<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, 2000.
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 January 4, 2001, 7,378,293 shares of the registrant's common stock were
outstanding.
<PAGE>
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)
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 78,317 $ 111,906 $ 155,892 $ 181,648
Cost of Sales 69,301 103,711 138,172 166,961
----------- ----------- ----------- -----------
Gross profit 9,016 8,195 17,720 14,687
Selling, general and administrative expenses 6,706 5,045 12,351 8,696
Legal settlement and related costs -- 4,250 -- 5,048
Interest expense (net) 1,214 819 2,575 1,526
----------- ----------- ----------- -----------
7,920 10,114 14,926 15,270
----------- ----------- ----------- -----------
Income/(loss) before taxes and cummulative
effect of change in accounting principle 1,096 (1,919) 2,794 (583)
----------- ----------- ----------- -----------
Income tax / (benefit) 371 (1,058) 1,036 (738)
----------- ----------- ----------- -----------
Income/(loss) before cummulative effect of
change in accounting principle 725 (861) 1,758 155
----------- ----------- ----------- -----------
Cummulative effect of change in
accounting method for start up activities -- -- -- (1,522)
----------- ----------- ----------- -----------
Net Income / (loss) $ 725 $ (861) $ 1,758 $ (1,367)
=========== =========== =========== ===========
Earnings/(loss) per share:
Basic earnings / (loss) per share before
cummulative effect of change in accounting
principle $ 0.09 $ (0.10) $ 0.22 $ 0.02
=========== =========== =========== ===========
Basic earnings / (loss) per share $ 0.09 $ (0.10) $ 0.22 $ (0.16)
=========== =========== =========== ===========
Average number of shares outstanding during
the period 7,796,356 8,261,323 7,880,579 8,315,321
=========== =========== =========== ===========
Diluted earnings / (loss) per share before
cummulative effect of change in accounting
principle $ 0.09 $ (0.10) $ 0.22 $ 0.02
=========== =========== =========== ===========
Diluted earnings / (loss) per share $ 0.09 $ (0.10) $ 0.22 $ (0.16)
=========== =========== =========== ===========
Average number of shares outstanding during
the period 7,799,030 8,261,323 7,899,126 8,315,321
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
November 30, May 31,
(Unaudited)
2000 2000
------------ -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,462 $ 7,254
Accounts and notes receivable-net 56,478 66,258
Inventories - rough diamonds 21,840 31,155
- polished diamonds 58,557 57,484
Prepaid expenses and other current assets 9,455 12,191
Deferred taxes 4,380 6,257
-------- --------
Total Current Assets 154,172 180,599
-------- --------
Non-current assets - net 12,158 17,445
Deferred taxes 5,591 4,655
-------- --------
Total Assets $171,921 $202,699
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Accounts payable and other current liabilities $ 44,194 $ 49,874
Notes payable - other and current portion
of long-term debt 7,460 32,709
-------- --------
Total Current Liabilities 51,654 82,583
-------- --------
Other long-term debt 38,314 37,309
-------- --------
Total Liabilities 89,968 119,892
-------- --------
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 8,543,393 shares 8,543 8,543
Additional paid-in capital 58,182 58,182
Cumulative translation adjustment (46) 239
Retained earnings 21,490 19,732
-------- --------
88,169 86,696
Less treasury stock, 836,550 and 498,150
shares at cost (6,216) (3,889)
-------- --------
Total Stockholders' equity 81,953 82,807
-------- --------
Total Liabilities and Stockholders' Equity $171,921 $202,699
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
November 30,
(Unaudited)
2000 1999
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income/(loss) $ 1,758 $ (1,367)
Adjustments to reconcile net income/(loss) to
net cash provided by/(used in) operating activities:
Depreciation and amortization 877 684
Provision for uncollectible accounts 20 30
Deferred income taxes 941 (774)
Cumulative effect of change in method of accounting -- 1,522
(Increase)/decrease in assets and increase/(decrease) in liabilities:
Notes and accounts receivable 9,760 (39,609)
Inventories 8,242 (1,734)
Prepaid expenses and other current assets 2,736 (5,975)
Non-current assets 5,495 (389)
Accounts payable and other current liabilities (5,680) 30,856
-------- --------
Net cash provided by/(used in) operating activities 24,149 (16,756)
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (1,085) (1,374)
-------- --------
Net cash used in investing activities (1,085) (1,374)
-------- --------
Cash Flows From Financing Activities:
Purchase of treasury stock (2,327) (1,400)
Increase/(decrease) in short-term borrowings (25,249) 16,961
Increase in long-term borrowings 1,005 2,231
Proceeds from exercise of stock options -- 15
-------- --------
Net cash (used in)/provided by financing activities (26,571) 17,807
-------- --------
Effect of foreign currency translation adjustment (285) 636
-------- --------
Net increase/(decrease) in cash (3,792) 313
Cash at beginning of year 7,254 5,181
-------- --------
Cash at end of period $ 3,462 $ 5,494
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<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 three and six months ended
November 30, 2000 and 1999 and the financial position as of November 30, 2000.
The balance sheet at May 31, 2000 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended May 31, 2000. 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 as of November 30, 2000,
which is comprised primarily of operating loss carryforwards, is approximately
$10,856,000 less a valuation allowance of approximately $885,000 resulting in a
net deferred tax asset of $9,971,000.
At November 30, 2000 the Company has available U.S. net operating losses of
$18.1 million which expire as follows:
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
2001 3,500
2002 500
2007 500
2008 900
2010 400
2013 1,200
2019 11,125
-------
$18,125
=======
</TABLE>
3. LEGAL SETTLEMENT AND RELATED COSTS
In October 1999 the Company settled certain litigation which was commenced
against it and other related parties. The total cost of the settlement to the
Company was $5,048,000, including related legal and other expenses.
5
<PAGE>
4. EARNINGS 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.
5. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) established rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires foreign currency
translation adjustments to be included in other comprehensive income. For the
six months ended November 30, 2000 and 1999, total comprehensive income/(loss)
was $1,473,000 and $(731,000), respectively.
6. CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING FOR START-UP COSTS
On June 1, 1999 the Company adopted Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities", which requires that start-up costs
capitalized prior to adoption be written off as a cumulative effect of a change
in accounting principle and any future start-up costs be expensed as incurred.
As a result, the Company recorded a non-cash charge of $1,522,000 (net of tax
benefit of $671,000). The effect of adoption of SOP 98-5 on income from
continuing operations for the six months ended November 30, 2000 and 1999 was
insignificant.
7. NEW CREDIT FACILITIES
In November 2000, a subsidiary of the Company entered into a two year committed
revolving loan facility. The facility provides that the subsidiary may borrow up
to 1.1 billion Japanese Yen (approximately $10 million) at an interest rate 1%
above the Japanese Yen LIBOR. Borrowings under the facility are available for
the repayment of other loans and working capital purposes. The Company
guarantees repayment of amounts borrowed.
In December 2000, the Company entered into an uncommitted $10 million unsecured
working capital line of credit with a bank at an interest rate 150 basis points
above the bank's base rate.
7. TREASURY STOCK
In December 2000, the Board of Directors authorized the extension of the
Company's stock repurchase program through April 6, 2002 for the repurchase of a
total of 2 million shares.
8. GEOGRAPHIC SEGMENT INFORMATION
6
<PAGE>
Revenue, gross profit/(loss) and income/(loss) before income taxes for the six
months ended November 30, 2000 and 1999 and identifiable assets at the end of
each of those periods, classified by geographic area, which was determined by
where sales originated from and where identifiable assets are held, were as
follows (in thousands):
<TABLE>
<CAPTION>
North Far Elimi- Consoli-
America Europe Africa East nations dated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Six months ended November 30, 2000
Net sales to unaffiliated customers $ 73,956 $ 70,236 $ 3,041 $ 8,659 $ -- $155,892
Transfers between geographic areas 24,236 17,225 -- 461 (41,922) --
-------------------------------------------------------------------------
Total revenue $ 98,192 $ 87,461 $ 3,041 $ 9,120 $(41,922) $155,892
=========================================================================
Gross Profit $ 14,626 $ 1,444 $ 310 $ 1,340 $ -- $ 17,720
=========================================================================
Income/(loss) before income taxes and
cumulative effect of change in accounting
principle $ 4,125 $ 6 $ (232) $(1,105) $ -- $ 2,794
=========================================================================
Identifiable assets at November 30, 2000 $152,666 $ 38,109 $12,723 $13,080 $(44,657) $171,921
=========================================================================
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
North Far Elimi- Consoli-
America Europe Africa East nations dated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Six months ended November 30, 1999
Net sales to unaffiliated customers $ 47,333 $125,085 $ 181 $ 9,049 $ -- $181,648
Transfers between geographic areas 10,926 3,365 93,987 -- (108,278) --
-----------------------------------------------------------------------
Total revenue $ 58,259 $128,450 $ 94,168 $ 9,049 $(108,278) $181,648
=======================================================================
Gross Profit $ 10,919 $ 1,882 $ 106 $ 1,780 $ -- $ 14,687
=======================================================================
Income/(loss) before income taxes and
cumulative effect of change in accounting
principle $ (1,375) $ 1,276 $ (404) $ (80) $ -- $ (583)
=======================================================================
Identifiable assets at November 30, 1999 $156,198 $ 42,437 $ 37,859 $13,026 $ (49,675) $199,845
=======================================================================
</TABLE>
The identifiable assets which are included in the eliminations primarily
represent advances to affiliates. These advances are included therein since the
Company, which is the parent company, finances the operations of these
affiliates.
--------------------------------------------------------------------------------
Revenue and gross profit for the six months ended November 30, 2000 and 1999
classified by product were as follows (in thousands):
<TABLE>
<CAPTION>
Polished Rough
diamonds diamonds Total
-------- -------- --------
<S> <C> <C> <C>
Six months ended November 30, 2000
Net Sales $109,627 $ 46,265 $155,892
-------- -------- --------
Gross Profit $ 16,594 $ 1,126 $ 17,720
-------- -------- --------
Six months ended November 30, 1999
Net Sales $ 59,706 $121,942 $181,648
-------- -------- --------
Gross Profit $ 12,088 $ 2,599 $ 14,687
-------- -------- --------
</TABLE>
7
<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, 2000. 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, 2000 were $155.9 million
compared to $181.6 million in sales during the same period last year. For the
three month period ended November 30, 2000 net sales were $78.3 million compared
to $111.9 million in the second quarter of last year.
Revenue from the sale of polished diamonds was $109.6 million for the six months
ended November 30, 2000 compared to $59.7 million in the same period last year,
an increase of 84%. For the three month period ended November 30, 2000, polished
diamond sales were $62.6 million compared to $30.0 million in the second quarter
last year, an increase of 108%. The increase in polished sales for the three and
six month periods was primarily due to higher sales of stones produced in
Russia, improved sales volume of Lazare Diamonds'r' and increased sales of
Bellataire'TM' diamonds.
Rough diamond sales were $46.3 million for the six months ended November 30,
2000 compared to $121.9 million in the same period last year. For the three
months ended November 30, 2000, rough diamond sales were $15.8 million compared
to $81.9 million in the second quarter of last year. The decrease for the three
and six month periods was attributable to the termination of the Company's rough
buying operation in Angola during the fourth quarter of fiscal 2000.
GROSS PROFIT
During the six months ended November 30, 2000 gross margin on net polished sales
was 15.1% compared to 20.2% in the same period last year. For the three months
ended November 30, 2000, gross margin on net polished sales was 14.2 % compared
to 21.6% in the second quarter of last year. The decrease in polished gross
margin percentage is primarily attributable to lower gross margin on the sale of
smaller stones produced in Russia.
Rough gross margin during the six months ended November 30, 2000 was 2.4%
compared to 2.1% in the same period last year. For the three months ended
November 30, 2000 rough gross margin was 0.7% compared to 2.1% in the prior year
period. The improved gross margin percentage for the six months ended November
30, 2000 reflects cost reductions achieved through the termination of operation
in Angola offset in part by costs associated with the sale of certain residual
inventories during the current quarter.
8
<PAGE>
As a result of the foregoing, overall gross margin (both polished and rough
diamonds) during the six month period ended November 30, 2000 was 11.4% compared
to 8.1% for the same period last year. For the three months ended November 30,
2000, overall gross margin on net sales was 11.5% compared to 7.3% in the second
quarter last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended November
30, 2000 were $12.4 million, compared to $8.7 million for the same period last
year. For the three months ended November 30, 2000, selling, general and
administrative expenses were $6.7 million compared to $5.0 million in the second
quarter last year. These increases were primarily attributable to increased
advertising expenditures, higher compensation and benefits costs (including
selling commissions) and a decrease in foreign exchange gains versus the same
period last year.
LEGAL SETTLEMENT AND RELATED COSTS
In October 1999 the Company settled certain litigation which was commenced
against it and other related parties. The total cost of the settlement to the
Company was $5,048,000, including related legal and other expenses.
INTEREST EXPENSE
Net interest expense for the six month period ended November 30, 2000 was $2.6
million compared to $1.5 million last year. For the three month period ended
November 30, 2000 net interest expense was $1.2 million compared to compared to
$0.8 million in the second quarter last year. The increase was due to increased
levels of outstanding borrowing compared to the same period last year.
CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING FOR START-UP COSTS
On June 1, 1999 the Company adopted Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities", which requires that start-up costs
capitalized prior to adoption be written off as a cumulative effect of a change
in accounting principle and any future start-up costs be expensed as incurred.
As a result, the Company recorded a non-cash charge of $1,522,000 (net of tax
benefit of $671,000), or $0.18 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at November 30, 2000 was $102.5 million, which was
$4.5 million more than its working capital at May 31, 2000. This increase
primarily reflects the repayment of loans with cash generated by operations.
The Company maintains a $40 million long-term unsecured, revolving loan which it
utilizes for general working capital purposes. It also maintains a $30 million
unsecured line of credit which is primarily used to finance rough inventory
transactions. In addition, the Company has a 1.1 billion Japanese Yen
denominated facility (approximately $10.0 million) which is used in support of
its operations in Japan.
Stockholders' equity was $82.0 million at November 30, 2000 as compared to $82.8
million at May 31, 2000. This decrease primarily reflects the repurchase of $2.3
million of treasury stock offset by earnings during the period. No dividends
were paid to stockholders during the six months ended November 30, 2000.
9
<PAGE>
In December 2000, the Company established an additional $10.0 million unsecured
credit facility which is available for general working capital purposes. The
Company anticipates using this line in support of future polished revenue
growth.
Also during December 2000, the Board of Directors authorized the extension of
the Company's stock repurchase program through April 6, 2002 for the repurchase
of a total of 2 million shares.
The Company believes that it has the ability to meet its current and anticipated
financing needs for the next twelve months.
10
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
Not applicable
PART 2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
None
(B) Reports on Form 8-K
None
11
<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/ William H. Moryto
--------------------------
William H. Moryto
Vice President and
Chief Financial Officer
Dated: January 15, 2001
12
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as................................'TM'
The registered trademark symbol shall be expressed as......................'r'
