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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 FEBRUARY 29, 2004.
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 April 4, 2004 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 3
Three and nine months ended February 29 and 28, 2004 and 2003
Consolidated balance sheets 4
February 29, 2004 and May 31, 2003
Consolidated statements of cash flows 5
Nine months ended February 29 and 28, 2004 and 2003
Notes to consolidated financial statements 6 - 11
February 29, 2004
Item 2. Management's Discussion and Analysis of Financial 12 - 15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
2
CONSOLIDATED INCOME STATEMENTS
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
Three Months Ended Nine Months Ended
----------------------- -----------------------
February 29 and 28, (unaudited) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 64,800 $ 52,854 $ 171,298 $ 158,489
Cost of Sales 57,651 46,830 152,474 141,044
- -------------------------------------------------------------------------------------------------------------------
7,149 6,024 18,824 17,445
- -------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 5,855 4,990 16,461 14,316
Interest expense, net of interest income 259 87 582 368
- -------------------------------------------------------------------------------------------------------------------
6,114 5,077 17,043 14,684
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,035 947 1,781 2,761
Income tax provision 282 364 551 1,044
- -------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principle 753 583 1,230 1,717
Cumulative effect of change in accounting principle, net of tax -- -- -- (972)
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 753 $ 583 $ 1,230 $ 745
===================================================================================================================
EARNINGS PER SHARE
Basic earnings per share before cumulative
effect of change in accounting principle $ 0.09 $ 0.07 $ 0.14 $ 0.20
===================================================================================================================
Basic earnings per share $ 0.09 $ 0.07 $ 0.14 $ 0.09
===================================================================================================================
Average number of shares outstanding during the period 8,504,748 8,601,055 8,517,914 8,663,692
===================================================================================================================
Diluted earnings per share before cumulative
effect of change in accounting principle $ 0.09 $ 0.07 $ 0.14 $ 0.20
===================================================================================================================
Diluted earnings per share $ 0.09 $ 0.07 $ 0.14 $ 0.09
===================================================================================================================
Average number of shares outstanding during the period
assuming dilution 8,587,668 8,617,187 8,581,890 8,687,986
===================================================================================================================
See notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------
(In thousands, except share data)
February 29, May 31,
(Unaudited) (Audited)
2004 2003
- ---------------------------------------------------------------------------------------------
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 813 $ 477
Accounts and notes receivable, net 72,117 57,360
Inventories, net
Rough stones 11,007 5,764
Polished stones 79,901 72,473
- ---------------------------------------------------------------------------------------------
Total inventories 90,908 78,237
- ---------------------------------------------------------------------------------------------
Prepaid expenses and other current assets 5,527 6,124
Deferred tax assets-current 1,320 1,425
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 170,685 143,623
Non-current assets, net 7,922 7,319
Deferred tax assets, net 9,225 9,469
- ---------------------------------------------------------------------------------------------
$187,832 $160,411
=============================================================================================
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable and other current liabilities $ 52,962 $ 53,448
Current portion of long-term debt 7,125 --
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 60,087 53,448
Long-term debt 36,509 16,756
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 96,596 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 and 8,706,514
in February 2004 and May 2003, respectively 8,707 8,707
Additional paid-in capital 61,578 61,575
Cumulative translation adjustment (276) (284)
Retained earnings 22,373 21,143
- ---------------------------------------------------------------------------------------------
92,382 91,141
Less treasury stock, at cost, 210,100 shares at February 29, 2004
and 180,100 shares at May 31, 2003 (1,146) (934)
- ---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 91,236 90,207
- ---------------------------------------------------------------------------------------------
$187,832 $160,411
=============================================================================================
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
(In thousands)
Nine months ended February 29 and 28, (unaudited) 2004 2003
- ------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 1,230 $ 745
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 881 1,125
Provision for uncollectible accounts 60 (45)
Deferred income taxes 349 539
Cumulative effect of change in method of accounting -- 972
Changes in operating assets and liabilities:
Accounts receivable (14,817) (6,200)
Rough and Polished inventories (12,671) 3,331
Prepaid expenses and other current assets 597 (381)
Other assets 90 398
Accounts payable and other current liabilities (486) (755)
- ------------------------------------------------------------------------------
Net cash used in operating activities (24,767) (271)
- ------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (1,574) (63)
- ------------------------------------------------------------------------------
Net cash used in investing activities (1,574) (63)
- ------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Increase in long-term borrowings 19,753 982
Increase in short-term borrowings 7,125 --
Purchase of treasury stock (212) (743)
Proceeds from exercise of stock options 3 10
- ------------------------------------------------------------------------------
Net cash provided by financing activities 26,669 249
- ------------------------------------------------------------------------------
Effect of foreign currency translation adjustment 8 (79)
- ------------------------------------------------------------------------------
Net increase / (decrease) in cash and cash equivalents 336 (164)
Cash and cash equivalents at beginning of period 477 1,102
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 813 $ 938
==============================================================================
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 nine months ended
February 29 and 28, 2004 and 2003 and its financial position as of February 29,
2004.
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 Nine Months Ended
------------------ -----------------
February 29 and 28, 2004 2003 2004 2003
- ---------------------------------------------------------------------------------
(In thousands, except per share data)
Net income as reported $ 753 $ 583 $1,230 $ 745
Less:
Stock-based employee compensation,
net of taxes (77) (92) (231) (276)
- ---------------------------------------------------------------------------------
Pro forma $ 676 $ 491 $ 999 $ 469
- ---------------------------------------------------------------------------------
Earnings per share:
As reported:
Basic $0.09 $0.07 $ 0.14 $0.09
Diluted $0.09 $0.07 $ 0.14 $0.09
- ---------------------------------------------------------------------------------
Pro forma:
Basic $0.08 $0.06 $ 0.12 $0.05
Diluted $0.08 $0.06 $ 0.12 $0.05
- ---------------------------------------------------------------------------------
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,
subsequently 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 March 15, 2004. 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
February 29, 2004 is approximately $10,678,000 less a valuation allowance of
approximately $133,000 resulting in a net deferred tax asset of $10,545,000.
At February 29, 2004 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 Nine Months Ended
--------------------- ---------------------
February 29 and 28, (unaudited) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------
Average number of shares outstanding
during the period 8,504,748 8,601,055 8,517,914 8,663,692
Effect of dilutive stock options 82,920 16,132 63,976 24,294
- --------------------------------------------------------------------------------------
Average number of shares outstanding
during the period assuming dilution 8,587,668 8,617,187 8,581,890 8,687,986
- --------------------------------------------------------------------------------------
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 February 29 and 28, 2004 and 2003, total comprehensive income
was $741,000 and $524,000, respectively. For the nine months ended February 29
and 28, 2004 and 2003, total comprehensive income was $1,238,000 and $666,000,
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 $20.0 million
at February 29, 2004.
The Company also has a $15 million and $25 million unsecured, uncommitted
lines of credit with a bank. Borrowings under both lines bear interest at a rate
160 basis points above the
8
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 $17.1 million at February 29, 2004.
A subsidiary of the Company maintains a loan facility that enables it to
borrow up to 1.1 billion Japanese yen (approximately $6.5 million outstanding at
February 29, 2004) 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 February 29, 2004 and February 28, 2003 classified by geographic area,
which was determined by where sales originated from, were as follows (in
thousands):
North Far Elimi- Consoli-
America Europe Africa East nations dated
---------------------------------------------------------
Three months ended February 29, 2004
Net sales to unaffiliated customers $23,536 $37,584 $ -- $3,680 $ -- $64,800
Transfers between geographic areas 9,202 165 -- -- (9,367) --
- ------------------------------------------------------------------------------------------------------------
Total revenue $32,738 $37,749 $ -- $3,680 $ (9,367) $64,800
- ------------------------------------------------------------------------------------------------------------
Gross Profit $ 6,098 $ 302 $ -- $ 833 $ (84) $ 7,149
- ------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes $ 1,508 $ (86) $(46) $ (257) $ (84) $ 1,035
- ------------------------------------------------------------------------------------------------------------
============================================================================================================
Three months ended February 28, 2003
Net sales to unaffiliated customers $23,858 $26,458 $ -- $2,538 $ -- $52,854
Transfers between geographic areas 9,950 235 -- -- (10,185) --
- ------------------------------------------------------------------------------------------------------------
Total revenue $33,808 $26,693 $ -- $2,538 $(10,185) $52,854
- ------------------------------------------------------------------------------------------------------------
Gross Profit $ 5,084 $ 418 $(32) $ 554 $ -- $ 6,024
- ------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative
effect of change in accounting principle $ 1,141 $ (15) $(80) $ (99) $ -- $ 947
- ------------------------------------------------------------------------------------------------------------
============================================================================================================
Revenue and gross profit for the three months ended February 29, 2004 and
February 28, 2003 were as follows (in thousands):
Polished Rough Total
- --------------------------------------------------------------------------------
Three months ended February 29, 2004
Net Sales $36,125 $28,675 $64,800
- --------------------------------------------------------------------------------
Gross Profit $ 5,868 $ 1,281 $ 7,149
================================================================================
Three months ended February 28, 2003
Net Sales $32,973 $19,881 $52,854
- --------------------------------------------------------------------------------
Gross Profit $ 5,154 $ 870 $ 6,024
================================================================================
10
9. Segment Information
GEOGRAPHIC SEGEMENT INFORMATION
- --------------------------------------------------------------------------------
(In thousands)
Revenue, gross profit and income/(loss) before income taxes for the nine months
ended February 29, 2004 and February 28, 2003 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 29, 2004
Net sales to unaffiliated customers $ 67,734 $92,592 $ -- $10,972 $ -- $171,298
Transfers between geographic areas 32,685 1,340 -- (34,025) --
- --------------------------------------------------------------------------------------------------------------
Total revenue $100,419 $93,932 $ -- $10,972 $(34,025) $171,298
- --------------------------------------------------------------------------------------------------------------
Gross Profit $ 15,154 $ 1,273 $ -- $ 2,481 $ (84) $ 18,824
- --------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes $ 2,665 $ 186 $ (700) $ (286) $ (84) $ 1,781
- --------------------------------------------------------------------------------------------------------------
Identifiable assets at February 29, 2004 $166,018 $ 8,306 $3,140 $10,537 $ (169) $187,832
==============================================================================================================
Nine months ended February 28, 2003
Net sales to unaffiliated customers $ 82,958 $67,381 $ -- $ 8,150 $ -- $158,489
Transfers between geographic areas 19,485 412 -- (19,897) --
- --------------------------------------------------------------------------------------------------------------
Total revenue $102,443 $67,793 $ -- $ 8,150 $(19,897) $158,489
- --------------------------------------------------------------------------------------------------------------
Gross Profit $ 14,938 $ 1,013 $ (336) $ 1,830 $ -- $ 17,445
- --------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative
effect of change in accounting principle $ 3,389 $ 3 $ (400) $ (231) $ -- $ 2,761
- --------------------------------------------------------------------------------------------------------------
Identifiable assets at February 28, 2003 $130,594 $ 4,299 $6,480 $ 6,815 $ (41) $148,147
==============================================================================================================
Revenue and gross profit for the nine months ended February 29, 2004 and
February 28, 2003 classified by product were as follows (in thousands):
Polished Rough Total
- ---------------------------------------------------------------------------------
Nine months ended February 29, 2004
Net Sales $104,135 $67,163 $171,298
- ---------------------------------------------------------------------------------
Gross Profit $ 15,949 $ 2,875 $ 18,824
=================================================================================
Nine months ended February 28, 2003
Net Sales $103,545 $54,944 $158,489
- ---------------------------------------------------------------------------------
Gross Profit $ 15,523 $ 1,922 $ 17,445
=================================================================================
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.
Overview
The Company is engaged in the cutting, polishing and selling of ideally
proportioned diamonds which it markets internationally under the brand name
"Lazare Diamonds'r'". Ideally proportioned diamonds are distinguished from
non-ideal cut ("commercial") diamonds by the symmetrical relationship of their
facets, which optimize the balance of brilliance, sparkle and fire in a polished
diamond. The Company's domestic manufacturing operation, located in Puerto Rico,
is believed by the Company to be the largest diamond cutting facility in the
United States. In addition, through various cooperative agreements, the Company
cuts and polishes commercial diamonds which it markets to wholesalers,
distributors and, to a growing extent, retail jewelers. Rough stones purchased
by the Company are either selected for manufacturing or resold as rough diamonds
in the marketplace.
The Company's overall revenues are, in part, dependent upon the
availability of rough diamonds, the world's known sources of which are highly
concentrated. The Diamond Trading Company ("DTC") is the world's largest rough
diamond selling organization. The Company has been a client of the DTC for more
than 60 years. The Company supplements its rough diamond needs by secondary
market purchases and has entered into relationships with other primary source
suppliers.
The Company has two agreements with AK ALROSA of Russia, which is the
largest producer of rough diamonds in Russia. Under the terms of these
agreements, the Company sells polished diamonds that are cut in facilities
jointly managed and supervised by the Company and ALROSA personnel. The proceeds
from the sale of these polished diamonds, after deduction of rough diamond cost,
generally are shared equally with ALROSA.
The Company has signed an agreement with NamGem Diamond Manufacturing
Company (PTY) Ltd. ("NamGem") for the cutting and polishing of diamonds in
Namibia. NamGem is Namibia's flagship venture in the international diamond
polishing industry. Under the terms of the agreement, the Company provides
technical manufacturing assistance and supervises the manufacture of the
Company's rough diamonds deemed suitable to cut and polish. Production under
this agreement commenced during the third fiscal quarter. During the third
fiscal quarter, the Company has continued efforts to develop additional sources
of rough diamonds, including potential opportunities in Africa.
12
While the Company believes that its success in maintaining quantities and
qualities of polished inventory that best meet its customers' needs is achieved
through its ability to fully integrate its diverse rough and polished diamond
sources, any significant disruption of the Company's access to its primary
source suppliers could have a material adverse effect on the Company.
Results of Operations
Net Sales
Net sales for the three and nine months ended February 29, 2004 were $64.8
and $171.3 million, respectively, an increase of $11.9 and $12.8 million over
the comparable period in the prior year.
Polished diamond revenue for the three and nine months ended February 29,
2004 was $36.1 and $104.1 million, respectively, as compared to $33.0 and $103.5
million in the prior year. The increase in polished sales reflects increased
sales of branded diamonds partially offset by lower sales of commercial stones.
Rough diamond sales were $28.7 and $67.2 million, an increase of $8.8 and
$12.2 million for the three and nine months ended February 29, 2004,
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 February 29, 2004 gross margin on net
polished sales was 16.2% compared to 15.6% in the third quarter of last year.
For the nine months ended February 29, 2004, gross margin on net polished sales
was 15.3% compared to 15.0% in the same period last year. The increase in
polished gross margin for the three and nine months reflects increased margins
obtained on branded diamonds offset, in part, by lower margins earned on the
sale of commercial diamonds.
Rough gross margin during the three month period ended February 29, 2004
was 4.5% compared to 4.4% in the prior year period. Rough gross margin during
the nine month period ended February 29, 2004 was 4.3% compared to 3.5% in the
prior year period. The increase in rough gross margin percentage primarily
reflects an increase in trading margins for stones the Company normally sells in
rough form.
13
As a result of the foregoing, overall gross margin percentage during the
three month period ended February 29, 2004 was 11.0% compared to 11.4% in the
third quarter last year. For the nine months ended February 29, 2004 and
February 28, 2003, overall gross margin on net sales was 11.0%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three and nine months
ended February 29, 2004 were $5.9 and $16.5 million, respectively, as compared
to $5.0 and $14.3 million for the same periods in the prior year. The increase
for the three and nine months ended February 29, 2004 reflects increased
advertising, personnel and consulting costs directed toward expanding
distribution and sourcing.
Interest Expense
Net interest expense for the three and nine months ended February 29, 2004
was $259,000 and $582,000, respectively, as compared to $87,000 and $368,000 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 nine months ended February
29, 2004 was 27.2% and 30.9%, respectively, as compared to 38.4% and 37.8% 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 February 29, 2004 was $110.6 million,
which was $20.4 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 ($20.0 million
outstanding at February 29, 2004). It also maintains $40 million of uncommitted
lines of credit (approximately $17.1 million outstanding at February 29, 2004)
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 $6.5 million outstanding at February 29, 2004) that is used in
support of its operations in Japan.
Stockholders' equity was $91.2 million at February 29, 2004 as compared to
$90.2 million at May 31, 2003. No dividends were paid to stockholders during the
three and nine months ended February 29, 2004.
The Company believes that it has the ability to meet its anticipated
financing needs for at least the next twelve months.
14
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,
subsequently 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 March 15, 2004. The Company has not yet
determined the effect of this interpretation on its financial position and
results of operations.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At February 29, 2004, the Company had borrowings totaling approximately
$43.6 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 February 29, 2004, 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 February 29, 2004. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to February 29,
2004.
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
16
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 13, 2004
17
STATEMENT OF DIFFERENCES
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The registered trademark symbol shall be expressed as.................. 'r'