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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 FEBRUARY 28, 1998.
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)
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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 [ ]
As of March 31, 1998, 8,512,549 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 Nine Months Ended
February 28, February 28,
(unaudited) (unaudited)
---------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $60,627 $56,463 $152,719 $206,134
Cost of Sales 56,960 50,322 142,340 186,692
------- ------- -------- --------
3,667 6,141 10,379 19,442
------- ------- -------- --------
Selling, General &
Administrative 3,302 2,803 10,069 9,297
Interest Expense - net 574 444 1,576 2,718
------- ------- -------- --------
3,876 3,247 11,645 12,015
------- ------- -------- --------
Income/(loss) before taxes,
and minority interest (209) 2,894 (1,266) 7,427
Income tax provision 62 19 12 396
------- ------- -------- --------
Income/(loss) before
minority interest (271) 2,875 (1,278) 7,031
Minority interest in
loss of consolidated
subsidiary (316) (187) (868) (593)
------- ------- -------- --------
Net Income/(Loss) $ 45 $ 3,062 $ (410) $ 7,624
======= ======= ======== ========
NET INCOME/(LOSS) PER SHARE:
Basic earnings/(loss)
per share $ 0.01 $ 0.39 $ (0.05) $ 1.13
======= ======= ======== ========
Average number of shares
outstanding during the
period 8,511,487 7,779,701 8,489,338 6,733,688
========= ========= ========= =========
Diluted earnings/(loss)
per share $ 0.01 $ 0.38 $ (0.05) $ 1.08
========= ========= ========= =========
Average number of shares
outstanding during the
period, assuming dilution 8,649,298 8,072,576 8,489,338 7,033,905
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
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CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, 1998 May 31, 1997
(Unaudited)
-----------------------------------------
(in thousands)
<C> <S> <S>
ASSETS
CURRENT ASSETS
Cash $ 3,496 $ 10,338
Accounts receivable - net 34,159 29,632
Inventories - rough diamonds 21,834 11,395
- polished diamonds 63,835 54,803
Prepaid expenses and other
current assets 11,412 11,149
Deferred tax assets 3,835 3,675
--------- ---------
TOTAL CURRENT ASSETS 138,571 120,992
PROPERTY, PLANT & EQUIPMENT - Net 7,626 6,726
OTHER ASSETS 1,387 2,361
--------- ---------
$147,584 $130,079
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & other
current liabilities $ 23,922 $ 14,358
Notes payable - other - 1,343
--------- ---------
TOTAL CURRENT LIABILITIES 23,922 15,701
SENIOR NOTES AND OTHER LONG
TERM DEBT 27,495 17,145
DEFERRED TAX LIABILITIES 300 300
--------- ---------
TOTAL LIABILITIES 51,717 33,146
--------- ---------
MINORITY INTEREST 5,521 6,389
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share,
Authorized 20,000,000 shares;
issued and outstanding, 8,512,383
and 8,407,121 shares, respectively 8,512 8,407
Additional paid-in capital 58,166 58,059
Retained earnings 23,668 24,078
-------- --------
TOTAL STOCKHOLDERS' EQUITY 90,346 90,544
-------- --------
$147,584 $130,079
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
February 28,
(unaudited)
--------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income/(Loss) $ (410) $ 7,624
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in)
operating activities:
Depreciation and amortization 1,776 1,806
Provision for uncollectible accounts 45 60
Minority interest in loss of
consolidated subsidiary (868) (593)
Benefit from deferred income taxes (160) -
Loss on sale of assets - 18
(Increase)/decrease in assets and increase/
(decrease) in liabilities:
Accounts receivable (4,572) (7,140)
Inventories (19,471) (6,535)
Prepaid and other current assets (263) (954)
Non-current assets 62 14
Accounts payable and other current
liabilities 9,564 (611)
-------- ------
Net cash used in
operating activities (14,297) (6,311)
-------- ------
Cash Flows From Investing Activities:
Proceeds from sale of assets - 24
Capital expenditures (1,764) (634)
------- --------
Net cash used in investing activities (1,764) (610)
------- -------
Cash Flows From Financing Activities:
Decrease in short-term borrowings (1,343) (849)
Increase/(decrease) in long-term borrowings 10,350 (12,725)
Proceeds from issuance of common stock, net - 33,582
Proceeds from exercise of stock options 212 579
------- -------
Net cash provided by financing activities 9,219 20,587
------- -------
Net increase/(decrease) in cash (6,842) 13,666
Cash at beginning of year 10,338 905
------- -------
Cash at end of period $ 3,496 $14,571
======= =======
</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 nine months and three months
ended February 28, 1998 and 1997 and the financial position as of February 28,
1998. With effect from 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 for the quarter and nine months ended February
28, 1998 of approximately $15 million.
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 $5,670,000 less a
valuation allowance of approximately $2,135,000 resulting in a net deferred tax
asset of $3,535,000.
For the nine months ended February 28, 1998, the Company recognized
approximately $200,000 of net operating loss carryforwards to offset Federal,
state and local income taxes.
5
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Taxes (continued)
At February 28, 1998 the Company has available U.S. net operating losses of $7.6
million which expire as follows:
<TABLE>
<CAPTION>
Year Amount
---- -------
<S> <C> <C>
2000 $1,800,000
2001 3,500,000
2002 500,000
2007 500,000
2008 900,000
2010 400,000
-----------
$7,600,000
===========
</TABLE>
During the second quarter 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. Net Income Per Share
For the third quarter ended February 28, 1998, the Company adopted Financial
Accounting Standards Board Statement No. 128 "Earnings per Share." This
statement replaced the calculation of primary and fully diluted earnings per
share with basic and diluted 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. All
earnings per share amounts for all periods have been presented and, where
necessary, restated to conform to the Statement 128 requirements.
4. Subsequent Event
On March 17, 1998 the Company announced that it had completed a transaction for
the sale of its shares in Lazare Kaplan Botswana (Pty) Ltd., which operates the
Botswana manufacturing facility. The sale resulted in cash proceeds to the
Company of $11.1 million and a net gain, after tax, on this transaction of
approximately $3.5 million.
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, 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 nine months ended February 28, 1998 were $152.7 million
compared to $206.1 million in sales during the comparable period last year. For
the three month period ended February 28, 1998 net sales increased 7% to $60.6
million from $56.5 million in the third quarter last year.
Revenues from the sale of polished diamonds were $59.3 million compared to $74.6
million in the comparable nine month period. For the three month period ended
February 28, 1998 polished diamond sales were $19.6 million compared to $23.4
million in the third quarter last year. Polished diamond revenues were impacted
during the nine months ended February 28, 1998 by the delay of large gem quality
polished stones from the Company's factories in Russia. On a comparable basis,
this resulted in a revenue shortfall in the nine month period of approximately
$17.0 million. The first two shipments of large polished diamonds from the
Company's new cutting facility in Moscow were received at the end of the second
quarter with additional shipments received consistently thereafter. During the
third quarter ended February 28, 1998 revenues from the sales of Russian
manufactured diamonds were consistent with the revenues for this material in the
comparable period in the prior year. However, during the third quarter ended
February 28, 1998, polished sales were negatively
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
impacted by the downturn in the economic environment in Southeast Asia and
Japan.
Rough sales decreased to $93.4 million for the nine months ended February 28,
1998 from $131.5 in the comparable period a year ago. Rough sales increased
24% to $41.0 million for the three months ended February 28. The decrease
during the nine months 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 early in calendar year
1997. The decrease was partially offset by increased volume in Angola in
conjunction with the Company's restructuring and expansion of its rough diamond
buying operations in Angola during the third quarter ended February 28, 1998.
Gross Profit
Gross margin on net polished sales for the nine months and three months ended
February 28, 1998 was 10.9% and 8.8%, respectively. The margins were 18.7% and
17.8%, respectively, during the same periods 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 large, high quality stones produced at the Company's factories in Russia in
the current year. Excluding the impact on margins from the Company's melee
factory in Botswana, which was sold during March 1998, the margins would have
been 14.5% and 11.6% for the nine months and three months ended February 28,
1998, respectively.
The overall (both polished and rough diamond) gross margin on net sales for the
nine month and three month periods ended February 28, 1998 was 6.8% and 6.1%,
respectively. This compares to 9.4% and 10.9%, respectively, for the same
periods last year. The overall margin decreases were due primarily to the lower
margins realized on polished sales during the nine months and the current
quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended February
28, 1998 were $10.1 million, compared to $9.3 million for this period last year.
During the three months ended February 28, expenses were $3.3 million as
compared to $2.8 million in the prior year. The increases were primarily
attributable to higher legal and travel expenses associated with
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the development of expansion opportunities as well as an increase in
compensation and benefits in the current year.
Interest Expense
Net interest expense for the nine month period ended February 28, 1998 was $1.6
million compared to $2.7 million last year and $574,000 in the three months
ended February 28, 1998 compared to $444,000 in the prior year. The decrease in
the nine months was a result of the reduction of the outstanding balance of the
Company's Senior Notes combined with lower average balances outstanding under
the Company's revolving loans and lines of credit in the current year. The
decrease in the third quarter ended February 28, 1998 was a result of lower
interest income due to lower average cash balances invested in the current
period.
Liquidity and Capital Resources
The Company's working capital at February 28, 1998 was $114.6 million, which was
$9.3 million greater than its working capital at May 31, 1997. The increase was
primarily related 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 February 28, 1998 as compared to $90.5
million at May 31, 1997. No dividends were paid to stockholders during the nine
months ended February 28, 1998.
9
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
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
Dated: April 14, 1998
11
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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> 9-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> FEB-28-1998
<CASH> 3,496
<SECURITIES> 0
<RECEIVABLES> 34,287
<ALLOWANCES> 128
<INVENTORY> 85,669
<CURRENT-ASSETS> 131,071
<PP&E> 17,299
<DEPRECIATION> 9,673
<TOTAL-ASSETS> 140,084
<CURRENT-LIABILITIES> 23,922
<BONDS> 27,495
<COMMON> 8,512
0
0
<OTHER-SE> 81,834
<TOTAL-LIABILITY-AND-EQUITY> 140,084
<SALES> 152,719
<TOTAL-REVENUES> 152,719
<CGS> 142,340
<TOTAL-COSTS> 142,340
<OTHER-EXPENSES> 10,069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,576
<INCOME-PRETAX> (1,266)
<INCOME-TAX> 12
<INCOME-CONTINUING> (410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (410)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
