c50673_10q.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

10-Q 1 c50673_10q.htm c50673_10q.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
		AUGUST 31, 2007.

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 44^thStreet, 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 August 31, 2007, 8,259,300 shares of the registrant's common stock were outstanding.


LAZARE KAPLAN INTERNATIONAL INC.

Index

Part I. Financial Information		Page
Item 1.	Financial Statements (Unaudited)

	Consolidated statements of operations	3
	Three months ended August 31, 2007 and 2006

	Consolidated balance sheets	4
	August 31, 2007 and May 31, 2007

	Consolidated statements of cash flows	5
	Three months ended August 31, 2007 and 2006

	Notes to consolidated financial statements	6 - 12

Item 2.	Management's Discussion and Analysis of Financial	13 - 17
	Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosure of Market Risk	18

Item 4.	Controls and Procedures	18

Part II. Other Information

Item 1.	Legal Proceedings	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 5.	Other Information	20

Item 6.	Exhibits and Reports on Form 8-K	20

Signature		21


PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.



CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and per share data)

	Three Months Ended
August 31, (unaudited)		2007			2006
Net sales	$	102,593		$	138,884
Cost of Sales		94,300			133,639
		8,293			5,245
Selling, general and administrative expenses		6,287			6,239
Equity in income of joint ventures		(75	)		(293	)
Interest expense, net of interest income		1,503			1,722
		7,715			7,668
Income / (loss) before income taxes		578			(2,423	)
Income tax provision / (benefit)		158			(598	)
NET INCOME / (LOSS)	$	420		$	(1,825	)

EARNINGS / (LOSS) PER SHARE
Basic earnings / (loss) per share	$	0.05		$	(0.22	)
Average number of shares outstanding during the period	8,259,300			8,197,259


Diluted earnings / (loss) per share	$	0.05		$	(0.22	)
Average number of shares outstanding during the period assuming dilution		8,321,797			8,197,259

See notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


		August 31,			May 31,
		(Unaudited)			(Audited)
		2007			2007
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	6,418		$	7,869
Accounts and notes receivable, net		120,385			133,989
Inventories, net
Rough stones		18,755			14,300
Polished stones		93,897			97,767
Total inventories		112,652			112,067
Prepaid expenses and other current assets		7,736			10,750
Deferred tax assets-current		1,957			1,989
TOTAL CURRENT ASSETS		249,148			266,664
Other non-current assets, net		13,918			14,085
Deferred tax assets, net		9,408			9,534
	$	272,474		$	290,283

Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Accounts payable and other current liabilities	$	67,218		$	75,690
Current Portion of long-term debt		73,050			85,536
TOTAL CURRENT LIABILITIES		140,268			161,226
Long-term debt		38,673			36,060
TOTAL LIABILITIES		178,941			197,286
COMMITMENTS AND CONTINGENCIES
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 8,946,845 at August and May 2007, respectively		8,947			8,947
Additional paid-in capital		63,090			63,090
Cumulative translation adjustment		(650	)		(766	)
Retained earnings		27,744			27,324
		99,131			98,595
Less treasury stock at cost; 687,545 shares at August and May 2007		(5,598	)		(5,598	)
TOTAL STOCKHOLDERS' EQUITY		93,533			92,997
	$	272,474		$	290,283

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


Three months ended August 31, (unaudited)	2007			2006

Cash Flows From Operating Activities:
Net income / (loss)	$	420		$	(1,825	)
Adjustments to reconcile net income to net cash
provided by / (used in) operating activities:
Depreciation and amortization		392			370
Provision for uncollectible accounts		(9	)		67
Compensation expense - noncash		—			31
Deferred income taxes		158			(622	)
Changes in operating assets and liabilities:
Accounts receivable		13,613			(20,978	)
Rough and Polished inventories		(585	)		6,689
Prepaid expenses and other current assets		3,014			(3,074	)
Other assets		(176	)		(144	)
Accounts payable and other current liabilities		(8,472	)		(3,160	)
Net cash provided by / (used in) operating activities		8,355			(22,646	)

Cash Flows From Investing Activities:
Capital expenditures		(49	)		(203	)
Net cash used in investing activities		(49	)		(203	)

Cash Flows From Financing Activities:
Increase / (decrease) in borrowings		(9,873	)		21,035
Proceeds from exercise of stock options		—			4
Net cash provided by / (used in) financing activities		(9,873	)		21,039

Effect of foreign currency translation adjustment		116			(150	)
Net decrease in cash and cash equivalents		(1,451	)		(1,960	)
Cash and cash equivalents at beginning of period		7,869			8,160
Cash and cash equivalents at end of period	$	6,418		$	6,200

See Notes to Consolidated Financial Statements

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 months ended August 31, 2007 and 2006 and its financial position as of August 31, 2007.

The balance sheet at May 31, 2007 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, 2007. The operating results for the interim periods presented are not necessarily indicative of the operating results for a full year. In this discussion, the years “2008” and “2007” refer to the fiscal years ended May 31, 2008 and May 31, 2007, respectively.

2. Accounting Policies

Sales arrangements with customers:

The Company’s polished diamond and diamond jewelry customers consist primarily of wholesale and retail clients. The Company’s rough diamond customers consist primarily of rough diamond cutters. The Company generally ships polished diamond inventory to customers subject to verification of the diamond particulars.

The Company’s policy is to recognize revenue when title and risk of ownership have passed to the buyer, the earnings process is complete and the sale price is fixed and determinable. Polished diamond sales include revenue derived from the sale of polished diamonds and fees associated with the cutting, polishing and laser inscription of polished diamonds. In addition, in certain instances, the Company may be entitled to receive incremental profits from its customers on the sale of certain stones. Such profits are recognized as revenue when realized. Where the Company acts as a principal in the sales transaction, takes title to the product and has risks and rewards of ownership the gross value of diamonds invoiced is recorded as sales with the portion of profits allocable to others (where applicable) included in cost of sales.

Where the Company believes profitability can be maximized, the Company may combine, and jointly sell, certain of its diamonds with those of other wholesalers. In such instances, the Company is obligated to share profits it realizes on the sale of such stones. Typically, the

participating wholesaler is required to advance funds to the Company equal to their proportional interest in the underlying diamonds.

The Company has an arrangement with a diamond producer whereby the Company sells certain polished diamonds that are cut and polished in Russia. The risk and rewards of ownership of these diamonds is transferred to the Company upon delivery to the Company of the diamonds in polished form. Generally, upon receipt, the Company pays a negotiated base price and the producer receives an economic interest in future profits associated with the diamonds.

The Company has a technical cooperation agreement with an entity responsible for the development and marketing of diamonds produced in Angola. Pursuant to this agreement the Company has established a joint buying and rough diamond trading operation for diamonds sourced in the Angolan informal sector. During the third fiscal quarter of 2006, the Company’s rough buying operations expanded to include buying in the Angolan formal sector. Through the first fiscal quarter 2007 Angolan formal sector buying and selling operations were conducted by the Company with the Company taking title to the diamonds upon acquisition in Angola and assuming responsibility for risk of loss. Sales by the Company were recorded at their gross invoice value. Profits in excess of operating and rough acquisition costs as defined are allocated between parties with such costs classified as cost of sales by the Company.

During the second fiscal quarter 2007 the Company formalized certain joint ventures relating to the buying and selling of rough diamonds acquired in the Angolan formal sector and transferred substantially all formal sector operations into the joint venture companies. As a result, Angolan formal sector rough buying and selling operations occurring during the second fiscal quarter 2007 have been accounted for on the equity method. The Company is currently negotiating a further expansion and restructuring of its Angolan operations to include exploration and development through various additional joint ventures.

Credit is extended to customers based on an evaluation of each customer’s financial condition and generally collateral is not required on the Company’s receivables.

Incentive Programs:

The Company participates in cooperative advertising arrangements with customers in order to build brand awareness and product acceptance. Under such an arrangement a customer is eligible to receive an allowance of up to a specified percentage of its purchases from the Company if certain qualitative advertising criteria are met and if specified amounts are spent on qualifying advertising. The Company characterizes as selling, general and administrative expense the consideration it pays to customers for cooperative advertising.

In addition, the Company offers programs whereby certain sales staff employed by the Company’s customers can receive consideration for sales of the Company’s products. The Company characterizes as selling, general and administrative expense the consideration it pays to the salesperson.

Customer rebates:

From time to time the Company has had arrangements whereby it would rebate to a customer a percentage of certain of its qualifying purchases. The Company characterizes such rebates as a reduction of sales.

Consideration received from vendors:

Periodically, the Company negotiates agreements with vendors to share certain promotional costs. The Company classifies amounts expended on such promotions as selling, general and administrative expense when incurred. Similarly, amounts reimbursed by vendors are characterized as a reduction of selling, general and administrative expense.

Shipping and handling:

Shipping and handling costs incurred by the Company to deliver product to customers are classified in the Company’s income statement as selling general and administrative expense.

Inventories:

Inventories, including amounts on consignment with customers, are stated at the lower of cost or market, using the average cost method.

Equity Investments:

The Company utilizes the equity method of accounting to record its proportionate share of income and losses from joint venture companies.

3. Stock Incentive Plans

In the quarter ended August 31, 2006, the Company adopted SFAS No. 123(R) “Share-Based Payment”. SFAS No. 123(R) focuses primarily on accounting for transactions in which the Company obtains employee services in exchange for share-based payments. Under SFAS No. 123(R), share-based awards that do not require future service (i.e., vested awards) are expensed immediately. Share-based employee awards that require future service are amortized over the relevant service period.

A summary of the Plans’ activity for the period ended August 31, 2007 is as follows:


					Weighted average
	Number		Weighted		remaining
	of		average price		contractual life	Aggregate
	shares		per share		remaining	intrinsic value
Outstanding - May 31, 2007	926,451	*	$	8.29
Options expired/cancelled	—		$	—
Options issued	—		$	—
Options exercised	—		$	—
Outstanding - August 31, 2007	926,451		$	8.29

Non-vested	100,000		$	7.77	7.70	$	93,000
Vested	826,451		$	8.36	4.12	$	284,829
Total	926,451	*	$	8.29	4.51	$	377,829

* Includes 190,000 warrants of which 90,000 are vested and 100,000 will vest upon meeting certain contigent conditions.

As of August 31, 2007 there was no unrecognized compensation costs related to non-vested awards.

4. Taxes

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 August 31, 2007 is approximately $12.2 million less a valuation allowance of approximately $0.9 million resulting in a net deferred tax asset of $11.3 million.

At August 31, 2007 the Company has available U.S. net operating loss carryforwards of $28.9 million, which expire as follows (in thousands):


	Net Operating
Year	Losses
2019	$	8,690
2020		298
2021		120
2022		10,190
2023		25
2026		4,066
2027		5,509
	$	28,898

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes “(FIN 48) effective June 1, 2007. FIN 48 clarifies the accounting for uncertainty in tax positions. This Interpretation requires financial statement recognition of the impact of a tax position if a position is more likely than not of being sustained on audit, based on the technical merits of the position. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The impact of adopting FIN 48 on the Company’s financial position, results of operations and cash flows was immaterial.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

The Company and its subsidiaries file income tax returns in international jurisdictions in addition to U.S. federal, state and local income tax jurisdictions. Based upon the statute of limitations the Company is no longer subject to U.S. federal tax examinations by tax authorities for years prior to fiscal 2003.

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 include the impact of dilutive stock options.


	Three Months Ended
August 31, (unaudited)	2007	2006

Average number of shares outstanding
during the period	8,259,300	8,197,259

Effect of dilutive stock options	62,497	—

Average number of shares outstanding
during the period assuming dilution	8,321,797	8,197,259

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 August 31, 2007 and 2006, total comprehensive income / (loss) was $0.5 million and ($ 2.0) million, respectively.

7. Lines of Credit

The Company has a $25.0 million and a $45.0 million unsecured, uncommitted line of credit with a bank. Borrowings under both lines bear interest at a rate 160 basis points above the 90 day LIBOR. As of August 31, 2007 the balance outstanding under both lines was $47.0 million. Borrowings under these lines are available for the Company’s working capital requirements and are payable on demand.

The Company has a $35.0 million long-term unsecured, committed revolving loan agreement and a $10.0 million unsecured, uncommitted credit agreement. The Company may borrow under the committed facility (including up to $1.0 million under letters of credit, $0.7 million issued at August 31, 2007) through December 1, 2008. The loan term may be extended in one-year increments commencing November 30, 2007, subject to the consent of the lending banks. Borrowings under both agreements 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 these facilities are available for working capital purposes. The loan agreements contain 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. As of August 31, 2007, the balance outstanding under both facilities was $41.0 million.

The Company maintains an additional unsecured, committed revolving loan agreement with a bank. At August 31, 2007, the maximum amount available under the facility was $20.0 million. The facility is set to expire on June 30, 2008 with the maximum borrowing limit permitted under the facility scheduled to reduce by $1.0 million per month at the end of September, October and November 2007, with further reductions of $7.0 million on December 31, 2007 and $5.0 million on each of March 31, 2008 and June 30, 2008. 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 August 31, 2007.

A subsidiary of the Company maintains a loan facility which enables it to borrow up to 520 million Japanese yen (approximately $4.3 million U.S. dollars) at an interest rate 1% above the Japanese yen LIBOR through November 2008. Borrowings under the facility are available for working capital purposes. The Company guarantees repayment of amounts borrowed. Borrowings under the loan are used in support of its operations in Japan. As of August 31, 2007, the balance outstanding under this facility was $3.7 million U.S. dollars.

Long-term debt of $38.7 million outstanding at August 31, 2007 is scheduled to be repaid in the fiscal year ended May 31, 2009. At August 31, 2007, the Company was in compliance with its debt covenants.

The Company guarantees a portion of certain indebtedness ($1.4 million at August 31, 2007) relating to a joint diamond cutting and polishing operation in South Africa. The fair value of the guarantee is immaterial.

The Company’s long-term facilities do not contain subjective acceleration clauses or require the Company to utilize a lock box whereby remittances from the Company’s customers reduce the debt outstanding.

8. Transactions with related parties

A member of the Company's Board of Directors is of counsel to a law firm which serves as counsel to the Company. Amounts paid to the law firm for the three months ended August 31, 2007 and 2006 was $0.1 million and $0.2 million, respectively.

9. Segment Information

GEOGRAPHIC SEGEMENT INFORMATION

(In thousands)

Revenue, gross profit and income/(loss) before income taxes for the three months ended August 31, 2007 and 2006 and identifiable assets at the end of each of those periods, classified by geographic area, which was determined by where sales originated from and where identifiable assets are held, were as follows (in thousands):


	North								Far			Elimi-		Consoli-
	America			Europe			Africa		East			nations		dated

Three months ended August 31, 2007
Net sales to unaffiliated customers	$	25,036		$	73,029		$	823	$	3,705	$	-		$	102,593
Transfers between geographic areas		36,863			58			34,984				(71,905	)		-
Total revenue	$	61,899		$	73,087		$	35,807	$	3,705	$	(71,905	)	$	102,593
Gross Profit	$	4,938		$	439		$	2,012	$	904	$	-		$	8,293
Income/(loss) before income taxes	$	(1,597	)	$	(299	)	$	2,463	$	11	$	-		$	578
Identifiable assets at August 31, 2007	$	132,117		$	89,138		$	42,668	$	8,598	$	(47	)	$	272,474

Three months ended August 31, 2006
Net sales to unaffiliated customers	$	22,847		$	110,405		$	1,487	$	4,145	$	-		$	138,884
Transfers between geographic areas		30,475						77,252				(107,727	)		-
Total revenue	$	53,322		$	110,405		$	78,739	$	4,145	$	(107,727	)	$	138,884
Gross Profit	$	3,684		$	505		$	82	$	974	$	-		$	5,245
Income/(loss) before income taxes	$	(2,693	)	$	(165	)	$	349	$	86	$	-		$	(2,423	)
Identifiable assets at August 31, 2006	$	173,253		$	75,855		$	21,641	$	8,952	$	(54	)	$	279,647

Revenue and gross profit for the three months ended August 31, 2007 and 2006 classified by product were as follows (in thousands):


		Polished		Rough		Total

Three months ended August 31, 2007
Net Sales	$	33,882	$	68,711	$	102,593
Gross Profit	$	4,052	$	4,241	$	8,293

Three months ended August 31, 2006
Net Sales	$	33,043	$	105,841	$	138,884
Gross Profit	$	3,857	$	1,388	$	5,245


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, 2007. 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 branded and non-branded (“commercial”) diamonds. The Company’s premier product line is comprised of ideally proportioned diamonds which it markets internationally under the brand name "Lazare Diamonds^®". Ideally proportioned diamonds are distinguished from non-ideal cut 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 facility, located in Puerto Rico, is believed by the Company to be among the largest diamond cutting facilities in the United States. In addition, through various cooperative agreements, the Company cuts and polishes commercial diamonds which it markets to wholesalers, distributors and 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 approximately 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 a technical assistance and cooperation agreement regarding the purchasing and marketing of rough diamonds with Sociedade de Comercializacao de Diamantes de Angola SARL (“SODIAM”), the government entity responsible for development and marketing of diamonds produced in Angola. Informal sector rough diamond buying from this operation commenced during the first fiscal quarter of 2005. During the third fiscal quarter of 2006, the Company’s rough buying operations expanded to include buying in the Angolan formal sector. During the second fiscal quarter of 2007, Angolan formal sector operations were transferred to separate joint venture companies. The

Company is currently negotiating a further expansion and restructuring of its Angolan operations to include exploration and development through various additional joint ventures.

The Company has an agreement with AK ALROSA of Russia, which is the largest producer of rough diamonds in Russia. Under the terms of this agreement, 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 a strategic cooperation 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.

During September 2006, the Company and the Overseas Private Investment Corporation, an independent agency of the United States Government (“OPIC”) signed a commitment letter pursuant to which OPIC committed to provide approximately $25 million of long-term financing in support of the acquisition of certain rough diamonds to be cut and polished in Namibia. Pursuant thereto, a subsidiary of the Company and OPIC entered into a financing agreement in February 2007. The Company is currently in negotiations with third parties regarding changes to its existing Namibian operations. Pending a satisfactory outcome of these negotiations and subject to various conditions precedent under the financing agreement, the Company anticipates initial borrowing under the facility to commence during fiscal 2008.

The Company has an agreement with Nozala Investments (Pty) Ltd., a broadly based women’s empowerment investment group, for cooperation in South Africa’s diamond sector. The agreement contemplates diamond mining, cutting, polishing, and distribution. The joint venture is in line with the South African Government’s recently announced program to promote new entrants and investment in the domestic diamond sector, increasing the sector’s contribution to economic development. Cutting and polishing activities which concentrate on local sources of rough diamond supply commenced during the third fiscal quarter of 2006.

In February 2006, Lazare Kaplan Botswana (Pty) Ltd., a wholly owned subsidiary, was granted a license from the Government of Botswana to cut and polish diamonds in that country.

The Company continues its efforts to develop additional sources of rough diamonds, including potential opportunities in Africa.

Through February 2009, the Company’s wholly-owned subsidiary, Pegasus Overseas Ltd. (“POL”) has an exclusive agreement with Diamond Innovations Inc. (“DI”) under which POL will market natural diamonds that have undergone a new high pressure, high temperature (HPHT) process to improve the color of certain gem diamonds without reducing their all-natural content. POL sells diamonds that have undergone the HPHT process under the Bellataire® brand name.

In November 2005, the Company (including certain of its subsidiaries) amended certain terms of its agreement with DI relating to the sourcing, manufacture and marketing of Bellataire diamonds. The amendment and related agreements seek to increase the sales and profitability of Bellataire diamonds by more closely aligning the economic interests of the parties through shared management of product sourcing, manufacturing and marketing as well as the sharing of related costs.

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 months ended August 31, 2007 were $102.6 million as compared to $138.9 million in the prior year period.

Polished diamond revenue for the three month period ended August 31, 2007 was $33.9 million as compared to $33.0 million in the comparable prior year period. The increase reflects higher sales of branded diamonds, partially offset by lower sales of fine cut commercial diamonds. The overall increase of 2.5% in polished diamond sales reflects a continuation of cautious buying patterns on the part of the Company’s retail and wholesale customers in light of uncertain consumer demand.

Rough diamond sales were $68.7 million for the three months ended August 31, 2007 as compared to $105.8 million for the prior year period. The decrease in rough diamond sales reflects the transfer of formal sector Angolan rough diamond buying and trading operations to a formal joint venture which the Company accounts for on the equity method.

Gross Profit

Gross Margin on net polished sales for the three months ended August 31, 2007 was 12.0% as compared to 11.7% for the prior year period. The increase in polished gross margin reflects a shift in sales mix whereby a higher percentage of polished sales were comprised of branded diamonds which typically carry a higher gross margin than commercial diamonds. Additionally, polished gross margin reflects reduced revenue and margin from laser inscription fees (see “Legal Proceedings”).

Rough diamond gross margin for the three months ended August 31, 2007 was 6.2% compared to 1.3% in the comparable prior year periods. Increased rough gross margins reflect improving market conditions for certain categories of diamonds which the Company chooses to sell in rough form and improved buying conditions in the Angolan informal sector.

As a result of the foregoing, overall gross margin percentage during the three month period ended August 31, 2007 was 8.1% as compared to 3.8% in the prior year period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended August 31, 2007 were $6.3 million as compared to $6.2 million for the prior year. The increase in selling, general and administrative expense for the three months ended August 31, 2007 reflects increased legal costs associated with litigation the Company initiated to protect certain of its intellectual property rights offset by a reduction in personnel and related costs.

Equity in Income of Joint Ventures

The Company is an equity owner in several joint venture companies relating to sourcing, cutting, polishing, processing and sales of diamonds. The Company’s combined share of income from these joint venture operations for the three months ended August31, 2007 was $0.1 million as compared to $0.3 million for the prior year period.

Interest Expense

Net interest expense for the three months ended August 31, 2007 was $1.5 million as compared to $1.7 million in the prior year. The decrease for the three months ended August 31, 2007 reflects lower net borrowing levels partially offset by higher interest rates compared to the prior year period.

Income Tax

The Company’s effective tax rate for the nine months ended August 31, 2007 was 27.3% as compared to 24.7% for the prior year period. The year-to-date increase is primarily attributable to an increase in the percentage of income applicable to higher tax rate jurisdictions.

Liquidity and Capital Resources

The Company generated $8.4 million of cash flow from operations during the three months ended August 31, 2007. The Company's working capital at August 31, 2007 was $108.9 million as compared to $105.4 million at May 31, 2007.

The Company maintains a long-term unsecured, revolving credit facility that it utilizes for general working capital purposes in the amount of $45.0 million. In addition, the Company has a 520 million Yen denominated facility that is used in support of its operations in Japan. The Company’s long-term facilities do not contain subjective acceleration clauses or require the Company to utilize a lock box whereby remittances from the Company’s customers reduce the debt outstanding.

The Company also maintains an additional $20.0 million unsecured, committed, revolving credit facility and $70.0 million of uncommitted lines of credit that are used to finance rough inventory transactions and other working capital needs.

Long-term debt includes the portion of borrowings which the Company has both the intention and the ability to refinance on a long-term basis.

Stockholders' equity was $93.5 million at August 31, 2007 as compared to $93.0 million at May 31, 2007. No dividends were paid to stockholders during the three ended August 31, 2007.

The Company believes that it has the ability to meet its anticipated financing needs for at least the next twelve months.

New Pronouncements

adopting FIN 48 on the Company’s financial position, results of operations and cash flows was immaterial.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of SFAS 157 on its financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Asset and Financial Liability: Including an amendment of FASB Statement No. 115” (“ SFAS 159”). The standard permits all entities to elect to measure certain financial instruments and other items at fair value with changes in fair value reported in earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 on its financial position, results of operations and cash flows.

Transactions with related parties


Item 3.		Quantitative and Qualitative Disclosure About Market Risk.

At August 31, 2007, the Company had borrowings totaling approximately $111.7 million outstanding under various credit agreements. The interest rates on these borrowings are variable and therefore the general level of U.S. and foreign interest rates affects interest expense. Increases in interest expense resulting from an increase in interest rates could impact the Company’s results of operations. The Company’s policy is to take actions that would mitigate such risk when appropriate. These actions include staggering the term and rate of its borrowings to match anticipated cash flows and movements in interest rates.


Item 4.		Controls and Procedures.

As of August 31, 2007 an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of August 31, 2007. There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the Company’s internal controls over financial reporting

PART II - OTHER INFORMATION


Item 1.		Legal Proceedings

On May 25, 2006, the Company filed a complaint in the United States District Court for the Southern District of New York against Photoscribe Technologies, Inc. (“Photoscribe”). The complaint asserted infringement of the Company’s intellectual property rights by Photoscribe with respect to two of the Company’s patents (the “patents-in-suit”). The patents-in-suit have claims relating to methods of, and apparatus for, laser inscribing gemstones, as well as the inscribed gemstones themselves.

On November 22, 2006, the Company amended its complaint against Photoscribe to include the Gemological Institute of America (the “GIA”) as a co-defendant. As of February 1996, the Company and the GIA entered into an exclusive United States inscription agreement (except for the Company’s own use) with respect to certain intellectual property, which is owned by the Company relating to certain laser inscription equipment and methods (the “Inscription Agreement”) and which includes the patents-in-suit. The GIA has purportedly terminated the Inscription Agreement as of July 31, 2006 under its terms. The GIA then began to commercially use Photoscribe equipment to inscribe gemstones, thus providing the basis to include the GIA in the suit. In addition to the same charges of patent infringement that were originally made against Photoscribe, the amended complaint also charges the GIA with breach of the exclusive license agreement prior to its purported termination and breach of a letter agreement by which GIA was to maintain the Company’s equipment that it had been using. The amended complaint further charges Photoscribe with tortious interference with the Company’s business relationship with the GIA.

On July 19, 2007, the Company filed a Second Amended Complaint which included Mr. David Benderly, President of Photoscribe, as an additional individual defendant, based on discovery during the case, which showed that Mr. Benderly controlled and directed the infringing activity of Photoscribe, and is thus personally liable for patent infringement. Further, the Second Amended Complaint charged Mr. Benderly with fraud based on a demonstration of Photoscribe equipment he gave in 2000 to counsel for the Company to show that the equipment did not infringe the Company's patents. However, discovery has indicated that he setup the machine for use during the demonstration to give the impression that the Photoscribe equipment could not operate to infringe the Company's patents when he knew that it could.

In the Photoscribe-GIA-Benderly litigation the Company seeks injunctive relief, as well as damages, including inscription fees and lost profits based on lost sales and the value added to inscribed gemstones by reason of the use of infringing systems by Photoscribe and the GIA. The Company also seeks to recover damages it suffered as a result of Mr. Benderly’s fraud.

GIA, Photoscribe and Benderly have answered the Second Amended Complaint and all deny liability for the charges made by the Company. GIA has also filed counterclaims alleging non-infringement, invalidity and unenforceability of the patents-in-suit. Further, GIA has asserted counterclaims for (i) breach of contract based on the allegation that the Company failed to provide operative equipment or to maintain the equipment and (ii) false marking for allegedly placing patent numbers on equipment that was not covered by the patents. GIA has additionally filed a counterclaim for equitable estoppel and implied license on the basis that the Company has submitted diamonds to GIA to be graded and these stones may be inscribed by GIA on Photoscribe equipment. The Company has moved to strike this defense. Further, the Company believes that the other counterclaims are without merit and will actively defend against them.

Photoscribe and David Benderly allege counterclaims for non-infringement, invalidity and unenforceability of the patents-in-suit. Further, Photoscribe and Benderly have asserted a counterclaim which charges the Company with an antitrust violation under Section 2 of the Sherman Act for monopolizing the laser inscription market. The antitrust claim has been bifurcated from the main case and may be considered separately after the main case is decided. The company will vigorously contest this counterclaim and the others as baseless.

The Company intends to continue to pursue its Second Amended Complaint against Photoscribe, the GIA and Benderly, and to defend aggressively against their counterclaims. A trial date has been set for February 25, 2008.

On September 1, 2006, Fifth Avenue Group, LLC (“Fifth Avenue”), a stockholder of the Company, filed a Complaint for a Declaratory Judgment and Other Relief in the Supreme Court of the State of New York, County of New York, against the Company and Mellon Investor Services. The Complaint seeks a declaratory judgment that 1,180,000 shares of the Company’s stock purchased by Fifth Avenue from the Company in a private sale in January 2002 are not “restricted stock” pursuant to Rule 144(k) of the Securities Exchange Act of 1934 and that any subsequent purchaser of such shares would not be subject to an irrevocable proxy granted to Messrs. Maurice and Leon Tempelsman by Fifth Avenue in connection with the private sale. The Company intends to vigorously pursue all defenses and counterclaims available to it.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.

On April 11, 2007, the Company adopted a resolution to continue to purchase in the open market, at any time and from time to time during the fiscal year ending May 31, 2008, shares of the Company’s common stock with an aggregate value not to exceed $2.0 million. The Company made no market purchases during the three months ended August 31, 2007.


Item 5.		Other Information

As noted above under the section “Legal Proceedings” the GIA has purported to terminate the Inscription Agreement with the Company as of July 31, 2006.


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

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	LAZARE KAPLAN INTERNATIONAL INC.




	By /s/ William H. Moryto
	William H. Moryto
	Vice President and
	Chief Financial Officer

Dated: October 12, 2007