Company received its first shipment of polished stones produced at this
facility during November 1997. The Company has agreed to sell the resulting
polished gem stones through its worldwide
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
distribution network. The proceeds from the sale of these polished diamonds,
after reimbursement of costs incurred by each of the parties, generally will be
shared equally with ALROSA. This agreement serves as a long-term off-take
arrangement to secure the repayment of the $62 million financing which is being
received by ALROSA from a United States commercial bank and to be guaranteed by
the Export-Import Bank of the United States ('Eximbank') for the purchase by
ALROSA of U.S. manufactured mining equipment. This equipment is being used by
ALROSA to increase production in its diamond mines.
In July 1998 the Company announced the expansion of its relationship with
ALROSA. In accordance with a Memorandum of Understanding signed by Eximbank,
ALROSA and the Company, Eximbank has stated its willingness to lend an
additional several hundred million dollars to ALROSA for the continued expansion
of its mining capacity. Lazare Kaplan will act as the off-take partner of this
arrangement and, with ALROSA, has agreed to establish a new polishing factory in
Russia with an annual capacity to cut and polish up to $150 million of rough
diamonds. This factory will be in addition to the existing facility which is
equipped to cut and polish $45 million per year of rough diamonds discussed
above.
In July 1996 the Company signed a five year agreement, approved by the
Government of Angola, for the supply of a portion of the rough diamonds mined in
Angola and the joint cutting, polishing and marketing of a portion of that
production. The agreement, entered into with Endiama and Sociedade Angolana de
Exploracao, Lapidacao e Commercializacao de Diamantes, a company owned by a
consortium of Angolan investors, provides for Endiama to sell to the Company a
portion of the rough diamonds mined in Angola consisting of sizes and qualities
selected by the Company as being suitable for cutting and sale as polished
diamonds, or for resale as rough diamonds. Purchases under this arrangement
began in August 1996. The Company has cut and polished the rough diamonds at its
existing facilities. After an agreed period of consistent, uninterrupted supply
of rough diamonds, a feasibility study will be undertaken by the Company to
examine the economic viability of establishing a diamond cutting factory in
Angola. In the agreement, the parties acknowledge that it is their long term
intention to create a diamond polishing facility in Angola with the capacity
for polishing at least $40 million of rough diamonds per year. However, the
arrangement remains in an early stage and Company has not yet been supplied
with suitable quantities of rough diamonds for cutting and polishing.
RISKS AND UNCERTAINTIES
The Company's business is dependent upon the availability of rough
diamonds. Based upon published reports, the Company believes that approximately
70-75% of the world's diamond output is purchased for resale by DeBeers
Centenary AG and its affiliated companies. Although DeBeers has historically
been one of the Company's major suppliers of rough diamonds, the Company has
successfully diversified its sources of supply by entering into arrangements
with other primary source suppliers and has been able to supplement its rough
diamond needs by purchasing supplies in the secondary market. While the Company
believes that it has good relationships with its suppliers and that its sources
of supply are sufficient to meet its present and foreseeable needs, the
Company's rough diamond supplies, and therefore, its manufacturing capacity,
could be adversely affected by political and economic developments in producing
countries over which it 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.
Further, through its control of the world's diamond output, DeBeers can
exert significant control over the pricing of rough and polished diamonds. A
large rapid increase in rough diamond prices could materially adversely affect
the Company's revenue and operating margins if the increased cost of the rough
diamonds could not be passed along to its customers in a timely manner.
Alternatively, any rapid decrease in the price of polished diamonds could have a
material adverse affect on the Company in terms of inventory losses and lower
margins.
9
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended May 31,
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Note 1) $ 222,617 $ 259,797 $ 266,321
Cost of sales (Note 1) 208,717 236,071 243,685
- ------------------------------------------------------------------------------------------------------------------
13,900 23,726 22,636
- ------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 13,721 12,366 11,439
Interest expense, net of interest income 2,062 3,112 4,048
Gain on sale of consolidated subsidiary (Note 7) (4,178) - -
- ------------------------------------------------------------------------------------------------------------------
11,605 15,478 15,487
- ------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income tax provision/(benefit)
and minority interest 2,295 8,248 7,149
Income tax provision/(benefit) (Notes 1 and 3) 417 (2,970) 459
- ------------------------------------------------------------------------------------------------------------------
Income from continuing operations before minority interest 1,878 11,218 6,690
Minority interest in loss of consolidated subsidiary 846 882 323
- ------------------------------------------------------------------------------------------------------------------
Income from continuing operations 2,724 12,100 7,013
Loss from discontinued operation, net of income tax benefit (Note 13) - 618 -
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,724 $ 11,482 $ 7,013
- ------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE (Note 1)
Basic earnings per share from continuing operations $ 0.32 $ 1.69 $ 1.14
- ------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.32 $ 1.61 $ 1.14
- ------------------------------------------------------------------------------------------------------------------
Average number of shares outstanding during the period 8,499,131 7,151,099 6,151,626
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings per share from continuing operations $ 0.31 $ 1.63 $ 1.12
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.31 $ 1.54 $ 1.12
- ------------------------------------------------------------------------------------------------------------------
Average number of shares outstanding during the period,
assuming dilution 8,669,366 7,442,518 6,278,019
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,222 $ 10,338
Accounts receivable, less allowance for doubtful accounts ($143 and $162 in 1998 and 1997,
respectively) 37,747 29,632
Inventories, net (Note 1):
Rough stones 23,843 11,395
Polished stones 57,675 54,803
--------------------
Total inventories 81,518 66,198
--------------------
Prepaid expenses and other current assets 12,640 11,149
Deferred tax assets (Note 3) 3,785 3,675
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 136,912 120,992
PROPERTY, PLANT AND EQUIPMENT, net (Notes 1 and 2) 4,734 6,726
OTHER ASSETS 684 2,361
- --------------------------------------------------------------------------------------------------------------------
$142,330 $130,079
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other current liabilities (Notes 1 and 4) $ 25,160 $ 14,358
Notes payable -- other (Note 5) - 1,343
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 25,160 15,701
SENIOR NOTES AND OTHER LONG-TERM DEBT (Notes 5 and 6) 23,560 17,145
DEFERRED TAX LIABILITIES (Note 3) 150 300
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 48,870 33,146
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
MINORITY INTEREST (Notes 1 and 7) - 6,389
STOCKHOLDERS' EQUITY (Notes 8 and 12)
Preferred stock, par value $.01 per share:
Authorized, 5,000,000 shares, no shares outstanding
Common stock, par value $1 per share:
Authorized, 20,000,000 and 10,000,000 shares in 1998 and 1997, respectively
Issued 8,534,549 and 8,407,121 shares in 1998 and 1997, respectively 8,535 8,407
Additional paid-in capital 58,145 58,059
Retained earnings 26,802 24,078
- --------------------------------------------------------------------------------------------------------------------
93,482 90,544
Less treasury stock, 2,000 shares at cost in 1998 (Note 14) (22) -
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 93,460 90,544
- --------------------------------------------------------------------------------------------------------------------
$142,330 $130,079
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
11
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Treasury Stockholders'
(In thousands) Stock Capital Earnings Stock Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1995 $6,148 $ 25,964 $ 5,583 $ - $37,695
Net Income - - 7,013 - 7,013
Exercise of Stock Options, 28,617 shares issued 28 134 - - 162
- ----------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1996 6,176 26,098 12,596 - 44,870
Net Income - - 11,482 - 11,482
Exercise of Stock Options, 100,696 shares issued 101 519 - - 620
Sale of common stock, net 2,130 31,442 - - 33,572
- ----------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1997 8,407 58,059 24,078 - 90,544
Net Income - - 2,724 - 2,724
Exercise of Stock Options, 127,428 shares issued 128 86 - - 214
Purchase of treasury stock, 2,000 shares - - - (22) (22)
- ----------------------------------------------------------------------------------------------------------------------
Balance, May 31, 1998 $8,535 $ 58,145 $26,802 $(22) $93,460
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
12
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,724 $ 11,482 $ 7,013
Adjustments to reconcile net income to net cash provided by/(used in) operating
activities:
Depreciation and amortization 2,070 2,376 2,234
Provision for uncollectible accounts 60 (25) 70
Minority interest in loss of consolidated subsidiary (846) (882) (323)
Net gain on sale of consolidated subsidiary (3,693) - -
Gain on sale of fixed assets - - (54)
Benefit from deferred income taxes (260) (3,375) -
Loss from discontinued operation - 618 -
(Increase)/decrease in assets and increase/(decrease) in liabilities:
Accounts receivable (8,204) (4,114) (3,261)
Rough and polished inventories (25,588) (9,899) (565)
Prepaid expenses and other current assets (1,837) (1,625) (3,976)
Other assets 66 1,544 (403)
Accounts payable and other current liabilities 12,628 (1,412) (264)
-------------------------------
Net cash provided by/(used in) operating activities (22,880) (5,312) 471
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of stock in consolidated subsidiary 11,100 - -
Proceeds from sale of fixed assets - 25 222
Capital expenditures (2,600) (805) (1,797)
-------------------------------
Net cash provided by/(used in) investing activities 8,500 (780) (1,575)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term borrowings (1,343) (1,657) (8,410)
Increase/(decrease) in long-term borrowings 6,415 (17,010) 7,725
Proceeds from exercise of stock options 214 620 162
Proceeds from issuance of common stock, net - 33,572 -
Purchase of treasury stock (22) - -
-------------------------------
Net cash provided by/(used in) financing activities 5,264 15,525 (523)
- ---------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (9,116) 9,433 (1,627)
Cash and cash equivalents at beginning of year 10,338 905 2,532
-------------------------------
Cash and cash equivalents at end of year $ 1,222 $ 10,338 $ 905
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,288 $ 3,573 $ 4,183
Income taxes 716 458 407
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
13
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1998, 1997 and 1996
1. ACCOUNTING POLICIES
- ---------------------------------------------------------
a. The Company and its principles of consolidation
The Company and its subsidiaries are engaged in the cutting and polishing
of rough diamonds and the selling of both polished and uncut rough diamonds. The
consolidated financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly owned. Through March 1998, the Company
owned 60% of Lazare Kaplan Botswana (Pty) Ltd. Minority interest represents the
minority stockholders' proportionate share of the equity of Lazare Kaplan
Botswana (Pty) Ltd. through such date (see Note 7). With effect from January 1,
1998, the Company restructured certain foreign operations. This resulted in the
inclusion of all revenue from these operations and an increase in rough diamond
sales for the year ended May 31, 1998 of approximately $37 million. All material
intercompany balances and transactions have been eliminated.
b. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that could affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from these estimates.
c. Sales and accounts receivable
The Company's net sales to customers in each of the following regions for
the years ended May 31, 1998, 1997 and 1996 are set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------
<S> <C> <C> <C>
United States 28% 22% 23%
Far East 7% 9% 8%
Europe, Israel & other 65% 69% 69%
- ---------------------------------------------------
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 ended May 31, 1998, 1997 and 1996.
Credit is extended based on an evaluation of each customer's
financial condition and generally collateral is not required on the Company's
receivables.
d. Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
e. Inventories
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market.
f. 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.
g. 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 were amortized from June 1, 1993 through March 1998, the date the
Company sold its interest in Lazare Kaplan Botswana (Pty) Ltd. (see Note 7). All
other deferred costs are amortized over their estimated useful lives, generally
less than two years.
h. Asset Impairments
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by the
related assets are less than the carrying amounts of those assets.
i. 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
14
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1998, 1997 and 1996
activities. In addition, the functional currency for Lazare Kaplan Botswana
(Pty) Ltd. was 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.
j. Advertising
Advertising costs are expensed as incurred and were $1,148,000, $1,054,000
and $980,000 in 1998, 1997, and 1996, respectively.
k. Income taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards 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.
Deferred income taxes reflect the net tax effects of (a) temporary differences
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.
The Company and its domestic subsidiaries file a consolidated income tax
return. The Company's foreign subsidiaries are not subject to Federal income
taxes and their provisions for income taxes 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 1998.
l. Earnings/(Loss) per share
In 1998 the Company adopted Statement of Financial Accounting Standards No.
128 'Earnings per Share' (SFAS 128). This statement replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Basic earnings per share is computed based upon the weighted average
number of common shares outstanding. Diluted earnings per share includes the
impact of dilutive stock options. All earnings per share amounts for all periods
have been presented and, where necessary, restated to conform to SFAS 128
requirements.
m. Risks and Uncertainties
The Company's business is dependent upon the availability of rough
diamonds. Based upon published reports, the Company believes that approximately
70-75% of the world's diamond output is purchased for resale by DeBeers
Centenary AG and its affiliated companies. Although DeBeers has historically
been one of the Company's major suppliers of rough diamonds, the Company has
successfully diversified its sources of supply by entering into arrangements
with other primary source suppliers and has been able to supplement its rough
diamond needs by purchasing supplies in the secondary market. While the Company
believes that it has good relationships with its suppliers and that its sources
of supply are sufficient to meet its present and foreseeable needs, the
Company's rough diamond supplies, and therefore, its manufacturing capacity,
could be adversely affected by political and economic developments in producing
countries over which it 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.
Further, through its control of the world's diamond output, DeBeers can
exert significant control over the pricing of rough and polished diamonds. A
large rapid increase in rough diamond prices could materially adversely affect
the Company's revenue and operating margins if the increased cost of the rough
diamonds could not be passed along to its customers in a timely manner.
Alternatively, any rapid decrease in the price of polished diamonds could have a
material adverse affect on the Company in terms of inventory losses and lower
margins.
n. Stock Option Incentive Plan
The Company accounts for its stock-based compensation plan using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
'Accounting for Stock Issued to Employees' and related interpretations and makes
certain pro forma disclosures (see Note 8).
15
<PAGE>
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[Logo]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1998, 1997 and 1996
o. New Accounting Pronouncements
Segment Information -- In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131, 'Disclosures
about Segments of an Enterprise and Related Information' ('SFAS 131'). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
will adopt the new standard, as required, retroactively in the financial
statements for the year ended May 31, 1999. Management has not completed its
review of SFAS 131.
2. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------------------------
Property, plant and equipment consists of (in thousands):
<TABLE>
<CAPTION>
May 31,
- -----------------------------------------------------
1998 1997
- -----------------------------------------------------
<S> <C> <C>
Land and buildings $ 1,526 $ 4,750
Leasehold improvements 1,883 1,876
Machinery, tools and equipment 4,275 5,201
Furniture and fixtures 1,113 1,308
Computer hardware and equipment 1,973 2,209
Construction in progress 1,278 406
- -----------------------------------------------------
12,048 15,750
Less accumulated depreciation
and amortization 7,314 9,024
- -----------------------------------------------------
$ 4,734 $ 6,726
- -----------------------------------------------------
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 hardware and equipment 10 TO 33%
- -----------------------------------------------------
</TABLE>
Depreciation expense for 1998, 1997 and 1996 was $1,082,000, $1,252,000 and
$1,135,000, respectively.
3. INCOME TAXES
- ---------------------------------------------------------
The items comprising the Company's net deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
May 31,
- -------------------------------------------------------
1998 1997
- -------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Operating loss and other
carryforwards $ 4,350 $ 6,200
Other 700 400
Deferred tax liabilities:
Depreciation 150 300
- -------------------------------------------------------
4,900 6,300
Less: Valuation allowance (1,265) (2,925)
- -------------------------------------------------------
Net deferred tax assets $ 3,635 $ 3,375
- -------------------------------------------------------
</TABLE>
During 1997 the Company recorded a tax benefit of $3,375,000 related to the
reversal of the valuation allowance that had been provided against the Company's
deferred tax assets that arose primarily from net operating loss carryforwards.
The income tax provision/(benefit) is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
Year ended May 31,
- -------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 20 $ 192 $158
State and local 24 88 143
Foreign 633 125 158
- -------------------------------------------------------
677 405 459
- -------------------------------------------------------
Deferred:
Federal (260) (3,375) -
- -------------------------------------------------------
$ 417 $(2,970) $459
- -------------------------------------------------------
</TABLE>
Income/(loss) before income taxes from the Company's domestic and foreign
operations was $3,615,000 and ($1,320,000), respectively for the year ended May
31, 1998, $9,224,000 and ($976,000), respectively for the year ended May 31,
1997 and
16
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<PAGE>
[Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1998, 1997 and 1996
$7,742,000 and ($593,000), respectively for the year ended May 31, 1996.
The tax provision/(benefit) is different from amounts computed by applying
the Federal income tax rate to the income before taxes as follows (in
thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------
<S> <C> <C> <C>
Tax provision/(benefit) at
statutory rate $ 780 $ 2,594 $ 2,430
(Decrease)/increase in
taxes resulting from:
Differential
attributable to
foreign operations 149 698 374
State and local taxes,
net of Federal
benefit 8 58 94
Utilization of net
operating loss
carryforwards - (2,945) (2,439)
Change in valuation
allowance for
deferred tax asset (520) (3,375) -
- --------------------------------------------------------
Actual tax
provision/(benefit) $ 417 $(2,970) $ 459
- --------------------------------------------------------
</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>
2000 $2,000
2001 3,500
2002 500
2007 500
2008 900
2010 400
2013 450
- --------------------------------------------------------
$8,250
- --------------------------------------------------------
</TABLE>
In addition, the Company has New York State and New York City net operating
loss carryforwards of approximately $8,900,000 each, expiring from 1999 to 2013.
The Company has Puerto Rico net operating loss carryforwards of approximately
$2,800,000 expiring from 1999 through 2002.
During 1998 the Internal Revenue Service ('IRS') completed an examination
of the Company's consolidated Federal income tax returns for the taxable years
ended May 31, 1991 through 1994. The IRS made an adjustment to the Company's net
operating loss carryforwards in an amount of approximately $2.0 million. The
cash tax paid by the Company as a result of this examination was insignificant.
4. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
- ---------------------------------------------------------
Accounts payable and other current liabilities consist of (in thousands):
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------
<S> <C> <C>
Accounts payable $ 9,816 $ 8,842
Accrued expenses and income
taxes 15,344 5,516
- -----------------------------------------------------
$25,160 $14,358
- -----------------------------------------------------
</TABLE>
5. LINES OF CREDIT
- ---------------------------------------------------------
On May 14, 1996 the Company entered into a long-term unsecured, revolving
loan agreement with two banks. The agreement, as amended, provides that the
Company may borrow up to $40,000,000 in the aggregate, at an interest rate of
any of a) one-eighth of one percent above the bank's prime rate, b) 160 basis
points above the London Interbank Offered Rate (LIBOR), or c) 160 basis points
above the bank's cost of funds rate. The applicable interest rate is contingent
upon the method of borrowing selected by the Company. The term of the loan is
through September 1, 2002. The proceeds of this facility are available for the
Company's working capital needs and to fund its future annual installments due
under the Senior Note Agreement. The revolving loan agreement contains certain
provisions that require, among other things, (a) maintenance of defined levels
of current working capital and annual cash flow, (b) limitations of
17
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1998, 1997 and 1996
borrowing levels, capital expenditures, and rental obligations and (c)
limitations on restricted payments, including the amount of dividends. The
Company was not in compliance with the capital expenditure covenant (due to
expenditures related to its new, Year 2000 compliant computer system) and the
annual cash flow covenant under the revolving loan agreement for the year ended
May 31, 1998. The banks have given a waiver to the Company with respect to these
covenants for the year ended May 31, 1998 and have amended such covenants for
the fiscal 1999 measurement periods. As of May 31, 1998 there was an aggregate
balance outstanding of $10,700,000 under this agreement. As of May 31, 1997,
there were no balances outstanding under this agreement. The weighted average
interest rate during 1998 and 1997 on the Company's revolving loan was 7.56% and
8.14%, respectively.
Through May 14, 1996, the Company had unsecured lines of credit with three
banks. The outstanding balances due under these facilities were repaid in full
with the proceeds of the long-term revolving loan described above.
The Company had a $3.0 million credit facility, payable on demand, at a
rate of one-half of one percent above the six-month LIBOR. At May 31, 1998, all
balances due under this facility were fully repaid. The weighted average
interest rate during 1998 and 1997 on this facility was 5.75% and 6.30%,
respectively.
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 is permitted to declare dividends subject to certain
limitations set forth in the Senior Note Agreement.
On August 25, 1995, these Senior Notes were amended to revise the
consolidated fixed charge ratio for all measurement periods through the quarter
ending May 31, 1996, and to increase the interest rate to 10.97% retroactively
from March 1, 1995 through May 31, 1996. Beginning June 1, 1996 the interest
rate on the Senior Notes reverted to the original lower rate of 9.97%.
7. SALE OF INTEREST IN LAZARE KAPLAN
BOTSWANA (PTY) LTD.
- ---------------------------------------------------------
In March 1998, the Company completed the sale of its 60% interest in Lazare
Kaplan Botswana (Pty) Ltd. for a price of $11.1 million in cash and recorded a
gain of approximately $3.7 million on the transaction (net of $485,000 of
Botswana taxes). The Company established the Botswana cutting factory in 1990 in
partnership with the Government of Botswana and successfully undertook an
intensive start-up and training program.
Through March 1998, the Company consolidated the accounts of Lazare Kaplan
Botswana (Pty) Ltd. Minority interest represents the minority stockholders'
proportionate share of the results of operations and equity of Lazare Kaplan
Botswana (Pty) Ltd. through the date of the sale of the Company's interest.
8. STOCK OPTION INCENTIVE PLAN
- ---------------------------------------------------------
A Stock Option Incentive Plan was approved by the Board of Directors on
March 11, 1988 (the '1988 Plan'). The 1988 Plan has reserved 650,000 shares of
the common stock of the Company for issuance to key employees of the Company and
its subsidiaries.
A Long-term Stock Incentive Plan was approved by the Board of Directors on
April 10, 1997 (the '1997 Plan'). The 1997 Plan has reserved 400,000 shares of
the common stock of the Company for issuance to key employees of the Company and
its subsidiaries.
18
<PAGE>
<PAGE>
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1998, 1997 and 1996
The purchase price of each share of common stock subject to an incentive
option under each of the plans is not to be less than 100 percent of the fair
market value of the stock on the day preceding the day the option is granted
(110 percent for 10 percent beneficial owners). The Stock Option 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.
Under APB Opinion No. 25, the Company does not recognize compensation
expense when the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of the grant. Under Statement of
Financial Accounting Standards No. 123, pro forma information regarding net
income and earnings per share is required as if the Company had accounted for
its employee stock options under the fair value method of the Statement. For
purposes of pro forma disclosures, the Company estimated the fair value of stock
options granted in 1998, 1997 and 1996 at the date of the grant using the
Black-Scholes option pricing model. The estimated fair value of the options is
amortized to expense over the options' vesting period for the pro forma
disclosures.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The following summarizes the assumptions used to estimate the fair value of
stock options granted in each year and certain pro forma information:
<TABLE>
<CAPTION>
- -------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest
rate 6.00% 6.00% 6.00%
Expected option life 5 YEARS 5 years 5 years
Expected volatility 35.70% 35.90% 38.20%
Expected dividends per
share $ 0.00 $ 0.00 $ 0.00
Weighted average
estimated fair value
per share of options
granted at market price $ 4.30 $ 6.13 $ 2.75
Weighted average
estimated fair value
per share of options
granted above market
price $ 3.94 $ 5.62 $ 2.53
Pro forma net income
(000's) $2,042 $11,312 $6,961
Pro forma basic
earnings per share $ 0.24 $ 1.58 $ 1.13
Pro forma diluted
earnings per share $ 0.24 $ 1.52 $ 1.11
- -------------------------------------------------------
</TABLE>
As any options granted in the future will also be subject to the fair value
pro forma calculations, the pro forma adjustments for 1998, 1997 and 1996 may
not be indicative of future years.
19
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1998, 1997 and 1996
A summary of the Plans' activity for each of the three years in the period
ended May 31, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
average
price
Number per
of shares Option price share
- -------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding -- June 1,
1995 590,149 $ 5.000-$ 9.350 $ 6.395
Options surrendered (115,300) $ 7.625-$ 9.350 $ 8.172
Options re-issued 115,300 $ 6.375-$ 7.0125 $ 6.643
Options exercised (39,751) $ 5.000-$ 7.625 $ 5.685
- -------------------------------------------------------------------
Outstanding -- May 31,
1996 550,398 $ 5.000-$ 7.625 $ 6.126
Options issued 224,250 $14.750-$ 16.225 $ 14.882
Options exercised (116,141) $ 5.000-$ 7.625 $ 6.130
- -------------------------------------------------------------------
Outstanding -- May 31,
1997 658,507 $ 5.000-$ 16.225 $ 9.107
Options expired (600) $ 5.000-$ 5.000 $ 5.000
Options issued 169,050 $10.375-$11.4125 $ 10.498
Options exercised (191,633) $ 5.000-$ 6.6000 $ 5.872
- -------------------------------------------------------------------
Outstanding -- May 31,
1998 635,324 $ 5.125-$ 16.225 $ 10.456
- -------------------------------------------------------------------
Exercisable options 278,340
- -------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options at May 31,
1998:
<TABLE>
<CAPTION>
Exercisable stock
Outstanding stock options options
- ------------------------------------------- --------------------
Weighted
average Weighted
remaining average
contractual exercise
Range of prices Shares life Shares price
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5.125-$ 6.375 167,081 6.01 years 144,814 $ 5.853
$7.0125-$ 7.625 74,943 7.52 years 58,776 $ 7.288
$10.375-$11.4125 169,050 9.04 years - -
$14.750-$ 16.225 224,250 8.43 years 74,750 $ 14.882
- --------------------------------------------------------------------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
- ---------------------------------------------------------
Future minimum payments (excluding sub-lease income) under noncancelable
operating leases with initial terms of more than one year consist of the
following at May 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Operating
Year leases
- --------------------------------------------------------
<S> <C>
1999 $365
2000 361
2001 319
2002 319
2003 319
Thereafter 93
- --------------------------------------------------------
$1,776
- --------------------------------------------------------
</TABLE>
Rental expense, including additional charges paid for increases in real
estate taxes and other escalation charges and credits for the years ended
May 31, 1998, 1997 and 1996, was approximately $422,000, $425,000 and $584,000,
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 employee
contributions in an amount equal to $0.50 for every pretax dollar contributed by
the employee up to 6% of the first $20,000 of compensation, provided the
Company's pretax earnings for the fiscal year that ends in the plan year exceed
$3,500,000. During 1998 and 1997 the Company contributed approximately $44,980
and $40,100 for calendar years 1997 and 1996, respectively. The Company did not
make a matching contribution for calendar year 1995.
20
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1998, 1997 and 1996
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, 1998
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):
<TABLE>
<CAPTION>
UNITED ELIMI- CONSOLI-
STATES EUROPE AFRICA NATIONS DATED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1998
Net sales to unaffiliated customers $107,298 $66,401 $48,918 $ - $222,617
Transfers between geographic areas 14,460 15,725 15,574 (45,759) -
------------------------------------------------------
Total revenue $121,758 $82,126 $64,492 $(45,759) $222,617
------------------------------------------------------
Gross profit $ 11,814 $ 1,016 $ 4,316 $ (3,246) $ 13,900
------------------------------------------------------
Income/(loss) from continuing operations before income tax
provision and minority interest $ 2,211 $ 510 $ (608) $ 182 $ 2,295
------------------------------------------------------
Identifiable assets at May 31, 1998 $128,549 $14,834 $23,051 $(24,104) $142,330
- --------------------------------------------------------------------------------------------------------------------
Year ended May 31, 1997
Net sales to unaffiliated customers $164,109 $54,144 $41,544 $ - $259,797
Transfers between geographic areas 19,483 12,674 20,213 (52,370) -
------------------------------------------------------
Total revenue $183,592 $66,818 $61,757 $(52,370) $259,797
------------------------------------------------------
Gross profit $ 20,159 $ 767 $ 6,019 $ (3,219) $ 23,726
------------------------------------------------------
Income from continuing operations before income tax
provision and minority interest $ 6,750 $ 246 $ 820 $ 432 $ 8,248
------------------------------------------------------
Identifiable assets at May 31, 1997 $122,351 $10,422 $26,653 $(29,347) $130,079
- --------------------------------------------------------------------------------------------------------------------
Year ended May 31, 1996
Net sales to unaffiliated customers $175,032 $69,544 $21,745 $ - $266,321
Transfers between geographic areas 20,470 12,057 20,337 (52,864) -
------------------------------------------------------
Total revenue $195,502 $81,601 $42,082 $(52,864) $266,321
------------------------------------------------------
Gross profit $ 20,798 $ 703 $ 4,511 $ (3,376) $ 22,636
------------------------------------------------------
Income/(loss) before income tax provision and minority
interest $ 6,988 $ 262 $ (886) $ 785 $ 7,149
------------------------------------------------------
Identifiable assets at May 31, 1996 $ 97,935 $13,150 $26,192 $(32,211) $105,066
- --------------------------------------------------------------------------------------------------------------------
</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.
21
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1998, 1997 and 1996
12. COMMON STOCK OFFERING
- ---------------------------------------------------------
On December 12, 1996, the Company completed an offering of 1,800,000 shares
of its common stock. In addition, on January 15, 1997 the underwriters of the
public offering exercised in full their over-allotment option, purchasing an
additional 330,000 shares of common stock from the Company. The public offering
price of all shares of common stock sold in connection with the public offering,
including the option shares, was $17.00 per share. The total net proceeds to the
Company, after offering expenses, was $33,572,000. The Company used a portion of
the net proceeds to repay its outstanding revolving bank loans and invested the
balance of the proceeds in a money market fund.
13. DISCONTINUED OPERATION
- ---------------------------------------------------------
During the fourth quarter of 1997 the Company discontinued its efforts to
organize and participate in the privatization of the mining of the Akwatia and
Birim deposits owned and operated by Ghana Consolidated Diamonds Ltd., in Ghana.
The nature of these deposits, consisting of small size low quality stones which
continued to be in oversupply and under price pressure in the marketplace, the
continued decline in monthly production, and the inability towards the end of
the fiscal year to reach agreement with the Ghanaian Government on the terms of
future marketing rights were the primary reasons for this decision. The
write-off of unamortized costs (net of tax benefit of $13,000) was $618,000.
14. TREASURY STOCK
- ---------------------------------------------------------
In February 1998, the Board of Directors authorized the repurchase, at
management's discretion, of up to 300,000 shares of the Company's common stock
during the succeeding twelve months. During fiscal 1998 the Company purchased
2,000 shares of its common stock which are shown as a reduction of Stockholders'
Equity.
22
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- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Lazare Kaplan International Inc.
We have audited the accompanying consolidated balance sheets of Lazare
Kaplan International Inc. and subsidiaries as of May 31, 1998 and 1997 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended May 31, 1998. 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 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lazare Kaplan International Inc. and subsidiaries at May 31, 1998 and 1997 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended May 31, 1998 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
August 27, 1998
New York, New York
23
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
<TABLE>
<S> <C> <C>
CORPORATE HEADQUARTERS DIRECTORS AND OFFICERS REGISTRAR AND TRANSFER AGENT
529 Fifth Avenue Maurice Tempelsman ChaseMellon Transfer
New York, New York 10017 Director; Services, LLC
Telephone (212) 972-9700 Chairman of the Board 85 Challenger Road
SUBSIDIARIES Leon Tempelsman Overpeck Center
Lazare Kaplan (Sierra Leone) Limited Director; Ridgefield Park, N.J. 07660
Lazare Kaplan Japan Inc. Vice Chairman of the Board COUNSEL
Lazare Kaplan Belgium, N.V. and President Warshaw Burstein Cohen
Lazare Kaplan Europe Inc. Michael W. Butterwick Schlesinger & Kuh, LLP
Lazare Kaplan Africa Inc. Director; 555 Fifth Avenue
Lazare Kaplan Ghana Ltd. Business Consultant New York, New York 10017
Lazare Kaplan (Bermuda) Ltd. Lucien Burstein INDEPENDENT AUDITORS
Kaplan Offshore Trading Limited Director; Ernst & Young LLP
Supreme Gems N.V. Secretary 787 Seventh Avenue
LK Enterprises Inc. Partner New York, New York 10019
RCS, Inc. Warshaw Burstein Cohen
Lazare Kaplan (Russia) Inc. Schlesinger & Kuh, LLP
Pegasus Overseas Limited (attorneys)
Myer Feldman
Director;
Partner
Ginsburg, Feldman and Bress,
Chartered (attorneys)
Sheldon L. Ginsberg
Director;
Executive Vice President and
Chief Financial Officer
Robert Speisman
Director;
Vice President - Sales
</TABLE>
24
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LAZARE KAPLAN INTERNATIONAL INC., 529 FIFTH AVENUE, NEW YORK, NY 10017
(212) 972-9700
<PAGE>
<PAGE>
EXHIBIT 21
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 Ghana Ltd. Bermuda
Lazare Kaplan (Bermuda) Ltd. Bermuda
Kaplan Offshore Trading Company Bermuda
Supreme Gems N.V. Belgium
LK Enterprises Inc. Delaware
RCS, Inc. Delaware
Lazare Kaplan (Russia) Inc. Delaware
Pegasus Overseas Limited Barbados
</TABLE>
51
<PAGE>
<PAGE>
EXHIBIT 23
REPORT AND CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Lazare Kaplan International Inc. and subsidiaries of our report dated,
August 27, 1998 included in the 1998 Annual Report to Stockholders of Lazare
Kaplan International Inc. and subsidiaries.
Our audits also included the consolidated financial statement schedule of Lazare
Kaplan International Inc. and subsidiaries listed in Item 14(a)2. This schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the 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 also consent to the incorporation by reference in
1) Registration Statement (Form S-8, No. 33-20528), Registration
Statement (Form S-8, No. 33-37617) and Registration Statement (Form
S-8, No. 33-57560), each of which relate to the Lazare Kaplan
International Inc. 1988 Stock Option Incentive Plan,
2) Registration Statement (Form S-8, No. 333-40225), which relates to
the Lazare Kaplan International Inc. 1997 Long Term Stock Incentive
Plan and
3) Post-Effective Amendment No. 1 to Registration Statement (Form S-8,
No. 333-52303), which relates to the Lazare Kaplan International Inc.
401(k) Plan for Savings and Investment
of Lazare Kaplan International Inc. of our report dated August 27, 1998 with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
Lazare Kaplan International Inc.
Ernst & Young, LLP
New York, New York
August 28, 1998
52
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted
from the balance sheet and income statement and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 1,222
<SECURITIES> 0
<RECEIVABLES> 37,890
<ALLOWANCES> 143
<INVENTORY> 81,518
<CURRENT-ASSETS> 136,912
<PP&E> 12,048
<DEPRECIATION> 7,314
<TOTAL-ASSETS> 142,330
<CURRENT-LIABILITIES> 25,160
<BONDS> 23,160
<COMMON> 8,535
0
0
<OTHER-SE> 84,925
<TOTAL-LIABILITY-AND-EQUITY> 142,330
<SALES> 222,617
<TOTAL-REVENUES> 222,617
<CGS> 208,717
<TOTAL-COSTS> 208,717
<OTHER-EXPENSES> 13,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,062
<INCOME-PRETAX> 2,295
<INCOME-TAX> 417
<INCOME-CONTINUING> 2,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,724
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
