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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
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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)
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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
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As of September 30, 1997, 8,509,466 shares of the registrant's common
stock were outstanding.
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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)
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1997 1996
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<S> <C> <C>
Net Sales $45,245 $69,400
Cost of Sales 42,693 63,868
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2,552 5,532
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Selling, General & Administrative Expenses 3,211 2,992
Interest Expense - net 420 945
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3,631 3,937
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Income/(loss) before taxes and
minority interest (1,079)
1,595
Income tax provision/(benefit) (Note 2) (168) 93
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Income/(loss) before minority interest (911) 1,502
Minority interest in loss
of consolidated subsidiary (252) (157)
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Net Income/(Loss) ($ 659) $ 1,659
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Net Income/(Loss) per share
Income/(loss) per share $ (0.08) $ 0.26
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Average number of shares outstanding
during the period 8,668,634 6,484,029
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
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CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1997 May 31, 1997
(unaudited)
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(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,718 $ 10,338
Accounts receivable - net 31,959 29,632
Inventories - rough diamonds 18,868 11,395
- polished diamonds 58,446 54,803
Prepaid expenses and other
current assets 9,103 11,149
Deferred tax assets 3,875 3,675
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TOTAL CURRENT ASSETS 125,969 120,992
PROPERTY, PLANT & EQUIPMENT - net 7,620 6,726
OTHER ASSETS 2,067 2,361
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$135,656 $130,079
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & other
current liabilities $ 22,014 $ 14,358
Notes payable - other - 1,343
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TOTAL CURRENT LIABILITIES 22,014 15,701
SENIOR NOTES AND OTHER LONG-TERM DEBT 17,145 17,145
DEFERRED TAX LIABILITIES 300 300
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TOTAL LIABILITIES 39,459 33,146
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MINORITY INTEREST 6,137 6,389
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STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized 10,000,000 shares;
issued and outstanding, 8,505,156
shares and 8,407,121 shares 8,505 8,407
Additional paid-in capital 58,136 58,059
Retained earnings 23,419 24,078
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TOTAL STOCKHOLDERS' EQUITY 90,060 90,544
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$135,656 $130,079
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</TABLE>
See Notes to Consolidated Financial Statements.
3
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CONSOLIDATED SUMMARY OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
August 31,
(unaudited)
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1997 1996
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(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) $ (659) $ 1,659
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in)
operating activities:
Depreciation and amortization 571 619
Provision for uncollectible accounts 15 15
Minority interest in income/(loss) of
consolidated subsidiary (252) (157)
Benefit from deferred income taxes (200) -
Loss on disposition of fixed assets - 22
(Increase)/decrease in assets and increase/
(decrease) in liabilities:
Accounts receivable (2,342) (3,092)
Inventories (11,116) (5,584)
Other current assets 2,046 (1,015)
Non-current assets - (42)
Accounts payable and other current
liabilities 7,656 1,247
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Net cash used in
operating activities (4,281) (6,328)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets - 11
Capital expenditures (1,171) (346)
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Net cash used in investing activities (1,171) (335)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(decrease) in short-term
borrowings (1,343) 6,460
Increase in long-term debt - 75
Proceeds from exercise of stock options 175 50
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Net cash provided by/(used in)
financing activities (1,168) 6,585
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Net (decrease) in cash (6,620) (78)
Cash at beginning of year 10,338 905
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Cash at end of period $ 3,718 $ 827
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</TABLE>
See Notes to Consolidated Financial Statements
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. INTERIM FINANCIAL REPORTING
These financial statements have 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, which are of a normal, recurring nature,
necessary to present fairly Lazare Kaplan International Inc.'s operating results
for the three months ended August 31, 1997 and 1996 and the financial position
as of August 31, 1997.
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 $6,500,000 less a
valuation allowance of approximately $2,925,000 resulting in a net deferred tax
asset of $3,575,000.
For the three months ended August 31, 1997, the Company generated approximately
$500,000 of net operating losses which can be used to offset future Federal,
state and local income taxes.
5
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TAXES (CONTINUED)
At August 31, 1997, the Company has available U.S. net operating losses of $10.7
million which expire as follows:
Year Amount
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2000 $ 3,300,000
2001 3,500,000
2002 500,000
2007 1,000,000
2008 1,500,000
2010 400,000
2013 500,000
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$10,700,000
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3. COMMON STOCK OFFERING
On December 12, 1996, the Company completed an offering of 1,800,000 shares of
its common stock. In addition, on January 15, 1997 the underwriters of the
public offering exercised in full their over-allotment option, purchasing an
additional 330,000 shares of common stock from the Company. The public offering
price of all shares of common stock sold in connection with the public offering,
including the option shares, was $17.00 per share. The total net proceeds to the
Company, after offering expenses, were approximately $33.6 million. The Company
used a portion of the proceeds to repay its outstanding revolving bank loans.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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INTRODUCTION
This quarterly report contains, in addition to historical information, certain
forward-looking statements that involve significant risks and uncertainties.
Such forward-looking statements are based on management's belief as well as
assumptions made by, and information currently available to, management pursuant
to the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. The Company's actual results could differ materially from those
expressed in or implied by the forward-looking statements contained herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Liquidity - Capital Resources" and in Item 1-
"Description of Business" and elsewhere in the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1997. The Company undertakes no
obligation to release publicly the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date of this quarterly report or to reflect the occurrence of other
unanticipated events.
RESULTS OF OPERATIONS
NET SALES
Net sales during the three month period ended August 31, 1997 were $45.2 million
compared to $69.4 million in sales during the comparable period last year.
Revenue from the sale of polished diamonds was $18.2 million and was equal to
polished sales for the first quarter last year. Polished diamond revenue
continued to be impacted by the delay of shipment of large gem quality polished
stones from the Company's factories in Russia. The Company believes that these
delays are a result of the reorganization of the legislation governing the
overall Russian diamond industry and are temporary. Excluding sales of polished
stones from Russia, other polished revenues increased more than 10% during the
first quarter of this year versus last year.
Rough sales were $27.1 million for the three months ended August 31, 1997
compared to $51.2 million in the first quarter last year. The decrease from the
prior year was partially attributable to lower sales of better quality rough
diamonds to the marketplace by the Company's primary rough diamond supplier, as
well as a result of the closure of the Company's buying operations in the former
Zaire earlier in the calendar year.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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GROSS PROFIT
During the quarter, gross margin on net polished sales was 11%, compared to 18%
in the comparable quarter last year, and 13% during the immediately preceding
quarter. The margins were impacted by increased costs of rough diamonds which
the Company has yet to reflect in the selling price of its polished diamonds and
by the decreased sales of stones produced at the Company's factories in Russia.
During the quarter, overall (both polished and rough diamond) gross margin on
net sales was 5.6% compared to 8.0% for the same period last year. The decrease
from the prior year was primarily due to the lower margins realized on polished
sales during the quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first quarter ended August
31, 1997 were $3.2 million compared to $3.0 million for this quarter last year.
The increase was primarily attributable to higher consulting and travel expenses
associated with the development of expansion opportunities.
INTEREST EXPENSE
Net interest expense for the three month period ended August 31, 1997 was
$420,000 compared to $945,000 last year. The decrease was due to the reduction
of the outstanding balance of the Company's Senior Notes combined with a
decrease in the average balance outstanding on the Company's revolving loan.
NET INCOME/(LOSS) PER SHARE
Income/(loss) 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.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings per Share", which is required to be adopted by the Company on
February 28, 1998. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of fully diluted earnings per share is not expected to be
material.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at August 31, 1997 was $104.0 million, which was
$1.3 million less than its working capital at May 31, 1997. The decrease was due
to higher accounts payable and accrued expenses partially offset by an increase
in inventories and accounts receivable in the current year.
The Company believes that it has the ability to meet its current and anticipated
financing needs for the next twelve months.
Stockholders' equity was $90.1 million at August 31, 1997 as compared to $90.5
million at May 31, 1997. No dividends were paid to stockholders during the
quarter ended August 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
9
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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
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Dated: October 14, 1997
10
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<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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> AUG-31-1997
<CASH> 3,718
<SECURITIES> 0
<RECEIVABLES> 32,136
<ALLOWANCES> 177
<INVENTORY> 77,314
<CURRENT-ASSETS> 125,969
<PP&E> 16,921
<DEPRECIATION> 9,301
<TOTAL-ASSETS> 135,656
<CURRENT-LIABILITIES> 22,014
<BONDS> 17,145
<COMMON> 8,505
0
0
<OTHER-SE> 81,555
<TOTAL-LIABILITY-AND-EQUITY> 135,656
<SALES> 45,245
<TOTAL-REVENUES> 45,245
<CGS> 42,693
<TOTAL-COSTS> 42,693
<OTHER-EXPENSES> 3,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 420
<INCOME-PRETAX> (1,079)
<INCOME-TAX> (168)
<INCOME-CONTINUING> (659)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (659)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
