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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 AUGUST 31, 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 September 30, 2002, 8,705,745 shares of the registrant's common
stock were outstanding.
Lazare Kaplan International Inc.
Financial Highlights
($ in thousands, except share and per share data)
Three Months Ended
August 31,
(Unaudited)
2002 2001
---------- ----------
Net Sales $ 53,888 $ 51,056
Cost of Sales 48,765 47,456
---------- ----------
Gross Profit 5,123 3,600
Selling, general and administrative expenses 4,625 5,483
Interest expense (net) 158 775
---------- ----------
4,783 6,258
---------- ----------
Income / (loss) before income taxes 340 (2,658)
---------- ----------
Income tax expense / (benefit) 136 (995)
---------- ----------
Net Income / (Loss) $ 204 $ (1,663)
========== ==========
Earnings / (Loss) per share:
Basic earnings / (loss) per share $ 0.02 $ (0.23)
========== ==========
Average number of shares outstanding during
the period 8,705,303 7,367,691
========== ==========
Diluted earnings / (loss) per share $ 0.02 $ (0.23)
========== ==========
Average number of shares outstanding during
the period assuming dilution 8,756,755 7,367,691
========== ==========
See notes to consolidated financial statements.
2
Consolidated Balance Sheets
(in thousands, except share data)
August 31, May 31,
(Unaudited) (Audited)
2002 2002
-------- --------
ASSETS:
Cash and cash equivalents $ 1,681 $ 1,102
Accounts and notes receivable-net 51,896 45,469
Inventories (net) - rough diamonds 6,427 9,468
- polished diamonds 68,865 64,833
Prepaid expenses and other current assets 6,002 6,058
Deferred taxes 2,279 2,319
-------- --------
Total Current Assets 137,150 129,249
-------- --------
Non-current assets - net 9,673 9,783
Deferred taxes (net) 8,862 8,955
-------- --------
Total Assets $155,685 $147,987
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Accounts payable and other current liabilities $ 43,474 $ 45,792
-------- --------
Total Current Liabilities 43,474 45,792
-------- --------
Long-term debt 21,961 12,089
-------- --------
Total Liabilities 65,435 57,881
-------- --------
Stockholders' Equity:
Preferred stock, par value $.01 per share
Authorized 1,500,000 shares;
no shares outstanding - -
Common stock, par value $1 per share
Authorized 12,000,000; issued 8,705,745 and 8,704,860
in August and May 2002, respectively 8,706 8,705
Additional paid-in capital 61,572 61,567
Cumulative translation adjustment (281) (215)
Retained earnings 20,253 20,049
-------- --------
Total Stockholders' equity 90,250 90,106
-------- --------
Total Liabilities and Stockholders' Equity $155,685 $147,987
======== ========
See notes to consolidated financial statements.
3
Consolidated Statements of Cash Flows
(Amounts in thousands)
Three Months Ended
August 31,
(Unaudited)
2002 2001
------- --------
Cash Flows From Operating Activities:
Net income / (loss) $ 204 $ (1,663)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 292 390
Provision for uncollectible accounts 30 (87)
Deferred income taxes 133 (904)
Changes in operating assets and liabilities:
Accounts and notes receivable (6,457) 1,456
Rough and Polished inventories (991) (10,551)
Prepaid expenses and other current assets 56 883
Other (165) 61
Accounts payable and other current liabilities (2,318) (3,016)
------- --------
Net cash used in operating activities (9,216) (13,431)
------- --------
Cash Flows From Investing Activities:
Capital expenditures (17) (52)
------- --------
Net cash used in investing activities (17) (52)
------- --------
Cash Flows From Financing Activities:
Increase in short-term borrowings - 13,882
Increase in long-term borrowings 9,872 92
Proceeds from issuance of common stock 1 -
Proceeds from exercise of stock options 5 -
------- --------
Net cash provided by financing activities 9,878 13,974
------- --------
Effect of foreign currency translation adjustment (66) (71)
------- --------
Net increase in cash 579 420
Cash at beginning of year 1,102 1,128
------- --------
Cash at end of period $ 1,681 $ 1,548
======= ========
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
for the three months ended August 31, 2002 and 2001 and its financial position
as of August 31, 2002.
The balance sheet at May 31, 2002 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, 2002. 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 August 31, 2002 is
approximately $11,274,000 less a valuation allowance of approximately $133,000
resulting in a net deferred tax asset of $11,141,000.
At August 31, 2002 the Company has available U.S. net operating losses of $26.1
million, which expire as follows (in thousands):
Year Net Operating Losses
---- --------------------
2007 $ 41
2008 926
2010 371
2012 406
2013 2,097
2019 12,268
2020 298
2021 120
2022 9,560
-------
$26,087
-------
5
3. 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.
4. 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 August 31, 2002 and 2001, total comprehensive income/(loss)
was $138,000 and $(1,734,000), respectively.
5. Lines of Credit
The Company entered into a new long-term unsecured, revolving loan
agreement in August 2002. The new agreement provides that the Company may borrow
up to $30 million in the aggregate through December 1, 2004. The loan term may
be extended in one year increments commencing November 30, 2003, subject to the
consent of the lending banks. Borrowings under this agreement bear interest at
(a) the higher of the banks base rate or one half of one percent above the
Federal Funds Effective Rate, or (b) 160 basis points above LIBOR. The
applicable interest rate is contingent upon the method of borrowing selected by
the Company. The proceeds of this facility are available for working capital
purposes. The loan agreement contains certain provisions that require, among
other things, (a) maintenance of defined levels of working capital, net worth
and profitability, (b) limitations on borrowing levels, investments and capital
expenditures and (c) limitations on dividends and the repurchase of treasury
shares. There were no borrowings under the loan agreement during the three
months ended August 31, 2002. The proceeds of this facility are available for
the Company's working capital needs.
The Company also has a $15 million and a $25 million unsecured,
uncommitted line of credit with a bank. Borrowings under the $15 million line
bear interest at a rate 150 basis points above the bank's base rate. Borrowings
under the $25 million line bear interest at a rate 160 basis points above the 90
day LIBOR. Borrowings under these lines are available for the Company's working
capital requirements and are payable on demand. Outstanding borrowings under
these lines amounted to approximately $12.8 million at August 31, 2002.
A subsidiary of the Company maintains a loan facility that enables it
to borrow up to 1.1 billion Japanese yen (approximately $9.2 million outstanding
at August 31, 2002) at an interest rate 1% above Japanese LIBOR through November
2003. The loan contains provisions that, among other things, require the Company
to maintain a minimum debt to equity ratio. Borrowings under the facility are
available for general working capital purposes and are guaranteed by the
Company.
6
6. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets ("Statement
142"). Statement 142 changes the accounting for goodwill and other indefinite
lived intangible assets from an amortization method to an impairment-only
approach. For the Company, the pronouncement is effective June 1, 2002. As a
result, the Company ceased amortization of goodwill and other indefinite lived
intangible assets on June 1, 2002. Had the Company been accounting for its
goodwill and other indefinite lived assets under SFAS No. 142 for the prior
year, the Company's net loss for the quarter ended August 31, 2001 would have
been reduced by approximately $32,000, which represents amortization expense net
of tax. Loss per share for the period ended August 31, 2001 would have remained
at $0.23.
The Company is currently evaluating whether its goodwill and its
indefinite lived intangible assets are impaired and expects to complete
impairment testing no later than November 30, 2002. Any resulting asset
impairment will be recorded as a cumulative effect of a change in accounting
principle as of June 1, 2002. At August 31, 2002 unamortized goodwill amounted
to approximately $1.5 million and is included in non-current assets.
7
7. Geographic Segment Information
Revenue, gross profit and income/(loss) before income taxes for the three months
ended August 31, 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
-------------------------------------------------------------------------
Three months ended August 31, 2002
Net sales to unaffiliated customers $ 27,695 $23,340 $ - $2,853 $ - $ 53,888
Transfers between geographic areas 2,592 - (2,592) -
-------------------------------------------------------------------------
Total revenue $ 30,287 $23,340 $ - $2,853 $(2,592) $ 53,888
=========================================================================
Gross Profit $ 4,199 $ 292 $ - $ 632 $ - $ 5,123
=========================================================================
Income/(loss) before income taxes $ 442 $ 7 $ (6) $ (103) $ - $ 340
=========================================================================
Identifiable assets at August 31, 2002 $136,752 $ 3,068 $7,125 $8,822 $ (82) $155,685
=========================================================================
- -------------------------------------------------------------------------------------------------------------------------
North Far Elimi- Consoli-
America Europe Africa East nations dated
-------------------------------------------------------------------------
Three months ended August 31, 2001
Net sales to unaffiliated customers $ 28,381 $19,631 $ - $3,044 $ - $ 51,056
Transfers between geographic areas 8,837 - - - (8,837) -
-------------------------------------------------------------------------
Total revenue $ 37,218 $19,631 $ - $3,044 $(8,837) $ 51,056
=========================================================================
Gross Profit $ 2,646 $ 410 $ - $ 544 $ - $ 3,600
=========================================================================
Income/(loss) before income taxes $ (2,271) $ 122 $ (283) $ (226) $ - $ (2,658)
=========================================================================
Identifiable assets at August 31, 2001 $152,567 $ 9,076 $13,954 $9,686 $ (141) $185,142
=========================================================================
- -------------------------------------------------------------------------------------------------------------------------
8
7. Geographic Segment Information (continued)
Revenue and gross profit for the three months ended August 31, 2002 and 2001
classified by product were as follows (in thousands):
Polished Rough
diamonds diamonds Total
------------ ------------ ------------
Three months ended August 31, 2002
Net Sales $31,397 $22,491 $53,888
------------ ------------ ------------
Gross Profit $ 4,298 $ 825 $ 5,123
------------ ------------ ------------
Three months ended August 31, 2001
Net Sales $37,223 $13,833 $51,056
------------ ------------ ------------
Gross Profit $ 3,448 $ 152 $ 3,600
------------ ------------ ------------
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, 2002. 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 three months ended August 31, 2002 were $53.9
million compared to $51.1 million in sales during the comparable period last
year.
Revenue from the sale of polished diamonds was $31.4 million for the
three months ended August 31, 2002 compared to $37.2 million in the comparable
period last year. The decrease in polished sales primarily reflects softness in
consumer demand attributable to difficult financial conditions in the United
States and Southeast Asia.
Rough diamond sales were $22.5 million for the three months ended
August 31, 2002 compared to $13.8 million in the comparable period last year.
The increase from the prior year is attributable to increased sourcing of rough
diamonds.
Gross Profit
During the three months ended August 31, 2002 gross margin on net
polished sales was $4.3 million, or 13.7%, compared to $3.4 million, or 9.3%, in
the comparable period last year. The increase in gross margin is primarily
attributable to a shift in mix toward the sale of larger, higher margin stones
as compared to the same period last year. Rough gross margin during the three
months ended August 31, 2002 was 3.7% compared to 1.1% in the same period last
year. The increase in rough gross margin percentage primarily reflects a
recovery of trading margins to levels in line with the Company's historical
experience. As a result of the foregoing, overall gross margin percentage
increased to 9.5% in the current period compared to 7.1% for the same period
last year.
10
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
August 31, 2002 were $4.6 million, compared to $5.5 million for the same period
last year. This decrease is primarily attributable to cost reduction efforts by
management.
Interest Expense
Net interest expense for the three month period ended August 31, 2002
was $158,000 compared to $775,000 for the prior year. The decrease was due to
reduced levels of borrowing and lower interest rates during the current period
compared to the same period last year.
Income Tax
The Company's effective tax rate for the three months ended August 31,
2002 was 40.0% compared to 37.4% in the same period last year. This increase is
primarily attributable to increased income in higher tax rate jurisdictions.
Liquidity and Capital Resources
The Company's working capital at August 31, 2002 was $93.7 million,
which was $10.3 million greater than its working capital at May 31, 2002. This
increase primarily reflects higher accounts receivable funded by noncurrent
borrowings.
The Company maintains a $30 million long-term unsecured, revolving
credit facility that it utilizes for general working capital purposes. It also
maintains $40 million of uncommitted lines of credit (approximately $12.8
million outstanding at August 31, 2002) that are used to finance rough inventory
transactions and other working capital needs. In addition, the Company has a 1.1
billion Yen denominated facility (approximately $9.2 million outstanding at
August 31, 2002) that is used in support of its operations in Japan.
Stockholders' equity was $90.3 million at August 31, 2002 as compared
to $90.1 million at May 31, 2002. No dividends were paid to stockholders during
the three months ended August 31, 2002.
The Company believes that it has the ability to meet its current and
anticipated financing needs for the next twelve months.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets ("Statement
142"). Statement 142 changes the accounting for goodwill and other indefinite
lived intangible assets from an amortization method to an impairment-only
approach. For the Company, the pronouncement is effective June 1, 2002. As a
result, the Company ceased amortization of goodwill and other indefinite lived
intangible assets on June 1, 2002. Had the Company been accounting for its
goodwill and other indefinite lived assets under SFAS No. 142 for the prior
year, the Company's net loss for the quarter ended August 31, 2001 would have
been reduced by approximately $32,000, which represents amortization expense net
of tax. Loss per share for the period ended August 31, 2001 would have remained
at $0.23.
11
The Company is currently evaluating whether its goodwill and its
indefinite lived intangible assets are impaired and expects to complete
impairment testing no later than November 30, 2002. Any resulting asset
impairment will be recorded as a cumulative effect of a change in accounting
principle as of June 1, 2002. At August 31, 2002 unamortized goodwill amounted
to approximately $1.5 million and is included in non-current assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
At August 31, 2002, the Company had borrowings totaling approximately $22.0
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.
ITEM 4. CONTROLS AND PROCEDURES
As of August 31, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were effective as of August 31, 2002. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to August 31, 2002.
PART 2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
(99.1) Certification of Leon Tempelsman, Vice Chairman of the Board
and President, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(99.2) Certification of William H. Moryto, Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(B) Reports on Form 8-K
None
12
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: October 11, 2002
13
I, Leon Tempelsman, Certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lazare
Kaplan International Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report
(the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function);
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 11, 2002 By: /s/ Leon Tempelsman
--------------------
Leon Tempelsman
(Chief Executive Officer)
14
I, Wiliam H. Moryto, Certify that:
1. I have reviewed this quarterly report on Form 10-Q of Lazare
Kaplan International Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report
(the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function);
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 11, 2002 By: /s/ William H. Moryto
---------------------
William H. Moryto
(Chief Financial Officer)
15