-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SZXxbsv3wZtp8vDcsQ9ityVjBorxbQ5AxV7HP4hLMIA4mhElXuQJMijyTkGiqsBG UMtPG0v2pu17GBugQvDhNg== 0000930413-07-003491.txt : 20070416 0000930413-07-003491.hdr.sgml : 20070416 20070416120946 ACCESSION NUMBER: 0000930413-07-003491 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20070228 FILED AS OF DATE: 20070416 DATE AS OF CHANGE: 20070416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAZARE KAPLAN INTERNATIONAL INC CENTRAL INDEX KEY: 0000202375 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-JEWELRY, WATCHES, PRECIOUS STONES & METALS [5094] IRS NUMBER: 132728690 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07848 FILM NUMBER: 07767559 BUSINESS ADDRESS: STREET 1: 529 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2129729700 MAIL ADDRESS: STREET 1: 529 FIFTH AVE STREET 2: 529 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10017 10-Q 1 c47946_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2007. 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 No. 1-7848 LAZARE KAPLAN INTERNATIONAL INC. (Exact name of registrant as specified in its charter) DELAWARE 13-2728690 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 19 WEST 44TH STREET, NEW YORK, NY 10036 (Address of principal executive offices) (Zip Code) (212) 972-9700 (Registrant's telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ______ No __X__ As of March 28, 2007, 8,197,634 shares of the registrant's common stock were outstanding. LAZARE KAPLAN INTERNATIONAL INC. INDEX
PART I. FINANCIAL INFORMATION PAGE ------------- Item 1. Financial Statements (Unaudited) Consolidated statements of operations 3 Three and nine months ended February 28, 2007 and 2006 Consolidated balance sheets 4 February 28, 2007 and May 31, 2006 Consolidated statements of cash flows 5 Nine months ended February 28, 2007 and 2006 Notes to consolidated financial statements 6 - 14 Item 2. Management's Discussion and Analysis of Financial 15 - 19 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure of Market Risk 20 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURE 23
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE AND PER SHARE DATA) Three Months Ended Nine Months Ended February 28, (unaudited) 2007 2006 2007 2006 - -------------------------------------------------------------------------------------------------- ------------------------------- Net sales $ 104,257 $ 157,912 $ 337,552 $ 393,043 Cost of Sales 96,980 149,003 320,101 369,098 - -------------------------------------------------------------------------------------------------- ------------------------------- 7,277 8,909 17,451 23,945 - -------------------------------------------------------------------------------------------------- ------------------------------- Selling, general and administrative expenses 5,777 7,080 18,847 20,196 Equity in income of joint ventures (361) - (1,561) - Interest expense, net of interest income 1,754 1,070 5,024 2,314 - -------------------------------------------------------------------------------------------------- ------------------------------- 7,170 8,150 22,310 22,510 - -------------------------------------------------------------------------------------------------- ------------------------------- Income / (loss) before income taxes 107 759 (4,859) 1,435 Income tax provision / (benefit) 49 249 (1,729) 424 - -------------------------------------------------------------------------------------------------- ------------------------------- NET INCOME / (LOSS) $ 58 $ 510 $ (3,130) $ 1,011 ================================================================================================== =============================== EARNINGS / (LOSS) PER SHARE ================================================================================================== =============================== Basic earnings / (loss) per share $ 0.01 $ 0.06 $ (0.38) $ 0.12 ================================================================================================== =============================== Average number of shares outstanding during the period 8,197,634 8,265,208 8,197,484 8,319,697 ================================================================================================== =============================== ================================================================================================== =============================== Diluted earnings / (loss) per share $ 0.01 $ 0.06 $ (0.38) $ 0.12 ================================================================================================== =============================== Average number of shares outstanding during the period assuming dilution 8,390,159 8,392,567 8,197,484 8,651,136 ================================================================================================== ===============================
See notes to consolidated financial statements. 3
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT SHARE DATA) February 28, May 31, (Unaudited) (Audited) 2007 2006 - ------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,741 $ 8,160 Accounts and notes receivable, net 113,441 91,403 Inventories, net Rough stones 12,854 24,746 Polished stones 102,275 108,368 - ------------------------------------------------------------------------------------------------------------------ Total inventories 115,129 133,114 - ------------------------------------------------------------------------------------------------------------------ Prepaid expenses and other current assets 12,800 12,763 Deferred tax assets-current 2,067 2,024 - ------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 250,178 247,464 Other non-current assets, net 10,373 8,741 Deferred tax assets, net 9,228 7,507 - ------------------------------------------------------------------------------------------------------------------ $ 269,779 $ 263,712 ================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and other current liabilities $ 66,992 $ 55,771 Current Portion of long-term debt 72,701 47,969 - ------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 139,693 103,740 Long-term debt 37,512 64,176 - ------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 177,205 167,916 - ------------------------------------------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY: Preferred stock, par value $.01 per share: Authorized 1,500,000 shares; no shares outstanding - - Common stock, par value $1 per share Authorized 12,000,000 shares; issued 8,821,845 at February 2006 and 8,821,345 at May 2006, respectively 8,822 8,821 Additional paid-in capital 62,283 62,187 Cumulative translation adjustment (614) (425) Retained earnings 27,170 30,300 - ------------------------------------------------------------------------------------------------------------------ 97,661 100,883 Less treasury stock at cost; 624,211 shares at February 2007 and May 2006 (5,087) (5,087) - ------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 92,574 95,796 - ------------------------------------------------------------------------------------------------------------------ $ 269,779 $ 263,712 ==================================================================================================================
See notes to consolidated financial statements. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Nine months ended February 28, (unaudited) 2007 2006 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income / (loss) $ (3,130) $ 1,011 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,135 970 Provision for uncollectible accounts 307 105 Compensation expense - noncash 93 Deferred income taxes (1,764) 13 Changes in operating assets and liabilities: Accounts receivable (22,345) (26,315) Rough and Polished inventories 17,985 (404) Prepaid expenses and other current assets (37) (1,625) Other assets (2,326) 121 Accounts payable and other current liabilities 11,221 (20,832) - ---------------------------------------------------------------------------------------------------------------- Net cash provided by / (used in) operating activities 1,139 (46,956) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (441) (1,781) - ---------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (441) (1,781) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase / (decrease) in borrowings (1,932) 48,740 Purchase of treasury stock - (1,921) Proceeds from exercise of stock options 4 115 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by / (used in) financing activities (1,928) 46,934 - ---------------------------------------------------------------------------------------------------------------- Effect of foreign currency translation adjustment (189) (471) - ---------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (1,419) (2,274) Cash and cash equivalents at beginning of period 8,160 10,320 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 6,741 $ 8,046 ==================================================================================================================
See Notes to Consolidated Financial Statements 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. INTERIM FINANCIAL REPORTING This financial information has been prepared in conformity with the accounting principles and practices reflected in the financial statements included in the annual report filed with the Securities Exchange Commission for the preceding fiscal year. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Lazare Kaplan International Inc.'s operating results for the three and nine months ended February 28, 2007 and 2006 and its financial position as of February 28, 2007. The balance sheet at May 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended May 31, 2006. The operating results for the interim periods presented are not necessarily indicative of the operating results for a full year. In this discussion, the years "2007" and "2006" refer to the fiscal years ended May 31, 2007 and May 31, 2006, respectively. 2. ACCOUNTING POLICIES Sales arrangements with customers: The Company's polished diamond and diamond jewelry customers consist primarily of wholesale and retail clients. The Company's rough diamond customers consist primarily of rough diamond cutters. The Company generally ships polished diamond inventory to customers subject to verification of the diamond particulars. The Company's policy is to recognize revenue when title and risk of ownership have passed to the buyer, the earnings process is complete and the sale price is fixed and determinable. Polished diamond sales include revenue derived from the sale of polished diamonds and fees associated with the cutting, polishing and laser inscription of polished diamonds. In addition, in certain instances, the Company may be entitled to receive incremental profits from its customers on the sale of certain stones. Such profits are recognized as revenue when realized. Where the Company acts as a principal in the sales transaction, takes title to the product and has risks and rewards of ownership the gross value of diamonds invoiced is recorded as sales with the portion of profits allocable to others (where applicable) included in cost of sales. Where the Company believes profitability can be maximized, the Company may combine, and jointly sell, certain of its diamonds with those of other wholesalers. In such instances, the Company is obligated to share profits it realizes on the sale of such stones. Typically, the 6 participating wholesaler is required to advance funds to the Company equal to their proportional interest in the underlying diamonds. The Company has an arrangement with a diamond producer whereby the Company sells certain polished diamonds that are cut and polished in Russia. The risk and rewards of ownership of these diamonds is transferred to the Company upon delivery to the Company of the diamonds in polished form. Generally, upon receipt, the Company pays a negotiated base price and the producer receives an economic interest in future profits associated with the diamonds. The Company has a technical cooperation agreement with an entity responsible for the development and marketing of diamonds produced in Angola. Pursuant to this agreement the Company has established a joint buying and rough diamond trading operation for diamonds sourced in the Angolan informal sector. During the third fiscal quarter of 2006, the Company's rough buying operations expanded to include buying in the Angolan formal sector. Through the first fiscal quarter 2007 Angolan formal sector buying and selling operations were conducted by the Company with the Company taking title to the diamonds upon acquisition in Angola and assuming responsibility for risk of loss. Sales by the Company were recorded at their gross invoice value. Profits in excess of operating and rough acquisition costs as defined are allocated between parties with such costs classified as cost of sales by the Company. During the second fiscal quarter 2007 the Company formalized certain joint ventures relating to the buying and selling of rough diamonds acquired in the Angolan formal sector and transferred substantially all formal sector operations into the joint venture companies. As a result, Angolan formal sector rough buying and selling operations occurring during the second fiscal quarter 2007 have been accounted for on the equity method. The Company is currently negotiating a further expansion and restructuring of its Angolan operations to include exploration and development through various additional joint ventures. Credit is extended to customers based on an evaluation of each customer's financial condition and generally collateral is not required on the Company's receivables. INCENTIVE PROGRAMS: The Company participates in cooperative advertising arrangements with customers in order to build brand awareness and product acceptance. Under such an arrangement a customer is eligible to receive an allowance of up to a specified percentage of its purchases from the Company if certain qualitative advertising criteria are met and if specified amounts are spent on qualifying advertising. The Company characterizes as selling, general and administrative expense the consideration it pays to customers for cooperative advertising. In addition, the Company offers programs whereby certain sales staff employed by the Company's customers can receive consideration for sales of the Company's products. The Company characterizes as selling, general and administrative expense the consideration it pays to the salesperson. CUSTOMER REBATES: From time to time the Company has had arrangements whereby it would rebate to a customer a percentage of certain of its qualifying purchases. The Company characterizes such rebates as a reduction of sales. 7 CONSIDERATION RECEIVED FROM VENDORS: Periodically, the Company negotiates agreements with vendors to share certain promotional costs. The Company classifies amounts expended on such promotions as selling, general and administrative expense when incurred. Similarly, amounts reimbursed by vendors are characterized as a reduction of selling, general and administrative expense. SHIPPING AND HANDLING: Shipping and handling costs incurred by the Company to deliver product to customers are classified in the Company's income statement as selling general and administrative expense. INVENTORIES: Inventories, including amounts on consignment with customers, are stated at the lower of cost or market, using the average cost method. EQUITY INVESTMENTS: The Company utilizes the equity method of accounting to record its proportionate share of income and losses from joint venture companies. 3. STOCK INCENTIVE PLANS In the quarter ended August 31, 2006, the Company adopted SFAS No. 123(R) "Share-Based Payment". SFAS No. 123(R) focuses primarily on accounting for transactions in which the Company obtains employee services in exchange for share-based payments. Under SFAS No. 123(R), share-based awards that do not require future service (i.e., vested awards) are expensed immediately. Share-based employee awards that require future service are amortized over the relevant service period. The Company adopted SFAS No. 123(R) under the modified prospective method, whereby the provisions of this standard are generally applied only to share-based awards granted subsequent to adoption, and therefore the Company's financial statements for periods prior to adoption are not restated. Three Nine Months Months February 28, 2006 Ended Ended - ------------------------------------------------ ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Share-Based compensation included in income before tax $ 31 $ 93 Income tax benefits (10) (30) - ------------------------------------------------ ----------- ----------- Share-Based compensation included in income (net of tax) $ 21 $ 63 - ------------------------------------------------ ----------- ----------- Share-Based compensation effects on earnings per share: Basic $ -- $ 0.01 Diluted $ -- $ 0.01 - ------------------------------------------------ ----------- ----------- 8 Prior to the adoption of SFAS No. 123(R), compensation expense was measured using the intrinsic value method under Accounting Principles Board Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for stock option awards as they are issued at or above fair market value. Had compensation cost been determined in accordance with Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", the Company's income and income per common share would have been as follows: Three Months Nine Months February 28, 2006 Ended Ended - --------------------------------------------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income / (loss) as reported $ 510 $ 1,011 Less: Stock-based employee compensation, net of taxes (111) (334) - --------------------------------------------- ----------- ----------- Pro forma $ 399 $ 677 - --------------------------------------------- ----------- ----------- Earnings per share: As reported: Basic $ 0.06 $ 0.12 Diluted $ 0.06 $ 0.12 ============================================= =========== =========== Pro forma: Basic $ 0.05 $ 0.08 Diluted $ 0.05 $ 0.08 - --------------------------------------------- ----------- ----------- A summary of the Plans' activity for the three and nine months ended February 28, 2007 is as follows:
Weighted average price Number of shares Option Price per share - ------------------------------------------------------------------------------------------------------------------------- Outstanding - May 31, 2006 1,304,451 $ 5.000 - $ 14.750 $ 8.697 Options expired/cancelled (90,000) $ 5.280 - $ 5.280 $ 5.280 Options issued - $ - - $ - $ - Options exercised (500) $ 5.480 - $ 5.480 $ 5.480 - ------------------------------------------------------------------------------------------------------------------------- Outstanding - August 31, 2006 1,213,951 $ 5.000 - $ 14.750 $ 9.019 - ------------------------------------------------------------------------------------------------------------------------- Options expired/cancelled $ - - $ - $ - Options issued $ - - $ - $ - Options exercised $ - - $ - $ - - ------------------------------------------------------------------------------------------------------------------------- Outstanding - November 30, 2006 1,213,951 $ 5.000 - $ 14.750 $ 9.019 - ------------------------------------------------------------------------------------------------------------------------- Options expired/cancelled $ - - $ - $ - Options issued $ - - $ - $ - Options exercised $ - - $ - $ - - ------------------------------------------------------------------------------------------------------------------------- Outstanding - February 28, 2007 1,213,951 $ 5.000 - $ 14.750 $ 9.019 - ------------------------------------------------------------------------------------------------------------------------- Exercisable vested options 1,027,286 - ---------------------------------------------------------------------
9 Options outstanding and exercisable at February 28, 2007 were as follows: Exercisable Outstanding Stock Options stock options - --------------------------------------------------------- --------------------- Weighted average Weighted Weighted remaining average Average contractual exercise exercise Range of prices Shares life price Shares price - --------------------------------------------------------- --------------------- $ 5.000 - $ 6.550 218,584 5.43 $ 5.88 218,584 $ 5.88 $ 7.000 - $ 8.800 493,567 4.46 $ 7.80 386,900 $ 7.81 $ 9.000 - $ 10.560 343,300 4.51 $ 10.13 263,302 $ 10.14 $ 14.750 158,500 0.35 $ 14.75 158,500 $ 14.75 - -------------------------------------------------------------------------------- 1,213,951 1,027,286 ----------- ----------- 4. TAXES Certain of the Company's subsidiaries conduct business in foreign countries. These subsidiaries are not subject to Federal income taxes and their provisions have been determined based upon the effective tax rates, if any, in the foreign countries. 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's net deferred tax asset as of February 28, 2007 is approximately $11.4 million less a valuation allowance of approximately $0.1 million resulting in a net deferred tax asset of $11.3 million. At February 28, 2007 the Company has available U.S. net operating loss carryforwards of $22.1 million, which expire as follows (in thousands): Year Net Operating Losses -------------- ------------------------- 2019 $ 8,690 2020 298 2021 120 2022 10,190 2023 25 2026 2,761 -------------------- $ 22,084 -------------------- 10 5. EARNINGS PER SHARE Basic and diluted earnings per share are computed in accordance with Financial Accounting Standards Board Statement No. 128 "Earnings per Share." Basic earnings per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings per share include the impact of dilutive stock options.
Three Months Ended Nine Months Ended February 28, (unaudited) 2007 2006 2007 2006 - -------------------------------------------------------- ------------------------------- ------------------------------- Average number of shares outstanding during the period 8,197,634 8,265,208 8,197,484 8,319,697 Effect of dilutive stock options 192,525 127,359 - 331,439 - -------------------------------------------------------- ------------------------------- ------------------------------- Average number of shares outstanding during the period assuming dilution 8,390,159 8,392,567 8,197,484 8,651,136 - -------------------------------------------------------- ------------------------------- -------------------------------
6. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) established rules for the reporting and display of comprehensive income and its components. SFAS 130 requires foreign currency translation adjustments to be included in other comprehensive income. For the three months ended February 28, 2007 and 2006, total comprehensive income was $0.0 million and $0.7 million, respectively. For the nine months ended February 28, 2007 and 2006, total comprehensive income / (loss) was ($3.3 million) and $0.5 million, respectively. 7. LINES OF CREDIT The Company has a $25.0 million and a $45.0 million unsecured, uncommitted line of credit with a bank. Borrowings under both lines bear interest at a rate 160 basis points above the 90 day LIBOR. As of February 28, 2007 the balance outstanding under both lines was $43.7 million. Borrowings under these lines are available for the Company's working capital requirements and are payable on demand. The Company has a $35.0 million long-term unsecured, committed revolving loan agreement and a $10.0 million unsecured, uncommitted credit agreement. The Company may borrow under the committed facility (including up to $1.0 million under letters of credit) through December 1, 2008. The loan term may be extended in one year increments commencing November 30, 2007, subject to the consent of the lending banks. Borrowings under both agreements bear interest at (a) the higher of the banks base rate or one half of one percent above the Federal Funds Effective Rate, or (b) 160 basis points above LIBOR. The applicable interest rate is contingent upon the method of borrowing selected by the Company. The proceeds of this facility are available for working capital purposes. The loan agreements contains certain provisions that require, among other things, (a) maintenance of defined levels of working capital, net worth and profitability, (b) limitations on borrowing levels, investments and capital expenditures and (c) limitations on dividends and the repurchase of treasury shares. As of February 28, 2007 the balance outstanding under both facilities was $38.0 million, excluding outstanding letters of credit in the amount of $0.7 million. The Company also maintains an additional unsecured, revolving loan agreement with a bank under which it may borrow up to $30.0 million in the aggregate. Borrowings under this agreement bear interest at (a) the higher of the banks base rate or one half of one percent above the Federal Funds Effective Rate, or (b) 160 basis points above LIBOR. The applicable interest rate is contingent 11 upon the method of borrowing selected by the Company. The proceeds of this facility are available for working capital purposes. The loan agreement contains certain provisions that require, among other things, (a) maintenance of defined levels of working capital, net worth and profitability, (b) limitations on borrowing levels, investments and capital expenditures and (c) limitations on dividends and the repurchase of treasury shares. Borrowings under this loan agreement amounted to $26.0 million at February 28, 2007. A subsidiary of the Company maintains a loan facility which enables it to borrow up to 520 million Japanese Yen (approximately $4.4 million U.S. dollars) at an interest rate 1% above the Japanese yen LIBOR through November 2008. Borrowings under the facility are available for working capital purposes. The Company guarantees repayment of amounts borrowed. Borrowings under the loan are used in support of its operations in Japan. As of February 28, 2007, the balance outstanding under this facility was $2.5 million U.S. dollars. Long-term debt of $47.5 million outstanding at February 28, 2007 is scheduled to be repaid in the fiscal year ended May 31, 2009. The Company was in compliance with its debt covenants at February 28, 2007. The Company guarantees a portion of certain indebtedness ($0.8 million, at February 28, 2007) relating to a joint diamond cutting and polishing operation in South Africa. The fair value of the guarantee is immaterial. The Company's long-term facilities do not contain subjective acceleration clauses or require the Company to utilize a lock box whereby remittances from the Company's customers reduce the debt outstanding. 8. TRANSACTIONS WITH RELATED PARTIES A member of the Company's Board of Directors is of counsel to a law firm which serves as counsel to the Company. Amounts paid to the law firm for the three and nine months ended February 28, 2007 were $0.1 million and $0.7 million, respectively as compared to $0.1 million and $0.5 million for the prior year comparable periods. The Company sold jewelry to a relative of a non-employee member of the Company's Board of Directors. Sales to this Board member for the nine months ended February 28, 2007 were approximately $0.2 million, as compared to $0.4 million for the three and nine month periods ended February 28, 2006. 12 9. SEGMENT INFORMATION GEOGRAPHIC SEGEMENT INFORMATION - -------------------------------------------------------------------------------- (IN THOUSANDS) Revenue, gross profit and income/(loss) before income taxes for the three months ended February 28, 2007 and 2006 and identifiable assets at the end of each of those periods, classified by geographic area, which was determined by where sales originated and where identifiable assets are held, were as follows (in thousands):
North Far Elimi- Consoli- America Europe Africa East nations dated --------------------------------------------------------------------------------- THREE MONTHS ENDED FEBRUARY 28, 2007 Net sales to unaffiliated customers $ 25,851 $ 73,709 $ 1,000 $ 3,697 $ - $ 104,257 Transfers between geographic areas 28,150 - 28,487 - (56,637) - - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue $ 54,001 $ 73,709 $ 29,487 $ 3,697 $ (56,637) $ 104,257 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Profit $ 4,759 $ 446 $ 1,135 $ 936 $ 1 $ 7,277 - ------------------------------------------------------------------------------------------------------------------------------------ Income/(loss) before income taxes $ (1,427) $ (115) $ 1,694 $ (44) $ 1 $ 109 - ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== THREE MONTHS ENDED FEBRUARY 28, 2006 Net sales to unaffiliated customers $ 24,312 $ 117,016 $ 12,691 $ 3,893 $ - $ 157,912 Transfers between geographic areas 35,803 15 76,534 - (112,352) - - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue $ 60,115 $ 117,031 $ 89,225 $ 3,893 $(112,352) $ 157,912 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Profit $ 5,031 $ 787 $ 2,206 $ 881 $ 4 $ 8,909 - ------------------------------------------------------------------------------------------------------------------------------------ Income/(loss) before income taxes $ (1,590) $ 192 $ 2,145 $ 8 $ 4 $ 759 - ------------------------------------------------------------------------------------------------------------------------------------ ====================================================================================================================================
Revenue and gross profit for the three months ended February 28, 2007 and 2006 classified by product were as follows (in thousands): Polished Rough Total - ------------------------------------------------------------------------------- THREE MONTHS ENDED FEBRUARY 28, 2007 Net Sales $ 35,347 $ 68,910 $ 104,257 - ------------------------------------------------------------------------------- Gross Profit $ 4,248 $ 3,029 $ 7,277 - ------------------------------------------------------------------------------- THREE MONTHS ENDED FEBRUARY 28, 2006 Net Sales $ 36,560 $ 121,352 $ 157,912 - ------------------------------------------------------------------------------- Gross Profit $ 5,345 $ 3,564 $ 8,909 - ------------------------------------------------------------------------------- 13 9. SEGMENT INFORMATION GEOGRAPHIC SEGEMENT INFORMATION - -------------------------------------------------------------------------------- (IN THOUSANDS) Revenue, gross profit and income/(loss) before income taxes for the nine months ended February 28, 2007 and 2006 and identifiable assets at the end of each of those periods, classified by geographic area, which was determined by where sales originated and where identifiable assets are held, were as follows (in thousands):
North Far Elimi- Consoli- America Europe Africa East nations dated --------------------------------------------------------------------------------- NINE MONTHS ENDED FEBRUARY 28, 2007 Net sales to unaffiliated customers $ 76,042 $ 248,197 $ 1,000 $ 12,313 $ - $ 337,552 Transfers between geographic areas 83,096 - 142,705 - (225,801) - - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue $ 159,138 $ 248,197 $ 143,705 $ 12,313 $(225,801) $ 337,552 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Profit $ 10,850 $ 1,344 $ 2,355 $ 2,901 $ 1 $ 17,451 - ------------------------------------------------------------------------------------------------------------------------------------ Income/(loss) before income taxes $ (8,252) $ (602) $ 4,016 $ (22) $ 1 $ (4,859) - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets at February 28, 2007 $ 160,056 $ 77,819 $ 23,009 $ 8,949 $ (54) $ 269,779 ==================================================================================================================================== NINE MONTHS ENDED FEBRUARY 28, 2006 Net sales to unaffiliated customers $ 81,340 $ 283,493 $ 16,393 $ 11,817 $ - $ 393,043 Transfers between geographic areas 121,342 497 152,999 9 (274,847) - - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue $ 202,682 $ 283,990 $ 169,392 $ 11,826 $(274,847) $ 393,043 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Profit $ 18,075 $ 2,087 $ 980 $ 2,790 $ 13 $ 23,945 - ------------------------------------------------------------------------------------------------------------------------------------ Income/(loss) before income taxes $ 68 $ 484 $ 798 $ 72 $ 13 $ 1,435 - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets at February 28, 2006 $ 157,405 $ 85,674 $ 25,649 $ 8,255 $ (57) $ 276,926 ====================================================================================================================================
Revenue and gross profit for the nine months ended February 28, 2007 and 2006 classified by product were as follows (in thousands): Polished Rough Total - -------------------------------------------------------------------------------- NINE MONTHS ENDED FEBRUARY 28, 2007 Net Sales $ 109,865 $ 227,687 $ 337,552 - -------------------------------------------------------------------------------- Gross Profit $ 10,794 $ 6,657 $ 17,451 - -------------------------------------------------------------------------------- NINE MONTHS ENDED FEBRUARY 28, 2006 Net Sales $ 116,218 $ 276,825 $ 393,043 - -------------------------------------------------------------------------------- Gross Profit $ 16,818 $ 7,127 $ 23,945 - -------------------------------------------------------------------------------- 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------------------------------- INTRODUCTION This quarterly 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 in "Liquidity - Capital Resources" and in Item 1 - "Description of Business" and elsewhere in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2006. 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 quarterly report or to reflect the occurrence of other unanticipated events. Overview The Company is engaged in the cutting, polishing and selling of ideally proportioned diamonds which it markets internationally under the brand name "Lazare Diamonds(R)". Ideally proportioned diamonds are distinguished from non-ideal cut ("commercial") diamonds by the symmetrical relationship of their facets, which optimize the balance of brilliance, sparkle and fire in a polished diamond. The Company's domestic manufacturing facility, located in Puerto Rico, is believed by the Company to be the largest diamond cutting facility in the United States. In addition, through various cooperative agreements, the Company cuts and polishes commercial diamonds which it markets to wholesalers, distributors and retail jewelers. Rough stones purchased by the Company are either selected for manufacturing or resold as rough diamonds in the marketplace. The Company's overall revenues are, in part, dependent upon the availability of rough diamonds, the world's known sources of which are highly concentrated. The Diamond Trading Company ("DTC") is the world's largest rough diamond selling organization. The Company has been a client of the DTC for approximately 60 years. The Company supplements its rough diamond needs by secondary market purchases and has entered into relationships with other primary source suppliers. The Company has a technical assistance and cooperation agreement regarding the purchasing and marketing of rough diamonds with Sociedade de Comercializacao de Diamantes de Angola SARL ("SODIAM"), the government entity responsible for development and marketing of diamonds produced in Angola. Pursuant to this agreement the Company has established a joint buying and rough diamond trading operation for diamonds sourced in the Angolan informal sector. During the third fiscal quarter of 2006 the Company's rough buying operations expanded to include buying in the Angolan formal sector. During the second fiscal quarter 2007 Angolan formal sector operations were transferred to separate joint venture companies. The Company is currently negotiating a further expansion and restructuring of its Angolan operations to include exploration and development through various additional joint ventures. 15 The Company has an agreement with AK ALROSA of Russia, which is the largest producer of rough diamonds in Russia. Under the terms of this agreement, the Company sells polished diamonds that are cut in facilities jointly managed and supervised by the Company and ALROSA personnel. The proceeds from the sale of these polished diamonds, after deduction of rough diamond cost, generally are shared equally with ALROSA. The Company has a strategic cooperation agreement with NamGem Diamond Manufacturing Company (PTY) Ltd. ("NamGem") for the cutting and polishing of diamonds in Namibia. NamGem is Namibia's flagship venture in the international diamond polishing industry. Under the terms of the agreement, the Company provides technical manufacturing assistance and supervises the manufacture of the Company's rough diamonds deemed suitable to cut and polish. During September 2006 the Company and the Overseas Private Investment Corporation, an independent agency of the United States ("OPIC") signed a commitment letter pursuant to which OPIC committed to provide approximately $25 million of long-term financing in support of the acquisition of certain rough diamonds to be cut and polished in Namibia. Pursuant thereto, a subsidiary of the Company and OPIC entered into a financing agreement in February 2007. The Company is currently in negotiations with third parties regarding changes to its existing Namibian operations. Pending a satisfactory outcome of these negotiations and subject to various conditions precedent under the financing agreement, the Company anticipates initial borrowing under the facility to commence during fiscal 2008. The Company signed an agreement with Nozala Investments (Pty) Ltd., a broadly based women's empowerment investment group, for cooperation in South Africa's diamond sector. The agreement contemplates diamond mining, cutting, polishing, and distribution. The joint venture is in line with the South African Government's recently announced program to promote new entrants and investment in the domestic diamond sector, increasing the sector's contribution to economic development. Cutting and polishing activities which concentrate on local sources of rough diamond supply commenced during the third fiscal quarter of 2006. In February 2006, Lazare Kaplan Botswana (Pty) Ltd., a wholly owned subsidiary, was granted a license from the Government of Botswana to cut and polish diamonds in that country. Through February 2009, the Company's wholly-owned subsidiary, Pegasus Overseas Ltd. ("POL") has an exclusive agreement with Diamond Innovations Inc. ("DI") under which POL will market natural diamonds that have undergone a high pressure, high temperature (HPHT) process to improve the color of certain gem diamonds without reducing their all-natural content. POL sells diamonds that have undergone the HPHT process under the Bellataire(R) brand name. In November 2005, the Company (including certain of its subsidiaries) amended certain terms of its agreement with DI relating to the sourcing, manufacture and marketing of Bellataire diamonds. The amendment and related agreements seek to increase the sales and profitability of Bellataire diamonds by more closely aligning the economic interests of the parties through shared management of product sourcing, manufacturing and marketing as well as the sharing of related costs. While the Company believes that its success in maintaining quantities and qualities of polished inventory that best meet its customers' needs is achieved through its ability to fully integrate its diverse rough and polished diamond sources, any significant disruption of the Company's access to its primary source suppliers could have a material adverse effect on the Company. 16 RESULTS OF OPERATIONS NET SALES Net sales for the three and nine months ended February 28, 2007 were $104.3 and $337.6 million, respectively. The decrease of $53.7 million and $55.5 million, respectively, primarily represents the transfer during the second fiscal quarter of 2007 of certain rough trading operations to a separately operated joint venture company which the Company accounts for on the equity method. Polished diamond revenue for the three and nine month periods ended February 28, 2007 were $35.3 and $109.9 million as compared to $36.6 and $116.2 million in the comparable prior year periods. The decrease reflects lower sales of branded diamonds, partially offset by higher sales of fine cut commercial diamonds. Factors leading to decreased polished sales include liquidity concerns throughout the diamond and jewelry distribution chain, reluctance on the part of U.S. retailers to take stock positions and resistance to price increases the Company seeks to pass through to customers. Rough diamond sales were $68.9 million and $227.7 million for the three and nine months ended February 28, 2007, as compared to $121.4 million and $276.8 million for the comparable prior year periods. The decrease in rough diamond sales for the three and nine months ended February 28, 2007 reflects the transfer of formal sector Angolan rough diamond buying and trading operations to a formal joint venture which the Company accounts for on the equity method. Rough diamond revenue for the three and nine months ended February 28, 2007 includes $1.0 million received in connection with certain sourcing and financing initiatives. GROSS PROFIT Gross Margin on net polished sales for the three and nine months ended February 28, 2007 was 12.0% and 9.8%, respectively, as compared to 14.6% and 14.5% for the prior year periods. The decline in polished gross margin reflects a shift in sales mix with a substantially higher percentage of polished sales derived from fine cut commercial diamonds which typically carry a lower gross margin than branded diamonds. This decrease also reflects increased rough diamond prices which the Company was unable to fully pass through to customers and efforts by the Company to sell certain slower moving commercial diamonds at reduced prices. Additionally, polished gross margin reflects reduced revenue and margin from laser inscription fees (see "Legal Proceedings"). Rough diamond gross margin for the three and nine months periods ended February 28, 2007 was 4.4% and 2.9%, compared to 2.9% and 2.6%, respectively in the comparable prior year periods. Increased rough gross margins reflect improving market conditions and a reduction in allocable sourcing costs incurred by the Company's Angolan informal sector operations. As a result of the foregoing, overall gross margin percentage during the three and nine month period ended February 28, 2007 was 7.0% and 5.2%, respectively, as compared to 5.6% and 6.1% in the prior year periods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the three and nine months ended February 28, 2007 were $5.8 million and $18.8 million, respectively, as compared to $7.1 million and $20.2 million for the same periods in the prior year. The decrease in selling, general and administrative expense for the three and nine months ended February 28, 2007 reflects increased legal costs 17 associated with litigation the Company initiated to protect certain of its intellectual property rights offset by a reduction in employee salaries and wages and the reimbursement of $1.2 million of costs incurred in connection with certain sourcing and financing initiatives. EQUITY IN INCOME OF JOINT VENTURES The Company is an equity owner in several joint venture companies relating to sourcing, cutting, polishing, processing and sales of diamonds. The Company's combined share of income from these joint venture operations for the three and nine months ended February 28, 2007 was $0.4 million and $1.6 million, respectively. INTEREST EXPENSE Net interest expense for the three and nine months ended February 28, 2007 was $1.8 million and $5.0 million, respectively, as compared to $1.1 million and $2.3 million for the same periods in the prior year. The increase for the three and nine months ended February 28, 2007 reflects higher interest rates and higher net borrowing levels as compared to the prior year periods. INCOME TAX The Company's effective tax rate for the nine months ended February 28, 2007 was 35.6% as compared to 29.5% for the prior year period. The year-to-date increase is primarily attributable to an increase in the percentage of income applicable to higher tax rate jurisdictions. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at February 28, 2007 was $110.5 million as compared to $143.7 million at May 31, 2006. The Company maintains a long-term unsecured, revolving credit facility that it utilizes for general working capital purposes in the amount of $35.0 million. In addition, the Company has a 520 million Yen denominated facility that is used in support of its operations in Japan. The Company's long-term facilities do not contain subjective acceleration clauses or require the Company to utilize a lock box whereby remittances from the Company's customers reduce the debt outstanding. The Company also maintains $110.0 million of uncommitted lines of credit that are used to finance rough inventory transactions and other working capital needs. Long-term debt includes the portion of borrowings which the Company has both the intention and the ability to refinance on a long-term basis. Stockholders' equity was $92.6 million at February 28, 2007 as compared to $95.8 million at May 31, 2006. No dividends were paid to stockholders during the three and nine months ended February 28, 2007. The Company believes that it has the ability to meet its anticipated financing needs for at least the next twelve months. 18 NEW PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires financial statement recognition of the impact of a tax position if a position is more likely than not of being sustained on audit, based on the technical merits of the position. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The provisions of FIN 48 will be effective as of the beginning of the Company's fiscal year 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of FIN 48 on its financial position, results of operations and cash flows. TRANSACTIONS WITH RELATED PARTIES A member of the Company's Board of Directors is of counsel to a law firm which serves as counsel to the Company. Amounts paid to the law firm for the three and nine months ended February 28, 2007 were $0.1 million and $0.7 million, respectively as compared to $0.1 million and $0.5 million for the prior year comparable periods. The Company sold jewelry to a relative of a non-employee member of the Company's Board of Directors. Sales to this Board member for the nine months ended February 28, 2007 were approximately $0.2 million, as compared to $0.4 million for the three and nine month periods ended February 28, 2006. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. - -------------------------------------------------------------------------------- At February 28, 2007, the Company had borrowings totaling approximately $110.2 million outstanding under various credit agreements. The interest rates on these borrowings are variable and therefore the general level of U.S. and foreign interest rates affects interest expense. Increases in interest expense resulting from an increase in interest rates could impact the Company's results of operations. The Company's policy is to take actions that would mitigate such risk when appropriate. These actions include staggering the term and rate of its borrowings to match anticipated cash flows and movements in interest rates. ITEM 4. CONTROLS AND PROCEDURES. - -------------------------------------------------------------------------------- As of February 28, 2007 an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of February 28, 2007. There has been no change in the Company's internal controls over financial reporting during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the Company's internal controls over financial reporting 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------------------------------------------------------------- On May 25, 2006, the Company filed a complaint in the United States District Court for the Southern District of New York against Photoscribe Technologies, Inc. ("Photoscribe"). The complaint asserted infringement of the Company's intellectual property rights by Photoscribe with respect to two of the Company's patents (the "patents-in-suit"). The patents-in-suit have claims relating to methods of, and apparatus for, laser inscribing gemstones, as well as the inscribed gemstones themselves. On November 22, 2006, the Company amended its complaint against Photoscribe to include the Gemological Institute of America (the "GIA") as a co-defendant. As of February 1996, the Company and the GIA entered into an exclusive United States inscription agreement (except for the Company's own use) with respect to certain intellectual property, which is owned by the Company relating to certain laser inscription equipment and methods (the "Inscription Agreement") and which includes the patents-in-suit. The GIA has purportedly terminated the Inscription Agreement as of July 31, 2006 under its terms. The GIA then began to commercially use Photoscribe equipment to inscribe gemstones, thus providing the basis to include the GIA in the suit. In addition to the same charges of patent infringement that were originally made against Photoscribe, the amended complaint also charges the GIA with breach of the exclusive license agreement prior to its purported termination and breach of a letter agreement by which GIA was to maintain the Company's equipment that it had been using. The amended complaint further charges Photoscribe with tortious interference with the Company's business relationship with the GIA. In the Photoscribe-GIA litigation the Company seeks injunctive relief, as well as damages, including inscription fees and lost profits based on lost sales and the value added to inscribed gemstones by reason of Photoscribe's and the GIA's use of infringing systems. Photoscribe and the GIA have answered the amended complaint and have filed counterclaims alleging non-infringement and invalidity of the patents-in-suit. The Company intends to continue to pursue its amended complaint against Photoscribe and the GIA, and to defend against their counterclaims. In July 2006, the Company filed a complaint against the GIA in Supreme Court of the State of New York, County of New York, asserting improper termination of the Inscription Agreement and seeking a declaratory judgment confirming the Company's interpretation of the Inscription Agreement. A subsequent decision by the court denied the Company's motion for a preliminary injunction against the GIA. The Company withdrew this complaint on October 16, 2006 without prejudice. On September 1, 2006, Fifth Avenue Group, LLC ("Fifth Avenue"), a stockholder of the Company, filed a Complaint for a Declaratory Judgment and Other Relief in the Supreme Court of the State of New York, County of New York, against the Company and Mellon Investor Services. The Complaint seeks a declaratory judgment that 1,180,000 shares of the Company's stock purchased by Fifth Avenue from the Company in a private sale in January 2002 are not "restricted stock" pursuant to Rule 144(k) of the Securities Exchange Act of 1934 and that any subsequent purchaser of such shares would not be subject to an irrevocable proxy granted to Messrs. Maurice and Leon Tempelsman by Fifth Avenue in connection with the private sale. The Company intends to vigorously pursue all defenses and counterclaims available to it. 21 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. - -------------------------------------------------------------------------------- (c) Issuer Purchase of Equity Securities On April 11, 2007, the Company adopted a resolution to continue to purchase in the open market, at any time and from time to time during the fiscal year ending May 31, 2008, shares of the Company's common stock with an aggregate value not to exceed $2.0 million. The Company made no market purchases during the nine months ended February 28, 2007. ITEM 5. OTHER INFORMATION - -------------------------------------------------------------------------------- As noted above under the section "Legal Proceedings" the GIA has purported to terminate the Inscription Agreement with the Company as of July 31, 2006. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------------- (a) Exhibits (31) Rule 13a - 14(a) / 15d - 14 (a) Certifications (32) Section 1350 Certifications (b) Reports on Form 8-K None 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LAZARE KAPLAN INTERNATIONAL INC. By /s/ William H. Moryto -------------------------------- William H. Moryto Vice President and Chief Financial Officer Dated: April 13 , 2007 --------------- 23 EX-31 2 c47946_ex31.txt EXHIBIT 31 CERTIFICATIONS REQUIRED TO BE FILED BY RULE 13a-14(a) I, Leon Tempelsman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Lazare Kaplan International Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: April 13, 2007 By: /s/ Leon Tempelsman -------------------------- Leon Tempelsman (Chief Executive Officer) CERTIFICATIONS REQUIRED TO BE FILED BY RULE 13a-14(a) I, William H. Moryto, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Lazare Kaplan International Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: April 13, 2007 By: /s/ William H. Moryto --------------------------- William H. Moryto (Chief Financial Officer) EX-32 3 c47946_ex32.txt EXHIBIT 32 CERTIFICATIONS REQUIRED BY RULE 13a-14(b) TO BE FURNISHED BUT NOT FILED Certifications Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Lazare Kaplan International Inc. (the "Company") on Form 10-Q for the period ended February 28, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Leon Tempelsman and William H. Moryto, Chief Executive Officer and Vice President and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Date: April 13, 2007 /s/ Leon Tempelsman /s/ William H. Moryto ------------------------------- ---------------------------- Leon Tempelsman William H. Moryto (Chief Executive Officer) (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----