(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 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 (State or other jurisdiction of incorporation or organization) |
13-2728690 (IRS Employer Identification No.) |
| 19 West 44th Street, New York, NY (Address of principal executive offices) |
10036 (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 þ No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
As of December 23, 2004, 8,429,642 shares of the registrant’s common stock were outstanding.
2
| Item 1. Financial Statements. |
|---|
| CONSOLIDATED INCOME STATEMENTS |
|---|
| (In thousands, except per share and per share data) |
| Three Months Ended | Six Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| November 30, (unaudited) |
2004 |
2003 |
2004 |
2003 | ||||||||||
| Net sales | $ | 93,201 | $ | 52,390 | $ | 171,508 | $ | 106,498 | ||||||
| Cost of Sales | 85,135 | 46,833 | 153,551 | 94,823 | ||||||||||
| 8,066 | 5,557 | 17,957 | 11,675 | |||||||||||
| Selling, general and administrative expenses | 5,746 | 5,226 | 11,392 | 10,606 | ||||||||||
| Interest expense, net of interest income | 654 | 159 | 1,099 | 323 | ||||||||||
| 6,400 | 5,385 | 12,491 | 10,929 | |||||||||||
| Income before income taxes | 1,666 | 172 | 5,466 | 746 | ||||||||||
| Income tax provision | 605 | 62 | 1,898 | 269 | ||||||||||
| NET INCOME | $ | 1,061 | $ | 110 | $ | 3,568 | $ | 477 | ||||||
| EARNINGS PER SHARE | ||||||||||||||
| Basic earnings per share | $ | 0.13 | $ | 0.01 | $ | 0.42 | $ | 0.06 | ||||||
| Average number of shares outstanding during the period | 8,472,241 | 8,527,040 | 8,482,670 | 8,526,771 | ||||||||||
| Diluted earnings per share | $ | 0.12 | $ | 0.01 | $ | 0.41 | $ | 0.06 | ||||||
| Average number of shares outstanding during the period assuming dilution | 8,636,227 | 8,599,946 | 8,642,850 | 8,581,275 | ||||||||||
See notes to consolidated financial statements.
3
| CONSOLIDATED BALANCE SHEETS |
|---|
| (In thousands, except share data) |
| November 30, (Unaudited) 2004 |
May 31, (Audited) 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 5,424 | $ | 1,209 | ||||
| Accounts and notes receivable, net | 59,286 | 61,812 | ||||||
| Inventories, net | ||||||||
| Rough stones | 28,653 | 11,944 | ||||||
| Polished stones | 97,959 | 81,433 | ||||||
| Total inventories | 126,612 | 93,377 | ||||||
| Prepaid expenses and other current assets | 11,235 | 5,918 | ||||||
| Deferred tax assets-current | 1,312 | 1,853 | ||||||
| TOTAL CURRENT ASSETS | 203,869 | 164,169 | ||||||
| Other non-current assets, net | 8,159 | 8,161 | ||||||
| Deferred tax assets, net | 7,120 | 8,382 | ||||||
| $ | 219,148 | $ | 180,712 | |||||
| Liabilities and Stockholders' Equity | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and other current liabilities | $ | 53,084 | $ | 46,677 | ||||
| Current Portion of long-term debt | 8,268 | 6,893 | ||||||
| TOTAL CURRENT LIABILITIES | 61,352 | 53,570 | ||||||
| Long-term debt | 62,025 | 34,726 | ||||||
| TOTAL LIABILITIES | 123,377 | 88,296 | ||||||
| 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 8,744,672 at November and 8,710,619 at May 2004, respectively | 8,745 | 8,711 | ||||||
| Additional paid-in capital | 61,749 | 61,595 | ||||||
| Cumulative translation adjustment | 64 | (286 | ) | |||||
| Retained earnings | 27,110 | 23,542 | ||||||
| 97,668 | 93,562 | |||||||
| Less treasury stock at cost; 291,646 shares at November and 210,100 shares at May 2004 | (1,897 | ) | (1,146 | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY | 95,771 | 92,416 | ||||||
| $ | 219,148 | $ | 180,712 | |||||
See notes to consolidated financial statements.
4
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
|---|
| (In thousands) |
| Six months ended November 30, (unaudited) |
2004 |
2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| Cash Flows From Operating Activities: | ||||||||
| Net income | $ | 3,568 | $ | 477 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
| Depreciation and amortization | 598 | 592 | ||||||
| Provision for uncollectible accounts | 44 | 30 | ||||||
| Deferred income taxes | 1,803 | 37 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 2,482 | (4,132 | ) | |||||
| Rough and Polished inventories | (33,235 | ) | (10,922 | ) | ||||
| Prepaid expenses and other current assets | (5,317 | ) | (459 | ) | ||||
| Other assets | 149 | 86 | ||||||
| Accounts payable and other current liabilities | 6,407 | (1,633 | ) | |||||
| Net cash used in operating activities | (23,501 | ) | (15,924 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Capital expenditures | (745 | ) | (1,249 | ) | ||||
| Net cash used in investing activities | (745 | ) | (1,249 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Increase in borrowings | 28,674 | 17,119 | ||||||
| Purchase of treasury stock | (751 | ) | — | |||||
| Proceeds from exercise of stock options | 188 | 3 | ||||||
| Net cash provided by financing activities | 28,111 | 17,122 | ||||||
| Effect of foreign currency translation adjustment | 350 | 23 | ||||||
| Net increase / (decrease) in cash and cash equivalents | 4,215 | (28 | ) | |||||
| Cash and cash equivalents at beginning of period | 1,209 | 477 | ||||||
| Cash and cash equivalents at end of period | $ | 5,424 | $ | 449 | ||||
See Notes to Consolidated Financial Statements
5
(Unaudited)
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, 2004 and 2003 and its financial position as of November 30, 2004.
The balance sheet at May 31, 2004 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, 2004. The operating results for the interim periods presented are not necessarily indicative of the operating results for a full year.
In December 2004, the Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards (SFAS) No. 123 “Share-Based Payment”. SFAS No. 123(R) will require the Company to expense stock options. Adoption is required for the interim or annual reporting periods beginning after June 15, 2005. The effect of expensing stock options on the Company’s results of operations using the Black-Scholes model is presented in the accompanying Notes to Consolidated Financial Statements (Note 3 – Stock Incentive Plans).
6
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, |
2004 |
2003 |
2004 |
2003 | ||||||||||
| (In thousands, except per share data) | ||||||||||||||
| Net income as reported | $ | 1,061 | $ | 110 | $ | 3,568 | $ | 477 | ||||||
| Less: | ||||||||||||||
| Stock-based employee compensation, net of taxes | (80 | ) | (77 | ) | (160 | ) | (154 | ) | ||||||
| Pro forma | $ | 981 | $ | 33 | $ | 3,408 | $ | 323 | ||||||
| Earnings per share: | ||||||||||||||
| As reported: | ||||||||||||||
| Basic | $ | 0.13 | $ | 0.01 | $ | 0.42 | $ | 0.06 | ||||||
| Diluted | $ | 0.12 | $ | 0.01 | $ | 0.41 | $ | 0.06 | ||||||
| Pro forma: | ||||||||||||||
| Basic | $ | 0.12 | $ | — | $ | 0.40 | $ | 0.04 | ||||||
| Diluted | $ | 0.11 | $ | — | $ | 0.39 | $ | 0.04 | ||||||
7
Certain of the Company’s subsidiaries conduct business in foreign countries. These 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, 2004 is approximately $8,565,000 less a valuation allowance of approximately $133,000 resulting in a net deferred tax asset of $8,432,000.
At November 30, 2004 the Company has available U.S. net operating loss carryforwards of $25.8 million, which expire as follows (in thousands):
| Net Operating | |
|---|---|
| Year |
Losses |
| 2013 | 2,901 |
| 2014 | 12,268 |
| 2015 | 298 |
| 2016 | 120 |
| 2017 | 10,190 |
| $25,777 | |
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) |
2004 |
2003 |
2004 |
2003 | ||||||||||
| Average number of shares outstanding during the period | 8,472,241 | 8,527,040 | 8,482,670 | 8,526,771 | ||||||||||
| Effect of dilutive stock options | 163,986 | 72,906 | 160,180 | 54,504 | ||||||||||
| Average number of shares outstanding during the period assuming dilution | 8,636,227 | 8,599,946 | 8,642,850 | 8,581,275 | ||||||||||
8
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, 2004 and 2003, total comprehensive income was $1,417,000 and $141,000, respectively. For the six months ended November 30, 2004 and 2003, total comprehensive income was $3,918,000 and $497,000, respectively.
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, 2006. The loan term may be extended in one year increments commencing November 30, 2005, 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 $28.0 million at November 30, 2004.
In September 2004, the Company entered into an additional long-term unsecured, revolving loan agreement with a bank under which it may borrow up to $30 million in the aggregate through December 1, 2006. The loan term may be extended in one year increments commencing November 30, 2005, subject to the consent of the bank. 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 expenditure