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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, 1999.
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 March 31, 1999, 8,486,593 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)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $47,045 $60,627 $190,595 $152,719
Cost of Sales 43,182 56,960 179,796 142,340
------ ------ ------- -------
Gross Profit 3,863 3,667 10,799 10,379
------ ------ ------- -------
Selling, General &
Administrative Expenses 3,751 3,302 11,034 10,069
Interest Expense - net 524 574 1,933 1,576
------ ------ ------- -------
4,275 3,876 12,967 11,645
------ ------ ------- -------
Income/(loss) before taxes,
and minority interest (412) (209) (2,168) (1,266)
Income tax provision/(benefit) (675) 62 (1,257) 12
------ ------ ------- -------
Income/(loss) before minority
interest in loss of
consolidated subsidiary 263 (271) (911) (1,278)
Minority interest in loss of
consolidated subsidiary -- (316) -- (868)
------- ------- -------- --------
Net Income/(Loss) $ 263 $ 45 $ (911) $ (410)
======= ======= ======== ========
Basic earnings/(loss)
per share $ 0.03 $ 0.01 $ (0.11) $ (0.05)
======= ======= ======== ========
Average number of shares
outstanding during the
period 8,486,593 8,511,487 8,509,679 8,489,338
========= ========= ========= =========
Diluted earnings/(loss)
per share $ 0.03 $ 0.01 $ (0.11) $ (0.05)
========= ========= ========= =========
Average number of shares
outstanding during the period 8,523,646 8,649,298 8,509,679 8,489,338
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
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Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 28, 1999 May 31, 1998
(Unaudited)
(in thousands,except per share data)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 6,206 $ 1,222
Accounts receivable - net 36,499 37,747
Inventories - rough diamonds 22,940 23,843
- polished diamonds 52,490 57,675
Prepaid expenses and other current assets 14,871 12,640
Deferred tax assets 5,045 3,785
-------- --------
TOTAL CURRENT ASSETS 138,051 136,912
NON-CURRENT ASSETS $ 11,225 $ 5,418
-------- --------
$149,276 $142,330
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & other
current liabilities $ 14,398 $ 25,160
-------- --------
TOTAL CURRENT LIABILITIES 14,398 25,160
SENIOR NOTES AND OTHER LONG
TERM DEBT 42,468 23,560
DEFERRED TAX LIABILITIES 150 150
-------- --------
TOTAL LIABILITIES 57,016 48,870
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.1 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 63 --
Retained earnings 25,891 26,802
-------- --------
92,638 93,482
Less treasury stock, 48,900 and
2,000 shares at cost (378) (22)
-------- ---------
TOTAL STOCKHOLDERS' EQUITY 92,260 93,460
-------- ---------
$149,276 $142,330
======== =========
</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)
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income/(Loss) $ (911) $ (410)
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in)
operating activities:
Depreciation and amortization 687 1,776
Provision for uncollectible accounts 45 45
Minority interest in loss of consolidated subsidiary -- (868)
Benefit from deferred income taxes (1,260) (160)
(Increase)/decrease in assets and increase/
(decrease) in liabilities:
Accounts receivable 1,203 4,752
Inventories 6,088 (19,471)
Prepaid expenses and
other current assets (2,231) (263)
Non-current assets (4,387) 62
Accounts payable and other current
liabilities (10,762) 9,564
-------- -------
Net cash used in
operating activities (11,528) (14,297)
-------- -------
Cash Flows From Investing Activities:
Capital expenditures (2,107) (1,764)
------- -------
Net cash used in investing activities (2,107) (1,764)
------- -------
Cash Flows From Financing Activities:
Purchase of Treasury stock (356) --
Decrease in short-term borrowings -- (1,343)
Increase/(decrease) in long-term borrowings 18,908 10,350
Proceeds from exercise of stock options 4 212
------- -------
Net cash provided by financing activities 18,556 9,219
------- -------
Effect of foreign currency translation
adjustment 63 --
------- -------
Net increase/(decrease) in cash 4,984 6,842
Cash at beginning of year 1,222 10,338
------- -------
Cash at end of period $ 6,206 $ 3,496
======= =======
</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, 1999 and 1998 and the financial position as of February 28,
1999.
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 $5,480,000 less a
valuation allowance of approximately $585,000 resulting in a net deferred tax
asset of $4,895,000.
For the nine months ended February 28, 1999, the Company generated approximately
$1,350,000 of net operating losses which can be used to offset future Federal,
state and local income taxes. Additionally, during the three months ended
February 28, 1999, the Company reversed approximately $500,000 of the valuation
allowance previously established against the Company's deferred tax asset.
5
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Taxes (continued)
At February 28, 1999 the Company has available U.S. net operating losses of
$10.35 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 1,200,000
2014 1,350,000
-----------
$10,350,000
===========
</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. 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 ended February 28, 1999, total comprehensive income
6
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Comprehensive income/(Loss) (continued)
was $448,000 and for the nine months ended February 28, 1999, total
comprehensive loss was $848,000.
6. Accounting for Costs of Computer Software Developed or
Obtained for Internal Use
As of December 1, 1998, the Company adopted SOP 98-1, "Accounting for the Costs
of Computer Software Developed For or Obtained For Internal Use." The SOP
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. As a result of adopting this
SOP, the Company capitalized approximately $500,000 related to internal use
software development projects.
7
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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 nine months ended February 28, 1999 were $190.6 million
compared to $152.7 million in sales during the comparable period last year. For
the three month period ended February 28, 1999 net sales were $47.0 million
compared to $60.6 million in the third quarter last year.
Revenue from the sale of polished diamonds was $82.8 million for the nine months
February 28, 1999 compared to $59.3 million in the comparable period last year.
For the three month period ended February 28, 1999 polished diamond sales were
$28.6 million compared to $19.6 million in the third quarter last year. The
increase during the three months ended February 28, 1999 was due to increased
volume in the United States, Japan and Southeast Asia. For the nine months ended
February 28, 1999, the increase was primarily due to 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,
partially offset by weaker sales volume earlier in the year in Southeast Asia.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Rough diamond sales were $107.8 million for the nine months ended February 28,
1999 compared to $93.4 million in the comparable period last year. For the three
months ended February 28, 1999 rough diamond sales were $18.5 million compared
to $41.0 million in the third quarter last year. The decrease in the third
quarter was primarily attributable to lower purchases and sell through,
particularly in Angola, where fewer diamonds were available at prices the
Company was prepared to pay due to increased rebel fighting, heavy rainfall and
increased competition. In addition, the decrease was caused 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 nine months ended February 28, 1999, gross margin on net polished
sales was 11.5%, compared to 10.9% in the comparable period last year. For the
three months ended February 28, 1999 gross margin on net polished sales was
13.0% compared to 8.8.% in the third quarter last year. Despite these increases,
polished diamond margins continued to be impacted by firm rough diamond prices
resulting from market supply curtailments by DeBeers as well as softer polished
diamond selling prices due to overall reduced demand in the Southeast Asian
market. During the nine months ended February 28, 1999 overall (both polished
and rough diamond) gross margin on net sales was 5.7% compared to 6.8% for the
same period last year. For the three months ended February 28, 1999, overall
gross margin on net sales was 8.2% compared to 6.1% in the third quarter last
year. The decrease from the prior year was primarily due to the lower margins
realized on rough diamond sales during the nine months. The increase for the
three months ended February 28, 1999 was a result of the increase in polished
diamond sales as a percentage of total sales as compared with the third quarter
last year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended February
28, 1999 were $11.0 million, compared to $10.1 million for this period last
year. For the three months ended February 28, 1999 selling, general and
administrative expenses were $3.8 million compared to $3.3 million in the third
quarter last year. The increases in both the nine and three months ended
February 28, 1999 were primarily attributable to the opening of
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
the Company's sales office in Japan in the current year, partially offset by the
capitalization of salary and benefit costs for those employees directly involved
with the Company's implementation of its new computer system.
Interest Expense
Net interest expense for the nine month period ended February 28, 1999 was $1.9
million compared to $1.6 million last year. For the three months ended February
28, 1999 net interest expense was $524,000 compared to $574,000 in the third
quarter last year. The increase for the nine months 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.
Liquidity and Capital Resources
The Company's working capital at February 28, 1999 was $123.7 million, which was
$11.9 million more than its working capital at May 31, 1998. The increase was
due to 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 $92.3 million at February 28, 1999 as compared to $93.5
million at May 31, 1998. No dividends were paid to stockholders during the nine
months ended February 28, 1999. During the nine months ended February 28, 1999,
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 August 31, 1999.
The total cost of this project is expected to be approximately $3.0 million. As
of
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
February 28, 1999, the Company has incurred and capitalized approximately $2.6
million in connection with the project which includes approximately $500,000 of
salary and benefit costs for employees who are directly involved with the
project as well as interest costs capitalized in accordance with SOP 98-1
"Accounting for Costs of Computer Software Developed or Obtained for Internal
Use."
In addition the Company has identified its significant suppliers and other third
party service providers and has initiated formal communications during the third
quarter 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.
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.
11
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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
12
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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, 1999
13
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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-31-1999
<PERIOD-END> FEB-28-1999
<CASH> 6,206
<SECURITIES> 0
<RECEIVABLES> 36,686
<ALLOWANCES> 187
<INVENTORY> 75,430
<CURRENT-ASSETS> 138,051
<PP&E> 14,099
<DEPRECIATION> 7,781
<TOTAL-ASSETS> 149,276
<CURRENT-LIABILITIES> 14,398
<BONDS> 42,468
<COMMON> 8,535
0
0
<OTHER-SE> 83,725
<TOTAL-LIABILITY-AND-EQUITY> 149,276
<SALES> 190,595
<TOTAL-REVENUES> 190,595
<CGS> 179,796
<TOTAL-COSTS> 179,796
<OTHER-EXPENSES> 11,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,933
<INCOME-PRETAX> (2,168)
<INCOME-TAX> (1,257)
<INCOME-CONTINUING> (911)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (911)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
