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 October 31, 2003
----------------
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
- ------------------------- -----------------------------------
(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
December 12, 2003 - 3,268,991 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 - October 31, 2003 (unaudited) and January 31, 2003...........2
Condensed Consolidated Statements of Income - Three Months
and Nine Months Ended October 31, 2003 and 2002 (unaudited).........................................3
Condensed Consolidated Statement of Stockholders' Equity
for the Nine Months Ended October 31, 2003 (unaudited)..............................................4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended October 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...............9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................11
Item 4. Controls and Procedures............................................................................12
PART II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K .................................................................12
Signatures Page ...................................................................................13
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
October 31, January 31,
ASSETS 2003 2003
(Unaudited)
Current Assets: ----------- -----------
Cash and cash equivalents......................................$2,467,178 $1,474,135
Accounts receivable, net of allowance for
doubtful accounts of $323,000 and $343,000 at
October 31, 2003 and January 31, 2003, respectively .........12,134,926 10,364,188
Inventories ...................................................24,170,266 25,470,044
Deferred income taxes ..........................................1,001,133 1,001,133
Other current assets ....................................... 644,558 549,564
----------- -----------
Total current assets..................................40,418,061 38,859,064
Property and equipment, net of accumulated
depreciation of $4,311,000 at October 31, 2003
and $3,708,000 at January 31, 2003............................3,635,164 3,356,835
Other assets.................................................. 846,922 606,835
----------- -----------
Total Assets $44,900,147 $42,822,734
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...............................................$3,212,507 $3,014,038
Current portion of long-term liabilities.......................15,809,810 16,657,882
Accrued expenses and other current liabilities.............. 1,227,798 1,262,175
----------- -----------
Total current liabilities.................................20,250,115 20,934,095
Long-term liabilities ........................................... 531,239 514,572
Deferred income taxes.................................... 14,643 14,643
----------- -----------
Total Liabilities 20,795,997 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;
3,268,991 and 2,969,107 shares issued and outstanding
at October 31, 2003 and January 31, 2003, respectively...........32,690 29,691
Additional paid-in capital.....................................11,853,043 8,762,673
Retained earnings..............................................12,218,417 12,567,060
----------- -----------
Total stockholders' equity................................24,104,150 21,359,424
----------- -----------
Total Liabilities and Stockholders' Equity $44,900,147 $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 NINE MONTHS ENDED
October31, October 31,
2003 2002 2003 2002
---- ---- ---- ----
Net sales..........................................$21,332,430 $18,534,900 $68,447,260 $58,142,368
Cost of goods sold................................. 16,831,208 15,083,441 55,156,892 46,873,895
----------- ----------- ----------- -----------
Gross profit........................................ 4,501,222 3,451,459 13,290,368 11,268,473
Operating expenses.................................. 3,034,538 2,445,343 8,867,638 7,880,146
----------- ----------- ----------- -----------
Operating profit.....................................1,466,684 1,006,116 4,422,730 3,388,327
Other income, net ................................. 14,417 4,090 59,643 44,593
Interest expense.................................... (118,650) (146,325) (399,647) (491,153)
----------- ----------- ----------- -----------
Income before income taxes ...................... 1,362,451 863,881 4,082,726 2,941,767
Provision for income taxes...................... 492,171 368,274 1,358,000 991,483
----------- ----------- ----------- -----------
Net income .......................................... $870,280 $ 495,607 $2,724,726 $ 1,950,284
=========== =========== =========== ===========
Net income per common share*:
Basic.........................................$ .27 $ .15 $ .83 $ .60
Diluted.......................................$ .27 $ .15 $ .83 $ .60
Weighted average common shares outstanding*:
Basic......................................... 3,268,991 3,262,993 3,268,351 3,259,957
=========== =========== =========== ===========
Diluted....................................... 3,274,429 3,272,833 3,274,480 3,272,454
=========== =========== =========== ===========
*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)
Nine months ended October 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 2,724,726 2,724,726
Exercise of stock options 5,500 55 19,945 20,000
10% stock dividend 294,384 2,944 3,070,425 (3,073,369) --
--------- ------------ ------------ ------------ ------------
Balance, October 31, 2003 3,268,991 $ 32,690 $ 11,853,043 $ 12,218,417 $ 24,104,150
========= ============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
October 31,
2003 2002
---- ----
Cash Flows from Operating Activities:
Net income ..................................................................... $2,724,726 $ 1,950,284
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for bad debts ........................................................ (20,000) 245,042
Depreciation and amortization .................................................. 602,555 447,430
(Increase) decrease in accounts receivable ..................................... (1,750,738) 354,404
Decrease in inventories ....................................................... 1,299,778 1,033,664
(Increase) decrease in other current and non-current assets .................... (335,081) 169,314
Increase (decrease) in accounts payable, accrued
expenses and other liabilities ............................................... 180,761 (1,134,022)
---------- -----------
Net cash provided by operating
activities ................................................................... 2,702,001 3,066,116
---------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment ............................................ (880,886) (1,000,862)
---------- -----------
Net cash used in investing activities .......................................... (880,886) (1,000,862)
---------- -----------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options ........................................ 20,000 19,662
Net repayments under loan agreements ........................................... (848,072) (1,855,384)
---------- -----------
Net cash used in financing activities .......................................... (828,072) (1,835,722)
---------- -----------
Net increase in cash ........................................................... 993,043 229,532
Cash and cash equivalents at beginning of period ............................... 1,474,135 1,760,635
---------- -----------
Cash and cash equivalents at end of period ..................................... $2,467,178 $ 1,990,167
========== ===========
Non Cash Financing Activity:
Issuance of Stock Dividend ..................................................... 3,073,369 2,376,365
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 nine -month periods ended October 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 nine-month periods ended
October 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:
October 31, January 31,
2003 2003
---- ----
Raw materials........................$8,863,673 $ 7,839,144
Work-in-process...................... 2,157,882 1,656,942
Finished goods.......................13,148,711 15,973,958
---------- -----------
$25,470,044 $24,170,266
=========== ===========
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out method.
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 dividend for all periods
presented.
(b) Earnings per share
6
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 Nine Months Ended
October 31, October 31,
2003 2002 2003 2002
---- ---- ---- ----
Numerator
Net income $ 870,280 $ 495,607 $ 2,724,726 $1,950,284
========== ========== =========== ==========
Denominator
Denominator for basic earnings per share
(Weighted-average shares) 3,268,991 3,262,993 3,268,351 3,259,957
Effect of dilutive securities:
Stock options 5,438 9,840 6,129 12,497
---------- ---------- ----------- ----------
Denominator for diluted earnings per share
(adjusted weighted-average shares) 3,274,429 3,272,833 3,274,480 3,272,454
========== ========== =========== ==========
Basic earnings per share $ .27 $ .15 $ .83 $ .60
========== ========== =========== ==========
Diluted earnings per share $ .27 $ .15 $ .83 $ .60
========== ========== =========== ==========
Excluded from the calculation of earnings per share are options to purchase
0 and 1,210 shares at October 31, 2003 and 2002, respectively, as they were not
exercisable or their inclusion would have been anti dilutive.
6. Credit Facility
At October 31, 2003, the balance outstanding under the Company's $18
million revolving credit facility amounted to $15,809,810. 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 71.9% and 74.0% of its raw materials
from DuPont for the nine months ended October 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 nine months ended October 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.
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 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 did not have an
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 October
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 fourth quarter of fiscal 2004.
8
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2.
Nine months ended October 31, 2003 compared to the nine months ended
October 31, 2002.
Net Sales. Net sales for the nine months ended October 31, 2003 increased
$10,305,000, (or 17.7%), to $68,447,000 from $58,142,000 reported for the nine
months ended October 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 nine months ended October 31, 2003,
increased by $2,022,000, (or 17.9%) to $13,290,000 from $11,268,000 for the nine
months ended October 31, 2002. Gross profit as a percentage of net sales remain
at 19.4% for the nine months ended October 31, 2003 and that reported for the
prior year's period. The principal factor affecting the current year's 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 nine months ended October
31, 2003 increased by $988,000 (or 12.5%) to $8,868,000, (or 13% of net sales)
from $7,880,000, (or 13.6% of net sales) for the nine months ended October 31,
2002. Operating expenses increased principally as a result of an increase in
payrolls, freight, commissions, medical expenses, partially offset by a decrease
in allowance for bad debts, R&D expense and VAT refunds received at the China
Locations.
Interest Expense. Interest expense for the nine months ended October 31,
2003 decreased by $91,000 or (18.5%) to $400,000 from $491,000 for the nine
months ended October 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 nine months ended
October 31, 2003 and 2002 of 33.3% and 33.7%, 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
$2,725,000 (or 39.7%) for the nine months ended October 31, 2003, from net
income of $1,950,000 for the nine months ended October 31, 2002.
Three months ended October 31, 2003 compared to the three months ended
October 31, 2002.
Net Sales. Net sales for the three months ended October 31, 2003 increased
$2,797,000, (or 15.1%) to $21,332,000 from $18,535,000 reported for the three
months ended October 31, 2002. The increase in sales was principally
attributable to improving economic conditions, to the sales price increase
effective May 12, 2003 and to a lesser extent to SARS related garment demand at
our Toronto, Canada and Chinese subsidiaries.
Gross Profit. Gross profit for the three months ended October 31, 2003,
increased by $1,050,000 (or 30.4%) to $4,501,000 from $3,451,000 for the three
months ended October 31, 2002. Gross profit as a percentage of net sales
increased to 21.1% for the three months ended October 31, 2003 from 18.6%
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 October 31, 2003 an
increase in inventory reserves was recorded.
Operating Expenses. Operating expenses for the three months ended October
31, 2003 increased by $590,000 (or 24.1%) to $3,035,000, (or 14.2% of net sales)
from $2,445,000, (or 13.2% of net sales) for the three months ended October 31,
2002. Operating expenses increased principally as a result of an increase in
freight, 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 October 31,
2003 decreased by $27,000 (or 18.5%) to $119,000 from $146,000 for the three
months ended October 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
October 31 2003 and 2002 of 36.1% and 42.6% 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.
9
Net Income. As a result of the foregoing net income increased to $870,000
(or 75%) for the three months ended October 31, 2003, from net income of
$496,000 for the three months ended October 31, 2002.
LIQUIDITY and CAPITAL RESOURCES
- -------------------------------
Liquidity and Capital Resources. The Company's working capital is equal to
$20,168,000 at October 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 $2,702,000 for the nine
months ended October 31, 2003 and was due primarily to an increase in accounts
receivables of $1,771,000 a decrease in inventories of $1,300,000 and net income
from operations of $2,725,000, and by a decrease in accounts payable, accrued
expenses and other liabilities of $201,000.
Net cash used in investing activities of $881,000 for the nine months ended
October 31, 2003 was primarily attributable to construction costs in China.
Net cash used in financing activities of $828,000 for the nine months ended
October 31, 2003 was primarily attributable to borrowings 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 October 31, 2003. Borrowings under the revolving credit facility
amounted to approximately $15,810,000 at October 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 October 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 October 31, 2003, the company has $2,467,000 in cash and an unused
credit line of $2,190,000. Capital spending for fiscal 2004 included the last
payment of $94,500 on the Company's 53,300 square foot facility in An Qui, China
and $243,000 on its 90,400 square foot facility in Jiaozhou, China; the latter
amount to a construction company upon completion.
New capital equipment expenditures (excluding buildings) 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.
10
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, the
Chinese RMB and the EURO. 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 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.
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.
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 did not have an
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 October
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 fourth quarter of fiscal 2004.
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 October 31, 2003, $15,810,000 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 $158,100. Each 1%
fluctuation in interest rates earned would not increase or decrease interest
income on these deposits by a significant amount.
11
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 through 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K:
a- 10(g) Employment Agreement between the Company and Raymond J.
Smith, dated September 22, 2003.
10(s) Employment Agreement between the Company and Paul C. Smith,
dated September 22, 2003.
31 and 32 Certifications Pursant to Section 302 of the
Sarbanes-Oxley Act of 2002
b - None
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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: December 12, 2003 /s/Raymond J. Smith
---------------------------------------
Raymond J. Smith,
President and Chief Executive Officer
Date: December 12, 2003 /s/Christopher J. Ryan
---------------------------------------
Christopher J. Ryan,
Executive Vice President, Secretary and
General Counsel
Date: December 12, 2003 /s/James M. McCormick
---------------------------------------
James M. McCormick,
Treasurer
(Principal Accounting Officer)
13