FORM 10-Q - QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2003
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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 Number: 0-15535
LAKELAND INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3115216
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(State of incorporation) (IRS Employer Identification Number)
711-2 Koehler Ave., Ronkonkoma, New York 11779
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(Address of principal executive offices)
(631) 981-9700
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(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]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value, outstanding
at September 12, 2003 - 3,269,025 shares.
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-Q
The following information of the Registrant and its subsidiaries
is submitted herewith:
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements:
Page
----
Introduction ....................................................................................1
Condensed Consolidated Balance Sheets - July 31, 2003 (unaudited) and January 31, 2003..............2
Condensed Consolidated Statements of Income - Three Months
and Six Months Ended July 31, 2003 and 2002 (unaudited).............................................3
Condensed Consolidated Statement of Stockholders' Equity
for the Six Months Ended July 31, 2003 (unaudited)..................................................4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended July 31, 2003 and 2002 (unaudited)............................................................5
Notes to Condensed Consolidated Financial Statements................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................11
Item 4. Controls and Procedures............................................................................12
PART II - OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security
Holders ...................................................................................12
Item 6. Exhibits and Reports on Form 8-K .................................................................12
Signatures Page ...................................................................................13
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002...........................14
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements:
Introduction
------------
CAUTIONARY STATEMENTS
This report may include "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are all statements other than
statements of historical fact included in this report, including, without
limitation, the statements under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position and liquidity, the Company's strategic
alternatives, future capital needs, development and capital expenditures
(including the amount and nature thereof), future net revenues, business
strategies, and other plans and objectives of management of the Company for
future operations and activities.
Forward-looking statements are based on certain assumptions and analyses
made by the Company in light of its experience and its perception of historical
trends, current conditions, expected future developments and other factors it
believes are appropriate under the circumstances. These statements are subject
to a number of assumptions, risks and uncertainties, and factors in the
Company's other filings with the Securities and Exchange Commission (the
"Commission"), general economic and business conditions, the business
opportunities that may be presented to and pursued by the Company, changes in
law or regulations and other factors, many of which are beyond the control of
the Company. Readers are cautioned that these statements are not guarantees of
future performance, and the actual results or developments may differ materially
from those projected in the forward-looking statements. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
1
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
ASSETS 2003 2003
(Unaudited)
----------- -----------
Current Assets:
Cash and cash equivalents................................................ $ 2,086,207 $ 1,474,135
Accounts receivable, net of allowance for
doubtful accounts of $290,000 and $343,000 at
July 31, 2003 and January 31, 2003, respectively ...................... 11,777,123 10,364,188
Inventories ............................................................. 22,752,936 25,470,044
Deferred income taxes ................................................... 1,001,133 1,001,133
Other current assets .................................................... 706,120 549,564
----------- -----------
Total current assets ........................................... 38,323,519 38,859,064
Property and equipment, net of accumulated
depreciation of $4,111,000 at July 31, 2003
and $3,708,000 at January 31, 2003 .................................... 3,552,682 3,356,835
Other assets ............................................................ 824,795 606,835
----------- -----------
Total Assets ................................................... $42,700,996 $42,822,734
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................................... $ 3,932,466 $ 3,014,038
Current portion of long-term liabilities ................................ 13,935,643 16,657,882
Accrued expenses and other current liabilities .......................... 1,065,635 1,262,175
----------- -----------
Total current liabilities .......................................... 18,933,744 20,934,095
Long-term liabilities ................................................... 518,739 514,572
Deferred income taxes ................................................... 14,643 14,643
----------- -----------
Total Liabilities ......................................... 19,467,126 21,463,310
----------- -----------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par;
1,500,000 shares authorized; none issued
Common stock, $.01 par;
10,000,000 shares authorized;
3,269,025 and 2,969,107 shares issued and outstanding
at July 31, 2003 and January 31, 2003, respectively ................... 32,690 29,691
Additional paid-in capital .............................................. 11,853,398 8,762,673
Retained earnings ....................................................... 11,347,782 12,567,060
----------- -----------
Total stockholders' equity ......................................... 23,233,870 21,359,424
----------- -----------
Total Liabilities and Stockholders' Equity ......................... $42,700,996 $42,822,734
=========== ===========
See notes to condensed consolidated financial statements.
2
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
July 31, July 31,
2003 2002 2003 2002
---- ---- ---- ----
Net sales........................................ $23,289,944 $18,964,284 $47,114,830 $39,607,468
Cost of goods sold............................... 18,596,614 15,321,155 38,325,684 31,790,454
----------- ----------- ----------- -----------
Gross profit..................................... 4,693,330 3,643,129 8,789,146 7,817,014
Operating expenses............................... 3,209,938 2,706,856 5,833,100 5,434,803
----------- ----------- ----------- -----------
Operating profit................................. 1,483,392 936,273 2,956,046 2,382,211
Other income, net ............................... 29,784 30,620 45,226 40,503
Interest expense................................. (143,201) (169,166) (280,997) (344,828)
----------- ----------- ----------- -----------
Income before income taxes .................... 1,369,975 797,727 2,720,275 2,077,886
Provision for income taxes....................... 379,829 239,209 865,829 623,209
----------- ----------- ----------- -----------
Net income ...................................... $ 990,146 $ 558,518 $ 1,854,446 $ 1,454,677
=========== =========== =========== ===========
Net income per common share*:
Basic....................................... $ .30 $ .17 $ .57 $ .45
=========== =========== =========== ===========
Diluted..................................... $ .30 $ .17 $ .57 $ .44
=========== =========== =========== ===========
Weighted average common shares outstanding*:
Basic....................................... 3,268,867 3,262,799 3,266,431 3,258,439
=========== =========== =========== ===========
Diluted..................................... 3,276,480 3,273,721 3,270,976 3,272,264
=========== =========== =========== ===========
*Adjusted for the 10% stock dividend to shareholders of record on July 31, 2003
and 2002.
See notes to condensed consolidated financial statements.
3
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Six months ended July 31, 2003
Additional
Common stock paid-in Retained
Shares Amount capital earnings Total
------ ------ ------- -------- -----
Balance, January 31, 2003 2,969,107 $ 29,691 $ 8,762,673 $ 12,567,060 $ 21,359,424
Net income .............. 1,854,446 1,854,446
Exercise of stock options 5,500 55 19,945 20,000
10% stock dividend ...... 294,418 2,944 3,070,780 (3,073,724) --
--------- ------------ ------------ ------------ ------------
Balance, July 31, 2003 .. 3,269,025 $ 32,690 $ 11,853,398 $ 11,347,782 $ 23,233,870
========= ============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
July 31,
2003 2002
---- ----
Cash Flows from Operating Activities:
Net income ...................................................................... $1,854,446 $ 1,454,677
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for bad debts ......................................................... (53,000) 233,549
Depreciation and amortization ................................................... 403,100 333,986
(Increase) decrease in accounts receivable ...................................... (1,359,935) 297,368
Decrease in inventories ........................................................ 2,717,108 3,050,533
(Increase) decrease in other current and non-current assets ..................... (374,516) 171,477
Increase (decrease) in accounts payable, accrued
expenses and other liabilities ................................................ 726,110 (1,040,101)
---------- -----------
Net cash provided by operating
activities .................................................................... 3,913,313 4,501,489
---------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment ............................................. (598,947) (774,735)
---------- -----------
Net cash used in investing activities ........................................... (598,947) (774,735)
---------- -----------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options ......................................... 19,945 19,662
Net payments under loan agreements............................................... (2,722,239) (2,946,503)
---------- -----------
Net cash used in financing activities............................................ (2,702,294) (2,926,841)
---------- -----------
Net increase in cash ............................................................ 612,072 799,913
Cash and cash equivalents at beginning of period ................................ 1,474,135 1,760,635
---------- -----------
Cash and cash equivalents at end of period....................................... $2,086,207 $ 2,560,548
========== ===========
See notes to condensed consolidated financial statements.
5
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware
corporation, organized in April 1982, is engaged primarily in the manufacture of
personal safety protective work clothing. The principal market for the Company's
products is the United States. No customer accounted for more than 10% of net
sales during the six -month periods ended July 31, 2003 and 2002.
2. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and reflect all adjustments which are, in
the opinion of management, necessary to present fairly the consolidated
financial information required therein. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission for the year ended
January 31, 2003.
The results of operations for the three-month and six-month periods ended
July 31, 2003 and 2002 are not necessarily indicative of the results to be
expected for the full year.
3. Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Laidlaw, Adams &
Peck, Inc., (a Delaware Corporation) Lakeland Protective Wear, Inc. (a Canadian
corporation), Lakeland de Mexico S.A. de C.V. (a Mexican corporation), Weifang
Lakeland Safety Products, Co., Ltd. (a Chinese corporation), Qing Dao May Tung
Healthcare Co., Ltd. ( a Chinese corporation), and Lakeland Industries Europe
Ltd. (a U.K. Corporation). All significant intercompany accounts and
transactions have been eliminated.
4. Inventories
Inventories consist of the following:
July 31, January 31,
2003 2003
---- ----
Raw materials.................... $ 8,268,907 $ 7,839,144
Work-in-process.................. 2,236,451 1,656,942
Finished goods................... 12,247,578 15,973,958
---------- ----------
$22,752,936 $25,470,044
=========== ===========
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out method.
6
5. Stockholders' Equity
(a) Stock split
On April 28, 2003 and June 24, 2002, the Company announced a 10% stock
dividend to shareholders of record on July 31, 2003 and 2002, respectively, with
a distribution date of August 31, 2003 and August 30, 2002. Share and per share
amounts have been restated to reflect the stock split for all periods presented.
(b) Earnings per share
Basic earnings per share are based on the weighted average number of common
shares outstanding without consideration of potential common shares. Diluted
earnings per share are based on the weighted average number of common and
potential common shares outstanding. The diluted earnings per share calculation
takes into account the shares that may be issued upon exercise of stock options,
reduced by the shares that may be repurchased with the funds received from the
exercise based on the average price during the period.
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
July 31, July 31,
2003 2002 2003 2002
---- ---- ---- ----
Numerator
Net income $ 990,146 $ 558,518 $1,854,446 $1,454,677
========== ========== ========== ==========
Denominator for basic earnings per share
(Weighted-average shares) 3,268,867 3,262,799 3,266,431 3,258,439
Effect of dilutive securities:
Stock options 7,613 10,922 4,545 13,825
---------- ---------- ---------- ----------
Denominator for diluted earnings per share
(adjusted weighted-average shares) 3,276,480 3,273,721 3,270,976 3,272,264
========== ========== ========== ==========
Basic earnings per share $ .30 $ .17 $ .57 $ .45
========== ========== ========== ==========
Diluted earnings per share $ .30 $ .17 $ .57 $ .44
========== ========== ========== ==========
Excluded from the calculation of earnings per share are options to purchase
8,910 and 1,210 shares at July 31, 2003 and 2002, respectively, as they were not
exercisable or their inclusion would have been anti dilutive.
6. Credit Facility
At July 31, 2003, the balance outstanding under the Company's secured $18
million revolving credit facility amounted to $13,935,643. This facility, which
is based on a percentage of eligible accounts receivable and inventory, as
defined, has been renewed and expires on July 31, 2004. Borrowings under the
facility bear interest at a rate per annum equal to the one-month LIBOR plus 2%.
The credit facility is collateralized by substantially all of the assets of the
Company and guaranteed by certain of the Company's subsidiaries. The credit
facility contains financial covenants, including, but not limited to, minimum
levels of earnings and maintenance of minimum tangible net worth and other
certain ratios at all times, for which the Company is in compliance.
7. Major Supplier
The Company purchased approximately 72.3% and 73.0% of its raw materials
from DuPont for the six months ended July 31, 2003 and 2002, respectively. The
Company has been purchasing such raw materials from DuPont for over twenty
years, and as one of its largest customers in Tyvek, considers its relationship
with this supplier to be excellent. The Company expects this relationship to
continue for the foreseeable future. If required, similar raw materials could be
purchased from other sources; although, the Company's competitive position in
the marketplace could be adversely affected.
7
8. Stock Based Compensation
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123"As amended by SFAS No.148
"Accounting for Stock Based Compensation Transaction and Disclosure"). The
Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its plans and does not recognize
compensation expense for its employee stock-based compensation plans when awards
are issued at a stock price that is at or above the current market price at the
time of the grant. All stock-based awards were fully vested at January 31, 2003.
During the six months ended July 31, 2003 option shares were granted to three
directors, upon election or re-election at the Company's Annual Meeting held on
June 18, 2003. These options are not exercisable for six months, accordingly, no
pro-forma compensation expense based on fair value exists for the six months
ended July 31, 2003 and 2002.
9. Impact of Recently Issued Accounting Standards
In May 2003, the FASB issued SFAS No.150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected included mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other asstes and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The initial adoption of SFAS No. 150 on August 1, 2003 is not expected to
hacve any impact on the Company's consolidated financial statements.
The FASB issued Interpretation No.45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Inbebtedness of
Others' and Interpretation of FASB Statements No. 5,57 and 107 and Rescission of
FASB Interpretation No. 34. This interpretation expands on the existing
accounting guidance and disclosure requirements for most guarantees, including
indemnifications. It requires that at the time a company issues a guarantee, the
company must recognize an initial liability for the fair value of the of the
obligations it assumes under that guarantee if that amount is reasonably
estimable, and must disclose that information in its interim and annual
financial statements. The provisions for initial recognition and measurement of
the liability are to be applied on a prospective basis to guarantees issued or
modified on or after January 1, 2003. The Company's initial adoption of this
statement on January 1, 2003, did not have an impact on its results of
operations, financial position, or cash flows. Guarantees issued or modified
after January 1, 2003, will be recognized at their fair value in the Company's
financial
8
statements. The Company has not issued any guarantees as of July 31, 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46, "Consolidation of Variable Interest Equities,"("FIN 46")
which provides guidance on identifying and assessing interests in variable
interest entities to decide whether to consolidate that entity. FIN 46 requires
consolidation of existing unconsolidated variable interest entities if the
entities do not effectively disperse risk among parties involved.
The Company adopted the provisions of FIN 46 during the first quarter of
2003, as required, for any variable interest entities created after January 31,
2003. The adoption of this provision of FIN 46 did not have an impact on the
Company's consolidated financial position and results of operations. The Company
is required to adopt the provisions of FIN 46 for variable interests acquired
before February 1, 2003 in the third quarter of 2003. The adoption thereof is
not anticipated to have a material impact on the Company's consolidated
financial position and results of operations.
9
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2.
Six months ended July 31, 2003 compared to the six months ended July 31,
2002.
Net Sales. Net sales for the six months ended July 31, 2003 increased
$7,507,000, (or 18.9%), to $47,115,000 from $39,607,000 reported for the six
months ended July 31, 2002. The increase in sales was principally attributable
to improving economic conditions, and partially to SARS related garment demand
at our Toronto, Canada and Chinese subsidiaries and to the sales price increase
effective May 12, 2003.
Gross Profit. Gross profit for the six months ended July 31, 2003,
increased by $972,000, (or 12.4%) to $8,789,000 from $7,817,000 for the six
months ended July 31, 2002. Gross profit as a percentage of net sales decreased
to 18.7% for the six months ended July 31, 2003 from 19.7% reported for the
prior year's period partially due to an increase in the price of raw materials,
an increase in inventory reserves, payroll and payroll taxes. The principal
factor affecting gross profit margins was that commencing March 1, 2003 the
Company incurred an increase in the price of raw materials from DuPont, but
could not impose a price increase on its products using these DuPont raw
materials until May 12, 2003 due to market conditions.
Operating Expenses. Operating expenses for the six months ended July 31,
2003 increased by $398,000 (or 7.3%) to $5,833,000, (or 12.4% of net sales) from
$5,435,000, (or 13.7% of net sales) for the six months ended July 31, 2002.
Operating expenses increased principally as a result of an increase in payrolls,
commissions, travel, medical expenses, partially offset by a decrease in the
allowance for bad debts, R&D expense and VAT refunds received at the China
locations.
Interest Expense. Interest expense for the six months ended July 31, 2003
decreased by $64,000 or (18.6%) to $281,000 from $345,000 for the six months
ended July 31, 2002. This decrease was primarily due to a decrease in average
borrowings under the Company's credit facility and to decreasing interest rates.
Income Tax Expense. The effective tax rate for the six months ended July
31, 2003 and 2002 of 31.8% and 30%, respectively, deviates from the Federal
statutory rate of 34.0%, which is primarily attributable to differing foreign
tax rates and tax refunds, and state income taxes.
Net Income. As a result of the foregoing, net income increased to
$1,854,000 (or 27.4%) for the six months ended July 31, 2003, from net income of
$1,455,000 for the six months ended July 31, 2002.
Three months ended July 31, 2003 compared to the three months ended July
31, 2002.
Net Sales. Net sales for the three months ended July 31, 2003 increased
$4,326,000, (or 22.8%) to $23,290,000 from $18,964,000 reported for the three
months ended July 31, 2002. The increase in sales was principally attributable
to improving economic conditions, to SARS related garment demand at our Toronto,
Canada and Chinese subsidiaries and to the sales price increase effective May
12, 2003.
Gross Profit. Gross profit for the three months ended July 31, 2003,
increased by $1,050,000, (or 28.8%) to $4,693,000 from $3,643,000 for the three
months ended July 31, 2002. Gross profit as a percentage of net sales increased
to 20.15% for the three months ended July 31, 2003 from 19.2% reported for the
prior year's period. The principal factor affecting gross profit margins was
that the Company imposed a sales price increase on its products on May 12, 2003.
During the three months ended July 31, 2003 an increase in inventory reserves
was recorded.
Operating Expenses. Operating expenses for the three months ended July 31,
2003 increased by $503,000 (or 18.6%) to $3,210,000, (or 13.8% of net sales)
from $2,707,000, (or 14.3% of net sales) for the three months ended July 31,
2002. Operating expenses increased principally as a result of an increase in
commissions, payrolls, professional fees, and insurance expenses, offset
partially by VAT refunds received at the China locations.
Interest Expense. Interest expense for the three months ended July 31, 2003
decreased by $26,000 (or 15.3%) to $143,000 from $169,000 for the three months
ended July 31, 2002. This decrease was primarily due to a decrease in average
borrowings under the Company's credit facility and to decreasing interest rates.
Income Tax Expense. The effective tax rate for the three months ended July
31, 2003 and 2002 of 27.7% and 30% respectively, deviates from the Federal
statutory rate of 34.0%, which is primarily attributable to differing foreign
tax rates and tax refunds, and state income taxes.
Net Income. As a result of the foregoing, net income increased to $990,000
(or 77%) for the three moths ended July 31, 2003, from net income of $559,000
for the three months ended July 31, 2002.
10
LIQUIDITY and CAPITAL RESOURCES
- -------------------------------
Liquidity and Capital Resources. The Company's working capital is equal to
$19,390,000 at July 31, 2003. The Company's primary sources of funds for
conducting its business activities have been from cash flow provided by
operations and borrowings under its credit facilities. The Company requires
liquidity and working capital primarily to fund increases in inventories and
accounts receivable associated with sales growth and, to a lesser extent, for
capital expenditures.
Net cash provided by operating activities was $3,913,000 for the six months
ended July 31, 2003 and was due primarily to an increase in accounts receivables
of $1,360,000 a decrease in inventories of $2,717,000 and net income from
operations of $1,854,000, and by an increase in accounts payable, accrued
expenses and other liabilities of $726,000.
Net cash used in investing activities of $599,000 for the six months ended
July 31, 2003 was primarily attributable to construction costs in China. Net
cash used in financing activities of $2,702,000 for the six months ended July
31, 2003 was primarily attributable to net payments in connection with the term
loan and revolving credit facility. The revolving credit facility permits the
Company to borrow up to a maximum of $18 million. The revolving credit agreement
expires on July 31, 2004 and has therefore been classified as a short-term
liability in the accompanying balance sheet at July 31, 2003. Borrowings under
the revolving credit facility amounted to approximately $13,936,000 at July 31,
2003.
The Company believes that cash flow from operations and the revolving
credit facility will be sufficient to meet its currently anticipated operating,
capital expenditures and debt service requirements for at least the next twelve
months. Historically, the Company has been able to renew its' credit facility on
acceptable terms, however, there can be no assurance that such financing will
continue to be available.
The Company is in compliance with all covenants under its credit agreement
as of July 31, 2003. The Company made its last principal and interest payment on
its $3 million term loan facility in April 2003, thereby extinguishing all
long-term bank debt.
Product Liability Claims have been de minimus over the last 10 years and
those claims made have all been dismissed, except one that was settled in 1993
and paid by the Company's insurer. In fiscal 2004 the Company has $5 million of
product liability insurance with a $10,000 deductible per occurrence. Presently
only one product liability suit is outstanding. The Company's total exposure on
this suit is $2,500. Suits are generally in the nature of minor chemical or fire
burns where the garments are misused or plaintiffs mistakenly sue the Company,
when indeed the Company's products are not involved. All costs of administering
and litigating claims is handled by attorneys appointed and paid by the
Company's insurer, other than the deductible amount per occurrence, which has
ranged from $2,500 to $10,000 over the last 10 years.
As of July 31, 2003, the company has $2,086,207 in cash and an unused
credit line of $4,064,357. Capital spending plans for fiscal 2004 include the
last payment of $94,500 on the Company's 53,300 square foot facility in An Qui,
China and $249,200 on its 90,400 square foot facility in Jiaozhou, China; the
latter amount to a construction company upon completion in Summer 2003.
New capital equipment expenditures for the remainder of fiscal 2004 are not
expected to exceed $450,000.
A reserve for a bond posting and settlement was recorded at January 31,
2003 in the amount of $48,000, relating to a dispute with Mexican officials over
custom's law for companies in the maquiladora program. Fiscal 2003 included a
reserve for a Canadian customs dispute of which approximately $12,000 remains.
The Company has received notice from both government agencies that the disputes
have been settled that no additional payments are required for these disputes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Activity and Interest Rates
- --------------------------------------------
The Company's foreign exchange exposure is principally limited to the
relationship of the U.S. Dollar to the Mexican Peso, Canadian Dollar and the
Chinese RMB. There have been no material changes to our market risks as
disclosed in our Annual Report of Form 10-K for the year ended January 31, 2003.
Market Risk
- -----------
The Company is exposed to market risk, including changes in interest rates
and currency exchange rates. To
11
manage the volatility relating to these exposures, the Company seeks to limit,
to the extent possible its non-U.S. dollar denominated purchases and sales.
Foreign exchange risk occurs principally only with regard to its Canadian, and
United Kingdom subsidiary sales.
Impact of Recently Issued Accounting Standards
----------------------------------------------
In May 2003, the FASB issued SFAS No.150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected included mandatory redeemable stock, certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The initial adoption of SFAS No. 150 on August 1, 2003 is not expected to
hacve any impact on the Company's consolidated financial statements.
The FASB issued Interpretation No.45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others' and Interpretation of FASB Statements No. 5,57 and 107 and Rescission of
FASB Interpretation No. 34. This interpretation expands on the existing
accounting guidance and disclosure requirements for most guarantees, including
indemnifications. It requires that at the time a company issues a guarantee, the
company must recognize an initial liability for the fair value of the of the
obligations it assumes under that guarantee if that amount is reasonably
estimable, and must disclose that information in its interim and annual
financial statements. The provisions for initial recognition and measurement of
the liability are to be applied on a prospective basis to guarantees issued or
modified on or after January 1, 2003. The Company's initial adoption of this
statement on January 1, 2003, did not have an impact on its results of
operations, financial position, or cash flows. Guarantees issued or modified
after January 1, 2003, will be recognized at their fair value in the Company's
financial statements. The Company has not issued any guarantees as of July 31,
2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46, "Consolidation of Variable Interest Equities,"("FIN 46")
which provides guidance on identifying and assessing interests in variable
interest entities to decide whether to consolidate that entity. FIN 46 requires
consolidation of existing unconsolidated variable interest entities if the
entities do not effectively disperse risk among parties involved.
The Company adopted the provisions of FIN 46 during the first quarter of 2003,
as required, for any variable interest entities created after January 31, 2003.
The adoption of this provision of FIN 46 did not have an impact on the Company's
consolidated financial position and results of operations. The Company is
required to adopt the provisions of FIN 46 for variable interests acquired
before February 1, 2003 in the third quarter of 2003. The adoption thereof is
not anticipated to have a material impact on the Company's consolidated
financial position and results of operations.
Foreign Exchange Risk Management
- --------------------------------
As a multinational corporation, the Company is exposed to changes in
foreign exchange rates. As the Company's non-denominated U.S. dollar
international sales grow, exposure to volatility in exchange rates could have an
adverse impact on the Company's financial results. The Company's risk from
exchange rate changes is presently related to non-dollar denominated sales in
Canada and the United Kingdom.
Interest Rate Risk
- ------------------
The Company is exposed to interest rate change market risk with respect to
its credit facility with a financial institution which is priced based upon
LIBOR. At July 31, 2003, $13,936,000 was outstanding under the term-loan and
revolving credit facilities. Changes in the above described interest rates
during fiscal 2004 will have a positive or negative effect on the Company's
interest expense. Each 1% fluctuation in the above rates will increase or
decrease interest expense for the Company by approximately $139,360. Each 1%
fluctuation in interest rates earned would not increase or decrease interest
income on these deposits by a significant amount.
Item 4. Controls and Procedures
Pursuant to rules adopted by the SEC as directed by Section 302 of the
Sarbanes-Oxley Act of 2002, the Company has performed an evaluation of its
disclosure controls and procedures (as defined by Exchange Act Rules 13a-4)
within 90 days of the date of the filing of this report. Based on this
evaluation, the Company's Chief Executive Officer and Principal Accounting Offer
have concluded that these procedures are effective in ensuring that information
required to be disclosed by the Company is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. In
addition, there have not been any significant changes in internal controls or
other factors that could significantly affect internal controls subsequent to
the date of the Company's most recent evaluation.
PART II. OTHER INFORMATION
Items 1 - 3 and 5 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the company (the "Annual Meeting")
was held on June 18, 2003 in Ronkonkoma, New York. The Company had
2,972,407 shares of common stock outstanding as of April 25, 2003, the
record date for the Annual Meeting.
Proposal 1 - Election of Director
The candidate listed below was duly elected to the Board of Directors at
the Annual Meeting by the tally indicated.
Candidate Votes in Favor Votes Withheld
--------- -------------- --------------
John J. Collins, Jr. 2,854,949 32,148
Eric O. Hallman 2,854,949 32,148
Michael E. Cirenza 2,854,909 32,688
Proposal 2 - Ratification of Auditors for fiscal 2003 and 2004:
Votes in Favor Votes Against Abstain
-------------- ------------- -------
Pricewaterhouse Coopers LLP 2,880,014 5,130 1,953
Item 6. Exhibits and
Reports on Form 8-K:
a - None
b - On June 10, 2003 the Company filed a Form 8-K relating to the results of
operations for the 1st Quarter Ended April 30, 2003.
On June 24, 2003 The Company filed a Form 8-K relating to the July 31, 2003
1 for 10 Stock distribution.
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SIGNATURES
-------------------- --------------------------
Pursuant to the requirements of Section 13 or 15 (d) 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.
LAKELAND INDUSTRIES, INC.
(Registrant)
Date: September 12, 2003 /s/ Raymond J. Smith
---------------------------------------
Raymond J. Smith,
President and Chief Executive Officer
Date: September 12, 2003 /s/ Christopher J. Ryan
---------------------------------------
Christopher J. Ryan,
Executive Vice President, Secretary and
General Counsel
Date: September 12, 2003 /s/ James M. McCormick
---------------------------------------
James M. McCormick,
Treasurer
(Principal Accounting Officer)
13