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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 NOVEMBER 30, 2003.
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.)
19 West 44th Street, New York, NY 10036
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of December 22, 2003, 8,497,248 shares of the registrant's common stock
were outstanding.
LAZARE KAPLAN INTERNATIONAL INC.
Index
Page
-------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated income statements
Three and six months ended November 30, 2003 and 2002 3
Consolidated balance sheets
November 30, 2003 and May 31, 2003 4
Consolidated statements of cash flows
Six months ended November 30, 2003 and 2002 5
Notes to consolidated financial statements
November 30, 2003 6 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 14
Item 3. Quantitative and Qualitative Disclosure of Market Risk 15
Item 4. Controls and Procedures 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
CONSOLIDATED INCOME STATEMENTS
- --------------------------------------------------------------------------------
(In thousands, except per share and per share data)
Three Months Ended Six Months Ended
----------------------- -----------------------
November 30, (unaudited) 2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales $ 52,390 $ 51,747 $ 106,498 $ 105,635
Cost of Sales 46,833 45,449 94,823 94,214
---------- ---------- ---------- ----------
5,557 6,298 11,675 11,421
---------- ---------- ---------- ----------
Selling, general and administrative expenses 5,226 4,701 10,606 9,326
Interest expense, net of interest income 159 123 323 281
---------- ---------- ---------- ----------
5,385 4,824 10,929 9,607
---------- ---------- ---------- ----------
Income before income taxes 172 1,474 746 1,814
Income tax provision 62 544 269 680
---------- ---------- ---------- ----------
Income before cumulative effect of change in accounting
principle 110 930 477 1,134
Cumulative effect of change in accounting principle, net of tax -- -- -- (972)
---------- ---------- ---------- ----------
NET INCOME $ 110 $ 930 $ 477 $ 162
========== ========== ========== ==========
EARNINGS PER SHARE
Basic earnings per share before cumulative effect of change in
accounting principle $ 0.01 $ 0.11 $ 0.06 $ 0.13
========== ========== ========== ==========
Basic earnings per share $ 0.01 $ 0.11 $ 0.06 $ 0.02
========== ========== ========== ==========
Average number of shares outstanding during the period 8,527,040 8,705,745 8,526,771 8,705,492
========== ========== ========== ==========
Diluted earnings per share before cumulative effect of change
in accounting principle $ 0.01 $ 0.11 $ 0.06 $ 0.13
========== ========== ========== ==========
Diluted earnings per share $ 0.01 $ 0.11 $ 0.06 $ 0.02
========== ========== ========== ==========
Average number of shares outstanding during the period
assuming dilution 8,599,946 8,711,042 8,581,275 8,733,867
========== ========== ========== ==========
See notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(In thousands, except share data)
November 30, May 31,
(Unaudited) (Audited)
2003 2003
------------ ---------
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 449 $ 477
Accounts and notes receivable, net 61,462 57,360
Inventories, net
Rough stones 9,811 5,764
Polished stones 79,348 72,473
-------- --------
Total inventories 89,159 78,237
-------- --------
Prepaid expenses and other current assets 6,583 6,124
Deferred tax assets-current 1,414 1,425
-------- --------
TOTAL CURRENT ASSETS 159,067 143,623
Other non-current assets, net 7,887 7,319
Deferred tax assets, net 9,443 9,469
-------- --------
$176,397 $160,411
======== ========
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable and other current liabilities $ 51,815 $ 53,448
-------- --------
TOTAL CURRENT LIABILITIES 51,815 53,448
Long-term debt 33,875 16,756
-------- --------
TOTAL LIABILITIES 85,690 70,204
-------- --------
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 shares; issued 8,707,348
at November and 8,706,514 at May 2003, respectively 8,707 8,707
Additional paid-in capital 61,578 61,575
Cumulative translation adjustment (264) (284)
Retained earnings 21,620 21,143
-------- --------
91,641 91,141
Less treasury stock 180,100 shares at cost (934) (934)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 90,707 90,207
-------- --------
$176,397 $160,411
======== ========
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(In thousands)
Six months ended November 30, (unaudited) 2003 2002
-------- -------
Cash Flows From Operating Activities:
Net income $ 477 $ 162
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 592 838
Provision for uncollectible accounts 30 60
Deferred income taxes 37 172
Cumulative effect of change in method of accounting -- 972
Changes in operating assets and liabilities:
Accounts receivable (4,132) (3,594)
Rough and Polished inventories (10,922) 3,382
Prepaid expenses and other current assets (459) (529)
Other assets 86 362
Accounts payable and other current liabilities (1,633) (2,592)
-------- -------
Net cash used in operating activities (15,924) (767)
======== =======
Cash Flows From Investing Activities:
Capital expenditures (1,249) (41)
-------- -------
Net cash used in investing activities (1,249) (41)
======== =======
Cash Flows From Financing Activities:
Increase in long-term borrowings 17,119 554
Proceeds from exercise of stock options 3 6
-------- -------
Net cash provided by financing activities 17,122 560
======== =======
Effect of foreign currency translation adjustment 23 (20)
-------- -------
Net decrease in cash and cash equivalents (28) (268)
Cash and cash equivalents at beginning of period 477 1,102
-------- -------
Cash and cash equivalents at end of period $ 449 $ 834
======== =======
See Notes to Consolidated Financial Statements
5
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 Securities Exchange 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 and six months ended
November 30, 2003 and 2002 and its financial position as of November 30, 2003.
The balance sheet at May 31, 2003 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, 2003. The
operating results for the interim periods presented are not necessarily
indicative of the operating results for a full year.
2. Stock Incentive Plans
The Company accounts for stock options granted to employees and directors
under the Plan in accordance with Accounting Principles Board Opinion No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for stock option awards. Had compensation cost been determined in accordance
with Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", the Company's income and
income per common share would have been as follows:
Three Months Ended Six Months Ended
------------------ ----------------
November 30, 2003 2002 2003 2002
(In thousands, except per share data) ----- ----- ----- -----
Net income as reported $ 110 $ 930 $ 477 $ 162
Less:
Stock-based employee compensation,
net of taxes (77) (92) (154) (184)
----- ----- ----- -----
Pro forma $ 33 $ 838 $ 323 $ (22)
----- ----- ----- -----
Earnings per share:
As reported:
Basic $0.01 $0.11 $0.06 $0.02
Diluted $0.01 $0.11 $0.06 $0.02
===== ===== ===== =====
Pro forma:
Basic $ -- $0.10 $0.04 $ --
Diluted $ -- $0.10 $0.04 $ --
===== ===== ===== =====
6
3. Accounting Policies and New Pronouncements
From time to time the Company retains an economic interest in the future
profits and losses of rough diamonds it sells to certain third parties. In such
situations, the Company defers recognition of sales until the diamonds are
resold and profit or loss is determinable.
Where the Company believes profitability can be maximized, the Company may
combine, and jointly sell, certain of its rough stones with those of other
wholesalers. Under certain circumstances, primarily related to foreign sales,
the wholesaler assumes responsibility for billing and collection efforts. While
the ultimate sales are made to multiple third parties the resulting accounts
receivable are aggregated for purposes of determining concentration of credit
risk.
In January 2003, the Financial Accounting Standards Board issued and,
in December 2003, revised Financial Interpretation No.46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. This
Interpretation applies to all Variable Interest Entities. Adoption is
required for public companies at the end of periods ending after December 15,
2003. The Company has not yet determined the effect of this Interpretation on
its financial position and results of operations.
4. 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, 2003 is approximately $10,990,000 less a valuation allowance of
approximately $133,000 resulting in a net deferred tax asset of $10,857,000.
At November 30, 2003 the Company has available U.S. net operating loss
carryforwards of $27.2 million, which expire as follows (in thousands):
Net Operating
Year Losses
- ---- -------------
2010 $ 66
2012 405
2013 3,881
2014 12,268
2015 298
2016 120
2017 10,190
-------
$27,228
=======
7
5. 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.
Three Months Ended Six Months Ended
--------------------- ---------------------
November 30, (unaudited) 2003 2002 2003 2002
--------- --------- --------- ---------
Average number of shares outstanding
during the period 8,527,040 8,705,745 8,526,771 8,705,492
Effect of dilutive stock options 72,906 5,297 54,504 28,375
--------- --------- --------- ---------
Average number of shares outstanding
during the period assuming dilution 8,599,946 8,711,042 8,581,275 8,733,867
========= ========= ========= =========
6. 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 November 30, 2003 and 2002, total comprehensive income was
$141,000 and $976,000, respectively. For the six months ended November 30, 2003
and 2002, total comprehensive income was $497,000 and $142,000, respectively.
7. Lines of Credit
The Company has a long-term unsecured, revolving loan agreement under which
it may borrow up to $30 million in the aggregate through December 1, 2005. The
loan term may be extended in one year increments commencing November 30, 2004,
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. Borrowings under this loan agreement amounted to $10.0 million
at November 30, 2003.
The Company also has a $15 million and a $25 million unsecured, uncommitted
lines of credit with a bank. Borrowings under both lines 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
8
requirements and are payable on demand. Outstanding borrowings under these lines
amounted to approximately $17.1 million at November 30, 2003.
A subsidiary of the Company maintains a loan facility that enables it to
borrow up to 1.1 billion Japanese yen (approximately $6.8 million outstanding at
November 30, 2003) at an interest rate 1% above Japanese LIBOR through December
1, 2005. 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.
8. Cumulative Effect of Change in Accounting Principle
On June 1, 2002 the Company adopted Financial Accounting Standards Board
Standard No. 142, Goodwill and Other Intangible Assets ("Statement 142"). As a
result, the Company ceased amortization of goodwill and other indefinite lived
intangible assets. Under the transition provision of Statement 142 the Company
completed its evaluation of goodwill and indefinite lived assets during the
quarter ended November 30, 2002, using a discounted cash flow methodology. As a
result of testing goodwill impairment in accordance with Statement 142, as of
June 1, 2002, the Company recorded a non-cash charge of approximately $1.5
million ($972,000 after tax, or $0.11 per share), which has been reported under
the caption "Cumulative Effect of a Change in Accounting Principle. The charge
relates to the Company's operations in Japan (Far East Segment).
9
9. Segment Information
GEOGRAPHIC SEGEMENT INFORMATION
- --------------------------------------------------------------------------------
(In thousands)
Revenue, gross profit and income/(loss) before income taxes for the three months
ended November 30, 2003 and 2002 classified by geographic area, which was
determined by where sales originated, were as follows (in thousands):
North Far Elimi- Consoli-
America Europe Africa East nations dated
------- ------- ------ ------ -------- --------
Three months ended November 30, 2003
Net sales to unaffiliated customers $24,110 $24,084 $ -- $4,196 $ -- $52,390
Transfers between geographic areas 10,743 1,130 -- -- (11,873) --
------- ------- ----- ------ -------- -------
Total revenue $34,853 $25,214 $ -- $4,196 $(11,873) $52,390
------- ------- ----- ------ -------- -------
Gross Profit $ 4,199 $ 450 $ -- $ 908 $ -- $ 5,557
------- ------- ----- ------ -------- -------
Income/(loss) before income taxes $ 134 $ 85 $(163) $ 116 $ -- $ 172
------- ------- ----- ------ -------- -------
Three months ended November 30, 2002
Net sales to unaffiliated customers $31,405 $17,583 $ -- $2,759 $ -- $51,747
Transfers between geographic areas 6,943 177 -- -- (7,120) --
------- ------- ----- ------ -------- -------
Total revenue $38,348 $17,760 $ -- $2,759 $ (7,120) $51,747
------- ------- ----- ------ -------- -------
Gross Profit $ 5,655 $ 303 $(304) $ 644 $ -- $ 6,298
------- ------- ----- ------ -------- -------
Income/(loss) before income taxes and
cumulative effect of change
in accounting principle $ 1,806 $ 11 $(314) $ (29) $ -- $ 1,474
------- ------- ----- ------ -------- -------
Revenue and gross profit for the three months ended November 30, 2003 and 2002
classified by product were as follows (in thousands):
Polished Rough Total
-------- ------- -------
Three months ended November 30, 2003
Net Sales $35,548 $16,842 $52,390
------- ------- -------
Gross Profit $ 4,759 $ 798 $ 5,557
======= ======= =======
Three months ended November 30, 2002
Net Sales $39,175 $12,572 $51,747
------- ------- -------
Gross Profit $ 6,071 $ 227 $ 6,298
======= ======= =======
10
9. Segment Information
GEOGRAPHIC SEGEMENT INFORMATION
- --------------------------------------------------------------------------------
(In thousands)
Revenue, gross profit and income/(loss) before income taxes for the six months
ended November 30, 2003 and 2002 and identifiable assets at the end of each of
those periods, classified by geographic area, which was determined by where
sales originated and where identifiable assets are held, were as follows (in
thousands):
North Far Elimi- Consoli-
America Europe Africa East nations dated
-------- ------- ------ ------ -------- --------
Six months ended November 30, 2003
Net sales to unaffiliated customers $ 44,198 $55,008 $ -- $7,292 $ -- $106,498
Transfers between geographic areas 23,483 1,175 -- (24,658) --
-------- ------- ------ ------ -------- --------
Total revenue $ 67,681 $56,183 $ -- $7,292 $(24,658) $106,498
-------- ------- ------ ------ -------- --------
Gross Profit $ 9,056 $ 971 $ -- $1,648 $ -- $ 11,675
-------- ------- ------ ------ -------- --------
Income/(loss) before income taxes $ 1,157 $ 272 $ (654) $ (29) $ -- $ 746
-------- ------- ------ ------ -------- --------
Identifiable assets at November 30, 2003 $156,766 $ 6,806 $3,140 $9,883 $ (198) $176,397
======== ======= ====== ====== ======== ========
Six months ended November 30, 2002
Net sales to unaffiliated customers $ 59,100 $40,923 $ -- $5,612 $ -- $105,635
Transfers between geographic areas 9,535 177 -- (9,712) --
-------- ------- ------ ------ -------- --------
Total revenue $ 68,635 $41,100 $ -- $5,612 $ (9,712) $105,635
-------- ------- ------ ------ -------- --------
Gross Profit $ 9,854 $ 595 $ (304) $1,276 $ -- $ 11,421
-------- ------- ------ ------ -------- --------
Income/(loss) before income taxes
and cumulative effect of change
in accounting principle $ 2,248 $ 18 $ (320) $ (132) $ -- $ 1,814
-------- ------- ------ ------ -------- --------
Identifiable assets at November 30, 2002 $128,456 $ 4,033 $6,726 $6,939 $ (57) $146,097
======== ======= ====== ====== ======== ========
Revenue and gross profit for the six months ended November 30, 2003 and 2002
classified by product were as follows (in thousands):
Polished Rough Total
-------- ------- --------
Six months ended November 30, 2003
Net Sales $68,010 $38,488 $106,498
------- ------- --------
Gross Profit $10,081 $ 1,594 $ 11,675
======= ======= ========
Six months ended November 30, 2002
Net Sales $70,572 $35,063 $105,635
------- ------- --------
Gross Profit $10,369 $ 1,052 $ 11,421
======= ======= ========
11
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, 2003. 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 for the three and six months ended November 30, 2003 were $52.4
and $106.5 million, respectively, an increase of $0.6 and $0.9 million over the
comparable period in the prior year.
Polished diamond revenue for the three and six months ended November 30,
2003 was $35.6 and $68.0 million, respectively, as compared to $39.2 and $70.6
million in the prior year. The decrease in polished sales primarily reflects
lower sales of commercial stones produced in Russia offset in part by increased
sales of branded diamonds.
Rough diamond sales were $16.8 and $38.5 million, an increase of $4.3 and
$3.4 million for the three and six months ended November 30, 2003, respectively,
as compared to the prior year. The increase from the prior year is attributable
to increased sourcing of rough diamonds.
Gross Profit
During the three months ended November 30, 2003 gross margin on net
polished sales was 13.4% compared to 15.5% in the second quarter of last year.
The decrease in polished gross margin for the three months primarily reflects a
shift in the mix of commercial sales toward smaller, lower margin stones,
offset, in part, by higher margins achieved on branded diamonds. For the six
months ended November 30, 2003 gross margin on net polished sales was 14.8%
compared to 14.7% in the same period last year. The year-to-date increase in
polished gross margin primarily reflects higher margin achieved on branded
diamonds offset in part by lower gross margin on the sale of commercial stones.
Rough gross margin during the three month period ended November 30, 2003
was 4.7% compared to 1.8% in the prior year period. Rough gross margin during
the six month period ended November 30, 2003 was 4.1% compared to 3.0% in the
prior year period. The increase in
12
rough gross margin percentage primarily reflects an increase in trading margins
for stones the Company normally sells in rough form.
As a result of the foregoing, overall gross margin percentage during the
three month period ended November 30, 2003 was 10.6% compared to 12.2% in the
second quarter last year. For the six months ended November 30, 2003 overall
gross margin on net sales was 11.0% compared to 10.8% for the same period last
year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three and six months
ended November 30, 2003 were $5.2 and $10.6 million, respectively, as compared
to $4.7 and $9.3 million for the same periods in the prior year. The increase
for the three and six months ended November 30, 2003 primarily reflects
personnel, consulting and related costs directed toward expanding distribution
and sourcing.
Interest Expense
Net interest expense for the three and six months ended November 30, 2003
was $159,000 and $323,000, respectively, as compared to $123,000 and $281,000
for the same periods in the prior year. These increases primarily reflect
increased levels of borrowing during the current period compared to the same
period last year.
Income Tax
The Company's effective tax rate for three and six months ended November
30, 2003 was 36.0% and 36.1%, respectively, as compared to 36.9% and 37.5% for
the prior year. This decrease is primarily attributable to an increase in the
percentage of income earned in lower tax rate jurisdictions.
Liquidity and Capital Resources
The Company's working capital at November 30, 2003 was $107.3 million,
which was $17.1 million greater than its working capital at May 31, 2003. This
increase primarily reflects higher inventory and accounts receivable levels
funded by borrowings reflected as noncurrent.
The Company maintains a $30 million long-term unsecured, revolving credit
facility that it utilizes for general working capital purposes ($10.0 million
outstanding at November 30, 2003). It also maintains $40 million of uncommitted
lines of credit (approximately $17.1 million outstanding at November 30, 2003)
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 $6.8 million outstanding at November 30, 2003) that is used in
support of its operations in Japan.
Stockholders' equity was $90.7 million at November 30, 2003 as compared to
$90.2 million at May 31, 2003. No dividends were paid to stockholders during the
three and six months ended November 30, 2003.
The Company believes that it has the ability to meet its anticipated
financing needs for at least the next twelve months.
13
Cumulative Effect of Change in Accounting Principle
On June 1, 2002 the Company adopted Financial Accounting Standards Board
Standard No. 142, Goodwill and Other Intangible Assets ("Statement 142"). As a
result, the Company ceased amortization of goodwill and other indefinite lived
intangible assets. Under the transition provision of Statement 142 the Company
completed its evaluation of goodwill and indefinite lived assets during the
quarter ended November 30, 2002, using a discounted cash flow methodology. As a
result of testing goodwill impairment in accordance with Statement 142, as of
June 1, 2002, the Company recorded a non-cash charge of approximately $1.5
million ($972,000 after tax, or $0.11 per share), which has been reported under
the caption "Cumulative Effect of a Change in Accounting Principle". The charge
relates to the Company's operations in Japan (Far East Segment).
Accounting Policies and New Pronouncements
From time to time the Company retains an economic interest in the future
profits and losses of rough diamonds it sells to certain third parties. In such
situations, the Company defers recognition of sales until the diamonds are
resold and profit or loss is determinable.
Where the Company believes profitability can be maximized, the Company may
combine, and jointly sell, certain of its rough stones with those of other
wholesalers. Under certain circumstances, primarily related to foreign sales,
the wholesaler assumes responsibility for billing and collection efforts. While
the ultimate sales are made to multiple third parties the resulting accounts
receivable are aggregated for purposes of determining concentration of credit
risk.
In January 2003, the Financial Accounting Standards Board issued and,
in December 2003, revised Financial Interpretation No.46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. This
Interpretation applies to all Variable Interest Entities. Adoption is
required for public companies at the end of periods ending after December 15,
2003. The Company has not yet determined the effect of this Interpretation on
its financial position and results of operations.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At November 30, 2003, the Company had borrowings totaling approximately
$33.9 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 November 30, 2003, 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 November 30, 2003. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to November 30,
2003.
PART 2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits
(31) Rule 13a - 14(a) / 15d - 14 (a) Certifications
(32) Section 1350 Certifications
(b) Reports on Form 8-K
None
15
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 9, 2003
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