-----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, PkbvCPpCKqSe/qgNYpGekcCZWD6X1aeq0jeaUqNIsHd1AtcoBjJfyA7biB4G4C4M fX2lQcqp4RMCEJdjuoD2pg== 0000950117-01-501080.txt : 20010829 0000950117-01-501080.hdr.sgml : 20010829 ACCESSION NUMBER: 0000950117-01-501080 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20010531 FILED AS OF DATE: 20010828 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07848 FILM NUMBER: 1725383 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-K 1 a31260.txt LAZARE KAPLAN INTERNATIONAL FORM 10-K 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-7848 LAZARE KAPLAN INTERNATIONAL INC. (Exact name of registrant as specified in its charter) Delaware 13-2728690 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 529 Fifth Avenue, New York, NY 10017 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 972-9700 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock ($1 par value) American Stock Exchange Preferred Share Purchase Rights American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of August 2, 2001, 7,367,691 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 $35,364,917. DOCUMENTS INCORPORATED BY REFERENCE 2001 definitive proxy statement to be filed with the Commission - incorporated by reference into Part III. 2001 Annual Report to Stockholders for the fiscal year ended May 31, 2001 to be filed with the Commission-incorporated by reference into Parts II and IV. Part 1 Item 1. Description of Business The Company Lazare Kaplan International Inc. ("the Company") was incorporated in 1972 under the laws of the state of Delaware as the successor to a business which was founded by Mr. Lazare Kaplan in 1903. The Company is engaged in the cutting, polishing and selling of ideally proportioned diamonds which it markets internationally under the brand name "Lazare Diamonds'r'". Ideally proportioned diamonds are distinguished from non-ideal cut ("commercial") diamonds by the symmetrical relationship of their facets, which 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 which are cut and polished at its facility in Puerto Rico. In addition, through a cooperative agreement with the largest Russian diamond mining company, the Company cuts and polishes commercial diamonds at three diamond cutting facilities in Russia which it markets to wholesalers, distributors and, to a growing extent, retail jewelers. All rough stones purchased by the Company are either selected for manufacturing or resold as rough diamonds in the marketplace. The Company believes that the combination of its cutting and polishing operations and its trading operations enables the Company to purchase larger quantities of rough diamonds from which it may select those rough diamonds best suited for the Company's current needs. The Company's marketing strategy in the selling of Lazare Diamonds is directed primarily toward quality conscious consumers throughout the United States, South America, the Far East and Europe. The Company focuses its distribution efforts for Lazare Diamonds on selectivity with a view towards helping retailers who carry the product maintain a competitive advantage. Lazare Diamonds can be found at some of the most prestigious jewelry stores around the world, including those with international reputations and those known only in their communities as being the highest quality retail jewelers. This strategy helps ensure that the Company's product is presented in an environment consistent with its superior quality and image. The Company also sells to certain jewelry manufacturers and diamond wholesalers. The Company has developed a comprehensive grading system which, when coupled with the "ideal cut" standard, allows jewelers to order inventory by category rather than through the more cumbersome process of visual selection. In addition, the Company designs, manufactures (through independent contractors) and sells a line of high quality jewelry which features Lazare Diamonds. An important element of the Company's strategy is the promotion of the Lazare Diamond brand name. Every Lazare Diamond bears a laser inscription on its outer perimeter, invisible to the naked eye, containing the Lazare Kaplan logo and an identification number unique to the stone. The laser signature also allows consumers to register their Lazare Diamonds with the Company under its program, The Lazare Diamond Registry'r', thereby providing proof of ownership in case of loss or theft. One of the Company's important suppliers of rough diamonds is the Diamond Trading Company ("DTC"), an affiliate of De Beers Centenary AG, a Swiss company ("De Beers"). Based on published reports, the Company believes that the DTC sells approximately 60% of the value of current 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, the Company has an office in Antwerp to supplement its rough diamond needs by secondary market purchases and has entered into relationships with other primary source suppliers. The Company believes that its success in maintaining quantities and qualities of polished inventory that best meet its customers' needs is achieved through its ability to fully integrate its diverse rough and polished diamond sources. The Company currently operates four manufacturing facilities. The Company's domestic manufacturing operation, located in Puerto Rico, is believed by the Company to be the largest diamond cutting facility in the United States. The Company believes its work force in Puerto Rico is the most highly skilled in the world producing ideal cut diamonds. This facility generally produces polished diamonds having weights of 1/5 of a carat and greater. The Company operates three manufacturing facilities in Russia. These facilities are conducted pursuant to agreements with AK ALROSA of Russia. Two of the facilities are located in Moscow and the third in Barnaul. All three facilities are currently operational. 2 Diamond Supply The Company's overall revenues are, in part, dependent upon the availability of rough diamonds, the world's known sources of which are highly concentrated. Based upon published reports, the Company believes that Angola, Australia, Botswana, Brazil, Canada, Ghana, Guinea, Ivory Coast, Namibia, Republic of the Congo, Russia, Sierra Leone and South Africa account for more than 90% of present world rough gem diamond production. The Diamond Trading Company ("DTC"), which is affiliated with De Beers, is the primary world-wide marketing mechanism of the rough diamond industry. The DTC historically has sought to maintain an orderly and stable market for diamonds by regulating the quantity and selection of rough diamonds that reach the market. This was 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 DTC are made in London to a select group of clients ("sightholders") which, according to published reports, number approximately 125, including the Company. Based upon published reports, the Company believes that approximately 60% of the world's current rough diamond output is sold by the DTC and its affiliated companies. In order to maintain their purchasing relationship, the DTC's clients have traditionally been expected to purchase 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. Throughout 1999 and 2000, the DTC conducted a strategic review of its overall business model. In July 2000, the DTC announced significant changes in its approach to rough diamond marketing. In brief, the DTC stated that it will stop open market purchases and alter its market control and pricing policies. Henceforth, the DTC has said it will focus on selling its own mining productions through its "supplier of choice" marketing programs. These policy changes are intended to modernize business practices within the industry, shorten channels of distribution, lower working diamond stocks, supply clients with downstream distribution and encourage additional investment in marketing and advertising programs. The Company believes it is well positioned to benefit from these changes in the DTC's approach to diamond marketing. However, there can be no assurance that this policy change will not have a material adverse effect on the Company's operations. In August 2001 the European Commission issued a statement of objections which identify a number of restrictions and trading conditions in the Supplier of Choice agreement which appear to violate European competition law, and which can therefore not benefit from exemption under Article 81(3). A Statement of Objections is a preliminary step in antitrust proceedings which does not prejudge the Commission's final decision. At this point, no conclusion can be reached by the Company as to the ultimate outcome of the Commission's ruling. 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 the Government of Angola. The agreement entitled the Company to establish buying offices throughout Government controlled areas of Angola, the first of which was set up during 1995 in Luanda, the capital of Angola. The agreement had a term of five years ending on December 31, 3 1999. The agreement has not been renewed and operations have ceased. 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. 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 of qualifying diamonds without reducing their all-natural content. The process, which was developed 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 a unique brand name and identification number. In December 1999, POL completed the test marketing of these diamonds in the United States. After careful study, a brand name, Bellataire'TM', was selected for the consumer launch. The Bellataire diamond is being offered for sale to U.S. retailers as of June 2000. The Company believes that it has good relations with its suppliers, that its trade reputation and established customer base will continue to assure access to primary sources of diamonds and that its sources of supply are sufficient to enable the Company to meet its present and foreseeable needs. However, the Company's sources of supply could be affected by political and economic developments in producing countries over which the Company has no control. While the Company believes that alternative sources of supply may be available, any significant disruption of the Company's access to its primary source suppliers could have a material adverse effect on its ability to purchase rough diamonds. The Company has rough diamond supply arrangements in Russia for the cutting and polishing of diamonds in Russia. See "Cutting and Polishing". As a concerned member of the diamond industry and global community at large, the Company fully supports a policy which prohibits the purchase of diamonds illicitly seized and sold by rebel forces in Angola, Sierra Leone, and the Democratic Republic of the Congo. As it has in the past, the Company will continue to condemn trading in illicit diamonds, a position which reflects the Company's leadership in the industry. Furthermore, the Company fully complies with and supports the resolutions adopted by the United Nations as well as concerned regional and international governments and various industry trade associations in attempting to isolate and eliminate the trade in illicit stones. Cutting and Polishing 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 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 $1.6 billion, accounting for approximately 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. In March 1999 (in furtherance of a Memorandum of Understanding signed by the Export-Import Bank of the United States ("Eximbank"), ALROSA and the Company) the Company and ALROSA entered into a second agreement (the "ALROSA II Agreement") to expand their relationship in the cutting, polishing and marketing of rough gem diamonds. Under the terms of the ALROSA II Agreement, the Company and ALROSA agreed to refurbish two additional diamond cutting facilities (both of which are now fully operational). These facilities are staffed by Russian technicians and jointly managed and supervised by the Company and ALROSA personnel. ALROSA has agreed to supply up to $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 4 polished stones produced at these facilities during the fourth quarter of fiscal 1999. These facilities have the capacity to cut and polish in excess of $150 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 deduction of rough diamond cost, generally will be shared equally with ALROSA. These agreements do not require the Company to advance funds for the purchase of rough diamonds. The ALROSA I Agreement served as a long-term off-take arrangement to secure the repayment of $62 million of financing which ALROSA received from a United States commercial bank guaranteed by the Export-Import Bank of the United States ("Eximbank") for the purchase by ALROSA of U.S. manufactured mining equipment. This equipment was used by ALROSA to increase production in its diamond mines. 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 for an additional several hundred million dollars. The first tranche of Eximbank financing secured by the ALROSA II agreement was closed in May 2001. These guaranties will allow ALROSA to continue purchasing U.S. manufactured mining equipment and expand mining production. 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. 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 current world rough diamond output, the DTC can exert significant control over the pricing of rough and polished diamonds by adjusting the quantity and pricing of rough diamonds it supplies to the marketplace. Rough diamond prices established by the DTC have been characterized historically by steady increases over the long term; however, prices in the secondary market have experienced a greater degree of volatility, particularly during the late 1970's. Traditionally, the Company has been able to pass along such price increases to its customers. From time to time, however, the Company has absorbed these price increases in the short term to maintain an orderly pricing relationship with its customers. This has, in the past, caused temporary adverse effects on the Company's earnings. However, a large rapid increase in rough diamond prices could materially adversely affect the Company's revenue and operating margins if the increased cost of rough diamonds could not be passed along to its customers in a timely manner. According to published reports, during 1995 there was an emergence of a two-tier market for rough 5 diamonds. The first tier is comprised of better quality rough diamonds, for which the DTC attempts 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. However, a significant decrease in the price of better quality rough diamonds could materially adversely affect the Company's revenues, operating margins and inventory value. 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 and inventory utilization programs. Marketing, Sales and Distribution Marketing Strategy The Company's sales strategy is directed primarily toward quality conscious consumers throughout the United States, South America, the Far East, the Middle East and Europe. The Company focuses its distribution efforts for Lazare Diamonds on selectivity with a view to helping retailers who carry the product maintain a competitive advantage. Lazare Diamonds can be found at some of the most prestigious jewelry stores around the world, including both those with international reputations and those recognized only in their local communities as being the highest quality retail jewelers. This strategy helps ensure that the Company's product is presented in an environment consistent with its superior quality and image. The Company also sells to certain jewelry manufacturers and diamond wholesalers. The Company has developed a comprehensive grading system for its diamonds which, when coupled with the "ideal cut" standard, allows jewelers to order inventory by category rather than through the more cumbersome process of visual selection. In addition, the Company designs, manufactures (through independent contractors) and sells a line of high quality jewelry that features Lazare Diamonds. A key element of the Company's strategy is the promotion of the Lazare Diamond brand name directly to consumers. The Company is able to market its diamonds under a brand name to retailers because (a) the ideal cut differentiates the Company's diamonds from commercial diamonds in the marketplace and (b) each Lazare Diamond is inscribed with the Company's logo and identification number using the Company's patented laser inscription process, thus authenticating the diamonds. The Company holds domestic and various international patents for this process. In addition, in August 1999, a U.S. patent was issued to the Company for a new and improved laser inscription process. The Company also has international patents-pending for this process. 6 The Company's decision to pursue the brand name strategy is reinforced by two factors - a rising trend among informed consumers to purchase quality, brand name products, and the need among upscale jewelers to set themselves apart in an increasingly competitive market by carrying and promoting a highly differentiated product. Building awareness and acceptance of the Lazare Diamond brand name is accomplished through a comprehensive marketing program which includes sales training, cooperative advertising, sales promotion and public relations. A wide assortment of sales promotion materials has been designed to facilitate jewelers' sales of the Company's diamonds and fine jewelry line to consumers. Public relations events are offered which help build traffic in retail stores. The Company has begun a new program to build both free standing and in-counter boutiques in the stores of a select group of its retail clients. The Company believes these marketing programs have been and will continue to be instrumental in increasing sales. The Company has no current plans to sell its diamonds directly to consumers and intends to continue concentrating its marketing efforts towards the quality retail jeweler. The Lazare Diamond Registry program has been established by the Company to enable consumers to register their Lazare Diamonds with the Company using the laser inscribed identification number, thereby providing proof of ownership in case of loss or theft. The Company has developed its own E-commerce site. This site directly links the Company to its retailers, which serves to significantly strengthen the ties with its retail client base. Sales and Distribution While the purchase and sale of rough diamonds is concentrated among relatively few parties, industry wide retailing of polished diamonds occurs through over 40,000 jewelry stores in the United States, over 25,000 retailers in Japan and over 60,000 retail stores in Europe. The Company's sales efforts for its polished diamonds are directed primarily toward the fine quality segment of these retailers (the majority of which are independently owned and operated), wholesalers and distributors and, to a lesser extent, to jewelry manufacturers. Full time regional sales representatives located throughout the United States, 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 in-house sales and service department. Sales to certain of the Company's largest accounts are handled by headquarters personnel. Most of the Company's major accounts are customers of long standing. The Company has been actively working to expand its foreign business activities, particularly in the Far East countries of Japan, Hong Kong, Singapore, Taiwan, Korea and Malaysia and recently throughout Latin America, Italy and the Middle East. After working with its former distributor for 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 realigned its position with its retail and wholesale customers and shortened its channels of distribution. In addition, this realignment 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 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. 7 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:
Years ended May 31, ------------------------------- 2001 2000 1999 ---- ---- ---- Percentage of Net Sales to Customers United States 28% 23% 31% Far East 9% 8% 8% Europe, Israel & other 63% 69% 61% ---- ----- ---- 100% 100% 100% ==== ==== ====
The world's rough diamond trading markets are primarily located in Belgium, India, and Israel; therefore, the majority of the Company's rough diamond sales have been transacted with foreign customers. In 1999, 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 2000 and in 2000 as compared to 2001. The Company believes that due to the possible international resale of diamonds by its customers, the above percentages may not represent the final location of retail sales of its product. All of the Company's foreign sales, other than those made in Japan, are denominated in United States dollars. The profitability of foreign sales of either polished or rough diamonds is consistent with that of domestic sales of similar merchandise. Competition The polished and rough diamond business is highly competitive. While the Company believes that it has achieved a reputation as a leading cutter and distributor of high quality diamonds, it faces competition in sales to its customers in the United States and abroad from many other suppliers. In addition, the Company sells rough diamonds in the competitive world market. A substantial number of cutters and polishers and traders, some of which the Company believes to be larger or to have greater financial resources than the Company, sell diamonds of all qualities to the Company's customers. The Company believes there are significant barriers to entry by potential competitors into the business of manufacturing and distributing 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, 2001, the Company had 205 full-time employees including 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 workers. The Company provides paid vacations, sick leave, group life, disability, hospitalization and medical insurance for its employees. The Company has a 401(k) retirement plan for its U.S. and Puerto Rico employees. The Company believes that it has satisfactory relationships with its employees. None of the Company's employees is represented by a union. 8 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 12,650 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 $35,000) . The Company owns a 330 square meter office in Antwerp, Belgium, a portion of which is devoted to sales rooms. The Company leases office space in Hong Kong for a term expiring April 30, 2002 at an annual rental rate of 481,200 Hong Kong dollars (approximately $62,000). The Company leases office space in Tokyo for a term expiring August 31, 2002 at an annual rental rate of 18,200,000 Japanese Yen (approximately $170,000). The Company believes that its facilities are fully equipped and adequate to fulfill its operating and manufacturing needs. Item 3. Legal Proceedings The Company is not involved in any significant legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders None Executive Officers of the Company The following table sets forth information regarding executive officers of the Company.
NAME POSITION AGE - ---- -------- --- Maurice Tempelsman Chairman of the Board 72 Leon Tempelsman Vice Chairman of the 45 Board and President Robert Speisman Senior Vice President - Sales 47 William H. Moryto Vice President and Chief Financial Officer 43
All officers were elected by the Board of Directors at its meeting following the Annual Meeting of Stockholders held in November 2000. All officers hold office until the Board of Directors meeting following the next Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. Maurice Tempelsman is the Chairman of the Board and a director of the Company and a general partner of Leon Tempelsman & Son ("LTS"), a partnership with interests in the international diamond and mining industries. 9 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. 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. William H. Moryto has been Vice President and Chief Financial Officer since May 2000. Prior to joining the Company in May 2000, he was Vice President and Chief Financial Officer of Calvin Klein Underwear & Accessories Inc., an apparel company. From 1997 through 1999 he was Vice President and Chief Financial Officer of Guerlain Inc., a fragrance and cosmetics company. From 1996 through July 1997 he served as Chief Financial Officer of Von Holtzbrinck Publishing Inc., a publishing company. Prior thereto, Mr. Moryto was a senior manager with Ernst & Young LLP, an auditing and consulting firm, where he was employed from 1983 through 1995. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock (par value $1 per share) is traded on the American Stock Exchange. Market prices and other information with respect to the Company's common stock are hereby incorporated by reference to the Company's Annual Report. Item 6. Selected Financial Data Selected financial data are hereby incorporated by reference to the Company's Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations is hereby incorporated by reference to the Company's Annual Report. Item 7A. Quantitative and Qualitative Disclosure About Market Risk At May 31, 2001, the Company had borrowings totaling approximately $51.1 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. 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, 2001. (iii) Consolidated Balance Sheets as at May 31, 2001 and May 31, 2000. 10 (iv) Consolidated Statements of Stockholder's Equity for each of the three years in the period ended May 31, 2001. (v) Consolidated Statements of Cash Flows for each of the three years in the period ended May 31, 2001. (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, 2001. Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. The response to this portion of Item 14 is set forth in Item 8 of Part II hereof. 2. Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended May 31, 2001. All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. 11 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES ----------------- SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS ---------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- Additions ----------------------------- Balance at Charged to Charged to Balance at beginning costs and other accounts Deductions end Description of period expenses describe describe of period ----------- ---------- ---------- -------------- ---------- ---------- YEAR ENDED MAY 31, 2001: Allowance for doubtful accounts $1,065,118 $382,000 $ - $344,118(A) $1,103,000 ---------- -------- ---- -------- ---------- YEAR ENDED MAY 31, 2000: Allowance for doubtful accounts $ 202,056 $874,000 $ - $ 10,938(A) $1,065,118 ---------- -------- ---- -------- ---------- YEAR ENDED MAY 31, 1999: Allowance for doubtful accounts $ 143,120 $ 60,000 $ - $ 1,064(A) $ 202,056 ---------- -------- ---- -------- ----------
(A) Amounts written off. 12 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) - -------------------------------------------------------------------------------- (b) Reports on Form 8-K - No reports on Form 8-K were filed during the fourth quarter of the fiscal year ending May 31, 2001. (c) Exhibits (3) Articles of Incorporation and Bylaws (a) Certificate of Incorporation, as amended - incorporated herein by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1987 filed with the Commission on August 26, 1987, as amended on January 14, 1988. (b) Certificate of Amendment of Certificate of Incorporation filed with the Secretary of State of the State of Delaware on November 1, 1990 - incorporated herein by reference to Exhibit (3)(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1992 filed with the Commission on August 28, 1992. (c) Certificate of Amendment of the Certificate of Incorporation filed with the Secretary of State of the State of Delaware on November 6, 1997 - incorporated by reference to Exhibit 4.1(a) (iii) to Company's Registration Statement for the Lazare Kaplan International Inc. 1997 Long Term Stock Incentive Plan on Form S-8 filed with the Commission on November 14, 1997. (d) Certificate of Designations of Series A Junior Participating Preferred Stock filed with the Secretary of State of the State of Delaware on November 6, 1997 - incorporated by reference to Exhibit 4.1(b) to the Company's Registration Statement on Form S-8 filed with the Commission on November 14, 1997. (e) By-laws, as amended - incorporated herein by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1987 filed with the Commission on August 26, 1987, as amended on January 14, 1988. (10) Material Contracts (a) Lazare Kaplan International Inc. Amended and Restated 1988 Stock Option Incentive Plan - incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the Commission on November 5, 1990. (b) Lazare Kaplan International Inc. 1997 Long Term Stock Incentive Plan - incorporated herein by reference to Exhibit A to the Company's proxy statement for its Annual Meeting of Stockholders held on November 5, 1997 filed with the Commission on September 17, 1997. (c) Form of Incentive Stock Option Agreement for options granted pursuant to the Lazare Kaplan International Inc. 1997 Long Term Stock Incentive Plan - incorporated herein by reference to Exhibit 4.5(a) to the Company's Registration Statement on Form S-8 filed with the Commission on November 14, 1997. (d) Form of Non-Qualified Stock Option Agreement for options granted pursuant to the Lazare Kaplan International Inc. 1997 Long Term Stock Incentive Plan - incorporated herein by reference to Exhibit 4.5(a) to the Company's Registration Statement on Form S-8 filed with the Commission on November 14, 1997. (e) 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.
13 (f) 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. (g) 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. (h) Third Amendment and Agreement to Loan Agreement, dated December 8, 1999, of the Loan Agreement, dated May 14, 1996, among Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank Leumi USA. (i) Fourth Amendment and Agreement to Loan Agreement, dated June 2, 2000, to the Loan Agreement, dated May 14, 1996, among Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank Leumi USA. (j) Fifth Amendment and Agreement to Loan Agreement, dated August 31, 2000, to the Loan Agreement, dated May 14, 1996, among Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank Leumi USA. (k) Sixth Amendment and Agreement to Loan Agreement, dated November 2, 2000, to the Loan Agreement, dated May 14, 1996, among Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank Leumi USA. (l) Agreement, dated as of December 14, 2000, between Antwerpse Diamantbank NV and Lazare Kaplan Belgium, N.V. relating to $30,000,000 (U.S.) facility. (m) Agreement, dated as of December 14, 2000, between Antwerpse Diamantbank NV and Lazare Kaplan Belgium, N.V. relating to $10,000,000 (U.S.) facility. (n) Guaranty, dated as of September 2, 1999, from Lazare Kaplan International Inc. in favor of Antwerpse Diamantbank NV. 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, 2000 filed with the Commission on August 28, 2000. (o) Letter Agreement, dated as of June 5, 2000, between Fleet Bank, N.A. and Lazare Kaplan International Inc. regarding Interest Rate Swap. Incorporated herein by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2000 filed with the Commission on August 28, 2000. (p) Credit Facility Agreement, dated as of November 29, 2000, between ABN Amro Bank N.V., Tokyo branch, Lazare Kaplan Japan Inc., and Lazare Kaplan International Inc. (q) 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). (r) Cooperation Agreement, dated March 23, 1999 between the Company and AK Almazi Rossii Sakha - incorporated herein by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1999 filed with the Commission on August 27, 1999 (certain portions of this agreement have been omitted pursuant to a request for confidential treatment). (s) Processing Agreement, dated as of February 20, 1999, between Pegasus Overseas Ltd. and a wholly-owned subsidiary of General Electric Company - incorporated herein by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1999 filed with the Commission on August 27, 1999 (certain portions of this agreement have been omitted
14 pursuant to a request for confidential treatment). (t) 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. (u) 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. (v) 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) 2001 Annual Report to Security Holders - incorporated herein by reference to the Company's 2001 Annual Report to Stockholders to be filed with the Commission. (21) Subsidiaries (23) Consent of Ernst & Young LLP
15 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LAZARE KAPLAN INTERNATIONAL INC. By /s/ William H. Moryto ---------------------- William H. Moryto, Vice President and Chief Financial Officer Dated: August 28, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Maurice Tempelsman Chairman of the August 28, 2001 - ---------------------------- Board of Directors (Maurice Tempelsman) /s/ Leon Tempelsman Vice Chairman of the August 28, 2001 - ---------------------------- Board of Directors and (Leon Tempelsman) President (principal executive officer) /s/ Lucien Burstein Director August 28, 2001 - ---------------------------- (Lucien Burstein) /s/ Myer Feldman Director August 28, 2001 - ---------------------------- (Myer Feldman) /s/ Robert A. Del Genio Director August 28, 2001 - ---------------------------- (Robert A. Del Genio) /s/ Robert Speisman Director August 28, 2001 - ---------------------------- (Robert Speisman) /s/ William H. Moryto Vice President and August 28, 2001 - ---------------------------- Chief Financial Officer (William H. Moryto) (principal financial and accounting officer)
16 EXHIBIT INDEX 10(h) Third Amendment and Agreement to Loan Agreement, dated December 8, 1999, of the Loan Agreement, dated May 14, 1996, among Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank Leumi USA. 10(i) Fourth Amendment and Agreement to Loan Agreement, dated June 2, 2000, to the Loan Agreement, dated May 14, 1996, among Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank Leumi USA. 10(j) Fifth Amendment and Agreement to Loan Agreement, dated August 31, 2000, to the Loan Agreement, dated May 14, 1996, among Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank Leumi USA. 10(k) Sixth Amendment and Agreement to Loan Agreement, dated November 2, 2000, to the Loan Agreement, dated May 14, 1996, among Lazare Kaplan International Inc., Fleet Bank, N.A. and Bank Leumi USA. 10(l) Agreement, dated as of December 14, 2000, between Antwerpse Diamantbank NV and Lazare Kaplan Belgium, N.V. relating to $30,000,000 (U.S.) facility. 10(m) Agreement, dated as of December 14, 2000, between Antwerpse Diamantbank NV and Lazare Kaplan Belgium, N.V. relating to $10,000,000 (U.S.) facility. 10(p) Credit Facility Agreement, dated as of November 29, 2000, between ABN Amro Bank N.V., Tokyo branch, Lazare Kaplan Japan Inc., and Lazare Kaplan International Inc. (13) 2001 Annual Report to Security Holders - incorporated herein by reference to the Company's 2001 Annual Report to Stockholders to be filed with the Commission. (21) Subsidiaries (23) Consent of Ernst & Young LLP
17 STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as............................... 'TM' The registered trademark symbol shall be expressed as.................... 'r' The Japanese Yen sign shall be expressed as.............................. 'Y' EX-10 3 ex10-h.txt EXHIBIT 10(H) SIGNED THIRD AMENDMENT AND AGREEMENT TO LOAN AGREEMENT This Third Amendment and Agreement to Loan Agreement is made as of the ______ day of ____________, 1999, by and between FLEET BANK, N. A., a national banking association ("Fleet"); and BANK LEUMI USA, formerly known as Bank Leumi Trust Company of New York, a New York banking corporation ("Bank Leumi"; Fleet and Bank Leumi are hereinafter referred to together as the "Banks"); and LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the "Borrower"). WITNESSETH THAT: WHEREAS, Fleet has extended a term loan to Lazare Kaplan Japan, Inc., a corporation organized under the laws of Delaware in the sum of One Billion One Hundred Million Japanese Yen ('Y'1,100,000,000) (the "Lazare Kaplan Japan Loan"); and WHEREAS, the Borrower has guaranteed the payment and performance of the Lazare Kaplan Japan Loan and has secured its guaranty by pledging the sum of Ten Million Ten Thousand Ten and 01/100 Dollars ($10,010,010.01) to Fleet (the "Pledged Collateral"); and WHEREAS, in order to account for the foreign currency risk of the Lazare Kaplan Japan Loan which was made in Japanese Yen but secured by U.S. Dollars, the Banks and the Borrower desire to amend the Loan Agreement dated as of May 14, 1996, as amended from time to time (as amended, the "Loan Agreement") between the Banks and the Borrower, in order to reduce the availability of the revolving loan extended thereunder by the amount that Fleet has determined is the foreign currency risk related to the Lazare Kaplan Japan Loan. NOW, THEREFORE, for value received, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. All capitalized terms used herein without definition shall have the definitions assigned by the Loan Agreement. 2. Effective the date hereof, Article One of the Loan Agreement is amended by adding new definitions for "Lazare Kaplan Japan Loan" and "Lazare Kaplan Japan Loan Foreign Currency Risk" to read in its entirety as follows: Lazare Kaplan Japan Loan means the term loan extended to Lazare Kaplan Japan, Inc., a corporation organized under the laws of Japan, in the sum of One Billion One Hundred Million Japanese Yen ('Y'1,100,000,000) by Fleet. Lazare Kaplan Japan Loan Foreign Currency Risk means twenty-five percent of the U.S. Dollar equivalent of the outstanding principal balance of the Lazare Kaplan Loan. 3. Effective the date hereof, the definition of "Commitment" set forth in Article 1 of the Loan Agreement is amended in its entirety as follows: Commitment: as to each Bank, the amount set forth opposite such Bank's name on the signature page hereof under the caption "Commitment", as such amount is subject to reduction in accordance with the terms hereof, provided however, in the case of Fleet, the Lazare Kaplan Japan Foreign Currency Risk shall be deemed to include indebtedness incurred pursuant to Fleet's Commitment. 4. The Banks and the Borrower hereby acknowledge and agree that the Lazare Kaplan Japan Loan Foreign Currency Risk shall be deemed to be indebtedness of the Borrower to the Banks under the Loan Agreement for all purposes of determining the amount of the Loans outstanding under the Loan Agreement and for determining the utilization of the Total Commitment and each Bank's respective Commitment. The Lazare Kaplan Japan Loan Foreign Currency Risk shall not be deemed to be indebtedness under the Loan Agreement for purposes of imposing an interest charge thereon. 5. Bank Leumi acknowledges that it has no security interest, claim, rights or other interest in or to the Pledged Collateral which secures the Borrower's Guaranty of the Lazare Kaplan Loan and hereby disclaims any security interest, claim, rights or other interest in or to the Pledged Collateral. 6. All references to the "Loan Agreement" in the Loan Agreement, the Notes and in all documents executed or delivered in connection with the Loan Agreement shall from and after the effective date hereof refer to the Loan Agreement, as amended hereby. 7. Except as amended hereby, the Loan Agreement shall remain in full force and effect and is in all respects hereby ratified and affirmed. 8. The Borrower jointly and severally covenant and agree to pay all out-of-pocket expenses, costs and charges incurred by the Banks (including reasonable fees and disbursements of counsel) in connection with the preparation and execution of this Third Amendment and Agreement to Loan Agreement. IN WITNESS WHEREOF, the undersigned parties have caused this Third Amendment and Agreement to Loan Agreement to be executed by their duly authorized officers as of the date first above written. WITNESS: LAZARE KAPLAN INTERNATIONAL INC. _________________________________ By:________________________________ Title: -2- Commitment (including the indebtedness FLEET BANK, N.A. Under the Lazare Kaplan Japan Foreign Currency Risk) $24,000,000 By:_________________________________ Title: By:_________________________________ Title: Commitment: BANK LEUMI USA $16,000,000 By:_________________________________ Title: By:_________________________________ Title: Acknowledged and Agreed to: LAZARE KAPLAN EUROPE INC. By:_________________________________________ Title: LAZARE KAPLAN BELGIUM, N.V. By:_________________________________________ Title: LAZARE KAPLAN GHANA LTD. By:_________________________________________ Title: SUPREME GEMS N.V. By:_________________________________________ Title: -3- EX-10 4 ex10-i.txt EXHIBIT 10(I) FOURTH AMENDMENT AND AGREEMENT TO LOAN AGREEMENT This Fourth Amendment and Agreement to Loan Agreement is made as of the ______ day of ____________, 2000, by and between FLEET BANK, N. A., a national banking association ("Fleet"); and BANK LEUMI USA, formerly known as Bank Leumi Trust Company of New York, a New York banking corporation ("Bank Leumi"; Fleet and Bank Leumi are hereinafter referred to together as the "Banks"); and LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the "Borrower"). WITNESSETH THAT: WHEREAS, Fleet has extended a term loan to Lazare Kaplan Japan, Inc., a corporation ("Lazare Kaplan Japan") organized under the laws of Delaware in the sum of One Billion One Hundred Million Japanese Yen ('Y'1,100,000,000) (the "Lazare Kaplan Japan Loan"); and WHEREAS, the Borrower has guaranteed the payment and performance of the Lazare Kaplan Japan Loan and has secured its guaranty by pledging the sum of Ten Million Ten Thousand Ten and 01/100 Dollars ($10,010,010.01) to Fleet (the "Pledged Collateral"); and WHEREAS, in order to account for the foreign currency risk of the Lazare Kaplan Japan Loan which was made in Japanese Yen but secured by U.S. Dollars, the Banks and the Borrower amended the Loan Agreement dated as of May 14, 1996, as previously amended (as amended, the "Loan Agreement") between the Banks and the Borrower, in order to reduce the availability of the revolving loan extended thereunder by the amount that Fleet determined was the foreign currency risk related to the Lazare Kaplan Japan Loan; and WHEREAS, the Borrower and the Banks desire to amend the loan Agreement as a result of a recalculation of the foreign currency risk related to the Lazare Kaplan Japan Loan; and WHEREAS, Lazare Kaplan Japan and Fleet National Bank have entered into ISDA Master Agreement (the "Master Agreement"); and WHEREAS, in order to account for the interest rate risk of the Lazare Kaplan Japan Loan as a result of Lazare Kaplan Japan entering into the Master Agreement, the Banks and the Borrower desire to further amend the Loan Agreement in order to reduce the availability of the revolving loan extended thereunder by the amount that Fleet has determined is the interest rate risk related to the Lazare Kaplan Japan Loan. NOW, THEREFORE, for value received, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. All capitalized terms used herein without definition shall have the definitions assigned by the Loan Agreement. 2. Effective the date hereof, Article One of the Loan Agreement is amended by adding new definitions for "Lazare Kaplan Japan Loan Foreign Currency/Interest Rate Risk" to read in its entirety as follows: Lazare Kaplan Japan Loan Foreign Currency/Interest Rate Risk means the sum of (a) fifteen percent (15%) (or such other percentage as Fleet shall notify Bank Leumi and the Borrower in writing as being the foreign currency risk related to the Lazare Kaplan Japan Loan upon each quarterly principal repayment of the Lazare Kaplan Japan Loan) of the U.S. Dollar equivalent of the outstanding principal balance of the Lazare Kaplan Japan Loan; plus (b) Two Hundred Ninety Thousand Dollars ($290,000) (which is the interest rate risk relating to the Lazare Kaplan Japan Loan as a result of Lazare Kaplan Japan entering into the Master Agreement). 3. Effective the date hereof, the definition of "Commitment" set forth in Article 1 of the Loan Agreement is amended in its entirety as follows: Commitment: as to each Bank, the amount set forth opposite such Bank's name on the signature page hereof under the caption "Commitment", as such amount is subject to reduction in accordance with the terms hereof, provided, however, in the case of Fleet, the Lazare Kaplan Japan Foreign Currency/Interest Rate Risk shall be deemed to be included as indebtedness incurred pursuant to Fleet's Commitment. 4. The Banks and the Borrower hereby acknowledge and agree that the Lazare Kaplan Japan Loan Foreign Currency/Interest Rate Risk shall be deemed to be indebtedness of the Borrower to the Banks under the Loan Agreement for all purposes of determining the amount of the Loans outstanding under the Loan Agreement and for determining the utilization of the Total Commitment and each Bank's respective Commitment. The Lazare Kaplan Japan Loan Foreign Currency/Interest Rate Risk shall not be deemed to be indebtedness under the Loan Agreement for purposes of imposing an interest charge thereon. 5. All references to the "Loan Agreement" in the Loan Agreement, the Notes and in all documents executed or delivered in connection with the Loan Agreement shall from and after the effective date hereof refer to the Loan Agreement, as amended hereby. 6. Except as amended hereby, the Loan Agreement shall remain in full force and effect and is in all respects hereby ratified and affirmed. 7. The Borrower jointly and severally covenant and agree to pay all out-of-pocket expenses, costs and charges incurred by the Banks (including reasonable fees and disbursements of counsel) in connection with the preparation and execution of this Fourth Amendment and Agreement to Loan Agreement. IN WITNESS WHEREOF, the undersigned parties have caused this Fourth Amendment and Agreement to Loan Agreement to be executed by their duly authorized officers as of the date first above written. WITNESS: LAZARE KAPLAN INTERNATIONAL INC. _____________________________________ By:________________________________ Title: -2- Commitment (including the indebtedness FLEET BANK, N.A. under the Lazare Kaplan Japan Foreign Currency/Interest Rate Risk) $24,000,000 By:_____________________________ Title: By:____________________________ Title: Commitment: BANK LEUMI USA $16,000,000 By:____________________________ Title: By:____________________________ Title: Acknowledged and Agreed to: LAZARE KAPLAN EUROPE INC. By:_________________________________________ Title: LAZARE KAPLAN BELGIUM, N.V. By:_________________________________________ Title: LAZARE KAPLAN GHANA LTD. By:_________________________________________ Title: SUPREME GEMS N.V. -3- By:_________________________________________ Title: LAZARE KAPLAN AFRICA, INC. By:_________________________________________ Title: LAZARE KAPLAN JAPAN, INC. By:_________________________________________ Title: -4- EX-10 5 ex10-j.txt EXHIBIT 10(J) FIFTH AMENDMENT AND AGREEMENT TO LOAN AGREEMENT This Fifth Amendment and Agreement to Loan Agreement is made as of the ______ day of ____________, 2000, by and between FLEET BANK, N. A., a national banking association ("Fleet"); and BANK LEUMI USA, formerly known as Bank Leumi Trust Company of New York, a New York banking corporation ("Bank Leumi"; Fleet and Bank Leumi are hereinafter referred to together as the "Banks"); and LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the "Borrower"). WITNESSETH THAT: WHEREAS, Fleet has extended a term loan to Lazare Kaplan Japan, Inc., a corporation ("Lazare Kaplan Japan") organized under the laws of Delaware in the sum of One Billion One Hundred Million Japanese Yen ('Y'1,100,000,000) (the "Lazare Kaplan Japan Loan"); and WHEREAS, the Borrower guaranteed the payment and performance of the Lazare Kaplan Japan Loan and secured its guaranty by pledging the sum of Ten Million Ten Thousand Ten and 01/100 Dollars ($10,010,010.01) to Fleet (the "Pledged Collateral"); and WHEREAS, the Borrower has agreed to assume the obligations under the Lazare Kaplan Japan Loan and will be jointly and severally liable with Lazare Kaplan Japan for the repayment of the Lazare Kaplan Japan Loan; and WHEREAS, in consideration thereof Fleet will release its security interest in the Pledged Collateral and the Borrower will use the proceeds of the Pledged Collateral to repay its obligations to Fleet under the Loan Agreement dated as of May 14, 1996, as amended from time to time (as amended, the "Loan Agreement") between the Banks and the Borrower; and WHEREAS, the Banks and the Borrower desire to amend the Loan Agreement, in order to reduce the availability of the revolving loan extended thereunder by the US Dollar equivalent of the outstanding principal balance of the Lazare Kaplan Japan Loan; NOW, THEREFORE, for value received, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. All capitalized terms used herein without definition shall have the definitions assigned by the Loan Agreement. 2. Effective the date hereof, Article One of the Loan Agreement is amended by adding a new definition for "Lazare Kaplan Japan Loan Indebtedness" to read in its entirety as follows: "Lazare Kaplan Japan Loan Indebtedness means the outstanding principal balance of the Lazare Kaplan Japan Loan from time to time." 3. Effective the date hereof, the definition of "Commitment" set forth in Article 1 of the Loan Agreement is amended in its entirety as follows: "Commitment: as to each Bank, the amount set forth opposite such Bank's name on the signature page hereof under the caption "Commitment", as such amount is subject to reduction in accordance with the terms hereof, provided, however, in the case of Fleet, the Lazare Kaplan Japan Foreign Currency/Interest Rate Risk and the Lazare Kaplan Japan Loan Indebtedness shall be deemed to be included as indebtedness incurred pursuant to Fleet's Commitment." 4. The Banks and the Borrower hereby acknowledge and agree that the Lazare Kaplan Japan Loan Indebtedness shall be deemed to be indebtedness of the Borrower to the Banks under the Loan Agreement for all purposes of determining the amount of the Loans outstanding under the Loan Agreement and for determining the utilization of the Total Commitment and each Bank's respective Commitment. The Lazare Kaplan Japan Loan Indebtedness shall not be deemed to be indebtedness under the Loan Agreement for purposes of imposing an interest charge thereon. 5. Notwithstanding the provisions of Paragraph 2.16(iv) of the Loan Agreement, the Banks agree to the repayments of Loans extended by Fleet to the Borrower under the Loan Agreement by an amount equal to the outstanding principal balance of the Pledged Collateral. 6. Effective the date hereof, the Loan Agreement is amended by adding a new Paragraph 10 entitled "General Provisions" to read in its entirety as follows (in the event of any inconsistency between the Loan Agreement and the provisions of this Paragraph 10, the provisions of this Paragraph 10 shall prevail and govern): "10. General Provisions. 10.1 All payments shall be made by the Borrower at the offices of the Banks herein set forth or such other place as the Banks may from time to time specify in writing in lawful currency of the United States of America in immediately available funds, without counterclaim or setoff and free and clear of, and without any deduction or withholding for, any taxes or other payments. 10.2 All payments shall be applied first to the payment of all fees, expenses and other amounts due to the Banks (excluding principal and interest), then to accrued interest and the balance on account of outstanding principal; provided, however, that after the occurrence of an Event of Default, payments will be applied to the obligations of the Borrower to the Banks as the Banks determines in their sole discretion. 10.3 The Following Business Day Convention shall be used to adjust any relevant date if that date would otherwise fall on a day that is not a Business Day. For the purposed herein, the term Following Business Day Convention shall mean that an adjustment will be made if any relevant date would otherwise fall on a day that is not a Business Day so that the date will be the first following day that is a Business Day. "Business Day" means, in respect of any date that is specified in this Loan Agreement to be subject to adjustment in accordance with the Following Business Day Convention, a day on which commercial banks settle payments in New York, if the payment obligation is calculated by reference to Prime Rate. All payments hereunder shall be adjusted in accordance with the Following Business Day Convention. 10.4 If this Loan Agreement or any payment hereunder becomes due on a day which is not a Business Day (as defined below), the due date of this Loan Agreement or payment shall be extended to the next succeeding Business Day, and such extension of time shall be included in computing interest and fees in connection with such payment. As used herein, "Business Day" shall mean any day other than a Saturday, Sunday or day which shall be in the State of New York a legal holiday or day on which banking institutions are required or authorized to close. -2- 10.5 The Borrower shall pay on demand all expenses of the Banks in connection with the preparation, administration, default, collection, wavier or amendment of loan terms, or in connection with the Banks' exercise, preservation or enforcement of any of their rights, remedies or options hereunder, including, without limitation, fees of outside legal counsel or the allocated costs of in-house legal counsel, accounting, consulting, brokerage or other costs relating to any appraisals or examinations conducted in connection with the loan or any collateral therefor, and the amount of all such expenses shall, until paid, bear interest at the rate applicable to principal hereunder (including any default rate) and be an obligation secured by any collateral. 10.6 The term "Prime Rate" means the variable per annum rate of interest so designated from time to time by Fleet National Bank as its prime rate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any the Borrower. 10.7 Changes in the rate of interest resulting from changes in the Prime Rate shall take place immediately without notice or demand of any kind. 10.8 All computations of interest shall be made on the basis of a three hundred sixty (360) day year and the actual number of days elapsed. 10.9 Upon default (whether or not the Banks have accelerated payment of this Loan Agreement), or after maturity or after judgment has been rendered on this Notes, the Borrower's right to select pricing options shall cease and the unpaid principal of all Advances shall, at the option of the Banks, bear interest at a rate which is four (4) percentage points per annum greater than that which would otherwise be applicable. 10.10 If the entire amount of any required principal and/or interest is not paid in full within ten (10) days after the same is due, the Borrower shall pay to the Banks a late fee equal to five percent (5%) of the required but unpaid payment. 10.11 All agreements between the Borrower and the Banks are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to the Banks for the use or the forbearance of the indebtedness evidenced hereby exceed the maximum permissible under applicable law. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof; provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Loan Agreement shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of the Borrower and the Banks in the execution, delivery and acceptance of this Loan Agreement to contract in strict compliance with the laws of the State of New York from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof or of any of the Loan Documents at the time of performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from circumstances whatsoever the Banks should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced hereby and not to the -3- payment of interest. This provision shall control every other provision of all agreements between the Borrower the Banks. 10.12 The Borrower and, by affirming its Guaranty, the Guarantors hereby grant to the Banks, a continuing lien, security interest and right of setoff as security for all liabilities and obligations to the Banks, whether now existing or hereafter arising, upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of the Banks or any entity under the control of FleetBoston Financial Corporation and its successors and assigns or in transit to any of them. At any time, without demand or notice (any such notice being expressly waived by the Borrower), the Banks may setoff the same or any part thereof and appy the same to any liability or obligation of the Borrower and any Guarantor even though unmatured and regardless of the adequacy of any other collateral securing the Loan. ANY AND ALL RIGHTS TO REQUIRE THE BANKS TO EXERCISE THEIR RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING THEIR RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE BORROWER OR THE GUARANTORS, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. 10.13 THE BORROWER AND THE BANKS MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN ) OR ACTIONS OF ANY PART, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE BANKS RELATING TO THE ADMINISTRATION OF THE LOAN OR ENFORCEMENT OF THE LOAN DOCUMENTS, AND AGREE THAT NEITHER PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, THE BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE BORROWER CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE BANKS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE BANKS WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE BANKS TO ACCEPT THIS LOAN AGREEMENT AND EXTEND THE LOAN FACILITY. 10.14 The Banks may at any time pledge or assign all or any portion of their rights under the loan documents, including any portion of their respective Note, to any of the twelve (12) Federal Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C. 341. No such pledge or assignment or enforcement thereof shall release the Banks from their obligations under any of the loan documents. 10.15 Each of the Banks shall have the unrestricted right at any time or from time to time, and without the Borrower's or any Guarantor's consent, to assign all or any portion of its -4- rights and obligations hereunder to one or more banks or other financial institutions (each, an "Assignee"), and the Borrower and the Guarantors agree that they shall execute, or cause to be executed, such documents, including without limitation, amendments to this Loan Agreement and to any other documents, instruments and agreements executed in connection herewith as the Banks shall deem necessary to effect the foregoing. In addition, at the request of the Banks and any such Assignee, the Borrower shall issue one or more new promissory notes, as applicable, to any such Assignee and, if the applicable Bank has retained any of its rights and obligations hereunder following such assignment, to such Bank, which new promissory notes shall be issued in replacement of, but not in discharge of, the liability evidenced by the promissory note held by such Bank prior to such assignment and shall reflect the amount of the respective commitments and loans held by such Assignee and such Bank after giving effect to such assignment. Upon the execution and delivery of appropriate assignment documentation, amendments and any other documentation required by the Banks in connection with such assignment, and the payment by Assignee of the purchase price agreed to by such Bank, and such Assignee, such Assignee shall be a party to this Loan Agreement and shall have all of the rights and obligations of the Banks hereunder (and under any and all other guaranties, documents, instruments and agreements executed in connection herewith) to the extent that such rights and obligations have been assigned by a Bank pursuant to the assignment documentation between such Bank and such Assignee, and such Bank shall be released from its obligations hereunder and thereunder to a corresponding extent. The Banks may furnish any information concerning the Borrower in their possession from time to time to prospective Assignees, provided that such Bank shall require any such prospective Assignees to agree in writing to maintain the confidentiality of such information. 10.16 Each of the Banks shall have the unrestricted right at any time and from time to time, and without the consent of or notice to the Borrower or the Guarantors, to grant to one or more banks or other financial institutions (each, a "Participant") participating interests in such Bank's obligation to lend hereunder and/or any or all of the loans held by such Bank hereunder. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower, such Bank shall remain responsible for the performance of its obligations hereunder and the Borrower shall continue to deal solely and directly with the Banks in connection with such Bank's rights and obligations hereunder. The Banks may furnish any information concerning the Borrower in their possession from time to time to prospective Participants, provided that the Banks shall require any such prospective Participant to agree in writing to maintain the confidentiality of such information. 10.17 This Loan Agreement and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with the laws of the State of New York (the "Governing State") (excluding the laws applicable to conflicts or choice of law). 10.18 THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS LOAN AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SET FORTH IN THIS LOAN AGREEMENT. THE BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT FORUM. -5- 10.19 This Loan Agreement is intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Loan Agreement. All prior or contemporaneous promises, agreements and understandings, whether oral or written, are deemed to be superseded by this Loan Agreement, and no party is relying on any promise, agreement or understanding not set forth in this Loan Agreement. This Loan Agreement may not be amended or modified except by a written instrument describing such amendment or modification executed by the Borrower and the Banks. 10.20 No portion of the proceeds of the loan shall be used, in whole or in part, for the purpose of purchasing or carrying any "margin stock" as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System. 10.21 Upon receipt of an affidavit of an officer of a Bank as to the loss, theft, destruction or mutilation of a Note or any other security document which is not of public record, and, in the case of any such loss, theft, destruction or mutilation, upon cancellation of such Note or other security document in the same principal amount thereof and otherwise of like tenor. 7. All references to the "Loan Agreement" in the Loan Agreement, the Notes and in all documents executed or delivered in connection with the Loan Agreement shall from and after the effective date hereof refer to the Loan Agreement, as amended hereby. 8. Except as amended hereby, the Loan Agreement shall remain in full force and effect and is in all respects hereby ratified and affirmed. 9. The Borrower y covenants and agrees to pay all out-of-pocket expenses, costs and charges incurred by the Banks (including reasonable fees and disbursements of counsel) in connection with the preparation and execution of this Fifth Amendment and Agreement to Loan Agreement. IN WITNESS WHEREOF, the undersigned parties have caused this Fifth Amendment and Agreement to Loan Agreement to be executed by their duly authorized officers as of the date first above written. WITNESS: LAZARE KAPLAN INTERNATIONAL INC. ___________________________ By:___________________________ Title: -6- Commitment (including the indebtedness FLEET BANK, N.A. under the Lazare Kaplan Japan Foreign Currency/Interest Rate Risk and the Lazare Kaplan Japan Loan Indebtedness) $24,000,000 By:________________________ Title: By:________________________ Title: Commitment: BANK LEUMI USA $16,000,000 By:________________________ Title: By:________________________ Title: Acknowledged and Agreed to: LAZARE KAPLAN EUROPE INC. By:____________________________ Title: LAZARE KAPLAN BELGIUM, N.V. By:____________________________ Title: LAZARE KAPLAN GHANA LTD. By:____________________________ Title: SUPREME GEMS N.V. -7- By:____________________________ Title: LAZARE KAPLAN AFRICA, INC. By:____________________________ Title: LAZARE KAPLAN JAPAN, INC. By:____________________________ Title: -8- EX-10 6 ex10-k.txt EXHIBIT 10(K) SIXTH AMENDMENT AND AGREEMENT TO LOAN AGREEMENT This Sixth Amendment and Agreement to Loan Agreement is made as of the ___________ day of ___________________, 2000, by and between FLEET BANK, N. A., a national banking association ("Fleet"); and BANK LEUMI USA, formerly known as Bank Leumi Trust Company of New York, a New York banking corporation ("Bank Leumi"; Fleet and Bank Leumi are hereinafter referred to together as the "Banks"); and LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the "Borrower"). WITNESSETH THAT: WHEREAS, Fleet extended a term loan to Lazare Kaplan Japan, Inc., a corporation ("Lazare Kaplan Japan") organized under the laws of Delaware in the sum of One Billion One Hundred Million Japanese Yen ('Y'1,100,000,000) (the "Lazare Kaplan Japan Loan") which the Borrower assumed and for which the Borrower became jointly and severally liable; and WHEREAS, the Loan Agreement dated as of May 14, 1996, as amended from time to time (as amended, the "Loan Agreement") between the Banks and the Borrower was amended in order to reduce the availability of the revolving loan extended thereunder by the US Dollar equivalent of the outstanding principal balance of the Lazare Kaplan Japan Loan; WHEREAS, the parties desire to amend the Loan Agreement in order to reflect the fact that the Lazare Kaplan Japan Loan has been paid in full and in order to make other amendments to the Loan Agreement; NOW, THEREFORE, for value received, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. All capitalized terms used herein without definition shall have the definitions assigned by the Loan Agreement. 2. Effective the date hereof, the definition of "Commitment" set forth in Article 1 of the Loan Agreement is amended in its entirety as follows: "Commitment: as to each Bank, the amount set forth opposite such Bank's name on the signature page hereof under the caption "Commitment", as such amount is subject to reduction in accordance with the terms hereof." 3. Effective the date hereof, Section 7.1 of the Loan Agreement is amended by adding the following subparagraphs (l) and (m) to read in their entirety as follows: "(l) Indebtedness to Antwerspse Diamantbank N.V. in the maximum principal sum of Ten Million Dollars ($10,000,000); and (m) Indebtedness of Lazare Kaplan Japan, Inc. to ABN AMRO Bank N.V. in the initial maximum principal amount of the Japanese Yen equivalent of Ten Million US Dollars ($10,000,000)." 4. Effective the date hereof, the first sentence of Section 7.3 of the Loan Agreement is amended in its entirety to read as follows: "Except as set forth on Schedule 7.1 hereto and except, with respect to the Guarantors, for the Guaranties, assume, endorse, be or become liable for, or guarantee, the obligations of any Person, except (a) by endorsement of negotiable instruments for deposit or collection in the ordinary course of business, and (b) the guaranty by the Borrower of the obligations of Lazare Kaplan Japan, Inc. to ABN AMRO Bank N.V., which Indebtedness is permitted by the terms of Section 7.1(m) hereof." 5. Effective the date hereof, Article 7 of the Loan Agreement is amended by adding a new Section 7.18 in its entirety to read as follows: "Enter into any agreement with any other Person which prohibits or limits the Borrower's ability or right to grant any lien, encumbrance, security interest, purchase money security interest, or charge to the Lenders." 6. All references to the "Loan Agreement" in the Loan Agreement, the Notes and in all documents executed or delivered in connection with the Loan Agreement shall from and after the effective date hereof refer to the Loan Agreement, as amended hereby. 7. Except as amended hereby, the Loan Agreement shall remain in full force and effect and is in all respects hereby ratified and affirmed. 8. The Borrower covenants and agrees to pay all out-of-pocket expenses, costs and charges incurred by the Banks (including reasonable fees and disbursements of counsel) in connection with the preparation and execution of this Sixth Amendment and Agreement to Loan Agreement. IN WITNESS WHEREOF, the undersigned parties have caused this Sixth Amendment and Agreement to Loan Agreement to be executed by their duly authorized officers as of the date first above written. WITNESS: LAZARE KAPLAN INTERNATIONAL INC. ______________________________ By:________________________________ Title: Commitment FLEET BANK, N.A. $24,000,000 By:_________________________________ Title: By:_________________________________ Title: -2- Commitment: BANK LEUMI USA $16,000,000 By:_________________________________ Title: By:_________________________________ Title: Acknowledged and Agreed to: LAZARE KAPLAN EUROPE INC. By:________________________________ Title: LAZARE KAPLAN BELGIUM, N.V. By:________________________________ Title: LAZARE KAPLAN GHANA LTD. By:________________________________ Title: SUPREME GEMS N.V. By:________________________________ Title: LAZARE KAPLAN AFRICA, INC. By:________________________________ Title: LAZARE KAPLAN JAPAN, INC. By:________________________________ Title: -3- EX-10 7 ex10-l.txt EXHIBIT 10(L) Antwerpse Diamantbank NV [LOGO] Free translation Confidential Antwerpen, December 14, 2000 LAZARE KAPLAN BELGIUM (LKB) NV Hoveniersstraat 30 bus 162 B-2018 ANTWERPEN 1 This letter replaces our confirmation letter dated 6th November 2000. Dear Sirs, Referring to our recent conversations we have the pleasure to confirm that our bank is willing to continue the existing bank relation and credits, with retention of the existing guarantees and collaterals, without debt novation and subject to the modalities and conditions as stipulated here below. 1. Amount A credit of a countervalue of maximum 30.000.000 US$ (thirty million US dollar). However, except for the preliminary and explicit consent of our bank the utilisation within this credit may not exceed the countervalue of 1.200.000.000 BEF (one billion two hundred million Belgian Franc) while drawings will only be permitted in US dollar and Belgian Franc. 2. Utilisation forms and modalities In principle the aforesaid credit is only to be utilised for overdrafts in current accounts. Utilisation, other than overdrafts in current accounts (e.g. straight loans, discount, bank guarantees issued by us, forward contracts, ...), as well as utilisation not directly connected to your diamond activities, always require a preliminary and explicit consent of our bank. This credit is to be utilised according to the modalities as specified in annexe 1. 3. Interest conditions With regard to the overdrafts in current accounts, following interests and provisions will be charged : debit interest : for utilisation in BEF : base rate BEF-ADB (presently 6,10 % per annum) increased with maximum 4,50 % per annum; for utilisation in US$ : base rate US$-ADB (presently 7,85 % per annum) increased with maximum 4,50 % per annum. overdraft provision : maximum 1/8% per month on the highest debit outstanding during this period. Changes in aforesaid base rates will be communicated as the occasion arises, either by letter or by computer generated message. With regard to possible other utilisation (cfr supra) the debit interest and/or commission will be fixed the moment these utilisation are authorised. As well as for possible overdrawing of credit facilities (cfr article 6 of our General Credit Granting Conditions) or in case of insufficient collateral(s) (cfr "utilisation modalities" in present letter), the bank has the right to increase aforesaid conditions with maximum 1%. - -------------------------------------------------------------------------------- Pelikaanstraat 54 Tel. : 03/204.72.04 H.R.A. 30908 B-2018 Antwerpen 1 Telefax : 03/233.90.95 P.R. 000-0018639-15 Telex : 31673 ADIABA B BTW BE 404.465.551 Swift : ADIABE 22 p2 Antwerpen, December 14, 2000 LAZARE KAPLAN BELGIUM (LKB) NV Hoveniersstraat 30 bus 162 B-2018 ANTWERPEN 1 4. General Conditions The granting of this credit is governed by our General Conditions for Banking Operations(1) and by our General Credit Granting Conditions(2) of which you already received a copy and to which you already explicitly agreed and enclosed addendum dated December 14, 2000. As far as necessary the acceptance of this credit reconfirms your agreement with said General Conditions. Moreover we link to this credit the stipulations specified in annexe 1 and we stipulate further that the credit granted by our bank implies that you will at least once a year provide us with a full insight information in your financial structure and that you will offer no personal guarantees and/or collateral to any other financial institution or to any third party without the preliminary and written consent of our bank, except as for the stipulations in your letter dated September 8, 1999 regarding the existing credit facilities and except as for possible limitations resulting from point 5 of the "Sixth Amendment and Agreement to Loan Agreement" of November 2000 between Lazare Kaplan Inc., Fleet Bank N.A. and Bank Leumi U.S.A. Without prejudice to the foregoing, personal guarantees or collateral covering a credit or granted, for whatever reason, to other financial institutions or to third parties will, in all instances also have to be granted to the bank in proportion to the credit granted by the latter. 5. Guarantees and Collateral As guarantee for all amounts you are or will be due to our bank in view of this credit, besides the activity linked collateral stipulated in annexe 1, following guarantees and commitments are granted: - - a corporate guarantee of LAZARE KAPLAN INTERNATIONAL INC, New York, acting amongst others through its LAZARE KAPLAN DIVISION (New York), PREFERRED DIAMONDS DIVISION (New York), SCIENTIFIC DIVISION (New York) and LAZARE KAPLAN (PUERTO RICO) DIVISION (Puerto Rico), for the total engagements - - a corporate guarantee of LAZARE KAPLAN AFRICA INC, Delaware for the total engagements - - a corporate guarantee of LAZARE KAPLAN EUROPE INC, Delaware for the total engagements - - a corporate guarantee of LAZARE KAPLAN JAPAN INC, Delaware for the total engagements - - the exclusivity of credit granting Additional or complementary collateral which we would obtain (cfr art. 15 of our aforesaid General Credit Granting Conditions) will also be registrated on a subdivision of your basic number in our books. LAZARE KAPLAN INTERNATIONAL INC., New York, makes itself strong that, should one or more of the companies mentioned below, would become active and/or would remarkably be capitalised, our bank will obtain the guarantee(s) of said company(ies): - - LAZARE KAPLAN (SIERRA LEONE) LTD, Bermuda - - LAZARE KAPLAN GHANA LTD, Bermuda - - LAZARE KAPLAN (BERMUDA) LTD, Bermuda - - KAPLAN OFFSHORE TRADING LTD, Bermuda - - LKN DIAMOND COMPANY, Bermuda - - LK ENTERPRISES INC, Delaware - - RCS INC, Delaware - - LK RUSSIA INC, Delaware - - LAZARE KAPLAN BELGIUM JEWELRY NV - ---------------- (1) Registered in Antwerp 10, five page, no forwarding, part 540 page 81 section 13 on 2nd November 2000. (2) Registered in Antwerpen 10, three page, no forwarding part 535 page 2 section 26 on 11th March 1999. - -------------------------------------------------------------------------------- Pelikaanstraat 54 Tel. : 03/204.72.04 H.R.A. 30908 B-2018 Antwerpen 1 Telefax : 03/233.90.95 P.R. 000-0018639-15 Telex : 31673 ADIABA B BTW BE 404.465.551 Swift : ADIABE 22 p3 Antwerpen, December 14, 2000 LAZARE KAPLAN BELGIUM (LKB) NV Hoveniersstraat 30 bus 162 B-2018 ANTWERPEN 1 Unless your agreement, the above-mentioned credit proposal is only valid during two weeks; we therefore kindly request you to confirm your agreement with the contents of the present letter by returning to us within 15 days the attached copy of this letter, signed by your legal representatives, under your company's legal seal and hand-written statement "seen and approved". Yours faithfully, Yves Mertens Willy Laeremans Yves Mertens Willy Laeremans Credit Division Credit Division Vice President Senior Vice President William A. Moryto William A. Moryto William A. Moryto William A. Moryto Vice President & CFO Secretary Lazare Kaplan International Inc. Lazare Kaplan Belgium NV Leon Tempelsman Leon Tempelsman President Lazare Kaplan International Inc. - -------------------------------------------------------------------------------- Pelikaanstraat 54 Tel. : 03/204.72.04 H.R.A. 30908 B-2018 Antwerpen 1 Telefax : 03/233.90.95 P.R. 000-0018639-15 Telex : 31673 ADIABA B BTW BE 404.465.551 Swift : ADIABE 22 Antwerpse Diamantbank NV [LOGO] Free translation Confidential Antwerpen, December 14, 2000 LAZARE KAPLAN BELGIUM (LKB) Hoveniersstraat 30 B 162 B-2018 ANTWERPEN 1 Annex 1 to credit confirmation dated December 14, 2000 ------------------------------------------------------ Credit modalities overdraft 16.500.000 US$ counter value 1 sight with pledge letter and/or against local bills payable with pledge letter, modality valid during maximum 30 days for the purchase of rough goods and/or against recently imported pledged rough goods, to be entrusted to partners, modality valid during maximum 30 days and/or against recently imported pledged rough goods, to be entrusted to partners, modality valid during maximum 30 days for imports from Transhex, South-Africa, of which in case of prefinance maximum 15 days blank and/or against recently imported pledged polished goods, to be entrusted to partners, modality valid during maximum 30 days and/or against recently imported pledged polished goods to be entrusted to partners, modality valid during maximum 60 days for imports from Russia and/or imports via LKI, afterwards to be converted into against receivables domiciled at the Bank overdraft 1.500.000 US$ against counter value 2 sights with pledge letter, afterwards to be converted into receivables domiciled at the Bank overdraft 12.000.000 US$ against free shipments and/or against invoices on the market ---------------- TOTAL 30.000.000 US$ Utilization within this credit may not exceed the counter value of 1.200.000.000 BEF (one billion two hundred million Belgian Franc). Possible bank guarantees issued by us to third parties are granted in application of above mentioned overdraft facilities. In order to make and keep them acceptable to us, aforesaid activity linked collateral have to meet our administrative and term demands in force up to now and we reserve ourselves the right not to accept sales to some of your buyers as collateral. - -------------------------------------------------------------------------------- Pelikaanstraat 54 Tel. : 03/204.72.04 H.R.A. 30908 B-2018 Antwerpen 1 Telefax : 03/233.90.95 P.R. 000-0018639-15 Telex : 31673 ADIABA B BTW BE 404.465.551 Swift : ADIABE 22 LAZARE KAPLAN BELGIUM (LKB) Hoveniersstraat 30 B 162 B-2018 ANTWERPEN 1 Annex 1 to credit confirmation dated December 14, 2000 (continuation) --------------------------------------------------------------------- Furthermore, your credit withdrawal possibilities will be restricted, by no longer allowing withdrawals under your credit facility with an amount equal to the receivables you domicile with our Bank for coverage of your credit withdrawals, but which have clearly not been paid on time through your account with our Bank, as follows: a) no longer allowing withdrawals under your credit line amounting to your local invoices domiciled at our Bank, drawn on Antwerp buyers which have not been received through our Bank 30 days after the invoice was due. b) no longer allowing withdrawals under your credit line amounting to your export invoices domiciled at our Bank, drawn on foreign buyers which have not been received through our Bank 180 days after date of shipments of the goods. - -------------------------------------------------------------------------------- Pelikaanstraat 54 Tel. : 03/204.72.04 H.R.A. 30908 B-2018 Antwerpen 1 Telefax : 03/233.90.95 P.R. 000-0018639-15 Telex : 31673 ADIABA B BTW BE 404.465.551 Swift : ADIABE 22 Antwerpse Diamantbank NV [LOGO] LAZARE KAPLAN BELGIUM (LKB) NV 529 Fifth Avenue NEW YORK (NY) 10036 USA confidential Antwerpen, December 14, 2000 Dear Sirs, We refer to our confirmation letter dated December 14, 2000 and in particular to subject 3 concerning the interest conditions. At your request we confirm that, until further notice, on your utilizations in BEF and/or USD as overdrafts in current account, following conditions are applicable: o debt interest : - for utilizations in BEF : base. rate BEF-ADB (presently 6,10 % per annum) increased with 1,50 % per annum, - for utilizations in USD : base rate USD-ADB (presently 7,85 % per annum) increased with 1,50 % per annum. o overdraft provision : nil Changes in aforesaid base rates will be communicated as the occasion arises, either by letter or by computer generated message. With regard to possible utilizations as overdrafts in current account in other currencies than BEF or USD and utilizations other than overdrafts in current account, the debit interest and/or commission will be fixed the moment these utilizations are authorized. As well as for possible overdrawing of credit facilities or in case of insufficient collateral(s), the Bank has the right to increase aforesaid conditions with maximum 0,50 %. Yours faithfully, Yves Mertens Willy Laeremans Yves Mertens Willy Laeremans Credit Division Credit Division Vice President Senior Vice President - -------------------------------------------------------------------------------- Pelikaanstraat 54 Tel. : 03/204.72.04 H.R.A. 30908 B-2018 Antwerpen 1 Telefax : 03/233.90.95 P.R. 000-0018639-15 Telex : 31673 ADIABA B BTW BE 404.465.551 Swift : ADIABE 22 EX-10 8 ex10-m.txt EXHIBIT 10(M) Antwerpse Diamantbank NV [LOGO] Confidential Antwerp, December 14, 2000 LAZARE KAPLAN INTERNATIONAL INC. 529 Fifth Avenue NEW YORK (NY) 10036 USA Dear sirs Referring to our recent conversations we have the pleasure to confirm that our Bank is willing to grant you an uncommitted credit line subject to the modalities and conditions as stipulated here below. 1. Amount ------ An uncommitted credit of a counter value of maximum 10.000.000 US$ (ten million US dollar). However, except for the preliminary and explicit consent of our Bank the utilization within this credit may not exceed the counter value of 400.000.000 BEF (four hundred million Belgian Franc) while drawings will only be permitted in US dollar and Belgian Franc. 2. Utilization forms and modalities -------------------------------- In principle the aforesaid credit is only to be utilized for overdrafts in current accounts. Utilization, other than overdrafts in current accounts (e.g. straight loans, discount, bank guarantees issued by us, forward contracts, ...), as well as utilization not directly connected to your diamond activities, always require a preliminary and explicit consent of our Bank. 3. Interest conditions ------------------- With regard to the overdrafts in current accounts, following interests and provisions will be charged: debit interest: for utilization in BEF : floating base rate BEF-ADB (presently 6,10% per annum) increased with 1,50% per annum; for utilization in US$: floating base rate US$-ADB (presently 7,85% per annum) increased with 1,50 % per annum. Base rate-ADB equals the per annum rate of interest announced by the Bank from time to time at its head office in Antwerp. Changes in aforesaid base rates will be communicated as the occasion arises, either by letter or by computer generated message. With regard to possible other utilization (cf. supra) the debit interest and/or commission will be fixed the moment these utilization are authorized. For possible overdrawing of credit facilities (cf. article 6 of our General Credit Granting Conditions) the Bank has the right to increase aforesaid conditions with maximum 0,5 % per annum. - -------------------------------------------------------------------------------- Pelikaanstraat 54 Tel. : 03/204.72.04 H.R.A. 30908 B-2018 Antwerpen 1 Telefax : 03/233.90.95 P.R. 000-0018639-15 Telex : 31673 ADIABA B BTW BE 404.465.551 Swift : ADIABE 22 p 2 Antwerp, December 14.2000 LAZARE KAPLAN INTERNATIONAL INC. 529 Fifth Avenue NEW YORK (NY) 10036 USA 4. General Conditions ------------------ The granting of this credit is governed by our General Conditions for Banking Operations(1) and by our General Credit Granting Conditions(2) of which you already received a copy and to which you already explicitly agreed and enclosed addendum dated December 14, 2000. As far as necessary the acceptance of this credit reconfirms your agreement with said General Conditions. We stipulate further that the credit granted by our Bank implies that you will at least once a year provide us with a full insight information in your financial structure and that you will offer no personal guarantees and/or collateral to any other financial institution or to any third party without the preliminary and written consent of our Bank, except as for the stipulations in your letter dated September 8, 1999, regarding the existing credit facilities and except as for possible limitations resulting from point 5 of the "Sixth Amendment and Agreement to Loan Agreement" of November 2000 between Lazare Kaplan Inc., Fleet Bank N.A. and Bank Leumi U.S.A. Without prejudice to the foregoing, personal guarantees or collateral covering a credit or granted, for whatever reason, to other financial institutions or to third parties will, in all instances also have to be granted to the Bank in proportion to the credit granted by the latter. 5. Guarantees and Commitments -------------------------- As guarantee for all amounts you are or will be due to our Bank in view of this credit, following guarantees m granted in favor of our Bank: - a several and indivisible corporate guarantee of LAZARE KAPLAN EUROPE INC., for the total engagements - a several and indivisible corporate guarantee of LAZARE KAPLAN BELGIUM NV, for the total engagements - a several and indivisible corporate guarantee of LAZARE KAPLAN GHANA LTD., for the total engagements - a several and indivisible corporate guarantee of LAZARE KAPLAN AFRICA INC., for the total engagements - a several and indivisible corporate guarantee of LAZARE KAPLAN JAPAN INC., for the total engagements Moreover you commit yourself to hand over to us the following information on a regular basis: - yearly audited Financial Statements (consolidated figures) - quarterly Financial Statements (consolidated figures) - monthly a detailed list of outstanding receivables (consolidated figures) - monthly overview debit positions other banks (consolidated figures) and durably to meet following conditions: - unless prior written notice to the Bank, your business offices should be maintained at the present address and your certificate of incorporation and/or by-laws are to remain unchanged - ratio of Senior Debt (only bank debt) to Tangible Net Worth at not more than 1.50:1 - ratio of current assets to current liabilities at not less than 2.50:1 (after correction for Pegasus non-owned assets) and associated liablities) - all information given by you to your American bankers related to the observance of the covenants imposed by them is to be given simultaneously to our Bank Additional or complementary collateral which we would obtain (cf. art. 15 of our aforesaid General Credit Granting Conditions) will also be registered on a subdivision of your basic number in our books. - ----------------------- (1) Registered in Antwerp 10, five page, no forwarding, part 540 page 8 section 13 on 2nd November 2000. (2) Registered in Antwerp 10, three page, no forwarding part 535 page 2 section 26 on 11th March 1999. - -------------------------------------------------------------------------------- Pelikaanstraat 54 Tel. : 03/204.72.04 H.R.A. 30908 B-2018 Antwerpen 1 Telefax : 03/233.90.95 P.R. 000-0018639-15 Telex : 31673 ADIABA B BTW BE 404.465.551 Swift : ADIABE 22 p 3 Antwerp, December 14.2000 LAZARE KAPLAN INTERNATIONAL INC. 529 Fifth Avenue NEW YORK (NY) 10036 USA For the sake of good order we remind you that the credit facility described herein is not a committed facility: no commitment fee will be charged, but we may terminate the credit facility at any time and for any reason, even though you may have compiled with all of the terms and conditions enumerated herein. Unless your agreement, the above-mentioned credit proposal is only valid during two weeks; we therefore kindly request you to confirm your agreement with the contents of the present letter by returning to us within 15 days the attached copy of this letter, signed by your legal representatives, under your company's seal and handwritten statement "seen and approved". Yours faithfully Yves Mertens Willy Laeremans Yves Mertens Willy Laeremans Credit Division Credit Division Vice President Senior Vice President William H. Moryto William H. Moryto Vice President & CFO Lazare Kaplan International Inc. Leon Tempelsman Leon Tempelsman President Lazare Kaplan International Inc.
- -------------------------------------------------------------------------------- Pelikaanstraat 54 Tel. : 03/204.72.04 H.R.A. 30908 B-2018 Antwerpen 1 Telefax : 03/233.90.95 P.R. 000-0018639-15 Telex : 31673 ADIABA B BTW BE 404.465.551 Swift : ADIABE 22 Antwerpse Diamantbank NV [LOGO] Confidential Antwerp, 6th March 2001 LAZARE KAPLAN INTERNATIONAL INC. 529 Fifth Avenue NEW YORK (NY) 10036 USA Addendum to our credit confirmation letter dated December 14, 2000 ------------------------------------------------------------------ Dear sirs, Please note that as from 31.12.2000 your interest conditions (point 3 of the above-mentioned letter) were modified as follows: Debit interest : for utilization in BEF : floating base rate BEF-ADB (presently 6,10% per annum) increased with 1.50 % per annum; for utilization in US$: Libor US$ fixing 3 months + 1,6 % per annum. Credit interest: nihil. All other conditions remain unchanged. This letter forms part of your most recent credit confirmation letter. Please signify your consent by sending back one copy of this letter, duly signed. Yours faithfully, Yves Mertens Willy Laeremans Yves Mertens Willy Laeremans Credit Division Credit Division Vice President Senior Vice President Lazare Kaplan International Inc. William H. Moryto William H. Moryto Vice President & CFO
EX-10 9 ex10-p.txt EXHIBIT 10(P) CREDIT FACILITY AGREEMENT THIS CREDIT FACILITY AGREEMENT (the "Agreement") is made as of November, 29th 2000 by and between ABN AMRO Bank N.V., Tokyo branch (the "Bank"), LAZARE KAPLAN JAPAN INC., a Delaware corporation, (the "Borrower") operating through its branch office in Japan and LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the "Guarantor") as follows: 1. Definitions: 1.1 In this Agreement, the following terms shall have the following meanings: Advance - the borrowing of the Facility (as defined in Section 2.1 below) by the Borrower pursuant to the terms of this Agreement. Business Day - a day, other than Saturday or Sunday on which banks are open for general interbank business in Tokyo, New York and London. Closing Date November 29th, 2000. Drawdown Date - the date on which the Advances are made, or are proposed to be made. Event of Default - any event specified in Section 14 of this Agreement. Interest Period - with respect to any Advance hereunder, the period determined in accordance with Section 4.2 of this Agreement. "month(s)" - a period of the required number of calendar days, ending on the day numerically corresponding to the day of the calendar month(s) on which it started and "monthly" shall be construed accordingly; provided, that (i) if there is no such numerically corresponding day, it shall end on the last Business Day in the relevant calendar month and (ii) if such numerically corresponding day is not a Business Day, the period shall end on the immediately preceding Business Date. Notice of Intent to Borrow - the Borrower's request to the Bank requesting an 1 Advance in a manner as provided in Section 8 hereof. Outstanding Amount(s) - all advances and monies extended hereunder, all liabilities of the Borrower to the bank whatsoever arising (whether accrued or contingent) and all interest and fees from time to time payable to the Bank, in each case under or in connection with the Facility (as defined in Section 2.1) or pursuant to this Agreement. Repayment Date - means, with respect to an Advance, the last day of the Interest Period with respect to such Advance; provided, that if such date falls on a day that is not a Business Day, the Repayment Date shall be the immediately succeeding Business Day; provided, further, that if such Business Day falls on the next calendar month, the Repayment Date shall be immediately preceding Business Day. Termination Date - two (2) years from the Closing Date; provided, that if such date falls on a day that is not a Business Day, the Termination Date shall be the immediately preceding Business Day. 1.2 Clause headings in this Agreement are inserted for convenience only and shall be ignored in construing this Agreement. Words denoting singular numbers shall include the plural and vice versa. 2. Type of Facilities and Facility Limit 2.1 Subject to the terms of this Agreement, the Bank agrees to make available to the Borrower loan facilities in Japanese yen (the "Facility" or "Facilities") in the maximum amount equivalent to Japanese Yen One Billion & one hundred million (JPY 1,100,000,000.00) (the "Facility Amount"). 2.2 The aggregate of all Advances outstanding hereunder shall not, at any time, exceed the Facility Amount. 3. Availability and Borrowing 3.1 From the Closing Date and prior to the Termination Date, the Borrower may borrow, repay and re-borrow, subject to the terms of the Facility as stated herein. 2 3.2 All Advances shall be in Japanese yen in the minimum principal amount equivalent to Japanese Yen One hundred million (JPY 1,000,000.00), with integral multiples equivalent to Yen One hundred million (JPY 1,000,000.00). 3.3 The Facility shall be available only if the debt to equity ratio of the Guarantor does not exceed 1.5 ; 1 , where debt would represent obligations of the Guarantor for borrowed money. 4. Interest Rates and Fees 4.1 Interest Rate The interest shall accrue on each Advance from and including the relevant Drawdown Date up to but excluding the date that the Advance is repaid at the rate that is the aggregate of: (i) The Japanese yen LIBOR for the relevant Interest Period that appears on the Telerate Page 3750 at or around 11:00 a.m. two (2) Business Days prior to the first day of each Interest Period (the "LIBOR"), and if the LIBOR does not appear on the Telerate Page 3750, the rate determined by the Bank by reference to such other publicly available service for displaying the LIBOR; and (ii) a margin rate of one percent (1%) per annum. 4.2 Interest Period With respect to any Advance, Interest Period is at the Borrower's option as stated in the Notice of Intent to Borrow at either one (1), two (2), three (3), six (6) or more months as requested by the Borrower; provided, that no Interest Period may exceed the Termination Date. The Interest Period for an Advance shall begin on the Drawdown Date of that Advance. If the Borrower fails to indicate an Interest Period in the Notice of Intent to Borrow, the Interest Period shall be one (1) month. 4.3 Interest Payment 3 With respect to each Advance, interest payment due from the Borrower under this Agreement accrue from day to day and are due on the last day of the Interest Period of such Advance; provided, that interest shall be payable by the Borrower at least semi-annually in arrears. The interest shall be calculated based on the actual number of days elapsed and 360 days a year. 4.4 Facility Fee A facility fee equal to 17.5 basis points (0.175%) per annum of the Facility Amount in Japanese Yen, accruing from and including the Closing Date to and including the Termination Date shall be payable by the Borrower to the Bank at least semi-annually in arrears in Japanese Yen. 4.5 Commitment Fee The Borrower shall pay to the Bank, at least semi-annually in arrears in Japanese Yen, a commitment fee equal to 25 basis points (0.25%) per annum of the unused portion of the Facility Amount in Japanese Yen, accruing from and including the Closing Date to and including the Termination Date. 5. Purpose of Facility The Facilities available under this Agreement shall be used by the Borrower for the purpose of working capital of the Borrower or any other purpose in the normal course of business, including the repayment of outstanding indebtness??. 6. Repayment The Borrower will be required to make repayment of any Advance of the Facility and any other Outstanding Amount under this Agreement on the Repayment Date. 7. Renewal and Review of Facility 4 The Borrower may request that the Bank renew and extend the terms of this Agreement for additional one year periods, provided that the Borrower gives notice of such request to the Bank at least three hundred and sixty five (365) days prior to the Termination Date then in effect. The determination to renew and extend this Facility on the same or new terms and conditions is in the sole discretion of the Bank and subject to the Bank's approval of the Borrower and Guarantor's credit history. 8. Notice of Intent to Borrow The Facility becomes available subject to the Bank's receipt of the Borrower's Notice of Intent to Borrow. Such Notice of Intent to Borrow must be received by the Bank at least by 11:00 a.m. two (2) Business Days prior to any proposed Drawdown Date. The Notice of Intent to Borrow shall state the amount of the Advance in Japanese Yen, the Interest Period and the Drawdown Date that the Borrower is requesting. 9. Conditions Precedent Save as the Bank may otherwise agree, the availability of the Facility and each Advance hereunder shall be strictly conditional upon the Borrower's compliance with all the terns and conditions stated in this Agreement, there being no occurrence of an Event of Default and the execution and delivery of the following documents and other evidence, and that each is, in form and substance, satisfactory to the Bank: (a) An original of this Agreement duly signed by the Borrower and the Guarantor; (b) A certified copy of the seal certificate (inkan shomei sho) of the Borrower; (c) A copy of the: (i) certified commercial register (shogyo tokibo tohon); (ii) Articles of Incorporation (teikan); and (iii) Regulations of the Board of Directors (torishimariyakukai kitei), of the Borrower certified as of a date which is before the first Drawdown Date; (d) Evidence that all necessary filings, if any, registration and other formalities in relation to this Agreement or any other document referred to herein or in connection with the Facility have been completed; and 5 (e) A certificate of the Borrower dated within seven (7) days after any Drawdown Date that (i) the Representations and Warranties contained in Section 10 below are true and correct in all material respects on and as of any Drawdown Date; and (ii) no Event of Default or event which, with the giving of notice or the passage of time or both, would be an Event of Default has occurred and is continuing, or would result from such borrowing. 10. Representations and Warranties 10.1 The Borrower represents and warrants as follows on and as of each Drawdown Date: (a) The Borrower is a corporation duly organized and validly existing under the laws of the State of Delaware with power to own its own property and assets and carry on its business as it is now being conducted. (b) The execution, delivery and performance by the Borrower of this Agreement are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action and do not contravene the Borrower's Articles of Incorporation ("teikan") or Regulations of the Board of Directors ("torishimariyakukai kitei") or does not violate any law or any existing agreement or contractual obligation binding on or affecting the Borrower. (c) No governmental, regulatory approval, registration, permit, or third party approval, etc. is required with regard to the Borrowers participation in the transactions contemplated by this Agreement. (d) There is no pending, threatened or continuing action, suit, investigation, litigation or proceeding affecting the Borrower before any court, governmental agency or arbitrator that could be reasonably likely to have a material adverse effect on the financial condition or business operations of the Borrower or would affect the legality, validity or enforceability of this Agreement or any Advance hereunder. (e) The claims of the Bank against the Borrower under this Agreement shall rank 6 at least pari passu with the claims of all other general unsecured creditors and all unsubordinated creditors of the Borrower except to the extent that there are certain preferential rights that arise as a matter of law. (f) The consolidated and non-consolidated financial statements of the Borrower and the Guarantor for the fiscal year ended May 31, 2000, and any other relevant information, copies of which have been furnished to the Bank, fairly and accurately present the financial condition of the Borrower as of such date and that there has been no material adverse change in the financial condition of the Borrower or in the results of the Borrower's business operations. (g) The Borrower is in compliance, in all material respects which bear any relation to this Agreement, with all applicable laws, rules, regulations and orders of Japan and of any foreign countries in which the Borrower carries on business and the Borrower has obtained and is maintaining all licenses and approvals as are required under applicable laws, rules, regulations and orders to ensure the validity and performance of this Agreement. (h) This Agreement has been duly executed and delivered by the Borrower. This Agreement shall constitute, when delivered, a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms and furthermore each loan made to the Borrower pursuant to this Agreement will constitute a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with the terms of this Agreement. (i) No Event of Default has occurred which has not been cured. 10.2 The Guarantor represents and warrants as follows on and as of each Drawdown Date: (a) The Guarantor is a corporation duly organized and validly existing under the laws of Delaware with power to own its own property and assets and carry on its business as it is now being conducted. (b) The execution, delivery and performance by the Guarantor of this Agreement 7 are within the Guarantor's corporate powers, have been duly authorized by all necessary corporate action and do not contravene the Guarantor's Articles of Incorporation or Certificate of Incorporation that may be applicable to the Guarantor or By-laws or does not violate any law or any existing agreement or contractual obligation binding on or affecting the Guarantor. (c) Paragraphs (c), (d), (e), (g) and (h) of Section 10.1 above are mutatis mutandis applicable to the Guarantor in respect of the guarantee made by the Guarantor hereunder and this Agreement. 11. Affirmative Covenants So long as any Outstanding Amount shall remain unpaid with respect to any Advance furnished by the Bank hereunder, the Borrower shall at all times: Material Compliance with Laws Comply, in all material respects which bear any relation to this Agreement, with all applicable laws rules, regulations and orders and obtain and maintain all licenses and approvals as are required under applicable law for the validity or performance of this Agreement. Payment of Taxes and Material Obligations Pay and discharge, before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its property and (ii) all lawful claims that, if unpaid, might by law become a lien upon its property; provided, that the Borrower shall not be required to pay or discharge any such tax, assessment, charge, claim or obligation that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained, unless and until any action is taken to enforce any lien resulting therefrom attached to its property. Maintenance of Books 8 Keep proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower in accordance with generally accepted accounting principles in effect from time to time. Maintenance of Properties Maintain and preserve all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. Reporting Requirements Furnish to the Bank, as soon as available and in any event within three (3) months after the end of each fiscal year and fiscal half year, a copy of all relevant financial statements or other statement or information relating to the business and financial condition of the Borrower and the Guarantor as may from time to time be requested by the Bank, with a verification as to the accuracy of such information. Further, the Borrower shall promptly notify the Bank in writing of any substantial change in its shareholders, management or constitutive documents; it shall promptly notify the Bank if there is any litigation that if adversely determined would have a material adverse effect on the financial condition or operations of the Borrower, or which would affect the legality, validity, and enforceability of this Agreement. 12. Financial Covenant (Maintaining Debt to Equity Ratio) So long as any amount shall remain unpaid with respect to any Advance furnished by the Bank hereunder, the Guarantor shall at all times maintain its debt to equity ratio not to exceed 1.5 : 1, where debt would represent obligations of the Guarantor for borrowed money. 13. Events of Default Each of the following describes circumstances that constitute an Event of Default: (a) The Borrower or the Guarantor fails to pay when due any or all of the Outstanding Amounts and/or any other amount payable under this 9 Agreement or any other document referred to in this Agreement or in connection with the Facility and upon notification of non payment by the bank the payment shall remain unpaid for a period of five (5) business days (b) The Borrower, or the Guarantor fails duly to perform or comply with any of the obligations or covenants assumed by it in this Agreement or any other document referred to in this Agreement or in connection with the Facility and such non compliance shall continue uncured for a period of forty five (45) days (c) Any representation or warranty made or deemed to be made by the Borrower or the Guarantor in this Agreement or any other document referred to in this Agreement or in connection with the Facility proves to have been incorrect of misleading in any material respect when made or deemed to be made. (d) Any indebtedness of the Borrower or the Guarantor for borrowed money in excess of US Dollars One Million (USD 1,000,000.00) in aggregate or its equivalent is not paid when due or within any applicable grace period, or any creditor or creditors of the Borrower or the Guarantor, as the case may be, declares that any indebtedness of the Borrower or the Guarantor for borrowed money in excess of US Dollars One Million (USD 1,000,000.00) in aggregate or its equivalent is in default and is due and payable prior to its specified maturity. (e) The Borrower or the Guarantor is unable to pay its debts as they fall due and commences negotiations with any one or more of its creditors with a view to the general readjustment or rescheduling of its indebtedness. (f) The Borrower or the Guarantor takes any corporate action or other steps are taken or legal proceedings are started for its winding-up, dissolution, administration or re-organization or for the appointment of a liquidator, receiver, trustee, administrator or similar officer or any proceeding is instituted by or against the Borrower or the Guarantor, whether in Japan or some other jurisdiction, seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, arrangement, adjustment, protection, relief, or composition of its or its debts under any law relating to bankruptcy ("hasan"), 10 commencement of procedures for rehabilitation ("saisei tetsuzuki"), commencement of reorganization proceedings ("kaisha kosei tetsuzuki"), commencement of company arrangement ("kaisha seiri"), commencement of special liquidation ("tokubetsu seisan") or such comparable actions in any other jurisdiction, and in the case of such proceeding against it, either such proceeding shall remain undismissed or unstayed for a period of thirty (30) days or any of the actions sought in such proceeding shall occur; or the Borrower shall take any corporate action to authorize any of the actions set forth above in this paragraph. (g) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 11 or the Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed and such failure is not remedied within ninety (90) days after the Bank has given written notice of such failure to the Borrower, or such other extended period of time as the Bank may agree upon; or it shall become unlawful for the Borrower or the Guarantor to perform or comply with any of its obligations hereunder or the Borrower or the Guarantor repudiates or expresses an intention to repudiate any obligation under this Agreement. (h) The debt to equity ratio of the Guarantor exceeded 1.5 : 1 where debt would represent obligations of the Guarantor for borrowed money. (i) Upon the occurrence of an Event of Default (and subject to the continuation thereof) or any termination of the Facility and/or this Agreement and at any time thereafter, the Bank may by giving verbal or written notice to the Borrower: (a) cancel any part of the Facility then undrawn or unutilized, and declare all Outstanding Amounts to be immediately due and payable; and (b) declare that this Agreement or the Facility shall be terminated. 14. Set-Off 11 Upon the occurrence and during the continuance of any Event of Default, the Bank may, at any time and from time to time, to the fullest extent permitted by law, set off and apply any obligation (whether or not matured) owed by the Bank to the Borrower or the Guarantor, as the case may be, including any and all deposits (general or special, time or demand, provisional or final) regardless of the place of payments, booking branch, or currency of either obligation against any and all of the obligations of the Borrower or the Guarantor now or hereafter existing under this Agreement and the Advances, whether or not the Bank shall have made any demand under this Agreement or any Advance and although such obligations may be unmatured. If the obligations are in different currencies, the Bank may convert its obligation at the spot rate of exchange of the Bank, for the purpose of the set-off. The rights of the Bank under this Section are in addition to other rights and remedies (including without limitation, other rights of set-off) that the Bank may have. 15. Taxes/Other Deductions and Expenses 15.1 All payments under this Agreement and any Advance hereunder are to be free and clear of any present or future taxes, withholding or other deductions whatsoever. 15.2 All relevant expenses, fees and out of pocket costs, including, but not limited to the legal fees and costs to be incurred by the Bank for the enforcement of its right hereunder, shall be for account of the Borrower, whether or not the Facility is actually advanced. 16. Changes in Circumstances If, at any time, it is unlawful for the Bank to fund or allow to remain outstanding all or any part of the Facility, then the Bank shall, promptly after becoming aware of the same, deliver to the Borrower a notice to that effect and any amount owing or liability incurred pursuant to this Agreement or in relation to or in connection with the Facility will be immediately due and payable and availability under the Facility will be reduced to zero. 17. Indemnity 12 The Borrower irrevocably and unconditionally undertakes to indemnify the Bank and each of its affiliates and its officers, directors, employees, agents, advisors and other representatives from and against any and all damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any of them arising out of or relating to the Facility or this Agreement or the guarantee hereunder, except to the extent such damage, loss, liability or expense is found in a final judgment by a court of competent jurisdiction to have resulted from the indemnified party's gross negligence or willful misconduct. 18. Bank Transaction Agreement To the extent that this Agreement does not contradict any terms of any Bank Transaction Agreement in effect between the Bank and the Borrower, the terms of any such Bank Transaction Agreement, except Article 4 (Security) and Article S (Acceleration of Payment) thereof, will apply to this Agreement. To the extent that this Agreement does contradict any terms of any Bank Transaction Agreement in effect between the Bank and the Borrower, the terms of this Agreement shall apply. 19. Guarantee The Guarantor hereby jointly and severally guarantees (rentai hosho) any debts, liabilities and obligations of the Borrower arising under or in connection with the Facility or pursuant to this Agreement, not merely as surety but as independent obligor for the Bank and its successors. 20. Governing Law and Jurisdiction 20.1 This Agreement shall be governed by and construed in accordance with the laws of Japan. The parties hereto hereby submit to the exclusive jurisdiction of the Tokyo District Court in connection with any disputes that may arise hereunder. 21. No Personal Liability 13 It is expressly understood and agreed that, (1) the person who executes this Agreement on behalf of the Borrower only acts in his capacity as the representative of the Borrower and shall not be personally liable for the obligations of the Borrower under or in connection with the Facility or pursuant to this Agreement, and (2) the person who executes this Agreement on behalf of the Guarantor only acts in his capacity as the representative of the Guarantor and shall not be personally liable for the obligations of the Guarantor under or in connection with the Facility or pursuant to this Agreement, except in the event of fraud, misappropriation or grave misconduct of such person with respect to this agreement. [Intentionally left blank] 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date indicated. LAZARE KAPLAN JAPAN INC. As Borrower By: /s/ Richard Scott Meiller Date: 12/4 , 2000 ------------------------------------- -------------------------- Name: Richard Scott Meiller Title: Representative LAZARE KAPLAN INTERNATIONAL INC. As Guarantor By: /s/ William H. Moryto Date: November 29th , 2000 ------------------------------------- -------------------------- Name: William H. Moryto Title: Vice President and Chief Financial Officer ABN AMRO Bank N.V., Tokyo branch As Bank By: Date: 12/5/ , 2000 ------------------------------ -------------------------- Name: Title:
/s/ Michael F. Kerbert -------------------------- Michael F. Kerbert Country Manager Japan 15 EX-13 10 ex-13.txt EXHIBIT 13 Lazare Kaplan International Inc. 2001 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, 2001 as filed with the Securities and Exchange Commission, will be made available to stockholders without charge. Requests should be directed to the Controller, Mr. Cochrane, Lazare Kaplan International Inc., 529 Fifth Avenue, New York, New York 10017. Annual Meeting November 8, 2001 10 A.M. The Cornell Club Six East 44th Street Third Floor, Library New York, New York 10017 Market Prices of Common Stock by Fiscal Quarter Fiscal 2001 ----------- High Low ---------------- First 8.8750 6.0000 Second 6.8125 4.8750 Third 6.2500 4.6250 Fourth 6.0000 5.3000 Fiscal 2000 ----------- High Low ----------------- First 11.2500 7.8750 Second 9.5000 7.2500 Third 9.6250 7.1250 Fourth 9.7500 7.0000 As of July 31, 2001 there were 1,756 stockholders of record of the 7,367,691 issued and outstanding shares of the common stock of the Company, including CEDE & Co. and other institutional holders who held an aggregate of 3,548,735 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 To Our Shareholders: The fiscal year ended May 31, 2001 saw a substantial decline in global economic activity. Falling financial markets, more cautious and selective consumer spending, and an overstocked distribution network meant a reduction in demand for diamonds and diamond jewelry in all markets, both domestic and overseas. Total Company revenue in fiscal 2001 was $270,786,000, and net profit was $1,543,000. Sales of higher gross margin polished diamonds were a record $193,805,000, a 40% increase over the previous year. The diamond industry continues to face important structural changes, and it remains unclear how these will play out, particularly in this difficult economic environment. De Beers, the dominant player in the rough diamond industry, completed its privatization and delisting, further redefining its previous role as "custodian of the market," to adjust to more competitive supply realities and attempt to participate in downstream opportunities. Because of requests for further information by the competition authorities of the European Union, De Beers delayed the implementation of its "supplier of choice" program. Their joint venture with LVMH did receive approval and is proceeding. We believe that LKI remains uniquely positioned to take advantage of the opportunities that these structural changes will bring. In response to a United Nations General Assembly resolution, the leading diamond producing and trading countries, as well as the industry, are participating in the "Kimberley Process," a series of meetings and negotiations leading toward a certification system to reduce the likelihood that the small percentage of rough diamonds produced in areas of conflict find its way into the mainstream of diamonds that contribute to growth and development in Africa. The Company remains committed to doing all it can to ensure the implementation of the "Kimberley Process" recommendations. Within our extensive distribution network, many of the quality jewelry stores who stock and market the ideal cut "Lazare Diamond'r'" had a slower than expected Christmas season. Although they are selling through to the consumer, they are exercising prudence in replenishing their inventories, and we expect that they will continue to do so for some time. As part of our long-term commitment to downstream brand marketing we have successfully expanded our "Lazare Diamond Boutiques," a store-within-a-store concept. There are now 26 Boutiques in place; four more are in the process of being installed, and 121 smaller visual merchandising systems have been introduced in customers' jewelry stores. We plan further expansion of this program in the U.S. and foreign markets in the coming year. Last year also brought great disappointment to those who felt that e-commerce would replace the retail jewelry store. Although e-commerce is here to stay, and will find its place, we opted for a more conservative approach that at all times was supportive of and non-competitive with our existing retail customers. We made a modest investment of approximately $400,000 in Enjewel, which we wrote off in the course of this year when the project turned out not to be economically viable. Our Company's website is in place and helps direct additional business to our jewelers. The Japanese economy, already depressed after many years of stagnation, continued to weaken. Japanese consumers have reduced their discretionary spending, and this is having a major impact on diamond consumption in Japan. We have shortened our distribution lines and, through Lazare Kaplan Japan Inc., our wholly owned subsidiary, have direct control over our Japanese marketing efforts. We have also reduced expenses to bring the operation into equilibrium as Japan represents an important market for quality diamonds, and the Lazare Diamond has an established niche. The Southeast Asia markets have declined as well, but not to the same extent as Japan. We have several Lazare Diamond Boutiques in place where performance is exceeding expectation. Our marketing efforts in Latin America continue to meet success, and we are currently expanding into the Middle East market. Our cooperation agreement with AK Alrosa in Russia is proceeding well. Production in the three plants has been ramped up. We are expanding our marketing efforts for the additional product lines produced by the Russian 2 operation. The cooperation agreement with AK Alrosa is a ten-year off take agreement to secure the repayment of loans guaranteed by the Export-Import Bank of the United States on behalf of Alrosa for the purchase of U.S. manufactured mining equipment to modernize and expand Alrosa's rough diamond production. Last year we successfully shifted a larger portion of our revenue towards the higher margin polished sector. However, rough trading will continue to be an important segment of our operation as a source of raw material suitable for manufacture into ideal cut diamonds as well as a self standing profit center. Our subsidiaries, Pegasus Overseas Limited and Bellataire Inc., continued to successfully implement the exclusive ten-year agreement with General Electric Company (GE). The Bellataire'TM' diamond, an all-natural diamond that has undergone a proprietary process that improves the color of a limited group of qualifying gem diamonds, is marketed through a selective retail distribution network. Each diamond is laser inscribed with a unique logo and a serial number and is accompanied by a Gemological Institute of America grading report. Our manufacturing facility in Puerto Rico, and its skilled and experienced work force, continues to produce the ideal cut "Lazare Diamond" -- the World's Most Beautiful Diamond'TM'. We are delighted to welcome to our Board of Directors Robert A. Del Genio, who brings to these responsibilities great skill and experience. We look forward to benefiting from his contribution and to a fruitful collaboration. Finally, our fellow employees are, as always, the strength and backbone of the Company. We value their professionalism and deeply appreciate their dedication and hard work. Maurice Tempelsman Leon Tempelsman Chairman of the Board Vice Chairman of the Board 3 Selected Financial Data
- ------------------------------------------------------------------------------------------------------------------------------- (In thousands, except share and per share data) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Net Sales $ 270,786 $ 361,134 $ 261,853 $ 222,617 $ 259,797 - ------------------------------------------------------------------------------------------------------------------------------- Income/(loss) from continuing operations before income tax provision/(benefit), minority interest and cumulative effect of change in accounting principle $ 2,401 $ 97 $ (11,575) $ 2,295 $ 8,248 - ------------------------------------------------------------------------------------------------------------------------------- Income/(loss) from continuing operations before cumulative effect of change in accounting principle $ 1,543 $ 775 $ (6,323) $ 2,724 $ 12,100 - ------------------------------------------------------------------------------------------------------------------------------- Net Income/(loss) $ 1,543 $ (747)(1) $ (6,323)(2) $ 2,724 $ 11,482 - ------------------------------------------------------------------------------------------------------------------------------- Basic earnings/(loss) per share from continuing operations before cumulative effect of change in accounting principle (based on the weighted average number of shares) $ 0.20 $ 0.09 $ (0.74) $ 0.32 $ 1.69(3) - ------------------------------------------------------------------------------------------------------------------------------- Basic earning/(loss) per share (based on weighted average number of shares) $ 0.20 $ (0.09) $ (0.74) $ 0.32 $ 1.61(3) - ------------------------------------------------------------------------------------------------------------------------------- Diluted earnings/(loss) per share from continuing operations before cumulative effect of change in accounting principle (based upon the weighted average number of shares) $ 0.20 $ 0.09 $ (0.74) $ 0.31 $ 1.63(3) - ------------------------------------------------------------------------------------------------------------------------------- Diluted earnings/(loss) per share (based on the weighted average number of shares) $ 0.20 $ (0.09) $ (0.74) $ 0.31 $ 1.54(3) - ------------------------------------------------------------------------------------------------------------------------------- At May 31: Total Assets $ 175,918 $ 202,699 $ 151,913 $ 142,330 $ 130,079 - ------------------------------------------------------------------------------------------------------------------------------- Long-term debt $ 39,626 $ 37,309 $ 38,575 $ 23,560 $ 17,145 - ------------------------------------------------------------------------------------------------------------------------------- Working capital $ 101,378 $ 98,016 $ 106,581 $ 111,752 $ 105,291 - ------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 79,934 $ 82,807 $ 85,994 $ 93,460 $ 90,544 - -------------------------------------------------------------------------------------------------------------------------------
Note: No cash dividends were declared or paid by the Company during the past five fiscal years (1) Includes $3.1 million (net of tax) of legal settlement and related costs, $0.4 million (net of tax) of benefit relating to insurance policies offset by realignment costs and other charges, and $1.5 million (net of tax) of cumulative effect of change in accounting principle in 2000. (2) Includes $2.8 million of fourth quarter losses incurred in the Company's rough buying operations in Angola and $3.4 million of costs associated with the realignment of the Company's Japanese distribution in 1999. (3) Reflects the impact of the issuance of 2,130,000 additional shares of common stock in 1997. 4 Management's Discussion and Analysis This Annual Report contains, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties. Such forward-looking statements are based on management's belief as well as assumptions made by, and information currently available to, management pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results could differ materially from those expressed in or implied by the forward-looking statements contained herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein and in Item 1 - "Description of Business", and elsewhere in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2001. 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 "2001", "2000" and "1999" refer to the fiscal years ended May 31, 2001, 2000 and 1999, respectively. 5 Results of Operations Net Sales Net sales in 2001 of $270,786,000 were 25% less than net sales of $361,134,000 in 2000. The Company's net revenue from the sale of polished diamonds of $193,805,000 in 2001 was 40% greater than 2000 polished sales of $138,568,000. The increase in polished diamond sales reflects growth in sales of stones produced in Russia, Lazare Diamonds'r' and Bellataire Diamonds'TM'. Rough diamond sales were $76,981,000 in 2001, a decrease of 65% compared to $222,566,000 in 2000. The decrease from the prior year was primarily attributable to the termination of the Company's rough buying operation in Angola during the fourth quarter of the fiscal 2000. Net sales in 2000 of $361,134,000 were 38% higher than net sales of $261,853,000 in 1999. The Company's net revenue from the sale of polished diamonds of $138,568,000 in 2000 was 23% greater than 1999 polished sales. The increase in polished diamond sales was primarily due to higher sales of polished stones produced in Russia in 2000, improved sales volume of Lazare Diamonds and pre-launch sales of Bellataire'TM' diamonds. Rough diamond sales were $222,566,000 in 2000, an increase of 49% compared to $149,280,000 in 1999. The increase from the prior year was primarily attributable to significantly increased purchases of better quality rough diamonds from one of the Company's primary rough diamond suppliers, as well as purchases made in its rough diamond buying operation in Africa. 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 2001 was 15% as compared to 17% in 2000. In 2001, the decrease in polished gross margin was primarily due to lower gross margin on sales of smaller stones produced in Russia, certain Bellataire Diamond sales and polished diamond sales made in Japan offset, in part, by the effect of inventory reserves recorded in 2000. Polished Diamond Gross Margin for 2000 was 17% as compared to 13% in 1999. In 2000, the Polished Diamond Gross Margin was favorably impacted by increased sales volume of higher margin, large stones produced in Russia. In addition, the Company realized increased sales of Lazare Diamonds compared to 1999 which contributed positively to the polished gross diamond margin percentage. The increased margin was partially offset by the effect of recording certain inventory reserves of approximately $2.0 million. The Company's gross margin on sales of rough stones not selected for manufacturing and sales of rough stones from the rough trading operation, includes an allocation of overhead costs estimated to be associated with the purchase and sale of rough stones. In 2001, the rough diamond margin was 2.3%, compared to 2.7% in 2000. The decline in rough diamond gross margin primarily reflects a softening of market demand for categories of stones which the Company normally sells in rough form, offset in part by cost reductions achieved through the termination of operations in Angola. 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. This was compounded by relatively high fixed infrastructure and security costs which could not be 6 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 which was included in the cost of goods sold for rough diamonds and, therefore, adversely impacted the rough diamond gross margin. During 2001, the overall gross margin on net sales of both polished diamonds and rough diamonds was 11.1%. This compares to 8.1% in 2000 and 4.5% in 1999. The year to year improvement in overall gross margin in 2001 and 2000 results primarily from a shift in sales mix toward polished sales, which provide higher margins. Selling, General and Administrative Expenses Selling, general and administrative expenses in 2001 were $23,316,000 compared to $20,608,000 in 2000. Excluding realignment costs and other charges, approximately $0.8 million of benefit in 2000, selling general and administrative expenses increased $1.9 million. The increase was primarily attributable to increased advertising expenditures, higher compensation and benefit costs (including selling commissions) and a decrease in foreign exchange gains versus the same period last year. In addition, the fourth quarter of 2001 includes a charge of approximately $0.4 million to fully reserve for the Company's investment in Enjewel, LLC an internet start-up company. Selling, general and administrative expenses in 2000 were $20,608,000 as compared to expenses of $20,691,000 in 1999. Excluding realignment costs and other charges, approximately $0.8 million of benefit in 2000 and $5.6 million of expense in 1999 (discussed below), selling, general and administrative expenses increased approximately $6.3 million during 2000. The increase was primarily attributable to higher compensation and benefit costs including the building of the Company's sales force in Japan, increased marketing and advertising expense and higher depreciation expense resulting from information system upgrades. Realignment Costs and Other Charges a. Japanese Distribution 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. As a result, the Company recorded a charge of approximately $5.6 million in 1999. During 2000, the Company realized approximately $3.0 million as beneficiary of certain life insurance policies which arose from its relationship with its former Japanese distributor. The Company also incurred $1.1 million of additional costs relating to the realignment of its Japanese operations. b. Angola On December 31, 1999, the Company's license to purchase diamonds in Angola expired. Through February 2000, the Company continued to operate its Angolan buying operations. During the fourth quarter of 2000, the Company terminated its operations in Angola and recorded charges relating to such operations of $1.1 million. c. Other Charges The Company recorded charges of $2.0 million in the fourth quarter of 2000 primarily related to year-end inventory adjustments. In aggregate, during 2000, realignment costs and other charges resulted 7 in a decrease of approximately $0.8 million in selling, general and administrative expenses and an increase of approximately $2.0 million in cost of sales. For 1999, the net effect was an increase of $5.6 million in selling, general and administrative expenses. Legal Settlement and Related Costs In October 1999, the Company settled litigation which was commenced against it and other related parties by International Diamond Traders CY B.V.B.A. ("IDT") and Avi Neumark, the President and controlling stockholder of IDT. The total cost of the settlement to the Company was $5,048,000, including related legal and other expenses. 8 Interest Expense Net interest expense was $4,317,000, $3,621,000 and $2,702,000 in 2001, 2000, and 1999, respectively. The increase in 2001 was due to higher average balances outstanding on the Company's various lines of credit and lower interest income compared to 2000, partially offset by the effect of lower interest rates during 2001. The increase in 2000 compared to 1999 was due to higher average balances outstanding on the Company's various lines of credit compared to 1999, partially offset by higher interest income in 2000. Income Taxes During 2001, the Company's effective tax rate of 35.7% approximated the U.S. statutory rate. During 2000 and 1999, the Company's tax provision, which varied significantly from the U.S. statutory rate, included tax benefits of $1,126,000, and $5,280,000, respectively, primarily in recognition of the net operating losses incurred in those years. Cumulative Effect of Change in Method of Accounting for Start-up Costs On June 1, 1999 the Company adopted Statement of Positon (SOP) 98-5, "Reporting on the Costs of Start-Up Activities", and recorded a non-cash charge of $1,522,000 (net of tax benefit of $671,000), or $0.18 per share. 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 ALROSA of Russia. The adoption of SOP 98-5 did not have a material effect on income from continuing operations for the year ended May 31, 2001 or 2000. Earnings/(Loss) Per Share During 2001, 2000 and 1999, basic and fully diluted earnings/(loss) per share was $0.20, $(0.09) and ($0.74), respectively. In 2000, basic and diluted earnings/(loss) per share before the cumulative effect of change in accounting principle was $0.09 per share. Basic earnings per share is computed based upon the weighted average number of common shares outstanding. Diluted earnings per share includes the impact of dilutive stock options. 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 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. The functional currency for Lazare Kaplan Japan is the Japanese yen and, as of May 31, 2001 and 2000, the Company recognized cumulative foreign currency translation adjustments with regard to the activities of Lazare Kaplan Japan in the amount of $(118,000)and $239,000 respectively, which are shown as a component of stockholders' equity in the accompanying balance sheet. Liquidity - Capital Resources 9 The Company's working capital at May 31, 2001 was $101,378,000, which was $3,362,000 more than its working capital at May 31, 2000. This increase primarily reflects the repayment of loans with cash generated by operations. The Company's working capital at May 31, 2000 was $98,016,000, a decrease of $8,565,000 from May 31, 1999. This decrease was primarily related to the repurchase of treasury shares, capital expenditures and the reclassification of a portion of the Company's long-term debt to current. Fixed asset additions totaled $1,416,000,$2,716,000 and $4,144,000 in 2001, 2000 and 1999, respectively. In November 2000, a subsidiary of the Company entered into a two year committed revolving loan facility. The facility provides that the subsidiary may borrow up to 1.1 billion Japanese yen at an interest rate 1% above the Japanese yen LIBOR. Borrowings under the facility are available for the repayment of other loans and working capital purposes. The Company guarantees repayment of amounts borrowed. Borrowings under the loan are used in support of its operations in Japan. The Company has a $40 million unsecured line of credit with a bank. As of May 31, 2001 and 2000, the balance outstanding under this line of credit was $2,896,000 and $16,780,000 million, respectively. This line of credit is available for the Company's working capital requirements. The Company has 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. The term of the loan is through September 1, 2002. The proceeds of this facility are available for the Company's working capital needs. 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. As of May 31, 2001 and 2000 there was an aggregate balance outstanding of $39,175,000 and $38,135,000, respectively, under this agreement. Management believes the Company has the ability to meet its current and anticipated financing needs for the next twelve months with the facilities in place and funds from operations. Stockholders' equity was $79,934,000 million at May 31, 2001 as compared to $82,807,000 at May 31, 2000. This decrease primarily reflects the repurchase of $4,096,000 of treasury stock offset by earnings during this period. No dividends were paid to stockholders during the year ended May 31, 2001. In December 2000, the Company's Board of Directors authorized the extension of the Company's stock repurchase program through April 6, 2002 for the repurchase of a total of 2 million shares. Business Developments Under the terms of its agreement with AK ALROSA of Russia, the Company equipped a diamond cutting factory which was completed in February 1997 within the ALROSA facility in Moscow. This facility is staffed by Russian technicians and managed and supervised by Company personnel. ALROSA has agreed to supply a minimum of $45 million per year of large rough gem diamonds selected by the Company as being suitable for processing at this facility. In May 1997, the facility completed the production of its first polished stones and the Company received its first shipment of polished stones produced at this facility during November 1997. Since that time the Company has received regular shipments of polished stones from the ALROSA facility. The Company is 10 selling the resulting polished gem stones through its worldwide distribution network. The proceeds from the sale of these polished diamonds, after deduction of rough diamond cost, generally are shared equally with ALROSA. This agreement serves as a long-term off-take arrangement to secure the repayment of 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 for up to $100 million a year. Under the terms of this agreement, the Company and ALROSA agreed to refurbish two new polishing facilities in Russia. Both of these facilities are fully operational and are in addition to the first joint 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 wholly-owned subsidiary, Pegasus Overseas Ltd. ("POL") 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. 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 of qualifying diamonds without reducing their all-natural content. The process, which was developed 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. In December 1999, POL completed the test marketing of these diamonds in the United States. After careful study, a brand name, Bellataire, was selected for the consumer launch. The Bellataire diamond is being offered for sale to U.S. retailers as of June 2000. The Company has granted GE a security interest in a portion of POL's inventory of polished diamonds. As a concerned member of the diamond industry and global community at large, the Company fully supports a policy which prohibits the purchase of diamonds illicitly seized and sold by rebel forces in Angola, Sierra Leone, and the Democratic Republic of the Congo. As it has in the past, the Company will continue to condemn trading in illicit diamonds, a position which reflects the Company's leadership in the industry. Furthermore, the Company fully complies with and supports the resolutions adopted by the United Nations as well as concerned regional and international governments and various industry trade associations in attempting to isolate and eliminate the trade in illicit stones. 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 11 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 current diamond output is sold by De Beers Centenary AG and its affiliated companies. Although De Beers has historically been one of the Company's major suppliers of rough diamonds, the Company has successfully diversified its sources of supply by entering into arrangements with other primary source suppliers and has been able to supplement its rough diamond needs by purchasing supplies in the secondary market. While the Company believes that it has good relationships with its suppliers and that its sources of supply are sufficient to meet its present and foreseeable needs, the Company's rough diamond supplies, and therefore, its manufacturing capacity, could be adversely affected by political and economic developments in producing countries over which it has no control. While the Company believes that alternative sources of supply may be available, any significant disruption of the Company's access to its primary source suppliers could have a material adverse effect on its ability to purchase rough diamonds. Further, through its control of the world's diamond output, De Beers 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. Throughout 1999 and 2000, the Diamond Trading Company ("DTC"), a De Beers affiliate, conducted a strategic review of its overall business model. In July 2000, the DTC announced significant changes in its approach to rough diamond marketing. In brief, the DTC stated that it will stop open market purchases and alter its market control and pricing policies. Henceforth, the DTC has said it will focus on selling its own mining productions through its "supplier of choice" marketing programs. These policy changes are intended to modernize business practices within the industry, shorten channels of distribution, lower working diamond stocks, supply clients with downstream distribution and encourage additional investment in marketing and advertising programs. The Company believes it is well positioned to benefit from these changes in the DTC's approach to diamond marketing. However, there can be no assurance that this policy change will not have a material adverse effect on the Company's operations. In August 2001 the European Commission issued a statement of objections which identify a number of restrictions and trading conditions in the Supplier of Choice agreement which appear to violate European competition law, and which can therefore not benefit from exemption under Article 81(3). A Statement of Objections is a preliminary step in antitrust proceedings which does not prejudge the Commission's final decision. At this point, no conclusion can be reached by the Company as to the ultimate outcome of the Commission's ruling. 12 Consolidated Statements of Operations
Year ended May 31, - -------------------------------------------------------------------------------------------------------------------------- (In thousands, except share and per share data) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- ------------------------------------------- Net Sales $ 270,786 $ 361,134 $ 261,853 Cost of Sales 240,752 331,760 250,035 - -------------------------------------------------------------------------------------------------------------------------- 30,034 29,374 11,818 - -------------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 23,316 20,608 20,691 Interest expense, net of interest income 4,317 3,621 2,702 Legal settlement and related costs - 5,048 - - -------------------------------------------------------------------------------------------------------------------------- 27,633 29,277 23,393 - -------------------------------------------------------------------------------------------------------------------------- Income/(loss) before income tax provision/(benefit) 2,401 97 (11,575) Income tax provison/(benefit) 858 (678) (5,252) - -------------------------------------------------------------------------------------------------------------------------- Income /(loss) before cumulative effect of change in accounting principle 1,543 775 (6,323) Cumulative effect of change in accounting principle - (1,522) - - -------------------------------------------------------------------------------------------------------------------------- NET INCOME/(LOSS) $ 1,543 $ (747) $ (6,323) - -------------------------------------------------------------------------------------------------------------------------- ------------------------------------------- EARNINGS/(LOSS) PER SHARE Basic earnings/(loss) per share before cumulative effect of change in accounting principle $ 0.20 $ 0.09 $ (0.74) - -------------------------------------------------------------------------------------------------------------------------- ------------------------------------------- Basic earning/(loss) per share $ 0.20 $ (0.09) $ (0.74) - -------------------------------------------------------------------------------------------------------------------------- ------------------------------------------- Average number of shares outstanding during the period 7,657,285 8,212,251 8,488,861 - -------------------------------------------------------------------------------------------------------------------------- ------------------------------------------- Diluted earnings/(loss) per share before cumulative effect of change in accounting principle $ 0.20 $ 0.09 $ (0.74) - -------------------------------------------------------------------------------------------------------------------------- ------------------------------------------- Diluted earnings/(loss) per share $ 0.20 $ (0.09) $ (0.74) - -------------------------------------------------------------------------------------------------------------------------- ------------------------------------------- Average number of shares outstanding during the period, assuming dilution 7,677,265 8,307,047 8,488,861 - -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------
See notes to consolidated financial statements. 13 Consolidated Balance Sheets
May 31, - ------------------------------------------------------------------------------------------------------- (In thousands, except share data) 2001 2000 - ------------------------------------------------------------------------------------------------------- Assets CURRENT ASSETS: Cash and cash equivalents $ 1,128 $ 7,254 Accounts receivables, less allowance for doubtful accounts ($1,103 and $1,065 in 2001 and 2000, respectively) 60,436 66,258 Inventories, net: Rough stones 16,541 31,155 Polished stones 67,103 57,484 ------------------------------- Total inventories 83,644 88,639 ------------------------------- Prepaid expenses and other current assets 8,016 12,191 Deferred tax assets-current 4,512 6,257 - ------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 157,736 180,599 Property, plant and equipment, net 9,394 9,554 Other assets 2,633 7,891 Deferred tax assets, net 6,155 4,655 - ------------------------------------------------------------------------------------------------------- $175,918 $202,699 - ------------------------------------------------------------------------------------------------------- ------------------------ Liabilities and Stockholders' Equity CURRENT LIABILITIES: Accounts payable and other current liabilities $ 44,287 $ 49,874 Notes payable-other and current portion of long- term debt 12,071 32,709 - ------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABLITIES 56,358 82,583 Other long-term debt 39,626 37,309 - ------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 95,984 119,892 - ------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY 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 2001 and 2000 Issued 8,549,441and 8,543,393 shares in 2001 and 2000, respectively. 8,549 8,543 Additional paid-in capital 58,213 58,182 Cumulative translation adjustment (118) 239 Retained earnings 21,275 19,732 - ------------------------------------------------------------------------------------------------------- 87,919 86,696 Less treasury stock, 1,181,750 and 498,150 at cost in 2001 and 2000, respectively (7,985) (3,889) - ------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 79,934 82,807 - ------------------------------------------------------------------------------------------------------- $175,918 $202,699 - ------------------------------------------------------------------------------------------------------- ------------------------
See notes to consolidated financial statements. 14 Consolidated Statements of Cash Flows
Year ended May 31, - ------------------------------------------------------------------------------------------------------------------------ (In thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net Income/(loss) $ 1,543 $ (747) $(6,323) Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: Depreciation and amortization 1,789 2,208 943 Provision for uncollectible accounts 382 863 60 Benefit from/(provision for) deferred income taxes 245 (1,126) (5,480) Cumulative effect of change in method of accounting - 1,522 - Changes in operating assets and liabilities: Accounts receivable 5,440 (34,219) 4,785 Rough and polished inventories 4,995 (7,285) 164 Prepaid expenses and other current assets 4,175 (1,741) (398) Other assets 5,045 (6,219) (1,704) Accounts payable and other current liabilities (5,587) 24,688 26 - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by/(used in) operating activities 18,027 (22,056) (7,927) - ------------------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities: Capital expenditures (1,416) (2,716) (4,144) - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (1,416) (2,716) (4,144) - ------------------------------------------------------------------------------------------------------------------------ Cash flows from Financing Activities: Increase/(decrease) in short-term borrowings (20,638) 30,551 2,158 Increase/(decrease) in long-term borrowings 2,317 (1,266) 15,015 Purchase of treasury stock (4,096) (2,676) (1,191) Proceeds from exercise of stock options 37 41 4 ------------------------------------------- Net cash provided by/(used in)financing activities (22,380) 26,650 15,986 - ------------------------------------------------------------------------------------------------------------------------ Effect of cumulative translation adjustment (357) 195 44 ------------------------------------------- Net increase/(decrease) in cash and cash equivalents (6,126) 2,073 3,959 Cash and cash equivalents at beginning of year 7,254 5,181 1,222 ------------------------------------------- Cash and cash equivalents at end of year $ 1,128 $ 7,254 $ 5,181 - ------------------------------------------------------------------------------------------------------------------------ ------------------------------------------- Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 4,193 $ 4,044 $ 2,872 Income taxes $ 231 $ 156 $ 129 - ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 15 Consolidated Statements Of Stockholders' Equity
Additional Cumulative Total Common Paid-in Translation Retained Treasury Stockholders' (In thousands, except share data) Stock Capital Adjustment Earnings Stock Equity - --------------------------------------------------------------------------------------------------------------- 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 Comprehensive income/(loss): Net income/(loss) - - - (747) - (747) Foreign currency translation - - 195 - - 195 ------- Comprehensive income/(loss) (552) Exercise of stock options, 7,900 shares issued 8 33 - - - 41 Purchase of treasury stock, 331,000 shares - - - - (2,676) (2,676) - ------------------------------------------------------------------------------------------------------ Balance, May 31, 2000 8,543 58,182 239 19,732 (3,889) 82,807 - ------------------------------------------------------------------------------------------------------ Comprehensive income/(loss): Net income/(loss) - - - 1,543 - 1,543 Foreign currency translation - - (357) - - (357) ------- Comprehensive income/(loss) 1,186 Exercise of stock options, 6,048 shares issued 6 31 - - - 37 Purchase of treasury stock, 683,600 shares - - - - (4,096) (4,096) - ------------------------------------------------------------------------------------------------------ Balance, May 31, 2001 $8,549 $58,213 $(118) $21,275 $(7,985) $79,934 - ------------------------------------------------------------------------------------------------------
See notes to consolidated financial Statements. 16 Notes to Consolidated Financial Statements Years ended May 31, 2001, 2000 and 1999 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. All material intercompany balances and transactions have been eliminated. In these notes to consolidated financial statements, the years "2001", "2000" and "1999" refer to the fiscal years ended May 31, 2001, 2000 and 1999, respectively. b. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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, 2001, 2000 and 1999 are set forth below:
2001 2000 1999 - ------------------------------------------------------------------------------------- United States 28% 23% 31% Far East 9% 8% 8% Europe, Israel & other 63% 69% 61% - ------------------------------------------------------------------------------------- 100% 100% 100% - -------------------------------------------------------------------------------------
No single customer of the Company accounted for 10% or more of the Company's net sales for the fiscal years ended May 31, 2001, 2000 and 1999. Credit is extended based on an evaluation of each customer's financial condition and generally collateral is not required on the Company's receivables. Revenue is recognized when goods are delivered and title and risk of ownership have passed to the buyer. 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. 17 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. 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. h. 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 subsidiary, Lazare Kaplan Japan, which are denominated in Japanese yen. 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. i. Advertising Advertising costs are expensed as incurred and were $2,615,000, $2,480,000 and $1,214,000 in 2001, 2000 and 1999, respectively. j. 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. Realization of the net deferred tax assets is dependent on generating sufficient taxable income prior to the expiration of net operating loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net deferred tax asset will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 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. 18 There were no taxable dividends paid to the Company from foreign subsidiaries during 2001. k. 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. l. 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 current diamond output is sold by De Beers Centenary AG and its affiliated companies. Although De Beers has historically been one of the Company's major suppliers of rough diamonds, the Company has successfully diversified its sources of supply by entering into arrangements with other primary source suppliers and has been able to supplement its rough diamond needs by purchasing supplies in the secondary market. While the Company believes that it has good relationships with its suppliers and that its sources of supply are sufficient to meet its present and foreseeable needs, the Company's rough diamond supplies, and therefore, its manufacturing capacity, could be adversely affected by political and economic developments in producing countries over which it has no control. While the Company believes that alternative sources of supply may be available, any significant disruption of the Company's access to its primary source suppliers could have a material adverse effect on its ability to purchase rough diamonds. Further, through its control of the world's diamond output, De Beers 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 rough or polished diamonds could have a material adverse affect on the Company in terms of inventory losses and lower margins. Throughout 1999 and 2000, the DTC, a De Beers affiliate, conducted a strategic review of its overall business model. In July 2000, the DTC announced significant changes in its approach to rough diamond marketing. In brief, the DTC stated that it will stop open market purchases and alter its market control and pricing policies. Henceforth, the DTC has said it will focus on selling its own mining productions through its "supplier of choice" marketing programs. These policy changes are intended to modernize business practices within the industry, shorten channels of distribution, lower working diamond stocks, supply clients with downstream distribution and encourage additional investment in marketing and advertising programs. The Company believes it is well positioned to benefit from these changes in the DTC approach to diamond marketing. However, there can be no assurance that this policy change will not have a material adverse effect on the Company's 19 operations. In August 2001 the European Commission issued a statement of objections which identify a number of restrictions and trading conditions in the Supplier of Choice agreement which appear to violate European competition law, and which can therefore not benefit from exemption under Article 81(3). A Statement of Objections is a preliminary step in antitrust proceedings which does not prejudge the Commission's final decision. At this point, no conclusion can be reached by the Company as to the ultimate outcome of the Commission's ruling. m. 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 10). n. Comprehensive Income/(Loss) The Company reports "Comprehensive Income/(Loss)" in accordance with Statement of Financial Accounting Standards No. 130, which requires foreign currency translation adjustments to be included in other comprehensive income. For the years ended May 31, 2001 and 2000, total comprehensive income/(loss) was $1,186,000 and ($552,000), respectively. o. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No.133, "Accounting for Derivative Instruments and Hedging Activities," and its amendments Nos. 137 and 138, ("Statements 133") in June 1999 and June 2000 respectively. Statement 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in fair value of the derivative is either offset against the change in fair value of the hedged item and reflected in earnings (fair value hedge), or recognized in other comprehensive income until the hedged item is reflected in earnings (cash flow hedge). The ineffective portion (that is, the change in fair value of the derivative that does not offset the change in fair value of the hedged item) of a derivative's change in fair value will be immediately recognized in earnings. The Company is required to adopt Statement 133 in the first quarter of fiscal year ended May 31, 2002 and does not believe that it will have a material impact on its results of operations. In July, 2001, the Financial Accounting Standards Board issued Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statements 142"). Under Statement 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt statement 142 in their fiscal year beginning after December 15, 2001. Early adoption is permitted for companies with fiscal years beginning after March 15, 2001 provided that their first quarter financial statements have not been issued. The Company is not required to adopt this new standard until fiscal year ended May 31,2003 and is currently evaluating its impact. P. Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation. 20 2. Property, Plant and Equipment Property, plant and equipment consists of (in thousands):
May 31, - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ Land and buildings $ 2,715 $ 2,693 Leasehold improvements 2,210 2,209 Machinery, tools and equipment 5,641 4,924 Furniture and fixtures 1,853 1,877 Computer hardware and equipment 7,516 6,877 19,935 18,580 Less accumulated depreciation and amortization 10,541 9,026 - ------------------------------------------------------------------------------ $ 9,394 $ 9,554 - ------------------------------------------------------------------------------
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%
Depreciation expense for 2001, 2000 and 1999 was $1,576,000, $1,313,000 and $727,000, respectively. 21 3. Income Taxes The items comprising the Company's net deferred tax assets are as follows (in thousands):
May 31, - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Deferred tax assets: Operating loss and other carryforwards $ 6,618 $ 9,181 Other 4,062 2,129 Deferred tax liabilities: Depreciation 120 265 - -------------------------------------------------------------------------------- $10,800 11,045 Less: Valuation allowance (133) (133) - -------------------------------------------------------------------------------- Net deferred tax assets $10,667 $10,912 - --------------------------------------------------------------------------------
The income tax provision/(benefit) is comprised of the following (in thousands):
Year ended May 31, - -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- Current: Federal $375 $ 48 $ -- State and local 93 327 28 Foreign 145 73 -- - -------------------------------------------------------------------------------- 613 448 28 - -------------------------------------------------------------------------------- Deferred: Federal, state and local 245 (1,126) (5,280) - -------------------------------------------------------------------------------- $858 $ (678) $(5,252) - --------------------------------------------------------------------------------
Income/(loss) before income taxes from the Company's domestic and foreign operations was $1,588,000 and $813,000, respectively for the year ended May 31, 2001, ($408,000) and $505,000, respectively for the year ended May 31, 2000 and ($11,102,000) and ($473,000), respectively for the year ended May 31, 1999. 22 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):
- -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- Tax provision/(benefit) at statutory rate $ 816 $ 33 $(3,936) (Decrease)/increase in taxes resulting from: Differential attributable to foreign operations (131) (174) (58) State and local taxes, net of Federal benefit 145 164 (578) Permanent items 28 (1,001) -- Change in valuation allowance for deferred tax asset -- 300 (680) - -------------------------------------------------------------------------------- Actual tax provision/(benefit) $ 858 $ (678) $(5,252) - --------------------------------------------------------------------------------
The Company has available Federal net operating losses to offset future taxable income which expire as follows (in thousands):
Net Operating Year Losses - -------------------------------------------------------------------------------- 2013 $ 2,054 2019 12,268 2020 298 - -------------------------------------------------------------------------------- $14,620 - --------------------------------------------------------------------------------
In addition, the Company has New York State and New York City net operating loss carryforwards of approximately $6,597,000 each, expiring in 2019. The Company has Puerto Rico net operating loss carryforwards of approximately $1,800,000 expiring from 2002 through 2005. 4. Accounts Payable and Other Current Liabilities Accounts payable and other current liabilities consist of (in thousands):
2001 2000 - --------------------------------------------------------------- Accounts payable $ 2,831 $10,745 Accrued expenses 41,456 39,129 - --------------------------------------------------------------- $44,287 $49,874 - ---------------------------------------------------------------
5. Lines of Credit The Company has 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. The revolving loan agreement contains certain 23 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 dividends. As of May 31, 2001 and 2000 there was an aggregate balance outstanding of $39,175,000 and $38,135,000, respectively, under this agreement. At May 31, 2001, $9,175,000 of the outstanding balance was classified as current. The weighted average interest rate during 2001 and 2000 on the Company's revolving loan was 8.38% and 7.43%, respectively. In December 1999, a subsidiary of the Company borrowed, at a fixed exchange rate, 1.1 billion Japanese yen under a loan facility with one of its primary commercial bank lenders. The Company repaid 96,250,000 yen during 2000 and repaid the balance of the loan due during 2001. In connection therewith, in November 2000 a subsidiary of the Company entered into a two year loan facility which enables the subsidiary to borrow up to 1.1 billion Japanese yen at an interest rate 1% above Japanese LIBOR. The loan contains provisions that, among other things, require the Company to maintain a minimum debt to equity ratio. Borrowings under the facility are available for general working capital purposes and are guaranteed by the Company. At May 31, 2001, the outstanding balance of 1.1 billion Japanese yen ($9,072,000) was classified as noncurrent. In June 2000, the Company entered into an interest rate swap agreement with one of its primary commercial bank lenders which had the effect of converting the December 1999 loan to a fixed interest rate loan. The swap agreement which expires in December 2001 had an immaterial effect on the result of operations in 2000 and 2001. The Company has a $30 million and a $10 million unsecured line of credit with a bank. Borrowings under the 30 million line bear interest at a rate 150 basis points above the bank's base rate. Borrowings under the $10 million line bear interest at a rate 160 basis points above the 90 day LIBOR. As of May 31, 2001, the balance outstanding under both lines was $2.9 million. Borrowings under these lines are available for the Company's working capital requirements. 6. Senior Notes During 2001 and 2000, the Company had outstanding unsecured 9.97% Senior Notes. The notes were fully repaid on May 15, 2001. The balance outstanding on May 31, 2000 was $4,290,000. 7. Legal Settlement and Related Costs A settlement agreement, dated October 18, 1999, was signed which settled all of the various disputes among the Company and other related parties and International Diamond Traders CY B.V.B.A. ("IDT") and Avi Neumark, the President and controlling stockholder of IDT. The Company agreed to pay the parties the sum of $3,275,000 over a period of 40 months. The balance outstanding on May 31, 2001 and 2000 was $1,317,000 and $1,975,000, respectively. The total cost of the settlement to the Company during the year ended May 31, 2000 was $5,048,000, including related legal and other expenses. 8. Realignment Costs and Other Charges a. Japanese Distribution 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 24 office. As a result, the Company recorded a charge of approximately $5.6 million in 1999. During 2000, the Company realized approximately $3.0 million as beneficiary of certain life insurance policies which arose from its relationship with its former Japanese distributor. The Company also incurred $1.1 million of additional costs relating to the realignment of its Japanese operations. b. Angola On December 31, 1999, the Company's license to purchase diamonds in Angola expired. Through February 2000, the Company continued to operate its Angolan buying operations. During the fourth quarter of 2000, the Company terminated its operations in Angola and recorded charges relating to such operations of $1.1 million. c. Other Charges The Company recorded charges of $2.0 million in the fourth quarter of 2000 primarily related to year-end inventory adjustments. In aggregate, during 2000, the life insurance proceeds net of realignment costs and other charges resulted in a decrease of approximately $0.8 million in selling, general and administrative expenses and an increase of approximately $2.0 million in cost of sales. In 1999, the net effect was an increase of $5.6 million in selling, general and administrative expenses. 9. Cumulative Effect of Change in Method of Accounting for Start-up Costs On June 1, 1999, the Company adopted Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities", and recorded a non-cash charge of $1,522,000 (net of tax benefit of $671,000). This amount is primarily comprised of a) the start-up expenses related to the operations of the Company's, 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 ALROSA of Russia. The adoption of SOP 98-5 did not have a material effect on income from continuing operations for the year ended May 31, 2001 or 2000. 10. 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 25 and its subsidiaries. No future grants may be made under the 1988 Plan, although outstanding 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 600,000 shares of the common stock of the Company for issuance to key employees of the Company and its subsidiaries. An increase to 1,350,000 shares reserved for issuance under the 1997 Plan was approved by the Board of Directors on May 16, 2001 and is subject to stockholder approval at the 2001 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 2001, 2000 and 1999 at the date of the grant using the Black-Scholes option pricing model. The estimated fair value of the options is amortized as 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:
- ---------------------------------------------------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------- Risk-free interest rate 6.00% 6.00% 6.00% Expected option life 5 years 5 years 5 years Expected volatility 38.20% 35.80% 37.30% Expected dividends per share $0.00 $0.00 $0.00 Weighted average estimated fair value per share of options granted at market price $2.15 $3.00 $3.13 Weighted average estimated fair value per share of options granted above market price - $2.66 - Pro forma net income/(loss) (000's) $1,350 $(1,106) $(6,857) Pro forma basic earnings/(loss) per share $ 0.18 $ (0.13) $ (0.81) Pro forma diluted earnings/(loss) per share $ 0.18 $ (0.13) $ (0.81) - ----------------------------------------------------------------------------------------
As any options granted in the future will also be subject to the fair value pro forma calculations, the pro forma adjustments for 2001, 2000 and 1999 may not be indicative of future years. 26 A summary of the Plans' activity for each of the three years in the period ended May 31, 2001 is as follows:
Number Weighted average of shares Option price price per share - ---------------------------------------------------------------------------------------------- Outstanding - June 1, 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 Options expired (1,300) $7.625-$10.375 $ 9.318 Options issued 141,300 $7.000-$ 9.000 $ 7.414 Options exercised (7,900) $5.125-$ 5.125 $ 5.125 - ---------------------------------------------------------------------------------------------- Outstanding - May 31, 2000 759,424 $5.125-$16.225 $ 9.988 - ---------------------------------------------------------------------------------------------- Outstanding - May 31, 2001 Options expired (92,100) $7.000-$14.750 $ 9.523 Options issued 101,800 $5.000-$ 8.438 $ 5.168 Options exercised (30,600) $5.125-$ 6.375 $ 6.150 Outstanding-May 31,2001 738,524 $5.000-$16.225 $ 9.830 - ---------------------------------------------------------------------------------------------- Exercisable options 542,423 ------- - ----------------------------------------------------------------------------------------------
The following table summarizes information about stock options at May 31, 2001:
Outstanding stock options Exercisable stock options - ------------------------- ------------------------- Weighted average Weighted remaining average Range of contractual exercise prices Shares life Shares price - --------------------------------------------------------------------------- $ 5.000-$6.375 220,381 5.75 years 123,581 $ 5.90 $ 7.000-$8.438 157,143 6.29 years 64,509 $ 7.41 $ 9.000-$11.413 157,500 4.83 years 150,833 $10.76 $14.750-$16.225 203,500 2.39 years 203,500 $15.76 - ---------------------------------------------------------------------------
11. Commitments and Contingencies Future minimum payments (excluding sub-lease income) under noncancelable operating leases with initial terms of more than one year consist of the following at May 31, 2001 (in thousands):
Operating Year leases - ------------------------------------------------------ 2002 $ 539 2003 355 2004 93 - ------------------------------------------------------ $ 987 - ------------------------------------------------------
Rental expense, including additional charges paid for increases in real estate taxes and other escalation charges and credits for the years ended May 31, 2001, 2000 and 1999, was approximately $878,000, $842,000 and $542,000, respectively. 12. 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 27 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. The Company did not make a matching contribution during the last three years. 13. 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, 2001 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): 28
North Far Elimini- Consoli- America Europe Africa East nations dated - ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------- Year ended May 31, 2001 - ----------------------- Net sales to unaffiliated customers $128,021 $114,606 $ 12,093 $16,066 $ - $270,786 Transfers between geographic areas 46,545 25,330 - 461 (72,336) - --------------------------------------------------------------------- Total revenue $174,566 $139,936 $ 12,093 $16,527 $ (72,336) $270,786 --------------------------------------------------------------------- Gross profit $ 23,166 $ 2,177 $ 2,257 $ 2,434 $ - $ 30,034 Income/(loss)from continuing operations before income tax provision $ 3,032 $ 98 $ 1,166 $(1,895) $ - $ 2,401 --------------------------------------------------------------------- Identifiable assets at May 31, 2001 $154,187 $ 35,886 $ 18,395 $ 9,926 $ (42,476) $175,918 - ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------- Year ended May 31, 2000 - ----------------------- Net sales to unaffiliated customers $106,848 $236,327 $ 208 $17,751 $ - $361,134 Transfers between geographic areas 25,275 6,646 132,627 - (164,548) - --------------------------------------------------------------------- Total revenue $132,123 $242,973 132,835 $17,751 $(164,548) $361,134 --------------------------------------------------------------------- Gross profit $ 23,650 $ 1,560 $ 498 $ 3,666 - $ 29,374 Income/(loss)from continuing operations before income tax provision and cumulative effect of change in accounting principle $ 1,915 $ (172) $ (1,121) $ (525) - $ 97 --------------------------------------------------------------------- Identifiable assets at May 31, 2000 $167,472 $ 51,982 $ 12,635 $13,479 $ (42,869) $202,699 - ------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------ ---------------------------------------------------------------------
The identifiable assets which are included in the elimination primarily represent advances to affiliates. These advances are included therein since the Company, which is the parent company, finances the operations of these affiliates. 29 Revenue and gross profit for each of the three years in the period ended May 31, 2001 classified by product were as follows (in thousands):
Polished Rough Total - ---------------------------------------------------------------------- Year ended May 31, 2001 Net sales $193,805 $ 76,981 $270,786 ---------------------------------- Gross Profit $ 28,294 $ 1,740 $ 30,034 - ---------------------------------------------------------------------- Year ended May 31, 2000 Net sales $138,568 $222,566 $361,134 ---------------------------------- Gross profit $ 23,333 $ 6,041 $ 29,374 - ---------------------------------------------------------------------- Year ended May 31, 1999 Net sales $112,573 $149,280 $261,853 ---------------------------------- Gross profit $ 14,415 $ (2,597) $ 11,818 - ----------------------------------------------------------------------
14. Treasury Stock The Board of Directors authorized the repurchase, at management's discretion, of up to 2,000,000 shares of the Company's common stock from time to time through April 16,2002. During 2001 and 2000, the Company purchased 683,600 and 331,000 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, 2001 and 2000 (in thousands, except per share data):
Quarter - -------------------------------------------------------------------------------------- First Second Third Fourth - -------------------------------------------------------------------------------------- 2001 - ---- Net sales $77,575 $ 78,317 $ 55,064 $59,830 Gross profit $ 8,704 $ 9,016 $ 6,935 $ 5,379 Net income/(loss) $ 1,033 $ 725 $ 250 $ (465) Basic earnings/(loss) per share $ 0.13 $ 0.09 $ 0.03 $ (0.06) Diluted earnings/(loss) per share $ 0.13 $ 0.09 $ 0.03 $ (0.06) 2000 - ---- Net sales $69,742 $111,906 $106,238 $73,248 Gross profit $ 6,492 $ 8,195 $ 8,875 $ 5,812 Income/(loss) before cumulative effect of change in accounting principle $ 1,016 (1) ($ 861)(2) $ 2,834(3) ($ 2,214)(4) Net income/(loss) ($ 506)(1) ($ 861)(2) $ 2,834(3) ($ 2,214)(4) Basic earnings/(loss) per share ($ 0.06) ($ 0.10) $ 0.35 ($ 0.27) Diluted earnings/(loss) per share ($ 0.06) ($ 0.10) $ 0.35 ($ 0.27)
(1) Includes $1.5 million (net of tax) related to the cumulative effect of a change in method of accounting and $0.5 million (net of tax) of costs associated with a legal settlement. (2) Includes $2.6 million (net of tax) of costs associated with a legal settlement. (3) Includes $1.6 million of benefits from certain life insurance policies. (4) Includes $1.4 million of benefits from certain life insurance policies offset by $2.6 million (net of tax) in costs to realign operations and other charges. 30 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, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended May 31, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000 and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 2001, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP New York, New York August 9, 2001 31 Corporate Information Corporate Headquarters 529 Fifth Avenue New York, New York 10017 Telephone (212) 972-9700 Directors and Officers Maurice Tempelsman Director; Chairman of the Board Leon Tempelsman Director; Vice Chairman of the Board and President Lucien Burstein Director; Secretary Partner Warshaw Burstein Cohen Schlesinger & Kuh, LLP (attorneys) Myer Feldman Director; Attorney, self-employed Robert A. Del Genio Director; Co-Founder Conway, Del Genio, Gries & Company, LLC Robert Speisman Director; Senior Vice President-Sales William H. Moryto Vice President and Chief Financial Officer 32 Registrar and Transfer Agent ChaseMellon Transfer Services, LLC 85 Challenger Road Overpeck Center Ridgefield Park, NJ 07660 Counsel Warshaw Burstein Cohen Schlesinger & Kuh, LLP 555 Fifth Avenue New York, New York 10017 Independent Auditors Ernst & Young LLP 787 Seventh Avenue New York, New York 10019 33 EX-21 11 ex-21.txt EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES OF LAZARE KAPLAN INTERNATIONAL INC.
NAME ORGANIZED UNDER LAWS OF ---- ----------------------- 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 Bellataire Diamonds Inc. Delaware
EX-23 12 ex-23.txt EXHIBIT 23 EXHIBIT 23 REPORT AND CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Lazare Kaplan International Inc. and subsidiaries of our report dated August 9, 2001 included in the 2001 Annual Report to Stockholders of Lazare Kaplan International Inc. Our audits also included the consolidated financial statement schedule of Lazare Kaplan International Inc. and subsidiaries listed in Item 14(a)2. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule, when considered in relation to the basic 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) and Registration Statement (Form S-8, No. 333-92077) which relate 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 9, 2001 with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Lazare Kaplan International Inc. ERNST & YOUNG, LLP New York, New York August 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----