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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended MAY 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period
from ________ to _________
Commission file number 1-7848
LAZARE KAPLAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
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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)
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Registrant's telephone number, including area code (212) 972-9700
Securities registered pursuant to Section 12(b) of the Act:
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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
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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 30, 1999, 8,368,343 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 $41,869,549.
DOCUMENTS INCORPORATED BY REFERENCE
1999 definitive proxy statement to be filed with the Commission -
incorporated by reference into Part III.
1999 Annual Report to Stockholders for the fiscal year ended May 31,
1999 to be filed with the Commission-incorporated by reference into Parts II
and IV.
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Part I
Item 1. Description of Business
The Company
Lazare Kaplan International Inc. ("the Company") was incorporated in
1972 under the laws of the state of Delaware as the successor to a business
which was founded by Mr. Lazare Kaplan in 1903. The Company is engaged in the
cutting, polishing and selling of ideally proportioned diamonds which it markets
internationally under the brand name "Lazare Diamonds'r'". Ideally proportioned
diamonds are distinguished from non-ideal cut ("commercial") diamonds by the
symmetrical relationship of their facets, which maximizes brilliance, sparkle
and fire. Due to these characteristics, Lazare Diamonds command a premium in the
marketplace. The Company believes there are only a few other companies worldwide
engaged primarily in the production of ideally proportioned diamonds and that it
is the largest U.S. producer of ideal cut diamonds through its facility in
Puerto Rico. In addition, at its facilities 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 towards
helping retailers who carry the product maintain a competitive advantage. Lazare
Diamonds can be found at some of the most prestigious jewelry stores around the
world, including those with international reputations and those known only in
their communities as being the highest quality retail jewelers. This strategy
helps ensure that the Company's product is presented in an environment
consistent with its superior quality and image. The Company also sells to
certain jewelry manufacturers and diamond wholesalers. The Company has developed
a comprehensive grading system which, when coupled with the "ideal cut"
standard, allows jewelers to order inventory by category rather than through the
more cumbersome process of visual selection. In addition, the Company designs,
manufactures (through independent contractors) and sells a line of high quality
jewelry which features Lazare Diamonds.
An important element of the Company's strategy is the promotion of the
Lazare Diamond brand name. Every Lazare Diamond bears a laser inscription on its
outer perimeter, invisible to the naked eye, containing the Lazare Kaplan logo
and an identification number unique to the stone. The laser signature also
allows consumers to register their Lazare Diamonds with the Company under its
program, The Lazare Diamond Registry'r', thereby providing proof of ownership in
case of loss or theft.
One of the Company's important suppliers of rough diamonds is the
Diamond Trading Company ("DTC"), an affiliate of De Beers Centenary AG, a Swiss
company ("DeBeers"). Based on published reports, the Company believes that the
DTC controls approximately 60% of the value of world rough diamond output. The
Company has been a client of the DTC for more than 60 years. In order to
diversify its sources of rough diamond supply, however, the Company has
broadened its purchasing capabilities throughout Africa 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 three manufacturing facilities. The Company's
domestic
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manufacturing operation, located in Puerto Rico, is believed by the Company to
be the largest diamond cutting facility in the United States. The Company
believes its work force in Puerto Rico is the most highly skilled in the world
producing ideal cut diamonds. This facility generally produces polished diamonds
having weights of 1/5 of a carat and greater. The Company also has two
manufacturing facilities in Russia. These facilities are conducted pursuant to
agreements with AK Almazi Rossii Sakha (ALROSA) of Russia. The Company's first
Russian factory in Moscow, which was equipped and staffed during fiscal year
1997, is operating near its full anticipated manufacturing capacity. The
Company's other Russian facility, located in Barnaul, was equipped and staffed
at the end of fiscal year 1999. 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, diamond production in Canada
commenced during late calendar year 1998, and, according to published reports,
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 rough diamond industry. The CSO seeks to maintain an orderly
and stable market for diamonds by regulating the quantity and selection of rough
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 rough 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 60% 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.
The DTC has been and continues to be an important supplier of rough
diamonds to the Company. The DTC periodically invites its clients to submit
their requirements as to the amount and type of stones they wish to purchase.
Employees of the Company attend offerings of rough diamonds ("sights") held by
the DTC periodically during the year in London. At sights, the Company
purchases, at the DTC's stated price, an assortment of rough diamonds known as a
"series", the composition of which attempts to take into account the qualitative
and quantitative requirements of the Company based on requests submitted to the
DTC by the Company. The Company has been a sightholder for more than 60 years.
The loss of its status as a sightholder could have a material adverse effect on
the Company.
In order to diversify its sources of supply, the Company has entered
into arrangements with other primary source suppliers and manufacturers. The
Company also has established an office in Antwerp to supplement its rough and
polished diamond needs by making purchases in the secondary market.
In December 1994, the Company reached an agreement with the Empresa
Nacional de Diamantes de Angola ("Endiama"), Angola's national diamond mining
company, pursuant to which the Company was granted a license to purchase rough
diamonds from local Angolan miners and export such rough diamonds for resale. At
the time, this was one of three such licenses granted by Endiama. The Company
believes that, since this time, Endiama has issued two additional licenses. 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
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in Angola, including the office in Luanda. The agreement has a term of five
years ending on December 31, 1999. The Company has not yet determined whether or
not to seek to renew this agreement. Any renewal will, among other things, be
dependent upon stability in Angola, market conditions, profitability, if any, of
the Company's Angolan operations and the Company's ability to negotiate
acceptable terms and conditions. As a result of the intensification of
hostilities and a restructuring of the Company's operations in Angola, the
Company's purchase of Angolan rough diamonds during the latter part of Fiscal
1999 were significantly reduced.
In March 1999, the Company announced that a newly formed, wholly-owned
subsidiary, Pegasus Overseas Ltd. ("POL") had entered into an exclusive ten-year
agreement with a wholly-owned subsidiary of General Electric Company ("GE")
under which POL will market natural diamonds that have undergone a new GE
process that enhances certain characteristics of select, natural gemstone
diamonds. The process is an additional step which complements the many steps to
which a diamond is customarily subjected in the course of being extracted,
processed with mechanical and chemical operations and then cut and polished. The
process is permanent and irreversible and it does not involve treatments such as
irradiation, laser drilling, surface coating or fracture filling and is
conducted before the final cutting and polishing by the Company. The process is
designed to improve the color, brilliance and brightness of qualifying diamonds
without reducing their all-natural content. The process, which was developed and
is owned by GE, will be used only on a select, limited range of natural diamonds
with qualifying colors, sizes and clarities for both round and fancy cuts. The
estimated number of gemstones with characteristics suitable for this process is
a small fraction of the overall diamond market. POL will sell only diamonds that
have undergone the new GE process. Each diamond sold by POL will be laser
inscribed with the brand name "GE POL." POL began offering these diamonds to
distributors around the world in late May 1999.
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 three primary cutting
and polishing operations, two located in Russia (of which one is in Moscow and
one is in Barnaul) and one located in Puerto Rico.
The Company's first factory in Russia was announced in July 1996 when
the Company reached an agreement (the "ALROSA I Agreement"), for a term of ten
years, with AK 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 ALROSA I Agreement, the Company has
equipped a diamond cutting factory which was completed in February 1997 within
the ALROSA facility in Moscow. This facility is staffed by Russian technicians
and managed and supervised by Company personnel. Under the ALROSA I Agreement,
ALROSA has agreed to supply a minimum of $45 million per year (at rough diamond
cost) of large rough gem diamonds selected by the Company as being suitable for
processing in this facility. The Company received its first shipment of polished
stones produced at this facility during November 1997. During fiscal year 1999,
this facility produced in excess of $45 million of polished stones. In March
1999 (in
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furtherance of a Memorandum of Understanding signed by the Export-Import Bank of
the United States ("Eximbank"), ALROSA and the Company) the Company and ALROSA
entered into a second agreement (the "ALROSA II Agreement") to expand their
relationship in the cutting, polishing and marketing of rough gem diamonds.
Under the terms of the ALROSA II Agreement, the Company and ALROSA agreed to
refurbish two additional diamond cutting facilities (one of which is not yet
operational). These facilities are staffed by Russian technicians and jointly
managed and supervised by the Company and ALROSA personnel. ALROSA has agreed to
supply a minimum of $100 million per year (at rough diamond cost) for ten years
of rough gem diamonds selected by the Company as being suitable for processing
in these facilities. The Company received its first test shipment of polished
stones produced at these facilities during the fourth quarter of fiscal 1999.
These facilities, once they are all fully operational, have the capacity to cut
and polish in excess of $150 to 200 million (at rough diamond cost) per year of
rough gem diamonds. Under both the ALROSA I and the ALROSA II agreements, the
Company sells the resulting polished diamonds through its worldwide distribution
network. The proceeds from the sale of these polished diamonds, after
reimbursement of costs incurred by each of the parties, generally will be shared
equally with ALROSA. These agreements do not require the Company to advance
funds for the purchase of rough diamonds. The ALROSA I Agreement served as a
long-term off-take arrangement to secure the repayment of $62 million of
financing which ALROSA received from a United States commercial bank and to be
guaranteed by Eximbank for the purchase by ALROSA of U.S. manufactured mining
equipment. This equipment will be used by ALROSA to increase production in its
diamond mines. Eximbank has stated that this agreement was the first transaction
approved under Eximbank's General Project Incentive Agreement with the Ministry
of Finance and the Central Bank of the Russian Federation signed in December
1993. The ALROSA II Agreement will enable ALROSA to receive additional loan
guarantees from Eximbank of an additional several hundred million dollars. These
guaranties will allow ALROSA to continue purchasing U.S. manufactured mining
equipment, expand mining productions and refurbish operations at currently
non-functioning Russian diamond cutting factories.
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
by the Company 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 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.
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The Company believes that it is recognized in the diamond industry for
the high quality and brilliance of the gems it cuts and that it also enjoys a
reputation as an imaginative and innovative cutter of large and difficult
diamonds.
Pricing
Rough Diamond Prices
Through its control of approximately 60% of the value of the world
diamond output, the DTC can exert significant control over the pricing of rough
and polished diamonds to maintain an orderly market by adjusting rough diamond
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, 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.
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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 recognized only in their local communities
as being the highest quality retail jewelers. This strategy helps ensure that
the Company's product is presented in an environment consistent with its
superior quality and image.
The Company also sells to certain jewelry manufacturers and diamond
wholesalers. The Company has developed a comprehensive grading system for its
diamonds which, when coupled with the "ideal cut" standard, allows jewelers to
order inventory by category rather than through the more cumbersome process of
visual selection. In addition, the Company designs, manufactures (through
independent contractors) and sells a line of high quality jewelry that features
Lazare Diamonds.
A key element of the Company's strategy is the promotion of the Lazare
Diamond brand name directly to consumers. The Company is able to market its
diamonds under a brand name to retailers because (a) the ideal cut
differentiates the Company's diamonds from commercial diamonds in the
marketplace and (b) each Lazare Diamond is inscribed with the Company's logo and
identification number using the Company's patented laser inscription process,
thus authenticating the diamonds. The Company holds a domestic patent, which
expires in 2000, and various international patents for this process. In
addition, on August 3, 1999, a U.S. patent was issued to the Company for a new
and improved laser inscription process. The Company also has international
patents-pending for this process.
The Company's decision to pursue the brand name strategy is reinforced
by two factors - a rising trend among informed consumers to purchase quality,
brand name products, and the need among upscale jewelers to set themselves apart
in an increasingly competitive market by carrying and promoting a highly
differentiated product.
Building awareness and acceptance of the Lazare Diamond brand name is
accomplished through a comprehensive marketing program which includes sales
training, cooperative advertising, sales promotion and public relations. A wide
assortment of sales promotion materials has been designed to facilitate
jewelers' sales of the Company's diamonds and fine jewelry line to consumers.
Public relations events are offered which help build traffic in retail stores.
The Company 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
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(the majority of which are independently owned and operated), wholesalers and
distributors and, to a lesser extent, to jewelry manufacturers. Full time
regional sales representatives located throughout the United States, Hong Kong
and Europe, are compensated on a commission basis and handle sales throughout
their respective territories.
The Company's U.S. sales force is supported by a New York based
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.
After working with its former distributor of over 25 years, in 1999,
the Company changed the nature of its distribution in Japan by assuming control
of distribution of its products and opening its own office. In this way, the
Company has realigned its position with its retail and wholesale customers and
shortened its channels of distribution. In addition, this realignment has
enabled the Company, without interruption, to assume control of the expansion
and maintenance of the Lazare Diamond brand name in Japan. As part of the
realignment, the Company retained experienced Japanese staff, giving it
immediate and direct access to important customers as well as in depth industry
knowledge. The Company believes that this realignment was necessary in order to
compete effectively in Japan (the world's second largest market for diamonds and
diamond jewelry) in the years to come. The Company continues to maintain its
relationship with Seiko Corporation ("Seiko"), one of the world's largest
watchmakers. 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:
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Years ended May 31,
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1999 1998 1997
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Percentage of Net Sales to Customers
United States 31% 28% 22%
Far East 8% 7% 9%
Europe, Israel & other 61% 65% 69%
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100% 100% 100%
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The world's rough diamond trading markets are primarily located in
Belgium and Israel; therefore, the majority of the Company's rough diamond sales
have been transacted with foreign customers. In 1999 and 1998, due to an
increase in demand in the United States combined with weaker markets in the Far
East, the Company sold a greater percentage of its polished diamonds
domestically than it had in prior years. In addition, the Company's sales to
customers in Europe, Israel & other, which consisted primarily of rough
diamonds, were lower as a percentage of total sales in 1999 as compared to 1998
due to the greater rate of increase in polished diamond sales in the U.S. in
1999 as compared to the prior years,
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The Company believes that due to the possible international resale of
diamonds by its customers, the above percentages may not represent the final
location of retail sales of its product. All of the Company's foreign sales,
other than those made in Japan, are denominated in United States dollars. Where
possible, the Company hedges its sales transactions in Japan to minimize the
impact of 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.
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 long-term relationships required to have access to adequate
supplies of rough diamonds, the limited number of persons with the skills
necessary to consistently cut significant amounts of ideally proportioned
diamonds, the difficulty in obtaining access to upscale channels of
distribution, the importance of public recognition of an established brand name
and the establishment of computer systems to report on and monitor the
manufacturing and distribution network.
Employees
At July 31, 1999, the Company had 191 full-time employees and 7
regional sales representatives. The Company maintains an apprenticeship program
at its facility in Puerto Rico, through which it trains its cutters, who are
highly skilled 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 Leon
Tempelsman & Son for a like term at a rental rate per square foot which is the
same as the Company is paying to the landlord.
The Company also owns a manufacturing facility in Caguas, Puerto Rico.
The Caguas facility consists of approximately 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 1,500,000 Belgian francs (approximately
$39,000).
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
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rental rate of 354,000 Hong Kong dollars (approximately $46,000).
The Company leases office space in Tokyo for a term expiring August 31,
2000 at an annual rental rate of 18,200,000 Japanese Yen (approximately
$148,500).
The Company believes that its facilities are fully equipped and
adequate to fulfill its operating and manufacturing needs.
Item 3. Legal Proceedings
On or about April 13, 1999, International Diamond Traders CY B.V.B.A.
("IDT") and Avi Neumark ("Neumark"), the President and controlling stockholder
of IDT, commenced an action in the U.S. District Court for the Southern District
of New York against the Company, Lazare Kaplan Belgium, N.V., a subsidiary of
the Company ("LKB"), and Maurice Tempelsman, Leon Tempelsman and Sheldon
Ginsberg, each of whom is a director and officer of the Company and a director
of LKB. The plaintiffs subsequently amended their complaints to eliminate LKB
and Mr. Ginsberg as defendants. The plaintiffs alleged, among other things, that
the Company and its principals fraudulently induced IDT to make more than $1.75
million in payments to the Company in connection with an alleged "joint venture"
for the purchase of rough diamonds, excluded IDT from this relationship and
expropriated its interest, defamed the plaintiffs, causing injury to their
business reputation and interfered with plaintiffs' business prospects. The
plaintiffs are seeking damages of $1.75 million, together with interest,
general, consequential and other damages in an unspecified amount and punitive
damages. The plaintiffs further seek the value of half of the alleged profits
since September 1998, the date at which the relationship was allegedly
wrongfully terminated. In addition, the plaintiffs allege that the Company's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1998
inaccurately includes all of the sales of the Company's Angolan operations. The
Company believes that the plaintiffs' allegations are without merit and is
vigorously defending this action.
In a related matter, on or about April 13, 1999, Novel Diamonds Inc.
("Novel") and Lexco Limited ("Lexco") submitted a demand for arbitration to the
International Chamber of Commerce naming as respondents, the Company, Lazare
Kaplan (Bermuda) Ltd., a wholly-owned subsidiary of the Company, LKN Diamond
Company, LTD. ("LKN") and Sheldon Ginsberg. Each of the claimants is controlled
by Neumark. The claimants have alleged, among other things, that the respondents
are in breach of their obligations to transfer the Company's "rough diamond
trading sight" (the "sight") to LKN as was allegedly required by a 1994
shareholders agreement and have improperly barred claimants and Mr. Neumark from
access to the "sight" business. As a result of the foregoing, the claimants are
seeking damages of $5 million and at least 50% of the profits from the "sight"
business since September 1998, plus interest, and 50% of the net asset value of
LKN, including the "sight." The Company believes that the claimants' allegations
are without merit and is vigorously defending this action.
The two above actions followed the institution, earlier in 1999, of an
arbitration proceeding jointly submitted by Neumark, IDT and the Company. This
matter was voluntarily submitted to arbitration by Neumark, IDT and the Company
to resolve all monetary disputes between the parties as a result of the
termination of their relationship, except for those that are the subject of the
foregoing actions. All matters submitted to arbitration have been substantially
resolved with the exception of the following (i) whether there is any goodwill
arising from the alleged relationship in Angola, and (ii) if goodwill exists,
the value of such goodwill and the amount of the payment, if any, to be made.
The Company believes that such claim for goodwill is without merit and is
vigorously defending its position that no payment for goodwill is appropriate.
If the opposing parties are successful in some or all of above related
proceedings, the Company's business could be materially and adversely affected.
10
<PAGE>
In addition, Neumark has commenced an action in Delaware Chancery Court
against the Company seeking the right to inspect, and make copies of, certain
books and records of LKI and LKB.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Company
The following table sets forth information regarding executive officers
of the Company.
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---- -------- ---
<S> <C> <C>
Maurice Tempelsman Chairman of the Board 70
Leon Tempelsman Vice Chairman of the 43
Board and President
Sheldon L. Ginsberg Executive Vice President and 45
Chief Financial Officer
Robert Speisman Senior Vice President - Sales 46
</TABLE>
All officers were elected by the Board of Directors at its meeting
following the Annual Meeting of Stockholders held in November 1998, 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 ("LTS"), a partnership
with interests in the international diamond and mining industries. He has held
these positions since 1984. Maurice Tempelsman is the father of Leon Tempelsman
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 Senior Vice President - Sales of the
Company since January 1999. He was Vice President - Sales of the Company from
April 1986 until January 1999. Mr. Speisman has been a director of the Company
since 1989. Mr. Speisman is the son-in-law of Maurice Tempelsman and the
brother-in-law of Leon Tempelsman.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
11
<PAGE>
The Company's common stock (par value $1 per share) is traded on the
American Stock Exchange.
Market prices and other information with respect to the Company's
common stock are hereby incorporated by reference to the Company's Annual
Report.
Item 6. Selected Financial Data
Selected financial data are hereby incorporated by reference to the
Company's Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis of financial condition and results
of operations is hereby incorporated by reference to the Company's Annual
Report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
(a) The following financial statements and supplementary data are
hereby incorporated by reference to the Company's Annual Report.
(i) Report of Ernst & Young LLP
(ii) Consolidated Statements of Operations for each of the
three years in the period ended May 31, 1999.
(iii) Consolidated Balance Sheets as at May 31, 1999 and
May 31, 1998.
(iv) Consolidated Statements of Stockholder's Equity for
each of the three years in the period ended May 31,
1999.
(v) Consolidated Statements of Cash Flows for each of the
three years in the period ended May 31, 1999.
(vi) Notes to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
Part III
Except for information regarding Executive Officers of the Company,
which, in accordance with Instruction G to Form 10-K, is included in Part I
hereof, the information called for by Part III (Items 10, 11, 12 and 13) is
incorporated by reference herein to the Company's definitive proxy statement to
be filed with the Commission within 120 days after the close of its fiscal year
ended May 31, 1999.
Part IV
12
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<S> <C> <C>
(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,
1999.
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.
</TABLE>
13
<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, 1999:
Allowance for doubtful accounts $143,120 $ 60,000 $ - $ 1,064(A) $202,056
-------- -------- ------- -------- --------
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
-------- -------- ------- -------- --------
</TABLE>
(A) Amounts written off.
14
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(continued)
(b) Reports on Form 8-K - The Company filed a Current Report on
Form 8-K, responding to Item 5 - "Other Events," on May 10,
1999.
(c) Exhibits
(3) Articles of Incorporation and Bylaws
(a) Certificate of Incorporation, as amended - incorporated herein
by reference to Exhibit 3(a) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1987 filed with
the Commission on August 26, 1987, as amended on January 14,
1988.
(b) Certificate of Amendment of Certificate of Incorporation filed
with the Secretary of State of the State of Delaware on
November 1, 1990 - incorporated herein by reference to Exhibit
(3)(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1992 filed with the Commission on
August 28, 1992.
(c) Certificate of Amendment of the Certificate of Incorporation
filed with the Secretary of State of the State of Delaware on
November 6, 1997 - incorporated by reference to Exhibit 4.1(a)
(iii) to Company's Registration Statement for the Lazare
Kaplan International Inc. 1997 Long Term Stock Incentive Plan
on Form S-8 filed with the Commission on November 14, 1997.
(d) Certificate of Designations of Series A Junior Participating
Preferred Stock filed with the Secretary of State of the State
of Delaware on November 6, 1997 - incorporated by reference to
Exhibit 4.1(b) to the Company's Registration Statement on Form
S-8 filed with the Commission on November 14, 1997.
(e) By-laws, as amended - incorporated herein by reference to
Exhibit 3(b) to the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1987 filed with the Commission
on August 26, 1987, as amended on January 14, 1988.
(10) Material Contracts
(a) Lazare Kaplan International Inc. Amended and Restated 1988
Stock Option Incentive Plan - incorporated herein by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-8 filed with the Commission on November 5, 1990.
(b) Lazare Kaplan International Inc. 1997 Long Term Stock
Incentive Plan - incorporated herein by reference to Exhibit A
to the Company's proxy statement for its Annual Meeting of
Stockholders held on November 5, 1997 filed with the
Commission on September 17, 1997.
(c) Form of Incentive Stock Option Agreement for options granted
pursuant to the Lazare Kaplan International Inc. 1997 Long
Term Stock Incentive Plan - incorporated herein by reference
to Exhibit 4.5(a) to the Company's Registration Statement on
Form S-8 filed with the Commission on November 14, 1997.
(d) Form of Non-Qualified Stock Option Agreement for options
granted pursuant to the Lazare Kaplan International Inc. 1997
Long Term Stock Incentive Plan - incorporated herein by
reference to Exhibit 4.5(a) to the Company's Registration
Statement on Form S-8 filed with the Commission on November
14, 1997.
15
<PAGE>
(e) Note Agreement dated as of May 15, 1991 by and between the
Company, 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.
(f) First Amendment to Note Agreement, dated as of February 28,
1992, by and between the Company, Allstate Life Insurance
Company, Monumental Life Insurance Company and PFL Life
Insurance Company - incorporated herein by reference to
Exhibit 10(d) to the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1992 filed with the Commission
on August 28, 1992.
(g) Second Amendment to Note Agreement, dated as of March 25, 1992
by and between the Company, 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 Company for the fiscal year ended
May 31, 1992 filed with the Commission on August 28, 1992.
(h) Third Amendment to the Note Agreement, dated as of December 1,
1992 by and between the Company, Allstate Life Insurance
Company, Monumental Life Insurance Company and PFL Life
Insurance Company - incorporated herein by reference to
Exhibit 10(f) to the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1993 filed with the Commission
on August 30, 1993.
(i) Fourth Amendment to the Note Agreement, dated as of August 25,
1995 by and between the Company, Allstate Life Insurance
Company, Monumental Life Insurance Company and PFL Life
Insurance Company - incorporated herein by reference to
Exhibit 10 to the Quarterly Report on Form 10-Q for the
quarterly period ended August 31, 1995 filed with the
Commission on October 13, 1995.
(j) Loan Agreement, dated May 14, 1996 among the Company, Fleet
Bank, N.A. and Bank Leumi Trust Company of New York -
incorporated herein by reference to Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1996 filed with the Commission on August 28, 1996.
(k) Amendment No. 1, dated as of November 29, 1996, to Loan
Agreement, dated May 14, 1996, among the Company, Fleet Bank,
N.A. and Bank Leumi Trust Company of New York - incorporated
herein by reference to Exhibit 10(1) to Amendment No. 2 to the
Company's Registration Statement on Form S-2 filed with the
Commission on December 11, 1996.
(l) Amendment No. 2, dated as of May 30, 1997, to Loan Agreement,
dated May 14, 1996, among the Company, Fleet Bank, N.A. and
Bank Leumi Trust Company of New York incorporated herein by
reference to Exhibit 10(n) to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1997 filed with
the Commission on August 28, 1997.
(m) Cooperation Agreement, dated July 15, 1996 between the Company
and AK Almazi Rossii Sakha - incorporated herein by reference
to Exhibit (2) to the Company's Current Report on Form 8-K/A
filed with the Commission on November 18, 1996 (certain
portions of this agreement have been omitted pursuant to a
request for confidential treatment).
(n) Cooperation Agreement, dated March 23, 1999 between the
Company and AK Almazi
16
<PAGE>
Rossii Sakha (certain portions of this agreement have been
omitted pursuant to a request for confidential treatment).
(o) Processing Agreement, dated as of February 20, 1999, between
Pegasus Overseas Ltd. and a wholly-owned subsidiary of General
Electric Company (certain portions of this agreement have been
omitted pursuant to a request for confidential treatment).
(p) Rights Agreement, dated as of July 31, 1997, between the
Company and ChaseMellon Shareholder Services, LLC -
incorporated herein by reference to Exhibit 99.1 to the
Company's Form 8-A filed with the Commission on August 26,
1997.
(q) Leon Tempelsman Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(o) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997 filed with the Commission on
August 28, 1997.
(r) Sheldon L. Ginsberg Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(p) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997 filed with the Commission on
August 28, 1997.
(s) Robert Speisman Retirement Benefit Plan of Lazare Kaplan
International Inc. incorporated herein by reference to Exhibit
10(q) to the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997 filed with the Commission on
August 28, 1997.
(13) 1999 Annual Report to Security Holders - incorporated herein by
reference to the Company's 1999 Annual Report to Stockholders to be
filed with the Commission.
(21) Subsidiaries
(23) Consent of Ernst & Young LLP
(27) Financial Data Schedule
17
<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 27, 1999
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 27, 1999
- --------------------------------- Board of Directors
(Maurice Tempelsman)
(s) Leon Tempelsman Vice Chairman of the August 27, 1999
- --------------------------------- Board of Directors and
(Leon Tempelsman) President (principal
executive officer)
(s) Lucien Burstein Director August 27, 1999
- ---------------------------------
(Lucien Burstein)
(s) Myer Feldman Director August 27, 1999
- ---------------------------------
(Myer Feldman)
(s) Sheldon L. Ginsberg Director and Executive August 27, 1999
- --------------------------------- Vice President and Chief
(Sheldon L. Ginsberg) Financial Officer (principal
financial and accounting
officer)
(s) Robert Speisman Director August 27, 1999
- ---------------------------------
(Robert Speisman)
</TABLE>
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
(10) (n) Cooperation Agreement, dated March 23, 1999 between the
Company and AK Almazi Rossii Sakha (certain portions of this
agreement have been omitted pursuant to a request for
confidential treatment).
(10) (o) Processing Agreement, dated as of February 20, 1999,
between Pegasus Overseas Ltd. and a wholly-owned subsidiary of
General Electric Company (certain portions of this agreement
have been omitted pursuant to a request for confidential
treatment).
(13) 1999 Annual Report to Security Holders-incorporated herein by
reference to the 1999 Annual Report to Stockholders to be filed
with the Commission.
(21) Subsidiaries
(23) Consent of Ernst & Young LLP
(27) Financial Data Schedule
</TABLE>
19
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as........................'r'
The paragraph symbol shall be expressed as...................................[p]
The trademark symbol shall be expressed as..................................'TM'
<PAGE>
EXHIBIT 10(n)
CO-OPERATION AGREEMENT
BETWEEN ALROSA AND LAZARE KAPLAN INTERNATIONAL INC.*
Joint Stock Company ALROSA, being a legal entity under the laws of the
Russian Federation (including any wholly-owned subsidiary thereof) and Lazare
Kaplan International Inc., hereinafter referred to as LKI, being a legal entity
under the laws of the United States (including any wholly-owned subsidiary
thereof), jointly referred to herein as the Parties, have made this Co-Operation
Agreement (the "Agreement") on cooperation in the processing of natural diamonds
and marketing of the resulting polished diamonds.
WHEREAS, ALROSA and LKI are parties to the Cooperation Agreement on the
Processing of Natural Diamonds and Marketing of the Resulting Polished Diamonds,
dated July 16, 1996 (the "Cooperation Agreement");
WHEREAS, ALROSA and LKI have implemented the Cooperation Agreement (the
"Project") and have obtained financing for ALROSA secured by the proceeds from
such Project;
WHEREAS, ALROSA desires to further increase its participation in the
world market of polished diamonds and seeks to obtain large scale debt financing
guaranteed by the Export-Import Bank of the United States ("Exim Bank") as well
as "untied" financing from commercial banks for activities furthering its
leadership role in the world rough diamond production; and
WHEREAS, ALROSA, Exim Bank and LKI are parties to the Memorandum of
Understanding, dated May 15, 1998, containing the undertaking by the Exim Bank
to extend financing to ALROSA, including in cooperation with commercial banks,
provided ALROSA and LKI agree to and implement a co-operation and marketing
agreement acceptable to Exim Bank;
Now, therefore, ALROSA and LKI agree as follows:
- --------
* Certain portions of this agreement have been omitted pursuant to a request for
confidential treatment.
<PAGE>
1 SUBJECT OF AGREEMENT.
1.1 Subject to the provisions of this Agreement, ALROSA and LKI will
coordinate their joint activities in:
-- selecting the necessary Facilities (as defined hereinafter) and
their proper outfitting;
-- selecting polishing professionals and staff for work at the
Facilities;
-- the assembly of diamond lots and determining their Base Cost (as
defined hereinafter);
-- planning the most efficient way of cutting and polishing such
diamonds;
-- cutting diamonds at the Facilities including control of the cutting
and polishing;
-- the certification of agreed upon diamonds;
-- marketing and sales of all the resulting polished diamonds in the
world market, using LKI and ALROSA sales networks.
2 OBLIGATION OF THE PARTIES.
2.1 The Parties through their authorized representatives shall take joint
decisions on the following issues:
2.1.1 Subject to the Minimum Level specified in Article 3.1.3, on the
amount and assortment of diamonds jointly assembled for cutting, the
timing of such assembly, the Base Cost (denominated in US dollars) of
each diamond lot assembled (for diamonds [*] carats and larger, for
each rough diamond), the planning and cutting of each diamond lot
assembled, and the valuation and sale of the resulting diamonds.
2.1.2 By means of written protocols, on the cost of each rough diamond
lot assembled (hereinafter referred to as the "Base Cost"), on the
reimbursable expenses of each party related to the implementation of
this Agreement by the Parties on an annual basis, on the export price
of each shipment of diamonds and on the distribution of the Shared
Proceeds (as defined in Article 5.3) from each shipment.
2.2 The Parties express their intent to conduct this cooperation in the spirit
of mutual trust, openness and confidentiality. Each Party will keep the other
Party fully informed about every material decision that must be taken, consult
and agree on each such decision, and include the other Party in all stages of
work necessary to fulfill this Agreement.
2.3 ALROSA has the right, and LKI shall provide such an opportunity, for
ALROSA's representatives to participate in the sales of polished diamonds in LKI
offices, to recommend purchasers from its own clients, to participate in the
presentations of the diamonds to perspective purchasers, in the sale
negotiations and in documenting final
2
<PAGE>
sales.
3 ALROSA OBLIGATIONS.
3.1 In addition to the obligations stated above in Article 2, ALROSA accepts the
following obligations:
3.1.1 To provide, or to ensure, as agreed with LKI, initially at its
own expense, but for reimbursement of expenses in accordance with this
Agreement out of sales proceeds, the facilities necessary for cutting
the rough diamonds (the "Facilities"), with premises sufficient to
accommodate the equipment and personnel required to process the Minimum
Level of rough diamonds, as defined in Paragraph 3.1.3, and to ensure
functioning of the Facilities necessary to implement provisions of this
Agreement.
3.1.2 To provide, or to ensure, initially at its own expense, but for
reimbursement of expenses in accordance with this Agreement out of
sales proceeds, the agreed upon number of professional workers and
administrative personnel, if any, all of whom to be jointly approved
with LKI for all stages of cooperation pursuant to this Agreement.
3.1.3 To provide not less than once a month rough diamonds, in sizes
and qualities suitable for efficient processing at the Facilities and
sale at the maximum prices, and in volumes and assortment regularly
agreed upon by the Parties in the corresponding protocols, and for such
Base Costs as may be required to assure the assembly, processing,
export (at regular intervals) and sales pursuant to this Agreement of
diamonds with an aggregate Base Cost of no less than US$50 million
during each six-month period, evenly distributed by carat size within
size groups in the assortment agreed upon by the Parties (the "Minimum
Level").
3.1.4 To provide LKI representatives with all documents and information
relating to the implementation of this Agreement at all stages of the
joint operation in order to fulfill the objectives of this Agreement.
3.1.5 To assist LKI experts in getting visas, work permits and
residency permits, as may be required by relevant regulations.
3.1.6 To arrange for all necessary Russian government decisions, export
and other permits, licenses, quotas and solutions of related issues
arising in connection with this Agreement.
3.1.7 To make the necessary arrangements, including export licenses for
the shipping at the contract price, not less than once a month, to LKI
offices or a joint trading company established by the Parties outside
Russia, for marketing and
3
<PAGE>
sale outside Russia, of all the polished diamonds manufactured under
this Agreement. Contract price shall not be less than the [*] of the
diamonds being shipped and shall not exceed the [*] plus the estimated
pre-agreed expenses of the Parties during the relevant period.
4 LKI OBLIGATIONS.
4.1 In addition to the obligations stated above in Article 2, LKI accepts the
following obligations for a fee, as provided in Article 5.2 hereof, for the
marketing of the polished diamonds outside of Russia:
4.1.1 To provide, initially at its own expense, but for reimbursement
of expenses in accordance with this Agreement out of sales proceeds,
the technical consultants required for the implementation of this
Agreement, such consultants to supervise at all stages the assembling,
planning, cutting and polishing process of all diamonds subject to this
Agreement.
4.1.2 To provide the required technology, equipment, tools and
materials (collectively, "Equipment") agreed to by the Parties, as
required by the expected volume of work and workers. The equipment
shall be procured pursuant to sales agreement with ALROSA, providing
for the terms of payment permitted by Russian law.
4.1.3 To provide, initially at its own expense but for reimbursement
out of sales proceeds, prior to receiving each shipment of polished
diamonds, an insurance certificate for the amount of the estimated
sales price of such shipment (listing ALROSA as beneficiary prior to it
receiving from LKI the Base Cost) covering 'all risks' of the processed
diamonds during the period of their transportation, storage and
delivery to the buyer up to the time of final sale.
4.1.4 If necessary, to certify, or obtain GIA certification for,
polished diamonds agreed to by the Parties before each shipment from
Russia.
4.1.5 To organize and perform, with the participation of ALROSA
representatives and their knowledge of the ALROSA marketing network but
retaining by LKI at all times physical possession and control of the
diamonds, the sorting, valuation and marketing of all diamonds polished
and delivered to LKI outside Russia under this Agreement, utilizing its
marketing expertise, analyses, facilities, network and contacts in
Antwerp, New York and Tokyo and worldwide, using such advertisement,
promotion and marketing technologies, including the timing thereof as
may be determined by the Parties in order to realize the maximum price
obtainable, and the sale of polished diamonds at such price. ALROSA has
the right to introduce its customers who offer a higher price than
customers known to LKI.
4
<PAGE>
4.1.6 To provide ALROSA with the full information and documents on the
performance, costs and results of marketing activities including copies
of necessary certificates and other documents.
4.1.7 To help arrange for visas, reception and residence for Russian
experts during their joint work outside Russia.
4.1.8 To transfer to the bank account specified by ALROSA (a) no later
than [*] after receiving the polished diamonds outside Russia (or on
the next succeeding day when banks in New York and Moscow are open) a
sum equivalent to [*] of the pre-agreed [*] of the rough diamonds; and
(b) no later than [*] from the shipping date of the polished diamonds
(or on the next succeeding day when banks in New York and Moscow are
open) the remaining amount of the contract price of such diamonds, and
(c) no later than [*] from the delivery date (without extending this
period), the final portion of the sales price received for such
diamonds, minus the amounts remitted to ALROSA pursuant to clauses (a)
and (b) above, provided however, that if by such [*] any of the
diamonds remain unsold, they will become the property of LKI at their
[*].
4.2 In the event that ALROSA proceeds with the Exim Bank or other financing
(a) to take all necessary actions within its control at each stage to
assure that the value of diamonds assembled, processed, exported and
sold pursuant to this Agreement within each successive 6 month period
meet the Minimum Level of US$50 million; and (b) to fully cooperate
with ALROSA, Exim Bank, and other financial institutions in the
formulation and implementation of such arrangements in connection with
this Agreement as may facilitate ALROSA's proceeding with the financing
of its operations.
5 PAYMENT.
5.1 ALROSA and LKI shall define the value of each rough diamond lot assembled
for processing in accordance with the current sales prices of USO ALROSA (for
sizes [*] carats and larger, for each rough diamond) (the "Base Cost"), and
confirm it by an appropriate protocol.
5.2 The Parties agree that the amounts to be distributed between them (the
"Shared Amount"), as defined in Paragraph 5.3, received from sales of polished
diamonds, will be distributed as follows: to ALROSA - [*] to LKI - [*], as its
fee for the consultations and marketing of the polished diamonds in the United
States and other markets outside Russia.
5.3 The Parties agree that "Shared Proceed" means the amount received from the
sales of polished diamonds excluding the cost of rough diamonds (the Base Cost)
and
5
<PAGE>
all ALROSA and LKI agreed upon expenses related to the implementation of this
Agreement, cutting (including expenses related to the use of the Facilities),
valuation, processing, export from Russia, transportation, certification,
insurance and marketing of polished diamonds pursuant to this Agreement,
including all compensation and related payments (such as international travel
and living expenses) paid to Russian and foreign professionals and the
amortization of the cost of the Equipment. All costs will be jointly agreed upon
and confirmed by appropriate protocols.
5.4 ALROSA shall pay to LKI, and will ensure that LKI receives, all sums due to
LKI in accordance with this Agreement; such amounts to be paid by a wire
transfer, in immediately available funds, to a bank account to be specified by
LKI to ALROSA. Unless such payments are effectuated by ALROSA otherwise and
unless agreed otherwise by the Parties, such payments shall be made from the
bank account of ALROSA in an authorized Russian bank (the "Bank") approved by
the Central Bank of Russia ("CB RF), to which revenues from the sale of diamonds
by LKI are transferred upon instructions from ALROSA.
ALROSA authorizes and instructs the Bank, and will provide the Bank with the
necessary written documents as the Bank may require, to ensure that the Bank
immediately and unconditionally upon receipt of payments from LKI to ALROSA
pursuant to Section 4.1.8 of this Agreement, reimburses LKI for all services
rendered and expenses incurred in accordance with the provisions of this
Agreement.
If in accordance with Russian laws and regulations ALROSA needs to make
mandatory conversions of convertible currency proceeds into Rubles, and the
remaining amounts are insufficient to reimburse LKI in full as provided in this
Article 5.4, ALROSA authorizes and instructs the Bank to effectuate immediate
reconversion of Rubles in necessary amounts, in order to make full payments to
LKI.
If LKI and ALROSA determine that a Bank guarantee is required to secure the
payments to LKI provided for in this Agreement, ALROSA and LKI will share the
cost of such Bank guarantee equally.
5.5 Notwithstanding any other provisions of this Agreement, during the term of
any financing to ALROSA, secured by this Agreement, ALROSA hereby irrevocably
instructs LKI, and LKI agrees, to pay all amounts due to ALROSA under this
Agreement on the day due by same day wire transfer into the account established
by the lender(s) pursuant to such financing.
6 THE TERM OF THE AGREEMENT AND SETTLEMENT OF DISPUTES.
6.1 This Agreement is valid from the moment of signing, and will be valid for 10
years and may be prolonged thereafter by mutual consent of the Parties.
6.2 If the external situation makes it impossible in full or in part for
one of the Parties
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to fulfill any of its obligations under this Agreement due to unforeseen
circumstances (force majeure) such as fire, natural disasters, war, military
operations of any kind, blockades, or other situations beyond the control of the
Parties, the time of fulfillment of such obligation will be delayed for a period
equal to the duration of the force majeure circumstances. If such circumstances
persist for more than 12 months, either Party may terminate the fulfillment of
its obligations. The compensation for any Party suffering losses as a result of
such termination will be decided by the Parties when the decision to terminate
this Agreement is taken.
6.2.1. The Party that cannot fulfill its obligations due to force
majeure circumstances must make clear to the other Party the nature of
the circumstances that prevent the fulfillment of the obligation. Proof
of existence of such force majeure circumstances and their duration
will be based upon information from the Chambers of Trade and Commerce
of Russia or the United States, whichever of the country in which the
existence of such circumstances of force majeure is claimed to have
occurred.
6.3 All disagreements and disputes resulting from or in relation to this
Agreement will be resolved in a friendly manner by negotiations. Disputes
unresolved by consultations and negotiations will be decided by the
International Commercial Arbitration Court of the Russian Federal Chamber of
Trade and Commerce.
6.4 Each Party confirms that this Agreement is not an agreement to create a
joint venture, partnership, sales or trade agreement or technology transfer
agreement. Each Party agrees to keep secret any business, financial, technical
or other information received about the other Party in connection with this
Agreement and agrees not to undertake any steps that could undermine the
effectiveness of this Agreement without obtaining the written consent of the
other Party. Each Party represents that this agreement does not violate any of
their respective legal obligations or undertakings.
6.5 The present Agreement shall not in any way affect the provisions of the
Cooperation Agreement on the Processing of Natural Diamonds and Marketing of the
Resulting Polished Diamonds, dated July 16, 1996, entered into by the Parties,
as amended from time to time (the "Cooperation Agreement") and shall in no way
affect the rights and obligations of the Parties under the Cooperation
Agreement.
7 TRANSFER OF RIGHTS OR DUTIES; FULL AGREEMENT.
7.1 No Party can transfer its rights or duties under this Agreement to any other
person without the written consent of the other Party, and, if this Agreement is
used as security for debt financing to ALROSA, and, as long as such debt
financing is outstanding, without the written consent of the relevant creditor.
LKI hereby authorizes ALROSA to make such pledge or assignment of its revenues
under this Agreement as ALROSA may agree with its creditors.
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7.2 This Agreement reflects the full mutual understanding of the Parties and any
modification therein must be mutually agreed upon by the Parties in writing,
and, as long as any debt financing for which this Agreement is used as security
is outstanding, by the relevant creditor.
8 LEGAL ADDRESSES.
<TABLE>
<S> <C>
ALROSA Lazare Kaplan International Inc.
678170 Mirny Ul.Lenina 6 529 5th Avenue
Teletype: 135818 Almaz New York, NY 10017 U.S.
Telex: 135113 Almaz SU Tel: 212 972-9700
Telefax (411) 36-244-51 Fax: 212 972-8561
109017 Moscow 1 Kazachy per.10/12
Teletype: 113258 Vilyi
Telex: 414199 Almaz RU
Telefax (095) 230-6631
</TABLE>
This Agreement is signed in Washington, D.C. on March 23, 1999 in two copies in
English and Russian, each of which have equal legal and binding force. In
separate letters to be delivered by the Parties' legal counsel, the English and
Russian texts of this Agreement shall be certified to be identical.
On behalf of ALROSA On behalf of Lazare Kaplan International Inc.
/s/ V.A. Shtyrov /s/ M. Tempelsman
President Chairman
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EXHIBIT 10(o)
PROCESSING AGREEMENT*
This processing agreement (the "Agreement") is made this 20th day of
February, 1999 by and between GE [*] a company whose principal place of business
is [*]("GE[*]), and which is an indirect wholly-owned subsidiary of General
Electric Company, a New York corporation ("GE"), and Pegasus Overseas Ltd., a
company organized under the laws of the Bahamas ("POL"), and which is a direct
wholly-owned subsidiary of Lazare Kaplan International Inc., a Delaware
corporation ("LKI") (each of GE[*] and POL being a "Party" and collectively, the
"Parties"), and sets forth the terms and conditions under which POL will acquire
certain [*] and [*] gem diamonds for delivery to GE[*] for processing and, after
such gem diamonds have been received back from GE[*], sell such gem diamonds.
Certain capitalized terms used but not defined herein have the meanings assigned
to them in Attachment A.
PART I - SOURCING OF GEM DIAMONDS
I. AGREEMENT TO SOURCE DIAMONDS. (A) On a regular basis to the extent
practicable in the circumstances, GE[*] shall advise POL regarding GE[*]'s
expected schedule for processing gem diamonds and its available capacity for
processing gem diamonds meeting the Specifications.
(B) POL shall take all steps necessary or appropriate to purchase (at the lowest
prices commercially obtainable by it), select, sort and screen [*]and [*] gem
diamonds meeting the Specifications (the "Gem Diamonds") and deliver them to the
GE[*] or GE facility specified in paragraph VII(I) for processing. Such
deliveries shall be made on a [*] basis (or more frequently if POL has
accumulated Gem Diamonds having a cost of approximately [*] or more). Each
package of Gem Diamonds delivered shall include documentation (i) setting forth
the Acquisition Cost for each of the Gem Diamonds included therein, (ii)
certifying that any required duty, tax or other fee arising from POL's
acquisition and/or delivery of the Gem Diamonds has been or will be paid on a
timely basis, (iii) assigning an identification code to each Gem Diamond in the
package, and (iv) containing such other customary information, if any, as the
parties shall determine to be necessary or useful to consign such package of Gem
Diamonds to GE[*] for processing (collectively, the "POL Delivery
Documentation"). POL shall indemnify GE[*] and hold GE[*] harmless from and
against all costs incurred in connection with POL's acquiring, sorting,
screening and delivery of Gem Diamonds to GE[*] (other than the Acquisition Cost
and Preparation Costs, which shall be allocated as set forth in paragraphs (D),
(E) and (F), below, but including, without limitation, boiling, packing,
shipping, insurance, duty and taxes). If GE[*] determines that any gem diamonds
delivered by POL do not meet the Specifications as to [*]or [*], GE[*] may
decline to accept such Gem Diamonds for processing. In the event of any failure
by Gem Diamonds delivered by POL to meet the Specifications, GE[*] shall so
notify POL in writing and POL shall identify the source of such Gem Diamonds and
suspend purchases from that source until it believes that gem diamonds from such
source will again meet the Specifications.
- --------
* Certain portions of this agreement have been omitted pursuant to a request for
confidential treatment.
<PAGE>
(C) As an inducement to POL to maximize the amount of Gem Diamonds it delivers
hereunder, GE[*] shall advance [*] of the Acquisition Cost and [*] of the
Estimated Preparation Costs for those Gem Diamonds delivered to GE[*] for
processing hereunder (excluding any gem diamonds which GE[*] declines to accept
for processing pursuant to paragraph I(B)). Such payment shall be made by wire
transfer to the bank account specified in writing by POL to GE[*] (which may be
changed by POL upon ten days' advance written notice to GE[*]) (the "POL
Account") within [*] after GE[*]'s receipt of such Gem Diamonds together with
the POL Delivery Documentation. Ownership, title and (except as set forth below)
risk of loss with respect to the Gem Diamonds purchased, sorted and delivered to
GE[*] for processing in accordance with this Agreement shall remain with POL
throughout the time that such Gem Diamonds are in GE[*]'s possession, provided
that GE[*] shall protect and hold such Gem Diamonds in a separate, safe and
secure location for POL property only, using a commercially reasonable degree of
care in view of the value of such Gem Diamonds. GE[*] shall maintain, at its
expense and for the benefit of POL as named insured, insurance for the Gem
Diamonds, covering the Gem Diamonds at all times when they are located at a
GE[*] facility (or the facility of a GE[*] Affiliate) for processing or being
delivered by GE[*] to POL after processing, pursuant to paragraph II(A). Such
insurance shall (i) be provided by a responsible insurance carrier reasonably
satisfactory to POL, (ii) cover all risks covered by the types of insurance
customarily carried by LKI and its Affiliates for similar inventory and
operations, (iii) provide benefits covering no less than the estimated value of
such Gem Diamonds (depending upon their stage of completion) as the Parties
shall determine, (iv) unless the Parties shall otherwise agree in writing, not
provide for any "deductible" to be applied to any loss, and (v) provide that POL
receive at least 30 days prior written notice of any material change or
termination of the insurance policy. Promptly upon written request therefor,
GE[*] shall deliver a Certificate of Insurance to POL, evidencing the foregoing
insurance. GE[*] shall be responsible to POL for any uninsured loss or damage
resulting in any diminishment of the value of POL's interest in any Gem Diamonds
while in GE[*]'s possession or under GE[*]'s control (including Gem Diamonds in
transit when GE[*] is responsible for delivery). It is understood and agreed
that any insurance payments or payments with respect to uninsured losses of Gem
Diamonds received by POL will be distributed pursuant to paragraph III(D) hereof
as if they were proceeds received upon sale of such Gem Diamonds. GE[*] will use
all reasonable business efforts to avoid the production of Special Inventory
Diamonds. Notwithstanding anything to the contrary contained herein, GE[*] shall
not have any liability for loss of potential value or other consequential
damages as a result of (i) producing Special Inventory Diamonds, (ii) any
failure to produce improvement, or a sufficient level of improvement, in any Gem
Diamond, or (iii) [*]to Gem Diamonds during the act of processing.
(D) The Pre-Processing Cost Factor to be applied during the first [*] is [*] per
carat of Prepared Gem Diamond delivered to GE[*] for processing. The
Post-Processing Cost Factor to be applied during the first [*] is [*] per carat
of Prepared Gem Diamond delivered to GE[*] for processing. The Certification
Cost Factor to be applied during the first [*] is [*] per carat of Prepared Gem
Diamond delivered to GE[*] for processing. As used herein, the term "Prepared
Gem Diamond" means a Gem Diamond that is either (i) [*] or (ii) [*] at
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the time of delivery to GE[*] for processing, and does not include Gem Diamonds
which are [*]upon such delivery. Notwithstanding anything to the contrary set
forth in this Agreement, except as the Parties shall agree on a case-by-case
basis, the Pre-Processing Costs, Post-Processing Costs and Certification Costs
attributable to a Gem Diamond which is [*]when delivered to GE[*] for processing
shall be zero, and no Estimated Preparation Costs will be payable by GE[*] in
respect thereof. If POL shall determine in good faith that any such Gem Diamond
should be [*] and [*] and certified, POL shall separately invoice GE[*] for [*]
of the Post-Processing Costs and [*] of the Certification Costs associated with
such Gem Diamond, using the Post-Processing Cost Factor and Certification Cost
Factor then in effect. Such invoices shall be payable by wire transfer to the
POL Account within [*] after GE[*]'s receipt thereof. POL shall supply to GE[*]
[*] the so-called "[*] WIP report," identifying which [*]Gem Diamonds have been
converted to [*] and [*] Gem Diamonds during the preceding [*].
(E) Within [*] days following the end of each [*] during the term of this
Agreement, the Parties shall confer to determine the Pre-Processing Cost Factor,
Post-Processing Cost Factor and Certification Cost Factor to be applied during
the then current [*] and to determine what changes, if any, should be made in
Annex 1 to Attachment A to this Agreement. If any changes are determined to be
necessary or desirable, then the Parties shall formally amend Annex 1 in
writing. During the pendency of such determination, the Parties will continue to
use the factors applicable during the prior [*]. Once the factors have been
reset, they shall apply retroactively to the beginning of the [*], and the
parties shall account to one another within [*] days thereafter to reconcile any
resulting discrepancy in amounts paid before the factors were reset. POL shall
use reasonable business efforts to minimize the Pre-Processing Costs,
Post-Processing Costs and Certification Costs, including, as necessary, reducing
or reassigning any underutilized personnel or other resources when necessary,
and shall not exceed the levels of staffing and other resources described in
Annex 1 to Attachment A to this Agreement without GE[*]'s prior written consent.
In no event shall the total personnel costs included in the Preparation Costs
increase by more than [*] in any calendar year. POL and GE[*] shall agree upon
the scope and timing of, and conduct, an annual on-site operational review at
the facilities of POL's Affiliate in [*] in order to ensure that all reasonable
measures are taken to maximize productivity and make efficient use of resources.
(F) In addition, within [*] days following the end of each [*] during the term
of this Agreement (and, if this Agreement shall expire or be terminated at any
time other than the end of a [*], within [*] days after such expiration or
termination), the Parties shall confer to determine whether the total amount of
Estimated Preparation Costs paid by GE[*] in respect of Gem Diamonds received
from POL during such period was equal to [*] of the total Preparation Costs
actually paid or incurred by POL during such period. If not, the parties shall
account to one another so that the amount paid by GE[*] equals [*] of such
actual Preparation Costs. In making any determination hereunder, each Party
shall bring forth all such data and documentation as such Party shall consider
to be relevant or that the other Party shall reasonably request including,
without limitation, (i) itemized invoices from diamond certification
laboratories, (ii) itemized invoices from POL's service vendors,
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and (iii) substantiation of any labor charges and variable material charges for
consumable materials applied [*] to the activities of POL and its Affiliates
hereunder and included in the Pre-Processing Costs or the Post-Processing Costs.
(G) If POL acquires Gem Diamonds meeting the requirements of paragraph I(B) as
part of a larger purchase that includes gem diamonds that are not the subject of
this Agreement (the "Co-mingled Diamonds") and it is impractical for POL to
negotiate with its source of supply a specific purchase price for the Co-mingled
Diamonds, POL shall assign to such Co-mingled Diamonds such Acquisition Cost as
POL determines to be appropriate in light of all the circumstances.
PART II - DELIVERY AND SALE OF GEM DIAMONDS
II. DELIVERY OF GEM DIAMONDS TO POL. (A) After processing, at its own expense,
the gem diamonds delivered by POL which meet the Specifications (using a process
designed to improve color, brightness and brilliance), GE[*] shall return the
processed Gem Diamonds and any Unprocessed Gem Diamonds (as defined below) to
POL together with documentation (i) certifying that any required duty, tax or
other fee arising from GE[*]'s delivery to POL of the Gem Diamonds has been or
will be paid on a timely basis, (ii) setting forth the Acquisition Cost of each
such Gem Diamond, and (iii) containing such other customary information, if any
as the parties shall determine to be necessary or useful for the return of such
Gem Diamonds to POL, and accompanied by the same identification code(s) that
accompanied the Gem Diamonds when received from POL (collectively, the "GE[*]
Delivery Documentation"), on a [*] basis (or more frequently, if GE[*] desires,
with respect to quantities having an aggregate market value of approximately [*]
or more). GE[*] shall also supply to POL [*] a report identifying which Gem
Diamonds have been processed during the preceding [*]. The Parties understand
and agree that the Acquisition Cost of a processed Gem Diamond shall not be an
accurate indicator of its value, and POL agrees that it shall not use
Acquisition Cost as the appropriate measure of a processed Gem Diamond's
insurable value after redelivery by GE[*]. For purposes of delivering Gem
Diamonds to POL, GE[*] shall use its best efforts to segregate in separate
parcels, (i) processed Gem Diamonds whose color, brightness and brilliance have
not improved (the "Unimproved Processed Diamonds"), (ii) processed Gem Diamonds
whose color, brightness and brilliance have improved, and (iii) any Unprocessed
Gem Diamonds as referred to below. GE[*] shall deliver such Gem Diamonds with
the GE[*] Delivery Documentation to POL's designated facility located in [*] and
GE[*] shall indemnify POL and hold POL harmless from and against all third party
costs arising in connection with such processing and delivery to POL, including,
without limitation, packing, shipping, insurance, duty and any taxes relating
thereto. GE[*] shall also deliver to POL Unprocessed Gem Diamonds which GE[*]
determines would, if processed, likely become Special Inventory Diamonds, and
any gem diamonds that do not meet the Specifications. Gem diamonds which are not
accepted by GE[*] due to failure to meet the Specifications relating to [*]or
[*] and for which GE[*] does not make any payment under paragraph I(C), shall no
longer be subject to this Agreement, and shall be transferred by POL to an
Affiliate
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for resale. Any other gem diamonds that GE[*] does not process shall be referred
to herein as "Unprocessed Gem Diamonds". Within [*] days after the end of each
calendar [*], GE[*] shall notify POL in writing of the amount of Special
Inventory Diamonds produced during such calendar [*], and POL shall take such
steps as shall be necessary to sell and transfer title to such Special Inventory
Diamonds to GE[*], upon payment by GE[*] of the Salvage Value thereof. In the
event that the Salvage Value for any Special Inventory Diamonds is a negative
number, POL shall pay the absolute value of such Salvage Value to GE[*] upon
transfer of title to GE[*]. GE[*] may use for its internal purposes or otherwise
dispose of (but may not resell on a commercial basis as gem stones) any Special
Inventory Diamonds purchased from POL hereunder.
(B) If GE[*] develops technical expertise and capability and constructs or
acquires necessary equipment to successfully process gem diamonds that are of
[*] those referred to in the Specifications (as in effect on the date hereof),
GE[*] will promptly modify the Specifications to include such [*] and [*] of gem
diamonds.
III. SALES AGREEMENT. (A) POL shall sell the Gem Diamonds processed by GE[*] in
accordance with the terms of this Agreement. In preparation for sale, POL will,
directly or through its Affiliates or third parties, further [*] [*]and [*](at
the facility of POL's Affiliate in [*] or such other location as the Parties may
agree), as necessary, any [*][*], and [*]and [*]Gem Diamonds successfully
processed by GE[*] (including Unimproved Processed Diamonds), and arrange,
through LKI, for their certification by the [*] POL shall accumulate the Gem
Diamonds in such quantities (and in separate parcels for Gem Diamonds in each of
the categories referred to in the third sentence of paragraph II(A)), as POL
determines, based upon its knowledge and expertise, will make economically
attractive and marketable parcels of Gem Diamonds. Pending sale, POL shall
protect and hold such Gem Diamonds in a separate, safe and secure location for
GE[*]-processed Gem Diamonds only, using a commercially reasonable degree of
care in view of the value of such Gem Diamonds. POL shall maintain, at its
expense, insurance for the Gem Diamonds, covering the Gem Diamonds at all times
after they are initially purchased by POL and until they are ultimately sold by
POL, except when they are (x) located at a GE[*] facility for processing, or (y)
being delivered by GE[*] to POL after processing, pursuant to paragraph II(A).
Such insurance shall (i) be provided by the same insurance carrier(s) who
provide the analogous insurance maintained by LKI, which shall, in any event, be
reasonably satisfactory to GE[*] (it being understood and agreed that Lloyd's of
London shall be satisfactory as the initial provider of insurance hereunder),
(ii) cover all risks covered by the types of insurance customarily carried by
LKI and its Affiliates for similar inventory and operations, (iii) provide
benefits covering no less than the estimated value of such Gem Diamonds
(depending upon their stage of completion) as the Parties shall determine, (iv)
unless the Parties shall otherwise agree in writing, not provide for any
"deductible" to be applied to any loss, (v) identify GE[*] (following its
receipt of the Gem Diamonds under paragraph I(B)) as an additional insured to
the extent of [*] of such insured value, and (vi) provide that GE[*] receive at
least 30 days prior written notice of any material change or termination of the
insurance policy. Promptly upon written request therefor, POL shall deliver a
Certificate of Insurance to GE[*], evidencing the foregoing
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insurance. POL shall be responsible to GE[*] for any uninsured loss or damage
resulting in any diminishment of the value of GE[*]'s interest in any Gem
Diamonds while in POL's possession or under POL's control (including Gem
Diamonds in transit when POL is responsible for delivery, and Gem Diamonds on
consignment to POL's customers). POL shall not have any liability for loss of
potential value or other consequential damages as a result of (i) any failure to
produce improvement, or a sufficient level of improvement, in any Gem Diamond,
or (ii) [*]or other [*]to Gem Diamonds during pre-processing or post-
processing. POL shall conduct its marketing and sales efforts in accordance with
the provisions of paragraph IV and shall not distribute, and shall not encourage
or facilitate distribution of the Gem Diamonds by any of its purchasers thereof,
in a manner inconsistent therewith, including by way of example and not
limitation, without their disclosure of the legend in paragraph IV(A). POL and
its Affiliates and GE[*] and its Affiliates shall not make any disclosures,
representations or warranties to third parties regarding the processed Gem
Diamonds except as expressly contemplated by paragraph IV without mutual written
agreement between GE[*] and POL.
(B) (1) Using marketing and sales efforts comparable to those used by LKI and
its Affiliates for LKI's gem diamond inventory of similar quality, color and
size, POL shall, at its own expense, take all steps necessary and appropriate to
market and sell all Gem Diamonds received from GE[*] in a commercially prompt
manner. Such sales of Gem Diamonds shall be made to third party unaffiliated
brokers, wholesalers, dealers, traders, and manufacturers (or in the case of [*]
and [*] Gem Diamonds, to third party unaffiliated manufacturers, wholesalers,
retailers, brokers, dealers, auction houses and traders), in each case on a
basis and in a manner consistent with the terms in this Agreement. POL shall
sell Gem Diamonds received from GE[*] at the highest prices commercially
obtainable by it. POL shall use its best efforts to sell significant quantities
of processed Gem Diamonds to purchasers who have significant wholesale, retail
or distribution operations in [*].
(2) Within [*] Business Days following the end of each calendar [*] during the
term of this Agreement, POL shall deliver to GE[*] a letter in the form of
Attachment C hereto, signed by an officer of POL.
(3) For so long as this Agreement shall be in effect, POL shall not (i) market
or sell, directly or indirectly (except for the sale of rejected gem diamonds to
an Affiliate pursuant to paragraph II(A) and the sale of Unprocessed Gem
Diamonds pursuant to paragraph III(C)), or (ii) allow its name to be used in the
marketing or sale of, any diamonds other than Gem Diamonds processed by GE[*]
under this Agreement.
(C) POL shall remit to GE[*], by wire transfer to GE[*]'s bank account as
specified in writing to POL (which may be changed by GE[*] upon ten days'
advance written notice to POL) (the "GE[*] Account"), a processing fee of [*]
per Gem Diamond for each Gem Diamond received hereunder from GE[*] (other than
Unprocessed Gem Diamonds) (the "Processing Fee"), which shall be due and payable
upon POL's receipt of such Gem Diamonds together with the related GE[*] Delivery
Documentation and an invoice for such
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fee. POL shall remit the Processing Fee by wire transfer to the GE[*] Account
within [*] days after receipt of such Gem Diamonds and the related GE[*]
Delivery Documentation. If, over any period of [*] months or more, more than [*]
of the Gem Diamonds processed by GE[*] hereunder are less then [*] (when
delivered by POL for processing), then the Parties shall confer in good faith to
determine if it would be appropriate to ascribe a lower Processing Fee to such
Gem Diamonds. No Processing Fee shall be payable with respect to Unprocessed Gem
Diamonds. Upon receipt of Unprocessed Gem Diamonds from GE[*], POL shall
undertake such additional processing as it deems necessary, and sell such
Unprocessed Gem Diamonds in accordance with paragraphs III(B) and III(D) hereof.
(D) POL shall net against the aggregate gross proceeds received on the sale of
each Gem Diamond received hereunder from GE[*] those fees or commissions
actually paid to, or collected and retained by, any of the auction houses listed
on Attachment B hereto in connection with the sale of such Gem Diamond, and
shall remit to GE[*] by wire transfer to the GE[*] Account [*] of such net
proceeds, deducting from such payment and retaining the Processing Fee paid, or
payable, with respect to such Gem Diamond. Such payment to GE[*], with respect
to any given Gem Diamond, shall be made on (i) that [*] which falls on the [*]
day after it is sold, or if such [*] day is not a [*], on the last [*] prior to
such [*] day, or (ii) if earlier, the [*] following actual receipt by POL of the
proceeds of the sale of such Gem Diamond. Notwithstanding the foregoing,
remittance to GE[*] with respect to any Gem Diamond sold to an Affiliate of POL
shall be made within [*] Business Days after the sale. To the extent provided in
paragraph III(E) below, all proceeds from the sale of each Gem Diamond hereunder
shall be held in constructive trust for GE[*] pending payment thereof as
described herein. It is expressly understood and agreed that such payment
includes repayment of the advance made under paragraph I(C) with respect to the
sold Gem Diamond, and is final. Except for any Processing Fees which may then
still be payable under paragraph III(C), no further payments shall be due from
POL to GE[*] with respect to such Gem Diamonds. Except as set forth in paragraph
II(A), POL shall not sell or transfer any Gem Diamond received hereunder from
GE[*] to an Affiliate of POL unless such transaction, and the proposed price
thereof, have received the prior written approval of GE[*]. POL shall submit to
GE[*] by facsimile on each [*], photocopies of the sales invoice (with customer
identity deleted, except in the case of a sale to any Affiliate of POL) for each
Gem Diamond sold on or after the preceding [*], which invoices shall state, the
[*], sale price, and a uniquely identifiable code number, for the Gem Diamond
sold thereby. In addition, with respect to each [*] sales, POL shall provide to
GE[*], within [*] days following the end of each calendar [*], a usage report
(the "Usage Report") (i) itemizing, for each transaction within such prior [*]
period, the Gem Diamonds sold, the sales revenue received and the funds remitted
to GE[*], and (ii) setting forth an inventory of all post-processing Gem
Diamonds on-hand at POL as of the end of such prior calendar [*] (other than
Special Inventory Diamonds) (including as on-hand any Gem Diamonds POL has
placed on consignment). Within [*] days after the execution of this Agreement,
POL shall develop and implement a process to specifically identify and track
receipt and sales of each (i) [*] and [*] Gem Diamond, and (ii) [*]Gem Diamond
of [*] carats or more in weight, covered by this Agreement (including those
already in inventory). A first-in, first-out ("FIFO") inventory accounting
method may be used for [*]Gem Diamonds of less than
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[*] carats in weight.
(E) (1) POL hereby grants to GE[*] a continuing purchase money security interest
and a constructive trust in proceeds (hereinafter, the "security interest") in
the amount described below in all inventories of Gem Diamonds purchased for
processing hereunder and all products, proceeds, substitutions, and accessions
thereof or thereto (all of which are referred to hereinafter as the
"Collateral"). With respect to each Gem Diamond (except any Gem Diamond which is
rejected by GE[*] at delivery under paragraph I(B) for failure to meet
specifications), such security interest shall arise upon the delivery of such
Gem Diamond to GE[*] in accordance with paragraph I(B) and continue until
remittance of GE[*]'s portion of the proceeds upon the subsequent sale of such
Gem Diamond pursuant to paragraph III(D). Such security interest shall at all
times have a value equal to the greater of (i) [*] of the total Acquisition
Cost, Preparation Costs and Processing Fees paid or incurred by the Parties with
respect to the Gem Diamonds contained in such inventory, or (ii) [*] of the
total Acquisition Cost paid or incurred by the Parties with respect to the Gem
Diamonds contained in such inventory. The foregoing grant of a security interest
shall continue in full force and effect for so long as there shall be any unsold
Gem Diamonds in inventory hereunder or any payment is due to GE[*] with respect
to any sold Gem Diamond.
(2) Upon request from GE[*], POL shall execute all such additional agreements or
instruments as may reasonably be required by GE[*] in connection with the
creation and perfection of the security interest granted herein, including
without limitation, financing statements or similar instruments suitable for
filing in such jurisdictions and localities as GE[*] may determine. To the
extent permitted under applicable law, a photocopy or other reproduction of any
financing statement or other instrument executed pursuant to this paragraph
III(E)(2) shall be sufficient for filing to perfect the security interests
granted herein. It is the intention of the parties that any instrument described
in this paragraph shall be sufficient to evidence the security interest in
whatever amount it shall represent from time to time, regardless of the value of
the security interest at the time such instrument was executed or filed.
(3) POL shall keep the Collateral at (i) its facilities or those of its
Affiliates in [*] (ii) the facilities of its service vendor in [*], and (iii)
the facilities of GE[*] and its Affiliates in [*], or (iv) at such other
location(s) as GE[*] shall agree in advance in writing; provided that nothing
herein shall prohibit POL from transporting or consigning any Collateral as
necessary in connection with its preparation for sale, or sale, in the ordinary
course of POL's business. POL shall not use or keep the Collateral in
circumstances which violate the conditions of any policy of insurance thereon.
To the extent permitted by applicable law, GE[*] shall have the right to receive
ownership and physical possession of Gem Diamond inventory having a realizable
market value equal to its security interest hereunder in the event of the
Bankruptcy of POL.
(4) POL hereby represents and warrants to GE[*] that no Lien currently exists
against any of its assets including, without limitation, any inventories of Gem
Diamonds, which has,
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or in the event of the Bankruptcy of POL, would have, a superior or equal
priority to the security interest created hereby. POL covenants and agrees that,
except for Permitted Liens, it shall not create any Lien against, or permit any
Lien to attach to, the Collateral which has, or in the event of the Bankruptcy
of POL, would have, a superior or equal priority to the security interest
created hereby.
PART III - GENERAL PROVISIONS
IV. OTHER PROVISIONS RELATED TO PROCESSED GEM DIAMONDS.
(A) Disclosure of Processing. (1) The following legend shall be contained in (i)
each set of GE[*] Delivery Documentation, and (ii) a letter delivered by POL to
the management of each of its customers upon the occasion of such customer's
receipt of its first delivery of processed Gem Diamonds (other than any
Unimproved Processed Diamonds):
If the processed gem Diamonds are in a [*]state:
Every diamond in this parcel is a natural gem diamond that has been
processed to improve its color, brightness and brilliance. Each one is
identical to any other natural diamond with the same color, clarity and
size. This improvement is permanent and does not require any special
care or maintenance. The process applied does not involve irradiation,
laser drilling, surface coating or fracture filling, and results in no
adverse change in the all-natural contents of the diamond.
If the processed gem Diamonds are in a [*], [*] or [*] and [*] state:
[This] [Each] diamond [in this group] is a natural gem diamond that has
been processed to improve its color, brightness and brilliance. [It]
[Each] is identical in all respects to any other natural diamond with
the same cut, color, clarity and size. This improvement is permanent
and does not require any special care or maintenance. The process
applied does not involve irradiation, laser drilling, surface coating
or fracture filling, and results in no adverse change in the
all-natural contents of the diamond.
In addition, such letter delivered by POL to first-time buyers of processed Gem
Diamonds shall be accompanied by a copy of the press release, in such form as
the Parties shall determine, published by the Parties following the execution of
this Agreement.
(2) The text of the legends and the letter described in paragraph IV(A)(1) may
be modified from time to time, subject to each Party's written consent not to be
unreasonably withheld, it being understood that consent would be deemed to be
unreasonably withheld if the modification proposed is based upon advice of legal
counsel (of the Party proposing modification). In the event of any agreed
modification, such modified legends and letters shall thereafter be used to the
same extent and in the same manner as specified in this paragraph IV(A).
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(B) Sample Testing of [*] and [*] Gem Diamonds. POL or its Affiliate has [*] and
[*] a sample of processed Gem Diamonds provided to it by GE[*] (the "Sample
Diamonds") and has sent the Sample Diamonds to: (1) [*] (2) [*] (3) [*] and (4)
[*]for grading as to their quality, clarity and color. POL has provided GE[*]
with a copy of all documentation received from each laboratory relating to the
inspection and grading of the Sample Diamonds. POL has arranged for the Sample
Diamonds to be stored, together with the laboratory reports and any
certifications, for safekeeping in a segregated area identifying them as the
Sample Diamonds. POL shall bear [*] of the acquisition, cutting and polishing
and other incidental costs for the Sample Diamonds and shall own and bear the
risk of loss with respect to the Sample Diamonds, but may not sell or dispose of
them without GE[*]'s prior written consent.
(C) Representations; Indemnities. (1) GE[*] hereby covenants and agrees that
GE[*]'s and its Affiliates' activities conducted in connection with this
Agreement will be conducted in accordance with this Agreement, that such
activities will, to the best of GE[*]'s and GE's knowledge, not violate the
rights of any person who is not and has not in the past been affiliated with or
employed by POL, LKI or their Affiliates and that such activities and their
other businesses will be conducted in accordance with all applicable laws and
regulations. GE[*] represents and warrants to POL that as a result of GE[*]'s
processing of Gem Diamonds, the color, brightness and brilliance resulting from
such processing will not change and is permanent to the same extent that the
color, brightness and brilliance of an unprocessed, natural diamond having the
same color, brightness and brilliance will not change and is permanent. GE[*]
and its Affiliates who conduct activities in connection with this Agreement
hereby indemnify and hold harmless, on an after-tax basis, POL and its
Affiliates and their employees, officers and directors from and against any
loss, cost, liability, expense or obligation (including reasonable attorneys'
fees and costs of defense) (collectively, "Losses") incurred by any such
indemnified party arising from any claim (including, without limitation, any
litigation or other judicial or administrative proceeding or any investigation
of any type or nature), or imposed on them by any third party (including any
governmental, administrative or similar body, including, without limitation, any
taxing authority) (any of the foregoing hereinafter referred to as a "Claim"),
arising out of or resulting from a breach by GE[*] or its Affiliates of GE[*]'s
covenants, representations or warranties in this Agreement.
(2) POL hereby covenants and agrees that POL's and its Affiliates' activities
conducted in connection with this Agreement will be conducted in accordance with
this Agreement, that such activities will, to the best of POL's and LKI's
knowledge, not violate the rights of any person who is not and has not in the
past been affiliated with or employed by GE[*], GE or their Affiliates and that
such activities and their other businesses will be conducted in accordance with
all applicable laws and regulations. POL and its Affiliates who conduct
activities in connection with this Agreement hereby indemnify and hold harmless,
on an after-tax basis, GE[*] and its Affiliates and their employees, officers,
and directors from and against any Losses incurred by any such indemnified party
arising from, or imposed on them in connection with, any Claim arising out of or
resulting from a breach by POL or its Affiliates of POL's covenants,
representations or warranties in this Agreement.
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(3) (a) Each Party will promptly notify the other Party in writing (in the case
of notice to GE[*], with notice being given to the General Manager of GE [*] and
in the case of notice to POL, with notice being given to the President of POL)
of any Claim or any investigation or inquiry by any independent laboratory or
any governmental, regulatory or administrative body or any media organization
relating to processed Gem Diamonds, the method of processing, the disclosure or
activities referred to in paragraph IV or similar matters. The Parties shall
consult with each other regarding defending against or responding to any such
Claim, investigation or inquiry, provided, however, that any Party against whom
request for indemnity is made under paragraph IV(C)(1) or (2) above and who
acknowledges in writing to the other Party its obligation to so indemnify, may,
at its election, control the defense, including the selection of counsel, of any
Claim which is the subject of such request for indemnity (other than in a
proceeding relating to a Claim asserted by a taxing authority, in which case the
indemnified party may, at its election, control the defense and select counsel,
provided, however, that the indemnifying party shall, subject to the indemnified
party's right to control the defense, have a right to participate fully at its
expense in such proceeding).
(b) Any response by POL or any Affiliate to an inquiry regarding the
type, nature, purpose or effect of the processing involving statements other
than a response consisting of the same substance as that contained in the
disclosure legend in paragraph IV(A), shall require GE[*]'s prior written
consent, which shall not be unreasonably withheld. In addition, each Party may,
following consultation with the other Party, disclose publicly the information
regarding the processing as described in the legends in paragraph IV(A), if it
determines that such disclosure is advisable due to a lack of public knowledge,
misperception or misunderstanding in the marketplace or advice of counsel.
(4) In the event that a Claim is made by any third party, or any governmental or
other authority, alleging that the disclosure provided for in paragraph IV(A)
hereof, the press release described in the Transition Agreement or any written
amendments or modifications to the foregoing are in any way unlawful (an "Other
Claim"), each Party will contribute to any (i) amounts payable to any third
party (including any judgments or settlements made in favor of such third
party), and (ii) legal or other out of pocket expenses in connection with
defending against such Other Claim (the amounts referred to in the foregoing
clauses (i) and (ii), hereinafter collectively referred to as the "Costs") in
the following proportion: [*]) of the Costs will be paid by GE[*] and [*] of the
Costs will be paid by POL.
(5) (a) In the event that an Other Claim is brought against both Parties, the
Parties shall in good faith consult with each other to select single counsel to
represent both Parties in any proceeding concerning such Other Claim If the
Parties are unable to so select a single counsel, then each Party shall assume
the defense of such Other Claim as against itself. The Parties shall cooperate
and consult in good faith with each other regarding defending against or
responding to such Other Claim.
(b) In the event that an Other Claim is brought against only one Party,
such named Party will promptly give written notice thereof to the other Party,
in the manner provided in paragraph IV(C)(3)(a) above. The Party against which
the Other Claim was brought shall
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have the right to control the defense of such Other Claim with counsel of its
choice. The Parties shall cooperate and consult in good faith with each other
regarding defending against or responding to such Other Claim; provided,
however, that the non-named Party may select separate counsel to protect its
interest in such proceeding to the extent possible, if, in good faith, it is
believed by such Party that there may be a conflict between their positions in
conducting the defense of such Other Claim.
(6) In the event that an Other Claim is brought against one Party or both
Parties, each Party hereby agrees that neither will, without the prior written
consent of the other, settle, compromise or consent to the entry of any judgment
relating to such Claim without first having given thirty (30) days' prior
written notice to the other Party and conferring in good faith with such other
party during such thirty (30) day period regarding any possible alternatives to
such settlement, compromise or judgment.
(7) Each of the Parties represents and warrants to the other that, to the best
of its knowledge and belief, the implementation of this Agreement by means of
the compliance of each of them with the provisions herein will not violate any
law or regulation.
(8) The provisions hereof shall not be deemed to limit either Party's rights in
the event of that the other Party shall fail in any way to comply with the
disclosure procedures set forth in paragraph IV (A) hereof.
V. CONFIDENTIALITY; INTELLECTUAL PROPERTY AND OTHER RIGHTS.
(A) (1) Each of POL and GE[*] and their respective Affiliates shall, and shall
cause, including by requiring execution of confidentiality agreements consistent
herewith, their respective employees, officers, directors and advisers
("Representatives") to, keep secret and confidential, except to the extent
permitted by paragraphs III(A) and IV, (a) the existence and terms of this
Agreement, (b) the activities conducted pursuant to this Agreement, and (c) all
information and data regarding the shipments, costs, sales, prices, and
processing schedules, and (2) POL shall, and shall cause its Representatives to,
keep secret and confidential all Specifications, processes, effects of
processes, equipment, equipment settings and other functional information,
technical knowledge, experience, technology, intellectual property or know-how,
including any modifications or improvements thereto (the "Technical
Information") that may have been or be made available or otherwise learned or
acquired in connection with or in contemplation of the activities contemplated
by this Agreement (whether before or after the date of this Agreement), in each
case except (x) as otherwise expressly permitted by this Agreement, (y) with
respect to information covered hereby (other than Technical Information) that
has been broadly and publicly disseminated not in violation of any
confidentiality obligation applicable to the Party (or its Affiliates or
Representatives) seeking to disclose the information or (z) to the extent
compelled to be disclosed by court or administrative order or similar judicial
process and after giving the other Party reasonable written notice and an
opportunity to seek a protective order and in any event after obtaining
confidential treatment to the fullest extent available under law. GE[*] shall
use its best efforts to prevent disclosure of Technical Information in any
manner that would be reasonably expected to have a material adverse
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effect on the marketability or sale prices for Gem Diamonds processed by GE[*]
or its Affiliates under this Agreement, provided that GE[*] and its Affiliates
shall be permitted to use and disclose such Technical Information as needed to
protect their proprietary and property rights therein, to conduct their
businesses, including without limitation to develop technical capability and
processes referred to in paragraph II(B) and to the extent it determines is
necessary in connection with any of the matters referred to in paragraph IV. To
the extent consistent with the foregoing, each Party further agrees to disclose
the information referred to above only to its Affiliates and Representatives who
need to have such information to assist such Party in fulfilling its obligations
and performance under this Agreement and to take measures necessary (including
by requiring execution of confidentiality agreements consistent herewith) to
ensure such persons maintain the confidentiality of such information in
accordance with the terms of this paragraph as applicable to GE[*] and POL. In
the event either Party determines, based upon advice of its legal counsel, that
this Agreement or any information required to be kept confidential as referred
to above, must be disclosed under the Exchange Act, the rules of any national
securities exchange or the rules, regulations or requirements of a federal
agency or other governmental authority, such Party shall promptly notify the
other Party in writing of the nature and extent of the disclosure counsel has
advised is required to be made and such other Party's written consent thereto,
including with regard to the actual text of any such disclosure, shall be
required (but may not be unreasonably withheld) prior to making such disclosure,
and in all events the disclosing Party shall obtain confidential treatment for
any disclosed information to the fullest extent obtainable without enduring
undue hardship or material detriment to its business. Each Party acknowledges
that money damages will not be adequate compensation for a breach of this
paragraph and thus injunctive relief shall, in addition to other remedies, also
be available.
(B) All rights and interests to and in all Technical Information are and shall
remain fully vested in GE[*] and/or its Affiliates, as applicable, and nothing
in this Agreement nor any activities of the Parties or their Affiliates
conducted in connection herewith or in contemplation hereof shall be deemed or
construed to transfer, license or vest any right, interest, claim or benefit in,
to, or under any such Technical Information to POL, LKI, any of their
Affiliates, or any other person or entity. Any Technical Information in written
form (including copies, summaries, excerpts, analyses or reports reflecting or
incorporating any Technical Information) shall be promptly returned to GE[*]
upon any termination of this Agreement or, with respect to Technical
Information, upon GE[*]'s earlier request.
VI. TERMINATION AND RENEWAL.
(A) This Agreement may be terminated as follows:
(1) If, during the term of this Agreement, without reference to any other costs
of either Party, the [*] (calculated in accordance with United States GAAP,
consistently applied) received from the sale of Gem Diamonds during any
[*]period of [*]calendar [*]is less than the [*] paid or incurred by the Parties
with respect to the Gem Diamonds sold during such [*] period, then either Party
shall have the right to terminate this Agreement upon [*] months' written
notice. Notwithstanding the foregoing, a Party shall not be permitted to
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terminate this Agreement pursuant to this clause (A)(1) if such Party's breach
or non-fulfillment of its obligations under this Agreement materially
contributed to the circumstances giving rise to such right of termination. No
[*] measurement period used for purposes of this paragraph shall commence prior
to the Commencement Date (as that term is defined in that certain Transition
Agreement of even date herewith by and between the Parties).
(2) In the event that a Party materially breaches this Agreement, the
non-breaching Party may terminate this Agreement if the breach is not cured
within [*]days after written notice of such breach by the nonbreaching Party to
the breaching Party (or may terminate this Agreement immediately in the case of
a material breach that is not curable, including without limitation a breach of
paragraph IV(A) or paragraph V).
(3) In the event a Change of Control occurs or is pending pursuant to a written
agreement, the Party that is not undergoing a Change of Control (with respect to
itself or an Affiliate) may terminate the Agreement upon [*]prior notice. Each
Party shall notify the other Party in writing as much in advance as possible of
any such proposed or pending Change of Control.
(4) Either GE[*] or POL may terminate this Agreement upon [*]days' advance
written notice if: (x) litigation or other judicial, administrative or
investigative process or proceeding relating to any of the activities conducted
in connection with this Agreement has been formally commenced against it or its
Affiliate, and (y) legal counsel for such Party or its Affiliate determines,
based upon the information available to it, that it is more likely than not that
the outcome of such litigation or other process will be in favor of the person
or group that commenced such litigation or other process and will result in (A)
a material adverse economic effect, measured in the context of the economics of
this Agreement (including, by way of example, [*] or [*]or other monetary award
or payment(s)), or (B) permanent injunctive or other similar equitable relief
resulting in such an adverse economic effect, or (C) other relief (such as, for
example, a declaratory judgment) that, if granted, would, in the good faith
judgment of the chief executive officer of a Party or its parent entity, result
in such injury to its business reputation or goodwill that had such Party been
aware of the likelihood of such litigation or other process occurring, it would
not have entered into this Agreement.
(5) Notwithstanding anything to the contrary set forth herein, either GE[*] or
POL may suspend its performance under this Agreement without liability during
the pendency of any litigation or other judicial proceeding relating to this
Agreement which is commenced against it or any of its Affiliates by the other
Party or any of its Affiliates.
(B) Unless earlier terminated as provided above, this Agreement shall have a
term ending on December 31, 2009, provided, that it shall be automatically
renewed (for a five-year term with similar subsequent possible renewals) unless
either Party gives written notice of termination on or before the date that is
six months prior to the scheduled termination date.
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(C) Upon the occurrence of any termination pursuant to paragraph VI(A) or the
nonrenewal of this Agreement pursuant to paragraph VI(B), the Parties shall
promptly take all necessary and appropriate actions to effectuate the
termination of the activities contemplated by this Agreement in an orderly
manner consistent with the provisions set forth herein. Any termination of this
Agreement shall not terminate or impair any Party's accrued or vested rights
hereunder. Without limiting the generality of the foregoing, upon any
termination of this Agreement, the Parties shall provide that (i) all Gem
Diamonds then in process (whether in possession of GE[*] for processing or at
any other pre-sale stage under this Agreement) are brought to completion so as
to be ready for sale, (ii) all finished Gem Diamonds are divided into
appropriate categories by grade, size, color and shape, and (iii) all such
categories are equitably divided between GE[*] and POL such that ownership and
physical possession of Gem Diamonds representing [*] of the total estimated
market value in each category is transferred to GE[*] by POL, and the remainder
retained by POL. Notwithstanding any termination of this Agreement, the
following provisions shall survive and continue to apply indefinitely or as
otherwise provided below:
(i) the indemnity obligations in paragraph IV(C) as they relate to events or
occurrences while the Agreement was in effect;
(ii) the confidentiality and nondisclosure obligations in paragraph V(A) (except
GE[*], its Affiliates and Representatives shall no longer be bound to keep the
Technical Information confidential);
(iii) the provisions in paragraph V(B) relating to GE[*]'s and its Affiliates'
rights with respect to the Technical Information;
(iv) paragraph VII(A) (to the extent it relates to provisions of the Agreement
still in effect); VII(B) (to the extent provided therein); VII(E) (as it relates
to retaining books and records and also as necessary to carry out the audit
process for the year in which the Agreement terminated); VII(H) (as it relates
to obligations still in effect); and VII(I), (J), and (K); and
(v) GE and LKI shall continue to be bound by paragraphs IV(A) and (C), V(A) and
(B) (to same extent applicable to GE[*] and POL, respectively), VII(B) (to same
extent applicable, if at all, to GE[*] or POL, respectively), VII(H), (I), (J)
and (K).
VII. MISCELLANEOUS.
(A) The Parties shall use their best efforts to ensure that any dispute or
controversy relating to the validity, interpretation, implementation, breach or
termination of any provision of this Agreement between the Parties (a "Dispute")
shall be promptly and amicably settled by discussions between the chief
executive officer of each of POL and of the [*] Division of GE (or their
respective successors). If no resolution is reached by such persons within 30
days, the matter will be presented for resolution to [*], President and Chief
Executive Officer, GE [*] of GE, or his successor and Mr. Maurice Tempelsman,
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Chairman, LKI or his successor. In the event the Dispute then remains unresolved
for an additional 30 day period, either Party may submit the Dispute for
resolution by mediation pursuant to the Center for Public Resources Model
Procedure for Mediation of Business Disputes as then in effect. Mediation will
continue for at least 60 days and if the Dispute then remains unresolved, the
Parties shall within 20 days after such 60 day period ends, agree upon a
third-party arbitrator or, if they cannot agree, permit the American Arbitration
Association to appoint a third-party arbitrator, whose decision will be binding
upon the Parties and enforceable in courts having jurisdiction to enforce such
decisions.
(B) (1) In consideration of the important commitments that each Party makes in
this Agreement, during the existence of this Agreement: (i) without the prior
written consent of POL, GE[*] and GE shall not, and shall use their best efforts
to ensure that each Affiliate of GE or GE[*] does not, whether directly or
indirectly for itself or others undertake -- or sell, distribute, offer for sale
or market natural gem diamonds that have been subjected to -- the same or
similar type of processing of natural gem diamonds (meaning processing to
improve color, brightness and brilliance) as is to be conducted pursuant to this
Agreement, as such process may be modified or improved during the existence of
this Agreement, except as contemplated by this Agreement, and (ii) without the
prior written consent of GE[*], POL and LKI shall not, and shall use their best
efforts to ensure that each Affiliate of POL or LKI does not, whether directly
or indirectly for itself, himself or others, process gem diamonds, or
manufacture, cut, polish, finish, purchase, sell, distribute, offer for sale, or
market gem diamonds processed in the same or similar way as the Gem Diamonds are
processed by GE[*] (meaning processing to improve color, brightness and
brilliance), as such process may be modified or improved during the existence of
this Agreement, except as contemplated by this Agreement; provided that POL,
LKI, or their Affiliates shall not be deemed to have violated this provision if
none of them knew, or with reasonable inquiry could have known, that any such
gem diamonds had been or were to be so processed, it being understood that
knowledge of the employees and Representatives of POL, LKI and each of their
Affiliates shall be attributed to each of POL, LKI, and each Affiliate. The
Parties agree that in the event this Agreement is terminated pursuant to
paragraph VI(A)(2) due to a material breach of this Agreement by a Party, the
restrictions in this paragraph VII(B) shall continue to apply to the breaching
Party and its Affiliates to the same extent as above for a period of [*] after
such termination. No such extension shall apply in the event of a termination of
this Agreement by mutual consent of the Parties.
(2) The foregoing restrictions in paragraph VII(B)(1) shall not be construed to
apply to any (x) Financial Services Business of a Party or of any of its
Affiliates, (y) any passive investment activity by any pension or retirement
fund or program operated by or for the benefit of any Party or its Affiliates,
or (z) any business activity which would otherwise violate the foregoing
restrictions which is acquired from or carried on by any entity (an "Acquired
Company") which is acquired by, combined with, or otherwise becomes an Affiliate
of, any Party after the date hereof, provided that, within one hundred and
eighty (180) days after the purchase or other acquisition of the Acquired
Company, such party disposes of the relevant portion of the Acquired Company's
business or causes such Acquired Company to comply with the foregoing
restrictions.
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(C) POL shall not:
(1) actively participate from an office in the United States in (i) arranging,
negotiating, or concluding purchases of, or entering into or otherwise
concluding supply agreements for, Gem Diamonds, or (ii) marketing or promoting
the sale of Gem Diamonds, or soliciting any orders, negotiating any sales
contracts, or performing other significant activities in connection with the
pursuit and/or consummation of any sales of Gem Diamonds; provided that POL may
purchase Gem Diamonds in the United States through a related party acting on its
behalf, but only if POL compensates such related party on an arm's length basis
for such purchasing activity on its behalf (for purposes of this Agreement, the
terms "arm's length" and "related party" are defined in Section 482 of the
Internal Revenue Code);
(2) represent to any person that POL can be contacted through an office in the
United States;
(3) accept any orders received by an office in the United States (and instead
all such orders shall be promptly referred to an office outside the United
States as described below); or
(4) notwithstanding anything to the contrary set forth in this Agreement, hold
inventory of Gem Diamonds in the United States except on a short-term basis as
shall be necessary in connection with the certification of such inventory.
POL also agrees that it will maintain, in its own name, one or more offices
outside the United States, and that such office or offices shall materially
participate in all sales by POL of Gem Diamonds in connection with this
Agreement. In particular, and without limiting the foregoing, such office or
offices of POL outside the United States shall actively participate in
soliciting all orders, negotiating all sales contracts, and performing all other
significant activities in connection with the pursuit and/or the consummation of
sales of Gem Diamonds in connection with this Agreement. For purposes of this
paragraph, POL shall be considered to maintain an office in its own name if such
office is maintained by a wholly-owned (direct or indirect) subsidiary of POL
and such subsidiary is a dependent agent of POL that has, and regularly
exercises, authority to negotiate and conclude contracts on behalf of POL
(whether as a disclosed or undisclosed agent).
(D) The Parties agree that each Party's respective obligations under this
Agreement may be suspended for a reasonable time as a result of an inability to
perform in a commercially reasonable manner due to force majeure (including
embargoes, acts of God or governmental entities, labor strikes or third party
actions not controllable by a Party) and agree to provide prompt written notice
to each other regarding the commencement and termination of any such event.
(E) Each of GE[*] and POL shall maintain and retain accurate and complete books
and records relating to the transactions and activities conducted pursuant to
this Agreement, separate and apart from those maintained by any of their
respective Affiliates. On an annual basis beginning in [*], coincident with the
annual end of [*] determination and
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reconciliation provided for in paragraphs I(E) and I(F), (i) GE[*] and POL shall
conduct a physical inventory of all Gem Diamonds which have been delivered to
GE[*] for processing or are at any subsequent stage of completion, and (ii)
Ernst & Young shall prepare and submit to the Parties a special report (subject
to review by GE[*]'s auditors) reporting the results of its methodical
examination and review ("audit") of the books and records maintained by the
Parties which reflect or contain information relevant to determining the
accuracy of amounts of Gem Diamond inventories, Acquisition Costs (including,
without limitation, Acquisition Costs assigned by POL to any Co-mingled
Diamonds), Preparation Costs, Pre-Processing Costs, Post-Processing Costs,
Certification Costs, the Post-Processing Cost Factor, the Pre-Processing Cost
Factor, the Certification Cost Factor, Processing Fees, Salvage Values payments
under paragraph III(D), sales revenues, cumulative losses for purposes of
paragraph VI(A)(1), information in POL Delivery Documentation, GE[*] Delivery
Documentation and Usage Reports, or any other amounts (or information necessary
to determine such amounts) payable by or to a Party under this Agreement and
such other information as may be mutually agreed by the Parties (collectively,
the "Material Information"). Such special report shall be finalized and
delivered to the Parties no later than [*] of the relevant year. GE[*] shall pay
Ernst & Young's fees, except that POL shall pay any such fees which arise from
revalidation of its special report which is requested by GE[*]'s auditors and
produces a material change in such report. Prior to commencement of such audit,
the Parties shall cause Ernst & Young and GE[*]'s auditors to enter into
appropriate confidentiality agreements. Each Party will, and will cause its
Representatives to, cooperate fully in such audit. In addition, each of GE[*]
and POL and their Representatives shall be entitled, on reasonable advance
notice, to have access, at their own expense, to the other Party's (and its
Affiliates') books, records, supporting documentation relating to the Material
Information (other than customer and supplier names and addresses and other
proprietary, competitively sensitive information that is not an essential
component of Material Information as may be agreed by the Parties) and to
discuss such matters with knowledgeable personnel and advisers of such Party, in
each case as necessary to verify the accuracy and completeness thereof. The
results of any such independent audit shall be binding upon the Parties and the
amounts payable under this Agreement by or to a Party shall be adjusted to
correct any errors or miscalculations that are identified as a result of any
such audit. POL has committed to GE[*], and GE[*] is relying upon such
commitment, that POL will conduct its sourcing activities and selling activities
hereunder in a manner that reflects that POL is to receive the synergistic and
market benefits of its affiliation with LKI (to be passed along to GE[*] under
the purchasing and selling transactions contemplated by this Agreement) but as
though POL were not controlled by LKI to the extent such control could be used
to deprive POL of any benefit or advantage (including without limitation through
transfer pricing or similar dealings) that POL would have as a non-controlled
entity.
(F) The Parties hereto and any of their Affiliates who perform any activities
contemplated by this Agreement are independent contractors. Nothing in this
Agreement is intended, or shall be deemed or construed, or be treated by any
person, to constitute the establishment of, or result in the existence of, any
partnership, agency, franchise or joint venture relationship among any of the
Parties or their Affiliates. Except as and to the extent, if any, expressly
provided in this Agreement, no Party shall incur debts or make any
18
<PAGE>
commitments for or on behalf of the other Party or its Affiliates. The Parties
agree that they and their Affiliates will report the transactions described
herein in a manner consistent with this Agreement for tax purposes.
(G) All amounts payable to a Party under this Agreement shall be denominated and
payable in U.S. dollars and no foreign currency exchange rate fluctuations shall
be taken into account in determining the amount of any payment. The Parties
agree to use their best efforts to take such further actions, including entering
into supplemental agreements, amendments to this Agreement and preparing and
executing other additional documentation, as reasonably necessary or appropriate
to more fully reflect and implement the agreements understandings, intentions
and arrangements contemplated by this Agreement.
(H) Each of GE on the one hand and LKI on the other hand shall take any and all
actions as are reasonably necessary or appropriate to cause and enable
(including, if necessary, by providing funding) GE[*] and its relevant
Affiliates and POL and its relevant Affiliates, respectively, including any
assignee pursuant to paragraph VII(I), to perform their respective obligations
under this Agreement in a timely manner and shall be directly responsible for
their respective nonperformance or delayed performance.
(I) The provisions of this Agreement shall inure to the benefit of the Parties
hereto, their Affiliates who perform activities to the extent permitted hereby
and their permitted assigns. No Party's rights, obligations or performance under
this Agreement may be assigned (with a merger into, or a similar transaction
with, another entity in which the Party is not the surviving entity being
treated as an assignment) or subcontracted, except that (1) GE[*]'s rights,
obligations and performance may be assigned or subcontracted to GE or to an
Affiliate of GE reasonably acceptable to POL (written notice to be given prior
to any proposed assignment or subcontract subject to such acceptance), and (2)
POL's rights, obligations and performance may be assigned or subcontracted to an
Affiliate of POL reasonably acceptable to GE[*] (written notice to be given
prior to any proposed assignment or subcontract subject to such acceptance).
Notwithstanding the foregoing, the Parties understand that GE[*]'s processing
will take place at GE's facility located in [*], through a [*]; GE[*] will use
its commercially reasonable efforts to relocate such processing activities to
GE[*]'s facility located in [*] by [*] Nothing in this Agreement shall give or
be construed to give any other person or entity any legal or equitable rights
under, or with respect to the subject matter of, this Agreement. This Agreement
(including the Attachments hereto and the Specifications), the Confidentiality
Agreement dated February 19, 1997 to which LKI and GE are parties, that certain
Joint Defense Agreement fully executed on February 4, 1998 by LKI and GE, and
that certain Transition Agreement of even date herewith by and among GE, GE[*],
LKI and POL contain the entire agreement of the Parties with respect to the
subject matter hereof and thereof. This Agreement may be modified only in a
writing signed by the Parties and, with respect to any of the matters referred
to on the signature page hereof as being binding upon GE and LKI, also signed by
GE and LKI.
(J) Notices to be given by one Party to the other under this Agreement shall be
effective
19
<PAGE>
when delivered at the address (or facsimile number) specified below, as the same
may be changed from time to time:
If to GE[*] to: GE [*]
[*]
[*]
with a copy to: GE [*]
[*]
and to: General Electric Company
3135 Easton Turnpike, W3A
Fairfield, CT 06431
Attention: Senior Counsel for Transactions
Fax: 203-373-3008
If to POL: Pegasus Overseas Ltd.
c/o Graham, Thompson & Co.
Sassoon House
Shirley Street and Victoria Avenue
P.O. Box N272
Nassau, New Providence, Bahamas
Attention: President
Fax: 242-328-1069
with a copy to: Lazare Kaplan International Inc.
529 Fifth Avenue
New York, NY 10017
Attention: President
Fax: 212-697-3197
and to: Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Attention: Theodore Sorensen
Fax: 212-757-3990
and to: Warshaw Burstein Cohen Schlesinger & Kuh L.L.P.
555 Fifth Avenue
New York, NY 10017
Attention: Lucien Burstein
Fax: 212-972-9150
(K) This Agreement and the performance hereunder shall be governed by and
construed under the laws of the State of New York, without regard to the choice
of law rules of such state, and each Party and other signatory hereto and their
respective Affiliates which
20
<PAGE>
conduct activities in connection with this Agreement shall submit to the
jurisdiction of state and federal courts situated in New York, New York for the
purpose of facilitating the enforcement of any arbitration award or decision
under paragraph VII(A) or injunctive relief as contemplated by paragraph V(A).
[Remainder of page intentionally left blank.]
21
<PAGE>
IN WITNESS WHEREOF, the Parties have duly executed this Agreement, in one or
more counterparts, as of the date first written above.
Witness: PEGASUS OVERSEAS LTD.
/s/ James L. Barnes By: /s/ Maurice Tempelsman
- --------------------------- -------------------------------
James L. Barnes Name: Maurice Tempelsman
Title: Chairman
GE [*]
By: /s/ William A. Woodburn
--------------------------------
Name: William A. Woodburn
Title: Director
The below listed companies shall be subject to and bound by paragraphs
III(B)(3), IV(A) and (C), V(A) and (B), and VII(B), (H), (I), (J) and (K) of
this Agreement:
LAZARE KAPLAN INTERNATIONAL INC. WITNESS:
/s/ Maurice Tempelsman /s/ James L. Barnes
- -------------------------------- --------------------------------
Name: Maurice Tempelsman James L. Barnes
Title: Chairman
GENERAL ELECTRIC COMPANY
/s/ William A. Woodburn
- ---------------------------------
Name: William A. Woodburn
Title: Vice President and General Manager
22
<PAGE>
ATTACHMENT A
(A) The following terms used but not defined in the Agreement have the following
meanings:
"ACQUISITION COST" with respect to any Gem Diamond or package of Gem
Diamonds, means [*]) of (i) POL's actual out-of-pocket purchase price for such
Gem Diamond(s), and (ii) any additional out-of-pocket costs related to the
purchase of Gem Diamonds paid by POL or its Affiliates and approved in writing
by GE[*], in each case, without any profit or mark-up thereon, and in the case
of a purchase by POL from an Affiliate, without any profit or mark-up on such
Affiliate's out-of-pocket costs. In the event that POL acquires Co-mingled
Diamonds, POL will make a good faith estimate of the market value of the
Co-mingled Diamonds and will apply an appropriate discount to that market value
such that as a result the Acquisition Cost for such Gem Diamonds shall be no
greater than POL's actual out-of-pocket purchase price for such Gem Diamonds
(plus any related additional costs approved as described above), provided that
in no event shall the Acquisition Cost be an amount higher than the comparable
price at which the individual Gem Diamonds constituting a portion of the
Co-mingled Diamonds could be purchased separately from an independent dealer,
trader or other third party.
"AFFILIATE" means a person that, directly or indirectly through one or
more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned person.
"BANKRUPTCY" means, with respect to any Party, (i) such Party's ceasing
to function as a going concern (including inability to meet obligations as they
mature), (ii) the appointment of a receiver for such Party's assets, (iii) the
initiation of any proceeding by or against such Party under any bankruptcy or
insolvency law (which proceeding, if initiated by a third party, has not been
dismissed within sixty (60) days after the commencement thereof), (iv) such
Party's making of an assignment for the benefit of creditors or entering into
any similar arrangement, or (v) (A) the declaration of a material default by any
lender to such Party with regard to any debt or obligation for money owed, which
default is not cured on or before the expiration of any applicable cure period,
and (B) the acceleration of such debt or obligation for money owed, and (C) the
continuation of such declaration and acceleration at the time of the
determination of such bankruptcy.
"BUSINESS DAY" means any day other than a Saturday or Sunday or other
day on which the commercial banks in [*] [*] or [*] are required or authorized
by law or executive order to close.
"CERTIFICATION COST FACTOR" for any [*] or other period means an amount
reasonably estimated to represent the per-carat allocation of the Certification
Costs for such period over the number of carats of Prepared Gem Diamonds
expected to be delivered to GE[*] by POL during such period.
"CERTIFICATION COSTS" for any period means the actual amount of the
costs listed
A-1
<PAGE>
in Part C of Annex 1 attached hereto paid or incurred by POL or its Affiliates
during such period in obtaining certification of Gem Diamonds as required by
Paragraph III(A) of the Agreement from [*]certification laboratories, without
any profit or mark-up thereon, and reflecting any discount or rebate paid or
credited in any form to POL or its Affiliates.
"CHANGE OF CONTROL" means:
(A) with respect to LKI (i) the Tempelsman Family ceasing to have
beneficial ownership of Voting Shares possessing more than [*]of the total
voting power of all outstanding Voting Shares, or (ii) the acquisition in a
transaction or series of transactions by a person or a group (within the meaning
of Rule 13d-5 and Section 13(d) under the Exchange Act) (a "Group") of
beneficial ownership of Voting Shares possessing total voting power greater than
the total voting power represented by the Voting Shares beneficially owned by
the Tempelsman Family, or (iii) the acquisition in a transaction or series of
transactions by a Disqualifying Person, as a person or as part of a Group, of
beneficial ownership of Voting Shares possessing at least [*] of the total
voting power of all outstanding Voting Shares, if in connection with or as a
result of such ownership interest, such Disqualifying Person either (x) does
not, at all times thereafter, meet the requirements of Rule 13d-1(b) or (c)
under the Exchange Act or (y) has access to information that is subject to the
confidentiality and nondisclosure requirements of paragraph V(A), or (iv) the
approval by the shareholders of LKI and/or its Board of Directors of a plan for
its liquidation, dissolution, merger or consolidation unless, in the case of a
merger or consolidation, those persons holding Voting Shares immediately
following such transaction have substantially the same proportionate voting
rights in respect of such entity as they had in respect of LKI immediately prior
to such transaction, or (v) the election or appointment of any person to the
Board of Directors of LKI or the resignation of any person or persons on such
board if, following such election, appointment or resignation, a majority of the
members of such Board ceases to consist of individuals who are Continuing
Directors, or (vi) LKI ceasing to be subject to the periodic public reporting
requirements of the Exchange Act or the regulations thereunder, provided that
the occurrence of the event described in this clause (vi) shall not be deemed in
itself to constitute a Change of Control if at all times following such event
either Maurice Tempelsman or Leon Tempelsman continues to serve as the chief
executive officer or president (or such other highest ranking officer position)
and Chairman or Vice Chairman of the Board of Directors of LKI, or (vii) the
acquisition in a transaction or series of transactions by a person or a group
(other than the Tempelsman Family, or a subsidiary of LKI or another entity
controlled by the Tempelsman Family) of a majority of the assets or business of
LKI; and
(B) with respect to POL (or another Affiliate of LKI performing
substantial activities under the Agreement) (i) the Tempelsman Family or LKI (or
a subsidiary of LKI) ceasing to own Voting Shares with voting power sufficient
to elect a majority of the directors to the Board of Directors of POL or such
Affiliate), or (ii) the acquisition in a transaction or series of transactions
by a Disqualifying Person, as a person or as part of a Group, of beneficial
ownership of Voting Shares possessing at least [*] of the total voting power of
all outstanding Voting Shares, if in connection with or as a result of such
ownership interest, such Disqualifying Person (x) does not, at all times
thereafter, meet the requirements of Rule 13d-1(c) under the Exchange Act
(whether or not actually applicable) or (y) has
A-2
<PAGE>
access to information that is subject to the confidentiality and nondisclosure
requirements of paragraph V(A), or (iii) the acquisition in a transaction or
series of transactions by a person or a Group (other than the Tempelsman Family,
LKI or a subsidiary of LKI) of at least a majority of the assets or business of
POL or such Affiliate, or (iv) the approval by the shareholders and/or the Board
of Directors of POL or such Affiliate of a plan for liquidation, dissolution,
merger or consolidation of POL or such Affiliate unless, in the case of a merger
or consolidation, those persons holding Voting Shares immediately following such
transaction have substantially the same proportionate voting rights in respect
of such entity as they had in respect of POL or such Affiliate immediately prior
to such transaction; and
(C) with respect to GE[*] (or another Affiliate of GE[*] performing
substantial activities under the Agreement) (i) GE (or a subsidiary of GE)
ceasing to own Voting Shares with voting power sufficient to elect a majority of
the directors to the Board of Directors of GE[*] or such Affiliate, (ii) the
acquisition in a transaction or series of transactions by a person or a Group
(other than GE or a subsidiary of GE) of at least a majority of the assets or
business of GE[*] or such Affiliate, or (iii) the approval by the shareholders
and/or the Board of Directors of GE[*] or such Affiliate of a plan for
liquidation, dissolution, merger or consolidation of GE[*] or such Affiliate
unless, in the case of a merger or consolidation, those persons holding Voting
Shares immediately following such transaction have substantially the same
proportionate voting rights in respect of such entity as they had in respect of
GE[*] or such Affiliate immediately prior to such transaction; and
(D) any of the foregoing transactions or events constituting a Change
of Control that occurs with respect to any successor or any assignee (under
paragraph VII(I)) of any of LKI, POL, GE[*] or any Affiliate as referred to
above.
"COMPETITIVE BUSINESS" means manufacturing, processing and/or dealing
in [*], or engaging in activities intended to produce results that are similar
to those resulting from the processing performed by GE[*] pursuant to the
Agreement.
"CONTINUING DIRECTOR" with respect to any company or similar entity
means a member of the Board of Directors of such entity who either (i) was a
member of such Board on the date hereof, or (ii) was nominated or appointed
(before his initial election) to serve as a member by a majority of the members
of such Board who were persons described in clause (i) hereof at the time of
such nomination or appointment, or (iii) was nominated or appointed (before his
initial election) to serve as a member by a majority of the members of such
Board who are persons described in clause (ii) hereof at the time of such
nomination or appointment, provided in the case of clauses (ii) and (iii) that
such member was not nominated or appointed as a result of or in connection with
a proxy solicitation or proposal by a person other than a member of the
Tempelsman Family.
"CONTROL" (including the terms "CONTROLLED," "CONTROLLED BY" and "UNDER
COMMON CONTROL WITH") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the management or
policies of a person, whether
A-3
<PAGE>
through the ownership of stock or as trustee or executor, by contract or credit
arrangement or otherwise.
"DISQUALIFYING ACTIVITY" means a conviction, guilty plea or plea of
no-contest for (i) a felony under U.S. law, (ii) a crime involving dishonesty,
fraud or moral turpitude that has or is likely to have a material adverse affect
on the business reputation or goodwill of such person, Group or Affiliated
entity, or (iii) comparably serious criminal activity under other applicable
law.
"DISQUALIFYING PERSON" means (i) a person or Group that is engaged in a
Competitive Business on the date on which such determination is made or has been
so engaged within the last five years, or (ii) a person or Group that has, or
has an executive level officer or key employee that has, while an executive
level officer or key employee, engaged in a Disqualifying Activity within the
period of five years prior to the date on which such determination is made.
"ESTIMATED PREPARATION COSTS" means, with respect to any Prepared Gem
Diamond, (i) the number of carats in such Gem Diamond, when delivered to GE[*]
for processing, multiplied by (ii) the sum of the Pre-Processing Cost Factor,
the Post- Processing Cost Factor and the Certification Cost Factor.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FINANCIAL SERVICES BUSINESS" shall include any activities undertaken
in connection with or in furtherance of (i) Financing, (ii) Leasing, (iii)
Default Recovery Activities or (iv) Other Financial Services Activities.
"Financing" shall include the making, entering into, purchase of, or
participation in (i) secured or unsecured loans, conditional sales agreements,
debt instruments or transactions of a similar nature, (ii) non-voting preferred
equity investments, and (iii) voting equity investments (where such investment
in voting equity is made in connection with a transaction referred to in either
or both of clauses (i) or (ii) of this definition) which do not result in either
(a) the ownership of [*]or greater equity interest in the entity in which such
investment is made by the person making such investment and its Affiliates in
the aggregate or (b) an acquisition that would at the time of such acquisition
cause such person to be an Affiliate of such entity.
"Leasing" shall include the leasing, under operating leases, finance leases or
rental agreements, of property, whether real, personal, tangible or intangible.
"Other Financial Services Activities" shall include the offering, sale,
distribution or provision, directly or through any distribution system or
channel, of any financial products, financial services, asset management
services or products or services or products related or ancillary to any of the
foregoing.
"Default Recovery Activities" shall include the exercise of any rights or
remedies in
A-4
<PAGE>
connection with any Financing, Leasing or Other Financial Services Activity
(whether such rights or remedies arise under any agreement relating to such
Financing, Leasing or Other Financial Services Activity, under applicable law or
otherwise) or in connection with the purchase or sale of goods and services
including, without limitation, any foreclosure, realization or repossession of
any collateral or other security for any Financing (including the equity in any
entity or business) or Other Financial Services Activities or any property
subject to any Leasing.
"GAAP" means generally accepted accounting principles, applied
consistently with prior periods.
"[*] means a period of [*]calendar months ending on either [*] or [*]
provided that the first [*] shall be the period beginning on the date of the
Agreement and ending on [*]
"INDEBTEDNESS FOR MONEY BORROWED" means all obligations for borrowed
money, including (i) any obligation owed for all or any part of the purchase
price of real property or other assets or for services, (ii) any capital lease
obligation, (iii) any obligation of reimbursement, (iv) any guarantee of
repayment for money borrowed, and (v) any factored receivables.
"LIEN" means any mortgage, lien, pledge, charge, security interest,
claim, restriction, encumbrance, or right, title or interest in any third party.
"PERMITTED LIENS" means (i) Liens arising from and attaching to pledges
or deposits by POL under workers' compensation laws, unemployment insurance
laws, social security laws, or similar legislation, or arising from and
attaching to deposits to secure public or statutory obligations of POL or
deposits as security for contested taxes or import duties or for the payment of
rent to any non-Affiliated party; (ii) Liens imposed by law in connection with
the provision of goods or services to POL by non-Affiliated third parties, such
as carriers' and warehousemen's liens, provided that payment for the goods or
services giving rise to the lien is not yet due and payable or is being
contested by POL in good faith and by appropriate proceedings; (iii) Liens for
POL's taxes, assessments or governmental charges not yet due and payable or the
validity of which is being contested in good faith and by appropriate
proceedings and for which proper and adequate book reserves have been
established by POL to the extent required by GAAP as then in effect, and then
only to the extent that a bond has been filed in cases where the filing of a
bond is permitted to avoid the creation of a Lien against any of POL's
properties. Except to the extent expressly set forth in this paragraph, in no
event shall Permitted Liens against the Collateral include any Lien arising from
or relating to any Indebtedness for Money Borrowed of POL or any of its
Affiliates.
"POST-PROCESSING COST FACTOR" for any [*] or other period means an
amount reasonably estimated to represent the per-carat allocation of the
Post-Processing Costs for such period over the number of carats of Prepared Gem
Diamonds expected to be delivered to GE[*] by POL during such period.
A-5
<PAGE>
"POST-PROCESSING COSTS" for any period means the actual amount of the
costs listed in Part B of Annex 1 attached hereto paid or incurred by POL during
such period in preparing Gem Diamonds for sale subsequent to processing by GE[*]
under the Agreement, without any profit or mark-up thereon, and reflecting any
discount or rebate paid or credited in any form to POL or its Affiliates.
"PREPARATION COSTS" means the Pre-Processing Costs, the Post-Processing
Costs and the Certification Costs.
"PRE-PROCESSING COST FACTOR" for any [*] or other period means an
amount reasonably estimated to represent the per-carat allocation of the
Pre-Processing Costs for such period over the number of carats of Prepared Gem
Diamonds expected to be delivered to GE[*] by POL during such period.
"PRE-PROCESSING COSTS" for any period means the actual amount of the
costs listed in Part A of Annex 1 attached hereto paid or incurred by POL during
such period in preparing Gem Diamonds for processing by GE[*], without any
profit or mark-up thereon, and reflecting any discount or rebate paid or
credited in any form to POL or its Affiliates.
"SALVAGE VALUE" when used with reference to Special Inventory Diamonds,
means the sum of (i) [*] of the Acquisition Cost of the Gem Diamond from which
such Special inventory Diamonds were produced, plus (ii) [*] of the Preparation
Cost allocable to such Gem Diamond, less (iii) the portion of such Preparation
Cost representing the Post- Processing Costs and the Certification Costs
allocable to such Gem Diamond.
"SPECIAL INVENTORY DIAMOND" means a Gem Diamond processed by GE[*]
that, as a result of such process, has [*]or been [*]into, or is otherwise of, a
[*]of less than .[*]of a carat and thus would be, in GE[*]'s good faith
judgment, uneconomic to market and sell as a processed Gem Diamond.
"SPECIFICATIONS" means the specifications for gem diamonds POL is to
purchase and supply to GE[*] as contemplated by the Agreement as provided in
writing by GE[*] to POL on or prior to the date hereof and as the same may be
modified from time to time by written notice from GE[*] to POL.
"SUBSIDIARY" or "SUBSIDIARIES" of any person means any corporation,
partnership, joint venture or other legal entity of which such person (either
alone or through or together with any other subsidiary) owns, directly or
indirectly, 50% or more of the stock or other equity interests, the holders of
which are generally entitled to vote for the election of the board of directors
or other governing body of such corporation or other legal entity.
"TEMPELSMAN FAMILY" means (i) Mr. Maurice Tempelsman; (ii) any
descendant (whether biological or adopted) of Mr. Maurice Tempelsman; (iii) the
spouse of any person described in clause (i) or (ii) hereof; (iv) the estate of
any person described in clause (i), (ii), or (iii) hereof; (v) any trust created
by or arising under the will of any person described
A-6
<PAGE>
in clause (i), (ii), or (iii) hereof; or (vi) a corporation, limited liability
company or other entity with respect to which the persons described in clauses
(i) - (v) above own Voting Shares possessing at least 51% of the total voting
power of all outstanding Voting Shares (or such higher percentage as needed to
elect a majority of the board of directors of a company or similar governing
body of another organization).
"VOTING SHARE" means an outstanding security possessing the right to
vote on matters submitted to the stockholders and "voting power" shall mean the
right to vote in the election of directors to the board of directors of a
company or similar governing body of another organization.
A-7
<PAGE>
(B) The following terms are defined in the Agreement as indicated below.
<TABLE>
<CAPTION>
TERM AGREEMENT REFERENCE [p]
- ---- -------------------------
<S> <C>
Agreement Introductory Paragraph
Claim IV(C)(I)
Collateral III(E)
Co-mingled Diamonds I(G)
Costs IV(C)(4)(a)
Dispute VII(A)
FIFO II(E)
GE Introductory Paragraph
Gem Diamonds I(B)
GE[*] Introductory Paragraph
GE[*] Account III(C)
GE[*] Delivery Documentation II(A)
[* ]
Initial Marketing Period III(D)(1)
LKI Introductory Paragraph
Losses IV(C)(1)
Material Information VII(E)
Other Claim IV(C)(4)(b)
Party Introductory Paragraph
POL Introductory Paragraph
POL Account I(C)
POL Delivery Documentation I(B)
Prepared Gem Diamond I(D)
Processing Fee III(C)
Representatives V(A)(1)
Sample Diamonds IV(B)
Technical Information V(A)(1)
Unimproved Processed Diamonds II(A)
Unprocessed Gem Diamonds II(A)
Usage Report III(C)
</TABLE>
A-8
<PAGE>
ANNEX 1
PART A - PRE-PROCESSING COSTS
The cost of such [*] and other preparation of Gem Diamonds as the Parties shall
agree in writing is necessary, including:
The actual invoiced costs (net of any discounts or rebates, whether or
not appearing on such invoices) of [*] and other preparation performed
for POL by third-party vendors, and delivery costs to and from such
third-party vendors
The compensation and benefits paid to [*] located in [*](currently [*]
dedicated full time to the implementation of the Agreement who shall
perform certain [*]and other [*]work on Gem Diamonds and coordinate [*]
and preparation by third-party vendors
Ordinary and necessary travel and living expenses of other experts
required to travel for purposes of monitoring or supervising the [*],
[*]and preparation of Gem Diamonds
The Pre-Processing Costs shall not include the Acquisition Cost, or the costs of
boiling, packing, shipping, insurance, duty and taxes paid in connection with
delivering Gem Diamonds to GE[*] for processing.
PART B - POST-PROCESSING COSTS
The costs of such further cutting, polishing and completion by POL or its
Affiliates of Gem Diamonds as the Parties shall agree in writing is necessary,
including:
The compensation and benefits paid to [*] located in [*] dedicated full
time to the implementation of the Agreement who shall perform cutting,
polishing and other finishing work on Gem Diamonds and [*] POL employee
located in [*] dedicated full time to the implementation of the
Agreement who shall coordinate activities with [*] certification
laboratories
[*]toward material handling costs
Direct variable material costs for grit, lapping wheels and similar
materials consumed by POL and its Affiliates in finishing Gem Diamonds
under the Agreement, but excluding indirect costs including, without
limitation, electricity, heat, other utilities, plant overhead and
depreciation
The Post-Processing Costs shall not include the costs of any capital equipment
used in performing finishing activities or the Certification Costs.
PART C - CERTIFICATION COSTS
Certification fees paid to [*] certification laboratories
A-9
<PAGE>
Material handling costs relating to certification by [*] certification
laboratories
A-10
<PAGE>
ATTACHMENT B
Sotheby's, Inc.
Christie's, Inc.
Phillips International Auctioneers
Doyle William Galleries, Inc.
<PAGE>
ATTACHMENT C
[Letterhead of Pegasus Overseas Ltd.]
[Date]
GE [*]
[*]
RE: PROCESSING AGREEMENT DATED FEBRUARY 20, 1999 (THE "AGREEMENT")
Ladies/Gentlemen:
Pegasus Overseas Ltd. ("POL") hereby represents and warrants to you
that, with respect to all Gem Diamonds received from you under the Agreement and
marketed and sold by POL during the [*] ended __________, it has achieved such
sales utilizing marketing methods, procedures, pricing and related arrangements
no different from those ordinarily utilized during that [*] by its Affiliates in
the sale in comparable markets of comparable diamonds not processed by you, and
that [*].
Sincerely,
PEGASUS OVERSEAS LTD.
By: _______________________
Its:
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LAZARE KAPLAN INTERNATIONAL INC.
"Photograph of the side view of a diamond with an enlarged laser inscription
which reads "LD 2000 1/2000".
[LAZARE KAPLAN LOGO]
The leader in ideal cut diamonds for over 90 years.
1999 Annual Report
<PAGE>
Cover photo: The LD 2000'TM' Millennium Lazare Diamond. To celebrate the
millennium, Lazare Kaplan International Inc. introduced a limited edition series
of Lazare Diamonds'r'. Each diamond will be inscribed with the commemorative
'LD 2000' insignia and that particular diamond's number in the series (i.e.,
1/2000 through 2000/2000), as well as the standard Lazare Diamond logo and
unique identification number.
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
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LAZARE KAPLAN INTERNATIONAL INC. 1999 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 buying and 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, 1999 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, 1999
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
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<TABLE>
<CAPTION>
FISCAL 1999
-------------------
HIGH LOW
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<S> <C> <C>
FIRST 12 1/4 8 1/4
SECOND 9 6 1/2
THIRD 8 1/4 6 3/4
FOURTH 9 1/2 6 7/8
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</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998
---------------------------
High Low
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<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
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</TABLE>
As of July 30, 1999 there were 1,776 stockholders of record of the 8,368,343
issued and outstanding shares of the common stock of the Company, including
CEDE & Co. and other institutional holders who held an aggregate of 4,743,043
shares of common stock as nominees for an undisclosed number of beneficial
holders. The Company estimates that it has in excess of 2,200 beneficial
holders.
1
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[LAZARE KAPLAN LOGO]
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TO OUR SHAREHOLDERS:
[TO COME]
2
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[LAZARE KAPLAN LOGO]
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[TO COME]
3
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[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
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SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
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(In thousands, except per share data) 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
NET SALES 261,853 222,617 259,797 266,321 178,143
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Income/(loss) from continuing operations
before income tax provision and
minority interest ($11,575) $ 2,295 $ 8,248 $ 7,149 ($ 1,418)
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Income/(loss) from continuing operations ($ 6,323) $ 2,724 $ 12,100 $ 7,013 ($ 1,153)
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Net income/(loss) ($ 6,323)(2) $ 2,724 $ 11,482 $ 7,013 ($ 1,153)
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Basic earnings/(loss) per share from
continuing operations (based on the
weighted average number of shares) ($ 0.74) $ 0.32 $ 1.69(1) $ 1.14 ($ 0.19)
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Basic earnings/(loss) per share (based on
the weighted average number of shares) ($ 0.74) $ 0.32 $ 1.61(1) $ 1.14 ($ 0.19)
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Diluted earnings/(loss) per share from
continuing operations (based on the
weighted average number of shares) ($ 0.74) $ 0.31 $ 1.63(1) $ 1.12 ($ 0.18)
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Diluted earnings/(loss) per share (based
on the weighted average number of
shares) ($ 0.74) $ 0.31 $ 1.54(1) $ 1.12 ($ 0.18)
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At May 31:
Total assets $151,913 $142,330 $130,079 $105,066 $ 99,163
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Long-term debt $ 38,575 $ 23,560 $ 17,145 $ 34,155 $ 26,430
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Working capital $106,581 $111,752 $105,291 $ 74,069 $ 59,290
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Stockholders' equity $ 85,994 $ 93,460 $ 90,544 $ 44,870 $ 37,695
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</TABLE>
Note: No cash dividends were declared or paid by the Company during the past
five fiscal years.
(1) Reflects the impact of the issuance of 2,130,000 additional shares of common
stock during 1997.
(2) Includes $2.8 million of fourth quarter losses incurred in the Company's
rough diamond buying operations in Angola and $3.4 million of costs
associated with the realignment of the Company's Japanese distribution in
1999.
4
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
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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',
Item 3 -- 'Legal Proceedings', and elsewhere in the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1999. 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 '1999', '1998' and '1997' refer to the fiscal years ended
May 31, 1999, 1998 and 1997, respectively.
RESULTS OF OPERATIONS
Net Sales
Net sales in 1999 of $261,853,000 were 18% greater than net sales of
$222,617,000 in 1998.
The Company's net revenue from the sale of polished diamonds of
$112,573,000 in 1999 was 34% greater than 1998 polished sales of $84,058,000.
The increase in polished diamond sales was primarily due to higher sales of
polished stones from the Company's new factory in Russia. This was due to the
fact that throughout 1999, the Company received regular and consistent shipments
from the factory, making more goods available for sale in the current year. In
the prior year, the Company did not receive its first shipment from this factory
until the second half of the fiscal year. During 1999, the Company experienced
increased volume in the United States and in Japan, the first sales increase in
Japan in several years. These increases were partially offset by lower sales in
Southeast Asia in the first half of 1999 as compared to the prior year.
Rough diamond sales were $149,280,000 in 1999, an increase of 8% compared
to $138,559,000 in 1998, despite lower purchases and sales in Angola during the
second half of 1999. Angola experienced increased military activity between the
Government of Angola and the rebel forces during this period which was heavily
concentrated in the diamond producing regions. This resulted in fewer, less
profitable diamonds available for purchase.
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 fiscal year. On a comparative basis, the Company experienced
larger shipments during 1997 from its older Russian facility which had suspended
production by 1998. 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
5
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
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.
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
1999 was 13% as compared to 11% in 1998. In 1999 the Polished Diamond Gross
Margin was favorably impacted by increased sales volume of large stones produced
at the Company's factory in Russia. In addition, during 1999 the Company had
increased sales volume of higher margined Lazare Diamonds as compared to 1998.
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%. However, in 1999
the Company experienced a negative rough diamond margin of -2% which was
caused by adverse results from the Company's operations in Angola, as discussed
above. This was compounded by relatively high fixed infrastructure and security
costs which could not be quickly reduced, certain purchases which resulted in
significant losses upon resale, and the defection of a significant portion of
the Company's expatriate rough diamond buying team. As a result, the Company
incurred a loss of approximately $4.6 million ($2.8 million, net of tax) from
its Angolan activities during the fourth quarter which was included in the cost
of goods sold for rough diamonds and, therefore, adversely impacted the rough
diamond gross margin.
During 1999, the overall gross margin on net sales of both polished
diamonds and rough diamonds was 4.5%. This compares to 6.2% in 1998 and 9.1% in
1997. The decrease in 1999 was primarily attributable to the lower rough diamond
margin as discussed above. Excluding the effect of the losses sustained in
Angola discussed above, the overall gross margin for 1999 would have been 6.3%.
The decrease in 1998 was primarily attributable to the decrease in 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 did not 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 had impacted the Company's sales of larger,
better quality stones, which carry higher margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in 1999 of $15,103,000 (5.8%
of net sales) increased 10% or $1,382,000 compared with expenses of $13,721,000
(6.2% of net sales) in 1998. The increase was primarily attributable to the
opening of the Company's sales office in Japan in the beginning of 1999
partially offset by the capitalization of certain salary and benefit costs for
those employees directly involved with the Company's implementation of its new
computer system (in accordance with Statement of Position 98-1, 'Accounting for
the Costs of Computer Software Developed For or Obtained For Internal Use').
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 year.
Sale of Interest in Lazare Kaplan Botswana (Pty) Ltd.
In 1998, the Company completed a transaction for the sale of its interest
in Lazare Kaplan Botswana
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
(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.
Costs Associated with Realignment of Japanese Distribution
After working with its former distributor of over 25 years, in 1999, the
Company changed the nature of its distribution in Japan by assuming control of
the distribution of its products and opening its own office. In this way, the
Company has realigned its position with its retail and wholesale customers and
shortened its channels of distribution. In addition, this realignment has
enabled the Company, without interruption, to assume control of the expansion
and maintenance of the Lazare Diamond brand name in Japan. As part of the
realignment, the Company retained experienced Japanese staff, giving it
immediate and direct access to important customers as well as in depth industry
knowledge. The Company believes that this realignment was necessary in order to
compete effectively in Japan (the world's second largest market for diamonds and
diamond jewelry) in the years to come. As a result, the Company recorded a
one-time, non-recurring charge of approximately $5.6 million ($3.4 million, net
of tax) in 1999.
Interest Expense
Net interest expense was $2,702,000, $2,062,000 and $3,112,000 in 1999,
1998 and 1997, respectively. The increase in 1999 was due to higher average
balances outstanding on the Company's lines of credit of $22.2 million compared
to $4.2 million in 1998, partially offset by lower interest expense on the
Company's Senior Notes due to the reduction of the outstanding balance during
the year. 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.
Income Taxes
During 1999 and 1998, the Company recorded a tax benefit of $5,280,000 and
$260,000, respectively, primarily in recognition of the net operating losses
incurred in those years.
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.
Discontinued Operation
During 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 write-off
of unamortized costs (net of tax benefit of $13,000) was $618,000 in fiscal
1997.
Earnings/(Loss) Per Share
During 1999, 1998 and 1997, basic earnings/(loss) per share was ($0.74),
$0.32 and $1.61, respectively. Diluted earnings per share was ($0.74), $0.31 and
$1.54 in 1999, 1998 and 1997, respectively. In 1999, excluding the costs
associated with the Company's realignment in Japan and the losses sustained in
the Company's Angolan operation, basic and diluted earnings/(loss) per share
would have been ($0.02). In 1997, basic and diluted earnings per share included
a loss of $.08 and $.09 per share, respectively, from a discontinued operation.
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.
FOREIGN OPERATIONS
International business represents a major portion of the Company's revenues
and profits. All purchases of rough diamonds worldwide are denominated in U.S.
dollars. All of the Company's foreign sales are
7
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LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
denominated in U.S. dollars, with the exception of those sales made by the
Company's subsidiary, Lazare Kaplan Japan, which are denominated in Japanese
yen. Where possible, the Company hedges its sales transactions in Japan to
minimize the impact of any foreign currency exposure on its foreign revenue.
Therefore, the Company does not experience any material foreign currency
exposure in connection with its purchasing and selling activities. The
functional currency for Lazare Kaplan Japan is the Japanese yen and, during
1999, the Company recognized foreign currency translation adjustments with
regard to the activities of Lazare Kaplan Japan in the amount of $44,000 which
are shown as a component of stockholders' equity in the accompanying balance
sheet. 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.
IMPACT OF YEAR 2000
In connection with the Company's efforts to update and modernize its
information systems, as well as to address its Year 2000 issue, during 1998 the
Company commenced the implementation of a new, fully integrated computer system.
The majority of the costs of this implementation will be capitalized by the
Company. The Company is utilizing both internal and external resources to
implement and test its new software and hardware and anticipates substantially
completing the project during the first quarter of fiscal year 2000. The total
cost of the new computer system is expected to be approximately $3.5 million, of
which $3.0 million has been incurred to date, including approximately $641,000
of salary and benefit costs (for certain employees who are directly involved
with the project) and interest costs capitalized in accordance with Statement of
Position 98-1, 'Accounting for the Costs of Computer Software Developed For or
Obtained For Internal Use'.
In addition, the Company has identified its significant suppliers and other
third party service providers and has initiated formal communications 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.
Contingency plans in the event of unsuccessful implementation of the above
project or noncompliance of any of the Company's primary service providers have
not been developed. However, the Company believes that any delay in the
implementation of its new computer system beyond December 1999 would not have a
material adverse effect on the Company's operations or its ability to service
its customers.
The costs of the computer 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, 1999 was $106,581,000, a decrease
of $5,171,000 from May 31, 1998. This decrease was primarily related to the
reclassification of a portion of the Company's deferred tax assets to
non-current assets.
The Company's working capital at May 31, 1998 was $111,752,000, an increase
of $6,461,000 from May 31, 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
Company used the proceeds to repay its outstanding non-current bank loans.
Fixed asset additions totaled $4,144,000, $2,600,000 and $805,000 in 1999,
1998 and 1997, respectively. In 1998 the Company commenced the design and
implementation of a new, fully integrated computer system which is Year 2000
compliant. The
8
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[LAZARE KAPLAN LOGO]
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
Company incurred $1,900,000 and $1,100,000 in 1999 and 1998, respectively, in
connection with this project. The Company expects to incur an additional
$500,000 during the upcoming fiscal year in order to complete this project. In
addition, in 1998 the fixed asset additions included new laser inscription
equipment. In 1997 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 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. As of May 31, 1999 and 1998 there was an aggregate
balance outstanding of $32,158,000 and $10,700,000, respectively under this
agreement. The increase in borrowing in 1999 compared to 1998 was due to the
Company having received proceeds of $11.1 million in connection with the sale of
its interest in Lazare Kaplan Botswana (Pty) Ltd. in March 1998 which was used
to repay outstanding amounts under this facility. The Company was not in
compliance with the annual cash flow covenant and the capital expenditure
covenant under the revolving loan agreement for the year ended May 31, 1999. The
banks have given a waiver to the Company with respect to these covenants for the
year ended May 31, 1999. In addition, the banks have amended the cash flow
covenant for the August 31, 1999, November 30, 1999 and February 29, 2000
measurement periods, and have amended the capital expenditure covenant for all
future measurement periods.
In May 1991, the Company, through a private placement, issued $30,000,000
of 9.97% Senior Notes, due May 15, 2001. As of May 31, 1999 and 1998, the
balance of Senior Notes outstanding was $8,575,000 and $12,860,000,
respectively. The Company was not in compliance with the requirements of the
consolidated fixed charge ratio for the year ended May 31, 1999. The Senior
Notes were amended in August 1999 to eliminate the requirements of the
consolidated fixed charge ratio retroactively for the fiscal quarter ending
May 31, 1999, to waive compliance with the consolidated fixed charge ratio for
the fiscal quarters ending August 31 and November 30, 1999, and to revise the
consolidated fixed charge ratio for the fiscal quarter ending February 29, 2000.
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, however, given the growth prospects of the
Company, it may seek to increase its credit facilities during the upcoming year.
Stockholders' equity was $85,994,000 at May 31, 1999, $93,460,000 at
May 31, 1998 and $90,544,000 at May 31, 1997. The decrease in 1999 was
attributable to the net loss incurred during the period as well as the purchase
of treasury stock. The increase in 1998 was attributable to the net income
earned during the year. Stockholders received no dividends in 1999, 1998 or
1997.
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
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
polished stones produced at this facility during November 1997. Since that time
the Company has received regular and consistent shipments of polished stones
from the ALROSA facility. The Company is selling the resulting polished gem
stones 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 are shared equally with ALROSA. This agreement serves as a
long-term off-take arrangement to secure the repayment of the $62 million
financing which has been received by ALROSA from a United States commercial bank
and is 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 March 1999, (in furtherance of a Memorandum of Understanding signed by
Eximbank, ALROSA and the Company in July, 1998) the Company and ALROSA entered
into a Cooperation Agreement to expand their relationship in the cutting,
polishing and marketing of rough gem diamonds. Under the terms of this
agreement, the Company and ALROSA agreed to refurbish two new polishing
facilities (one of which is not yet operational) in Russia with an annual
capacity to cut and polish up to $150 to $200 million of rough diamonds. These
facilities 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 March 1999, the Company announced that a newly formed, wholly owned
subsidiary, Pegasus Overseas Ltd. (POL) had entered into an exclusive ten-year
agreement with a wholly owned subsidiary of General Electric Company (GE) under
which POL will market natural diamonds that have undergone a new GE process that
enhances certain characteristics of select, natural gemstone diamonds. The
process is an additional step which complements the many steps to which a
diamond is customarily subjected in the course of being extracted, processed
with mechanical and chemical operations and then cut and polished. The process
is permanent and irreversible and it does not involve treatments such as
irradiation, laser drilling, surface coating or fracture filling and is
conducted before the final cutting and polishing by the Company. The process is
designed to improve the color, brilliance and brightness of qualifying diamonds
without reducing their all-natural content. The process, which was developed and
is owned by GE, will be used only on a select, limited range of natural diamonds
with qualifying colors, sizes and clarities for both round and fancy cuts. The
estimated number of gemstones with characteristics suitable for this process is
a small fraction of the overall diamond market. POL will sell only diamonds that
have undergone the new GE process. Each diamond sold by POL will be laser
inscribed with the brand name 'GE POL.' POL began offering these diamonds to
distributors around the world during late May 1999.
RISKS AND UNCERTAINTIES
The world's sources of rough diamonds are highly concentrated in a limited
number of countries. Varying degrees of political and economic risk exist in
many of these countries. As a consequence, the diamond business is subject to
various sovereign risks beyond the Company's control, such as changes in laws
and policies affecting foreign trade and investment. In addition, the Company is
subject to various political and economic risks, including the instability of
foreign economies and governments, labor disputes, war and civil disturbances
and other risks that could cause production difficulties or stoppages, restrict
the movement of inventory or result in the deprivation or loss of contract
rights or the taking of property by nationalization or expropriation without
fair compensation.
The Company's business is dependent upon the availability of rough
diamonds. Based upon published reports, the Company believes that approximately
60% 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
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS
(Continued)
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.
11
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31,
- ----------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------------
Net sales (Note 1) $ 261,853 $ 222,617 $ 259,797
Cost of sales (Note 1) 250,035 208,717 236,071
- ----------------------------------------------------------------------------------------------
11,818 13,900 23,726
- ----------------------------------------------------------------------------------------------
Selling, general and administrative expenses 15,103 13,721 12,366
Interest expense, net of interest income 2,702 2,062 3,112
Costs associated with realignment of Japanese
distribution (Note 7) 5,588 - -
Gain on sale of consolidated subsidiary (Note 8) - (4,178) -
- ----------------------------------------------------------------------------------------------
23,393 11,605 15,478
- ----------------------------------------------------------------------------------------------
Income/(loss) from continuing operations before income
tax provision/(benefit) and minority interest (11,575) 2,295 8,248
Income tax provision/(benefit) (Notes 1 and 3) (5,252) 417 (2,970)
- ----------------------------------------------------------------------------------------------
Income/(loss) from continuing operations before minority
interest (6,323) 1,878 11,218
Minority interest in loss of consolidated subsidiary
(Note 8) - 846 882
- ----------------------------------------------------------------------------------------------
Income/(loss) from continuing operations (6,323) 2,724 12,100
Loss from discontinued operation, net of income tax
benefit (Note 13) - - 618
- ----------------------------------------------------------------------------------------------
NET INCOME/(LOSS) $ (6,323) $ 2,724 $ 11,482
- ----------------------------------------------------------------------------------------------
------------------------------------
EARNINGS/(LOSS) PER SHARE (Note 1)
Basic earnings per share from continuing operations $ (0.74) $ 0.32 $ 1.69
- ----------------------------------------------------------------------------------------------
------------------------------------
Basic earnings per share $ (0.74) $ 0.32 $ 1.61
- ----------------------------------------------------------------------------------------------
------------------------------------
Average number of shares outstanding during the period 8,488,861 8,499,131 7,151,099
- ----------------------------------------------------------------------------------------------
------------------------------------
Diluted earnings per share from continuing operations $ (0.74) $ 0.31 $ 1.63
- ----------------------------------------------------------------------------------------------
------------------------------------
Diluted earnings per share $ (0.74) $ 0.31 $ 1.54
- ----------------------------------------------------------------------------------------------
------------------------------------
Average number of shares outstanding during the period,
assuming dilution 8,488,861 8,669,366 7,442,518
- ----------------------------------------------------------------------------------------------
------------------------------------
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
- ---------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998
- ---------------------------------------------------------------------------------
-------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 5,181 $ 1,222
Accounts receivable, less allowance for doubtful accounts
($202 and $143 in 1999 and 1998, respectively) 32,902 37,747
Inventories, net (Note 1):
Rough stones 30,363 23,843
Polished stones 50,991 57,675
-------------------
Total inventories 81,354 81,518
-------------------
Prepaid expenses and other current assets 13,038 12,640
Deferred tax assets -- current (Note 3) 1,450 3,785
- ---------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 133,925 136,912
PROPERTY, PLANT AND EQUIPMENT, net (Notes 1 and 2) 8,151 4,734
OTHER ASSETS 2,172 684
DEFERRED TAX ASSETS, net (Note 3) 7,665 -
- ---------------------------------------------------------------------------------
$151,913 $142,330
- ---------------------------------------------------------------------------------
-------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other current liabilities (Notes 1
and 4) $ 25,186 $ 25,160
Notes payable -- other (Note 5) 2,158 -
- ---------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 27,344 25,160
SENIOR NOTES AND OTHER LONG-TERM DEBT (Notes 5 and 6) 38,575 23,560
DEFERRED TAX LIABILITIES (Note 3) - 150
- ---------------------------------------------------------------------------------
TOTAL LIABILITIES 65,919 48,870
- ---------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 9 and 14)
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 shares in 1999 and 1998
Issued 8,535,493 and 8,534,549 shares in 1999 and 1998,
respectively 8,535 8,535
Additional paid-in capital 58,149 58,145
Cumulative translation adjustment (Note 1) 44 -
Retained earnings 20,479 26,802
- ---------------------------------------------------------------------------------
87,207 93,482
Less treasury stock, 167,150 and 2,000 shares at cost in
1999 and 1998, respectively (1,213) (22)
- ---------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 85,994 93,460
- ---------------------------------------------------------------------------------
$151,913 $142,330
- ---------------------------------------------------------------------------------
-------------------
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Paid-in Translation Retained Treasury Stockholders'
(In thousands, except share data) Stock Capital Adjustment Earnings Stock Equity
- ----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Comprehensive income/(loss):
Net income/(loss) - - - (6,323) - (6,323)
Foreign currency translation - - 44 - - 44
-------------
Comprehensive income/(loss) (6,279)
Exercise of stock options, 944
shares issued - 4 - - - 4
Purchase of treasury stock,
165,150 shares - - - - (1,191) (1,191)
- ----------------------------------------------------------------------------------------------------------
Balance, May 31, 1999 $8,535 $58,149 $44 $20,479 ($1,213) $85,994
- ----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------------------------------------------------------
(IN THOUSANDS) 1999 1998 1997
-------------------------------------------------------------------------------------------
-----------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(6,323) $ 2,724 $ 11,482
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 943 2,070 2,376
Provision for uncollectible accounts 60 60 (25)
Benefit from deferred income taxes (5,480) (260) (3,375)
Minority interest in loss of consolidated subsidiary - (846) (882)
Net gain on sale of consolidated subsidiary - (3,693) -
Loss from discontinued operation - - 618
(Increase)/decrease in assets and increase/ (decrease) in
liabilities:
Accounts receivable 4,785 (8,204) (4,114)
Rough and polished inventories 164 (25,588) (9,899)
Prepaid expenses and other current assets (398) (1,837) (1,625)
Other assets (1,704) 66 1,544
Accounts payable and other current liabilities 26 12,628 (1,412)
-----------------------------
Net cash provided by/(used in) operating activities (7,927) (22,880) (5,312)
-------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,144) (2,600) (805)
Proceeds from sale of stock in consolidated subsidiary - 11,100 -
Proceeds from sale of fixed assets - - 25
-----------------------------
Net cash provided by/(used in) investing activities (4,144) 8,500 (780)
-------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(decrease) in short-term borrowings 2,158 (1,343) (1,657)
Increase/(decrease) in long-term borrowings 15,015 6,415 (17,010)
Purchase of treasury stock (1,191) (22) -
Proceeds from exercise of stock options 4 214 620
Proceeds from issuance of common stock, net - - 33,572
-----------------------------
Net cash provided by/(used in) financing activities 15,986 5,264 15,525
-------------------------------------------------------------------------------------------
Effect of cumulative translation adjustment 44 - -
Net increase/(decrease) in cash and cash equivalents 3,959 (9,116) 9,433
Cash and cash equivalents at beginning of year 1,222 10,338 905
-----------------------------
Cash and cash equivalents at end of year $ 5,181 $ 1,222 $ 10,338
-------------------------------------------------------------------------------------------
-----------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,872 $ 2,288 $ 3,573
Income taxes $ 129 $ 716 $ 458
-------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
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 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 8). 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. In these notes to
consolidated financial statements, the years '1999', '1998' and '1997' refer to
the fiscal years ended May 31, 1999, 1998 and 1997, respectively.
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, 1999, 1998 and 1997 are set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------
------------------
<S> <C> <C> <C>
United States 31% 28% 22%
Far East 8% 7% 9%
Europe, Israel & other 61% 65% 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, 1999, 1998 and 1997.
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 8). All
other deferred costs are amortized over their estimated useful lives, generally
less than ten 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 purchases of rough diamonds worldwide are denominated in U.S. dollars.
All of the Company's foreign sales are denominated in U.S. dollars, with the
exception of those sales made by the Company's
16
<PAGE>
[LAZARE KAPLAN LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
subsidiary, Lazare Kaplan Japan, which are denominated in Japanese yen. Where
possible, the Company hedges its sales transactions in Japan to minimize the
impact of any foreign currency exposure on its foreign revenue. Therefore, the
Company does not experience any material foreign currency exposure in connection
with its purchasing and selling activities. The functional currency for Lazare
Kaplan Japan is the Japanese yen and the Company recognizes foreign currency
translation adjustments with regard to the activities of Lazare Kaplan Japan
which are shown as a component stockholders' equity in the accompanying balance
sheets. 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.
j. Advertising
Advertising costs are expensed as incurred and were $1,214,000, $1,148,000
and $1,054,000 in 1999, 1998, and 1997, 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 1999.
l. Earnings/(Loss) per share
The Company computes basic earnings per share based upon the weighted
average number of common shares outstanding, and diluted earnings per share
based upon the weighted average number of common shares outstanding including
the impact of dilutive stock options.
m. Risks and Uncertainties
The world's sources of rough diamonds are highly concentrated in a limited
number of countries. Varying degrees of political and economic risk exist in
many of these countries. As a consequence, the diamond business is subject to
various sovereign risks beyond the Company's control, such as changes in laws
and policies affecting foreign trade and investment. In addition, the Company is
subject to various political and economic risks, including the instability of
foreign economies and governments, labor disputes, war and civil disturbances
and other risks that could cause production difficulties or stoppages, restrict
the movement of inventory or result in the deprivation or loss of contract
rights or the taking of property by nationalization or expropriation without
fair compensation.
The Company's business is dependent upon the availability of rough
diamonds. Based upon published reports, the Company believes that approximately
60% 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
17
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
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 Incentive Plans
The Company accounts for its stock-based compensation plans 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 9).
o. Comprehensive Income/(Loss)
As of June 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, 'Reporting Comprehensive Income' (SFAS 130). SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS 130 had no impact on the Company's
net income/(loss) or stockholders' equity. SFAS 130 requires foreign currency
translation adjustments to be included in other comprehensive income. For the
year ended May 31, 1999, total comprehensive loss was $6,279,000.
p. New Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
'Reporting on the Costs of Start-Up Activities'. The SOP broadly defines
start-up costs as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer, initiating a new process in an
existing facility or commencing some new operation. The Company is required to
adopt the new standard on June 1, 1999. The SOP requires that start-up costs
capitalized prior to adoption be written off as a cumulative effect of a change
in accounting principle and any future start-up costs be expensed as incurred.
Management expects the adoption of the SOP to result in a charge of
approximately $1,750,000 (net of tax) in the first quarter of fiscal year
May 31, 2000. This amount is primarily comprised of a) the start-up expenses
related to the operations of the Company's newly formed, wholly owned
subsidiary, Pegasus Overseas Ltd. and the signing and implementation of its ten
year agreement with a wholly owned subsidiary of General Electric Company, and
b) the start-up expenses related to the signing and implementation of the March
1999 Cooperation Agreement with AK Almazi Rossii Sakha of Russia.
2. PROPERTY, PLANT AND EQUIPMENT
- -------------------------------------------------------------
Property, plant and equipment consists of (in thousands):
<TABLE>
<CAPTION>
May 31,
- --------------------------------------------
1999 1998
- --------------------------------------------
<S> <C> <C>
-----------------
Land and buildings $ 2,436 $ 1,526
Leasehold improvements 2,107 1,883
Machinery, tools and
equipment 4,247 4,275
Furniture and fixtures 1,850 1,113
Computer hardware and
equipment 2,093 1,973
Construction in progress 3,393 1,278
- --------------------------------------------
16,126 12,048
Less accumulated
depreciation and
amortization 7,975 7,314
- --------------------------------------------
$ 8,151 $ 4,734
- --------------------------------------------
-----------------
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>
18
<PAGE>
[LAZARE KAPLAN LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
Depreciation expense for 1999, 1998 and 1997 was $727,000, $1,082,000 and
$1,252,000, respectively.
3. INCOME TAXES
- ---------------------------------------------------------
The items comprising the Company's net deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
May 31,
- -----------------------------------------------
1999 1998
- -----------------------------------------------
-----------------
<S> <C> <C>
Deferred tax assets:
Operating loss and other
carryforwards $ 9,100 $ 4,350
Other 650 700
Deferred tax liabilities:
Depreciation 50 150
- -----------------------------------------------
9,700 4,900
Less: Valuation allowance (585) (1,265)
- -----------------------------------------------
Net deferred tax assets $ 9,115 $ 3,635
- -----------------------------------------------
-----------------
</TABLE>
The income tax provision/(benefit) is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
Year ended May 31,
- ------------------------------------------------
1999 1998 1997
- ------------------------------------------------
-------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 20 $ 192
State and local 28 24 88
Foreign - 633 125
- ------------------------------------------------
28 677 405
Deferred:
Federal, state and
local (5,280) (260) (3,375)
- ------------------------------------------------
$(5,252) $ 471 $(2,970)
- ------------------------------------------------
-------------------------
</TABLE>
Income/(loss) before income taxes from the Company's domestic and foreign
operations was ($11,102,000) and ($473,000), respectively for the year ended
May 31, 1999, $3,615,000 and ($1,320,000), respectively for the year ended
May 31, 1998 and $9,224,000 and ($976,000), respectively for the year ended
May 31, 1997.
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>
- ------------------------------------------------
1999 1998 1997
- ------------------------------------------------
-------------------------
<S> <C> <C> <C>
Tax provision/
(benefit) at
statutory rate $(3,936) $ 780 $ 2,594
(Decrease)/increase
in taxes resulting
from:
Differential
attributable to
foreign
operations (58) 149 698
State and local
taxes, net of
Federal benefit (578) 8 58
Utilization of net
operating loss
carryforwards - - (2,945)
Change in valuation
allowance for
deferred tax
asset (680) (520) (3,375)
- ------------------------------------------------
Actual tax
provision/(benefit) $(5,252) $ 417 $(2,970)
- ------------------------------------------------
-------------------------
</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 1,200
2019 11,350
- ---------------------------------------------
$20,350
- ---------------------------------------------
-------
</TABLE>
In addition, the Company has New York State and New York City net operating
loss carryforwards of approximately $12,600,000 each, expiring from 2000 to
2014. The Company has Puerto Rico net operating loss carryforwards of
approximately $2,000,000 expiring from 2000 through 2005.
19
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
During 1999, the Internal Revenue Service (IRS) completed an examination of
the Company's consolidated Federal income tax returns for the taxable years
ended May 31, 1995 through 1997 and made no adjustments to those returns as
filed. During 1998, the IRS completed an examination of the Company's
consolidated Federal income tax returns for the taxable years ended May 31, 1991
through 1994 during which it made an adjustment to the Company's net operating
loss carryforwards in an amount of approximately $2.0 million. The tax paid by
the Company as a result of these examinations was insignificant.
4. ACCOUNTS PAYABLE AND OTHER
CURRENT LIABILITIES
- ---------------------------------------------------------
Accounts payable and other current liabilities consist of (in thousands):
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------
-----------------
<S> <C> <C>
Accounts payable $13,109 $ 9,816
Accrued expenses 12,077 15,344
- --------------------------------------------
$25,186 $25,160
- --------------------------------------------
-----------------
</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 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 cash flow covenant and the capital expenditure covenant
under the revolving loan agreement for the years ended May 31, 1999 and 1998.
The banks have given a waiver to the Company with respect to these covenants for
the year ended May 31, 1999. In addition, the banks have amended the cash flow
covenant for the August 31, 1999, November 30, 1999 and February 29, 2000
measurement periods, and have amended the capital expenditure covenant for all
future measurement periods. The banks had given a waiver to the Company with
respect to these covenants for the year ended May 31, 1998 and amended such
covenants for the fiscal 1999 measurement periods. As of May 31, 1999 and 1998
there was an aggregate balance outstanding of $32,158,000 and $10,700,000,
respectively, under this agreement. The weighted average interest rate during
1999 and 1998 on the Company's revolving loan was 6.96% and 7.56%, 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. As of May 31, 1999 and 1998, the balance of
Senior Notes outstanding was $8,575,000 and $12,860,000, respectively.
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. The Company was not
in compliance with the requirements of the consolidated fixed charge ratio for
the year ended May 31, 1999. The Senior Notes were amended in August 1999 to
eliminate the requirements of the consolidated fixed charge ratio retroactively
for the fiscal quarter ending
20
<PAGE>
[LAZARE KAPLAN LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
May 31, 1999, to waive compliance with the consolidated fixed charge ratio for
the fiscal quarters ending August 31 and November 30, 1999, and to revise the
consolidated fixed charge ratio for the fiscal quarter ending February 29, 2000.
7. COSTS ASSOCIATED WITH REALIGNMENT OF
JAPANESE DISTRIBUTION
- ---------------------------------------------------------
After working with its former distributor of over 25 years, in 1999, the
Company changed the nature of its distribution in Japan by assuming control of
the distribution of its products and opening its own office. In this way, the
Company has realigned its position with its retail and wholesale customers and
shortened its channels of distribution. In addition, this realignment has
enabled the Company, without interruption, to assume control of the expansion
and maintenance of the Lazare Diamond brand name in Japan. As part of the
realignment, the Company retained experienced Japanese staff, giving it
immediate and direct access to important customers as well as in depth industry
knowledge. The Company believes that this realignment was necessary in order to
compete effectively in Japan (the world's second largest market for diamonds and
diamond jewelry) in the years to come. As a result, the Company recorded a
one-time, non-recurring charge of approximately $5.6 million ($3.4 million, net
of tax) in 1999.
8. 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).
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.
9. STOCK INCENTIVE PLANS
- ---------------------------------------------------------
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. No future grants may be made under the 1988 Plan, although options
may continue to be exercised.
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. An increase to 600,000 shares reserved for issuance under the 1997
Plan was approved by the Board of Directors on August 5, 1999 and is subject to
stockholder approval at the 1999 Annual Meeting.
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.
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 'Accounting for Stock-Based Compensation', 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 1999, 1998 and 1997 at the date of the grant using the
Black-Scholes option pricing model. The estimated fair value of the options is
amortized as
21
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
an 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>
- ------------------------------------------------
1999 1998 1997
- ------------------------------------------------
<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 37.30% 35.70% 35.90%
Expected dividends
per share $ 0.00 $ 0.00 $ 0.00
Weighted average
estimated fair
value per share of
options granted at
market price $ 3.13 $ 4.30 $ 6.13
Weighted average
estimated fair
value per share of
options granted
above market price -- $ 3.94 $ 5.62
Pro forma net
income/(loss)
(000's) $(7,103) $2,042 $11,312
Pro forma basic
earnings/(loss) per
share $(0.84) $ 0.24 $ 1.58
Pro forma diluted
earnings/(loss) per
share $(0.84) $ 0.24 $ 1.52
- ------------------------------------------------
-------------------------
</TABLE>
As any options granted in the future will also be subject to the fair value
pro forma calculations, the pro forma adjustments for 1999, 1998 and 1997 may
not be indicative of future years.
A summary of the Plans' activity for each of the three years in the period
ended May 31, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
average
price
Number per
of shares Option price share
- -----------------------------------------------------------------
---------------------------------------
<S> <C> <C> <C>
Outstanding -- June 1,
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
Options expired (8,834) $ 6.375-$ 7.625 $ 7.578
Options issued 6,500 $ 7.375-$ 7.375 $ 7.375
Options exercised (5,666) $ 6.000-$ 6.375 $ 6.044
- -----------------------------------------------------------------
Outstanding -- May 31,
1999 627,324 $ 5.125-$ 16.225 $10.505
- -----------------------------------------------------------------
---------------------------------------
Exercisable options 433,374
- -----------------------------------------------------------------
--------
</TABLE>
The following table summarizes information about stock options at May 31,
1999:
<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-$ 6.375 161,081 4.64 years 161,081 $ 5.917
$7.0125-$ 7.625 72,943 6.37 years 66,443 $ 7.178
$10.375-$11.4125 169,050 8.04 years 56,350 $10.498
$14.750-$ 16.225 224,250 7.43 years 149,500 $14.882
- ------------------------------------------------------------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
- ---------------------------------------------------------
Future minimum payments (excluding sub-lease income) under noncancelable
operating leases with
22
<PAGE>
[LAZARE KAPLAN LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
initial terms of more than one year consist of the following at May 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Operating
Year leases
- --------------------------------------------
------
<S> <C>
2000 $ 507
2001 354
2002 317
2003 317
2004 93
Thereafter 0
- --------------------------------------------
$1,588
- --------------------------------------------
------
</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, 1999, 1998 and 1997, was approximately $542,000, $422,000 and $425,000,
respectively.
On or about April 13, 1999, International Diamond Traders CY B.V.B.A.
('IDT') and Avi Neumark ('Neumark'), the President and controlling stockholder
of IDT, commenced an action in the U.S. District Court for the Southern District
of New York against the Company, Lazare Kaplan Belgium, N.V., a subsidiary of
the Company ('LKB'), and Maurice Tempelsman, Leon Tempelsman and Sheldon
Ginsberg, each of whom is a director and officer of the Company and a director
of LKB. The plaintiffs subsequently amended their complaints to eliminate LKB
and Mr. Ginsberg as defendants. The plaintiffs alleged, among other things, that
the Company and its principals fraudulently induced IDT to make more than $1.75
million in payments to the Company in connection with an alleged 'joint venture'
for the purchase of rough diamonds, excluded IDT from this relationship and
expropriated its interest, defamed the plaintiffs, causing injury to their
business reputation and interfered with plaintiffs' business prospects. The
plaintiffs are seeking damages of $1.75 million, together with interest,
general, consequential and other damages in an unspecified amount and punitive
damages. The plaintiffs further seek the value of half of the alleged profits
since September 1998, the date at which the relationship was allegedly
wrongfully terminated. In addition, the plaintiffs allege that the Company's
Quarterly Report on Form 10-Q for the quarter ended November 30, 1998
inaccurately includes all of the sales of the Company's Angolan operations. The
Company believes that the plaintiffs' allegations are without merit and is
vigorously defending this action.
In a related matter, on or about April 13, 1999, Novel Diamonds Inc.
('Novel') and Lexco Limited ('Lexco') submitted a demand for arbitration to the
International Chamber of Commerce naming as respondents, the Company, Lazare
Kaplan (Bermuda) Ltd., a wholly-owned subsidiary of the Company, LKN Diamond
Company, LTD. ('LKN') and Sheldon Ginsberg. Each of the claimants is controlled
by Neumark. The claimants have alleged, among other things, that the respondents
are in breach of their obligations to transfer the Company's 'rough diamond
trading sight' (the 'sight') to LKN as was allegedly required by a 1994
shareholders agreement and have improperly barred claimants and Mr. Neumark from
access to the 'sight' business. As a result of the foregoing, the claimants are
seeking damages of $5 million and at least 50% of the profits from the 'sight'
business since September 1998, plus interest, and 50% of the net asset value of
LKN, including the 'sight'. The Company believes that the claimants' allegations
are without merit and is vigorously defending this action.
The two above actions followed the institution, earlier in 1999, of an
arbitration proceeding jointly submitted by Neumark, IDT and the Company. This
matter was voluntarily submitted to arbitration by Neumark, IDT and the Company
to resolve all monetary disputes between the parties as a result of the
termination of their relationship, except for those that are the subject of the
foregoing actions. All matters submitted to arbitration have been substantially
resolved with the exception of the following (i) whether there is any goodwill
arising from the alleged relationship in Angola, and (ii) if goodwill exists,
the value of such goodwill and the amount of the payment, if any, to be made.
The Company believes that such claim for goodwill is without merit and is
vigorously defending its position that no payment for goodwill is appropriate.
23
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
If the opposing parties are successful in some or all of above related
proceedings, the Company's business could be materially and adversely affected.
In addition, Neumark has commenced an action in Delaware Chancery Court
against the Company seeking the right to inspect, and make copies of, certain
books and records of the Company and LKB.
11. 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 $45,000
and $40,100 for calendar years 1997 and 1996, respectively. The Company did not
make a matching contribution during 1999 for calendar year 1998.
24
<PAGE>
[LAZARE KAPLAN LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
12. 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, 1999
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>
NORTH ELIMI- CONSOLI-
AMERICA EUROPE AFRICA FAR EAST NATIONS DATED
- ---------------------------------------------------------------------------------------------------
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended May 31, 1999
Net sales to unaffiliated
customers $113,017 $ 98,339 $ 36,206 $14,291 $ - $261,853
Transfers between geographic
areas 22,798 9,432 70,913 - (103,143) -
----------------------------------------------------------------
Total revenue $135,815 $107,771 $107,119 $14,291 $(103,143) $261,853
----------------------------------------------------------------
Gross profit/(loss) $ 11,791 $ 689 $ (3,001) $ 2,692 $ (353) $ 11,818
----------------------------------------------------------------
Income/(loss) from continuing
operations before income tax
provision and minority interest $ (7,361) $ (96) $ (3,713) $ (52) $ (353) $(11,575)
----------------------------------------------------------------
Identifiable assets at May 31,
1999 $145,493 $ 22,602 $ 34,096 $ 9,719 $ (59,997) $151,913
- ---------------------------------------------------------------------------------------------------
----------------------------------------------------------------
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 52,371 - (82,556) -
----------------------------------------------------------------
Total revenue $121,758 $ 82,126 $101,289 $ - $ (82,556) $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
- ---------------------------------------------------------------------------------------------------
----------------------------------------------------------------
</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.
25
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended May 31, 1999, 1998 and 1997
Revenue and gross profit for each of the three years in the period ended
May 31, 1999 classified by product were as follows (in thousands):
<TABLE>
<CAPTION>
POLISHED ROUGH TOTAL
- --------------------------------------------------------------------------------------------
------------------------------
<S> <C> <C> <C>
Year ended May 31, 1999
Net sales $112,573 $149,280 $261,853
------------------------------
Gross profit/(loss) $ 14,415 $ (2,597) $ 11,818
- --------------------------------------------------------------------------------------------
------------------------------
Year ended May 31, 1998
Net sales $ 84,058 $138,559 $222,617
------------------------------
Gross profit $ 9,369 $ 4,531 $ 13,900
- --------------------------------------------------------------------------------------------
------------------------------
Year ended May 31, 1997
Net sales $ 95,154 $164,643 $259,797
------------------------------
Gross profit $ 16,560 $ 7,166 $ 23,726
- --------------------------------------------------------------------------------------------
------------------------------
</TABLE>
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 write-off of unamortized costs (net of tax benefit of $13,000) was $618,000.
14. TREASURY STOCK
- ---------------------------------------------------------
The Board of Directors authorized the repurchase, at management's
discretion, of up to 500,000 shares of the Company's common stock from time to
time through March 22, 2000. During 1999 and 1998 the Company purchased 165,150
and 2,000 shares, respectively, of its common stock which are shown as a
reduction of stockholders' equity in the accompanying balance sheets.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
The following is a summary of the results of operations for the years ended
May 31, 1999 and 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
- ------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------
-------------------------------------
<S> <C> <C> <C> <C>
1999
Net sales $68,844 $74,705 $47,045 $71,259
Gross profit $ 3,193 $ 3,743 $ 3,863 $ 1,019
Net income/(loss) $ (547) $ (627) $ 263 $(5,412)(1)
Basic earnings/(loss) per share $ (0.06) $ (0.07) $ 0.03 $ (0.64)
Diluted earnings/(loss) per share $ (0.06) $ (0.07) $ 0.03 $ (0.64)
1998
Net sales $45,245 $46,848 $60,627 $69,897
Gross profit $ 2,552 $ 4,160 $ 3,667 $ 3,521
Net income/(loss) $ (659) $ 205 $ 45 $ 3,133(2)
Basic earnings/(loss) per share $ (0.08) $ 0.02 $ 0.01 $ 0.37
Diluted earnings/(loss) per share $ (0.08) $ 0.02 $ 0.01 $ 0.36
</TABLE>
(1) Includes $2.8 million of losses incurred in the Company's rough diamond
buying operations in Angola and $3.4 million of costs associated with the
realignment of the Company's Japanese distribution.
(2) Includes $3.7 million gain associated with the sale of the Company's
interest in Lazare Kaplan Botswana (Pty) Ltd.
26
<PAGE>
[LAZARE KAPLAN LOGO]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended May 31, 1999. 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, 1999 and 1998 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended May 31, 1999 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
August 25, 1999
New York, New York
27
<PAGE>
[LAZARE KAPLAN LOGO]
LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
<TABLE>
<S> <C> <C>
CORPORATE HEADQUARTERS DIRECTORS AND OFFICERS REGISTRAR AND TRANSFER
529 Fifth Avenue AGENT
New York, New York 10017 Maurice Tempelsman
Telephone (212) 972-9700 Director; ChaseMellon Transfer
Chairman of the Board Services, LLC
85 Challenger Road
Leon Tempelsman Overpeck Center
Director; Ridgefield Park, NJ 07660
Vice Chairman of the Board
and President COUNSEL
Lucien Burstein Warshaw Burstein Cohen
Director; Schlesinger & Kuh, LLP
Secretary 555 Fifth Avenue
Partner New York, New York 10017
Warshaw Burstein Cohen
Schlesinger & Kuh, LLP INDEPENDENT AUDITORS
(attorneys)
Ernst & Young LLP
Myer Feldman 787 Seventh Avenue
Director; New York, New York 10019
Attorney
Sheldon L. Ginsberg
Director;
Executive Vice President and
Chief Financial Officer
Robert Speisman
Director;
Senior Vice President - Sales
</TABLE>
28
<PAGE>
[LAZARE KAPLAN LOGO]
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LAZARE KAPLAN INTERNATIONAL INC.,
529 FIFTH AVENUE, NEW YORK, NY 10017 (212) 972-9700
<PAGE>
LIST OF SUBSIDIARIES OF
LAZARE KAPLAN INTERNATIONAL INC.
<TABLE>
<CAPTION>
NAME ORGANIZED UNDER LAWS OF
<S> <C>
Lazare Kaplan Europe Inc. Delaware
Lazare Kaplan Belgium, N.V. Belgium
Lazare Kaplan Japan Inc. (Tokyo Branch) Japan
Pegasus Overseas Ltd. Bahamas
Pegasus Overseas LLC Delaware
POCL Bvba Belgium
</TABLE>
<PAGE>
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. of our report dated August 25, 1999 included
in the 1999 Annual Report to Stockholders of Lazare Kaplan International Inc.
Our audits also included the financial statement schedule of Lazare Kaplan
International Inc. 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 financial statement schedule, when considered in
relation to the basic 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 our report dated August 25, 1999 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.
ERNST & YOUNG LLP
New York, New York
August 27, 1999
<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-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 5,181
<SECURITIES> 0
<RECEIVABLES> 33,104
<ALLOWANCES> 202
<INVENTORY> 81,354
<CURRENT-ASSETS> 141,640
<PP&E> 16,126
<DEPRECIATION> 7,975
<TOTAL-ASSETS> 151,963
<CURRENT-LIABILITIES> 27,344
<BONDS> 38,575
<COMMON> 8,535
0
0
<OTHER-SE> 77,459
<TOTAL-LIABILITY-AND-EQUITY> 151,963
<SALES> 261,853
<TOTAL-REVENUES> 261,853
<CGS> 250,035
<TOTAL-COSTS> 250,035
<OTHER-EXPENSES> 15,103
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,702
<INCOME-PRETAX> (11,575)
<INCOME-TAX> (5,252)
<INCOME-CONTINUING> (6,323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,323)
<EPS-BASIC> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
