-----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, C/EyRsml/qvUnOR1iIz9/HXURyLdNLqjMxkazXXi3wOq6YkmrtnaD6MN2wKCFo9k 5WiKBQMU9XfNqov6JVE28g== 0000950117-96-001569.txt : 19961212 0000950117-96-001569.hdr.sgml : 19961212 ACCESSION NUMBER: 0000950117-96-001569 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19961211 SROS: AMEX 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: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-14227 FILM NUMBER: 96679361 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 S-2/A 1 LAZARE KAPLAN INTERNATIONAL S-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1996 REGISTRATION NO. 333-14227 ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ LAZARE KAPLAN INTERNATIONAL INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 13-2728690 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
529 FIFTH AVENUE NEW YORK, NEW YORK 10017 (212) 972-9700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ SHELDON L. GINSBERG LAZARE KAPLAN INTERNATIONAL INC. 529 FIFTH AVENUE NEW YORK, NEW YORK 10017 (212) 972-9700 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: FREDERICK R. CUMMINGS, JR., ESQ. EARL D. WEINER, ESQ. WARSHAW BURSTEIN COHEN SULLIVAN & CROMWELL SCHLESINGER & KUH, LLP 125 BROAD STREET 555 FIFTH AVENUE NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10017 (212) 558-3820 (212) 984-7700
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effectiveness of this registration statement. If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this form, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ________________________________________________________________________________ Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Subject to Completion, Dated December 11, 1996 PROSPECTUS 2,200,000 SHARES [LOGO] LAZARE KAPLAN INTERNATIONAL INC. COMMON STOCK ($1.00 PAR VALUE) --------------------- Of the 2,200,000 shares of Common Stock offered hereby, 1,800,000 shares are being sold by Lazare Kaplan International Inc. (the 'Company') and 400,000 shares are being sold by the Company's Chairman, Maurice Tempelsman (the 'Selling Stockholder'). See 'Principal and Selling Stockholders and Security Ownership of Management.' The Company will not receive any of the proceeds from the sale of Common Stock by the Selling Stockholder. The Common Stock is listed on the American Stock Exchange under the symbol 'LKI.' On December 10, 1996, the closing price for the Common Stock was $18 3/8 per share. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE 'RISK FACTORS,' COMMENCING ON PAGE 8. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions(1) Company(2) Stockholder Per share...................... $ $ $ $ Total(3)....................... $ $ $ $
(1) See 'Underwriting' for indemnification arrangements. (2) Before deducting expenses of the offering estimated at $ . (3) The Company has granted the Underwriters a 30 day option to purchase up to 330,000 additional shares of Common Stock at the Price to Public less Underwriting Discounts and Commissions shown above, solely to cover over-allotments, if any. If this option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See 'Underwriting.' --------------------- The shares of Common Stock offered by the Underwriters are subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and to certain other conditions. It is expected that delivery of such shares will be made through the offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or about December , 1996. --------------------- UBS SECURITIES FURMAN SELZ , 1996 [LOGO] [GRAPHIC OF DIAMOND DISPLAY] Lazare Kaplan International Inc., a multi-national diamond company, is engaged in rough diamond sourcing, in cutting and polishing these diamonds into gemstones and in selling polished diamonds to an international network of quality retail jewelers. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission (the 'Commission'). Reports, proxy statements and other information filed by the Company can be inspected and copied at the principal office of the Commission, Public Reference Room, 450 Fifth Street, N.W., Washington, DC 20549, and at the regional offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60651-2511 and at Seven World Trade Center, Suite 1300, New York, New York 10048. Copies can be obtained from the Commission at prescribed rates by writing to the Commission at 450 Fifth Street, N.W., Washington, DC 20549. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of such Web site is http://www.sec.gov. The Common Stock of the Company is listed on the American Stock Exchange. Reports, proxy and information statements, and other information concerning the Company can be inspected and copied at the American Stock Exchange, 86 Trinity Place, New York, NY 10006. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company's Annual Report on Form 10-K for the year ended May 31, 1996 and the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996, which were filed with the Commission, are incorporated in this Prospectus by reference. The Company will provide, upon request, without charge to each person to whom this Prospectus is delivered, a copy of any or all of the documents incorporated herein by reference except for certain exhibits to such documents. Requests for such copies should be directed to Chief Financial Officer, Lazare Kaplan International Inc., 529 Fifth Avenue, New York, NY 10017, telephone number (212) 972-9700. Any statement contained in a document incorporated herein by reference shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this Prospectus modifies or replaces such statement. 3 PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus, including the information set forth under 'Risk Factors.' Except as otherwise specified, all share and per share data described herein are based on the assumption that the Underwriters' over-allotment option is not exercised. Certain statements contained in the Prospectus Summary and elsewhere in this Prospectus regarding matters that are not historical facts, such as the Company's continued ability to obtain rough diamonds and the Company's plans to expand its business and with respect to strategic alliances and other agreements with third parties, are forward-looking statements (as such term is defined in the Securities Act of 1933, as amended) and because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those discussed herein under 'Risk Factors.' THE COMPANY GENERAL Lazare Kaplan International Inc. is engaged in the cutting, polishing and selling of ideally proportioned diamonds. The Company markets such diamonds 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 in the world engaged in the production of ideally proportioned diamonds and that it is the largest producer of ideal cut diamonds. In addition, the Company cuts and polishes commercial diamonds, which it markets to wholesalers, distributors and through select retail jewelers. Those stones purchased by the Company and not selected for manufacturing are promptly resold as rough diamonds in the marketplace. The Company is also engaged in the trading of rough diamonds. 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. See 'Business.' GROWTH STRATEGY The Company seeks to expand its current business by increasing its marketing efforts, adding to its sources of rough diamonds, improving manufacturing efficiencies, diversifying its product line and pursuing additional strategic opportunities. The Company is focusing on expanding its marketing and distribution efforts by distributing its polished diamonds into new geographic markets, exploring alternative distribution opportunities and selectively increasing the number of customers selling the Company's products in existing markets. The Company seeks to increase its access to sources of supply of rough diamonds by pursuing new business ventures in rough diamond producing countries. The recent agreements in Russia and Angola are two examples of this effort. See ' -- Recent Developments.' The Company endeavors to increase productivity and yield (rough weight to polished weight conversion) by seeking to enhance efficiency in its existing manufacturing facilities through worker incentives, training programs and state-of-the-art technology. The Company seeks to diversify its product line by manufacturing a broader range of sizes and types of polished diamonds in response to changing market demand. The Company evaluates acquisition opportunities and alliances with strategic partners which could allow it to integrate vertically by entering into the diamond retail or mining sectors. 4 MARKETING STRATEGY The Company's marketing strategy is directed primarily toward quality conscious consumers throughout the United States, the Far East and Europe. The Company focuses its distribution efforts for Lazare Diamonds on selectivity with a view to helping retailers who carry the product maintain a competitive advantage. Lazare Diamonds can be found at some of the most prestigious jewelry stores around the world, including those with international reputations and those known only in their communities as being the highest quality retail jewelers. This strategy helps ensure that the Company's product is presented in an environment consistent with its superior quality and image. The Company also sells to certain jewelry manufacturers and diamond wholesalers. The Company has developed a comprehensive grading system for its diamonds, which allows jewelers to order inventory by category rather than through the more cumbersome process of visual selection. In addition, the Company designs, manufactures (through independent contractors) and sells a line of high quality jewelry that features Lazare Diamonds. See 'Business -- Marketing, Sales and Distribution.' An important element of the Company's strategy is the promotion of the Lazare Diamonds brand name. Every Lazare Diamond bears a laser inscription on its outer perimeter, invisible to the naked eye, containing the Lazare Kaplan logo and an identification number unique to each stone. The laser signature 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. See 'Business -- Marketing, Sales and Distribution.' DIAMOND SUPPLY The Company's principal supplier of rough diamonds is the Diamond Trading Company (the 'DTC'), an affiliate of De Beers Centenary AG. Based on published reports, the Company believes that the DTC controls approximately 75% of the value of world rough diamond output. The Company has been a client of the DTC for more than 50 years. In order to diversify its sources of rough diamond supply, however, the Company has broadened its purchasing capabilities throughout Africa and has an office in Antwerp to supplement its rough diamond needs by secondary market purchases. The Company also has expanded its operations and entered into relationships with other primary source suppliers. The Company believes that this ability to diversify rough diamond sourcing allows it to maintain quantities and qualities of polished inventory that best meet its customers' needs. See ' -- Recent Developments' and 'Business -- Diamond Supply.' MANUFACTURING OPERATIONS The Company currently has three 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. This facility generally produces polished diamonds having weights of 1/5 of a carat and greater. In 1993 the Company opened its factory, located in Molepolole, Botswana, which is operated in partnership with the Government of Botswana. This new state-of-the-art factory expands the Company's product line by cutting and polishing ideal cut diamonds in smaller sizes (generally smaller than 1/5 of a carat in size) than those produced in Puerto Rico. The Company's third manufacturing operation is conducted in cooperation with the Russian Government agency responsible for diamond exports and the Russian national stockpile and is located at this agency's facility in Moscow, Russia. The Company believes this facility, opened in 1991, is one of the largest factories in the world primarily dedicated to the cutting and polishing of large rough diamonds. See 'Business -- Properties.' RECENT DEVELOPMENTS On July 16, 1996, the Company announced that it had signed a ten year agreement with AK Almazi Rossii Sakha ('ARS'), a Russian company, for the cutting, polishing and marketing of large rough gem diamonds. According to published reports, ARS is the largest producer of rough diamonds in Russia with annual production in excess of $1.2 billion, accounting for over 20% of the value of the world's supply of rough diamonds. In accordance with the terms of the agreement, the Company has begun to equip a diamond cutting factory (estimated to cost $600,000, half of which will be borne by 5 ARS) within the existing ARS facility in Moscow. This new facility will be staffed by Russian technicians and managed and supervised by Company personnel. ARS 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. The Company has agreed to sell the resulting polished diamonds through its worldwide distribution network. The proceeds from the sale of these polished diamonds, after reimbursement of the costs incurred by each of the parties, generally will be shared equally with ARS. This agreement does not require the Company to advance funds for the purchase of rough diamonds. The Company anticipates that the facility will commence cutting and polishing before June 1997. See 'Business -- Cutting and Polishing' and 'Risk Factors -- Risk of Foreign Operations.' In July 1996, the Company signed a five year agreement, approved by the Government of Angola, for the supply of a portion of the rough diamonds mined in Angola and for the joint cutting, polishing and marketing of that production. The agreement, entered into with Empresa Nacional de Diamantes de Angola ('Endiama'), Angola's national diamond mining company, and a company owned by a consortium of Angolan investors, provides for Endiama to sell to the Company a portion of the rough diamonds mined in Angola consisting of sizes and qualities selected by the Company as being suitable for cutting and sale as polished diamonds, or for resale as rough diamonds. See 'Business -- Diamond Supply.' In October 1996, Aiwa Co., Ltd. ('Aiwa'), the Japanese distributor with whom the Company has had a marketing relationship since 1972, announced that it entered into an agreement in Japan with Seiko Corporation ('Seiko'), one of the world's largest watchmakers. In connection with this agreement, the Company and Aiwa intend that Seiko will act as the exclusive distributor in Japan for Lazare Diamonds. The Company plans to form a joint venture in Japan with Aiwa (to be known as Lazare Kaplan Japan) to provide promotional and other support services to Seiko. This joint venture will implement an arrangement whereby Seiko will distribute, market and promote Lazare Diamonds in Japan. Seiko is generally recognized as a leader in consumer brand marketing and has a well developed network of contacts and retailers. Aiwa, with a distribution network of over 200 retailers and wholesalers, will continue to be an important customer of the Company's non-branded polished diamonds. BACKGROUND Lazare Kaplan International Inc. 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's principal stockholder is Maurice Tempelsman, the Chairman of the Board. Mr. Tempelsman and his son, Leon Tempelsman, are the only general partners of Leon Tempelsman & Son ('LTS'), a New York limited partnership, which holds 1,528,416 shares of Common Stock. In addition, prior to this offering, Maurice Tempelsman is the direct beneficial holder of 2,310,409 shares of Common Stock and holds, directly and indirectly, approximately 61.3% of the Company's issued and outstanding Common Stock. Maurice Tempelsman is the Selling Stockholder referred to in this Prospectus. THE OFFERING(1) Common Stock offered by: The Company.............................................................................. 1,800,000 shares The Selling Stockholder(2)............................................................... 400,000 shares Total.................................................................................... 2,200,000 shares Common Stock to be outstanding after the offering............................................. 8,061,071 shares Use of proceeds by the Company......................................................Repayment of Senior Notes and reduction of bank indebtedness American Stock Exchange symbol.............................................................................. LKI
- ------------ (1) Assumes Underwriters' over-allotment option is not exercised. (2) Maurice Tempelsman, the Chairman of the Board of the Company and the Company's principal stockholder, is the Selling Stockholder. 6 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED MAY 31, AUGUST 31, -------------------------------------------------------- ------------------- 1992 1993 1994 1995(1) 1996 1995 1996 -------- -------- -------- -------- -------- ------- ------- Statement of Operations Data: Net sales.................. $151,875 $158,075 $204,047 $178,143 $266,321 $61,697 $69,400 EBITDA(2).................. $ 1,646 $ 3,362 $ 8,705 $ 4,243 $ 13,566 $ 2,498 $ 3,199 Income/(loss) before income tax provision and minority interest........ $ (2,287) $ (728) $ 2,803 $ (1,418) $ 7,149 $ 886 $ 1,595 Income/(loss) before minority interest(3)..... $ (2,951) $ (903) $ 2,685 $ (1,632) $ 6,690 $ 829 $ 1,502 Net income/(loss).......... $ (2,951) $ (903) $ 3,024 $ (1,153) $ 7,013 $ 786 $ 1,659 Net income/(loss) per share.................... $ (0.48) $ (0.15) $ 0.49 $ (0.18) $ 1.12 $ 0.13 $ 0.26 Weighted average number of shares outstanding....... 6,121,680 6,121,680 6,226,708 6,309,071 6,288,157 6,236,021 6,484,029 Pro Forma Statement of Operations Data(4)(5): Net sales................................................................. $266,321 -- $69,400 EBITDA(2)................................................................. $ 13,635 -- $ 3,216 Income/(loss) before income tax provision and minority interest........... $ 10,403 -- $ 2,315 Income/(loss) before minority interest(3)................................. $ 9,879 -- $ 2,207 Net income/(loss)......................................................... $ 10,202 -- $ 2,364 Net income/(loss) per share............................................... $ 1.26 -- $ 0.29 Supplementary shares outstanding(6)....................................... 8,088,157 -- 8,284,029
AT AUGUST 31, 1996 -------------------------------------- ACTUAL AS ADJUSTED(5)(7) ----------------- ----------------- Balance Sheet Data: Working capital....................................................... $ 75,960 $ 82,420 Total assets.......................................................... $ 114,400 $ 114,077 Short-term debt....................................................... $ 9,460 $ 3,000 Long-term debt........................................................ $ 34,230 $ 11,004 Stockholders' equity.................................................. $ 46,579 $ 75,942
- ------------ (1) Fiscal 1995 results include a non-recurring charge of $1.8 million relating to a write-down of the Company's polished small stone inventory. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' (2) EBITDA represents net income/(loss) before interest expense, taxes, minority interest, depreciation and amortization. EBITDA should not be considered as a substitute for net income, as an indicator of operating performance, or as an alternative to cash flow as a measure of liquidity. (3) Reflects the use of the Company's net operating loss carryforwards. See Note 3 to the Consolidated Financial Statements. (4) Reflects the effect on the historical income statement data for the year ended May 31, 1996 and for the quarter ended August 31, 1996 of the reduction of interest expense of $3,185,000 and $703,000, respectively, as if the offering made hereby had been completed June 1, 1995 and the Company had prepaid the outstanding balance on its Senior Notes and a portion of the balance then outstanding under the Company's revolving loan and lines of credit. The historical income statement data have not been adjusted to reflect (a) the write-off of deferred financing costs associated with the Senior Notes of approximately $340,000 and $323,000 for the year ended May 31, 1996 and the quarter ended August 31, 1996, respectively, or (b) the prepayment premium associated with the prepayment of the Senior Notes. See 'Use of Proceeds.' (5) Gives effect to the sale of the shares of Common Stock offered by the Company hereby at an assumed offering price of $18.925 per share (the average of the closing prices on the American Stock Exchange from December 4, 1996 through December 10, 1996) and the application of the estimated net proceeds from such sale. (6) Supplementary shares outstanding reflects the adjustment to the historical weighted average shares outstanding at May 31, 1996 and August 31, 1996 for the sale of the shares issued in connection with this offering. (7) The balance sheet data have been adjusted to reflect (a) the impact of the repayment of the Senior Notes outstanding of $21,430,000 at August 31, 1996 and of $8,256,000 for the repayment of other bank indebtedness, (b) the write-off of deferred financing costs associated with the Senior Notes and (c) the payment of the prepayment premium associated with the prepayment of the Senior Notes. See 'Use of Proceeds.' 7 RISK FACTORS Potential purchasers of Common Stock should consider carefully the following matters, as well as the other information contained in this Prospectus, before deciding to purchase shares of Common Stock offered hereby. Availability of Rough Diamonds. The Company's business is dependent upon the availability of rough diamonds, the world's known sources of which are highly concentrated. Historically, the Company's principal supplier of rough diamonds has been the Diamond Trading Company (the 'DTC'), which, based on published reports, together with its affiliates, controls approximately 75% of the value of world diamond output. The Company has been a client of the DTC for over 50 years and believes its relations with the DTC are good. For the three fiscal years ended May 31, 1996, 1995 and 1994, approximately 50%, 47% and 58%, respectively, of the Company's purchases of rough diamonds were from the DTC. The Company has diversified its sources of supply over the last several years by entering into arrangements with other suppliers of rough diamonds. This diversification includes the expansion of purchasing of rough diamonds in Africa, and expanding operations at its office in Antwerp to supplement the Company's rough diamond buying needs by making purchases in the secondary market. However, if there should be any interruption in the Company's relationship with the DTC as its primary source supplier of rough diamonds, such interruption could have a material adverse effect on the Company's operations. The Company's sources of supply could also be adversely affected by political and economic developments in producing countries over which the Company has no control. See ' -- Risk of Foreign Operations' and 'Business -- Diamond Supply.' Effect of Possible Diamond Supply and Price Fluctuations. Through its control of the world's rough diamond supply and its own inventory, De Beers Centenary AG, an affiliate of the DTC, can exert significant control over the pricing of rough and polished diamonds. Global rough diamond pricing can be affected positively or negatively by general economic conditions as well as by imbalances in the supply of and demand for rough and/or polished diamonds. In recent years, significant short-term increases of rough diamond supply have reportedly originated from Russia and Angola. Should there be a material and sudden increase in the availability of rough diamonds beyond the global marketplaces' capacity to absorb, including increases in available diamonds from such sources or from new sources, the Company and the diamond industry could be materially adversely affected. Major fluctuations in the prices of rough and polished diamonds have occurred in the past. Any large rapid increase in rough diamond prices could materially adversely affect the Company's revenue and operating margins if the increased cost cannot be passed along to the Company's customers in a timely manner. Any rapid decrease in the price of polished diamonds could materially adversely affect the Company in terms of inventory losses and lower margins. See 'Business -- Pricing.' Risk of Foreign Operations. The world's sources of rough diamonds are highly concentrated in a limited number of countries, including Angola, Australia, Botswana, Ghana, Guinea, Namibia, Russia, Sierra Leone, South Africa and Zaire. Varying degrees of political and economic risk exist in these countries. As a consequence, the diamond business is subject to various sovereign risks beyond the industry'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. Recent news articles report that there is a Russian governmental investigation into alleged tax irregularities at ARS. Recent reports also indicate that ARS has denied these allegations. See 'The Company -- Recent Developments.' Luxury Product. The Company produces a luxury product that it sells domestically and internationally primarily to quality retailers. Consumers purchase polished diamonds with discretionary, disposable income. Consumer purchasing patterns can be influenced by general economic conditions in consuming countries, employment levels and consumer confidence. A negative trend in any of these items could have a material adverse effect on the Company. 8 Dependence on Key Personnel. The success of the Company is highly dependent upon the efforts of Maurice Tempelsman and Leon Tempelsman, the loss of whose combined services would have a material adverse effect on the Company. See 'Management.' Limited Trading Market and Possible Volatility of Common Stock Prices. Although the Common Stock has been traded on the American Stock Exchange since 1972, trading activity of the Common Stock has been limited, totalling approximately 119,225 shares per month on average over the 12 months ended September 30, 1996. Accordingly, this low trading volume may have had a significant effect on the market price of the Common Stock, and historic prices may not necessarily be indicative of market prices in a more liquid market. See 'Price Range of Common Stock.' Control by Existing Stockholders. Upon the completion of this offering, the shares of Common Stock beneficially owned by Maurice Tempelsman, the Chairman of the Board of the Company, together with the shares of Common Stock beneficially owned by his son, Leon Tempelsman, the Vice-Chairman and President of the Company (Maurice Tempelsman and Leon Tempelsman, collectively, the 'Tempelsmans'), will constitute 3,771,038 shares, or approximately 45.9% of the Common Stock then outstanding (44.1% if the Underwriter's over-allotment option is exercised in full). See 'Principal and Selling Stockholders and Security Ownership of Management.' As a result of the ownership of such shares, the Tempelsmans effectively will continue to be able to elect all of the Company's directors, to determine the outcome of all corporate actions requiring stockholder approval, and otherwise to control the Company's business. See 'Certain Transactions.' USE OF PROCEEDS The net proceeds to be received by the Company from the sale of Common Stock offered by it hereby are estimated to be approximately $31,586,000 (approximately $37,457,000 if the Underwriters' over-allotment option is exercised in full based on an assumed offering price of $18.925, the average of the closing prices of the Common Stock from December 4, 1996 through December 10, 1996). The Company currently intends to use a portion of the proceeds to prepay all or a portion of the outstanding principal balance of its Senior Notes of $21,430,000, and the prepayment premiums associated therewith of up to approximately $1,900,000. The Senior Notes bear interest at the rate of 9.97% per annum and mature May 15, 2001. The Company intends to use the remaining proceeds to repay a portion of the balance outstanding under its revolving loan, of which $19,260,000 was outstanding as of August 31, 1996. The weighted average interest rate for the three months ended August 31, 1996 on the revolving loan was 8.10%. The Company intends to draw down funds under its existing $35,500,000 revolving loan from time to time until the expiration thereof on June 1, 1999 for general corporate purposes, including the working capital requirements for the Company's expansion in Russia and Angola. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.' The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholder. PRICE RANGE OF COMMON STOCK The Company's Common Stock is listed on the American Stock Exchange under the symbol 'LKI.' The Company intends to list the shares of Common Stock offered hereby on the American Stock Exchange. The following chart sets forth the high and low sale prices of the Common Stock on the American Stock Exchange during the fiscal quarters of the Company listed below. See 'Risk Factors -- Limited Trading Market and Possible Volatility of Common Stock Prices.'
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED MAY 31, 1995 MAY 31, 1996 MAY 31, 1997 --------------------- --------------------- --------------------- HIGH LOW HIGH LOW HIGH LOW --------- -------- --------- -------- --------- -------- First quarter................................. $ 9 7/8 $8 7/8 $ 7 7/8 $6 1/2 $16 1/2 $ 12 1/2 Second quarter................................ 9 3/4 8 1/2 7 9/16 6 1/8 21 7/8 16 1/2 Third quarter................................. 9 3/4 8 5/8 9 6 3/4 19 3/8* 18 3/8* Fourth quarter................................ 8 3/4 7 1/2 14 3/4 7 5/8
- ------------ * Through December 10, 1996. 9 For a recent closing price for the Common Stock on the American Stock Exchange see the cover page of this Prospectus. DIVIDEND POLICY The Company has not paid any cash dividends to the holders of its Common Stock since 1982. The Company intends to retain future earnings to provide funds for the operation and expansion of its business and, accordingly, does not anticipate resuming the payment of cash dividends in the foreseeable future. In addition, pursuant to the terms of the Company's long term revolving loan facility, the Company is not permitted to declare and pay cash dividends. The Company's ability to declare and pay cash dividends is also restricted under the terms of its Senior Notes. CAPITALIZATION The following table sets forth short-term debt and the capitalization of the Company (i) as of August 31, 1996 and (ii) as adjusted to reflect the sale of the 1,800,000 shares of Common Stock offered by the Company hereby at an assumed offering price of $18.925, the average of the closing prices of the Common Stock from December 4, 1996 through December 10, 1996, and the application of the estimated net proceeds therefrom to prepay the Company's long-term Senior Notes and a portion of certain other bank indebtedness, as well as the impact of the prepayment premium associated with the prepayment of the Senior Notes and the write-off of deferred financing costs associated with the Senior Notes. See 'Prospectus Summary -- Summary of Financial Information.' This information should be read in conjunction with the consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus.
AUGUST 31, 1996 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Short-term debt...................................................... $ 9,460 $ 3,000 ------- ----------- Long-term debt....................................................... $34,230 $11,004 Stockholders' equity: Common Stock, $1.00 par value, 10,000,000 shares authorized; issued and outstanding, 6,185,531 at August 31, 1996 and 7,985,531 shares, as adjusted................................. 6,186 7,986 Additional paid-in capital...................................... 26,138 55,924 Retained earnings............................................... 14,255 12,032 ------- ----------- Total stockholders' equity........................................... 46,579 75,942 ------- ----------- Total capitalization....................................... $80,809 $86,946 ------- ----------- ------- -----------
10 SELECTED FINANCIAL INFORMATION The selected data presented below as of and for each of the five years in the period ended May 31, 1996 have been derived from the consolidated financial statements of the Company, which financial statements for each of the two years in the period ended May 31, 1996 were audited by Ernst & Young LLP, independent auditors, and for each of the three years in the period ended May 31, 1994 by Deloitte & Touche LLP, independent auditors. The selected data presented below as of and for the three-month periods ended August 31, 1995 and 1996 are derived from unaudited financial statements, but, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results of operations for these periods. The results of operations for the three months ended August 31, 1996 are not necessarily indicative of the results to be expected for the entire year. The data should be read in conjunction with the consolidated financial statements, related notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Prospectus. All data is in thousands, except share and per share data.
YEAR ENDED MAY 31, -------------------------------------------------------- 1992 1993 1994 1995(1) 1996 -------- -------- -------- -------- -------- Statement of Operations Data Net sales.............................................. $151,875 $158,075 $204,047 $178,143 $266,321 Cost of sales.......................................... 140,348 146,819 187,664 165,686 243,685 -------- -------- -------- -------- -------- 11,527 11,256 16,383 12,457 22,636 -------- -------- -------- -------- -------- Selling, general & administrative expenses............. 10,980 8,977 9,833 10,386 11,439 Interest expense, net of interest income............... 2,834 3,007 3,747 3,489 4,048 -------- -------- -------- -------- -------- 13,814 11,984 13,580 13,875 15,487 -------- -------- -------- -------- -------- Income/(loss) before income tax provision and minority interest............................................. (2,287) (728) 2,803 (1,418) 7,149 Income tax provision(2)................................ 664 175 118 214 459 -------- -------- -------- -------- -------- Income/(loss) before minority interest................. (2,951) (903) 2,685 (1,632) 6,690 Minority interest in (income)/loss of consolidated subsidiary........................................... -- -- 339 479 323 -------- -------- -------- -------- -------- Net income/(loss)...................................... $ (2,951) $ (903) $ 3,024 $ (1,153) $ 7,013 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income/(loss) per share............................ ($0.48) ($0.15) $0.49 ($0.18) $1.12 Weighted average number of shares...................... 6,121,680 6,121,680 6,226,708 6,309,071 6,288,157 THREE MONTHS ENDED AUGUST 31, -------------------- 1995 1996 --------- -------- Statement of Operations Data Net sales.............................................. $ 61,697 $ 69,400 Cost of sales.......................................... 57,019 63,868 --------- -------- 4,678 5,532 --------- -------- Selling, general & administrative expenses............. 2,776 2,992 Interest expense, net of interest income............... 1,016 945 --------- -------- 3,792 3,937 --------- -------- Income/(loss) before income tax provision and minority interest............................................. 886 1,595 Income tax provision(2)................................ 57 93 --------- -------- Income/(loss) before minority interest................. 829 1,502 Minority interest in (income)/loss of consolidated subsidiary........................................... (43) 157 --------- -------- Net income/(loss)...................................... $ 786 $ 1,659 --------- -------- --------- -------- Net income/(loss) per share............................ $0.13 $0.26 Weighted average number of shares...................... 6,236,021 6,484,029
Pro Forma Statement of Operations Data(3)(4): Net sales........................................................................................ $266,321 -- Cost of sales.................................................................................... $243,685 -- Selling, general & administrative expenses....................................................... $ 11,370 -- Interest expense, net of interest income......................................................... $ 863 -- Income/(loss) before income tax provision and minority interest.................................. $ 10,403 -- Income tax provision(2).......................................................................... $ 524 -- Income/(loss) before minority interest........................................................... $ 9,879 -- Minority interest in (income)/loss of consolidated subsidiary.................................... $ 323 -- Net income....................................................................................... $ 10,202 -- Supplementary net income per share............................................................... $ 1.26 -- Supplementary shares outstanding(5).............................................................. 8,088,157 --
Pro Forma Statement of Operations Data(3)(4): Net sales........................................................................................ $ 69,400 Cost of sales.................................................................................... $ 63,868 Selling, general & administrative expenses....................................................... $ 2,975 Interest expense, net of interest income......................................................... $ 242 Income/(loss) before income tax provision and minority interest.................................. $ 2,315 Income tax provision(2).......................................................................... $ 108 Income/(loss) before minority interest........................................................... $ 2,207 Minority interest in (income)/loss of consolidated subsidiary.................................... $ 157 Net income....................................................................................... $ 2,364 Supplementary net income per share............................................................... $ 0.29 Supplementary shares outstanding(5).............................................................. 8,284,029
- ------------ (1) Fiscal 1995 results include a non-recurring charge of $1.8 million relating to a write-down of the Company's polished small stone inventory. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' (2) Reflects the use of the Company's net operating loss carryforwards. See Note 3 to the Consolidated Financial Statements. (3) Reflects the effect on the historical income statement data for the year ended May 31, 1996 and for the quarter ended August 31, 1996 of the reduction in interest expense of $3,185,000 and $703,000, respectively, as if the offering made hereby had been completed June 1, 1995 and the Company had prepaid the outstanding balance on its Senior Notes and a portion of the balance then outstanding under the Company's revolving loan and lines of credit. The historical income statement data have not been adjusted to reflect (a) the write-off of deferred financing costs associated with the Senior Notes of approximately $340,000 and $323,000 for the year ended May 31, 1996 and the quarter ended August 31, 1996, respectively or (b) the prepayment premium associated with the prepayment of the Senior Notes. See 'Use of Proceeds.' (4) Gives effect to the sale of the shares of Common Stock offered by the Company hereby at an assumed offering price of $18.925 per share (the average of the closing prices on the American Stock Exchange from December 4, 1996 through December 10, 1996) and the application of the estimated net proceeds from such sale. (5) Supplementary shares outstanding reflects the adjustment to the historical weighted average shares outstanding at May 31, 1996 and August 31, 1996 for the sale of the shares issued in connection with this offering.
AT MAY 31, --------------------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- Balance Sheet Data (in thousands): Working capital............................................... $61,079 $53,011 $52,333 $59,290 $74,069 Total assets.................................................. 77,977 86,452 93,178 99,163 105,066 Short-term notes payable...................................... 3,000 12,005 17,185 11,410 3,000 Long-term debt................................................ 30,000 30,000 25,715 26,430 34,155 Stockholders' equity.......................................... 36,573 35,671 38,751 37,695 44,870 AT AUGUST 31, ----------------- 1995 1996 ------- ------- Balance Sheet Data (in thousands): Working capital............................................... $60,365 $75,960 Total assets.................................................. 103,638 114,400 Short-term notes payable...................................... 9,785 9,460 Long-term debt................................................ 26,430 34,230 Stockholders' equity.......................................... 38,481 46,579
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company believes that it has achieved a worldwide reputation as a premier manufacturer of ideally proportioned diamonds, which command premium prices in the marketplace. The Company's current and long-term strategic efforts are focused on maintaining and expanding this position in domestic and international markets. The Company's results of operations and growth are dependent on its ability to obtain rough diamonds of suitable quality for manufacture into ideally proportioned diamonds and to maintain and expand its worldwide customer base for these products. The Company's current operations do not require substantial capital expenditures, and its working capital needs relate primarily to inventories of diamonds and customer receivables. Any significant increase in sales would therefore result in a commensurate need for increased working capital. The Company believes that its current infrastructure will support a substantial increase in sales without a commensurate increase in its selling, general and administrative expenses. The following table sets forth the Company's net sales of polished and rough diamonds for the periods shown (in thousands):
THREE MONTHS ENDED YEAR ENDED MAY 31, AUGUST 31, ------------------------------ ----------------- 1994 1995 1996 1995 1996 -------- -------- -------- ------- ------- Polished diamonds................................. $ 51,484 $ 73,097 $ 89,968 $19,956 $18,169 Rough diamonds.................................... 152,563 105,046 176,353 41,741 51,231 -------- -------- -------- ------- ------- Total net sales.............................. $204,047 $178,143 $266,321 $61,697 $69,400 -------- -------- -------- ------- ------- -------- -------- -------- ------- -------
See 'Business -- Marketing, Sales and Distribution' for a discussion of the Company's domestic and international sales for such periods. RESULTS OF OPERATIONS FOR THE FISCAL QUARTER ENDED AUGUST 31, 1996 NET SALES Net sales during the three month period ended August 31, 1996 of $69,400,000 were $7,703,000 or 12% above the $61,697,000 in sales during the three month period ended August 31, 1995. Revenue from the sale of polished diamonds decreased 9% to $18,169,000 during the three month period ended August 31, 1996 from $19,956,000 during the comparable three month period ended August 31, 1995. This decrease was attributable to lower sales in Japan as the Company continued to examine opportunities for augmenting its channels of distribution with its existing distributor, and a decrease in sales from its Russian production caused by a temporary delay in shipments of polished diamonds from Russia. The delayed shipments were subsequently exported and received by the Company during September and October of 1996. Rough sales increased to $51,231,000 for the three months ended August 31, 1996 from $41,741,000 a year ago. The increase over the prior year is a result of continued growth in the Company's rough buying operations 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 diamonds (the 'Polished Diamond Gross Margin'). During the quarter ended August 31, 1996, the Polished Diamond Gross Margin was 18%, three percentage points higher than the 15% level in the quarter ended August 31, 1995. The increase from last year resulted from increased sales of larger diamonds (which historically have higher margins) and selling price increases to offset the increased cost of rough diamonds. During the quarter ended 12 August 31, 1996, overall gross margin (both polished and rough diamonds) on net sales was 8.0% compared to 7.6% for the quarter ended August 31, 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the first quarter ended August 31, 1996 were $2,992,000 (4.3% of net sales), compared to $2,776,000 (4.5% of net sales) for the quarter ended August 31, 1995. The increase was primarily attributable to higher consulting and legal expenses associated with the development of expansion opportunities. INTEREST EXPENSE Net interest expense for the quarter ended August 31, 1996 was $945,000 compared to $1,016,000 for the quarter ended August 31, 1995. The decrease was due primarily to the decrease in the interest rate charged on the Company's Senior Notes in the current year. INCOME PER SHARE Income per share is computed based on the weighted average number of shares outstanding including, as appropriate, the assumed exercise of all dilutive stock options, during each period. Income per share for the quarter ended August 31, 1996 was $.26 as compared to $.13 for the quarter ended August 31, 1995. RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MAY 31, 1996, 1995 AND 1994 In this discussion the years '1996', '1995' and '1994' refer to the fiscal years ended May 31, 1996, 1995 and 1994, respectively. NET SALES Net sales in 1996 of $266,321,000 were $88,178,000 or 50% greater than net sales of $178,143,000 in 1995. The Company's net revenue from the sale of polished diamonds of $89,968,000 in 1996 was 23% greater than 1995 polished sales. The increase was due to continued growth in the United States market as well as increased volume associated with the Company's cutting and polishing venture with the Russian Government organization responsible for diamond policy and the national stockpile in Russia. Rough diamond sales increased 68% to $176,353,000 in 1996. This increase was attributable to continued expansion of the Company's rough diamond buying operations, primarily in Angola, as well as increases in the supply of rough diamonds from the DTC, the Company's primary supplier during the current year. Net sales in 1995 of $178,143,000 were $25,904,000 or 13% less than the net sales of $204,047,000 in 1994. This reduction was primarily attributable to a decrease in sales of rough diamonds, which was partially offset by an increase in sales of polished diamonds. The Company's net revenue from the sale of polished diamonds of $73,097,000 in 1995 increased 42% compared to 1994 polished sales of $51,484,000. The increase was a result of increased polished diamond sales in the United States and the Pacific Rim due to increased demand and strengthening local economies as well as a stronger market in Japan. Rough diamond sales decreased 31% in 1995 compared to 1994. This decrease was a result of industry-wide market conditions and reduced supplies of rough diamonds made available from the DTC. See 'Risk Factors -- Availability of Rough Diamonds.' GROSS PROFIT Polished Diamond Gross Margin for 1996 was 16%, an increase of three percentage points from the 1995 level of 13%. The increase was due to an improvement in the quality of diamonds sold as well 13 as an increase in sales of larger diamonds, which traditionally carry higher margins, as compared to the prior year. The gross margin on sales of rough diamonds not selected for manufacturing and sales of rough diamonds from the rough trading operation, including an allocation of overhead costs estimated to be associated with the purchase and sale of rough diamonds, has averaged approximately 3% for the three years ended May 31, 1996. During 1996, the combined gross margin on net sales of both polished diamonds and rough diamonds was 8.5%. This compares to 7.0% in 1995 and 8.0% in 1994. Polished Diamond Gross Margin was 13% in 1995, a decrease of 11 percentage points from the 1994 level of 24%. Contributing to this decrease was a non-recurring charge of approximately $1.8 million to write down to market value the Company's inventory of small polished stones produced at its manufacturing facility in Botswana. The carrying value of this inventory was burdened with the pre-operating expenses incurred and manufacturing inefficiencies experienced during the startup phase of the factory, which, combined with the market conditions that existed during the year, caused such carrying value to exceed its selling price in 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses in 1996 of $11,439,000 (4.3% of net sales) increased 10% or $1,053,000 compared with expenses of $10,386,000 (5.8% of net sales) in 1995. The increase was attributable to higher compensation, commissions and benefits of $916,000 in 1996 as well as additional rent, depreciation and office expenses associated with the overall expansion of the Company's business. Selling, general and administrative expenses in 1995 of $10,386,000 (5.8% of net sales) increased 6% or $553,000 compared with expenses of $9,833,000 (4.8% of net sales) in 1994. The increase was primarily attributable to a theft of polished diamonds that was not covered by insurance. INTEREST EXPENSE Net interest expense was $4,048,000, $3,489,000 and $3,747,000 in 1996, 1995 and 1994, respectively. The increase in interest expense in 1996 was due primarily to higher average short-term borrowings of $13,196,000 as compared to $9,186,000 in 1995 and a full year of the higher interest rate charged on the Senior Notes (See Note 6 to the Consolidated Financial Statements and Liquidity -- Capital Resources below). The decrease in interest expense in 1995 was due primarily to lower average short-term borrowings of $9,186,000 in 1995 as compared to $14,371,000 in 1994. INCOME/(LOSS) PER SHARE During 1996, 1995 and 1994 income/(loss) per share was computed based on the weighted average number of shares outstanding, including the impact of dilutive stock options during the period. For 1996, income per share was $1.12 as compared to loss per share of ($.18) in 1995 and income per share of $.49 in 1994. FOREIGN OPERATIONS International business accounts for a major portion of the Company's revenues and profits. All foreign sales are denominated in U.S. dollars, and all purchases of rough diamonds worldwide are denominated in U.S. dollars. Therefore, the Company does not experience any material foreign currency exposure in connection with these activities. The functional currency for Lazare Kaplan Botswana (Pty) Ltd. is the U.S. dollar, and this subsidiary was not materially affected by foreign currency translation adjustments during the year. 14 LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at August 31, 1996 was $75,960,000, which was $1,891,000 greater than its working capital at May 31, 1996. The increase was due to higher inventories and accounts receivable partially offset by an increase in short-term borrowings in the current year. On May 14, 1996 the Company entered into a long-term unsecured, revolving loan agreement with two banks. The agreement provided that the Company may borrow up to $27,500,000 in the aggregate, at an interest rate of any of a) one-eighth of one percent above the bank's prime rate, b) two and one half percent above the London Interbank Offered Rate (LIBOR), or c) two and one-half percent above the bank's cost of funds rate. The applicable interest rate is contingent upon the method of borrowing selected by the Company. Effective in November 1996, the two banks agreed to increase the amount the Company may borrow to $35,500,000. All amounts borrowed under this agreement are due and payable on June 1, 1999. As of August 31, 1996, there was an aggregate balance outstanding of $19,260,000 under the loan agreement. In September 1996, the Company entered into a loan agreement with one of its banks providing for an additional short-term line of credit of up to $8.0 million, with an interest rate equal to any one of a) one-eighth of one percent above the bank's prime rate, b) two and one half percent above LIBOR, or c) two and one-half percent above the bank's cost of funds rate. The applicable interest rate is contingent upon the method of borrowing selected by the Company. All amounts borrowed under this agreement are due and payable on January 31, 1997. The Company has a $3.0 million credit facility, payable on demand, at a rate of one-half of one percent above the six-month LIBOR. At August 31, 1996, the full amount of this facility had been drawn upon. After giving effect to the offering of the shares of Common Stock offered by the Company hereby and the related repayment of indebtedness by the Company as described under 'Use of Proceeds', the Company will have additional capacity under its revolving loan. The Company believes that its cash flow from operations, together with such borrowing capacity, will be sufficient to meet the Company's operating needs and capital expenditures for the next 12 months. RECENT DEVELOPMENT On December 9, 1996, the Company announced earnings for the six and three month periods ended November 30, 1996. The Company reported that net income for the six months ended November 30, 1996 was $4.6 million, compared to $2.3 million for the six month period ended November 30, 1995. Net income for the fiscal quarter ended November 30, 1996 was $2.9 million, compared to $1.5 million in the fiscal quarter ended November 30, 1995. The Company reported that the increase in earnings was primarily due to an increase in polished diamond sales in the current year combined with improved margins on those sales. Total net sales for the six months ended November 30, 1996 increased 12% to $149.7 million from $134.0 million in the six month period ended November 30, 1995. In the fiscal quarter ended November 30, 1996, total net sales increased 11% to $80.3 million from $72.3 million in the fiscal quarter ended November 30, 1995. Sales of polished diamonds were $51.2 million for the six months ended November 30, 1996, an increase of 12% from $45.9 million in the six month period ended November 30, 1995. In the fiscal quarter ended November 30, 1996, polished diamond sales increased 28% to $33.1 million compared to $25.9 million in the fiscal quarter ended November 30, 1995. The Company reported that these increases were attributable to continued growth of polished diamond sales in the United States and Southeast Asia and, in the second quarter of the current year, also as a result of increased shipments, a portion of which were delayed from the first quarter of the current year, of large polished diamonds received from the Company's facility in Russia. Revenue from the sale of rough diamonds increased 12% to $98.4 million during the six months ended November 30, 1996 from $88.1 million during the six month period ended November 30, 1995. 15 For the three months ended November 30, 1996, rough diamond sales increased 2% to $47.2 million from $46.4 million in the fiscal quarter ended November 30, 1995. Income before income tax provision was $4.9 million for the six months ended November 30, 1996 compared to $2.6 million for the six months ended November 30, 1995. In the fiscal quarter ended November 30, 1996, income before income tax provision was $3.2 million compared to $1.7 million in the fiscal quarter ended November 30, 1995. Earnings per share for the six months ended November 30, 1996 was $0.70 compared to $0.37 for the six months ended November 30, 1995. For the fiscal quarter ended November 30, 1996, earnings per share was $0.44 compared to $0.25 for the fiscal quarter ended November 30, 1995. BUSINESS Lazare Kaplan International Inc. is engaged in the cutting, polishing and selling of ideally proportioned diamonds. The Company markets these diamonds internationally under the brand name 'Lazare Diamonds'r'. Ideally proportioned diamonds are distinguished from commercial cut diamonds by the symmetrical relationship of their facets, which maximizes brilliance, sparkle and fire. Due to these characteristics, Lazare Diamonds command a premium in the marketplace. The Company believes there are only a few other companies in the world engaged in the production of ideally proportioned diamonds and that it is the largest producer of ideal cut diamonds. In addition, the Company cuts and polishes commercial diamonds, which it markets to wholesalers, distributors and through select retail jewelers. The Company is also engaged in the trading of rough, unprocessed, natural diamonds. The Company is the successor to a business that began in 1903. The Company's principal offices are located at 529 Fifth Avenue, New York, New York 10017. The Company's telephone number is (212) 972-9700. IDEAL CUT DIAMONDS Every Lazare Diamond is cut to ideal proportions. This method of cutting diamonds results in diamonds that possess characteristics that the Company believes are most desired by consumers: optimum brilliance, sparkle and fire. A mathematical formula including the precise measurements for the diamonds' angles and proportions governs the production of ideal cut diamonds (see Diagram I). Because more of the rough diamond is cut away in order to achieve these specifications, it is more costly than other methods of manufacturing. In addition, a very high level of skill is required in the manufacturing process. The Company believes that less than one percent of the world's diamonds are cut to these exacting tolerances. DIAGRAM I: IDEAL CUT SPECIFICATIONS [ILLUSTRATION] Diagram II illustrates the reflection and refraction of light as it passes through a diamond. In an ideal cut diamond, light rays enter the diamond and are reflected back through the top of the diamond toward the eye, thus maximizing the brilliance, sparkle and fire of each diamond (Illustration A). In a diamond cut too deep or too shallow (Illustrations B and C, respectively), the light 'leaks' out through the side or bottom of the diamond causing a dispersion of light and a loss of brilliance. 16 DIAGRAM II: PATH OF LIGHT IN THREE DIAMONDS
IDEAL CUT NON-IDEAL CUT ILLUSTRATION A ILLUSTRATION B ILLUSTRATION C
Each Lazare Diamond is inscribed with the Company's logo and identification number using the Company's unique laser inscription process, thus authenticating the diamond as a Lazare Diamond. This laser 'signature', which is invisible to the naked eye but visible when viewed under ten-power magnification, serves as the purchaser's assurance that he is buying an authentic Lazare Diamond. Diagram III illustrates the laser inscription. DIAGRAM III: LASER INSCRIPTION [PHOTO] DIAMOND SUPPLY The Company's business is dependent upon the availability of rough diamonds, the world's known sources of which are highly concentrated. Based on published reports, the Company believes that Angola, Australia, Botswana, Brazil, Ghana, Guinea, Ivory Coast, Namibia, Russia, Sierra Leone, South Africa and Zaire account for more than 90% of present world rough gem diamond production. The Central Selling Organization (the 'CSO'), which is affiliated with De Beers Centenary AG, a Swiss company, is the dominant world-wide marketing mechanism of the diamond industry. The CSO seeks to maintain an orderly and stable market for diamonds by regulating the quantity and selection of diamonds that reach the market. This is achieved either by directly owning diamond mines, entering into multi-year purchase agreements with host governments, or by purchasing diamonds in the secondary market. Sales for the CSO are made in London by the Diamond Trading Company (the 'DTC') to a select group of clients ('sightholders') which, according to published reports, number approximately 160 worldwide, including the Company. Based upon published reports, the Company believes that approximately 75% of the value of world diamond output is purchased for resale by the DTC and its affiliated companies. In order to maintain their purchasing relationship, sightholders have traditionally been expected to purchase all of the diamonds offered to them by the DTC. Companies that are not sightholders of the DTC must either purchase their requirements from sightholders or seek access to that portion of the world supply not marketed by the DTC. Historically, the Company's principal supplier of rough diamonds has been the DTC, which periodically invites its clients to submit their requirements as to the amount and type of rough diamonds 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 and its predecessor have been sightholders for more than 50 years. The Company's subsidiary in Botswana is also a sightholder. 17 In order to diversify its sources of supply, the Company has entered into arrangements with other primary source suppliers, has expanded its rough diamond purchasing capabilities throughout Africa, and has established an office in Antwerp to supplement its rough diamond needs by making purchases in the secondary market. For the three years ended May 31, 1996, 1995 and 1994, approximately 50%, 47% and 58%, respectively, of the Company's diamond purchases were from the DTC, down from approximately 82% in 1988. In December 1994 the Company reached an agreement with Empresa Nacional de Diamantes de Angola ('Endiama'), Angola's national diamond mining company, pursuant to which the Company was granted a license to purchase rough diamonds from local Angolan miners and export such diamonds for resale. This is one of three such licenses granted by Endiama. The agreement entitles the Company to establish buying offices throughout Angola, the first of which was set up during 1995 in Luanda, the capital of Angola. The Company currently has three buying offices located in Angola, including the office in Luanda, and intends to establish additional buying offices in the future. The agreement will run for a term of five years and is subject to renewal thereafter. In July 1996 the Company signed a five year agreement, approved by the Government of Angola, for the supply of a portion of the rough diamonds mined in Angola and the joint cutting, polishing and marketing of a portion of that production. The agreement, entered into with Endiama and Sociedade Angolana de Exploracao, Lapidacao e Comercializacao de Diamantes, a company owned by a consortium of Angolan investors, provides for Endiama to sell to the Company a portion of the rough diamonds mined in Angola consisting of sizes and qualities selected by the Company as being suitable for cutting and sale as polished diamonds, or for resale as rough diamonds. Purchases under this arrangement began in August 1996. The Company intends to cut and polish the rough diamonds at its existing facilities. After an agreed period of consistent, uninterrupted supply of rough diamonds, a feasibility study will be undertaken by the Company to examine the economic viability of establishing a diamond cutting factory in Angola. In the agreement, the parties acknowledge that it is their long-term intention to create a diamond polishing facility in Angola with the capacity for polishing at least $40 million of rough diamonds per year. However, the arrangement is now in an early stage and there can be no assurances that the Company will be supplied with suitable diamonds for cutting and polishing, that the Company will be supplied with a sufficient and consistent quantity of diamonds, or that the feasibility study will result in a recommendation to proceed with the creation of the polishing operation. In addition to its purchase of rough diamonds the Company also has arrangements for the marketing of diamonds cut and polished in Russia. See ' -- Cutting and Polishing.' The Company believes that it has good relations with its suppliers, that its trade reputation and established customer base will continue to assure access to primary sources of diamonds and that its sources of supply are sufficient to enable the Company to meet its present and foreseeable needs. However, the Company's sources of supply could be affected by political and economic developments in producing countries over which the Company has no control. While the Company believes that alternative sources of supply may be available, any significant disruption of the Company's access to its primary source suppliers could have a material adverse effect on its ability to purchase rough diamonds. See 'Risk Factors -- Risk of Foreign Operations.' CUTTING AND POLISHING The Company currently has three primary cutting and polishing operations, one located in Puerto Rico, one located in Botswana, and one located in Moscow, Russia conducted in cooperation with the Russian Government organization responsible for diamond policy and the Russian national stockpile. Under this last arrangement, rough diamonds supplied by this organization are polished by Russian technicians in Moscow, under the management and supervision of Company technical personnel and subsequently marketed by the Company. The diamonds, which are primarily commercial quality diamonds, are sold through the Company's worldwide distribution network. The proceeds from the sale of these polished gems are shared by the parties. In July 1996 the Company announced that it had reached an agreement, for a term of ten years, with AK Almazi Rossii Sakha (ARS) of Russia for the cutting, polishing and marketing of large rough 18 gem diamonds. According to published reports, ARS is the largest producer of rough diamonds in Russia with annual production in excess of $1.2 billion, accounting for over 20% of the world's supply of diamonds. Under the terms of the agreement, the Company has begun to equip a diamond cutting factory (estimated to cost $600,000, half of which will be borne by ARS) within the ARS facility in Moscow. This new facility will be staffed by Russian technicians and managed and supervised by Company personnel. ARS has agreed to supply a minimum of $45 million per year of large rough gem diamonds selected by the Company as being suitable for processing in this facility. The Company has agreed to sell the resulting polished diamonds through its worldwide distribution network. The proceeds from the sale of these polished diamonds, after reimbursement of costs incurred by each of the parties, generally will be shared equally with ARS. The agreement does not require the Company to advance funds for the purchase of rough diamonds. This agreement will serve as a long-term off-take arrangement to secure the repayment of the $60 million financing anticipated to be received by ARS from a United States commercial bank and to be guaranteed by the Export-Import Bank of the United States ('Ex-Im') for the purchase by ARS of U.S. manufactured mining equipment. This equipment will be used by ARS to increase production in its diamond mines. The Ex-Im has stated that this agreement is the first transaction approved under the Ex-Im's General Project Incentive Agreement with the Ministry of Finance and the Central Bank of the Russian Federation signed on December 1993. The Company anticipates that this facility will commence cutting and polishing before June 1997. 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 proportions, or to commercial proportions, or to 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 carat 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 provide a constant flow of skilled labor to satisfy its needs for further growth. Through its subsidiary, Lazare Kaplan Botswana (Pty) Limited, the Company, pursuant to a long term license issued by the Government of Botswana, owns and operates a diamond cutting and polishing factory in Molepolole, Botswana. Lazare Kaplan Botswana began operations in its newly constructed facility in early 1993. The factory, which is a state-of-the-art facility, uses both automated and manual equipment and is committed to train and employ Batswana workers. Currently, there are 535 employees at this facility, of whom 97 are trainees. This factory cuts and polishes rough diamonds to ideal proportions in sizes that currently are not processed by the Company's facility in Puerto Rico. The factory, which is still in the beginning stages, is concentrating on the manufacture of rough diamonds of somewhat smaller size (generally smaller than 1/5 carat in size). The size range manufactured will be expanded as the skills of its employees are developed. Lazare Kaplan Botswana, which is owned by the Company (60%), the Government of Botswana (5.1%), and the Botswana Development Corporation (34.9%), purchases rough diamonds on its own account directly from the DTC, as well as from third party sources, for manufacture in the Botswana factory. Botswana is widely regarded today as the most important rough gem diamond producing country in the world. 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. 19 PRICING ROUGH DIAMOND PRICES Through its control of approximately 75% of the value of the world diamond output, the DTC can exert significant control over the pricing of rough and polished diamonds to maintain an orderly market by adjusting supplies in the marketplace. Rough diamond prices established by the DTC have been characterized historically by steady increases over the long term; however, prices in the secondary market have experienced a greater degree of volatility, particularly during the late 1970's. Traditionally, the Company has been able to pass along such price increases to its customers. From time to time, however, the Company has absorbed these price increases in the short term to maintain an orderly pricing relationship with its customers. This has, in the past, caused temporary adverse effects on the Company's earnings. However, a large rapid increase in rough diamond prices could materially adversely affect the Company's revenue and operating margins if the increased cost of rough diamonds could not be passed along to its customers in a timely manner. According to published reports, during 1995 there was an emergence of a two-tier market for rough diamonds. The first tier is comprised of better quality rough diamonds, for which the DTC continues to maintain an orderly market. The Company conducts its cutting and polishing operations almost exclusively in this segment of the market. The second tier is comprised of small, less expensive, imperfect rough diamonds. The prices for these diamonds are determined principally by supply and demand. Consequently, there has been considerable volatility in the prices of less expensive diamonds since 1995. Because the Company focuses primarily on better quality rough diamonds, this volatility has not had a significant effect on the Company. POLISHED DIAMOND PRICES Over the past 60 years, increases in the price of rough diamonds have generally resulted in a corresponding increase in the price of polished diamonds. 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 losses, 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 significant fluctuations in the price of rough and polished diamonds. These include computerized rough diamond evaluation programs, automatic economic order quantity models and inventory utilization programs. MARKETING, SALES AND DISTRIBUTION MARKETING STRATEGY The Company's marketing strategy is directed primarily toward quality conscious consumers throughout the United States, the Far East and Europe. The Company focuses its distribution efforts for Lazare Diamonds on selectivity with a view to helping retailers who carry the product maintain a competitive advantage. Lazare Diamonds can be found at some of the most prestigious jewelry stores around the world, including both those with international reputations and those known only in their communities as being the highest quality retail jewelers. This strategy helps ensure that the Company's product is presented in an environment consistent with its superior quality and image. The Company also sells to certain jewelry manufacturers and diamond wholesalers. The Company has developed a comprehensive grading system for its diamonds, which 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. 20 A key element of the Company's strategy is the promotion of the Lazare Diamonds 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 unique laser inscription process, thus authenticating the diamonds. The Company holds a domestic patent, which expires in 2000, and various international patents for this process. In addition, the Company has a domestic patent -- pending for a new and improved laser inscription process. The Company's decision to pursue the brand name strategy is reinforced by two factors -- a rising trend among informed consumers to purchase quality, brand name products, and the need among upscale jewelers to set themselves apart in an increasingly competitive market by carrying and promoting a differentiated product. Building awareness and acceptance of Lazare Diamonds is accomplished through a comprehensive marketing program which includes sales training, cooperative advertising, sales promotion and public relations. The advertising program includes usage of a toll-free number which consumers may call to receive additional information about the product and to be referred to jewelers carrying Lazare Diamonds and Lazare Diamond jewelry in their geographic area. A wide assortment of sales promotion materials has been designed to facilitate jewelers' sales of the Company's diamonds and fine jewelry line to consumers. Public relations events are offered to help build traffic in retail stores. The Company believes these marketing programs have been and will continue to be instrumental in increasing sales. The Company has no current plans to sell its diamonds directly to consumers and intends to continue concentrating its marketing efforts towards quality retail jewelers. The Lazare Diamond Registry program has been established by the Company to enable consumers to register their Lazare Diamonds with the Company using the laser inscribed identification number, thereby providing proof of ownership in case of loss or theft. SALES AND DISTRIBUTION While the purchase and sale of rough diamonds is concentrated among relatively few parties, industry wide retailing of polished diamonds occurs through over 39,000 jewelry stores in the United States, over 26,000 retailers in Japan and over 48,000 retail stores in Europe. The Company's 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) and, to a lesser extent, to jewelry manufacturers and wholesalers. Full time regional sales representatives located throughout the United States, Hong Kong and Antwerp, are compensated on a commission basis and handle sales throughout their respective territories. The Company's sales force is supported by a New York based telemarketing department. Sales to certain of the Company's largest accounts are handled by headquarters personnel. Most of the Company's major accounts are customers of long standing. The Company has been actively working to expand its foreign business activities, particularly in the Far East countries of Japan, Hong Kong, Singapore, Taiwan, Thailand, Korea, Malaysia and Indonesia. In October 1996, Aiwa Co., Ltd. ('Aiwa'), the Japanese distributor with whom the Company has had a marketing relationship since 1972, announced that it entered into an agreement in Japan with Seiko Corporation ('Seiko'), one of the world's largest watchmakers. In connection with this agreement, the Company and Aiwa intend that Seiko will act as the exclusive distributor in Japan for Lazare Diamonds. The Company plans to form a joint venture in Japan with Aiwa (to be known as Lazare Kaplan Japan) to provide promotional and other support services to Seiko. This joint venture will implement an arrangement whereby Seiko will distribute, market and promote Lazare Diamonds in Japan. Seiko is generally recognized as a leader in consumer brand marketing and has a well developed network of contacts and retailers. Aiwa, with a distribution network of over 200 retailers and wholesalers, will continue to be an important customer of the Company's non-branded polished diamonds. 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 diamonds are uniformly cut to ideal proportions, reduces and in some cases eliminates the need for 21 customers to view diamonds before placing orders. The system enables customers to standardize their inventories, order by mail or telephone and minimize their inventory investment. The percentages of the Company's total domestic and foreign net sales to its customers, which include a combination of both rough diamonds and polished diamonds sales taken together, for the past three fiscal years and for the three months ended August 31, 1995 and 1996 are set forth below:
THREE MONTHS ENDED YEAR ENDED MAY 31, AUGUST 31, ------------------------ --------------- 1994 1995 1996 1995 1996 ---- ---- ---- ---- ---- Percentage of Net Sales to Customers United States........................................ 16% 25% 23% 23% 16% Far East............................................. 6% 13% 8% 7% 7% Europe, Israel & Other............................... 78% 62% 69% 70% 77% ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
The world's rough diamond trading market is primarily located in Belgium and Israel; therefore, the majority of the Company's rough diamond sales have been transacted with foreign customers. The foreign sales decrease in 1995 as compared to the prior year was a result of the decrease in rough diamond sales in 1995 as compared to 1994. In 1996, due to an increase in production and sales of polished diamonds, the Company sold a greater portion of its polished diamonds domestically than it had in prior years. Offsetting this percentage increase in domestic sales was a continued increase in rough diamond sales to foreign customers. In the fiscal quarter ended August 31, 1996, domestic sales decreased as compared to the first quarter in the prior year. This decrease was due to the fact that the Company experienced a temporary delay in shipments of polished diamonds from its Russian operation during the first quarter of fiscal 1996. In the prior year, a large portion of these polished diamonds was sold to domestic customers. The Company believes that due to the possible international resale of diamonds by its customers, the above percentages may not represent the final location of retail sales of its product. As all foreign sales are denominated in United States dollars, the Company does not experience any material foreign currency exposure on its foreign revenue. The profitability of foreign sales of either polished or rough diamonds is consistent with that of domestic sales of similar merchandise. COMPETITION The polished and rough diamond business is highly competitive. While the Company believes that it has achieved a reputation as a leading cutter and distributor of high quality ideal cut diamonds, it faces competition in sales to its customers in the United States and abroad from many other suppliers. In addition, the Company sells rough diamonds in the competitive world market. A substantial number of cutters and polishers and traders, some of which the Company believes to be larger or to have greater financial resources than the Company, sell diamonds of all qualities to the Company's customers. The Company believes there are significant barriers to entry by potential competitors into the business of manufacturing ideally proportioned diamonds. Among the most important of these barriers are the need for significant working capital to purchase rough diamonds and hold polished inventory, the access to adequate supplies of rough diamonds, the limited number of persons with the skills necessary to cut ideally proportioned diamonds, the difficulty in obtaining access to upscale channels of distribution, the importance of public recognition of an established brand name and the establishment of computer systems to gauge and monitor the manufacturing and distribution network. EMPLOYEES At November 30, 1996, the Company had approximately 700 full-time employees. The Company also has six regional sales representatives. The Company maintains an apprenticeship program at its facility in Puerto Rico, through which it trains its cutters, who are highly skilled workmen. The Company also has a program in Botswana through which it trains cutters and polishers. 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. 22 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The following table sets forth information regarding executive officers and directors of the Company.
POSITIONS AND OFFICES DIRECTOR NAME WITH THE COMPANY AGE SINCE - -------------------------------- --------------------------------------------------------------- --- -------- Maurice Tempelsman.............. Chairman of the Board, Director 67 1984 Leon Tempelsman................. Vice Chairman of the Board, President, Director 40 1984 George R. Kaplan................ Vice Chairman of the Board, Director 78 1972 Sheldon L. Ginsberg............. Executive Vice President and Chief Financial Officer, Director 42 1989 Robert Speisman................. Vice President -- Sales, Director 43 1989 Lucien Burstein................. Secretary, Director 74 1984 Michael W. Butterwick........... Director 69 1982 Myer Feldman.................... Director 79 1984
BACKGROUND The early 1980's were a time of crisis in the diamond industry caused by dramatic price declines coupled with over-leveraged inventories (see 'Business -- Marketing, Sales and Distribution') which led to the Company's filing of a petition under Chapter 11 of the United States Bankruptcy Code. In 1984, Maurice Tempelsman and Leon Tempelsman acquired a controlling interest in the Company by an investment of more than $22,500,000. As a condition precedent to such investment, the Company voluntarily withdrew its petition. The Tempelsman family has long been involved primarily in rough diamond trading. The Tempelsmans' strength historically lay in their rough diamond sourcing capabilities built over more than forty years of contacts and business relations in the leading diamond producing countries. This investment was, and continues to be, viewed by the Tempelsmans as a strategic long-term investment. BIOGRAPHICAL INFORMATION Maurice Tempelsman is the Chairman of the Board and a director of the Company and a general partner of Leon Tempelsman & Son, a limited partnership with interests in the international diamond and mining industries. He has held these positions since 1984. Prior to that time, he was President and Chief Executive Officer of its predecessor, Leon Tempelsman & Son, Inc. 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. Prior to that time, he was President of LTS Industries, Inc., a wholly-owned subsidiary of Leon Tempelsman & Son, Inc., engaged in selling polished diamonds to retailers. 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 competing with those of the Company. George R. Kaplan has been Vice Chairman of the Board since 1984 and a director of the Company since 1972. Mr. Kaplan has been associated with the Company or its predecessor for more than 58 years. Sheldon L. Ginsberg has been Executive Vice President and Chief Financial Officer since February 1996. He was the Vice President and Chief Financial Officer from April 1991 until February 1996. He was the Vice President -- Finance from January 1986 until April 1991. Mr. Ginsberg has been a director of the Company since 1989. Robert Speisman has been the Vice President -- Sales of the Company since 1986. From April 1984 to April 1986 he was the manager of telemarketing. From April 1981 to 1984 he was the Director of Sales and Marketing for LTS Industries, Inc. Mr. Speisman has been a director of the Company since 23 1989. Mr. Speisman is the son-in-law of Maurice Tempelsman and the brother-in-law of Leon Tempelsman. Lucien Burstein is, and for more than the past five years has been, a partner in the law firm of Warshaw Burstein Cohen Schlesinger & Kuh, LLP, which acts as general counsel to the Company. Mr. Burstein has been Secretary to the Company and a director of the Company since 1984. Michael W. Butterwick is, and for more than the past five years has been, an independent business consultant. Mr. Butterwick has been a director of the Company since 1982. Myer Feldman is, and for more than the past five years has been, a partner in the law firm of Ginsburg, Feldman and Bress, Chartered Attorneys. He has been a director of the Company since 1984. All officers were elected at the Annual Meeting of the Board of Directors held in November 1996, and hold office until the next Annual Meeting of the Board of Directors and until their respective successors have been duly elected and qualified. All directors were elected at the Annual Meeting of Stockholders held in November 1996 and hold office until the next Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. All outside directors receive a fee equal to $1,250 per quarter; accordingly, $5,000 in directors' fees was paid by the Company for the fiscal year ended May 31, 1996 to each of Messrs. Burstein, Butterwick and Feldman, for a total of $15,000. Mr. Burstein credits his fee against legal fees of Warshaw Burstein Cohen Schlesinger & Kuh, LLP incurred by the Company for each period for which directors' fees are paid. PRINCIPAL AND SELLING STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT The following table reflects as of December 10, 1996 the beneficial ownership of shares of Common Stock of the Company (a) by those persons known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, (b) by each director of the Company, and (c) by all directors and officers as a group. Except as otherwise noted, the named beneficial owner has sole voting and investment power. In addition, the table reflects the effect of the sale of the shares of Common Stock offered hereby, assuming the Underwriters' over-allotment option is not exercised.
PERCENTAGE OF NUMBER OF SHARES COMMON STOCK BENEFICIALLY BENEFICIALLY OWNED OWNED PERCENTAGE OF COMMON NAME AND ADDRESS AS OF AS OF STOCK BENEFICIALLY OF BENEFICIAL OWNER DECEMBER 10, 1996 DECEMBER 10, 1996 OWNED AFTER OFFERING - ---------------------------------------------------- ----------------- ----------------- -------------------- Maurice Tempelsman(1)(2)(3) ........................ 3,838,825 61.3% 42.7% 529 Fifth Avenue New York, NY 10017 Leon Tempelsman(2)(3)(4) ........................... 1,860,629 29.0% 22.7% 529 Fifth Avenue New York, NY 10017 Myer Feldman ....................................... 338,259 5.4% 4.2% 1250 Connecticut, N.W. Suite 800 Washington, DC 20036 Sheldon L. Ginsberg(5) ............................. 46,305 0.7% 0.6% 529 Fifth Avenue New York, NY 10017 Robert Speisman(2)(6) .............................. 44,800 0.7% 0.6% 529 Fifth Avenue New York, NY 10017 George R. Kaplan(7) ................................ 23,965 0.4% 0.3% 529 Fifth Avenue New York, NY 10017 Lucien Burstein .................................... 1,500 less than 0.1% less than 0.1% 555 Fifth Avenue New York, NY 10017
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PERCENTAGE OF NUMBER OF SHARES COMMON STOCK BENEFICIALLY BENEFICIALLY OWNED OWNED PERCENTAGE OF COMMON NAME AND ADDRESS AS OF AS OF STOCK BENEFICIALLY OF BENEFICIAL OWNER DECEMBER 10, 1996 DECEMBER 10, 1996 OWNED AFTER OFFERING - ---------------------------------------------------- ----------------- ----------------- -------------------- Michael W. Butterwick .............................. 0 -- -- Sapperton House Sapperton Cirencester Glos. GL7 GILE, England Dimensional Fund Advisors, Inc.(8) ................. 317,300 5.0% 3.9% 1299 Ocean Avenue Suite 650 Santa Monica, CA 90401 All officers and directors as a group(1)-(7)........ 4,625,867 71.1% 50.9%
- ------------ (1) Maurice Tempelsman, the Selling Stockholder, is the Company's Chairman of the Board and its principal stockholder. Mr. Tempelsman is offering 400,000 shares of Common Stock in this offering. Mr. Tempelsman has advised the Company that he is participating in the offering to diversify his investments. The shares owned by Mr. Tempelsman after the offering are eligible for future sale pursuant to Rule 144 under the Securities Act, which, among other restrictions, limits the volume and manner of any such sales. In addition, Mr. Tempelsman has agreed with the Underwriters that for a period of 180 days from the date of this Prospectus, he will not issue, sell, offer, or agree to sell, grant, distribute or otherwise dispose of any of his Common Stock. The shares of Common Stock being offered for sale by Mr. Tempelsman will be borrowed from Leon Tempelsman & Son, a New York limited partnership ('LTS') of which each of Mr. Tempelsman and Leon Tempelsman, as the only general partners, has sole power to vote and dispose. LTS will receive from Mr. Tempelsman amounts equal to dividends and other distributions, if any, that would have been paid on the borrowed shares, plus a customary fee, and Mr. Tempelsman will be obligated to repay the borrowing by delivering to LTS shares equal in number to the borrowed shares three business days after demand by LTS. Mr. Tempelsman intends to repay the borrowing within 20 days of the date of such borrowing. (2) Maurice Tempelsman, the Chairman of the Board and a director of the Company, is the father of Leon Tempelsman and the father-in-law of Robert Speisman, Vice President-Sales of the Company. Each of Maurice Tempelsman, Leon Tempelsman and Robert Speisman disclaims beneficial ownership of shares beneficially owned by the others. (3) Number and percentage of shares include the 1,528,416 shares owned by LTS. (4) Number and percentage of shares include 2,240 shares held by the spouse of Leon Tempelsman, 26,816 shares owned by his sister, Rena Speisman, 26,725 shares owned by his sister, Marcy Meiller, 34,641 shares owned by Rena Speisman as custodian for her children, and 1,600 shares held by his brother-in-law, Scott Meiller, as to all of which shares Leon Tempelsman has been granted a proxy. Number and percentage of shares also include 34,641 shares held by Leon Tempelsman as custodian for his children, 150,550 shares which are the subject of currently exercisable options granted to Mr. Tempelsman pursuant to the Company's 1988 Stock Option Incentive Plan (the 'Plan'), and 1,528,416 shares owned by LTS, of which each of Maurice and Leon Tempelsman, as the sole general partners, has sole power to vote and dispose. (5) Number and percentage include an aggregate of 46,300 shares which are the subject of currently exercisable options granted to Sheldon L. Ginsberg pursuant to the Plan. (6) Number and percentage of shares do not include the 1,528,416 shares owned by LTS, of which Rena Speisman, the wife of Robert Speisman, is a limited partner. Number and percentage of shares also do not include 61,457 shares owned by Rena Speisman for herself and as custodian for the children of Robert and Rena Speisman, as to all of which beneficial ownership is disclaimed by Mr. Speisman. (footnotes continued on next page) 25 (footnotes continued from previous page) Number and percentage include 44,800 shares which are the subject of currently exercisable options granted to Mr. Speisman pursuant to the Plan. (7) Number and percentage of shares do not include 1,500 shares owned by the spouse of George Kaplan, the beneficial ownership of which is disclaimed by Mr. Kaplan. (8) All of such shares are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, as to all of which Dimensional Fund Advisors Inc. serves as investment manager. Dimensional Fund Advisors Inc. disclaims beneficial ownership of all of such shares. CERTAIN TRANSACTIONS The Company has entered into a sublease with Leon Tempelsman & Son, a New York limited partnership of which Maurice Tempelsman and Leon Tempelsman are the sole general partners ('LTS'), under which approximately 30% of the 20th Floor at 529 Fifth Avenue, New York, New York, the Company's principal offices, is sublet to LTS. The sublease is prorated to the same rental rate per square foot which the Company is paying to the landlord under its lease for the 19th and 20th Floors at the same location. Rental payments under the sublease amount to a base annual rent of $89,518 (excluding escalations). The Company is a party to an agreement dated August 11, 1982, as amended on April 8, 1983 (the 'Agreement'), with GIA Gem Trade Laboratory, Inc. ('GTL'), a wholly owned subsidiary of Gemological Institute of America, Inc., pursuant to which the Company has granted a license to GTL to use a laser micro-inscription system developed by the Company in connection with GTL's business of grading diamonds and identifying gem stones and issuing reports thereon. The Agreement, unless earlier terminated in accordance with its terms, expires in the year 2000, when the United States patent on the laser micro-inscription device expires. George R. Kaplan, Vice Chairman of the Board of the Company, is a Board Member Emeritus of the Board of Governors of the Gemological Institute of America. The Agreement, which requires GTL to pay to the Company royalties based on fees charged by GTL for inscribing gem stones, was the result of arms-length negotiations between the Company and GTL. The Company's principal stockholder is LTS, of which Maurice Tempelsman and Leon Tempelsman, both directors and officers of the Company, are the only general partners. See 'Principal and Selling Stockholders and Security Ownership of Management' and 'Management'. The Company believes that neither the Tempelsmans nor LTS currently engage directly or indirectly in any activities competitive with those of the Company. Lucien Burstein, a director of the Company, is a partner of the law firm of Warshaw Burstein Cohen Schlesinger & Kuh, LLP, which has been general counsel to the Company since 1984. DESCRIPTION OF COMMON STOCK The Company's authorized capital stock consists of 10,000,000 shares of Common Stock, $1.00 par value, of which 6,261,071 are issued and outstanding, and of which there will be, immediately after this offering, 8,061,071 shares issued and outstanding (assuming the Underwriters' over-allotment option is not exercised). As of December 10, 1996, there were approximately 231 record holders of shares of Common Stock. Holders of shares of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Stockholders do not have cumulative voting rights. Each share of Common Stock is entitled to share equally in such dividends as the Board of Directors, in its discretion, may validly declare from funds legally available therefor. See 'Dividend Policy.' In the event 26 of liquidation, each outstanding share of Common Stock entitles its holder to participate ratably in the assets remaining after payment of liabilities. Stockholders have no preemptive rights or other rights to subscribe for or purchase additional shares of any class of capital stock or any other securities of the Company and there are no redemption or sinking fund provisions with regard to the Common Stock or any conversion rights. All outstanding shares of Common Stock are, and those offered hereby will be, validly issued, fully paid and nonassessable. UNDERWRITING Subject to the terms and conditions of an underwriting agreement (the 'Underwriting Agreement') among the Company, the Selling Stockholder and the underwriters named below (the 'Underwriters'), the Underwriters have agreed to purchase the following respective number of shares of Common Stock:
UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------- --------- UBS Securities LLC......................................................................... Furman Selz LLC............................................................................ --------- Total................................................................................. --------- ---------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriting Agreement contains certain provisions whereby if either Underwriter defaults in its obligation to purchase shares, and the aggregate obligation of the Underwriter so defaulting does not exceed 10% of the shares offered hereby, the remaining Underwriter must assume such obligations. The Underwriters have advised the Company that the Underwriters propose to offer the shares of Common Stock directly to the public at the offering price set forth on the cover of this Prospectus, and to certain dealers at such price less a concession not in excess of $. per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $. per share to certain other dealers. After the public offering of the shares of Common Stock, the offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 330,000 additional shares of Common Stock to cover over-allotments, if any, at the public offering price set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Company has agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the Underwriters, except for the sale or issuance by the Company of shares of Common Stock pursuant to outstanding employee stock options. Maurice Tempelsman, Leon Tempelsman and LTS have agreed that, subject to certain exceptions, they will not, for a period of 180 days after the date of this Prospectus, without the prior written consent of UBS Securities LLC, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock beneficially owned by them, or any securities convertible into or exercisable or exchangeable for Common Stock. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. UBS Securities LLC ('UBS') has been engaged by the Company as the Company's exclusive financial advisor for a 12 month term expiring April 30, 1997 with respect to various investment banking 27 matters (each such matter a 'Transaction'). The Company has agreed to pay UBS an annual retainer fee of $100,000. In addition, if during the term of the engagement a Transaction is consummated, the Company has agreed to pay UBS a transaction fee in an amount to be specified in a letter agreement to be entered into between the Company and UBS at such time. UBS has agreed to charge competitive fees for its services, and where market indices exist on fees for similar services, fees consistent with market practices. The Company has also agreed to pay UBS a percentage of the value of each Transaction initiated by UBS during the term and consummated within six months of the termination of the engagement based upon an agreed formula. VALIDITY OF COMMON STOCK The validity of the Common Stock will be passed upon for the Company by Warshaw Burstein Cohen Schlesinger & Kuh, LLP, New York, New York, and for the Underwriters by Sullivan & Cromwell, New York, New York. EXPERTS The consolidated financial statements and schedule of the Company at May 31, 1996 and 1995 and for each of the two years in the period ended May 31, 1996, included in this Prospectus and elsewhere in the Registration Statement, have been audited by Ernst & Young LLP, independent auditors, and the consolidated statements of operations, cash flows, stockholders' equity and financial statement schedule for the year ended May 31, 1994 have been audited by Deloitte & Touche LLP, independent auditors, as set forth in their respective reports thereon appearing elsewhere herein, and are included in reliance upon such reports, given upon the authority of such firms as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C., a registration statement (the 'Registration Statement') under the Securities Act of 1933, as amended, with respect to the securities covered by this Prospectus. This Prospectus omits certain information contained in the Registration Statement. For further information, reference is made to the Registration Statement, the exhibits and financial statements filed as a part thereof, which may be examined without charge at the office of the Commission, and photocopies of which, or any portion thereof, may be obtained upon payment of the prescribed fee. Statements contained in this Prospectus as to the contents of any agreement or other document referred to are not complete, and where such agreement or other document is an exhibit to the Registration, each statement is deemed to be qualified and amplified in all respects by the provisions of the exhibit. 28 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report of Ernst & Young LLP................................................................ F-2 Independent Auditors' Report of Deloitte & Touche LLP............................................................ F-3 Consolidated Statements of Operations for the years ended May 31, 1996, 1995 and 1994............................ F-4 Consolidated Balance Sheets as of May 31, 1996 and 1995.......................................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended May 31, 1996, 1995 and 1994.................. F-6 Consolidated Statements of Cash Flows for the years ended May 31, 1996, 1995 and 1994............................ F-7 Notes to Consolidated Financial Statements for the years ended May 31, 1996, 1995 and 1994....................... F-8 Consolidated Statements of Operations for the three months ended August 31, 1996 and 1995 (unaudited)............ F-15 Consolidated Balance Sheets as of August 31, 1996 (unaudited) and May 31, 1996................................... F-16 Consolidated Statements of Cash Flows for the three months ended August 31, 1996 and 1995 (unaudited)............ F-17 Notes to Consolidated Financial Statements for the three months ended August 31, 1996 (unaudited)................ F-18
F-1 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders LAZARE KAPLAN INTERNATIONAL INC. We have audited the accompanying consolidated balance sheets of Lazare Kaplan International Inc. and subsidiaries as of May 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1996 and 1995 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, 1996 and 1995 and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP July 9, 1996 New York, New York F-2 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders LAZARE KAPLAN INTERNATIONAL INC. We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of Lazare Kaplan International Inc. and subsidiaries for the year ended May 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Lazare Kaplan International Inc. and subsidiaries for the year ended May 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York July 13, 1994 (August 31, 1994 as to Note 11) F-3 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31, - ------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ -------------------------------------- Net sales (Note 1) $ 266,321 $ 178,143 $ 204,047 Cost of sales (Note 1) 243,685 165,686 187,664 - ------------------------------------------------------------------------------------------------------------------ 22,636 12,457 16,383 - ------------------------------------------------------------------------------------------------------------------ Selling, general and administrative expenses 11,439 10,386 9,833 Interest expense, net of interest income 4,048 3,489 3,747 - ------------------------------------------------------------------------------------------------------------------ 15,487 13,875 13,580 - ------------------------------------------------------------------------------------------------------------------ Income/(loss) before income tax provision and minority interest 7,149 (1,418) 2,803 Income tax provision (Notes 1 and 3) 459 214 118 - ------------------------------------------------------------------------------------------------------------------ Income/(loss) before minority interest 6,690 (1,632) 2,685 Minority interest in loss of consolidated subsidiary 323 479 339 - ------------------------------------------------------------------------------------------------------------------ NET INCOME/(LOSS) $ 7,013 $ (1,153) $ 3,024 - ------------------------------------------------------------------------------------------------------------------ -------------------------------------- NET INCOME/(LOSS) PER SHARE (NOTE 1) $ 1.12 $ (0.18) $ 0.49 - ------------------------------------------------------------------------------------------------------------------ -------------------------------------- Weighted average number of shares 6,288,157 6,309,071 6,226,708 - ------------------------------------------------------------------------------------------------------------------ --------------------------------------
See notes to consolidated financial statements. F-4 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
May 31, - -------------------------------------------------------------------------------------------------------------------- (In thousands) 1996 1995 - -------------------------------------------------------------------------------------------------------------------- ------------------- ASSETS CURRENT ASSETS: Cash $ 905 $ 2,532 Accounts receivable, less allowance for doubtful accounts ($281 and $220 in 1996 and 1995, respectively) 25,493 22,302 Inventories (Note 1): Rough stones 9,320 11,928 Polished stones 46,979 43,806 ------------------- Total inventories 56,299 55,734 ------------------- Prepaid expenses and other current assets 10,142 6,166 - -------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 92,839 86,734 PROPERTY, PLANT AND EQUIPMENT, net (Notes 1 and 2) 7,198 6,704 OTHER ASSETS 5,029 5,725 - -------------------------------------------------------------------------------------------------------------------- $105,066 $99,163 - -------------------------------------------------------------------------------------------------------------------- ------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and other current liabilities (Notes 1 and 4) $ 15,770 $16,034 Notes payable -- other (Note 5) 3,000 3,000 Notes payable -- banks (Note 5) - 4,125 Current portion of long-term debt (Note 6) - 4,285 - -------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 18,770 27,444 SENIOR NOTES AND OTHER LONG-TERM DEBT (Notes 5 and 6) 34,155 26,430 - -------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 52,925 53,874 - -------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 9) MINORITY INTEREST (Notes 1 and 7) 7,271 7,594 STOCKHOLDERS' EQUITY (Note 8) Common stock, par value $1 per share: Authorized, 10,000,000 shares Outstanding, 6,176,425, 1996 and 6,147,808, 1995 6,176 6,148 Additional paid-in capital 26,098 25,964 Retained earnings 12,596 5,583 - -------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 44,870 37,695 - -------------------------------------------------------------------------------------------------------------------- $105,066 $99,163 - -------------------------------------------------------------------------------------------------------------------- -------------------
See notes to consolidated financial statements. F-5 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total Common Paid-in Retained Stockholders' (In thousands) Stock Capital Earnings Equity - --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------- Balance, May 31, 1993 $6,122 $ 25,837 $ 3,712 $35,671 Net Income - - 3,024 3,024 Exercise of Stock Options, 9,426 shares issued 9 47 - 56 - --------------------------------------------------------------------------------------------------------------------- Balance, May 31, 1994 6,131 25,884 6,736 38,751 Net Loss - - (1,153 ) (1,153) Exercise of Stock Options, 16,702 shares issued 17 80 - 97 - --------------------------------------------------------------------------------------------------------------------- Balance, May 31, 1995 6,148 25,964 5,583 37,695 Net Income - - 7,013 7,013 Exercise of Stock Options, 28,617 shares issued 28 134 - 162 - --------------------------------------------------------------------------------------------------------------------- Balance, May 31, 1996 $6,176 $ 26,098 $12,596 $44,870 - --------------------------------------------------------------------------------------------------------------------- -------------------------------------------------
See notes to consolidated financial statements. F-6 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 31, - --------------------------------------------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- ---------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) $ 7,013 ($1,153) $ 3,024 Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,234 1,924 1,899 Provision for uncollectible accounts 70 70 170 Minority interest in loss of consolidated subsidiary (323) (479) (339) Gain on sale of fixed assets (54) (43) - (Increase)/decrease in assets and increase/(decrease) in liabilities: Accounts receivable (3,261) 828 (3,211) Inventories (565) (2,248) (4,993) Prepaid expenses and other current assets (3,976) (2,911) 803 Other assets (403) (488) - Accounts payable and other current liabilities (264) 4,697 3,029 ---------------------------- Net cash provided by operating activities 471 197 382 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets 222 79 - Capital expenditures (1,797) (1,578) (972) ---------------------------- Net cash used in investing activities (1,575) (1,499) (972) - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in minority interest - 7,883 - (Decrease)/increase in short-term borrowings (8,410) (5,775) 895 Increase in long-term borrowings 7,725 715 - Proceeds from exercise of stock options 162 97 56 ---------------------------- Net cash (used in)/provided by financing activities (523) 2,920 951 - --------------------------------------------------------------------------------------------------------------------- Net (decrease)/increase in cash (1,627) 1,618 361 Cash at beginning of year 2,532 914 553 ---------------------------- Cash at end of year $ 905 $2,532 $ 914 - --------------------------------------------------------------------------------------------------------------------- ---------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 4,183 $3,737 $ 4,003 Income taxes 407 314 239 - --------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Capitalized Leases - - $ 61 - --------------------------------------------------------------------------------------------------------------------- ----------------------------
See notes to consolidated financial statements. F-7 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended May 31, 1996, 1995 and 1994 1. ACCOUNTING POLICIES - --------------------------------------------------------- a. The Company and its principles of consolidation The Company and its subsidiaries are engaged in the cutting, polishing and selling of diamonds and the trading of uncut rough diamonds. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned except for Lazare Kaplan Botswana (Pty) Ltd., which was owned 60% by the Company at May 31, 1996 and 1995 and 85% by the Company at May 31, 1994. Minority interest represents the minority stockholders' proportionate share of the equity of Lazare Kaplan Botswana (Pty) Ltd. All material intercompany balances and transactions have been eliminated. b. Sales and accounts receivable The Company's net sales to customers in each of the following regions for the years ended May 31, 1996, 1995 and 1994 are set forth below:
1996 1995 1994 - --------------------------------------------------- -------------------- United States 23% 25% 16% Far East 8% 13% 6% Europe, Israel & other 69% 62% 78% - --------------------------------------------------- 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, 1996, 1995 and 1994. The Company generally does not require collateral on its receivables. c. Inventories Inventories are stated at the lower of cost, using the first-in, first-out method, or market. d. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the shorter of asset lives or lease terms. e. Deferred costs The Company deferred the recognition of certain costs for professional fees, travel and total staffing incurred during the construction and training period of the Company's cutting and polishing facility in Botswana. Such costs included only direct and incremental costs incurred during the start-up period. These costs are being amortized over a five year period which began on June 1, 1993. All other deferred costs are amortized over their estimated useful lives ranging from two to ten years. f. Foreign currency All foreign sales of the Company are denominated in U.S. dollars and all purchases of rough diamonds worldwide are denominated in U.S. dollars. Therefore, the Company does not experience any foreign currency exposure in connection with these activities. In addition, the functional currency for Lazare Kaplan Botswana (Pty) Ltd. is the U.S. dollar. Any gains or losses from foreign currency translations relating to this subsidiary were immaterial and are included in results of operations. g. Income taxes The Company provides for deferred income taxes in accordance with Statement of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for Income Taxes', whereby deferred income taxes are determined based upon the enacted income tax rates for the years in which these taxes are estimated to be payable or recoverable. Deferred income taxes reflect the net tax effects of (a) temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss carryforwards. The Company and its domestic subsidiaries file a consolidated income tax return. The Company's foreign subsidiaries are not subject to Federal income taxes and their provisions for income taxes have been computed based on the effective tax rates, if any, in the foreign countries. There were no taxable dividends paid to the Company from foreign subsidiaries during 1996. h. Net income/(loss) per share Net income/(loss) per share is computed based on the weighted average number of shares outstanding F-8 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended May 31, 1996, 1995 and 1994 including the impact of dilutive stock options during each period. i. Risks and Uncertainties The Company's business is dependent upon the availability of rough diamonds. Approximately 75% of the world's diamond output is controlled by DeBeers Centenary AG and its affiliated companies. Although DeBeers has historically been the Company's major supplier 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 over which it has no control. Further, through its control of the world's diamond output, DeBeers can exert significant control over the pricing of rough and polished diamonds. A large rapid increase in rough diamond prices could 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 adversely affect the Company in terms of inventory losses and lower margins. j. Stock Option Incentive Plan The Company accounts for its incentive stock options under the provisions of Accounting Principles Board No. 25 'Accounting for Stock Issued to Employees' and intends to continue to do so. 2. PROPERTY, PLANT AND EQUIPMENT - --------------------------------------------------------- Property, plant and equipment consists of (in thousands):
May 31, - ----------------------------------------------------- 1996 1995 - ----------------------------------------------------- ----------------- Land and buildings $ 4,710 $4,170 Leasehold improvements 1,812 1,139 Machinery, tools and equipment 5,322 5,064 Furniture and fixtures 1,242 1,656 Computer installation 2,311 2,225 Construction in progress 364 - - ----------------------------------------------------- 15,761 14,254 Less accumulated depreciation and amortization 8,563 7,550 - ----------------------------------------------------- $ 7,198 $6,704 - ----------------------------------------------------- ----------------- Depreciation and amortization rates: - ----------------------------------------------------- Buildings 2 TO 3.7% Leasehold improvements 3.7 TO 20% Machinery, tools and equipment 10 TO 25% Furniture and fixtures 10 TO 20% Computer installation 10 TO 33% - -----------------------------------------------------
Depreciation expense for 1996, 1995 and 1994 was $1,135,000, $1,088,000 and $1,094,000, respectively. F-9 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended May 31, 1996, 1995 and 1994 3. INCOME TAXES - --------------------------------------------------------- The items comprising the Company's net deferred tax liabilities are as follows (in thousands):
May 31, - ----------------------------------------------------- 1996 1995 - ----------------------------------------------------- -------------------- Deferred tax assets: Operating loss and other carryforwards $ 9,500 $ 13,200 Other 500 400 Deferred tax liabilities: Depreciation 600 1,100 - ----------------------------------------------------- 9,400 12,500 Less: Valuation allowance (9,400) (12,500) - ----------------------------------------------------- Net deferred tax liabilities $ 0 $ 0 - ----------------------------------------------------- --------------------
The income tax provision is comprised of the following (in thousands):
Year ended May 31, - ------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------ --------------------- Current: Federal $ 158 $- $ 68 State and local 143 40 185 Foreign 158 174 70 - ------------------------------------------------------ 459 214 323 - ------------------------------------------------------ Deferred: Federal - - (68) State and local - - (137) - ------------------------------------------------------ - - (205) - ------------------------------------------------------ $ 459 $214 $118 - ------------------------------------------------------ ---------------------
Income/(loss) before income taxes from the Company's domestic and foreign operations was $7,742,000 and ($593,000), respectively for the year ended May 31, 1996. The tax provision is different from amounts computed by applying the Federal income tax rate to the income before taxes as follows (in thousands):
- ------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------ --------------------------- Tax provision (benefit) at statutory rate $ 2,430 $(482) $ 953 (Decrease)/increase in taxes resulting from: Differential attributable to foreign operations 374 502 764 State and local taxes, net of Federal benefit 94 26 48 Net operating loss carryforward arising in current year not resulting in current benefit - 168 - Utilization of net operating loss carryforwards (2,439) - (1,647) - ------------------------------------------------------ Actual tax provision $ 459 $ 214 $ 118 - ------------------------------------------------------ ---------------------------
The Company has available Federal net operating losses to offset future taxable income which expire as follows (in thousands):
Net operating Year losses - -------------------------------------------------------- --------- 1998 $ 4,100 1999 4,200 2000 4,300 2001 3,500 2002 500 2007 1,000 2008 1,500 2010 400 - -------------------------------------------------------- $19,500 - -------------------------------------------------------- ---------
F-10 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended May 31, 1996, 1995 and 1994 In addition, the Company has New York State and New York City net operating loss carryforwards of approximately $22,500,000 each, expiring from 1998 to 2008. The Company has Puerto Rico net operating loss carryforwards of approximately $3,500,000 expiring from 1997 through 2002 and Botswana net operating loss carryforwards of approximately $3,400,000 expiring from 1998 through 2000. 4. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES - --------------------------------------------------------- Accounts payable and other current liabilities consist of (in thousands):
1996 1995 - ----------------------------------------------------- ----------------- Accounts payable $ 7,861 $5,377 Accrued expenses and income taxes 7,909 10,657 - ----------------------------------------------------- $15,770 $16,034 - ----------------------------------------------------- -----------------
5. LINES OF CREDIT - --------------------------------------------------------- On May 14, 1996 the Company entered into a long-term unsecured, revolving loan agreement with two banks. The agreement provides that the Company may borrow up to $27,500,000 in the aggregate, at an interest rate of any of a) one-eighth of one percent above the bank's prime rate (which was 8.25% on May 31, 1996), b) two and one half percent above the London Interbank Offered Rate (LIBOR), or c) two and one-half percent above the bank's cost of funds rate. The applicable interest rate is contingent upon the method of borrowing selected by the Company. All amounts borrowed under this agreement are due and payable on June 1, 1999. As of May 31, 1996, there was an aggregate balance outstanding of $12,725,000 under this loan agreement. The proceeds of this facility were used to repay a) all amounts outstanding under the Company's short-term lines of credit, b) a long-term promissory note in the amount of $5,000,000, which had a maturity date of December 2, 1996, and c) the annual installment of $4,285,000 which was due on May 15, 1996 with respect to the Company's Senior Note obligation. In addition, the Company intends to use the proceeds of this facility for its working capital needs and to fund its future annual installments due under the Senior Note Agreement. The revolving loan agreement contains certain provisions that require, among other things, (a) maintenance of defined levels of current working capital and annual cash flow, (b) limitations of borrowing levels, capital expenditures, and rental obligations and (c) limitations on restricted payments, including the amount of dividends. Through May 14, 1996, the Company had unsecured lines of credit with three banks. These loan agreements provided that the Company could borrow up to $19.0 million, in the aggregate. Two of the facilities, in amounts of $3.0 million and $8.0 million, carried an interest rate equal to the respective bank's prime rate or one and one-half percent above LIBOR, depending upon the method of borrowing utilized by the Company. The third facility, in the amount of $8.0 million, carried an interest rate of one-eighth of a percent above the bank's prime rate, or one and five-eighths percent above LIBOR depending upon the method of borrowing utilized by the Company. The outstanding balances due under these facilities were repaid in full with the proceeds of the long-term revolving loan described above. As of May 31, 1995 there was an aggregate balance outstanding on these facilities of $4,125,000. The weighted average interest rate during 1996 and 1995 on the Company's revolving loan and lines of credit was 7.83% and 8.12%, respectively. The Company has a $3.0 million credit facility, payable on demand, at a rate of one-half of one percent above the six-month LIBOR (which was 6.31% on June 12). At May 31, 1996, the full amount of this facility had been drawn upon. The weighted average interest rate during 1996 and 1995 on this facility was 6.47% and 6.20%, respectively. 6. SENIOR NOTES AND OTHER LONG-TERM DEBT - --------------------------------------------------------- In May, 1991 the Company, through a private placement, issued $30,000,000 of unsecured 9.97% Senior Notes, due May 15, 2001. Interest is payable semi-annually every May 15 and November 15. F-11 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended May 31, 1996, 1995 and 1994 Repayments of $4,285,000 annually commenced on May 15, 1995 and end in 2000 with the remaining principal of $4,290,000 payable on May 15, 2001. Provisions of the Senior Notes require, among other things, (a) maintenance of defined levels of consolidated tangible net worth and current working capital, (b) limitation of borrowing levels and (c) limitations on restricted payments, including the amount of dividends. Under the provisions of the Senior Notes, the Company was not permitted to declare or pay any dividends either in cash or property through August 31, 1994. Commencing September 1, 1994, this restriction was modified to allow the declaration of dividends subject to certain limitations set forth in the Senior Note Agreement. On December 1, 1992, the Senior Notes were amended to revise the consolidated fixed charge ratio and increase the interest rate to 10.47% through August 31, 1994. On August 25, 1995, these Senior Notes were again amended to eliminate the requirements of the consolidated fixed charge ratio retroactively for the fiscal quarters ended February 28, 1995 and May 31, 1995, to revise the consolidated fixed charge ratio for all subsequent measurement periods through the quarter ending May 31, 1996, and to increase the interest rate to 10.97% retroactively from March 1, 1995 through May 31, 1996. Beginning June 1, 1996 the interest rate on the Senior Notes reverted to the original lower rate of 9.97%. On May 31, 1995 the Company entered into a long-term promissory note with a bank in the amount of $5,000,000. The note, which bore interest at the bank's prime rate and had a maturity date of December 2, 1996, was repaid in full with the proceeds of the long-term revolving loan described above. 7. MINORITY INTEREST - --------------------------------------------------------- On August 31, 1994, the Botswana Development Corporation ('BDC') invested 21.8 million pula (approximately $8.0 million) for an equity position in Lazare Kaplan Botswana (Pty) Ltd. In exchange for its investment the BDC received common shares and cumulative, redeemable, non-voting, participating preference shares of this subsidiary. Following this transaction, the Company owns 60% of Lazare Kaplan Botswana (Pty) Ltd., the BDC owns 34.9% and the Government of Botswana owns 5.1%. 8. STOCK OPTION INCENTIVE PLAN - --------------------------------------------------------- A Stock Option Incentive Plan was approved by the Board of Directors on March 11, 1988 (the 'Plan'). The Plan has reserved 650,000 shares of the common stock of the Company for issuance to key employees of the Company and its subsidiaries. The purchase price of each share of common stock subject to an incentive option under the Plan 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 Compensation Committee determines the period or periods of time during which an option may be exercised by the participant and the number of shares as to which the option is exercisable during such period or periods, provided that the option period shall not extend beyond ten years (five years in the case of 10 percent beneficial owners) from the date the option is granted. F-12 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended May 31, 1996, 1995 and 1994 A summary of the Plan's activity for each of the three years in the period ended May 31, 1996 is as follows:
Number of shares Option price - ------------------------------------------------------- --------------------------- Outstanding -- June 1, 1993 520,533 $5.000-$ 7.625 Options issued 101,750 $6.000-$ 8.387 Options exercised (11,434 ) $5.000-$ 8.000 Options canceled (10,601 ) $5.125-$ 7.625 - ------------------------------------------------------- Outstanding -- May 31, 1994 600,248 $5.000-$ 8.387 Options issued 28,750 $8.500-$ 9.350 Options exercised (34,231 ) $5.000-$ 7.625 Options canceled (4,618 ) $6.000-$ 7.625 - ------------------------------------------------------- Outstanding -- May 31, 1995 590,149 $5.000-$ 9.350 Options surrendered (115,300 ) $7.625-$ 9.350 Options re-issued 115,300 $6.375-$7.0125 Options exercised (39,751 ) $5.000-$ 7.625 - ------------------------------------------------------- Outstanding -- May 31, 1996 550,398 $5.000-$ 7.625 - ------------------------------------------------------- --------------------------- Exercisable options 433,698 - ------------------------------------------------------- ---------
9. COMMITMENTS AND CONTINGENCIES - --------------------------------------------------------- Future minimum payments (excluding sub-lease income) under noncancelable operating leases with initial terms of more than one year consist of the following at May 31, 1996 (in thousands):
Operating Year leases - -------------------------------------------------------- --------- 1997 $ 559 1998 429 1999 360 2000 326 2001 326 Thereafter 744 - -------------------------------------------------------- $ 2,744 - -------------------------------------------------------- ---------
Rental expense, including additional charges paid for increases in real estate taxes and other escalation charges for the years ended May 31, 1996, 1995 and 1994, was approximately $584,000, 549,000 and $565,000, respectively. 10. PROFIT SHARING PLAN - --------------------------------------------------------- The Company has a profit sharing and retirement plan subject to Section 401(k) of the Internal Revenue Code. The plan covers all full-time employees in the United States and Puerto Rico who complete at least one year of service. Participants may contribute up to a defined percentage of their annual compensation through salary deductions. The Company intends to match employee contributions in an amount equal to $0.50 for every pretax dollar contributed by the employee up to 6% of the first $20,000 of compensation, provided the Company's pretax earnings for that fiscal year exceed $3,500,000. The Company did not make matching contributions for calendar years 1995, 1994 or 1993. 11. GEOGRAPHIC SEGMENT INFORMATION - --------------------------------------------------------- Revenue, gross profit and income/(loss) before income tax provision and minority interest for each of the three years in the period ended May 31, 1996 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): F-13 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended May 31, 1996, 1995 and 1994
UNITED ELIMI- CONSOLI- STATES EUROPE AFRICA NATIONS DATED - -------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ Year ended May 31, 1996 Net sales to unaffiliated customers $175,032 $69,544 $21,745 $ - $266,321 Transfers between geographic areas 20,470 12,057 20,337 (52,864) - ------------------------------------------------------ Total revenue $195,502 $81,601 $42,082 $(52,864) $266,321 ------------------------------------------------------ Gross profit $ 20,798 $ 703 $ 4,511 $ (3,376) $ 22,636 ------------------------------------------------------ Income/(loss) before income tax provision and minority interest $ 6,988 $ 262 $ (886) $ 785 $ 7,149 ------------------------------------------------------ Identifiable assets at May 31, 1996 $ 97,935 $13,150 $26,192 $(32,211) $105,066 - -------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ Year ended May 31, 1995 Net sales to unaffiliated customers $123,322 $49,684 $ 5,137 $ - $178,143 Transfers between geographic areas 22,196 16,679 22,810 (61,685) - ------------------------------------------------------ Total revenue $145,518 $66,363 $27,947 $(61,685) $178,143 ------------------------------------------------------ Gross profit $ 11,866 $ 561 $ 6,259 $ (6,229) $ 12,457 ------------------------------------------------------ (Loss)/income before income tax provision and minority interest $ (495) $ 100 $ (615) $ (408) $ (1,418) ------------------------------------------------------ Identifiable assets at May 31, 1995 $ 91,980 $11,536 $23,552 $(27,905) $ 99,163 - -------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ Year ended May 31, 1994 Net sales to unaffiliated customers $130,070 $73,921 $ 56 $ - $204,047 Transfers between geographic areas 22,092 13,984 8,737 (44,813) - ------------------------------------------------------ Total revenue $152,162 $87,905 $ 8,793 $(44,813) $204,047 ------------------------------------------------------ Gross profit $ 15,663 $ 772 $ 85 $ (137) $ 16,383 ------------------------------------------------------ Income/(loss) before income tax provision and minority interest $ 4,990 $ 420 $(2,461) $ (146) $ 2,803 ------------------------------------------------------ Identifiable assets at May 31, 1994 $ 92,628 $ 8,386 $20,374 $(28,210) $ 93,178 - -------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------
The identifiable assets which are included in the eliminations primarily represent advances to affiliates. These advances are included therein since the Company, which is the parent company, finances the operations of these affiliates. F-14 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended August 31, - ------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- ------------------------ Net Sales $ 69,400 $ 61,697 Cost of Sales 63,868 57,019 - ------------------------------------------------------------------------------------------------------------------- 5,532 4,678 - ------------------------------------------------------------------------------------------------------------------- Selling, General & Administrative Expenses 2,992 2,776 Interest Expense -- net 945 1,016 - ------------------------------------------------------------------------------------------------------------------- 3,937 3,792 - ------------------------------------------------------------------------------------------------------------------- Income before taxes and minority interest 1,595 886 Income tax provision (Note 2) 93 57 - ------------------------------------------------------------------------------------------------------------------- Income before minority interest 1,502 829 Minority interest in income/(loss) of consolidated subsidiary (157) 43 - ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,659 $ 786 - ------------------------------------------------------------------------------------------------------------------- ------------------------ NET INCOME PER SHARE - ------------------------------------------------------------------------------------------------------------------- ------------------------ Income per share $ 0.26 $ 0.13 - ------------------------------------------------------------------------------------------------------------------- ------------------------ Average number of shares outstanding during the period 6,484,029 6,236,021 - ------------------------------------------------------------------------------------------------------------------- ------------------------
See Notes to Consolidated Financial Statements. F-15 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
August 31, May 31, - -------------------------------------------------------------------------------------------------------------------- (In thousands) 1996 1996 - -------------------------------------------------------------------------------------------------------------------- -------------------- (unaudited) ASSETS CURRENT ASSETS: Cash $ 827 $ 905 Accounts receivable -- net 28,570 25,493 Inventories Rough diamonds 11,287 9,320 Polished diamonds 50,596 46,979 -------------------- Prepaid expenses and other current assets 11,157 10,142 - -------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 102,437 92,839 PROPERTY, PLANT & EQUIPMENT -- net 7,173 7,198 OTHER ASSETS 4,790 5,029 - -------------------------------------------------------------------------------------------------------------------- $114,400 $105,066 - -------------------------------------------------------------------------------------------------------------------- -------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable & other current liabilities $ 17,017 $ 15,770 Notes payable -- other 3,000 3,000 Notes payable -- banks 6,460 - - -------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 26,477 18,770 SENIOR NOTES AND OTHER LONG-TERM DEBT 34,230 34,155 - -------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 60,707 52,925 - -------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST 7,114 7,271 STOCKHOLDERS' EQUITY Common stock, par value $1 per share: Authorized 10,000,000 shares; issued and outstanding, 6,185,531 shares and 6,176,425 shares 6,186 6,176 Additional paid-in capital 26,138 26,098 Retained earnings 14,255 12,596 - -------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 46,579 44,870 - -------------------------------------------------------------------------------------------------------------------- $114,400 $105,066 - -------------------------------------------------------------------------------------------------------------------- --------------------
See Notes to Consolidated Financial Statements. F-16 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended August 31, - ---------------------------------------------------------------------------------------------------------------------- (In thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,659 $ 786 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Depreciation and amortization 619 573 Provision for uncollectible accounts 15 15 Minority interest in income/(loss) of consolidated subsidiary (157) 43 Loss on disposition of fixed assets 22 - (Increase)/decrease in assets and increase/(decrease) in liabilities: Accounts receivable (3,092) (3,969) Inventories (5,584) (1,293) Other current assets (1,015) (976) Non-current assets (42) (15) Accounts payable and other current liabilities 1,247 5,271 ------------------ Net cash provided by/(used in) operating activities (6,328) 435 - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets 11 - Capital expenditures (346) (312) ------------------ Net cash used in investing activities (335) (312) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase/(decrease) in short-term borrowings 6,460 (1,625) Increase in long-term debt 75 - Proceeds from exercise of stock options 50 - ------------------ Net Cash provided by/(used in) financing activities 6,585 (1,625) - ---------------------------------------------------------------------------------------------------------------------- Net (decrease) in cash (78) (1,502) Cash at beginning of year 905 2,532 ------------------ Cash at end of period $ 827 $ 1,030 - ---------------------------------------------------------------------------------------------------------------------- ------------------
See Notes to Consolidated Financial Statements F-17 LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. INTERIM FINANCIAL REPORTING - --------------------------------------------------------- This financial information has been prepared in conformity with the accounting principles and practices reflected in the financial statements included in the annual report filed with the Commission for the preceding fiscal year. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Lazare Kaplan International Inc.'s operating results for the three months ended August 31, 1996 and 1995 and the financial position as of August 31, 1996. The operating results for the interim periods presented are not necessarily indicative of the operating results for a full year. 2. TAXES - --------------------------------------------------------- The Company's subsidiaries conduct business in foreign countries. The subsidiaries are not subject to Federal income taxes and their provisions have been determined based upon the effective tax rates, if any, in the foreign countries. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss carryforwards. The Company's net deferred tax asset, which is comprised primarily of operating loss carryforwards, is approximately $8,600,000 less a valuation allowance of approximately $8,600,000 resulting in no net deferred tax asset. For the three months ended August 31, 1996, the Company has utilized approximately $2,100,000 of net operating loss carryforwards to offset Federal, state and local income taxes. At August 31, 1996, the Company has available U.S. net operating losses of $17.4 million which expire as follows:
Year Amount - ------------------------------------------------------- ----------- 1998 $ 2,000,000 1999 4,200,000 2000 4,300,000 2001 3,500,000 2002 500,000 2007 1,000,000 2008 1,500,000 2010 400,000 - ------------------------------------------------------- $17,400,000 - ------------------------------------------------------- -----------
F-18 No person is authorized in connection with any offering made hereby to give any information or to make any representation not contained herein and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the Common Stock offered hereby, nor does it constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any date subsequent to the date hereof. --------------------------- TABLE OF CONTENTS
Page ---- Available Information.......................... 3 Incorporation of Certain Documents by Reference.................................... 3 Prospectus Summary............................. 4 Summary Financial Information.................. 7 Risk Factors................................... 8 Use of Proceeds................................ 9 Price Range of Common Stock.................... 9 Dividend Policy................................ 10 Capitalization................................. 10 Selected Financial Information................. 11 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 12 Business....................................... 15 Management..................................... 23 Principal and Selling Stockholders and Security Ownership of Management...................... 24 Certain Transactions........................... 26 Description of Common Stock.................... 26 Underwriting................................... 27 Validity of Common Stock....................... 28 Experts........................................ 28 Additional Information......................... 28 Index to Financial Statements.................. F-1
2,200,000 SHARES [LOGO] LAZARE KAPLAN INTERNATIONAL INC. COMMON STOCK --------------------------- PROSPECTUS , 1996 --------------------------- UBS SECURITIES FURMAN SELZ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses to be incurred by the Company in connection with the issuance and distribution of the shares of Common Stock being registered hereby, other than underwriting discounts and commissions.
TOTAL -------- Securities and Exchange Commission Registration Fee............................... $ 16,483 National Association of Securities Dealers, Inc. Filing Fee....................... 5,940 American Stock Exchange Listing Fee............................................... 17,500 Transfer Agent and Registrar Fee.................................................. 3,000 Accounting Fees and Expenses...................................................... 100,000 Legal Fees and Expenses (not including Blue Sky Fees and Expenses)................ 175,000 Blue Sky Fees and Expenses........................................................ 5,000 Miscellaneous..................................................................... 112,077 -------- Total................................................................... $435,000 -------- --------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The following states the general effect of all statutes, charter provisions, by-laws, contracts or other arrangements under which any controlling person, director or officer of the Company is insured or indemnified in any manner against liability which he may incur in his capacity as such: Section 145 of the Delaware General Corporation Law provides: 145. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS: INSURANCE. (a) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery II-1 or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made (l) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or, if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. (h) For purposes of this section, references to 'the corporation' shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to 'other enterprises' shall include employee benefit plans; references to 'fines' shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to 'serving at the request of the corporation' shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to any employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner 'not opposed to the best interests of the corporation' as referred to in this section. II-2 (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person, who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation's obligation to advance expenses (including attorneys' fees). The Certificate of Incorporation of the Company provides: SEVENTH: The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Certificate of Incorporation further provides: EIGHTH: No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of his fiduciary duty as a director, provided that nothing contained herein shall eliminate or limit the liability of a director (i) for any breach of such director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or any amendment thereto of any successor thereto, or (iv) for any transaction from which the director derived an improper personal benefit. Neither the amendment nor repeal of this Article EIGHTH nor the adoption of any provision of the certificate of incorporation inconsistent with this Article EIGHTH, shall eliminate or reduce the effect of this Article EIGHTH in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article EIGHTH would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. The By-Laws of the Company provide: ARTICLE VI INDEMNIFICATION 1. EXECUTIVE OFFICERS. The corporation shall indemnify its executive officers and those of its subsidiaries to the same extent as they would have been insured under the terms of an insurance policy issued to the corporation by National Union Fire Insurance Company of Pittsburgh, Pennsylvania for the policy year beginning September 26, 1984 and ending September 26, 1985 had such policy been in effect at the time a claim is made against any such executive officers. The executive officers of the corporation and its subsidiaries entitled to indemnification pursuant to this Article VI, Section l, shall include such persons who may hold the offices, either currently or in the future, as were covered under the aforementioned policy in the policy year indicated. Any indemnification pursuant to this Article VI, Section l shall be applicable to acts or omissions that occurred prior to the adoption of this Article VI, Section l provided they would have been covered under the insurance policy mentioned above. The right to indemnification under this Article VI, Section l shall continue after any person has ceased to serve in the capacity which would have entitled him to such indemnification. Any subsequent repeal or amendment of this Article VI, Section l or any provision hereof, which shall have the effect of limiting, qualifying or restricting the powers or rights of indemnification provided or permitted hereunder shall not, solely by reason of such repeal or II-3 amendment, eliminate, restrict or otherwise affect the right or power of the corporation to indemnify any person or affect any right of indemnification of such person with respect to claims made prior to such repeal or amendment. The indemnification provided under this Article VI, Section l shall not be deemed exclusive of any other rights to which directors, officers, agents or employees of the corporation may be entitled under Article SEVENTH of the Certificate of Incorporation of the corporation, or any agreement, vote of the stockholders or disinterested directors, or otherwise. The corporation shall have the right to impose, as conditions to any indemnification provided or permitted pursuant to this Article VI, Section l, such reasonable requirements and conditions as the Board of Directors or stockholders may deem appropriate in each specific case and circumstance, including but not limited to (i) that any counsel representing the person to be indemnified in connection with the defense or settlement of any action shall be selected by the corporation, subject to the approval of the person to be indemnified, which consent shall not be unreasonably withheld, (ii) that the corporation shall have the right, at its option, to assume and control the defense or settlement of any claim or proceeding made, initiated or threatened against the person to be indemnified, and (iii) that the corporation shall be subrogated, to the extent of any payments made by way of indemnification, to all of the indemnified person's right of recovery, and that the person to be indemnified shall execute all writings and do everything necessary to assure such rights of subrogations to the corporation. 2. OUTSIDE DIRECTORS. The corporation shall indemnify its outside (i.e. non-officer) directors and those of its subsidiaries to the same extent as they would have been insured under the terms of an insurance policy issued to the corporation by National Union Fire Insurance Company of Pittsburgh, Pennsylvania, for the policy year beginning September 26, 1984 and ending September 26, 1985 had such policy been in effect at the time a claim is made against any such outside director. The outside directors of the corporation and its subsidiaries entitled to indemnification pursuant to this Article VI, Section 2 shall include such persons who may hold the offices, either currently or in the future, as were covered under the aforementioned policy in the policy year indicated. Any indemnification pursuant to this Article VI, Section 2 shall be applicable to acts or omissions that occurred prior to the adoption of this Article VI, Section 2 provided they would have been covered under the insurance policy mentioned above. The right to indemnification under Article VI, Section 2 shall continue after any person has ceased to serve in the capacity which would have entitled him to such indemnification. Any subsequent repeal or amendment of this Article VI, Section 2 or any provision hereof, which shall have the effect of limiting, qualifying or restricting the powers or rights of indemnification provided or permitted hereunder shall not, solely by reason of such repeal or amendment, eliminate, restrict or otherwise affect the right or power of the corporation to indemnify any person or affect any right of indemnification of such person with respect to claims made prior to such repeal or amendment. The indemnification provided under this Article VI, Section 2 shall not be deemed exclusive of any other rights to which directors, officers, agents or employees of the corporation may be entitled under Article SEVENTH of the Certificate of Incorporation of the corporation, or any agreement, vote of the stockholders or disinterested directors, or otherwise. The corporation shall have the right to impose, as conditions to any indemnification provided or permitted pursuant to Article VI, Section 2, such reasonable requirements and conditions as the Board of Directors or stockholders may deem appropriate in each specific case and circumstance, including but not limited to (i) that any counsel representing the person to be indemnified in connection with the defense or settlement of any action shall be selected by the corporation, subject to the approval of the person to be indemnified, which consent shall not be unreasonably withheld, (ii) that the corporation shall have the right, at its option, to assume and control the defense or settlement of any claim or proceeding made, initiated or threatened against the person to be indemnified, and (iii) that the corporation shall be subrogated, to the extent of any payments made by way of indemnification, to all of the indemnified person's right of recovery, and that the person to be indemnified shall execute all writings and do everything necessary to assure such rights of subrogation to the corporation. II-4 3. EXECUTIVE OFFICERS AND DIRECTORS PRIOR TO APRIL 9, 1984. The corporation shall indemnify its directors and executive officers and those of its subsidiaries who were in office prior to April 9, 1984 to the same extent as they would have been insured under the terms of an insurance policy issued to the corporation by National Union Fire Insurance Company of Pittsburgh, Pennsylvania for the policy year beginning September 26, 1984 and ending September 26, 1985 had such policy been in effect at the time a claim is made against any such director or officer. The directors and officers of the corporation and its subsidiaries entitled to indemnification pursuant to this Article VI, Section 3 shall include such persons who held the offices as were covered under the aforementioned policy in the policy year indicated. Any indemnification pursuant to this Article VI, Section 3 shall be applicable to acts or omissions that occurred prior to the adoption of this Article VI, Section 3, provided they would have been covered under the insurance policy mentioned above. The right to indemnification under this Article VI, Section 3 shall continue after any person has ceased to serve in the capacity which would have entitled him to such indemnification hereunder. Any subsequent repeal or amendment of this Article VI, Section 3 or any provision hereof, which shall have the effect of limiting, qualifying or restricting the powers or rights of indemnification provided or permitted hereunder shall not, solely by reason of such repeal or amendment, eliminate, restrict or otherwise affect the right or power of the corporation to indemnify any person or affect any right of indemnification of such person with respect to claims made prior to such repeal or amendment. The indemnification provided under this Article VI, Section 3 shall not be deemed exclusive of any other rights to which directors, officers, agents or employees of the corporation may be entitled under Article SEVENTH of the Certificate of Incorporation of the corporation, or any agreement, vote of the stockholders or disinterested directors, or otherwise. The corporation shall have the right to impose, as conditions to any indemnification provided or permitted pursuant to this Article VI, Section 3, such reasonable requirements and conditions as the Board of Directors or stockholders may deem appropriate in each specific case and circumstance, including but not limited to (i) that any counsel representing the person to be indemnified in connection with the defense or settlement of any action shall be selected by the corporation, subject to the approval of the person to be indemnified, which consent shall not be unreasonably withheld, (ii) that the corporation shall have the right, at its option, to assume and control the defense or settlement of any claim or proceeding made, initiated or threatened against the person to be indemnified, and (iii) that the corporation shall be subrogated, to the extent of any payments made by way of indemnification, to all of the indemnified person's right of recovery, and that the person to be indemnified shall execute all writings and do everything necessary to assure such rights of subrogation to the corporation. 4. DIRECTORS. The corporation shall indemnify its existing directors and those of its subsidiaries to the same extent as they would have been insured under the terms of an insurance policy issued to the corporation by National Union Fire Insurance Company of Pittsburgh, Pennsylvania for the policy year beginning September 26, 1984 and ending September 26, 1985 had such policy been in effect at the time a claim is made against any such director. The directors of the corporation and its subsidiaries entitled to indemnification pursuant to this Article VI, Section 4 shall include such persons who may hold the offices, either currently or in the future, as were covered under the aforementioned policy in the policy year indicated. Any indemnification pursuant to this Article VI, Section 4 shall be applicable to acts or omissions that occurred prior to the adoption of this Article VI, Section 4 provided they would have been covered under the insurance policy mentioned above. The right to indemnification under this Article VI, Section 4 shall continue after any person has ceased to serve in the capacity which would have entitled him to such indemnification hereunder. Any subsequent repeal or amendment of this Article VI, Section 4 or any provision hereof, which shall have the effect of limiting, qualifying or restricting the powers or rights of indemnification provided or permitted hereunder shall not, solely by reason of such repeal or amendment, eliminate, restrict or otherwise affect the right or power of the corporation to indemnify any person or affect any right of indemnification of such person with respect to claims made prior to such repeal or amendment. II-5 The indemnification provided under this Article VI, Section 4 shall not be deemed exclusive of any other rights to which directors, officers, agents or employees of the corporation may be entitled under Article SEVENTH of the Certificate of Incorporation of the corporation, or any agreement, vote of the stockholders or disinterested directors, or otherwise. The corporation shall have the right to impose, as conditions to any indemnification provided or permitted pursuant to this Article VI, Section 4, such reasonable requirements and conditions as the Board of Directors or stockholders may deem appropriate in each specific case and circumstance, including but not limited to (i) that any counsel representing the person to be indemnified in connection with the defense or settlement of any action shall be selected by the corporation, subject to the approval of the person to be indemnified, which consent shall not be unreasonably withheld, (ii) that the corporation shall have the right, at its option, to assume and control the defense or settlement of any claim or proceeding made, initiated or threatened against the person to be indemnified, and (iii) that the corporation shall be subrogated, to the extent of any payments made by way of indemnification, to all of the indemnified person's right of recovery, and that the person to be indemnified shall execute all writings and do everything necessary to assure such rights of subrogation to the corporation. 5. SEVERABILITY. If any of the provisions of this Article VI, or any part hereof, is hereafter construed to be invalid or unenforceable, the same shall not affect the remaining provisions of this Article VI, which shall remain in full effect without regard to the invalid portion or portions. In addition, the By-Laws provide that the Company has the authority to obtain liability insurance. ITEM 16. (A) EXHIBITS
EXHIBIT NUMBERS DESCRIPTION OF EXHIBITS - -------- --------------------------------------------------------------------------------------------------------- (1)** -- Form of Underwriting Agreement (4) -- Specimen of Certificate of Common Stock -- incorporated herein by reference to Exhibit 4(a) to Amendment No. 1 to Registration Statement on Form S-2 of the Registrant filed with the Commission on October 4, 1990 (5)** -- Opinion of Warshaw Burstein Cohen Schlesinger & Kuh, LLP (including consent) (10) -- Material Contracts (a) -- Lazare Kaplan International Inc. Amended and Restated 1988 Stock Option Incentive Plan -- incorporated herein by reference to Exhibit 4.1 to Registration Statement on Form S-8 of the Registrant filed with the Commission on November 5, 1990. (b) -- Note Agreement dated as of May 15, 1991 by and between the Registrant, Allstate Life Insurance Company, Monumental Insurance Company and PFL Life Insurance Company -- incorporated herein by reference to Exhibit 28 to Report on Form 8-K dated May 23, 1991 filed with the Commission on June 4, 1991. (c) -- First Amendment to Note Agreement, dated as of February 28, 1992, by and between the Registrant, Allstate Life Insurance Company, Monumental Life Insurance Company and PFL Life Insurance Company -- incorporated herein by reference to Exhibit 10(d) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1992 filed with the Commission on August 28, 1992. (d) -- Second Amendment to Note Agreement, dated as of March 25, 1992 by and between the Registrant, Allstate Life Insurance Company, Monumental Life Insurance Company and PFL Life Insurance Company -- incorporated herein by reference to Exhibit 10(e) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1992 filed with the Commission on August 28, 1992. (e) -- Third Amendment to the Note Agreement, dated as of December 1, 1992 by and between the Registrant, Allstate Life Insurance Company, Monumental Life Insurance Company and PFL Life Insurance Company -- incorporated herein by reference to Exhibit 10(f) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1993 filed with the Commission on August 30, 1993. (f) -- Fourth Amendment to the Note Agreement, dated as of August 25, 1995 by and between the Registrant, Allstate Life Insurance Company, Monumental Life Insurance Company and PFL Life Insurance Company -- incorporated herein by reference to Exhibit 10 to Report on Form 10-Q of the Registrant for the quarterly period ended August 31, 1995 filed with the Commission on October 13, 1995.
II-6
EXHIBIT NUMBERS DESCRIPTION OF EXHIBITS - -------- --------------------------------------------------------------------------------------------------------- (g) -- Agreement, dated December 5, 1990, by and between the Registrant and the Government of the Republic of Botswana -- incorporated herein by reference to Exhibit 10(f) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1992 filed with the Commission on August 28, 1992. (h) -- Subscription Agreement, dated August 24, 1994 among the Registrant and the Botswana Development Corporation -incorporated herein by reference to Exhibit 10(h) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1994 filed with the Commission on August 31, 1994. (i) -- Loan Agreement, dated May 14, 1996 among the Registrant, Fleet Bank, N.A. and Bank Leumi Trust Company of New York -- incorporated herein by reference to Exhibit 10(i) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1996 filed with the Commission on August 28, 1996. (j) -- Cooperation Agreement, dated July 5, 1996, among the Registrant, Empresa Nacional de Diamantes de Angola and Sociedade Angolana de Exploracao, Lapidacao e Comercializacao de Diamantes -- incorporated herein by reference to Exhibit (1) to Current Report on Form 8-K of the Registrant filed with the Commission on October 31, 1996 (certain portions of this agreement are subject to a request for confidential treatment). (k) -- Cooperation Agreement, dated July 15, 1996, between the Registrant and AK Almazi Rossii Sakha -- incorporated herein by reference to Exhibit (2) to Current Report on Form 8-K/A of the Registrant filed with the Commission on November 18, 1996 (certain portions of this agreement are subject to a request for confidential treatment). (l)* -- Amendment No. 1, dated as of November 29, 1996, to Loan Agreement, dated May 14, 1996, among the Registrant, Fleet Bank, N.A. and Bank Leumi Trust Company of New York. (23)(a)* -- Consent of Deloitte & Touche LLP (included on page S-2 as part of Independent Auditors' Consent and Report as to Schedules) (23)(b)* -- Consent of Ernst & Young LLP (23)(c) -- Consent of Warshaw Burstein Cohen Schlesinger & Kuh, LLP (included as part of Exhibit 5 of the Registration Statement) (25)** -- Power of Attorney
(B) FINANCIAL STATEMENTS AND SCHEDULES. (1) The Financial Statements are included in the Prospectus; see 'Index to Financial Statements' in the Prospectus. (2) The following financial statement schedule of the Company included herein should be read in conjunction with audited financial statements included in the Prospectus.
SCHEDULE NUMBER DESCRIPTION OF SCHEDULE --------------- ----------------------------------------------------------- II Valuation and Qualifying Accounts
All other schedules for the Company are omitted because either they are not applicable or the required information is shown in the financial statements or notes thereto. - ------------ * Filed herewith. ** Previously filed. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer II-7 or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing of Form S-2 and has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, in the City of New York, State of New York, on November 19, 1996. LAZARE KAPLAN INTERNATIONAL INC. By /S/ SHELDON L. GINSBERG ................................... SHELDON L. GINSBERG EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement 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 - ------------------------------------------ -------------------------------------------- ------------------- * Chairman of the Board of Directors December 11, 1996 ......................................... (MAURICE TEMPELSMAN) * Vice Chairman of the Board of Directors and December 11, 1996 ......................................... President (principal executive officer) (LEON TEMPELSMAN) * Director December 11, 1996 ......................................... (GEORGE R. KAPLAN) * Director December 11, 1996 ......................................... (LUCIEN BURSTEIN) * Director December 11, 1996 ......................................... (MICHAEL W. BUTTERWICK) * Director December 11, 1996 ......................................... (MYER FELDMAN) SHELDON L. GINSBERG Director, Executive Vice President and Chief December 11, 1996 ......................................... Financial Officer (principal financial and (SHELDON L. GINSBERG) accounting officer) * Director December 11, 1996 ......................................... (ROBERT SPEISMAN) *By: /s/ SHELDON L. GINSBERG ......................................... (SHELDON L. GINSBERG) ATTORNEY-IN-FACT
II-9 To the Board of Directors and Stockholders LAZARE KAPLAN INTERNATIONAL INC. We have audited the consolidated financial statements of Lazare Kaplan International Inc. and subsidiaries as of May 31, 1996 and 1995 and for the years then ended and have issued our report thereon dated July 9, 1996 (included elsewhere within the Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement for the years ended May 31, 1996 and 1995. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein for the years ended May 31, 1996 and 1995. ERNST & YOUNG LLP New York, New York July 9, 1996 S-1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE We consent to the use in this Registration Statement of Lazare Kaplan International Inc. and subsidiaries on Form S-2 of our report dated July 13, 1994 (August 31, 1994 as to Note 11), appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the headings 'Selected Financial Information' and 'Experts' in such Prospectus. Our audit of the financial statements referred to in our aforementioned report also included the financial statement schedule of Lazare Kaplan International Inc. and subsidiaries, listed in Item 16(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such 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. DELOITTE & TOUCHE LLP New York, New York December 11, 1996 S-2 SCHEDULE II LAZARE KAPLAN INTERNATIONAL INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
COLUMN C ----------------------------- COLUMN B ADDITIONS -------- ----------------------------- COLUMN E BALANCE (1) -------- AT CHARGED (2) COLUMN D BALANCE COLUMN A BEGINNING TO COSTS CHARGED TO -------- AT END - --------------------------------------------------- OF AND OTHER ACCOUNTS DEDUCTIONS OF DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - --------------------------------------------------- -------- --------- -------------- -------- -------- YEAR ENDED MAY 31, 1996: Allowance for doubtful accounts............... $220,046 $ 70,000 $-- $ 8,781 (B) $281,265 -------- --------- -------------- -------- -------- Sales returns and allowances.................. $ -- $ -- $-- $ -- $ -- -------- --------- -------------- -------- -------- YEAR ENDED MAY 31, 1995: Allowance for doubtful accounts............... $165,169 $ 70,000 $-- $15,123 (B) $220,046 -------- --------- -------------- -------- -------- Sales returns and allowances.................. $ -- $ -- $-- $ -- $ -- -------- --------- -------------- -------- -------- YEAR ENDED MAY 31, 1994: Allowance for doubtful accounts............... $403,837 $ 10,000 $-- $248,668(B) $165,169 -------- --------- -------------- -------- -------- Sales returns and allowances.................. $268,632 $(268,632)(A) $-- $ -- $ -- -------- --------- -------------- -------- --------
- ------------ (A) Adjustments to reserve balance (B) Amounts written off S-3 STATEMENT OF DIFFERENCES ------------------------- The registered trademark shall be expressed as.......................... 'r' EXHIBIT INDEX
EXHIBIT NUMBERS DESCRIPTION OF EXHIBITS - -------- ---------------------------------------------------------------------------------------------------------- (1)** -- Form of Underwriting Agreement (4) -- Specimen of Certificate of Common Stock -- incorporated herein by reference to Exhibit 4(a) to Amendment No. 1 to Registration Statement on Form S-2 of the Registrant filed with the Commission on October 4, 1990 (5)** -- Opinion of Warshaw Burstein Cohen Schlesinger & Kuh, LLP (including consent) (10) -- Material Contracts (a) -- Lazare Kaplan International Inc. Amended and Restated 1988 Stock Option Incentive Plan -- incorporated herein by reference to Exhibit 4.1 to Registration Statement on Form S-8 of the Registrant filed with the Commission on November 5, 1990. (b) -- Note Agreement dated as of May 15, 1991 by and between the Registrant, Allstate Life Insurance Company, Monumental Insurance Company and PFL Life Insurance Company -- incorporated herein by reference to Exhibit 28 to Report on Form 8-K dated May 23, 1991 filed with the Commission on June 4, 1991. (c) -- First Amendment to Note Agreement, dated as of February 28, 1992, by and between the Registrant, Allstate Life Insurance Company, Monumental Life Insurance Company and PFL Life Insurance Company -- incorporated herein by reference to Exhibit 10(d) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1992 filed with the Commission on August 28, 1992. (d) -- Second Amendment to Note Agreement, dated as of March 25, 1992 by and between the Registrant, Allstate Life Insurance Company, Monumental Life Insurance Company and PFL Life Insurance Company --incorporated herein by reference to Exhibit 10(e) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1992 filed with the Commission on August 28, 1992. (e) -- Third Amendment to the Note Agreement, dated as of December 1, 1992 by and between the Registrant, Allstate Life Insurance Company, Monumental Life Insurance Company and PFL Life Insurance Company -- incorporated herein by reference to Exhibit 10(f) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1993 filed with the Commission on August 30, 1993. (f) -- Fourth Amendment to the Note Agreement, dated as of August 25, 1995 by and between the Registrant, Allstate Life Insurance Company, Monumental Life Insurance Company and PFL Life Insurance Company -- incorporated herein by reference to Exhibit 10 to Report on Form 10-Q of the Registrant for the quarterly period ended August 31, 1995 filed with the Commission on October 13, 1995. (g) -- Agreement, dated December 5, 1990, by and between the Registrant and the Government of the Republic of Botswana -- incorporated herein by reference to Exhibit 10(f) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1992 filed with the Commission on August 28, 1992. (h) -- Subscription Agreement, dated August 24, 1994 among the Registrant and the Botswana Development Corporation -incorporated herein by reference to Exhibit 10(h) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1994 filed with the Commission on August 31, 1994. (i) -- Loan Agreement, dated May 14, 1996 among the Registrant, Fleet Bank, N.A. and Bank Leumi Trust Company of New York -- incorporated herein by reference to Exhibit 10(i) to Report on Form 10-K of the Registrant for the fiscal year ended May 31, 1996 filed with the Commission on August 28, 1996. (j) -- Cooperation Agreement, dated July 5, 1996, among the Registrant, Empresa Nacional de Diamantes de Angola and Sociedade Angolana de Exploracao, Lapidacao e Comercializacao de Diamantes -- incorporated herein by reference to Exhibit (1) to Current Report on Form 8-K of the Registrant filed with the Commission on October 31, 1996 (certain portions of this agreement are subject to a request for confidential treatment). (k) -- Cooperation Agreement, dated July 15, 1996, between the Registrant and AK Almazi Rossii Sakha -- incorporated herein by reference to Exhibit (2) to Current Report on Form 8-K/A of the Registrant filed with the Commission on November 18, 1996 (certain portions of this agreement are subject to a request for confidential treatment). (l)* -- Amendment No. 1, dated as of November 29, 1996, to Loan Agreement dated May 14, 1996, among the Registrant, Fleet Bank, N.A. and Bank Leumi Trust Company of New York.
LOCATION OF EXHIBIT EXHIBIT IN SEQUENTIAL NUMBERS NUMBERING SYSTEM - -------- ------------------- (23)(a)* -- Consent of Deloitte & Touche LLP (included on page S-2 as part of Independent Auditors' Consent and Report as to Schedules) (23)(b)* -- Consent of Ernst & Young LLP (23)(c) -- Consent of Warshaw Burstein Cohen Schlesinger & Kuh, LLP (included as part of Exhibit 5 of the Registration Statement) (25)** -- Power of Attorney
EX-10 2 EXHIBIT 10(1) AMENDMENT NO. 1 TO LOAN AGREEMENT AMENDMENT NO. 1 TO LOAN AGREEMENT (this "First Amendment"), made and executed as of November 29, 1996, by and among: LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the "Borrower"); FLEET BANK, N.A. (formerly NatWest Bank N.A.), a national banking association, ("Fleet"); and BANK LEUMI TRUST COMPANY OF NEW YORK, a New York banking corporation ("Bank Leumi"; Fleet and Bank Leumi are hereinafter sometimes referred to individually as a "Bank" and together as the "Banks"); W I T N E S S E T H: WHEREAS: (A) The Borrower has entered into a certain Loan Agreement dated May 14, 1996 (together with all Exhibits and Schedules thereto, hereinafter referred to as the "Loan Agreement") with the Banks pursuant to which the Banks have agreed to make Loans to the Borrower in the aggregate principal amount of up to Twenty-Seven Million Five Hundred Thousand ($27,500,000) Dollars on the terms and conditions set forth in the Loan Agreement; (B) All capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the Loan Agreement; (C) The Borrower has requested that the Banks increase the amount of the Total Commitment from Twenty-Seven Million Five Hundred Thousand ($27,500,000) Dollars to Thirty-Five Million Five Hundred Thousand ($35,500,000) Dollars; and (D) The Banks are willing to increase the Total Commitment as aforesaid, on the terms and conditions hereinafter set forth; NOW, THEREFORE, the parties hereto hereby agree as follows: Article 1. Construction; Changes in Commitments; Amendments to Loan Agreement; Allonges to Notes. 1.1 Construction. All of the terms and provisions of this First Amendment are hereby incorporated by reference into the Loan Agreement as if such terms and provisions were set forth therein. 1.2 Change in Commitments. 1.2.1 From and after the date hereof, the Commitment of each Bank shall be the amount set forth opposite such Bank's name under the heading "Commitment" on the signature pages hereto, and such amount shall supersede and be deemed to amend the amount of such Bank's respective Commitment as set forth opposite its name under the heading "Commitment" on the signature pages to the Loan Agreement as in effect immediately prior to the effectiveness of this First Amendment. 1.2.2 The phrase "the amount set forth opposite such Bank's name on the signature pages hereof under the caption 'Commitment' as such amount is subject to reduction in accordance with the terms hereof", appearing in the definition of "Commitment" in Article 1 of the Loan Agreement, shall be deemed to refer to the amounts set forth opposite each Bank's name on the signature pages to this First Amendment. 1.3 Amendments. The Loan Agreement is hereby amended, effective upon the consummation of the conditions precedent set forth in Article 5 hereof, as follows: 1.3.1 The Recital appearing on page 1 of the Loan Agreement is amended by deleting the dollar amount "Twenty-Seven Million Five Hundred Thousand ($27,500,000) Dollars" and substituting therefor the dollar amount "Thirty-Five Million Five Hundred Thousand ($35,500,000) Dollars". 1.3.2 Article 1 of the Loan Agreement (Definitions) is amended as follows: (a) The following definition is added in its appropriate alphabetic location: "Amendment No. 1: Amendment No. 1 to Loan Agreement dated as of November 29, 1996, by and among the Borrower and the Banks." (b) The definitions of "Cash Flow", and "Total Commitment" are deleted in their entirety and the following definitions are substituted therefor, respectively: "Cash Flow: for any period, the consolidated net income of any Person after all income taxes paid by such Person during such period plus, but only to the extent such items shall have been deducted in determining such net income, depreciation and amortization of assets, minus all Capital Expenditures incurred by such Person during such period; as to all of the foregoing, as determined in accordance with GAAP, consistently applied. -2- Total Commitment: the aggregate obligation of the Banks to make Loans hereunder not exceeding Thirty-Five Million Five Hundred Thousand ($35,500,000) Dollars, as the same shall and/or may be reduced from time to time pursuant to Article 2 hereof." 1.3.3 Article 2 of the Loan Agreement (Commitment; Loans; Guaranties) is amended in the following respects: (a) Subsection 2.4(a) of the Loan Agreement (Notes) is deleted in its entirety and the following is substituted therefor: "Section 2.4 Notes. (a) The Loans made by each Bank shall be evidenced by a single promissory note of the Borrower in substantially the form of Exhibit A hereto as amended by an allonge to note in the form of Exhibit A to Amendment No. 1 (each, as so amended, a 'Note' and collectively, the 'Notes'). Each Note shall be dated the date of the initial borrowing of the Loans under this Agreement, shall be payable to the order of such Bank in a principal amount equal to such Bank's Commitment as in effect on the effective date of Amendment No. 1, and shall otherwise be duly completed. The Notes shall be payable as provided in Sections 2.1 and 2.5 hereof." (b) Section 2.7(a) of the Loan Agreement (Fees) is deleted in its entirety and the following is substituted therefor: "Section 2.7 Fees. (a) The Borrower shall pay to the Banks pro rata according to their respective Commitments, a commitment fee (the 'Commitment Fee') as follows: (i) simultaneously with the execution and delivery of Amendment No. 1, an amount equal to the product of: (A) $83.33 [representing 3/8 of 1% of $8,000,000, divided by 360], multiplied by (B) the number of days during the period commencing on the effective date of Amendment No. 1 and ending on May 14, 1997; and (ii) on each of May 14, 1997 and May 14, 1998 or, if earlier, on the date the Commitments are terminated, $133,125. 1.3.4 Article 6 of the Loan Agreement (Affirmative Covenants) is amended by adding a new Section 6.13 thereto as follows: -3- "Section 6.13 Notice of Additional Indebtedness. Subject to compliance with Section 7.1 hereof, use its best efforts to notify the Banks in writing, not less than fifteen (15) days prior to the incurrence thereof (but in any event, shall notify the Banks in writing not less than five (5) days prior to the incurrence thereof), of any Indebtedness for borrowed money from an institutional lender proposed to be incurred by the Borrower (including, without limitation any extension or renewal of any Debt Instrument to which the Borrower was or is then a party)." 1.3.5 Schedule 3 (Cash Flow) to Exhibit C (No Default Certificate) to the Loan Agreement is deleted in its entirety and a new schedule, in the form attached hereto as Schedule 3, is substituted therefor. 1.4 Allonges to Notes. In order to evidence the increase in the Commitments, the Borrower shall, simultaneously with the execution and delivery of this First Amendment, execute and deliver to each Bank an allonge to such Bank's Note in the form of Exhibit A annexed hereto (each, an "Allonge" and together, the "Allonges"). Article 2. Confirmation. In order to induce the Banks to enter into this First Amendment and to increase the Commitments, each of the Guarantors hereby acknowledges and confirms that: (a) the guarantee by each of them of the due payment and performance by the Borrower of all the indebtedness, liabilities and obligations of the Borrower to the Banks shall be deemed to include all of the indebtedness, liabilities and obligations of the Borrower to the Banks arising under this First Amendment and the Notes as amended by the Allonges, and (b) the term "Guaranteed Obligations", as used in the Guaranties (or any other term used therein to describe or refer to the indebtedness, liabilities, and obligations of the Borrower to the Banks) includes, without limitation, all of the indebtedness, liabilities and obligations of the Borrower to the Banks arising under this First Amendment and the Notes as amended by the Allonges. Article 3. References in the Loan Documents. The Borrower hereby acknowledges and confirms to, and agrees with, the Banks that all references in the Loan Agreement as amended hereby, the Notes as amended by the Allonges, the Guaranties, and all other documents executed and delivered in connection therewith, including all amendments, modifications and supplements thereto, to: -4- (a) the "Loan Agreement" or "this Agreement" (to the extent such term refers to the Loan Agreement) shall be deemed to refer to the Loan Agreement as amended hereby and as hereafter amended, modified and/or supplemented; (b) the "Loan Documents" shall be deemed to refer to this First Amendment, the Loan Agreement as amended hereby, the Allonges, the Notes as amended by the Allonges, the Guaranties as acknowledged and confirmed hereby, and all other agreements, instruments and documents relating to the transactions covered by the Loan Agreement as amended hereby; (c) the "Commitments" shall be deemed to refer to the Commitments as increased by this First Amendment; (d) a "Note" or the "Notes" shall be deemed to refer to a Note or the Notes, each as amended by its respective Allonge; and (g) the "Guaranties" shall be deemed to refer to the Guaranties as acknowledged and confirmed hereby. Article 4. Representation and Warranties. The Borrower hereby represents and warrants to the Banks that: 4.1 Article 3 of Loan Agreement; No Defaults. 4.1.1 Each and every one of the representations and warranties set forth in Article 3 of the Loan Agreement is true in all respects as of the date hereof, except for changes which, either singly or in the aggregate, are not materially adverse to the business or financial condition of the Borrower and the Corporate Guarantors, taken as a whole. 4.1.2 As of the date hereof, there exists no Event of Default under the Loan Agreement, and no event which, with the giving of notice or lapse of time or both, would constitute such an Event of Default. 4.2 Power, Authority, Consents. The Borrower and each Guarantor has the power to execute, deliver and perform this First Amendment and the Borrower has the power to execute, deliver and perform the Allonges. The Borrower has the power to borrow under the Loan Agreement as amended hereby and has taken all necessary corporate action to authorize the borrowing under the Loan Agreement as amended hereby on the terms and conditions thereof. The Borrower and each Guarantor has taken all necessary action, corporate or otherwise, to authorize the execution, delivery and performance of this First Amendment and the Allonges, as applicable. Other than due authorization by the -5- Board of Directors of the Borrower and of each corporate Guarantor, each of which has been duly obtained, no consent or approval of any Person (including, without limitation, any stockholder of the Borrower or any Guarantor), no consent or approval of any landlord or mortgagee, no waiver of any Lien or right of distraint or other similar right and no consent, license, approval, authorization or declaration of any governmental authority, bureau or agency, is or will be required in connection with the execution, delivery or performance by the Borrower or any Guarantor, or the validity, enforcement or priority, of this First Amendment and the Allonges, as applicable. 4.3 No Violation of Law or Agreements. The execution and delivery by the Borrower and each Guarantor of this First Amendment and the Allonges, as applicable, and performance by each of them hereunder and thereunder, will not violate any provision of law and will not conflict with or result in a breach of any order, writ, injunction, ordinance, resolution, decree, or other similar document or instrument of any court or governmental authority, bureau or agency, domestic or foreign, or any certificate of incorporation or by-laws of the Borrower or any Guarantor, or create (with or without the giving of notice or lapse of time, or both) a default under or breach of any agreement, bond, note or indenture to which the Borrower or any Guarantor is a party, or by which any of them is bound or any of their respective properties or assets is affected, or result in the imposition of any Lien of any nature whatsoever upon any of the properties or assets owned by or used in connection with the business of the Borrower or any Guarantor. 4.4 Due Execution, Validity, Enforceability. Each of this First Amendment and the Allonges has been duly executed and delivered by the Borrower and/or each Guarantor, as applicable, and each constitutes the valid and legally binding obligation of the Borrower or such Guarantor, as applicable, enforceable in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws, now or hereafter in effect, relating to or affecting the enforcement of creditors' rights generally and except that the remedy of specific performance and other equitable remedies are subject to judicial discretion. Article 5. Conditions Precedent to the Effectiveness of this First Amendment. The effectiveness of this First Amendment and the obligation of the Banks to increase the Commitments shall be subject to the fulfillment (to the satisfaction of the Banks) of the following conditions precedent: -6- 5.1 First Amendment. The Borrower shall have executed and delivered to the Banks this First Amendment. 5.2 Allonges. The Borrower shall have executed and delivered to each Bank its Allonge. 5.3 Guarantors. Each of the Guarantors shall have executed and delivered to the Banks this First Amendment and shall have duly complied with all of the terms and conditions hereof. 5.4 Commitment Fee. The Banks shall have received the Commitment Fee referred to in Subsection 2.7(a)(i) of the Loan Agreement as amended hereby. 5.5 Corporate Action. The Banks shall have received true and complete copies of all action, corporate or otherwise, taken by the Borrower and each Guarantor to authorize the execution, delivery and performance of this First Amendment and the Allonges, as applicable, certified by its respective secretary. 5.6 Compliance. 5.6.1 The Borrower shall have complied and shall then be in compliance with all of the terms, covenants and conditions of this First Amendment and the Loan Agreement as amended hereby; 5.6.2 There shall exist no Default or Event of Default under the Loan Agreement as amended hereby; and 5.6.3 The representations and warranties contained in Article 3 hereof shall be true and correct on the date hereof; and the Banks shall have received a Compliance Certificate dated the date hereof certifying, inter alia, that the conditions set forth in this Section 5.6 are satisfied on such date. 5.7 Legal Matters. All legal matters incident hereto shall be satisfactory to counsel to the Banks. Article 6. Miscellaneous. 6.1 Full Force and Effect. Except as specifically amended herein, the Loan Agreement and each of the other Loan Documents shall remain in full force and effect in accordance with its terms. 6.2 Miscellaneous. The miscellaneous provisions under Article 9 of the Loan Agreement as amended hereby, together -7- with the definitions of all terms used therein, and all other sections of the Loan Agreement as amended hereby to which Article 9 refers are hereby incorporated herein by reference as if the provisions thereof were set forth in full herein, except that: (i) the term "Loan Agreement" shall be deemed to refer to the Loan Agreement as amended hereby; (ii) the term "Notes" shall be deemed to refer to the Notes as amended by the Allonges; (iii) the term "this Loan Agreement" shall be deemed to refer to this First Amendment; and (iv) the terms "hereunder" and "hereto" shall be deemed to refer to this First Amendment. This First Amendment together with the Loan Agreement and the other Loan Documents embody the entire agreement and understanding among the Banks, the Borrower, and each of the Guarantors and supersedes all prior agreements and understandings relating to the subject matter hereof. 6.3 Counterparts. This First Amendment may be signed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. [SIGNATURE PAGES TO FOLLOW] -8- IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed on the date first above written. LAZARE KAPLAN INTERNATIONAL INC. By_____________________________ Title Agreed to and Accepted and Acknowledged as to Article 3 hereof: LAZARE KAPLAN EUROPE INC. By__________________________ Title LAZARE KAPLAN GHANA LTD. By__________________________ Title LAZARE KAPLAN BELGIUM, N.V. By__________________________ Title SUPREME GEMS N.V. By__________________________ Title -9- Commitment: $21,300,000 FLEET BANK, N.A. By_______________________________ Karen A. Purelis, Vice President Lending Office for Prime Rate Loans, LIBOR Loans and Designated Rate Loans: 1133 Avenue of the Americas New York, New York 10036 Attention: Karen A. Purelis Vice President Address for Notices: Fleet Bank, N.A. 1133 Avenue of the Americas New York, New York 10036 Attention: Karen Purelis Vice President Telex: 232369 Answer-Back Code: NBNA UR Telecopier: (212) 703-1824 -10- Commitment: $ 14,200,000 BANK LEUMI TRUST COMPANY OF NEW YORK By_____________________________ Jeff Pfeffer Senior Vice President By_____________________________ Title Lending Office for Prime Rate Loans; LIBOR Loans and Designated Rate Loans: 579 Fifth Avenue New York, New York 10017 Attention: Jeff Pfeffer Senior Vice President Address for Notices: 579 Fifth Avenue New York, New York 10017 Attention: Jeff Pfeffer Senior Vice President Telecopier: (212) 407-4482 -11- EXHIBIT A TO AMENDMENT NO. 1 TO LOAN AGREEMENT BY AND AMONG LAZARE KAPLAN INTERNATIONAL INC., FLEET BANK, N.A. AND BANK LEUMI TRUST COMPANY OF NEW YORK FORM OF ALLONGE The undersigned, LAZARE KAPLAN INTERNATIONAL INC. (the "Borrower") and ______________________ (the "Bank"), hereby amend the Note dated May 14, 1996 made by the Borrower payable to the order of the Bank in the original principal amount of $_____________ (the "Original Note") by deleting the heading thereof and the first paragraph set forth therein and substituting the following therefor: "$____________ New York, New York May 14, 1996 FOR VALUE RECEIVED, the undersigned LAZARE KAPLAN INTERNATIONAL INC., a Delaware corporation (the 'Borrower'), hereby promises to pay to the order of ____________________ ______________________ (the 'Bank') on the Maturity Date (as defined in the Loan Agreement dated the date hereof between the Borrower, ___________________________ and the Bank (as such Loan Agreement may be amended, modified or supplemented, the 'Loan Agreement')), the lesser of (i) the principal sum of __________________________ Dollars ($____________), or (ii) the aggregate unpaid principal amount of the Loans (as defined in the Loan Agreement) made by the Bank to the Borrower pursuant to the Loan Agreement, and to pay interest on the unpaid principal amount of each Loan from the date thereof at the rates per annum and for the periods set forth in or established by the Loan Agreement and calculated as provided therein." The Original Note shall be deemed amended by this Allonge and a copy of this Allonge shall be attached to the Original Note. The amendment evidenced by this Allonge shall be effective November 29, 1996. Except as expressly amended by this Allonge, all terms and conditions of the Original Note shall continue in full force and effect. LAZARE KAPLAN INTERNATIONAL INC. By______________________________ Title Accepted and Agreed to: [BANK] By_________________________ Title [By________________________ Title] -2- SCHEDULE 3 TO AMENDMENT NO. 1 TO LOAN AGREEMENT BY AND AMONG LAZARE KAPLAN INTERNATIONAL INC., FLEET BANK, N.A. AND BANK LEUMI TRUST COMPANY OF NEW YORK SCHEDULE 3 TO FORM OF NO DEFAULT CERTIFICATE ANNUAL CASH FLOW Date: _____________ Period: Four consecutive fiscal quarters ending ___________ Net Income $__________________ (ADD) + Depreciation $__________________ + Amortization $__________________ (SUBTRACT) - Capital Expenditures $__________________ Incurred (EQUALS) = Annual Cash Flow $__________________ Required Amount $__________________ Compliance (Y/N): _____________ EX-23 3 EXHIBIT 23(B) EXHIBIT (23)(b) CONSENT OF ERNST & YOUNG LLP We consent to the reference to our firm under the captions "Selected Financial Information" and "Experts" and to the use of our report dated July 9, 1996, in the Registration Statement (Form S-2, No. 333-14227) and related Prospectus of Lazare Kaplan International Inc. for the registration of 2,200,000 shares of its common stock. We also consent to the use of our report dated July 9, 1996 with respect to the financial statement schedule of Lazare Kaplan International Inc. for the years ended May 31, 1996 and 1995 included in the Registration Statement. Ernst & Young LLP New York, New York December 11, 1996 -----END PRIVACY-ENHANCED MESSAGE-----