-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CWjcHKsuERsVqGpSrLeSsFiqIgeGsW49xmU+mbFaQW4cyVFD2pDc2ea1M9Ol1r7U pj1/VCtrOOIqGw52RctT0g== 0000950117-04-001330.txt : 20040413 0000950117-04-001330.hdr.sgml : 20040413 20040413132711 ACCESSION NUMBER: 0000950117-04-001330 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040229 FILED AS OF DATE: 20040413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAZARE KAPLAN INTERNATIONAL INC CENTRAL INDEX KEY: 0000202375 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-JEWELRY, WATCHES, PRECIOUS STONES & METALS [5094] IRS NUMBER: 132728690 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07848 FILM NUMBER: 04730182 BUSINESS ADDRESS: STREET 1: 529 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2129729700 MAIL ADDRESS: STREET 1: 529 FIFTH AVE STREET 2: 529 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10017 10-Q 1 a37440.txt LAZARE KAPLAN INTERNATIONAL INC. 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 ------------------------ The registered trademark symbol shall be expressed as.................. 'r' EX-31 3 ex31.txt EXHIBIT 31 EXHIBIT 31 CERTIFICATIONS REQUIRED TO BE FILED BY RULE 13a-14(a) 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: April 13, 2004 By: /s/ Leon Tempelsman ------------------------------------ Leon Tempelsman (Chief Executive Officer) EXHIBIT 31 CERTIFICATIONS REQUIRED TO BE FILED BY RULE 13a-14(a) I, William 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: April 13, 2004 By: /s/ William H. Moryto ------------------------------------ William H. Moryto (Chief Financial Officer) EX-32 4 ex32.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATIONS REQUIRED BY RULE 13a-14(b) TO BE FURNISHED BUT NOT FILED Certifications Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Lazare Kaplan International, Inc. (the "Company") on Form 10-Q for the period ended February 29, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Leon Tempelsman and William H. Moryto, Chief Executive Officer and Vice President and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Date: April 13, 2004 /s/ Leon Tempelsman /s/ William H. Moryto - ------------------------------ ---------------------------------- Leon Tempelsman William H. Moryto (Chief Executive Officer) (Chief Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----