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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 AUGUST 31, 1998.
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)
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<S> <C>
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)
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(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, 1998, 8,519,849 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)
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<CAPTION>
Three Months Ended
August 31,
(Unaudited)
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1998 1997
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<S> <C> <C>
Net Sales $68,844 $45,245
Cost of Sales 65,651 42,693
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3,193 2,552
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Selling, General & Administrative Expenses 3,356 3,211
Interest Expense - net 589 420
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3,945 3,631
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Income/(loss) before taxes and minority interest (752) (1,079)
Income tax provision/(benefit) (Note 2) (205) (168)
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Income/(loss) before minority interest (547) (911)
Minority interest in loss of consolidated
subsidiary (Note 4) -- (252)
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Net Income/(loss) $ (547) $(659)
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Net Income/(loss) per share (Note 3)
Basic and diluted earnings/(loss) per share $ (0.06) $(0.08)
======= ======
Average number of shares outstanding during the period 8,532,549 8,448,139
========= =========
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See Notes to Consolidated Financial Statements.
2
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Consolidated Balance Sheets
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<CAPTION>
August 31, 1998 May 31, 1998
(unaudited)
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(in thousands, except share data)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,032 $ 1,222
Accounts receivable - net 33,902 37,747
Inventories - rough diamonds 31,223 23,843
- polished diamonds 59,406 57,675
Prepaid expenses and other
current assets 12,180 12,640
Deferred tax assets 3,990 3,785
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TOTAL CURRENT ASSETS 142,733 136,912
NON-CURRENT ASSETS, net 9,580 5,418
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$152,313 $142,330
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & other
current liabilities $ 30,507 $ 25,160
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TOTAL CURRENT LIABILITIES 30,507 25,160
SENIOR NOTES AND OTHER LONG-TERM DEBT 28,743 23,560
DEFERRED TAX LIABILITIES 150 150
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TOTAL LIABILITIES 59,400 48,870
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STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share
Authorized 5,000,000 shares;
no shares outstanding
Common stock, par value $1 per share
Authorized 20,000,000 shares;
issued 8,534,549 shares 8,535 8,535
Additional paid-in capital 58,145 58,145
Retained earnings 26,255 26,802
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92,935 93,482
Less treasury stock, 2,000
shares at cost (22) (22)
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TOTAL STOCKHOLDERS' EQUITY 92,913 93,460
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$152,313 $142,330
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See Notes to Consolidated Financial Statements.
3
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Consolidated Statements of Cash Flows
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<CAPTION>
Three Months Ended
August 31,
(unaudited)
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1998 1997
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(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income/(Loss) $ (547) $ (659)
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in)
operating activities:
Depreciation and amortization 224 571
Provision for uncollectible accounts 15 15
Minority interest in income/(loss) of
consolidated subsidiary - (252)
Benefit from deferred income taxes (205) (200)
(Increase)/decrease in assets and increase/
(decrease) in liabilities:
Accounts receivable 3,830 (2,342)
Inventories (9,111) (11,116)
Prepaid expenses and other
current assets 460 2,046
Other assets (4,000)
Accounts payable and other current
liabilities 5,347 7,656
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Net cash used in operating activities (3,987) (4,281)
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Cash Flows From Investing Activities:
Capital expenditures (386) (1,171)
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Net cash used in investing activities (386) (1,171)
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Cash Flows From Financing Activities:
Increase in long-term debt 5,183 -
Increase/(decrease) in short-term
borrowings - (1,343)
Proceeds from exercise of stock options - 175
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Net cash provided by/(used in)
financing activities 5,183 (1,168)
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Net increase/(decrease) in cash 810 (6,620)
Cash at beginning of year 1,222 10,338
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Cash at end of period $ 2,032 $3,718
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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
August 31, 1998 and 1997 and the financial position as of August 31, 1998.
Effective as of January 1, 1998, the Company restructured certain foreign
operations. This resulted in the inclusion of all revenue from these operations
and an increase in rough sales of approximately $20.0 million for the three
months ended August 31, 1998.
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 $5,100,000 less a
valuation allowance of approximately $1,260,000 resulting in a net deferred tax
asset of $3,840,000.
For the three months ended August 31, 1998, the Company generated approximately
$550,000 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, 1998, the Company has available U.S. net operating losses of $8.8
million which expire as follows:
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<CAPTION>
Year Amount
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<S> <C>
2000 $ 2,000,000
2001 3,500,000
2002 500,000
2007 500,000
2008 900,000
2010 400,000
2013 450,000
2014 550,000
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$ 8,800,000
===========
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3. Earnings/(Loss) Per Share
Basic and diluted earnings per share are computed in accordance with Financial
Accounting Standards Board Statement No. 128 "Earnings per Share." Basic
earnings per share is computed based upon the weighted average number of common
shares outstanding. Diluted earnings per share includes the impact of dilutive
stock options.
4. Sale of interest in Lazare Kaplan Botswana (Pty) Ltd.
In March 1998, the Company completed the sale of its 60% interest in Lazare
Kaplan Botswana (Pty) Ltd. for a price of $11.1 million in cash and recorded a
net gain, after Botswana taxes, of approximately $3.7 million on the
transaction. Through March 1998, the Company consolidated the accounts of Lazare
Kaplan Botswana (Pty)Ltd. Minority interest represented the minority
stockholders' proportionate share of the results of operations of Lazare Kaplan
Botswana (Pty) Ltd.
6
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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, 1998. 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, 1998 were $68.8 million
compared to $45.2 million in net sales during the comparable period last year.
Revenue from the sale of polished diamonds was $25.4 million, an increase of 40%
as compared to $18.2 million in polished sales for the first quarter last year.
Polished diamond revenue was positively impacted by increased sales of large gem
quality polished stones from the Company's factory in Russia in the current
quarter as well as strong sales throughout the United States. This increase was
partially offset by decreases in polished diamond sales in Japan and Southeast
Asia during the current quarter.
Rough sales were $43.4 million for the three months ended August 31, 1998, an
increase of 60% compared to $27.1 million in the first quarter last year. This
increase from the prior year was primarily attributable to increased purchases
of rough diamonds in Southern Africa and increased volume in Angola related to
the Company's
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
restructuring and expansion of its Angolan rough diamond operation. This was
partially offset by continued lower sales of better quality rough diamonds to
the marketplace by DeBeers, one of the Company's principal rough diamond
suppliers.
Gross Profit
During the quarter, gross margin on net polished sales was 11% and was equal to
the gross margin on net polished sales in the comparable quarter last year.
Margins continued to be impacted by increased costs, including rough diamond
costs, which the Company has yet to reflect in the selling price of its polished
diamonds. During the quarter, overall (combined polished and rough diamond)
gross margin on net sales was 4.6% compared to 5.6% for the same period last
year. The decrease from the prior year was primarily due to the lower margins
realized on rough sales during the current quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter ended August
31, 1998 were $3.4 million compared to $3.2 million for this quarter last year.
The increase was primarily attributable to higher professional fees and travel
expenses associated with the development of expansion opportunities.
Interest Expense
Net interest expense for the three month period ended August 31, 1998 was
$589,000 compared to $420,000 last year. The increase was due to an increase in
the average balance outstanding on the Company's revolving loan combined with
lower interest income in the current year.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Liquidity and Capital Resources
The Company's working capital at August 31, 1998 was $112.2 million, which was
essentially unchanged from its working capital at May 31, 1998.
The Company believes that it has the ability to meet its current and anticipated
financing needs for the next twelve months.
Stockholders' equity was $92.9 million at August 31, 1998 as compared to $93.5
million at May 31, 1998. No dividends were paid to stockholders during the
quarter ended August 31, 1998.
Year 2000
In connection with the Company's efforts to update and modernize its information
systems, as well as to address its Year 2000 issue, the Company commenced the
implementation of a new, fully integrated computer system during the prior
fiscal year. The majority of the costs of this implementation will be
capitalized by the Company. The Company is utilizing both internal and external
resources to implement and test its new software and hardware. Management
anticipates that the project will be substantially complete by June 30, 1999.
The total cost of this project is expected to be approximately $2.0 million. As
of August 31, 1998, the Company has incurred approximately $1.25 million in
connection with the project.
In addition, the Company has identified its significant suppliers and other
third party service providers and expects to initiate formal communications
during the second and third fiscal quarters to determine the extent to which the
Company's operations may be vulnerable to the failure of those third parties to
remediate their own Year 2000 issues. Contingency plans in the event of
unsuccessful implementation of the above project or noncompliance of any of the
Company's primary service providers have yet to be developed, but will be
developed in the coming months.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The costs of the computer project and the time frame in which the Company
believes it will complete installation of its new computer system, including the
Year 2000 compliance, are based on management's best estimates; however, there
can be no assurance that these estimates will be achieved and actual results
could differ materially from those anticipated.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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<S> <C>
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
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10
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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, 1998
11
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<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-31-1999
<PERIOD-END> AUG-31-1998
<CASH> 2,032
<SECURITIES> 0
<RECEIVABLES> 34,060
<ALLOWANCES> 158
<INVENTORY> 90,629
<CURRENT-ASSETS> 142,733
<PP&E> 12,434
<DEPRECIATION> 7,484
<TOTAL-ASSETS> 152,313
<CURRENT-LIABILITIES> 30,507
<BONDS> 28,743
<COMMON> 8,535
0
0
<OTHER-SE> 84,378
<TOTAL-LIABILITY-AND-EQUITY> 152,313
<SALES> 68,844
<TOTAL-REVENUES> 68,844
<CGS> 65,651
<TOTAL-COSTS> 65,651
<OTHER-EXPENSES> 3,356
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 589
<INCOME-PRETAX> (752)
<INCOME-TAX> (205)
<INCOME-CONTINUING> (547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (547)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
