<PAGE>
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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 NOVEMBER 30, 1997.
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 December 31, 1997, 8,511,716 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 Six Months Ended
November 30, November 30,
(Unaudited) (Unaudited)
----------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 46,848 $ 80,270 $ 92,093 $ 149,671
Cost of Sales 42,688 72,501 85,380 136,370
----------- ----------- ----------- -----------
4,160 7,769 6,713 13,301
----------- ----------- ----------- -----------
Selling, General &
Administrative Expenses 3,556 3,501 6,767 6,493
Interest Expense - net 582 1,329 1,002 2,274
----------- ----------- ----------- -----------
4,138 4,830 7,769 8,767
Income/(loss) before taxes
and minority interest 22 2,939 (1,056) 4,534
Income tax provision/(benefit) 118 284 (50) 377
----------- ----------- ----------- -----------
Income/(loss) before minority
interest (96) 2,655 (1,006) 4,157
Minority interest in income
/(loss) of consolidated
subsidiary (301) (249) (552) (405)
----------- ----------- ----------- -----------
Net Income/(Loss) $ 205 $ 2,904 $ (454) $ 4,562
=========== =========== =========== ===========
Net income per share:
Income/(loss) per share $ 0.02 $ 0.44 $ (0.05) $ 0.70
=========== =========== =========== ===========
Average number of shares
outstanding during the period 8,696,827 6,545,116 8,677,371 6,497,793
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
2
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CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, 1997 May 31, 1997
(Unaudited)
------------------------------------
(in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,235 $ 10,338
Accounts receivable - net 38,535 29,632
Inventories - rough diamonds 12,720 11,395
- polished diamonds 66,761 54,803
Prepaid expenses and other
current assets 9,710 11,149
Deferred tax assets 3,835 3,675
-------- --------
TOTAL CURRENT ASSETS 132,796 120,992
PROPERTY, PLANT & EQUIPMENT - Net 7,487 6,726
OTHER ASSETS 1,736 2,361
-------- --------
$142,019 $130,079
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & other
current liabilities $ 20,101 $ 14,358
Notes payable - other -- 1,343
-------- --------
TOTAL CURRENT LIABILITIES 20,101 15,701
SENIOR NOTES AND OTHER
LONG-TERM DEBT 25,495 17,145
DEFERRED TAX LIABILITIES 300 300
-------- --------
TOTAL LIABILITIES 45,896 33,146
-------- --------
MINORITY INTEREST 5,837 6,389
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
Authorized 20,000,000 shares;
issued and outstanding 8,509,466
and 8,407,121 shares 8,509 8,407
Additional paid-in capital 58,153 58,059
Retained earnings 23,624 24,078
-------- --------
TOTAL STOCKHOLDERS' EQUITY 90,286 90,544
-------- --------
$142,019 $130,079
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
November 30,
(Unaudited)
---------------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (454) $ 4,562
Adjustments to reconcile net income
to net cash provided by/(used in)
operating activities:
Depreciation and amortization 1,152 1,215
Provision for uncollectible accounts 30 45
Minority interest in income/(loss) of
consolidated subsidiary (552) (405)
Benefit from deferred income taxes (160) --
(Gain)/loss on disposition of
fixed assets -- 19
(Increase)/decrease in assets and increase/
(decrease) in liabilities:
Notes and accounts receivable (8,933) (12,990)
Inventories (13,283) (11,827)
Other current assets 1,439 (3,493)
Non-current assets 35 (31)
Accounts payable and other current
liabilities 5,743 6,061
-------- --------
Net cash provided by/(used in)
operating activities (14,983) (16,844)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets -- 18
Capital expenditures (1,323) (486)
-------- --------
Net cash provided by/(used in)
investing activities (1,323) (468)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(decrease) in short-term borrowings (1,343) 17,450
Increase in long-term borrowings 8,350 75
Proceeds from exercise of stock options 196 532
-------- --------
Net cash provided by/(used in)
financing activities 7,203 18,057
-------- --------
Net increase/(decrease) in cash (9,103) 745
Cash at beginning of year 10,338 905
-------- --------
Cash at end of period $ 1,235 $ 1,650
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
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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 six and three months ended
November 30, 1997 and 1996 and the financial position as of November 30, 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 do 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 $6,460,000 less a
valuation allowance of approximately $2,925,000 resulting in a net deferred tax
asset of $3,535,000.
For the six months ended November 30, 1997, the Company generated approximately
$100,000 of net operating losses which can be used to offset future taxable
income.
5
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<PAGE>
TAXES (CONTINUED)
At November 30, 1997, the Company has available U.S. net operating losses of
$8,300,000 which expire as follows:
Year Amount
---- ------
2000 1,300,000
2001 3,500,000
2002 500,000
2007 1,000,000
2008 1,500,000
2010 400,000
2013 100,000
------------
$ 8,300,000
============
During the six months ended November 30, 1997, the Internal Revenue Service
completed an examination of the Company's tax returns for the years ended
May 31, 1991 through 1994, which resulted in minimal additional taxes and a
reduction in the Company's net operating losses of approximately $2.0 million.
3. COMMON STOCK OFFERING
On December 12, 1996, the Company completed a public 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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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 six months ended November 30, 1997 were $92.1 million
compared to $149.7 million in sales during the comparable period last year. For
the three month period ended November 30, 1997 net sales were $46.8 million
compared to $80.3 million in the second quarter last year.
Revenue from the sale of polished diamonds were $39.7 million compared to $51.2
million in the comparable period last year. For the three month period ended
November 30, 1997, polished diamond sales were $21.6 million compared to $33.1
million in the second quarter last year. Polished diamond revenue continued to
be impacted during the six months and three months ended November 30, 1997 by
the delay of shipment of large gem quality polished stones from the Company's
factories in Russia. The Company received its first two shipments of large
polished diamonds from its new cutting facility in Moscow during the last week
of the second quarter. Excluding sales of polished stones from Russia, other
polished revenues increased more than 18% during the first six months of this
year versus last year and more than 25% during the second quarter of this year
versus last year.
7
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rough sales were $52.4 million for the six months ended November 30, 1997
compared to $98.4 million in the comparable period last year. For the three
months ended November 30, 1997, rough diamond sales were $25.3 million compared
to $47.2 million in the second 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 Republic of
Congo earlier in the calendar year.
GROSS PROFIT
During the six months ended November 30, 1997, gross margin on net polished
sales was 12%, compared to 19% in the comparable period last year. For the three
months ended November 30, 1997, gross margin on net polished sales was 13%
compared to 20% in the second quarter last year. 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 six months ended
November 30, 1997, overall (both polished and rough diamonds) gross margin on
net sales was 7.3% compared to 8.9% for the same period last year. For the three
months ended November 30, 1997, overall gross margin on net sales was 8.9%
compared to 9.7% in the second quarter last year. The decrease from the prior
year was primarily due to the lower margins realized on polished sales during
the six months and the current quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended November
30, 1997 were $6.8 million, compared to $6.5 million for this period last year.
For the three months ended November 30, 1997, selling, general and
administrative expenses were $3.6 million compared to $3.5 million in the second
quarter last year. These increases were primarily attributable to higher
consulting and travel expenses associated with the development of expansion
opportunities.
INTEREST EXPENSE
Net interest expense for the six month period ended November 30, 1997 was $1.0
million compared to $2.3 million last year. For the three months ended November
30, 1997 net interest expense was $582,000 compared to $1.3 million in the
second quarter last year. These decreases were due to the reduction of the
outstanding
8
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 "Earning per Share", in which it 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 iused 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at November 30, 1997 was $112.7 million, which was
$7.4 million more than its working capital at May 31, 1997. The increase was due
to higher inventories and accounts receivable partially offset by an increase in
accounts payable and accrued expenses 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 $90.3 million at November 30, 1997 as compared to $90.5
million at May 31, 1997. No dividends were paid to stockholders during the six
months ended November 30, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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
Dated: January 14, 1998
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> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> NOV-30-1997
<CASH> 1,235
<SECURITIES> 0
<RECEIVABLES> 38,697
<ALLOWANCES> 162
<INVENTORY> 79,481
<CURRENT-ASSETS> 132,796
<PP&E> 17,059
<DEPRECIATION> 9,572
<TOTAL-ASSETS> 142,019
<CURRENT-LIABILITIES> 20,101
<BONDS> 25,495
<COMMON> 8,509
0
0
<OTHER-SE> 81,777
<TOTAL-LIABILITY-AND-EQUITY> 142,019
<SALES> 92,093
<TOTAL-REVENUES> 92,093
<CGS> 85,380
<TOTAL-COSTS> 85,380
<OTHER-EXPENSES> 6,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,002
<INCOME-PRETAX> (1,079)
<INCOME-TAX> (50)
<INCOME-CONTINUING> (454)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (454)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
