<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _________
Commission File No. 1-7848
LAZARE KAPLAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2728690
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
529 Fifth Avenue, New York, NY 10017
(Address of principal executive offices) (Zip Code)
(212) 972-9700
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of September 30, 1995, 6,147,808 shares of the registrant's common
stock were outstanding.
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Operations
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
(Unaudited)
1995 1994
----------- -----------
<S> <C> <C>
Net Sales $ 61,697 $ 38,586
Cost of Sales 57,019 34,745
----------- -----------
4,678 3,841
----------- -----------
Selling, General & Administrative Expenses 2,776 2,298
Interest Expense - net 1,016 963
----------- -----------
3,792 3,261
----------- -----------
Income before taxes and minority interest 886 580
Income tax provision (Note 2) 57 105
----------- -----------
Income before minority interest 829 475
Minority interest in income/(loss)
of consolidated subsidiary 43 (50)
----------- -----------
Net Income $ 786 $ 525
=========== ===========
Net Income per share
Income per share $ 0.13 $ 0.08
=========== ===========
Average number of shares outstanding
during the period 6,236,021 6,324,185
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31, 1995 May 31, 1995
(unaudited)
----------------------------------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,030 $ 2,532
Accounts receivable - net 26,256 22,302
Inventories - rough diamonds 10,373 11,928
- polished diamonds 46,654 43,806
Other current assets 7,142 6,166
-------- --------
TOTAL CURRENT ASSETS 91,455 86,734
PROPERTY, PLANT & EQUIPMENT - net 6,744 6,704
NON-CURRENT ASSETS 5,439 5,725
-------- --------
$103,638 $ 99,163
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - banks $ 2,500 $ 4,125
Notes payable - other 3,000 3,000
Current portion of long-term debt 4,285 4,285
Accounts payable & other
current liabilities 21,305 16,034
-------- --------
TOTAL CURRENT LIABILITIES 31,090 27,444
SENIOR NOTES AND OTHER LONG-TERM DEBT 26,430 26,430
-------- --------
TOTAL LIABILITIES 57,520 53,874
-------- --------
MINORITY INTEREST 7,637 7,594
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized 10,000,000 shares;
issued and outstanding, 6,147,808
shares and 6,147,808 shares 6,148 6,148
Additional paid-in capital 25,964 25,964
Retained earnings 6,369 5,583
-------- --------
TOTAL STOCKHOLDERS' EQUITY 38,481 37,695
-------- --------
$103,638 $ 99,163
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
3
Consolidated Summary of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
August 31,
(unaudited)
----------------------
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 786 $ 525
Adjustments to reconcile net income
to net cash provided by/(used in)
operating activities:
Depreciation and amortization $ 573 450
Provision for uncollectible accounts 15 12
Minority interest in income/(loss) of
consolidated subsidiary 43 (50)
(Increase)/decrease in assets and increase/
(decrease) in liabilities:
Accounts receivable (3,969) (5,367)
Inventories (1,293) (4,109)
Other current assets (976) (432)
Non-current assets (15) -
Accounts payable and other current
liabilities 5,271 5,150
------ ------
Net cash provided by/(used in)
operating activities 435 (3,821)
------ ------
Cash Flows From Investing Activities:
Capital expenditures (312) (269)
------ ------
Net cash used in investing activities (312) (269)
------ ------
Cash Flows From Financing Activities:
Increase in minority interest - 7,883
Increase/(decrease) in short-term
borrowings (1,625) 3,760
Proceeds from exercise of stock options - 3
------ ------
Net Cash provided by financing activities (1,625) 11,646
------ ------
Net increase/(decrease) in cash (1,502) 7,556
Cash at beginning of year 2,532 914
------ ------
Cash at end of period $1,030 $8,470
====== ======
See Notes to Consolidated Financial Statements
4
<PAGE>
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,
1995 and 1994 and the financial position as of August 31, 1995.
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 is comprised primarily of
operating loss carryforwards which have a tax effect of approximately
$12,900,000 less a valuation allowance of approximately $12,900,000 resulting in
no net deferred tax asset.
For the three months ended August 31, 1995, the Company has utilized $300,000 of
net operating loss carryforwards to offset Federal, state and local income
taxes.
5
<PAGE>
Taxes (continued)
At August 31, 1995, the Company has available U.S. net operating losses of $26.7
million which expire as follows:
</TABLE>
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1998 $11,200,000
1999 4,200,000
2000 4,300,000
2001 3,500,000
2002 500,000
2007 1,000,000
2008 1,500,000
2010 500,000
-----------
$26,700,000
===========
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales
Net sales during the three month period ended August 31, 1995 of $61.7 million
were $23.1 million or 60% above the $38.6 million in sales during the comparable
period last year.
Revenue from the sale of polished diamonds increased 25% to $20.0 million from
$15.9 million during the comparable three month period. This increase is
attributable to higher sales in the U.S. domestic market, Europe and Japan and
included increased volume of ideal cut melee from the Company's factory in
Botswana and sales from its Russian production.
Rough sales increased to $41.7 million for the three months ended August 31,
1995 from $22.6 million a year ago. The significant increase from the prior year
is a result of the Company's initial success in its Angolan rough buying
operation as well as an increased supply of rough diamonds from the Company's
major supplier.
Gross Profit
During the quarter, gross margin on net polished sales was 15.1%, higher than
the 11.9% gross margin in the most previous quarter, but lower than the 20.1% in
the comparable quarter last year. The decrease from last year resulted from the
Company's inability to fully pass along increased product costs and from the
sales of stones (which historically have lower margins) cut and polished jointly
with Roskomdragmet (the Russian Government organization responsible for diamond
policy). During the quarter, overall (both polished and rough diamond) gross
margin on net sales was 7.6% compared to 10.0% for the same period last year.
The overall margin decrease was due primarily to a greater percentage of lower
margined rough sales to overall sales as compared with last year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter ended August
31, 1995 were $2.8 million, compared to $2.3 million for this quarter last year.
The increase was primarily attributable to higher compensation, benefits and
additional rent and office expenses in connection with the opening of new
offices, including a sales office in Hong Kong.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Interest Expense
Net interest expense for the three month period ended August 31, 1995 was
$1,016,000 compared to $963,000 last year. The increase was due to lower
interest income 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.
Liquidity and Capital Resources
The Company's working capital at August 31, 1995 was $60.4 million, which was
$1.1 million greater than its working capital at May 31, 1995.
Stockholders' equity was $38.5 million at August 31, 1995 as compared to $37.7
million at May 31, 1995. No dividends were paid to stockholders during the
quarter ended August 31, 1995.
8
<PAGE>
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
(10) Material Contracts
Fourth Amendment to 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.
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
9
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAZARE KAPLAN INTERNATIONAL INC.
By (s) Sheldon L. Ginsberg
---------------------------
Sheldon L. Ginsberg
Vice President and
Chief Financial Officer
Dated: October 16, 1995
10
<PAGE>
EXHIBIT 10
FOURTH AMENDMENT TO NOTE AGREEMENT
Reference is hereby made to that Note Agreement dated as of May 31,
1991 (the 'Original Agreement'), as amended by that First Amendment to Note
Agreement dated as of February 28, 1992 (the 'First Amendment'), that Second
Amendment to Note Agreement dated as of March 25, 1992 (the 'Second Amendment)
and that Third Amendment to Note Agreement dated as of December 1, 1992 (the
'Third Agreement') (as amended by the First Amendment, the Second Amendment and
the Third Amendment, the 'Agreement'), between Lazare Kaplan International Inc.
(the 'Company'), Allstate Life Insurance Company, Monumental Life Insurance
Company, and PFL Life Insurance Company (collectively, the 'Purchasers'). This
Fourth Amendment to Note Agreement is hereinafter referred to as the 'Fourth
Amendment'.
WHEREAS, the Company has advised the Purchasers that it has not
complied with the covenant set forth in Section 7.4 of the Agreement as of the
fiscal quarters ending February 28, 1995 and May 31, 1995 and that it
anticipates that it will not comply with such covenant until the fiscal quarter
ending August 31, 1996; and
WHEREAS, the Company has requested that the Purchasers agree to certain
amendments with respect to Section 7.4 of the Agreement; and
WHEREAS, the Purchasers have requested certain additional amendments to
the Agreement as consideration for the aforesaid amendments.
It is therefore agreed that:
1. Definitions.
All defined terms used herein shall have the meanings assigned to such
terms in the Agreement.
2. Amendments.
The following amendments are effective from February 28, 1995 through
and including May 31, 1996. The Purchasers and the Company hereby amend the
Agreement as follows:
(a) Section 1.1 of the Agreement is amended by deleting such
paragraph in its entirety and inserting in lieu thereof the following:
'Section 1.1 Description of Notes.
(a) The Company has authorized the issuance and
sale of $30,000,000 aggregate principal amount of its Senior
Notes (the 'Notes'), to be dated the date of issuance, to bear
interest from such date at the rate of 9.97% per annum prior
<PAGE>
to maturity (the 'Original Interest Rate'), payable
semi-annually on the fifteenth day of May and November of
each year, commencing November 15, 1991, and at maturity, to
bear interest on overdue principal (including any overdue
required or optional prepayment), premium, if any, and (to
the extent legally enforceable) on any overdue installment of
interest at the rate of 10.97% per annum (the 'Original
Overdue Rate'), to be expressed to mature on May 15, 2001 and
to be substantially in the form attached as Exhibit A. The
term 'Notes' as used herein shall include each Note delivered
pursuant to this Note Agreement (the 'Agreement') and each
note delivered in substitution or exchange thereof and, where
applicable, shall include the singular numbers as well as the
plural. Any reference to you in this Agreement shall in all
instances be deemed to include any nominee of yours or any
separate account or other person on whose behalf you are
purchasing Notes. You are sometime referred to herein as the
'Purchaser' and, together with the other Purchasers, as the
'Purchasers'.
(b) Notwithstanding the foregoing paragraph (a), the
Company agrees that the Notes shall, commencing March 1, 1995
through and including May 31, 1996, bear interest from and to
and including such dates at the rate of 10.97% per annum
prior to maturity (the 'Increased Interest Rate'), payable
semi-annually on the fifteenth day of May and November of
each year, and shall bear interest on overdue principal
(including any overdue required or optional prepayment),
premium, if any, and (to the extent legally enforceable) on
any overdue installment of interest at the rate of 11.97% per
annum.'
(b) Section 7.4 of the Original Agreement is amended by deleting such
Section in its entirety and inserting in lieu thereof the following:
'Section 7.4 Consolidated Fixed Charge Ratio. (a)
For the fiscal quarter ending February 28, 1995, and for the
fiscal quarter ending May 31, 1995, the Company shall not be
required to meet the requirements of Section 7.4 of the
Original Agreement.
(b) The Company will not permit the ratio of
Consolidated Income Available for Fixed Charges to
Consolidated Fixed Charges to be less than: (A) 1.25 to 1.0
for the three month period ending August 31, 1995, (B) 1.30
to 1.0 for the six month period ending November 30, 1995; (C)
1.30 to 1.0 for the nine month period ending February 29,
1996 and (D) 1.30 to 1.0 for the twelve month period ending
May 31, 1996.'
3. Representations and Warranties.
In order to induce the Purchasers to enter into this Fourth Amendment
to Note Agreement,
2
<PAGE>
the Company confirms that, except as disclosed in the Form 10-Q of the Company
for the quarter ended February 28, 1995, the press release of the Company
summarizing financial results for the Company's fiscal year ended May 31, 1995
and correspondence from the Company dated May 26, 1995 and June 5, 1995,
including certain financial projections, each of the representations and
warranties set forth in the Original Agreement is true and correct as of the
date hereof and that no Event of Default (which has not been cured pursuant to
amendments made hereunder) has occurred and is continuing.
4. Interest Payment.
The Company agrees to pay by wire transfer on September 5, 1995
interest equal to the difference between the Increased Interest Rate and the
Original Interest Rate accrued from and including March 1, 1995 (but not
including) May 15, 1995.
5. Anticipated Amendment.
In connection with a fifth amendment to this Agreement which the
parties hereto will use good faith efforts to execute by October 31, 1995 (the
'Fifth Amendment'):
(a) The Purchasers agree that (i) if the Company has, since
the date hereof, been in compliance with all the covenants, terms and conditions
of the Agreement, as amended hereby and (ii) if no material adverse change has
occurred since the date hereof in the condition, financial or otherwise, of the
Company and its Subsidiaries, then the interest rate payable on the Notes shall
not, for the period commencing March 1, 1995 and ending June 1, 1996, as a
result of the Fifth Amendment, be in excess of 10.97% per annum and no fees
(other than fees and expenses of counsel to the Purchasers) will be required by
the Purchasers in connection with the Fifth Amendment; and
(b) the Company agrees to issue a replacement note to reflect
interest rate changes resulting from the Fourth and Fifth Amendments.
6. Counterparts.
This Fourth Amendment to Note Agreement may be executed by the parties
hereto individually, or in any combination of the parties hereto in several
counterparts, all of which taken together shall constitute one and the same
Fourth Amendment to Note Agreement.
7. Ratification and Acknowledgement.
All of the representations, warranties, provisions, covenants, terms
and conditions of the Agreement shall remain unaltered and in full force and
effect and, as amended hereby, the Agreement is in all respects agreed to,
ratified and confirmed by the Company. The Company
3
<PAGE>
acknowledges and agrees that the amendments granted herein shall not be
construed as establishing a course of conduct on the part of the Purchasers
upon which the Company may rely at any time in the future.
8. Reference to and Effect on the Agreement.
Upon the effectiveness of this Fourth Amendment to Note Agreement, each
reference in the Agreement and in other documents describing or referencing this
Agreement to 'this Agreement', 'hereunder', 'hereof', 'herein', or words of like
import referring to the Agreement, shall mean and be a reference to the
Agreement, as amended hereby.
Dated as of this 25th day of August, 1995.
LAZARE KAPLAN INTERNATIONAL INC.
By:/s/ Sheldon L. Ginsberg
---------------------------
Its:
ALLSTATE LIFE INSURANCE COMPANY
By:/s/ Patricia Wilson
---------------------------
Its: Authorized Signatory
By:/s/ Richard L. Conway
---------------------------
Its: Authorized Signatory
MONUMENTAL LIFE INSURANCE COMPANY
By:/s/ Frederick A. Sabetta
---------------------------
Its: Frederick A. Sabetta
Vice President
PFL LIFE INSURANCE COMPANY
By:/s/ Frederick A. Sabetta
---------------------------
Its: Frederick A. Sabetta
Vice President
4
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the balance
sheet and income statement and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> AUG-31-1995
<CASH> 1,030
<SECURITIES> 0
<RECEIVABLES> 26,491
<ALLOWANCES> 235
<INVENTORY> 57,027
<CURRENT-ASSETS> 91,455
<PP&E> 14,566
<DEPRECIATION> 7,822
<TOTAL-ASSETS> 103,638
<CURRENT-LIABILITIES> 31,090
<BONDS> 26,430
<COMMON> 6,148
0
0
<OTHER-SE> 32,333
<TOTAL-LIABILITY-AND-EQUITY> 103,638
<SALES> 61,697
<TOTAL-REVENUES> 61,697
<CGS> 57,019
<TOTAL-COSTS> 57,019
<OTHER-EXPENSES> 2,776
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,016
<INCOME-PRETAX> 886
<INCOME-TAX> 57
<INCOME-CONTINUING> 786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 786
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
