10-Q 1 a32458.txt LAZARE KAPLAN INT'L INC. FORM 10-Q UNITED STATES 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 FEBRUARY 28, 2002. 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 26, 2002, 8,702,476 shares of the registrant's common stock were outstanding. PART 1 - FINANCIAL INFORMATION ITEM 1 Financial Statements Consolidated Statements of Operations (in thousands except share and per share data)
Three Months Ended Nine Months Ended February 28, February 28, (Unaudited) (Unaudited) 2002 2001 2002 2001 ---------- ---------- ----------- ---------- Net sales $ 48,291 $ 55,064 $ 145,801 $ 210,956 Cost of sales 42,460 48,129 131,362 186,301 ---------- ---------- ----------- ---------- Gross profit 5,831 6,935 14,439 24,655 Selling, general and administrative expenses 4,927 5,481 14,927 17,832 Interest expense (net) 467 980 2,004 3,555 ---------- ---------- ----------- ---------- 5,394 6,461 16,931 21,387 ---------- ---------- ----------- ---------- Income / (loss) before taxes 437 474 (2,492) 3,268 ---------- ---------- ----------- ---------- Income tax (benefit) / expense 151 224 (860) 1,260 ---------- ---------- ----------- ---------- Net Income / (Loss) $ 286 $ 250 $ (1,632) $ 2,008 ========== ========== =========== ========== Earnings / (Loss) per share: Basic earnings / (loss) per share $ 0.04 $ 0.03 $ (0.22) $ 0.26 ========== ========== =========== ========== Average number of shares outstanding during the period 7,701,596 7,497,616 7,501,253 7,744,163 ========== ========== =========== ========== Diluted earnings / (loss) per share $ 0.04 $ 0.03 $ (0.22) $ 0.26 ========== ========== =========== ========== Average number of shares outstanding during the period assuming dilution 7,766,998 7,511,080 7,501,253 7,765,973 ========== ========== =========== ==========
See Notes to Consolidated Financial Statements. 2 Consolidated Balance Sheets (in thousands, except share data)
February 28, May 31, 2002 2001 (Unaudited) (Note 1) --------- --------- ASSETS: Cash and cash equivalents $ 1,151 $ 1,128 Accounts receivable-net 54,783 60,436 Inventories - rough diamonds 21,024 16,541 - polished diamonds 56,938 67,103 Prepaid expenses and other current assets 4,644 8,016 Deferred taxes 4,779 4,512 --------- --------- Total Current Assets 143,319 157,736 --------- --------- Non-current assets - net 10,855 12,027 Deferred taxes 6,660 6,155 --------- --------- Total Assets $ 160,834 $ 175,918 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY: Liabilities: Accounts payable and other current liabilities $ 45,130 $ 44,287 Notes payable - other and current portion of long-term debt - 12,071 --------- --------- Total Current Liabilities 45,130 56,358 --------- --------- Long-term debt 25,972 39,626 --------- --------- Total Liabilities 71,102 95,984 --------- --------- Stockholders' Equity: Preferred stock, par value $.01 per share Authorized 1,500,000 and 5,000,000 shares in February 2002 and May 2001, respectively; no shares outstanding - - Common stock, par value $1 per share Authorized 12,000,000 and 20,000,000 shares; issued 8,702,476 and 8,549,441 in February 2002 and May 2001, respectively 8,702 8,549 Additional paid-in capital 61,555 58,213 Cumulative translation adjustment (168) (118) Retained earnings 19,643 21,275 --------- --------- 89,732 87,919 Less treasury stock 1,181,750 shares at cost - (7,985) --------- --------- Total Stockholders' Equity 89,732 79,934 --------- --------- Total Liabilities and Stockholders' Equity $ 160,834 $ 175,918 ========= =========
See Notes to Consolidated Financial Statements. 3 Consolidated Statements of Cash Flows (in thousands)
Nine Months Ended February 28, 2002 2001 -------- -------- (Unaudited) Cash Flows From Operating Activities: Net income / (loss) $ (1,632) $ 2,008 Adjustments to reconcile net income / (loss) to net cash provided by operating activities: Depreciation and amortization 991 1,122 Provision for uncollectible accounts (166) 234 Deferred income taxes (772) 985 Changes in operating assets and liabilities: Accounts receivable 5,819 9,123 Inventories 5,682 9,996 Prepaid expenses and other current assets 3,372 3,131 Non-current assets 292 5,199 Accounts payable and other current liabilities 843 (6,139) -------- -------- Net cash provided by operating activities 14,429 25,659 -------- -------- Cash Flows From Investing Activities: Capital expenditures (111) (1,155) -------- -------- Net cash used in investing activities (111) (1,155) -------- -------- Cash Flows From Financing Activities: Decrease in short-term borrowings (12,071) (26,751) Increase/(decrease) in long-term borrowings (13,654) 2,598 Purchase of treasury stock - (4,096) Proceeds from issuance of common stock 1,125 Proceeds from sale of treasury stock, net 10,351 Proceeds from exercise of stock options 4 37 -------- -------- Net cash used in financing activities (14,245) (28,212) -------- -------- Effect of foreign currency translation adjustment (50) (339) -------- -------- Net increase / (decrease) in cash 23 (4,047) Cash at beginning of year 1,128 7,254 -------- -------- Cash at end of period $ 1,151 $ 3,207 ======== ========
See Notes to Consolidated Financial Statements 4 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 (consisting of normal recurring accruals) necessary to present fairly Lazare Kaplan International Inc.'s operating results and its financial position. The balance sheet at May 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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, 2001. The operating results for the interim periods presented are not necessarily indicative of the operating results for a full year. Certain prior year amounts have been reclassified to conform to current year presentation. 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 February 28, 2002 is approximately $11,691,000 less a valuation allowance of approximately $252,000 resulting in a net deferred tax asset of $11,439,000. At February 28, 2002 the Company has available U.S. net operating losses of $14.6 million, which expire as follows (in thousands):
Year Amount ---- ------- 2013 $ 2,054 2019 12,268 2020 298 ------- $14,620 =======
3. Sale of Common Stock In February 2002 the Company sold 1,305,000 shares of its common stock, consisting of 1,180,000 of previously repurchased treasury shares and 125,000 authorized but unissued shares, in a private transaction. Proceeds from the sale, approximately $11.5 million (net of costs), were used to pay down bank debt and for other general corporate purposes. During the nine months 5 ended February 28, 2002 the Company made approximately $1.0 million of sales to entities affiliated with the investor. 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 three months ended February 28, 2002 and 2001, total comprehensive income was $312,000 and $196,000, respectively. For the nine months ended February 28, 2002 and 2001, total comprehensive income/(loss) was $(1,682,000) and $1,669,000, respectively. 6. Lines of Credit In October 2001, the Company amended certain terms of its $40 million long-term unsecured, revolving loan agreement. The amendment extends the term of the loan through September 1, 2003. The loan agreement contains provisions that require, among other things, (a) maintenance of defined levels of working capital, annual cash flow and earnings, (b) limitations on borrowing levels, capital expenditures, and rental obligations, and (c) limitations on restricted payments, including dividends. Interest on borrowings is a function of either the bank's prime rate, its cost of funds or the London Interbank Offered Rate (LIBOR) and varies depending on the term and method of borrowing selected by the Company. The weighted average interest rate on outstanding borrowings under the loan agreement at February 28, 2002 was 3.96%. The proceeds of this facility are available for the Company's working capital needs. In November 2001, a subsidiary of the Company amended its 1.1 billion Japanese yen loan facility extending its term through November 2003. Borrowings under this facility bear interest at 1% above Japanese LIBOR and are available for general working capital purposes. Repayment of amounts borrowed is guaranteed by the Company. 6 7. Geographic Segment Information Revenue, gross profit and income/(loss) before income taxes for the three months ended February 28, 2002 and 2001 classified by geographic area, which was determined by where sales originated from as follows (in thousands):
North Far Elimi- Consoli- America Europe Africa East nations dated ------------------------------------------------------------------------- Three months ended February 28, 2002 Net sales to unaffiliated customers $ 30,464 $ 15,082 $ (156) $ 2,901 $ - $ 48,291 Transfers between geographic areas 7,782 24 - - (7,806) - ------------------------------------------------------------------------- Total revenue $ 38,246 $ 15,106 $ (156) $ 2,901 $ (7,806) $ 48,291 ========================================================================= Gross Profit $ 5,161 $ 301 $ (175) $ 544 $ - $ 5,831 ========================================================================= Income/(loss) before income taxes $ 910 $ 65 $ (336) $ (202) $ - $ 437 ========================================================================= ---------------------------------------------------------------------------------------------------------------------
North Far Elimi- Consoli- America Europe Africa East nations dated ------------------------------------------------------------------------- Three months ended February 28, 2001 Net sales to unaffiliated customers $ 23,177 $ 19,062 $ 9,052 $ 3,773 $ - $ 55,064 Transfers between geographic areas 8,459 6,169 - - (14,628) - ------------------------------------------------------------------------- Total revenue $ 31,636 $ 25,231 $ 9,052 $ 3,773 $(14,628) $ 55,064 ========================================================================= Gross Profit $ 3,703 $ 781 $ 1,907 $ 544 $ - $ 6,935 ========================================================================= Income/(loss) before income taxes $ (1,130) $ 432 $ 1,596 $ (424) $ - $ 474 ========================================================================= ---------------------------------------------------------------------------------------------------------------------
7 7. Geographic Segment Information (continued) Revenue, gross profit and income/(loss) before income taxes for the nine months ended February 28, 2002 and 2001 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):
North Far Elimi- Consoli- America Europe Africa East nations dated ------------------------------------------------------------------------- Nine months ended February 28, 2002 Net sales to unaffiliated customers $ 86,197 $ 50,352 $ (156) $ 9,408 $ - $145,801 Transfers between geographic areas 29,976 98 - - (30,074) - ------------------------------------------------------------------------- Total revenue $116,173 $ 50,450 $ (156) $ 9,408 $(30,074) $145,801 ========================================================================= Gross Profit $ 11,781 $ 1,012 $ (177) $ 1,823 $ - $ 14,439 ========================================================================= Income/(loss) before income taxes $ (1,559) $ 350 $ (759) $ (524) $ - $ (2,492) ========================================================================= Identifiable assets at February 28, 2002 $135,481 $ 6,253 $ 10,931 $ 8,286 $ (117) $160,834 ========================================================================= ---------------------------------------------------------------------------------------------------------------------
North Far Elimi- Consoli- America Europe Africa East nations dated ------------------------------------------------------------------------- Nine months ended February 28, 2001 Net sales to unaffiliated customers $ 97,133 $ 89,298 $ 12,093 $ 12,432 $ - $210,956 Transfers between geographic areas 32,695 23,394 - 461 (56,550) - ------------------------------------------------------------------------- Total revenue $129,828 $112,692 $ 12,093 $ 12,893 $(56,550) $210,956 ========================================================================= Gross Profit $ 18,329 $ 2,225 $ 2,217 $ 1,884 $ - $ 24,655 ========================================================================= Income/(loss) before income taxes $ 2,995 $ 438 $ 1,364 $ (1,529) $ - $ 3,268 ========================================================================= Identifiable assets at February 28, 2001 $133,957 $ 10,144 $ 14,440 $ 11,559 $ (144) $169,956 ========================================================================= ---------------------------------------------------------------------------------------------------------------------
8 7. Geographic Segment Information (continued) Revenue and gross profit for the three months ended February 28, 2002 and 2001 classified by product were as follows (in thousands):
Polished Rough diamonds diamonds Total -------- ------- -------- Three months ended February 28, 2002 Net Sales $ 39,162 $ 9,129 $ 48,291 ======== ======= ======== Gross Profit $ 5,562 $ 269 $ 5,831 ======== ======= ======== Three months ended February 28, 2001 Net Sales $ 41,085 $13,979 $ 55,064 ======== ======= ======== Gross Profit $ 6,628 $ 307 $ 6,935 ======== ======= ========
Revenue and gross profit for the nine months ended February 28, 2002 and 2001 classified by product were as follows (in thousands):
Polished Rough diamonds diamonds Total -------- ------- -------- Nine months ended February 28, 2002 Net Sales $116,546 $29,255 $145,801 ======== ======= ======== Gross Profit $ 14,053 $ 386 $ 14,439 ======== ======= ======== Nine months ended February 28, 2001 Net Sales $150,712 $60,244 $210,956 ======== ======= ======== Gross Profit $ 23,222 $ 1,433 $ 24,655 ======== ======= ========
9 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, 2001. 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, 2002 were $145.8 million compared to $211.0 million during the same period last year. For the three month period ended February 28, 2002 net sales were $48.3 million compared to $55.1 million in the third quarter of last year. Revenue from the sale of polished diamonds was $116.5 million for the nine months ended February 28, 2002 compared to $150.7 million in the same period last year. For the three month period ended February 28, 2002, polished diamond sales were $39.2 million compared to $41.1 million in the third quarter last year. The decrease in polished sales for the three and nine month periods was primarily due to a softening of consumer demand resulting from recessionary conditions existing in the United States and Southeast Asia. Rough diamond sales were $29.3 million for the nine months ended February 28, 2002 compared to $60.2 million in the same period last year. For the three months ended February 28, 2002, rough diamond sales were $9.1 million compared to $14.0 million in the third quarter of last year. The decrease for the three and nine month periods is attributable to reduced rough buying in response to perceived softness in market demand. Gross Profit During the nine months ended February 28, 2002 gross margin on net polished sales was 12.1% compared to 15.4% in the same period last year. For the three months ended February 28, 2002, gross margin on net polished sales was 14.2 % compared to 16.1 % in the third quarter of last year. The decrease in polished gross margin percentage is primarily attributable to pricing pressure resulting from recessionary conditions existing in the United Sates and Southeast Asia and efforts by the Company to liquidate slower moving inventory. Rough gross margin during the nine month period ended February 28, 2002 was 1.3% compared to 2.4% in the same period last year. This decrease primarily reflects a softening of market demand for categories of stones that the Company normally sells in rough form. 10 As a result of the foregoing, overall gross margin (both polished and rough diamonds) during the nine month period ended February 28, 2002 was 9.9% compared to 11.7% for the same period last year. For the three months ended February 28, 2002, overall gross margin on net sales was 12.1% compared to 12.6% in the third quarter last year. Included in the above mentioned decrease is a partial recovery associated with inventory resulting in approximately 0.3% increase in gross margin for the nine month period ended February 28, 2002. Selling, General and Administrative Expenses Selling, general and administrative expenses for the nine months ended February 28, 2002 were $14.9 million, compared to $17.8 million for the same period last year. For the three months ended February 28, 2002, selling, general and administrative expenses were $4.9 million compared to $5.5 million in the third quarter last year. These decreases were primarily attributable to cost reduction programs instituted during the year. Interest Expense Net interest expense for the nine month period ended February 28, 2002 was $2.0 million compared to $3.6 million last year. For the three month period ended February 28, 2002 net interest expense was $0.5 million compared to $1.0 million in the third quarter last year. The decrease was primarily attributable to reduced levels of borrowing and lower interest rates during the current period. Income Tax The Company's effective tax rate for the three months ended February 28, 2002 was 34.5% compared to 47.3% for the same period in the prior year, and 34.6% compared to 38.6% for the nine months ended February 28, 2002 and 2001. The decrease is primarily attributable to favorable tax rates applicable to certain foreign operations. Liquidity and Capital Resources The Company's working capital at February 28, 2002 was $98.2 million, which was $3.2 million less than its working capital at May 31, 2001. The Company maintains a $40 million long-term unsecured, revolving loan which it utilizes for general working capital purposes. It also maintains a $40 million unsecured line of credit which is primarily used to finance inventory transactions. In addition, the Company has a 1.1 billion Japanese Yen denominated facility (approximately $8.1 million at February 28, 2002) which is used in support of its operations in Japan. Outstanding borrowings under these lines at February 28, 2002 amounted to approximately $26.0 million. Stockholders' equity was $89.7 million at February 28, 2002 as compared to $79.9 million at May 31, 2001. This increase was primarily attributable to the sale of 125,000 newly issued shares and 1,180,000 treasury shares during February 2002. As a result of this transaction, stockholders' equity increased approximately $11.5 million (net of expenses). No dividends were paid to stockholders during the nine months ended February 28, 2002. 11 The Company believes that it has the ability to meet its current and anticipated financing needs for the next twelve months. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK At February 28, 2002, the Company had borrowings totaling approximately $26.0 million outstanding under various credit agreements. The interest rates on these borrowings are variable and therefore the general level of U.S. and foreign interest rates affects interest expense. Increases in interest expense resulting from an increase in interest rates could impact the Company's results of operations. The Company's policy is to take actions that would mitigate such risk when appropriate. These actions include staggering the term and rate of its borrowings to match anticipated cash flows and movements in interest rates. PART 2 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits None (B) Reports on Form 8-K The Company filed a Current Report on Form 8-K, responding to Item 5 - "Other Events", on January 18, 2002. 13 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: April 12, 2002 14