<PAGE>
<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 NOVEMBER 30, 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)
<TABLE>
<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)
</TABLE>
(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, 1998, 8,486,593 shares of the registrant's common
stock were outstanding.
<PAGE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements
[CAPTION]
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)
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $74,705 $46,848 $143,549 $92,093
Cost of Sales 70,962 42,688 136,613 85,380
------- ------- -------- -------
3,743 4,160 6,936 6,713
------- ------- -------- -------
Selling, General &
Administrative Expenses 3,927 3,556 7,283 6,767
Interest Expense - net 820 582 1,409 1,002
------- ------- -------- -------
4,747 4,138 8,692 7,769
------- ------- -------- -------
Income/(loss) before taxes
and minority interest (1,004) 22 (1,756) (1,056)
Income tax provision/(benefit)
(Note 2) (377) 118 (582) (50)
------- ------- -------- -------
Income/(loss) before minority
interest (627) (96) (1,174) (1,006)
Minority interest in loss of
consolidated subsidiary
(Note 4) - (301) - (552)
------- ------- -------- -------
Net Income/(Loss) $ (627) $ 205 $ (1,174) $ (454)
======= ======= ======== =======
Income/(loss) per share
(Note 3)
Basic earnings/(loss)
per share $ (0.07) $ 0.02 $ (0.14) $ (0.05)
======= ======= ======== =======
Average number of shares
outstanding during the
period 8,509,896 8,508,389 8,521,223 8,478,264
========= ========= ========= =========
Diluted earnings/(loss)
per share $ (0.07) $ 0.02 $ (0.14) (0.05)
========= ========= ========= =========
Average number of shares
outstanding during the
period 8,509,896 8,697,626 8,521,223 8,478,264
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, 1998 May 31, 1998
(Unaudited)
-----------------------------------------
(in thousands, except share data)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,741 $ 1,222
Accounts receivable - net 48,206 37,747
Inventories - rough diamonds 12,307 23,843
- polished diamonds 61,260 57,675
Prepaid expenses and other
current assets 15,940 12,640
Deferred tax assets 4,370 3,785
--------- ---------
TOTAL CURRENT ASSETS 145,824 136,912
NON-CURRENT ASSETS, net 10,212 5,418
--------- ---------
$ 156,036 $ 142,330
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & other
current liabilities $ 15,856 $ 25,160
Notes payable - banks 5,358 -
--------- ---------
TOTAL CURRENT LIABILITIES 21,214 25,160
SENIOR NOTES AND OTHER
LONG-TERM DEBT 42,860 23,560
DEFERRED TAX LIABILITIES 150 150
--------- ---------
TOTAL LIABILITIES 64,224 48,870
--------- ---------
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 8,535,493 and 8,534,549
shares 8,535 8,535
Additional paid-in capital 58,149 58,145
Foreign currency translation
adjustment (122) -
Retained earnings 25,628 26,802
-------- --------
92,190 93,482
Less treasury stock, 48,900 and
2,000 shares at cost (378) (22)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 91,812 93,460
-------- --------
$156,036 $142,330
======== ========
</TABLE>
See Notes to Consolidated Financial Statement
3
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
November 30,
(Unaudited)
--------------------
1998 1997
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(1,174) $ (454)
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in)
operating activities:
Depreciation and amortization 458 1,152
Provision for uncollectible accounts 30 30
Minority interest in income/(loss) of
consolidated subsidiary - (552)
Benefit from deferred income taxes (585) (160)
(Increase)/decrease in assets and increase/
(decrease) in liabilities:
Accounts receivable (10,489) (8,933)
Inventories 7,951 (13,283)
Other current assets (3,300) 1,439
Non-current assets (4,134) 35
Accounts payable and other current
liabilities (9,304) 5,743
------- ------
Net cash (used in)/provided by
operating activities (20,547) 14,983
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,118) (1,323)
------- ------
Net cash used in investing activities (1,118) (1,323)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (356) -
Increase/(decrease) in short-term borrowings 5,358 (1,343)
Increase in long-term borrowings 19,300 8,350
Proceeds from exercise of stock options 4 196
------- ------
Net cash provided by financing activities 24,306 7,203
------- ------
Effect of foreign currency translation
adjustment (122) -
------- -------
Net increase/(decrease) in cash 2,519 (9,103)
Cash at beginning of year 1,222 10,338
------- -------
Cash at end of period $ 3,741 $ 1,235
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
<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 six and three months ended
November 30, 1998 and 1997 and the financial position as of November 30, 1998.
Effective as of January 1, 1998, the Company restructured its Angolan
operations. This resulted in the inclusion of all revenue from these operations
and an increase in rough sales of approximately $49.7 million and $27.2 million
for the six months and three months ended November 30, 1998, respectively.
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 tax 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 $5,480,000 less a
valuation allowance of approximately $1,260,000 resulting in a net deferred tax
asset of $4,220,000.
For the six months ended November 30, 1998, the Company generated approximately
$1,650,000 of net operating losses which can be used to offset future Federal,
state and local income taxes.
5
<PAGE>
<PAGE>
TAXES (CONTINUED)
At November 30, 1998, the Company has available U.S. net operating losses of
$9.9 million which expire as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<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 1,650,000
------------
$ 9,900,000
============
</TABLE>
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/(loss) per share is computed based upon the weighted average number of
common shares outstanding. Diluted earnings/(loss) 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.
5. REVOLVING LOAN AGREEMENT
The Company was not in compliance with the annual cash flow covenant under the
revolving loan agreement for the period ended November 30, 1998. The banks have
given a waiver to the Company with respect to this covenant for the period ended
November 30, 1998 and have amended this covenant for the period ended February
28, 1999.
6. COMPREHENSIVE INCOME/(LOSS)
As of June 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of SFAS 130 had no impact on the
Company's net income/(loss) or stockholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. For the three months and six months ended November 30, 1998, total
comprehensive loss amounted to $749,000 and $1,296,000, respectively.
6
<PAGE>
<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, 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 six months ended November 30, 1998 were $143.5 million
compared to $92.1 million in sales during the comparable period last year. For
the three month period ended November 30, 1998 net sales were $74.7 million
compared to $46.8 million in the second quarter last year.
Revenue from the sale of polished diamonds was $54.2 million for the six months
ended November 30, 1998 compared to $39.7 million in the comparable period last
year. For the three month period ended November 30, 1998, polished diamond sales
were $28.8 million compared to $21.6 million in the second quarter last year.
Polished diamond revenue was positively impacted during the six months and three
months ended November 30, 1998 by increased sales of large gem quality polished
stones from the Company's factory in Russia, continued strong sales throughout
the United States and sales increases in Japan. These increases were partially
offset by decreases in polished diamond sales in other areas of Southeast Asia
during the same periods.
7
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rough diamond sales were $89.3 million for the six months ended November 30,
1998 compared to $52.4 million in the comparable period last year. For the three
months ended November 30, 1998, rough diamond sales were $45.9 million compared
to $25.3 million in the second quarter last year. The increases from the prior
year were primarily attributable to increased purchases of rough diamonds
throughout Africa. The increases were 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 six months ended November 30, 1998, gross margin on net polished
sales was 11%, compared to 12% in the comparable period last year. For the three
months ended November 30, 1998, gross margin on net polished sales was 10%
compared to 13% in the second quarter last year. Polished diamond margins
continued to be impacted by firm rough diamond prices resulting from market
supply curtailments by DeBeers as well as a softer polished diamond selling
prices due to reduced demand in the Southeast Asian market. During the six
months ended November 30, 1998, overall (both polished and rough diamonds) gross
margin on net sales was 4.8% compared to 7.3% for the same period last year. For
the three months ended November 30, 1998, overall gross margin on net sales was
5.0% compared to 8.9% in the second quarter last year. The decrease from the
prior year was primarily due to the lower margins realized on rough diamond
sales during the six months and the current quarter. Rough diamond margins also
continue to be impacted in the current year by increased rough diamond prices
described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended November
30, 1998 were $7.3 million, compared to $6.8 million for this period last year.
For the three months ended November 30, 1998, selling, general and
administrative expenses were $3.9 million compared to $3.6 million in the second
quarter last year. These increases were primarily attributable to expenses
related to the opening of the Company's sales office in Japan in the current
year.
8
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST EXPENSE
Net interest expense for the six month period ended November 30, 1998 was $1.4
million compared to $1.0 million last year. For the three months ended November
30, 1998 net interest expense was $820,000 compared to $582,000 in the second
quarter last year. The increases were due to an increase in the average balance
outstanding on the Company's revolving loan combined with lower interest income
in the current year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at November 30, 1998 was $124.6 million, which was
$12.9 million more than its working capital at May 31, 1998. The increase was
due to higher accounts receivable and lower current liabilities 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 $91.8 million at November 30, 1998 as compared to $93.5
million at May 31, 1998. No dividends were paid to stockholders during the six
months ended November 30, 1998. During the six months ended November 30, 1998,
the Company purchased 46,900 shares of its common stock which are shown as a
reduction of stockholders' equity.
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 $2.2 million. As
of November 30, 1998, the Company has incurred and capitalized approximately
$1.7 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
third and fourth 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
9
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
of any of the Company's primary service providers have yet to be developed, but
will be developed in the coming months.
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.
10
<PAGE>
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
11
<PAGE>
<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
Executive Vice President and
Chief Financial Officer
Dated: January 14, 1999
12
<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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> NOV-30-1998
<CASH> 3,741
<SECURITIES> 0
<RECEIVABLES> 48,379
<ALLOWANCES> 173
<INVENTORY> 73,567
<CURRENT-ASSETS> 145,824
<PP&E> 13,110
<DEPRECIATION> 7,607
<TOTAL-ASSETS> 156,036
<CURRENT-LIABILITIES> 21,214
<BONDS> 42,860
<COMMON> 8,535
0
0
<OTHER-SE> 83,277
<TOTAL-LIABILITY-AND-EQUITY> 156,036
<SALES> 143,549
<TOTAL-REVENUES> 143,549
<CGS> 136,613
<TOTAL-COSTS> 136,613
<OTHER-EXPENSES> 7,283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,409
<INCOME-PRETAX> (1,756)
<INCOME-TAX> (582)
<INCOME-CONTINUING> (1,174)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,174)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
