As “the center of gravity” of the diamond supply industry moves to southern Africa, Lazare Kaplan revealed that it is shifting its operations to that region. Not only has the company recently cemented its existing relationships with diamond suppliers, governments, and vendors in Namibia, Botswana, and South Africa, but management said that the company has stepped up its involvement with new cutting and polishing operations in those countries. In Angola, Lazare Kaplan Chairman Maurice Tempelsman said his company is actively negotiating expanded opportunities with its partner, now that peace has returned to that country.

 

However, the cost of this operational realignment is expected to be significant. Because of recent disappointing financial results as well as the prospects for more short term financial pain as the company responds to the changing diamond industry environment, Lazare Kaplan has announced a major belt-tightening plan that will eliminate bonuses, result in redundancies, and reallocate its remaining personnel. Finally, the company’s top two officers – Maurice Tempelsman, chairman, and Leon Tempelsman, vice chairman and president – have agreed to forego bonuses as well as take a 15 percent salary cut.

 

Larger Operating Loss in November Quarter

For its second fiscal quarter ended November, 2006, Lazare Kaplan reported a modest decline in revenues and a sharply larger operating loss. Revenues were $94.4 million in the three-month period, down about 2 percent from the same period a year ago, while its after-tax loss rose to $1.4 million versus the prior year’s loss of $0.4 million. Most of the increased loss came from legal expenses – well in excess of $1 million – that Lazare Kaplan incurred to protect its intellectual property rights, specifically related to its suit against Photoscribe and the GIA over the right to use what Lazare Kaplan claims are its patented laser inscription techniques.

 

While Lazare Kaplan’s profits have been sagging for some time, we believe that financial results in the November quarter probably pushed company management and its board of directors to move ahead with its realignment and restructuring program.

 

Restructuring Plan: Major Changes Ahead for Lazare Kaplan

In a recent conference call, Leon Tempelsman articulated a specific action plan in response to changing diamond industry conditions. In addition, Tempelsman acknowledged that his company could continue to experience short term financial pain, but it would set the company up for long term financial success. Details of management’s restructuring plan are as follows:

 

• Namibia – Lazare Kaplan will exercise its option to acquire a 50 percent interest in NamGem, with whom it has a cooperation agreement. Under the terms of this agreement, Lazare Kaplan (LKI) provides marketing and technical manufacturing assistance to NamGem. LKI purchases rough diamonds and supervises the cutting and polishing of certain of those diamonds. LKI pays NamGem a fee for manufacturing those stones. All rough and polished diamonds in its Namibian operations are bought and sold by the company for its own account.

• Botswana – Lazare Kaplan has a license to set up a manufacturing operation in Botswana. It has acquired land, and it is moving ahead with plans to construct a diamond cutting and polishing operation. The company is working closely with both the government of Botswana as well as potential vendors.

• South Africa – Lazare Kaplan is expanding its relationship with Nozala to set up a major diamond polishing operation in an unused factory. In February, LKI and its partners will hold a summit meeting to determine the economic viability of the project.

• Angola – Currently, Lazare Kaplan has a technical assistance agreement with Sodiam, the government entity responsible for the development and marketing of Angolan diamonds. With a return to peace in Angola, LKI has taken a substantial minority position in Sodiam to develop diamond operations in that country.

• Russia – Lazare Kaplan’s ten-year agreement with diamond producer Alrosa still has two years to run. However, with the uncertain political climate in Russia, coupled with changing conditions in the diamond industry, LKI plans to begin its negotiations early this year to re-calibrate its long-term relationship with Alrosa.

• Puerto Rico – Lazare Kaplan’s diamond cutting facility in Puerto Rico, perhaps the largest facility in the U.S., will become a service center and resource center to support the growth of Lazare Kaplan and its partners’ operations in southern Africa.

• Downstream operations – Lazare Kaplan’s management plans to strengthen its downstream operations, as follows:

• Lazare Diamond brand – Management has developed a three-prong plan to improve sales of its flagship Lazare Diamond brand: 1) broaden existing relationships; 2) develop new markets; and 3) open Lazare Diamond stores.
• Fine-quality commercial-make diamonds – The company plans to develop a market for its fine-quality commercial-make diamonds, with a focus on markets in Belgium, Israel, and Hong Kong.
• Lazare Jewelry – The company will broaden its line of Lazare Jewelry, which has a classic look.

• Bellataire – Lazare Kaplan plans to expand its line of high-pressure, high-temperature enhanced diamonds marketed under the Bellataire brand. It will focus on larger diamonds where it can add significant value.

• Defend its intellectual property – Leon Tempelsman said that he believes the future of the diamond industry will be driven by technology, including synthetic diamonds. In an effort to protect some of Lazare Kaplan’s ground-breaking, patented technology, the company indicated it will fight to protect its patents, licenses, and technology. Both Leon Tempelsman and Chief Financial Officer Bill Moryto spent an inordinate amount of time carefully explaining the company’s position on its intellectual property. Clearly, the company is not saber-rattling; it means business, and it spent well in excess of $1 million defending its rights in the three-month period ended November 2006. In its suit against Photoscribe and the GIA, Lazare Kaplan is seeking both injunctive relief as well as damages from lost sales and profits. Photoscribe and the GIA have filed counter-suits.

Belt-Tightening Plan

Management is taking steps to streamline its overhead costs, cut expenses, and reduce unproductive inventory. It plans to re-deploy people in its manufacturing, sales, and operational areas of its business. No bonuses will be paid. Incentive pay will be put in place, where appropriate. Management also said that its belt-tightening would likely “result in redundancies.” This means positions will be eliminated, and people could be laid off.

 

Finally, Lazare Kaplan’s top two officers – Maurice and Leon Tempelsman – have agreed to forego a bonus this year and take a 15 percent salary cut. The Tempelsman family owns roughly 60 percent – about 5 million shares – of the outstanding stock of Lazare Kaplan. For the fiscal year ended May 2006, Chairman Maurice Tempelsman earned a salary of $355,000 and a bonus of $80,000. In the same period, Leon Tempelsman, vice-chairman and president earned a salary of $540,000 and a bonus of $80,000. In addition, he received just over $11,000 of other compensation. In prior years, Leon Tempelsman had received long-term compensation consisting of options to purchase LKI shares; the board’s compensation committee did not award him any stock options in the most recent fiscal year ended May 2006.