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Lazare Kaplan Estimates FY Sales -36% to $68M

Litigation Continues to Create 'Material Uncertainties'

Sep 9, 2013 2:50 PM   By Jeff Miller
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RAPAPORT... Lazare Kaplan International Inc. notified the Securities and Exchange Commission (SEC)  of its intention to again file its most recent fiscal-year report late  for the period that ended on  May 31, 2013, following ongoing litigation or ''material uncertainties.'' Lazare Kaplan claims it has been unable to file its quarterly and annual financial statements since the fourth quarter of fiscal year 2009 that ended on May 31, 2009. However, Lazare Kaplan has provided quarterly revenue estimates and once it has resolved litigation and the recovery of certain assets, and the potential obligations under certain lines of credit and a guaranty, the company has said it intends to file all of its delayed Forms 10-K and Forms 10-Q with the SEC.

Nonetheless, the company estimated that  sales fell nearly 36 percent year on year to approximately $68 million for fiscal year 2013. The decrease was attributed to a significant drop in rough trading volume and a decrease in sales of commercial (non-branded) polished diamonds.

Lazare Kaplan added that current uncertain economic conditions continue to impact the diamond and jewelry industry. Rough diamond prices charged by producers have generally been rising ahead of polished diamond prices, placing significant pressure on diamond manufacturers, itself included.  In addition, Lazare Kaplan's continued litigation with banks in Belgium  has adversely impacted its ability to transact business. ''This includes, without limitation, the ability of the company to maintain and/or expand its operations,'' according to the filing.

In July 2013, the company's board agreed to sell 625,000 shares that were held in its treasury to Leon Tempelsman at a price of $1.40 per share, for an aggregate consideration of $875,000 for the purpose of working capital. This sales price represented the highest weighted average trading price of the company's shares over the immediately preceding six months. Tempelsman also agreed to allow the company, at its sole discretion, to repurchase all 625,000 shares at the purchase price of $1.40 per share at any time on or before February 28, 2014.

Meanwhile, Lazare Kaplan explained that progress was being made to resolve material uncertainties. It has recently entered into discussions with various financial institutions to resolve its potential claims and repayment of amounts, which were asserted as being owed, and it has filed claims for indemnification under two sets of "all risks" insurance policies, one governed by the laws of the U.S. and the other by the laws of the U.K. Lazare Kaplan is also pursuing the recovery of its assets through a series of legal actions, including litigation in the courts of Belgium, the U.K. and the U.S.

Background on Material Uncertainties

In December 2009, Lazare Kaplan entered into an interim payment agreement with underwriters of a U.S. policy and received a non-refundable payment of $28 million, for which the underwriters agreed to reimburse certain costs incurred in connection with its investigation of lost assets. Underwriters also agreed to provide coverage opinion regarding all claims made by May 3, 2010, according to Lazare Kaplan. But in April and May of that year, the underwriters of the U.K. and U.S. policies promptly notified Lazare Kaplan that their coverage was denied and initiated a suit for judgment. Lazare Kaplan filed counter claims asserting the non-payment of covered losses, unpaid sue and labor costs and consequential damages.

In July 2011, Lazare Kaplan entered into a settlement agreement with the U.S. and U.K. underwriters and received $32 million, and while the parties dismissed all pending litigation and executed mutual releases, Lazare Kaplan retained its rights to pursue recovery of its assets against third parties.

Separately, Lazare Kaplan and various affiliates, entered into a settlement agreement with ABN Amro Bank and the Royal Bank of Scotland (RBS) in October 2010, with some $64 million in obligations deemed ''paid in full.'' Those obligations, as Lazare Kaplan explained, included  unpaid principal, interest and expenses under  facility letters and  amended and restated credit agreements with ABN Amro and another between the company's affiliate in Japan and RBS. Lazare Kaplan explained that ABN agreed to transfer back all legal and equitable right, title and interest in and to an aggregate of 2,151,103 shares of the company's common stock. All parties released each other of certain claims asserted during the process and Lazare Kaplan paid $14 million to ABN and RBS.

Concurrently, Lazare Kaplan Belgium entered into a $25 million credit facility with  Antwerp Diamond Bank (ADB) in February 2008, this was later amended to an  unsecured, uncommitted $45 million New York credit facility. Early in 2009,  Lazare Kaplan engaged ADB concerning, among other matters, its knowledge with respect to the loss or theft of company assets and the possible obligations of ADB to Lazare Kaplan resulting from its actions and the actions of certain senior bank executives, according to the company.

ADB responded with its intent to terminate the  $25 million facility as of January 2010, which, at the time had no outstanding balance. A second notification terminated the $45 million facility by March 2010 and ADB listed the outstanding balance, plus accrued and unpaid interest, costs, charges and fees at $43 million, which  would be due and payable March 1, 2010. Lazare Kaplan proceeded to take its ''lost asset'' claims and concerns to  ADB's parent company, KBC Bank N.V., and proceeded to negotiate a resolution,  with the  understanding that ADB and senior members of bank management were allegedly involved, according to the company.

ADB commenced litigation against Lazare Kaplan that month for the balance  payment. Lazare Kaplan continues to deny that any amount is due and further denies that any action under that $45 million facility may be brought by ADB in the courts of Belgium.

Lazare Kaplan sued ADB and KBC in December 2011 under the Racketeer Influenced and Corrupt Organizations Act (RICO) and state law, seeking, among other things, in excess of $500 million in damages that could be trebled under RICO. The lawsuit alleged that the banks engaged in money laundering and other illegal activity that included the theft of over $135 million from the sales of diamonds belonging to the company and its affiliates. Both banks have offices in New York and conduct licensed banking operations in the U.S.

But in April  2012, KBC and ADB filed motions to dismiss the RICO and state law claims and the court agreed in September 2012 on the grounds that this lawsuit belonged in Belgium. Lazare Kaplan promptly appealed and,  in addition in March 2013, filed criminal proceedings in Antwerp against ADB alleging, among other things, fraud, embezzlement and money laundering.

A judge in the Antwerp Civil Litigation had postponed full hearings on the merits of this case until December 20, 2013. The Antwerp Commercial Court held hearings relating to the procedural order of rulings on jurisdiction and Article 4 of the Belgian judicial code that, if found to be applicable, may suspend the Antwerp Civil Litigation pending the resolution of criminal proceedings filed by Lazare Kaplan in Belgium. The Antwerp Commercial Court's ruling is currently pending. Additional hearings on criminal proceedings are scheduled during September 2013.

In the U.S., the court of appeals vacated the lower court's decision  and remanded  the company's RICO and state law claims to the District Court for further proceedings. On July 8, 2013, the District Court instructed all parties involved to engage in limited discovery, which is in progress.

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Tags: ABN Amro, Antwerp Diamond Bank, Belgium, district court, Jeff Miller, kbc, Lazare kaplan, litigation, material uncertainties
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