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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number: 0 - 15535
LAKELAND INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3115216
(State of Incorporation) (I.R.S. Employer Identification Number)
711-2 Koehler Ave., Ronkonkoma, NY 11779
(Address of Principal Executive Offices)
(631) 981-9700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None Securities
registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S - K (ss. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10 - K or any amendment to this Form 10 - K Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the Common Stock outstanding and held by
non-affiliates (as defined in Rule 405 under the Securities Exchange Act of
1934) of the Registrant, based upon the closing price of the Common Stock on
NASDAQ on the last day of the registrant's most recently completed second
quarter (July 31, 2003) was approximately $23,994,513 (based on 2,298,325 shares
held by non-affiliates).
The number of shares outstanding of the Registrant's common stock, $.01
par value, on April 26, 2004 was 3,273,925.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than May 30, 2004,(for the Annual Meeting of Stockholders to be held June
16, 2004), are incorporated by reference to Part III of this Annual Report on
Form 10-K.
1
LAKELAND INDUSTRIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PART 1:
Cautionary Statement regarding Forward-Looking Information
Item I Business
Overview
Industry Overview and Consolidation
Business Strategy
Our Competitive Strengths
Products
Quality Control
Marketing and Sales
Research and Development
Suppliers and Materials
Competition
Seasonality
Patents and Trademarks
Employees
Enviromental Matters
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II:
Item 5 Market for the Registrant's Common Stock and Related Stockholder
Matters
Item 6 Selected Consolidated Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A Quantitative and Qualitative Disclosure about Market Risk
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A Controls and Procedures
PART III:
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Relationships and Related Transactions
Item 14 Principal Accounting Fees and Services
PART IV:
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Certification under Exchange Act Rules 13a - 14(b) and 15d- 14(b)
2
This Annual Report on Form 10-K contains forward-looking statements that
are made pursuant to the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve risks,
uncertainties and assumptions as described from time to time in registration
statements, annual reports and other periodic reports and filings of the Company
filed with the Securities and Exchange Commission. All statements, other than
statements of historical facts, which address the Company's expectations of
sources of capital or which express the Company's expectation for the future
with respect to financial performance or operating strategies, can be identified
as forward-looking statements. As a result, there can be no assurance that the
Company's future results will not be materially different from those described
herein as "believed,""anticipated,""estimated" or "expected," which reflect the
current views of the Company with respect to future events. We caution readers
that these forward-looking statements speak only as of the date hereof. The
Company hereby expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any such statements to reflect any change
in the Company's expectations or any change in events, conditions or
circumstances on which such statement is based.
PART I
Lakeland Industries, Inc. (the "Company" or "Lakeland," "we," "our," or
"us") was incorporated in the State of Delaware in 1986. Our executive offices
are located at 711-2 Kohler Avenue, Ronkonkoma, New York 11779, and our
telephone number is (631) 981-9700. Our web site is located at www.lakeland.com.
Information contained on our web site is not part of this report.
ITEM 1. BUSINESS
Overview
We manufacture and sell a comprehensive line of safety garments and
accessories for the industrial protective clothing market. Our products are sold
by our in-house sales force and independent sales representatives to a network
of over 500 safety and mill supply distributors. These distributors in turn
supply end user industrial customers such as chemical/petrochemical, automobile,
steel, glass, construction, smelting, janitorial, pharmaceutical and high
technology electronics manufacturers, as well as hospitals and laboratories. In
addition, we supply federal, state and local governmental agencies and
departments such as fire and police departments, airport crash rescue units, the
Department of Defense, Central Intelligence Agency, Federal Bureau of
Investigation, U.S. Secret Service and the Centers for Disease Control. In
fiscal 2004, we had net sales of $89.7 million and earnings per share of $1.11,
which represent a growth rate of 15.3% and 38.8%, respectively, over our
previous fiscal year. Our net sales attributable to customers outside the United
States were $4.5 million, $5.7 million and $8.0 million, in fiscal 2002, fiscal
2003 and fiscal 2004, respectively.
Our major product categories and their applications are described below:
Limited Use/Disposable Protective Clothing. We manufacture a complete line
of limited use/disposable protective garments offered in coveralls, lab coats,
shirts, pants, hoods, aprons, sleeves and smocks. These garments are made from
several non-woven fabrics, primarily Tyvek(R) and TyvekQC (both DuPont
manufactured fabrics) and also our proprietary fabrics manufactured pursuant to
customer order. These garments provide protection from low-risk contaminants or
irritants, such as chemicals, pesticides, fertilizers, paint, grease and dust,
and from limited exposure to hazardous waste and toxic chemicals, including
acids, asbestos, lead and hydro-carbons (or PCBs) that pose health risks after
exposure for long periods of time. Additional applications include protection
from viruses and bacteria, such as AIDS, streptococcus, SARS and hepatitis, at
hospitals, clinics and emergency rescue sites and use in clean room environments
to prevent human contamination in the manufacturing processes. This is our
largest product line.
High-End Chemical Protective Suits. We manufacture heavy duty chemical
suits made from TyChem(R) SL, TK and TyChem(R) BR, which are DuPont manufactured
fabrics. These suits are worn by individuals on hazardous material teams to
provide protection from powerful, highly concentrated and hazardous or
potentially lethal chemical and biological toxins, such as toxic wastes at Super
Fund sites, toxic chemical spills or biological discharges, chemical or
biological warfare weapons (such as anthrax or ricin), and chemicals and
petro-chemicals present during the cleaning of refineries and nuclear
facilities. These suits can be used in conjunction with a fire protective shell
that we manufacture to protect the user from both chemical and flash fire
hazards. Homeland Security measures and government funding of personal
protective equipment for first responders to terrorist threats or attack have
recently resulted in increased demand for our high-end chemical suits and we
believe demand for these suits will continue to increase in the future.
Fire Fighting and Heat Protective Apparel. We manufacture an extensive
line of fire fighting and heat protective apparel for use by fire fighters and
other individuals that work in extreme heat environments. Our branded fire
fighting apparel Fyrepel(TM) is sold to local municipalities and industrial fire
fighting teams. Our heat protective aluminized fire suits
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are manufactured from Nomex(R), a fire and heat resistant material, and
Kevlar(R), a cut and heat resistant, high-strength, lightweight, flexible and
durable material produced by DuPont. This apparel is also used for maintenance
of extreme high temperature equipment, such as coke ovens, kilns, glass
furnaces, refinery installations and smelting plants, as well as for military
and airport crash and rescue teams.
Gloves and Arm Guards. We manufacture gloves and arm guards from Kevlar(R)
and Spectra(R), a cut resistant fiber made by Honeywell. Our gloves are used
primarily in the automotive, glass and metal fabrication industries to protect
the wearer's hand and arms from lacerations and heat without sacrificing manual
dexterity or comfort.
Reusable Woven Garments. We manufacture a line of reusable and washable
woven garments that complement our fire fighting and heat protective apparel
offerings and provide alternatives to our limited use/disposable protective
clothing lines. Product lines include electrostatic dissipative apparel used in
the automotive industry for control of static electricity in the manufacturing
process, clean room apparel to prevent human contamination in the manufacturing
processes, hospital garments to protect against blood borne pathogens and
bacteria such as AIDS, streptococcus and hepatitis, and flame resistant Nomex(R)
coveralls used in chemical and petroleum plants and for wild land fire fighting.
We believe we are one of the largest independent customers of DuPont's
Tyvek(R) and TyChem(R) apparel grade material. We purchase Tyvek(R) under North
American licensing agreements and other DuPont materials, such as Kevlar(R),
under international licensing agreements. While we have operated under these
trademark agreements since 1995, we have been a significant customer of these
DuPont materials since 1982. The trademark agreements require certain quality
standards and the identification of the DuPont trademark on the finished product
manufactured by us. We believe this brand identification with DuPont and
Tyvek(R) significantly benefits the marketing of our largest product line, as
over the past 30 years Tyvek(R) has become known as the standard for limited
use/disposable protective clothing. We believe our relationship with DuPont to
be excellent.
We maintain manufacturing facilities in Decatur, Alabama; Celaya, Mexico;
AnQui City, China; Jiaozhou, China; and St. Joseph, Missouri, where our products
are designed, manufactured and sold. We also have a relationship with a sewing
subcontractor in Mexico, which we can utilize for unexpected production surges.
Our China and Mexico facilities allow us to take advantage of favorable labor
and supplier costs, thereby increasing our profit margins on products
manufactured in these facilities. Our China and Mexico facilities are designed
for the manufacture of limited use/disposable protective clothing as well as our
high-end chemical protective suits. We have significantly improved our profit
margins in these product lines by shifting production to our international
facilities and we intend to expand our international manufacturing capabilities
to include our gloves and reusable woven protective apparel product lines in the
future.
Industry Overview
According to Global Industry Analysts, Inc., the global market for
industrial protective clothing is projected to be approximately $6.0 billion in
2004, and is projected to grow at a compound annual growth rate of approximately
6.5%. Our primary market, North America, is the largest market, expected to make
up over one-third, or approximately $2.0 billion, of the global market. The
industrial protective clothing market includes our limited use/disposable
protective clothing, our high-end chemical protective suits, our fire fighting
and heat protective apparel and our reusable woven garments. Global Industry
Analysts, Inc. estimates that the market for gloves was over $2.6 billion
worldwide in 2003.
The industrial protective clothing market has evolved over the past 35
years as a result of governmental regulations and requirements and commercial
product development. In 1970, Congress enacted the Occupational Safety and
Health Act, or OSHA, which requires employers to supply protective clothing in
certain work environments. Almost two million workers are subject to OSHA
standards today. Certain states have also enacted worker safety laws that
supplement OSHA standards and requirements.
The advent of OSHA coincided with DuPont's development of Tyvek(R) which,
for the first time, allowed for the economical production of lightweight,
disposable protective clothing. The attraction of disposable garments grew in
the late 1970s as a result of increases in labor and material costs of producing
cloth garments and the promulgation of federal, state and local safety
regulations.
In 1990, additional standards proposed and developed by the National Fire
Protection Association and the American Society for Testing and Materials were
adopted by OSHA. These standards identify four levels of protection, A through
D, and specify the equipment and clothing required to adequately protect the
wearer at each level:
o Level A requires total encapsulation in a vapor proof chemical suit
with self contained breathing apparatus, or SCBA, and appropriate
accessories.
4
o Level B calls for SCBA or a positive pressure supplied respirator
with escape SCBA, plus hooded chemical resistant clothing
(coveralls), one or two piece chemical splash suit, or disposable
chemical resistant coveralls.
o Level C requires hooded chemical resistant clothing, such as
coveralls, two piece chemical splash suit, or disposable chemical
resistant coveralls.
o Level D involves work and/or training situations that require
minimal coverall protection.
In response to the terrorist attacks that took place on September 11, 2001,
the federal government has provided for additional protective equipment funding
through programs that are part of the Homeland Security initiative. The Fire Act
of 2002 created the federal Assistance to Firefighters Grant Program, or AFGP,
to provide funds directly to local fire districts to help improve their
readiness and capability to respond to terrorist attacks. Funds are allocated
under AFGP to the following areas: fire operations/firefighter safety; fire
prevention; emergency medical services; and firefighting vehicle acquisition.
AFGP will provide more than $1.3 billion in funding through 2004, with
approximately $750 million appropriated for 2003 and $750 million more in 2004.
The Bio Terrorism Preparedness and Response Act of 2002, which we refer to as
the Bio Terrorism Act, appropriated $337 million for bio-defense equipment and
another $770 million to purchase equipment for first responders, such as fire,
police, medical and military personnel. These bio terrorism monies are expected
to be disbursed in late 2005 and 2006.
Recently, federal and state purchasing of industrial protective clothing
and federal grants to fire departments have increased demand for industrial
protective clothing to protect first responders against actual or threatened
terrorist incidents. Specific events such as the 2002 U.S. Winter Olympics, the
anthrax letters incidents in 2001 and the ricin letter incidents in 2004 have
also resulted in increased demand for our products.
Industry Consolidation
The industrial protective clothing industry is highly fragmented and
consists of a large number of small, closely-held family businesses. DuPont,
Kimberly Clark and Lakeland and are the dominant disposable industrial
protective apparel manufacturers. Since 1997, the markets for manufacturing and
distribution have consolidated. A number of large distributors with access to
capital have acquired smaller distributors. The acquisitions include Vallen
Corporation's acquisitions of Safety Centers, Inc., All Supplies, Inc., Shepco
Manufacturing Co., and Century Safety (Canada) and Hagemeyer's acquisition of
Vallen Corporation; W.W. Grainger's acquisitions of Allied Safety, Inc., Lab
Safety Supply, Inc., Acklands Limited, Gempler's safety supply division and Ben
Meadows, Inc.; Air Gas' acquisitions of Rutland Tool & Supply Co., Inc., IPCO
Safety Supply, Inc., Lyon Safety, Inc., Safety Supply, Inc., Safety West, Inc.
and Delta Safety Supply, Inc.; and Fischer Scientific's acquisitions of Safety
Services of America, Cole-Parner, Retsch and Emergo.
As these safety distributors consolidate and grow, we believe they are
looking to reduce the number of safety manufacturing vendors they deal with and
support, while at the same time shifting the burden of end user selling to the
manufacturer. This creates a significant capital availability issue for small
safety manufacturers as end user selling is more expensive, per sales dollar,
than selling to safety distributors. As a result, the manufacturing sector in
this industry is seeing follow-on consolidation. DuPont has acquired Marmac
Manufacturing, Inc., Kappler, Inc., Cellucup, Melco, Mfg., and Regal
Manufacturing since 1998, while in the related safety product industries
Norcross Safety Products L.L.C. has acquired Morning Pride, Ranger-Servus,
Salisbury, North and Pro Warrington and Christian Dalloz has acquired Bacou, USA
which itself acquired Uvex Safety, Inc., Survivair, Howard Leight, Perfect Fit,
Biosystems, Fenzy, Titmus, Optrel, OxBridge and Delta Protection.
We believe a larger industrial protective clothing manufacturer has
competitive advantages over a smaller competitor including:
o economies of scale when selling to end users, either through the use
of a direct sales force or independent representation groups;
o broader product offerings that facilitate cross-selling
opportunities;
o the ability to employ dedicated protective apparel training and
selling teams;
o the ability to offer volume and growth incentives to safety
distributors; and
o access to international sales.
5
We believe we have a substantial opportunity to pursue acquisitions in the
industrial protective clothing industry, particularly because many smaller
manufacturers share customers with us.
Business Strategy
Key elements of our strategy include:
o Increase Sales to the First Responder Market. Our high-end
chemical protective suits meet all of the requirements and are
particularly well qualified to provide protection to first
responders to chemical or biological attacks. For example, our
products have been used for response to recent threats such as
the 2001 anthrax letters and the 2004 ricin letters. A portion
of appropriations for the Fire Act of 2002 and the Bio
Terrorism Act of 2002 are available for purchase of products
for first responders that we manufacture, and we intend to
aggressively target this market.
o Improve Marketing in Existing Markets. We believe significant
growth opportunities are available to us through the better
positioning, marketing and enhanced cross-selling of our
reusable woven protective clothing, glove and arm guards and
high-end chemical suit product lines, along with our limited
use/disposable lines.
o Increase Penetration of the North American Tyvek(R) Market. We
intend to increase our sales of Tyvek(R)-based garments by
introducing Tyvek(R) in industries which have generally used
woven reusable garments, such as food processing and food
service industries including kitchens, grocery stores and
chicken and fishery slaughter operations. We believe that
limited use/disposable garments are more effective at
preventing contamination than reusable garments that are
exposed to possible contamination while in transit or while
being laundered. We also plan to expand our sales of
Tyvek(R)-based products and marketing efforts in Mexico and
Canada. Industrial safety gear utilized in U.S. manufacturing
often gains acceptance as standard equipment for new
facilities and factories operated by U.S. companies in other
countries.
o Emphasize Customer Service. We continue to offer a high level
of customer service to distinguish our products and to create
customer loyalty. We offer well-trained and experienced sales
and support personnel, on-time delivery and accommodation of
custom and rush orders. We also seek to extensively advertise
our brand names.
o Decrease Manufacturing Expenses by Moving Production to
International Facilities. We have additional opportunities to
take advantage of our low cost production capabilities in
Mexico and China. Beginning in 1995, we successfully moved the
labor intensive sewing operation for our limited
use/disposable protective clothing lines to these facilities.
Beginning January 1, 2005, pursuant to the United States World
Trade Organization Treaty with China, quota requirements
imposed by the U.S. on textiles such as our reusable woven
garments and gloves are scheduled to be removed, making it
more cost effective to move production for these product lines
to our assembly facilities in China. We are in the early
stages of this process and expect to complete this process by
the third quarter of fiscal 2005. As a result, we expect to
see profit margin improvements for these product lines, which
will allow us to compete more effectively as the quota
restrictions are removed.
o Acquisitions. We believe that the protective clothing market
is fragmented and presents the opportunity to acquire
businesses that offer comparable products or specialty
products that we do not offer. We intend to consider
acquisitions that afford us economies of scale, enhanced
opportunity for cross-selling, expanded product offerings and
an increased market presence. We have no letters of intent or
understandings with respect to any potential acquisitions.
o Introduction of New Products. We continue our history of
product development and innovation by introducing new
proprietary products across all our product lines. Our
innovations have included Micromax(R) disposable protective
clothing line, our Despro(TM) glove and Grapolator(TM) sleeve
lines for hand and arm cut protection and our Thermbar(TM)
Mock Twist glove for hand and arm heat protection. We own
seven patents on fabrics and production machinery and have
eight additional patents in application. We will continue to
dedicate resources to research and development.
Our Competitive Strengths
Our competitive strengths include:
6
o Industry Reputation. We devote significant resources to
creating customer loyalty by accommodating custom and rush
orders and focusing on on-time delivery. Additionally, our ISO
9001 certified facilities manufacture high-quality products.
As a result of these factors, we believe that we have an
excellent reputation in the industry.
o Long-standing Relationship with DuPont. We believe we are the
largest independent customer for Dupont's Tyvek(R) and
TyChem(R) material for use in the industrial protective
clothing market. Our trademark agreements with DuPont for
Tyvek(R), TyChem(R) and Kevlar(R) require certain quality
standards and the identification of the DuPont brand on the
finished product. We believe this brand identification with
DuPont significantly benefits the marketing of our product
lines, as over the past 30 years Tyvek(R) has become known as
the standard for limited use/disposable protective clothing.
We believe our relationship with DuPont to be excellent.
o International Manufacturing Capabilities. We have operated
manufacturing facilities in Mexico since 1995 and in China
since 1996. Our three facilities in China total over 160,000
sq. ft. of manufacturing, warehousing and administrative space
while our facility in Mexico totals over 14,000 sq. ft. of
manufacturing, warehousing and administrative space. Our
facilities and capabilities in China and Mexico allow access
to a less expensive labor pool than is available in the United
States and permit us to purchase certain raw materials at a
lower cost than they are available domestically.
o Comprehensive Inventory. We have a large product offering with
numerous specifications, such as size, styles and pockets, and
maintain a large inventory of each in order to satisfy
customer orders in a timely manner. Many of our customers
traditionally make purchases of industrial protective gear
with expectations of immediate delivery. We believe our
ability to provide timely service for these customers enhances
our reputation in the industry and positions us strongly for
repeat business, particularly in our limited use/disposable
protective clothing product lines.
o Manufacturing Flexibility. By locating labor-intensive
manufacturing processes such as sewing in Mexico and China,
and by utilizing sewing sub-contractors, we have the ability
to increase production without substantial additional capital
expenditures. Our manufacturing systems allow us flexibility
for unexpected production surges and alternative capacity in
the event any of our independent contractors become
unavailable.
o Experienced Management Team. We have an experienced management
team. Our executive officers average greater than 20 years of
experience in the industrial protective clothing market. The
knowledge, relationships and reputation of our management team
helps us maintain and build our customer base.
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Products
The following table summarizes our principal product lines, the raw
materials used to manufacture them, their applications and end markets:
- ------------------------------------------------------------------------------------------------------------------------
Product Line Raw Material Protection Against End Market
- ------------------------------------------------------------------------------------------------------------------------
Limited use/disposable o Tyvek(R) and o Contaminants, o Chemical/petrochemical
protective clothing TyvekQC, laminates of irritants, metals, industries
Polyethylene, chemicals, fertilizers, o Automotive and
Micromax(R), SMS, pesticides, acids, pharmaceutical
Polypropylene, asbestos, PCBs, industries
Pyrolon(R), and other lead, dioxin and o Public utilities
non-woven fabrics many other hazardous o Government (terrorist
chemicals response)
o Viruses and o Janitorial
bacteria (AIDS,
streptococcus, SARS
and hepatitis)
- ------------------------------------------------------------------------------------------------------------------------
High-end chemical protective o TyChem(R) SL o Chemical spills o Hazardous material
suits o TyChem(R) TK o Toxic chemicals used teams
o TyChem(R) BR in manufacturing o Chemical and
o Other Lakeland processes nuclear industries
patented co-polymer o Terrorist attacks, o Fire departments
laminates biological warfare o Government (first
(anthrax and ricin) responders)
- ------------------------------------------------------------------------------------------------------------------------
Fire fighting and heat o PBI o Fire, burns and o Municipal, corporate
protective apparel o Nomex(R) excessive heat and volunteer fire
o Millenia(R) departments
o Basofil(R) o Wildland fire fighting
o Advance Indura(R) o Hot equipment
Ultrasoft maintenance personnel
o Aluminized Nomex(R) and industrial fire
o Aluminized Kevlar(R) departments
o Oil well fires
o Airport crash rescue
- ------------------------------------------------------------------------------------------------------------------------
Gloves and arm guards o Kevlar(R) yarns o Cuts, lacerations, o Automotive, glass and
o Spectra(R) yarns heat and chemical metal fabrication
o Kevlar(R) wrapped irritants industries
steel core yarns o Chemical plants
- ------------------------------------------------------------------------------------------------------------------------
Reusable woven garments o Staticsorb carbon o Protects o Hospital and industrial
thread with polyester manufactured facilities
o Cotton polyester products from human o Clean room
blends contamination or environments
o Cotton static electrical o Emergency medical
o Polyester charge ambulance services
o FR cottons/Nomex(R) o Bacteria, viruses and o Chemical and refining
blood borne
pathogens
o Protection from flash
fires
- ------------------------------------------------------------------------------------------------------------------------
Limited Use/Disposable Protective Clothing
We manufacture a complete line of limited use/disposable protective
garments, including coveralls, laboratory coats, shirts, pants, hoods, aprons,
sleeves and smocks. Limited use garments can also be coated or laminated to
increase splash protection against many inorganic acids, bases and other liquid
chemicals. Limited use garments are made from several non-woven fabrics,
including Tyvek(R) and Tyvek QC (both DuPont fabrics) and our own fabrics such
as Pyrolon(R) Plus 2 XT, CRFR, Micromax(R), Safegard "76"(R), Zonegard, Body
Gard(R), RyTex(R) and TomTex(R), which are made of spunlaced polyester,
polypropylene and polyethylene materials, laminates, films and derivatives. We
incorporate many seaming
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techniques depending on the level of protection needed in the end use
application.
Typical users of these garments include chemical plants, petrochemical
refineries and related installations, automotive manufacturers, pharmaceutical
companies, construction companies, coal and oil power generation utilities and
telephone utility companies. Numerous smaller industries use these garments for
specific safety applications unique to their businesses. Additional applications
include protection from viruses and bacteria, such as AIDS, streptococcus, SARS
and hepatitis, at hospitals, clinics and emergency rescue sites and use in clean
room environments to prevent human contamination in the manufacturing processes.
Our limited use/disposable protective clothing products range in unit
price from $.04 for shoe covers to approximately $14.00 for a TyChem(R) QC
laminated hood and booted coverall. Our largest selling item, a standard white
Tyvek(R) coverall, sells for approximately $2.75 to $3.75 per garment. By
comparison, similar reusable cloth coveralls range in price from $30.00 to
$60.00, exclusive of laundering, maintenance and shrinkage expenses.
We cut, warehouse and sell our limited use/disposable garments primarily
at our Decatur, Alabama and China facilities. The fabric is cut into required
patterns at our Decatur plant and shipped to our Mexico facility for assembly.
Our assembly facilities in China or Mexico and independent contractors sew and
package the finished garments and return them primarily to our Decatur, Alabama
plant, normally within one to eight weeks, for immediate shipment to the
customer.
We presently utilize nine independent domestic sewing contractors and one
international contractor under agreements that are terminable at will by either
party. In fiscal 2004, no independent sewing contractor accounted for more than
5% of our production of limited use/disposable garments. We believe that we can
obtain adequate alternative production capacity should any of our independent
contractors become unavailable.
The capacity of our facilities, complemented by the availability of our
independent sewing contractors, allow us to reduce by 10%, or alternately
increase by 20%, our production capacity without incurring large on going costs
typical of many manufacturing operations. This allows us to react quickly to
changing unit demand for our products.
High-End Chemical Protective Suits
We manufacture heavy-duty chemical suits made from DuPont TyChem(R) SL, TK
and TyChem(R) BR fabrics. These suits are worn by individuals on hazardous
material teams to provide protection from powerful, highly concentrated and
hazardous or potentially lethal chemical and biological toxins, such as toxic
wastes at Super Fund sites, toxic chemical spills or biological discharges,
chemical or biological warfare weapons (such as anthrax or ricin), and chemicals
and petro-chemicals present during the cleaning of refineries and nuclear
facilities. Our line of chemical suits range in cost from $24 per coverall to
$1,926. The chemical suits can be used in conjunction with a fire protective
shell that we manufacture to protect the user from both chemical and flash fire
hazards. We have also introduced two garments approved by the National Fire
Protection Agency for varying levels of protection that are manufactured from
DuPont materials:
o TyChem(R) TK - a co-polymer film laminated to a durable spun
bonded substrate. This garment offers the broadest temperature
range for limited use garments of -94(degree)F to
194(degree)F. TyChem(R) TK meets all OSHA Level A
requirements. It is available in National Fire Protection
Agency 1991-2000 certified versions when worn with an
aluminized over cover.
o TyChem(R) BR - meets all OSHA Level B and all National Fire
Protection Agency 1994 fabric requirements and offers splash
protection against a wide array of chemicals.
We manufacture chemical protective clothing at our facilities in Decatur,
Alabama and Mexico. Using fabrics such as TyChem(R) SL, TyChem(R) TK and
TyChem(R) BR, we design, cut, glue and/or sew the materials to meet customer
purchase orders.
The federal government, through the Fire Act of 2002, appropriated
approximately $750 million in 2003 to fire departments in the United States and
its territories to fund the purchase, among other things, of personal protective
equipment, including our fire fighting and heat protective apparel and high-end
chemical protective suits. An additional $750 million has been appropriated for
2004. The Bio Terrorism Preparedness and Response Act of 2002 includes an
appropriation of $337 million for bio-defense equipment and $770 million to
purchase equipment for first responders, such as fire, police, medical and
military personnel. Purchases of equipment under these appropriations will
include our personal protective equipment and are expected to be made in late
2005 and in 2006.
9
Fire Fighting and Heat Protective Apparel
We manufacture an extensive line of products to protect individuals who
work in high heat environments. Our heat protective aluminized fire suit product
lines include the following:
o Fire entry suit - to allow total flame entry when dealing with
volatile and highly flammable products.
o Kiln entry suit - to protect kiln maintenance workers from
extreme heat.
o Proximity suits - to give protection in high heat areas where
exposure to hot liquids, steam or hot vapors is possible.
o Approach suits - to protect personnel engaged in maintenance,
repair and operational tasks where temperatures do not exceed
200(degree)F ambient, with a radiant heat exposure up to
2,000(degree)F.
We manufacture fire fighter protective apparel for domestic and foreign
fire departments. We developed the popular Sterling Heights(TM) style (short
coat and bib pants) bunker gear. Crash rescue continues to be a major market for
us, as we were one of the first manufacturers to supply military and civilian
markets with airport fire fighting protection.
Our fire suits range in price from $480 for standard fire department turn
out gear to $2,000 for a fire entry suit. All of our heat protective clothing is
currently manufactured at our facility in St. Joseph, Missouri. Our Fyrepel(TM)
brand of fire fighting apparel continues to benefit from ongoing research and
development investment, as we seek to address the ergonomic needs of stressful
occupations.
Gloves and Arm Guards
We manufacture and sell specially designed gloves and arm guards made from
Kevlar(R), a cut and heat resistant material produced by DuPont, Spectra(R), a
cut resistant fiber made by Honeywell, and our proprietary patented yarns. We
are one of only seven companies licensed in North America to sell 100% Kevlar(R)
gloves, which are high strength, lightweight, flexible and durable. Kevlar(R)
gloves offer a better overall level of protection and lower worker injury rates,
and are more cost effective, than traditional leather, canvas or coated work
gloves. Kevlar(R) gloves, which can withstand temperatures of up to 400(degree)F
and are cut resistant enough to allow workers to safely handle sharp or jagged
unfinished sheet metal, are used primarily in the automotive, glass and metal
fabrication industries. Our higher end Kevlar(R) and Spectra(R) gloves range in
price from $37 to $240 for a dozen pair.
We manufacture gloves primarily at our Decatur, Alabama facility, but we
are shifting production to our Mexico and China facilities. We expect to
complete this shift by the third quarter of fiscal 2005 as quotas and tariffs on
products of this type expire. Foreign production will allow lower fabric and
labor costs.
We have applied for patents on manufacturing processes that provide hand
protection to the areas of a glove where it is most needed in various
applications. For example, while the top or back of a glove generally does not
require the same thickness as the palm or thumb of a glove, gloves typically
have a uniform level of yarn protection. This manufacturing process allows us to
produce our gloves more economically.
Reusable Woven Garments
We manufacture and market a line of reusable and washable woven garments
that complement our fire fighting and heat protective apparel offerings and
provide alternatives to our limited use/disposable protective clothing lines and
give us access to the much larger woven industrial and health care-related
markets. Cloth reusable garments are favored by customers for certain uses or
applications because of familiarity with and acceptance of these fabrics and
woven cloth's heavier weight, durability and longevity. These products allow us
to supply and satisfy a wider range of safety and customer needs. Our product
lines include the following:
o Electrostatic dissipative apparel - used primarily in the
automotive industry.
o Clean room apparel - used in semiconductor manufacturing and
pharmaceutical manufacturing to protect against human
contamination.
o Hospital garments - used to protect against blood borne
pathogens and common bacteria.
o Flame resistant Nomex(R) coveralls/pants/jackets - used in
chemical and petroleum plants and for wild land firefighting.
10
Our reusable woven garments range in price from $10 to $100 per garment.
We manufacture and sell woven cloth garments at our facility in St. Joseph,
Missouri. We continue to relocate highly repetitive sewing processes for our
high volume, standard product lines such as woven protective coveralls and
electrostatic dissipative apparel to our facilities in China where lower fabric
and labor costs allow increased profit margins. We expect the relocation process
to be substantially complete by the third quarter of fiscal 2005.
Quality Control
Our Alabama, Missouri, Mexico and China manufacturing facilities are ISO
9001 certified. ISO standards are internationally recognized quality
manufacturing standards established by the International Organization for
Standardization based in Geneva, Switzerland. To obtain our ISO registration,
our factories were independently audited to test our compliance with the
applicable standards. In order to maintain registration, our factories receive
regular announced inspections by an independent certification organization. We
believe that the ISO 9001 certification makes us more competitive in the
marketplace, as customers increasingly recognize the standard as an indication
of product quality.
Marketing and Sales
We employ an in-house sales force of 14 people and utilize 42 independent
sales representatives. These employees and representatives call on over 500
safety and mill supply distributors nationwide in order to promote, provide
product information for and sell our products. Distributors buy our products for
resale and typically maintain inventory at the local level in order to assure
quick response times and the ability to service their customers properly. Our
sales employees and independent representatives have consistent communication
with end users and decision makers at the distribution level, thereby allowing
us valuable feedback on market perception of our products, as well as
information about new developments in our industry. During fiscal 2004, no
single distributor accounted for more than 5% of our net sales.
We seek to maximize the efficiency of our established distribution network
through direct promotion of our products at the end user level. We advertise
primarily through trade publications and our promotional activities include
sales catalogs, mailings to end users, a nationwide publicity program and our
Internet web site. We exhibit at both regional and national trade shows such as
the National Safety Congress and the American Industrial Hygienists Convention.
Research and Development
We continue to evaluate and engineer new or innovative products. We
recently introduced the Micromax(R) line of disposable protective clothing; a
newly configured line of fire retardant work coveralls and fire turn-out gear; a
SARS protective medical gown for Chinese hospital personnel; the Despro(TM),
Grapolator(TM) and Kut Buster(TM) cut protective glove and sleeve lines; and our
patented Thermbar(TM) Mock Twist that provides heat protection for temperatures
up to 600(degree)F. We own seven patents on various fabrics, patterns and
production machinery. We plan to continue investing in research and development
in protective apparel fabrics and manufacturing equipment. Specifically, we plan
to continue to develop new specially knit and coated gloves, woven gowns for
industrial and medical uses, fire retardant cotton fabrics and protective
non-woven fabrics. During fiscal 2002, 2003 and 2004, we spent approximately
$378,000, $164,000 and $82,000, respectively, on research and development.
Suppliers and Materials
Our largest supplier is DuPont, from whom we purchase Tyvek(R) under North
American trademark licensing agreements and Kevlar(R) under international
trademark licensing agreements. Commencing in 1995, anticipating the expiration
of certain patents on its proprietary materials, DuPont offered certain
customers of these materials the opportunity to enter into two year trademark
licensing agreements. We entered into such agreements and have renewed them
continually since. In fiscal 2004, we purchased approximately 77.4% of the
dollar value of our materials from DuPont, and Tyvek(R) constituted
approximately 55% of our cost of goods sold and approximately 71.2% of the
dollar value of our raw material purchases. We believe our relationship with
DuPont to be excellent and expect to continue our licenses.
We do not have long-term, formal agreements with any other suppliers of
non-woven fabric raw materials used by us in the production of our limited
use/disposable protective clothing product lines. Materials such as
polypropylene, polyethylene, polyvinyl chloride, spun laced polyester and their
derivatives are available from thirty or more major mills. Flame retardant
fabrics are also available from a number of both domestic and international
mills. The accessories used in the production of our disposable garments, such
as thread, boxes, snaps and elastics are obtained from unaffiliated suppliers.
We have not experienced difficulty in obtaining our requirements for these
commodity component items.
We have not experienced difficulty in obtaining materials, including
cotton, polyester and nylon, used in the production of reusable non-wovens and
commodity gloves. We obtain Spectra(R) yarn used in our super cut-resistant
Dextra Guard gloves from Honeywell, and we believe Honeywell will be able to
meet our needs for this material in the future. We obtain Kevlar(R), used in the
production of our specialty safety gloves, from independent mills that purchase
the fiber from DuPont. Our use of Kevlar(R) is subject to the trademark
licensing agreements described above.
11
Materials used in our fire and heat protective suits include glass fabric,
aluminized glass, Nomex(R), aluminized Nomex(R), Kevlar(R), aluminized
Kevlar(R), polybenzimidazole and Gortex, as well as combinations utilizing
neoprene coatings. Traditional chemical protective suits are made of Viton,
butyl rubber and polyvinyl chloride, all of which are available from multiple
sources. Advanced chemical protective suits are made from Tyvek(R) SL, TyChem(R)
TK and BR, which we obtain from DuPont, and our patented fabrics. We have not
experienced difficulty obtaining any of these materials.
Competition
Our business is highly competitive. We believe that the barriers to entry
in the reusable garments and glove markets are relatively low. We face
competition in some of our other product markets from large established
companies that have greater financial, managerial, sales and technical
resources. Where larger competitors, such as DuPont and Kimberly Clark, offer
products that are directly competitive with our products, particularly as part
of an established line of products, there can be no assurance that we can
successfully compete for sales and customers. Larger competitors also may be
able to benefit from economies of scale and technological innovation and may
introduce new products that compete with our products.
Seasonality
Our operations have historically been seasonal, with higher sales
generally occurring in February, March, April and May when scheduled maintenance
on nuclear, coal, oil and gas fired utilities, chemical, petrochemical and
smelting facilities, and other heavy industrial manufacturing plants occurs,
primarily due to cooler temperatures. Sales decline during the warmer summer and
vacation months and generally increase from Labor Day through February with
slight declines during holidays. As a result of this seasonality in our sales,
we have historically experienced a corresponding seasonality in our working
capital, specifically inventories, with peak inventories occurring between
September and March coinciding with lead times required to accommodate the
spring maintenance schedules. We believe that by sustaining higher levels of
inventory, we gain a competitive advantage in the marketplace. Certain of our
large customers seek sole sourcing to avoid sourcing their requirements from
multiple vendors whose prices, delivery times and quality standards differ.
In recent years, due to increased demand by first responders for our
chemical suits and fire gear, our historical seasonal pattern has shifted.
Governmental disbursements are dependent upon budgetary processes and grant
administration processes that do not follow our traditional seasonal sales
patterns. Due to the size and timing of these governmental orders, our net
sales, results of operations, working capital requirements and cash flows can
vary between different reporting periods. As a result, we expect to experience
increased variability in net sales, net income, working capital requirements and
cash flows on a quarterly basis.
Patents and Trademarks
We own seven patents and have eight patents in the application and
approval process with the U.S. Patent and Trademark Office. Additionally, a
Patent Corporation Treaty application was filed for our Unilayer Glove Fabrics
which involves technology using a robotic knitter that allows us to knit a glove
using stronger or weaker yarns in different parts of the glove, as necessary,
depending on the expected wear. We license one patent from Lavian Corporation,
covering manufacturing processes for certain limited use/disposable protective
clothing products. This license provides for semi-exclusive rights in North
American and international markets, subject to royalty payments based on yards
sold and annual dollar minimums. Net sales from products manufactured pursuant
to this process accounted for less than 2% of our total net sales in fiscal
2004.
Employees
As of April 19, 2004, we had approximately 1,292 full time employees,
1,005, or 77.8%, of whom were employed in our international facilities and 287,
or 22.2%, of whom were employed in our domestic facilities. An aggregate of 988
of our employees, representing all of our employees in our Mexico facility and
in each of our China facilities, are members of unions. We are not currently a
party to any collective bargaining agreements. We believe our employee relations
to be excellent.
Environmental Matters
We are subject to various foreign, federal, state and local environmental
protection, chemical control, and health and safety laws and regulations, and we
incur costs to comply with those laws. We own and lease real property, and
certain environmental laws hold current or previous owners or operators of
businesses and real property responsible for contamination on or originating
from property, even if they did not know of or were not responsible for the
contamination. The presence of hazardous substances on any of our properties or
the failure to meet environmental regulatory requirements could affect our
ability to use or to sell the property or to use the property as collateral for
borrowing, and could result in substantial remediation or compliance costs. If
hazardous substances are released from or located on any of our properties, we
could incur substantial costs and damages.
12
Although we have not in the past had any material costs or damages
associated with environmental claims or compliance and we do not currently
anticipate any such costs or damages, we cannot assure you that we will not
incur material costs or damages in the future, as a result of the discovery of
new facts or conditions, acquisition of new properties, the release of hazardous
substances, a change in interpretation of existing environmental laws or the
adoption of new environmental laws.
ITEM 2. PROPERTIES
We believe that our owned and leased facilities are suitable for the
operations we conduct in each of them. Each manufacturing facility is well
maintained and capable of supporting higher levels of production. The table
below sets forth certain information about our principal facilities.
Estimated
Square
Address Feet Annual Rent Lease Expiration Principal Activity
- ------- --------- ----------- ---------------- ------------------
Weifang Lakeland Safety Products Co., 65,000 Owned(1) N/A Manufacturing
Ltd. Administration
Xiao Shi Village Engineering
AnQui City, Shandong Province
PRC 262100
Qing Dao MayTung 90,415 Owned(1) N/A Manufacturing
Healthcare Co., Ltd Administration
Yinghai Industrial Park Warehousing
Jiaozhou, Shandong Province
PRC 266318
Meiyang Protective Products 9,360 $3,630 12/31/04 Manufacturing
Co., Ltd.
Xiao Shi Village
AnQui City, Shandong Province
PRC 262100
Uniland Division 44,000 $96,000 7/31/06 Manufacturing
2401 SW Parkway Administration
St. Joseph, MO 64503 Warehousing
Lakeland de Mexico S.A. de C.V. 14,057 $59,400 7/31/07 Manufacturing
(Luis Gomez Guzman - employee) Administration
Poniente, Mza 8, Lote 11 Warehousing
Ciudad Industrial, S/No.
Celaya, Guanajuato 38010
Mexico
Lakeland Protective Wear Canada 8,250 $55,600 11/30/07 Sales
5109-B7 Harvestor Road Administration
Burlington, ON L7L5Y9 Warehousing
Canada
Lakeland Industries, Inc. 4,362 $43,402 6/30/04 Administration
Headquarters
711-2 Koehler Avenue
Ronkonkoma, NY 11779
Lakeland Industries, Inc. 900 $7,800 6/30/04 Studio
751-4 Koehler Avenue Warehousing
Ronkonkoma, NY 11779
13
Estimated
Square
Address Feet Annual Rent Lease Expiration Principal Activity
- ------- --------- ----------- ---------------- ------------------
Lakeland Industries, Inc. 91,788 $364,900 3/31/09 Manufacturing
(POMS Holding Co.- related party) Administration
202 Pride Lane Engineering
Decatur, AL 35603 Warehousing
Lakeland Industries, Inc. 49,500 $199,100 3/31/09 Warehousing
(River Group Holding Co., Ltd - Administration
related Party)
3428 Valley Ave. (201 1/2Pride Lane)
Decatur, AL 35603
Lakeland Industries, Inc. 2,400 $18,000 3/31/09 Sales
(Harvey Pride, Jr. - officer- related Administration
party) 201 Pride Lane, SW
Decatur, AL 35603
Lakeland Industries Europe Ltd. 2,470 Approximately 1/31/08 Warehouse
Wallingfen Park $25,528 (varies Sales
236 Main Road with exchange
Newport, East Yorkshire rates)
HU15 2RH U United Kingdom
- ----------
(1) We own the buildings in which we conduct our manufacturing operations and
lease the land underlying the buildings from the Chinese government. We
have 43 years and 48 years remaining under the leases with respect to the
AnQui City and Jiaozhou facilities, respectively.
Our facilities in Decatur, Alabama; Celaya, Mexico; AnQui, China;
Jiaozhou, China; and St. Joseph, Missouri contain equipment used for the design,
development and manufacture and sale of our products. Our operations in
Burlington, Canada and Newport, United Kingdom are primarily sales and
warehousing operations receiving goods for resale from our manufacturing
facilities around the world. We had $0.2 million, $1.4 million and $1.9 million
of long-lived assets, net located in China and $0.12 million, $0.21 million and
$0.17 million of long-lived assets located in Mexico as of January 31, 2002,
2003 and 2004.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a party to litigation arising in the ordinary
course of our business. We are not currently a party to any litigation that we
believe could reasonably be expected to have a material adverse effect on our
results of operations, financial condition or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of our security holders.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS
Our common stock is currently traded on the Nasdaq National Market under
the symbol "LAKE". The following table sets forth for the periods indicated the
high and low sales prices for our common stock as reported by the Nasdaq
National Market. The stock prices in the table below have been adjusted for
periods prior to July 31, 2003 to reflect our 10% stock dividends to
stockholders of record on July 31, 2002 and July 31, 2003.
Price Range of
Common Stock
-----------------------
High Low
-------- ---------
Fiscal 2003
First Quarter................................... $ 8.64 $ 6.72
Second Quarter.................................. 9.92 5.46
Third Quarter................................... 8.77 5.52
Fourth Quarter.................................. 7.29 5.69
Fiscal 2004
First Quarter................................... $ 8.44 $ 6.14
Second Quarter.................................. 10.92 7.73
Third Quarter................................... 12.99 9.67
Fourth Quarter.................................. 18.87 11.78
Fiscal 2005
First Quarter (through April 20, 2004).......... $ 22.33 $ 15.64
On April 20, 2004 the last reported sale price of our common stock on the
Nasdaq National Market was $22.33 per share. As of April 2, 2004, there were
approximately 78 record holders of shares of our common stock.
Dividend Policy
We have never paid any cash dividends on our common stock and we currently
intend to retain any future earnings for use in our business. The payment and
rate of future dividends, if any, are subject to the discretion of our board of
directors and will depend upon our earnings, financial condition, capital
requirements, contractual restrictions under our credit facilities and other
factors.
In the past, we have declared dividends in stock to our stockholders. We
paid a 10% dividend in additional shares of our common stock to holders of
record on July 31, 2002 and another 10% dividend in additional shares of our
common stock to holders of record on July 31, 2003. We may pay stock dividends
in future years at the discretion of our board of directors.
ITEM 6. Selected Consolidated Financial Data
The following selected consolidated financial data as of and for our
fiscal years 2000, 2001, 2002, 2003 and 2004 have been derived from our audited
consolidated financial statements, which have been audited by Grant Thornton LLP
as of and for the fiscal years ended January 31, 2000, 2001 and 2002 and by
PricewaterhouseCoopers LLP as of and for the fiscal years ended January 31, 2003
and 2004. You should read the information set forth below in conjunction with
our "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
in this Form 10-K.
15
Year Ended January 31,
-----------------------------------------------------------------------
2000 2001 2002 2003 2004
----------- ----------- ----------- ----------- -----------
(in thousands, except share and per share data)
Income Statement Data:
Net sales ..................................... $ 58,644 $ 76,108 $ 76,431 $ 77,826 $ 89,717
Costs of goods sold ........................... 48,156 64,798 63,294 62,867 71,741
----------- ----------- ----------- ----------- -----------
Gross profit .............................. 10,488 11,310 13,137 14,959 17,976
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling and shipping ...................... 4,177 4,825 5,414 6,338 7,342
General and administrative ................ 3,014 3,794 4,134 4,262 4,596
Impairment of goodwill .................... -- -- -- -- 249
----------- ----------- ----------- ----------- -----------
Total operating expenses .................. 7,191 8,619 9,548 10,600 12,187
----------- ----------- ----------- ----------- -----------
Operating profit .......................... 3,297 2,691 3,589 4,359 5,789
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest expense .......................... (821) (1,248) (882) (643) (535)
Interest income ........................... 26 27 18 20 19
Other income .............................. 7 15 91 40 24
----------- ----------- ----------- ----------- -----------
Total other expense ....................... 788 1,206 773 583 492
Income before income taxes ................ 2,509 1,485 2,816 3,776 5,297
Income tax expense ............................ 761 362 846 1,172 1,659
----------- ----------- ----------- ----------- -----------
Net income ................................ $ 1,748 $ 1,123 $ 1,970 $ 2,604 $ 3,638
=========== =========== =========== =========== ===========
Net income per common share
(Basic)(1) .................................. $ 0.54 $ 0.35 $ 0.61 $ 0.80 $ 1.11
=========== =========== =========== =========== ===========
Net income per common share
(Diluted)(1) ................................ $ 0.54 $ 0.35 $ 0.61 $ 0.80 $ 1.11
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding(1):
Basic .................................... 3,211,280 3,200,990 3,222,956 3,261,116 3,268,551
=========== =========== =========== =========== ===========
Diluted .................................. 3,234,873 3,227,265 3,247,290 3,269,039 3,275,501
=========== =========== =========== =========== ===========
Balance Sheet Data (at period end):
Current assets ................................ $ 32,460 $ 36,099 $ 39,545 $ 38,859 $ 43,285
Total assets .................................. 34,770 38,628 42,417 42,823 47,304
Current liabilities ........................... 16,551 20,052 22,778 20,934 21,509
Long-term liabilities ......................... 2,759 1,981 912 529 768
Stockholders' equity .......................... 15,405 16,537 18,727 21,359 25,027
- ----------
(1) Adjusted for periods prior to July 31, 2003 to reflect our 10% stock
dividends to stockholders of record as of July 31, 2002 and July 31, 2003.
Earnings per share have been restated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share."
16
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following summary together with the more detailed
business information and consolidated financial statements and related notes
that appear elsewhere in this Form 10-K and Annual Report and in the documents
that we incorporate by reference into this Form 10-K. This document may contain
certain "forward-looking" information within the meaning of the Private
Securities Litigation Reform Act of 1995. This information involves risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements.
Overview
We manufacture and sell a comprehensive line of safety garments and
accessories for the industrial protective clothing market. Our products are sold
by our in-house sales force and independent sales representatives to a network
of over 500 safety and mill supply distributors. These distributors in turn
supply end user industrial customers such as chemical/petrochemical, automobile,
steel, glass, construction, smelting, janitorial, pharmaceutical and high
technology electronics manufacturers, as well as hospitals and laboratories. In
addition, we supply federal, state and local governmental agencies and
departments such as fire and police departments, airport crash rescue units, the
Department of Defense, Central Intelligence Agency, Federal Bureau of
Investigation, U.S. Secret Service and the Centers for Disease Control. Our net
sales attributable to customers outside the United States were $4.5 million,
$5.7 million and $8.0 million, in fiscal 2002, fiscal 2003 and fiscal 2004,
respectively.
In fiscal 2004, we hired five additional sales personnel, increasing our
sales team from nine to fourteen. Although it has taken time to identify and
train the new personnel, we believe our increase in net sales in the year ended
January 31, 2004 compared to the year ended January 31, 2003 is in part
attributable to our increased focus on our internal sales team. As sales
increase, we intend to continue to invest in the hiring of additional sales
personnel.
Our sales of limited use/disposable protective clothing grew approximately
13% in the year ended January 31, 2004 compared to the year ended January 31,
2003, and our expectation is to see continued growth. We expect that
distributors will continue to stock more inventory as economic conditions in the
United States continue to improve. We also expect our net sales to increase as
we introduce our Tyvek(R)-based products into new industries in which the use of
Tyvek(R) is not widespread. In addition, our net sales are driven in part by
government funding and health-related events. Our net sales attributable to
chemical suits increased 55% and our net sales attributable to fire gear and
aluminized apparel increased 25% in the year ended January 31, 2004 compared to
the year ended January 31, 2003. These sales increases were driven primarily by
grants from the federal government under the Fire Act of 2002 and the Bio
Terrorism Preparedness and Response Act of 2002 as part of the Homeland Security
initiatives. During fiscal 2004, as a result of the SARS virus outbreak in
various cities in 2003, we sold approximately $1.1 million of SARS-related
garments in China, Toronto, Hong Kong and Taiwan. The Centers for Disease
Control has recommended protective garments be used to protect healthcare
workers in the fight against the spread of the SARS virus. In the event of
future outbreaks of SARS or other similar contagious viruses, such as avian flu
in 2004, we have positioned ourselves with increased production capacity.
We have operated manufacturing facilities in Mexico since 1995 and in
China since 1996. Beginning in 1995, we moved the labor intensive sewing
operation for our limited use/disposable protective clothing lines to these
facilities. Our facilities and capabilities in China and Mexico allow access to
a less expensive labor pool than is available in the United States and permit us
to purchase certain raw materials at a lower cost than they are available
domestically. As we have increasingly moved production of our products to our
facilities in Mexico and China, we have seen improvements in the profit margins
for these products. We are in the early stages of moving production of our
reusable woven garments and gloves to these facilities and expect to complete
this process by the third quarter of fiscal 2005. As a result, we expect to see
profit margin improvements for these product lines as well.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our audited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of our financial statements in conformity
with accounting principles generally accepted in the United States requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, net sales and expenses, and disclosure of contingent assets and
liabilities. We base estimates on our past experience and on various other
assumptions that we believe to be reasonable under the circumstances and we
periodically evaluate these estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
17
Revenue Recognition. We derive our sales primarily from our limited
use/disposable protective clothing and secondarily from our sales of high-end
chemical protective suits, fire fighting and heat protective apparel, gloves and
arm guards, and reusable woven garments. Sales are recognized when goods are
shipped to our distributors at which time title and the risk of loss passes.
Sales are reduced for sales returns and allowances. Payment terms are generally
net 30 days for United States sales and net 90 days for international sales.
Inventories. Inventories include freight-in, materials, labor and overhead
costs and are stated at the lower of cost (on a first-in, first-out basis) or
market. Provision is made for slow-moving, obsolete or unusable inventory.
Allowance for Doubtful Accounts. We establish an allowance for doubtful
accounts to provide for accounts receivable that may not be collectible. In
establishing the allowance for doubtful accounts, we analyze the collectibility
of individual large or past due accounts customer-by-customer. We establish
reserves for accounts that we determine to be doubtful of collection.
Income Taxes and Valuation Reserves. We are required to estimate our
income taxes in each of the jurisdictions in which we operate as part of
preparing our consolidated financial statements. This involves estimating the
actual current tax in addition to assessing temporary differences resulting from
differing treatments for tax and financial accounting purposes. These
differences, together with net operating loss carryforwards and tax credits, are
recorded as deferred tax assets or liabilities on our balance sheet. A judgment
must then be made of the likelihood that any deferred tax assets will be
realized from future taxable income. A valuation allowance may be required to
reduce deferred tax assets to the amount that is more likely than not to be
realized. In the event we determine that we may not be able to realize all or
part of our deferred tax asset in the future, or that new estimates indicate
that a previously recorded valuation allowance is no longer required, an
adjustment to the deferred tax asset is charged or credited to net income in the
period of such determination.
Valuation of Goodwill and Other Intangible Assets. On February 1, 2002, we
adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets," which provides that goodwill and other intangible
assets are no longer amortized, but are assessed for impairment annually and
upon occurrence of an event that indicates impairment may have occurred.
Goodwill impairment is evaluated utilizing a two-step process as required by
SFAS No. 142. Factors that we consider important that could identify a potential
impairment include: significant underperformance relative to expected historical
or projected future operating results; significant changes in the overall
business strategy; and significant negative industry or economic trends. When we
determine that the carrying value of intangibles and goodwill may not be
recoverable based upon one or more of these indicators of impairment, we measure
any potential impairment based on a projected discounted cash flow method.
Estimating future cash flows requires our management to make projections that
can differ materially from actual results.
In fiscal 2004, as a result of our decision to move a portion of our
reusable woven garment assembly from the United States to China, we reviewed
this portion of our business for impairment. An impairment was calculated based
on estimating the fair value, utilizing a discounted cash flow analysis,
resulting in an impairment charge of $0.2 million, we have no remaining goodwill
recorded as of January 31, 2004.
Self-Insured Liabilities. We have a self-insurance program for certain
employee health benefits. The cost of such benefits is recognized as expense
based on claims filed in each reporting period and an estimate of claims
incurred but not reported during such period. Our estimate of claims incurred
but not reported are based upon historical trends. If more claims are made than
were estimated or if the costs of actual claims increases beyond what was
anticipated, reserves recorded may not be sufficient and additional accruals may
be required in future periods. We maintain separate insurance to cover the
excess liability over set single claim amounts and aggregate annual claim
amounts.
18
Results of Operations
The following table set forth our historical results of operations for the
years ended January 31, 2002, 2003 and 2004 as a percentage of our net sales.
Year Ended January 31,
-------------------------------------
2002 2003 2004
------ ------ ------
Net sales .......................... 100.0% 100.0% 100.0%
Cost of goods sold ................. 82.8% 80.8% 80.0%
------ ------ ------
Gross profit ................... 17.2% 19.2% 20.0%
Operating expenses ................. 12.5% 13.6% 13.6%
Operating profit ............... 4.7% 5.6% 6.4%
Interest expense, net .............. 1.0% 0.8% 0.5%
Income tax expense ................. 1.1% 1.5% 1.8%
------ ------ ------
Net income ..................... 2.6% 3.3% 4.1%
Year Ended January 31, 2004 Compared to Year Ended January 31, 2003
Net Sales. Net sales increased $11.9 million, or 15.3%, to $89.7 million
for the year ended January 31, 2004 from $77.8 million for the year ended
January 31, 2003. The increase was due primarily to an increase in our market
share in our Tyvek(R)-based product lines as well as an increase in the price of
these products beginning in May 2003. Increased sales were also driven by an
improving U.S. economy which increased demand for our products, particularly in
the industrial Tyvek(R) markets we serve, and increased demand for our chemical
protective suits and fire turnout gear for Homeland Security purposes. In
addition, as a result of the SARS outbreak, we sold our products for the first
time in domestic China, which amounted to $0.6 million in the year ended January
31, 2004.
Gross Profit. Gross profit increased $3.0 million, or 20.2%, to $18.0
million for the year ended January 31, 2004 from $15.0 million for the year
ended January 31, 2003. Gross profit as a percent of net sales increased to
20.0% for the year ended January 31, 2004 from 19.2% for the year ended January
31, 2003, primarily because of cost reductions achieved by shifting production
of additional Tyvek(R) -based products and chemical suits to China and Mexico.
We have increasingly shifted production to these lower-cost facilities. In
addition, we increased the price of our Tyvek(R) -based products beginning in
May 2003, which contributed to an increase in our gross margins for these
products. In the year ended January 31, 2004, we also determined that a portion
of our inventory was obsolete. As a result, we wrote off $0.4 million of
inventory offsetting the factors contributing to an increase in gross profit
discussed above.
Operating Expenses. Operating expenses increased $1.6 million, or 15%, to
$12.2 million for the year ended January 31, 2004 from $10.6 million for the
year ended January 31, 2003. As a percent of net sales, operating expenses
remained constant at 13.6% for the year ended January 31, 2004 and the year
ended January 31, 2003. The $1.6 million increase in operating expenses in the
year ended January 31, 2004 compared to the year ended January 31, 2003 was
principally due to increased expenses corresponding to our increase in net
sales, as well as impairment of goodwill of $0.2 million. This was offset by a
decrease in bad debt expense of $0.3 million in fiscal 2004 resulting from
improvement in the U.S. economy and a reorganization of our credit department.
Interest Expenses. Interest expenses decreased $0.1 million, or 16.8%, to
$0.5 million for the year ended January 31, 2004 from $0.6 million for the year
ended January 31, 2003. The decrease was primarily due to a decrease in average
monthly borrowings under our credit facilities.
Income Tax Expense. Income tax expense consists of federal, state and
foreign income taxes. Income tax expense increased $0.5 million, or 41.6%, to
$1.7 million for the year ended January 31, 2004 from $1.2 million for the year
ended January 31, 2003. The increase was due to a relative increase in our
income recognized in the United States as compared to the income recognized in
China, where income tax rates are lower. Our effective tax rate was 31.3% and
31.0% in the years ended January 31, 2004 and 2003, respectively. Our effective
tax rate varied from the federal statutory rate of 34% due primarily to lower
foreign tax rates.
Net Income. Net income increased $1.0 million, or 39.7%, to $3.6 million
for the year ended January 31, 2004 from $2.6 million for the year ended January
31, 2003. The increase in net income was the result of an increase in net sales
and increased productivity as a result of shifts in production to our China
facilities, partially offset by an increase in costs and expenses due to higher
volumes of our products being sold.
19
Year Ended January 31, 2003 Compared to Year Ended January 31, 2002
Net Sales. Net sales increased $1.4 million, or 1.8%, to $77.8 million for
the year ended January 31, 2003 from $76.4 million for the year ended January
31, 2002. The increase in net sales was principally attributable to slowly
improving economic conditions and to an increase in the price of our
Tyvek(R)-based products beginning in April 2002.
Gross Profit. Gross profit increased by $1.8 million, or 13.9%, to $15.0
million for the year ended January 31, 2003 from $13.1 million for the year
ended January 31, 2002. Gross profit as a percentage of net sales increased to
19.2% for the year ended January 31, 2003 from 17.1% for the prior year,
principally due to an increase in the price of our Tyvek(R) -based products
beginning in April 2002, which contributed to an increase in our gross margins
for these products. Labor and overhead costs also decreased in the year ended
January 31, 2003 compared to the year ended January 31, 2002 due to a headcount
reduction in our Decatur, Alabama facility and our continuing shift of
production to China, where the labor costs are lower. This was partially offset
by an increase in inventory reserves of $0.2 million as well as a decrease in
our margins on our Tyvek(R)-based products in the period between March 2002 and
April 2002 during which we were unable to pass on the Tyvek(R) price increase to
our customers.
Operating Expenses. Operating expenses increased by $1.1 million, or 11%,
to $10.6 million for the year ended January 31, 2003 from $9.5 million for the
year ended January 31, 2002. As a percent of net sales, operating expenses
increased to 13.6% for the year ended January 31, 2003 from 12.5% for the year
ended January 31, 2002. The $1.1 million increase in operating expenses for the
year ended January 31, 2003 compared to the year ended January 31, 2002 was due
primarily to a $0.3 million increase in freight costs as a result of price
increases by our carriers, a $0.3 million increase in sales commissions as a
result of a corresponding increase in our chemical suit sales which have a
higher commission rate than our Tyvek(R)-based products, and a $0.3 million
increase in bad debt expense as a result of general economic conditions. These
increases were offset in part by a $0.2 million decrease in labor expenses as a
result of increased automation in our manufacturing processes and a $0.2 million
decrease in research and development expenses as a result of the completion of
our development of our Micromax(R) products.
Interest Expense. Interest expense decreased by $0.3 million, or 27.1%, to
$0.6 million for the year ended January 31, 2003 from $0.9 million for the year
ended January 31, 2002. This decrease was primarily due to a decrease in average
borrowings under our revolving credit facilities and to decreasing interest
rates.
Income Tax Expense. Income tax expense increased $0.4 million, or 50.0%,
to $1.2 million for the year ended January 31, 2003 from $0.8 million for the
year ended January 31, 2002. The increase was due to a relative increase in our
income recognized in the United States as compared to the income recognized in
China, where income tax rates are lower. Our effective tax rate was 31.0% and
30.0% in the years ended January 31, 2003 and 2002, respectively. Our effective
tax rate varied from the federal statutory rate of 34% due primarily to lower
foreign tax rates.
Net Income. Net income increased $0.6 million, or 32.2%, from $2.6 million
for the year ended January 31, 2003 from $2.0 million for the year ended January
31, 2002. The increase in net income was primarily the result of the price
increase of our Tyvek(R)-based products, offset in part by the increase in
operating expenses discussed above.
Liquidity and Capital Resources
Cash Flows
As of January 31, 2004 we had cash and cash equivalents of $2.4 million
and working capital of $21.8 million, an increase of $1.0 million and $3.9
million, respectively, from January 31, 2003. Our primary sources of funds for
conducting our business activities have been from cash flow provided by
operations and borrowings under our credit facilities described below. We
require liquidity and working capital primarily to fund increases in inventories
and accounts receivable associated with our net sales and, to a lesser extent,
for capital expenditures.
Net cash provided by operating activities of $2.2 million for the year
ended January 31, 2004 was due primarily to net income from operations of $3.6
million and an increase in accounts payable of $0.4 million, offset in part by
an increase in inventories of $0.8 million and an increase in accounts
receivable of $2.2 million. Net cash provided by operating activities of $1.8
million for the year ended January 31, 2003 was primarily attributable to net
income from operations of $2.6 million and an decrease in inventories of $1.0
million, offset in part by an decrease in accounts payable of $1.9 million and
an increase in accounts receivable of $0.8 million.
Net cash used in investing activities of $1.4 million and $1.7 million in
the years ended January 31, 2004 and 2003, respectively, was due to purchases of
property and equipment.
Net cash provided by financing activities in the years ended January 31,
2004 and 2003 was primarily attributable to payments and borrowings under our
credit facilities.
20
Credit Facilities
We currently have two credit facilities:
o an $18 million revolving credit facility, of which we had
$16.3 million of borrowings outstanding as of April 20, 2004;
and
o a $3 million revolving credit facility (the availability of
which reduces incrementally over its 3-year term), of which we
had no borrowings outstanding as of April 20, 2004.
In November 1999, we entered into a 5-year $3 million term loan which we repaid
in full on March 31, 2003.
Our $18 million revolving credit facility permits us to borrow up to the
lower of $18 million and a borrowing base determined by reference to a
percentage of our eligible accounts receivable and inventory. Our $18 million
revolving credit facility expires on July 31, 2004, and has therefore been
classified as a short-term liability on our balance sheet at January 31, 2004.
Borrowings under this revolving credit facility bear interest at the London
Interbank Offering Rate (LIBOR) plus 2% and were approximately $16.8 million at
January 31, 2004. As of April 20, 2004, we had $1.7 million of borrowing
availability under this revolving credit facility.
In January 2004, we entered into a new 3-year $3 million revolving credit
facility which expires on January 21, 2007. Availability under this facility
decreases from $3 million by $83,333 each month over the 3-year term and is also
subject to the borrowing base limitation discussed above in connection with our
$18 million revolving credit facility. Borrowings under this revolving credit
facility bear interest at LIBOR plus 2.5%. We did not have any borrowings
outstanding under this facility at January 31, 2004. As of April 20, 2004, we
had $2.9 million of borrowing availability under this revolving credit facility.
Our credit facilities require that we comply with specified financial
covenants relating to interest coverage, debt coverage, minimum consolidated net
worth, and earnings before interest, taxes, depreciation and amortization. These
restrictive covenants could affect our financial and operational flexibility or
impede our ability to operate or expand our business. Default under our credit
facilities would allow the lenders to declare all amounts outstanding to be
immediately due and payable. Our lenders have a security interest in
substantially all of our assets to secure the debt under our credit facilities.
As of April 20, 2004, we were in compliance with all covenants contained in our
credit facilities.
We believe that cash flow from operations along with borrowing
availability under our $3 million revolving credit facility, as well as the
expected renewal of our $18 million revolving credit facility, will be
sufficient to meet our currently anticipated operating, capital expenditures and
debt service requirements for at least the next 12 months. Historically, we have
been able to renew our primary credit facility on acceptable terms, but there
can be no assurance that such financing will continue to be available or that
any renewal will be on favorable terms as favorable as our current facility.
Capital Expenditures
Our capital expenditures principally relate to purchases of manufacturing
equipment, computer equipment, leasehold improvement and automobiles, as well as
payments related to the construction of our facilities in China. Our capital
spending plans for fiscal 2005 include the last payment on our 90,415 square
foot facility in Jiaozhou, China due to a construction company as payment for
the construction of this facility in 2004. Our facilities in China are not
encumbered by commercial bank mortgages and thus Chinese commercial mortgage
loans may be available with respect to these real estate assets if we need
additional liquidity. We expect our capital expenditures to be approximately
$1.1 million in fiscal 2005.
21
Contractual Obligations
We had no off-balance sheet arrangements at January 31, 2004. As shown
below, at January 31, 2004, our contractual cash obligations totaled
approximately $20.6 million, including lease renewals entered into subsequent to
January 31, 2004.
Payments Due by Period
------------------------------------------------------------------
Less than
---------
Total 1 Year 1-3 Years 4-5 Years After 5 Years
--------- --------- --------- --------- -------------
(in thousands)
Operating leases ......................... $ 3,702 $ 848 $ 1,589 $ 1,265 $ --
Automobiles leased ....................... 78 30 34 14 --
Revolving credit facility ................ 16,785 16,785 -- -- --
========= ========= ========= ========= =========
Total .................................... $ 20,565 $ 17,663 $ 1,623 $ 1,279 $ --
Seasonality
Our operations have historically been seasonal, with higher sales
generally occurring in February, March, April and May when scheduled maintenance
occurs on nuclear, coal, oil and gas fired utilities, chemical, petrochemical
and smelting facilities, and other heavy industrial manufacturing plants occurs,
primarily due to cooler temperatures. Sales decline during the warmer summer and
vacation months, and generally increase from Labor Day through February with
slight declines during holidays. As a result of this seasonality in our sales,
we have historically experienced a corresponding seasonality in our working
capital, specifically inventories, with peak inventories occurring between
September and March coinciding with lead times required to accommodate the
spring maintenance schedules. We believe that by sustaining higher levels of
inventory, we gain a competitive advantage in the marketplace. Certain of our
large customers seek sole sourcing to avoid sourcing their requirements from
multiple vendors whose prices, delivery times and quality standards differ.
In recent years, due to increased demand by first responders for our
chemical suits and fire gear, our historical seasonal pattern has shifted.
Governmental disbursements are dependent upon budgetary processes and grant
administration processes that do not follow our traditional seasonal sales
patterns. Due to the size and timing of these governmental orders, our net
sales, results of operations, working capital requirements and cash flows can
vary between different reporting periods. As a result, we expect to experience
increased variability in net sales, net income, working capital requirements and
cash flows on a quarterly basis.
Effects of Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board, or FASB,
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others-an 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
obligations it assumes under that guarantee if the 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. Our initial adoption of this statement on
January 1, 2003 did not have an impact on its results of operations, financial
position or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation provides guidance with respect
to the consolidation of certain entities, referred to as variable interest
entities, in which an investor is subject to a majority of the risk of loss from
the variable interest entity's activities, or is entitled to receive a majority
of the variable interest entity's residual returns. This interpretation also
provides guidance with respect to the disclosure of variable interest entities
in which an investor maintains an interest but is not required to consolidate.
The provisions of the interpretation are effective immediately for all variable
interest entities created after January 31, 2003, or in which we obtain an
interest after that date. In October 2003, the FASB issued a revision to this
pronouncement, FIN 46R, which clarified certain provisions and modified the
effective date from July 1, 2003 to December 31, 2003 for variable interest
entities created before February 1, 2003. We believe that the adoption of this
pronouncement will have no impact on our financial position or results of
operations.
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 that were accounted for as
equity under previous guidance must now be accounted for as liabilities. The
financial instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in
22
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
adoption of SFAS No. 150 did not have any impact on our consolidated financial
statements for the year ended and at January 31, 2004.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers
Disclosures about Pension and Other Postretirement Benefits", to improve
financial statement disclosures for defined benefit plans. We have adopted SFAS
No. 132, which includes new disclosure requirements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including changes in interest rates and
currency exchange rates. To manage the volatility relating to these exposures,
we seek to limit, to the extent possible, our non-U.S. dollar denominated
purchases.
Foreign Currency Risk
We are exposed to changes in foreign currency exchange rates as a result
of our purchases and sales in other countries. To manage the volatility relating
to foreign currency exchange rates, we seek to limit, to the extent possible,
our non-U.S. dollar denominated purchases and sales.
In connection with our operations in China, we purchase a significant
amount of products from outside of the United States. However, our purchases in
China are primarily made in Chinese Yuan, the value of which has been largely
pegged to the U.S. dollar for the last decade. As a result, any currency risks
related to these transactions are deemed to be immaterial to us as a whole.
Our primary risk from foreign currency exchange rate changes is presently
related to non-U.S. dollar denominated sales in Canada and, to a smaller extent,
in Europe. Our sales in Canada are denominated in U.S. dollars. If the value of
the U.S. dollar increases relative to the Canadian dollar, then our net sales
could decrease as our products would be more expensive to our Canadian customers
because of the exchange rate change. Although our sales in China are denominated
in the Chinese Yuan, because this currency has recently been largely pegged to
the U.S. dollar, our foreign currency exchange rate risk in China has been
minimized. At this time, we do not manage the foreign currency risk through the
use of derivative instruments. A 10% decrease in the value of the U.S. dollar
relative to foreign currencies would not have a material impact on our results
of operations or financial position. As non-U.S. dollar denominated
international purchases and sales grow, exposure to volatility in exchange rates
could have a material adverse impact on our financial results.
Interest Rate Risk
We are exposed to interest rate risk with respect to our credit
facilities, which have variable interest rates based upon the London Interbank
Offered Rate. At January 31, 2004, we had $16.8 million of borrowings
outstanding under these credit facilities. If the interest rate applicable to
this variable rate debt rose 1% in the year ended January 31, 2004, our interest
expense would have increased and our income before income taxes would have
decreased by less than $200,000.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Consolidated Financial Statements:
Page No.
--------
Report of Independent Auditors A-25
Report of Independent Auditors A-26
Consolidated Balance Sheets - January 31, 2004 and 2003 A-27
Consolidated Statements of Income for the years ended A-28
January 31, 2004, 2003 and 2002
Consolidated Statement of Stockholders' Equity for the years ended A-29
January 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended A-30
January 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements A-31 to 46
Schedule II - Valuation and Qualifying Accounts A-47
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
24
Report of Independent Auditors
To the Board of Directors and Shareholders
Of Lakeland Industries, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Lakeland Industries, Inc. and its subsidiaries at January 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the years then
ended in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
for the years ended January 31, 2004 and 2003 listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial information.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets", on
February 1, 2002.
PricewaterhouseCoopers LLP
Melville, New York
April 2, 2004
25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Lakeland Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Lakeland Industries, Inc. and
Subsidiaries (the "Company") for the year ended January 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the results of operations and cash flows. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of the Company for the year ended January 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
We have also audited Schedule II - Valuation and Qualifying Accounts for the
year ended January 31, 2002. In our opinion, this schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Melville, New York
April 15, 2002
26
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
January 31,
2004 2003
----------- -----------
Assets
Current assets
Cash and cash equivalents $ 2,445,271 $ 1,474,135
Accounts receivable, net of allowance for doubtful accounts of
$323,000 and $343,000 at January 31, 2004 and 2003 respectively 12,570,320 10,364,188
Inventories 26,265,807 25,470,044
Deferred income taxes 790,272 1,001,133
Other current assets 1,213,104 549,564
----------- -----------
Total current assets 43,284,774 38,859,064
Property and equipment, net 3,921,308 3,356,835
Other assets, net 97,745 358,001
Goodwill 248,834
----------- -----------
Total assets $47,303,827 $42,822,734
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 3,461,353 $ 3,014,038
Accrued compensation and benefits 796,285 586,795
Other accrued expenses 466,759 675,380
Borrowings under revolving credit facility 16,784,781 16,657,882
----------- -----------
Total current liabilities 21,509,178 20,934,095
Pension liability 517,147 514,572
Deferred income taxes 250,532 14,643
----------- -----------
Total liabilities 22,276,857 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;
3,273,925 and 2,969,107 shares issued and outstanding 32,739 29,691
at January 31, 2004 and 2003, respectively
Additional paid-in capital 11,862,461 8,762,673
Retained earnings 13,131,770 12,567,060
----------- -----------
Total stockholders' equity 25,026,970 21,359,424
----------- -----------
Total liabilities and stockholders' equity $47,303,827 $42,822,734
=========== ===========
The accompanying notes are an integral part of these financial statements.
27
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Fiscal years ended January 31,
2004 2003 2002
------------ ------------ ------------
Net sales $ 89,717,162 $ 77,825,717 $ 76,431,245
Cost of goods sold 71,740,876 62,866,550 63,293,922
------------ ------------ ------------
Gross profit 17,976,286 14,959,167 13,137,323
------------ ------------ ------------
Operating expenses
Selling and shipping 7,342,017 6,337,726 5,414,400
General and administrative 4,596,437 4,262,707 4,133,790
Impairment of goodwill 248,834 -0- -0
------------ ------------ ------------
Total operating expenses 12,187,288 10,600,433 9,548,190
------------ ------------ ------------
Operating profit 5,788,998 4,358,734 3,589,133
------------ ------------ ------------
Other income (expense)
Interest expense (534,540) (642,595) (881,948)
Interest income 18,976 20,245 17,311
Other income - net 24,064 39,555 91,040
------------ ------------ ------------
Total other expense (491,500) (582,795) (773,597)
------------ ------------ ------------
Income before income taxes 5,297,498 3,775,939 2,815,536
Income tax expense 1,659,064 1,171,881 846,000
------------ ------------ ------------
Net income $ 3,638,434 $ 2,604,058 $ 1,969,536
============ ============ ============
Net income per common share
Basic $ 1.11 $ .80 $ .61
============ ============ ============
Diluted $ 1.11 $ .80 $ .61
============ ============ ============
Weighted average common shares
outstanding
Basic 3,268,551 3,261,116 3,222,956
============ ============ ============
Diluted 3,275,501 3,269,039 3,247,290
============ ============ ============
The accompanying notes are an integral part of these financial statements.
28
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Fiscal years ended January 31, 2004, 2003 and 2002
Common stock Additional
---------------------- paid-in Retained
Shares Amount Capital Earnings Total
--------- ------- ----------- ------------ -----------
Balance, January 31, 2001 2,646,000 $26,460 $ 6,140,221 $ 10,369,831 $16,536,512
Net income 1,969,536 1,969,536
Exercise of stock options 38,600 386 125,864 126,250
Stock option income tax benefit 94,656 94,656
--------- ------- ----------- ------------ -----------
Balance, January 31, 2002 2,684,600 26,846 6,360,741 12,339,367 18,726,954
Net income 2,604,058 2,604,058
Exercise of stock options 10,100 101 28,311 28,412
10% stock dividend 274,407 2,744 2,373,621 (2,376,365) --
--------- ------- ----------- ------------ -----------
Balance, January 31, 2003 2,969,107 29,691 8,762,673 12,567,060 21,359,424
Net income 3,638,434 3,638,434
Exercise of stock options 10,400 104 29,008 29,112
10% stock dividend 294,418 2,944 3,070,780 (3,073,724) --
--------- ------- ----------- ------------ -----------
Balance, January 31, 2004 3,273,925 $32,739 $11,862,461 $ 13,131,770 $25,026,970
--------- ------- ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements.
29
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended January 31,
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities
Net income $ 3,638,434 $ 2,604,058 $ 1,969,536
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Deferred income taxes 446,750 (401,490) (19,000)
Depreciation and amortization 803,234 595,384 689,969
Impairment of goodwill 248,834 -- --
Stock option income tax benefit -- -- 94,656
(Increase) decrease in operating assets
Accounts receivable (2,206,132) (763,450) 1,257,550
Inventories (795,763) 1,059,106 (3,819,067)
Prepaid income taxes and other
current assets (663,540) 216,739 355,587
Other assets 260,256 47,365 (80,832)
Increase (decrease) in operating liabilities
Accounts payable 447,315 (1,913,434) (1,731,074)
Accrued expenses and other liabilities 3,444 355,724 312,638
----------- ----------- -----------
Net cash provided by (used in)
operating activities 2,182,832 1,800,002 (970,037)
----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment (1,367,707) (1,733,759) (831,919)
----------- ----------- -----------
Net cash used in investing activities (1,367,707) (1,733,759) (831,919)
----------- ----------- -----------
Cash flows from financing activities
Borrowings from related party to finance
construction of a building 168,099
Net borrowings (payments) under credit
agreements 126,899 (549,254) 2,772,513
Proceeds from exercise of stock options 29,112 28,412 126,250
Payment of deferred financing costs -- -- (120,750)
----------- ----------- -----------
Net cash provided by (used in) financing 156,011 (352,743) 2,778,013
activities ----------- ----------- -----------
Net increase (decrease) in cash and cash 971,136 (286,500) 976,057
equivalents
Cash and cash equivalents at beginning of year 1,474,135 1,760,635 784,578
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,445,271 $ 1,474,135 $ 1,760,635
=========== =========== ===========
See notes for Supplemental Cash Flow information.
The accompanying notes are an integral part of these financial statements
30
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2004, 2003 and 2002
1. - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware
corporation, organized in April 1982, manufactures and sells a comprehensive
line of safety garments and accessories for the industrial protective clothing
market. The principal market for the company's products is in the United States.
No customer accounted for more than 10% of net sales during the fiscal years
ended January 31, 2004, 2003 and 2002.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Laidlaw, Adams & Peck, Inc. and
Subsidiary (MeiYang Protective Products Co. Ltd., a Chinese corporation),
Lakeland Protective Wear, Inc. (a Canadian corporation), Weifang Lakeland Safety
Products Co., Ltd. (a Chinese corporation), Qing Dao Maytung Healthcare Co.,
Ltd. (a Chinese corporation, formed), Lakeland Industries Europe Ltd. (a British
corporation) and Lakeland de Mexico S.A. de C.V. (a Mexican corporation). All
significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
The Company derives its sales primarily from its limited use/disposable
protective clothing and secondarily from its sales of high-end chemical
protective suits, fire fighting and heat protective apparel, gloves and arm
guards, and reusable woven garments. Sales are recognized when goods are shipped
at which time title and the risk of loss passes to the customer. Sales are
reduced for sales returns and allowances. Payment terms are generally net 30
days for United States sales and net 90 days for international sales. Domestic
and international sales are as follows:
Fiscal Years Ended January 31,
2004 2003 2002
---- ---- ----
Domestic $81,763,000 91.1% $72,126,000 92.7% $71,962,000 94.2%
International 7,954,000 8.9% 5,700,000 7.3% 4,469,000 5.8%
----------- ------- ----------- ------- ----------- -------
Total $89,717,000 100% $77,826,000 100% $76,431,000 100%
=========== ======= =========== ======= =========== =======
Inventories
Inventories include freight-in, materials, labor and overhead costs and
are stated at the lower of cost (on a first-in first-out basis) or market.
Provision is made for slow-moving, obsolete or unusable inventory.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives, on a straight-line basis.
Leasehold improvements and leasehold costs are amortized over the term of the
lease or service lives of the improvements, whichever is shorter. The costs of
additions and improvements which substantially extend the useful life of a
particular asset are capitalized. Repair and maintenance costs are charged to
expense. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the account and the gain or loss on
disposition is reflected in operating income.
31
Goodwill
On February 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which provides
that goodwill and other intangible assets will no longer be amortized, but are
assessed for impairment annually and upon occurrence of an event that indicates
impairment may have occurred. Goodwill impairment is evaluated, utilizing a
two-step process as required by SFAS No. 142. Factors that the Company considers
important that could identify a potential impairment include: significant under
performance relative to expected historical or projected future operating
results; significant changes in the overall business strategy; and significant
negative industry or economic trends. When the Company determines that the
carrying value of intangibles and goodwill may not be recoverable based upon one
or more of these indicators of impairment, the Company measures any potential
impairment based on a projected discounted cash flow method. Estimating future
cash flows requires the Company's management to make projections that can differ
materially from actual results.
In fiscal 2004, as a result of the Company's decision to move a portion of
our reusable woven garment assembly from the United States to China, the Company
reviewed this portion of its business for impairment. The impairment was
calculated based on estimating the fair value utilizing a discounted cash flow
analysis, resulting in an impairment of $0.2 million in fiscal 2004. The Company
has no remaining goodwill recorded at January 31, 2004.
In fiscal 2003, the Company ceased amortization of goodwill. Had this
pronouncement been retroactively applied net income would have increased
approximately $12,000 net of tax in 2002 and diluted earnings per share would
have increased by less than one cent per share in 2002.
32
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2004, 2003 and 2002
1. (continued)
Stock-Based Compensation
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123"). In compliance with SFAS
123, 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.
The Company has also adopted the disclosure provisions of SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure." This
pronouncement requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results. If the
Company had elected to recognize compensation expense based upon the fair value
at the date of grant for awards under these plans, consistent with the
methodology prescribed by SFAS 123, the effect on the Company's net income and
earnings per share as reported would be reduced for the years ended January 31,
2004, 2003 and 2002 to the pro forma amounts indicated below:
2004 2003 2002
------------- ------------- -------------
Net income
As reported $ 3,638,434 $ 2,604,058 $ 1,969,536
Less:
Option expense based on fair value method 28,344 -- 3,930
Pro forma $ 3,610,090 $ 2,604,058 $ 1,965,606
============= ============= =============
Basic earnings per common share
As reported $ 1.11 $ .80 $ .61
Pro forma $ 1.10 $ .80 $ .61
Diluted earnings per common share
As reported $ 1.11 $ .80 $ .60
Pro forma $ 1.10 $ .80 $ .60
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following assumptions for the
years ended January 31, 2004 and 2002: expected volatility of 57% and 57%,
respectively; risk-free interest rate of 3.25 % and 5%, respectively; expected
dividend yield of 0.0%; and expected life of six years. All stock-based awards
were fully vested at January 31, 2004 and 2003 and 7,000 new option grants were
made during the year ended January 31, 2004. No options were granted in 2003.
Earnings per share have been adjusted to reflect the 10% stock dividends to
stockholders of record as of July 31, 2003 and 2002.
Allowance for Doubtful Accounts
The Company establishes an allowance for doubtful accounts to provide for
accounts receivable that may not be collectible. In establishing the allowance
for doubtful accounts, the Company analyzes the collectibility of individual
large or past due accounts customer-by-customer. The Company establishes
reserves for accounts that it determines to be doubtful of collection.
33
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2004, 2003 and 2002
1. (continued)
Shipping and Handling Costs
The Company includes shipping and handling fees billed to customers in net
sales. Shipping and handling costs associated with outbound freight are included
in selling and shipping expenses and aggregated approximately $2,394,000,
$1,835,000 and $1,532,000 in the fiscal years ended January 31, 2004, 2003 and
2002, respectively.
Research and Development Costs
Research and development costs are expensed as incurred and included in
general and administrative expenses. Research and development expenses
aggregated approximately $82,000, $164,000, and $378,000 in the fiscal years
ended January 31, 2004, 2003 and 2002, respectively, paid to contractors for
development of new raw materials.
Income Taxes
The Company is required to estimate its income taxes in each of the
jurisdictions in which it operates as part of preparing the consolidated
financial statements. This involves estimating the actual current tax in
addition to assessing temporary differences resulting from differing treatments
for tax and financial accounting purposes. These differences, together with net
operating loss carryforwards and tax credits, are recorded as deferred tax
assets or liabilities on the Company's balance sheet. A judgment must then be
made of the likelihood that any deferred tax assets will be recovered from
future taxable income. A valuation allowance may be required to reduce deferred
tax assets to the amount that is more likely than not to be realized. In the
event the Company determines that it may not be able to realize all or part of
our deferred tax asset in the future, or that new estimates indicate that a
previously recorded valuation allowance is no longer required, an adjustment to
the deferred tax asset is charged or credited to income in the period of such
determination.
Earnings Per Share
Basic earnings per share are based on the weighted average number of
common shares outstanding without consideration of common stock equivalents.
Diluted earnings per share are based on the weighted average number of common
and common stock equivalents. The common stock equivalents for the years ended
January 31, 2004, 2003 and 2002 were 6,950, 7,923, and 24,334 respectively,
representing the dilutive effect of stock options. The diluted earnings per
share calculation takes into account the shares that may be issued upon exercise
of stock options, reduced by shares that may be repurchased with the funds
received from the exercise, based on the average price during the fiscal year
(as adjusted for the 10% stock dividend to holders of record July 31, 2003 and
2002). Options to purchase 1,100, and 1,000, shares of the Company's common
stock have been excluded from the computation of diluted earnings per share in
2003 and 2002, respectively, as their inclusion would have been anti-dilutive.
Advertising Costs
Advertising costs are expensed as incurred.
34
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
1. (continued)
Statement of Cash Flows
The Company considers highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market funds. The market value of the cash
equivalents approximates cost. Foreign denominated cash and cash equivalents
were approximately $2,012,000 and $1,011,000 at January 31, 2004 and 2003,
respectively.
Supplemental cash flow information for the years ended January 31 is as
follows:
2004 2003 2002
---------- -------- --------
Interest paid $ 534,540 $642,595 $881,934
Income taxes paid 1,303,513 895,401 606,700
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade receivables.
Concentration of credit risk with respect to these receivables is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion across geographic areas principally within
the United States. The Company routinely addresses the financial strength of its
customers and, as a consequence, believes that its receivable credit risk
exposure is limited.
Foreign Operations and Foreign Currency Translation
The Company maintains manufacturing operations and uses independent
contractors in Mexico and the People's Republic of China. It also maintains a
sales and distribution entity located in Canada and the U.K. The Company is
vulnerable to currency risks in these countries. The functional currency of
foreign subsidiaries is the U.S. dollar.
The monetary assets and liabilities of the Company's foreign operations
are translated into U.S. dollars at current exchange rates, while non-monetary
items are translated at historical rates. Revenues and expenses are generally
translated at average exchange rates for the year. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred and aggregated approximately $29,000, $95,000, and
$129,000 for the fiscal years ended January 31, 2004, 2003 and 2002,
respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
year-end and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The most significant
estimates include the allowance for doubtful accounts and inventory reserves. It
is reasonably possible that events could occur during the upcoming year that
could change such estimates.
35
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
1. (continued)
Fair value of Financial Instruments
The Company's principal financial instrument consists of its outstanding
revolving credit facility and term loan. The Company believes that the carrying
amount of such debt approximates the fair value as the variable interest rates
approximate the current prevailing interest rate.
Effects of Recent Accounting Pronouncements
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 that were accounted for as
equity under previous guidance, must now be accounted for as liabilities. The
financial instruments affected include 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 adoption of SFAS No. 150 in July 1, 2003 did not have any impact on
our consolidated financial statements for the year ended and at January 31,
2004.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others-an 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 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. Our initial adoption
of this statement on January 1, 2003 did not have an impact on its results of
operations, financial position, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation provides guidance with respect
to the consolidation of certain entities, referred to as variable interest
entities ("VIE"), in which an investor is subject to a majority of the risk of
loss from the VIE's activities, or is entitled to receive a majority of the
VIE's residual returns. This interpretation also provides guidance with respect
to the disclosure of VIEs in which an investor maintains an interest but is not
required to consolidate. The provisions of the interpretation are effective
immediately for all VIEs created after January 31, 2003, or in which we obtain
an interest after that date. In October 2003, the FASB issued a revision to this
pronoucement, FIN 46R which clarified certain provisions and modified the
effective date from July 1, 2003 to December 31, 2003 for variable interest
entities created before February 1, 2003. We believe that the adoption of this
pronouncement will have no impact on our financial position or results of
operations.
In December 2003, the FASB issued a revised FAS No. 132, Employers
Disclosures about Pensions and Other Postretirement benefits, to improve
financial statement disclosures for defined benefit plans. The company has
adopted FAS No. 132, which includes new disclosure requirements, which have been
included in note 7, Benefit Plans.
2 -INVENTORIES
Inventories consist of the following at January 31:
2004 2003
----------- -----------
Raw materials $10,868,816 $ 7,839,144
Work-in-process 2,279,444 1,656,942
Finished goods 13,117,547 15,973,958
----------- -----------
$26,265,807 $25,470,044
----------- -----------
36
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
3 -PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following at January 31:
Useful life
in years 2004 2003
----------- ---------- ----------
Machinery and equipment 3 - 10 5,819,322 $ 4,815,225
Furniture and fixtures 3 - 10 205,216 176,073
Leasehold improvements Lease term 802,318 778,514
Building ( in China) 20 1,605,737 1,295,074
----------- -----------
8,432,593 7,064,886
Less accumulated depreciation and amortization (4,511,285) (3,708,051)
----------- -----------
$ 3,921,308 $ 3,356,835
=========== ===========
Depreciation expense incurred in fiscal 2004, 2003 and 2002 amounted to
$803,234, $595,384, and $689,969, respectively. Net fixed assets in China were
approximately $1.9 million, $1.4 million and $0.2 million as of January 31,
2004, 2003 and 2002, respectively. Net fixed assets in Mexico were approximately
$168,000, $208,000 and $121,000 at January 31, 2004, 2003 and 2002,
respectively.
4 -LONG-TERM DEBT
Long-term debt consists of the following at January 31:
2004 2003
----------- -----------
Revolving credit facility $16,784,781 $16,478,781
Term loan -0- 179,101
----------- -----------
16,784,781 16,657,882
Less current portion 16,784,781 16,657,882
----------- -----------
Long-term debt $ -0- $ -0-
=========== ===========
37
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
4. (continued)
Revolving Credit Facility
The Company's agreement with its lending institution, as amended, provides
the Company with a revolving credit facility of $18 million. This credit
facility, which is subject to a borrowing base based on a percentage of eligible
accounts receivable and inventory as defined, bears interest at LIBOR plus 2%
(3.10% at January 31, 2004) and pursuant to an amendment dated July 19, 2003
expires on July 31, 2004. The agreement was amended on March 9, 2001 to (i)
extend the maturity date to October 31, 2001, (ii) modify the interest rate, and
(iii) modify certain financial covenants. The agreement was amended on July 12,
2001 to (i) extend the maturity date to July 31, 2002, (ii) increase the amount
available under the revolving line of credit from $14 million to a percentage of
eligible accounts receivable and inventory as defined, up to a maximum of $18
million, (iii) modify the interest rate, and (iv) modify a certain financial
covenant. The maximum amounts borrowed under the credit facility during the
fiscal years ended January 31, 2004, 2003 and 2002 were $18,000,000,
$18,000,000, and $17,702,000 respectively, and the average interest rates during
the periods were 3.20%, 3.73% and 5.93%, respectively. At January 31, 2004, the
Company had approximately $1,215,000 in availability under the agreement.
In January 2004, the Company entered into a new 3-year $3 million
revolving credit facility which expires on January 21, 2007. Availability under
this facility decreases from $3 million by $83,333 each month over the 3-year
term and is also subject to the borrowing base limitation discussed above in
connection with the $18 million revolving credit facility. Borrowings under this
revolving credit facility bear interest at LIBOR plus 2.5%. The Company did not
have any borrowings outstanding under this facility at January 31, 2004.
Term Loan
In November 1999, the Company entered into a $3,000,000, five-year term
loan which was paid in full in March 2003.
The credit facility is and the term loan was collateralized by
substantially all of the assets of the Company. The credit facility and term
loan contain 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. The fees incurred by the Company related to the credit
facility amounted to $63,000, $63,000, and $107,000 during fiscal 2004, 2003 and
2002, respectively.
5. - STOCKHOLDERS' EQUITY AND STOCK OPTIONS
The Non-employee Directors' Option Plan (the "Directors' Plan") provides
for an automatic one-time grant of options to purchase 5,000 shares of common
stock to each non-employee director elected or appointed to the Board of
Directors. Under the Directors' Plan, 60,000 shares of common stock have been
authorized for issuance. Options are granted at not less than fair market value,
become exercisable commencing six months from the date of grant and expire six
years from the date of grant. In addition, all non-employee directors re-elected
to the Company's Board of Directors at any annual meeting of the stockholders
will automatically be granted additional options to purchase 1,000 shares of
common stock on each of such dates.
The Company's 1986 Incentive and Non-statutory Stock Option Plan (the
"Plan") provides for the granting of incentive stock options and non-statutory
options. The Plan provides for the grant of options to key employees to purchase
up to 400,000 shares of the Company's common stock, upon terms and conditions
determined by a committee of the Board of Directors, which administers the plan.
Options are granted at not less than fair market value (110 percent of fair
market value as to incentive stock options granted to ten percent stockholders)
and are exercisable over a period not to exceed ten years (five years as to
incentive stock options granted to ten percent stockholders).
38
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
5. (continued)
Additional information with respect to the Company's plans for the fiscal
years ended January 31, 2004, 2003 and 2002 is summarized as follows:
2004
-----------------------------------------------
Directors' Plan Plan
-----------------------------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
------ --------- ------ ---------
Shares under option
Outstanding at beginning of year 9,900 $ 4.71 4,455 $1.86
10% stock dividend 1,140 445
Granted 7,000 8.74
Exercised (5,500) (4,900)
-------- -------
Outstanding and exercisable at end of year 12,540 7.70 0
======== =======
Weighted-average remaining contractual
life of options outstanding 4.25 years
Weighted-average fair value per shares of
options granted during 2004 $7.70
2003
-----------------------------------------------
Directors' Plan Plan
-----------------------------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
------ --------- ------ ---------
Shares under option
Outstanding at beginning of year 9,000 $5.48 13,900 $2.70
10% stock dividend 900 655
exercised 0 (10,100)
-------- -------
Outstanding and exercisable at end of year 9,900 4.71 4,455 1.86
======== =======
Weighted-average remaining contractual
life of options outstanding 1.5 years 1 year
39
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
5. (continued)
2002
-----------------------------------------------
Directors' Plan Plan
-----------------------------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
------ --------- ------ ---------
Shares under option
Outstanding at beginning of year 8,000 $5.53 52,500 $3.06
Granted 1,000 6.69
Exercised (38,600) 3.27
-------- -------
Outstanding and exercisable at end of year 9,000 5.48 13,900 2.70
======== =======
Weighted-average remaining
contractual life of options outstanding 2.7 years 2.5 years
Weighted-average fair value per shares
of options granted during 2002 $6.69
Summarized information about stock options outstanding under the two plans
at January 31, 2003 is as follows (as adjusted for the 10% stock dividends):
Options outstanding and exercisable
---------------------------------------------------------------------
Weighted-
Number Average
Outstanding Remaining Weighted-
Range of At Contractual Average
Exercise prices January 31, 2004 Life in years Exercise price
--------------- ---------------- ------------- --------------
$4.91-$5.53 3,630 3.00 $5.11
$8.74-$8.88 8,910 5.5 8.76
------
12,540 4.25 7.70
======
6. - INCOME TAXES
The provision for income taxes is based on the following pre-tax income:
Domestic $3,292,770 $2,905,060 $1,881,965
Foreign 2,004,728 870,879 933,571
Total $5,297,498 $3,775,939 $2,815,536
---------- ---------- ----------
40
The provision for income taxes is summarized as follows:
Year ended January 31,
2004 2003 2002
---------- ----------- ---------
Current
Federal $ 699,069 $ 1,273,371 $ 719,000
State 99,324 163,984 78,000
Foreign 413,921 136,016 68,000
---------- ----------- ---------
1,212,314 1,573,371 865,000
Domestic 446,750 (401,490) (19,000)
deferred ---------- ----------- ---------
$1,659,064 $ 1,171,881 $ 846,000
========== =========== =========
The following is a reconciliation of the effective income tax rate to the
Federal statutory rate:
Year ended January 31,
----------------------------------
2004 2003 2002
------ ------ ------
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal tax benefit 1.7% 2.3% 1.6
Nondeductible expenses .6% -- .6
Taxes on foreign income which differ from
the statutory rate (3.2%) (4.7%) (5.6)
Other (1.8%) (.6%) (.6)_
------ ------ ------
Effective rate 31.3% 31.0% 30.0%
------ ------ ------
The tax effects of temporary differences which give rise to deferred tax
assets at January 31, 2003 and 2002 are summarized as follows:
January 31,
2004 2003
Deferred tax assets
Inventories $639,156 $ 505,680
Net operating loss carry forward -
foreign subsidiary 0 123,810
Accounts receivable 122,740 130,340
Accrued compensation and other 28,376 241,303
-------- ----------
Gross deferred tax assets 790,272 1,001,133
-------- ----------
Deferred tax liabilities
Depreciation and other 250,532 14,643
-------- ----------
Gross deferred tax liabilities 250,532 14,643
-------- ----------
Net deferred tax asset $539,740 $ 986,490
======== ==========
41
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
7. - BENEFIT PLANS
Defined Benefit Plan
The Company has a frozen defined benefit pension plan that covers former
employees of an acquired entity. The Company's funding policy is to contribute
annually the recommended amount based on computations made by its consulting
actuary as of January 31, 2004 and 2003.
The following table sets forth the plan's funded status for the fiscal year
ended January 31:
2004 2003
----------- -----------
Change in benefit obligation
Projected benefit obligation at beginning of year $ 1,159,088 $ 998,058
Interest cost 76,727 73,635
Actuarial (gain) loss 3,819 130,639
Benefits paid (44,779) (43,244)
----------- -----------
Projected benefit obligation at end of year $ 1,194,855 $ 1,159,088
=========== ===========
Change in plan assets
Fair value of plan assets at beginning of year $ 633,404 $ 568,057
Actual return on plan assets 366,369 86,591
Employer contributions 34,000 22,000
Benefits paid (44,779) (43,244)
----------- -----------
Fair value of plan assets at end of year $ 988,994 $ 633,404
=========== ===========
Funded status
Pension Liability 205,861 525,684
Unrecognized net gain 321,514 8,971
Unrecognized net transition liability (10,228) (20,083)
----------- -----------
Accrued pension cost $ 517,147 $ 514,572
=========== ===========
The components of net periodic pension cost for the fiscal years ended
January 31 are summarized as follows:
2004 2003 2002
--------- -------- --------
Interest cost $ 76,727 $ 73,233 $ 75,889
Actual return on plan assets (366,369) (86,591) (89,707)
Net amortization and deferral 326,217 52,178 61,230
--------- -------- --------
Net periodic pension cost $ 36,575 $ 38,820 $ 47,412
========= ======== ========
An assumed discount rate of 6.75%, 6.75% and 7.5% was used in determining
the actuarial present value of benefit obligations for the years ended January
31, 2004, 2003 and 2002, respectively. The expected long-term rate of return on
plan assets was 8% for all periods presented. At January 31, 2004 and 2003,
approximately 33.9% and 35.7%of the plan's assets were held in mutual funds
invested primarily in equity securities, 64.5% and 62.2%were invested in equity
securities and debt instruments and 1.6% and 2.1% were invested in money market
and other instruments, respectively.
42
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
7. (continued)
The Company's policy is to hold no more than 50% of its pension assets in
broadly held mutual funds which invest in a wide range of securities as well as
money market funds, with the remainder of the plan assets invested in equity
securities and debt instruments. The Company has utilized and expected long-term
rate of return of 8% which it deems appropriate as a result of the fact that the
actual rate of return on investments has not been less that 8% in the past 4
years. The Company does not expect its contributions for 2005 to exceed $50,000.
Defined Contribution Plan
Pursuant to the terms of the Company's 401(k) plan, substantially all U.S.
employees over 21 years of age with a minimum period of service are eligible to
participate. The 401(k) plan is administered by the Company and provides for
voluntary employee contributions ranging from 1% to 15% of the employee's
compensation. The Company made discretionary contributions of $100,033, $88,901
and $81,225 in the fiscal years ended January 31, 2004, 2003 and 2002,
respectively.
8. - MAJOR SUPPLIER
The Company purchased approximately 77.4%, 76.3% and 82.7% of its raw
materials from one supplier under licensing agreements for the fiscal years
ended January 31, 2004, 2003 and 2002, respectively. 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 affected.
9. - COMMITMENTS AND CONTINGENCIES
Employment Contracts
The Company has employment contracts with four principal officers and the
Chairman of the Board of Directors, expiring through January 2007. Such
contracts are automatically renewable for two, one year terms unless 30 to 120
days notice is given by either party. Pursuant to such contracts, the Company is
committed to aggregate annual base remuneration of $1,015,000 and $1,095,000 for
the fiscal years ended January 31, 2005 and 2006.
Leases
POMS Holding Co. ("POMS"), a partnership consisting of three directors and
one officer of Lakeland, who own 55% of the entity, and six non-affiliates, was
formed to lease both land and building to the Company because bank financing was
unavailable. POMS presently leases to the Company a 91,788 square foot
disposable garment manufacturing facility in Decatur, Alabama. 20% of this space
is highly improved office space. Under a lease effective September 1, 1999 and
expiring on August 31, 2004, the Company paid an annual rent of $364,900 and is
the sole occupant of the facility. This lease was renewed on April 1, 2004
through March 31, 2009 at the same rental rate.
On June 1, 1999, the Company entered into a five year lease agreement
(expiring May 31, 2004) with River Group Holding Co., L.L.C. for a 49,500 sq.
ft. warehouse facility located next to the existing facility in Decatur,
Alabama. River Group Holding Co., L.L.C. is a limited liability company
consisting of five directors and one officer of the Company. The annual rent for
this facility is $199,100 and the Company is the sole occupant of the facility.
This lease was renewed on April 1, 2004 through March 31, 2009 at the same
rental rate.
On March 1, 1999, the Company entered into a one year (renewable for four
additional one year terms) lease agreement with Harvey Pride, Jr., an officer of
the Company, for a 2,400 sq. ft. customer service office for $18,000 annually
located next to the existing Decatur, Alabama facility mentioned above. This
lease was renewed on March 1, 2004 through March 31, 2009 at the same rental
rate and terms.
43
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
9. (continued)
The Company believes that all rents paid to POMS, River Group Holding Co.,
L.L.C. and Harvey Pride, Jr. by the Company are comparable to what would be
charged by an unrelated party, as three different rent fairness appraisals were
performed in 1999, 2002 and 2004. The net rent paid to POMS and River Group
Holding Co., L.L.C. by the Company for the year entered January 31, 2004
amounted to $564,000 and the total rent paid to Harvey Pride, Jr. by the Company
for use of the customer service office for the year ended January 31, 2004
amounted to $18,000.
Total rental under all operating leases is summarized as follows:
Rentals
Gross paid to
rental related
expense parties
------- -------
Year ended January 31,
2004 $944,375 $641,400
2003 827,187 641,400
2002 858,429 611,700
Minimum annual rental commitments for the remaining term of the Company's
non-cancelable operating leases relating to manufacturing facilities, office
space and equipment rentals at January 31, 2004 including lease renewals
subsequent to year-end, are summarized as follows:
Year ending January 31,
2005 $ 878,000
2006 839,000
2007 784,000
2008 697,000
2009 582,000
----------
$3,780,000
==========
Certain leases require additional payments based upon increases in
property taxes and other expenses.
Litigation
The Company is involved in various litigation arising during the normal
course of business which, in the opinion of the management of the Company, will
not have a material effect on the Company's financial position, results of
operations, or cash flows.
10. OTHER RELATED PARTY TRANSACTIONS
In 1997, An Qui Holding Co., L.L.C., or An Qui, a limited liability
company whose members include the Company, five directors and one officer of the
Company, provided financing for the construction of a 46,000 square foot
building in An Qui City, China and the lease of the real property underlying the
building for 50 years from the Chinese government to Weifang Lakeland Safety
Product Co., Ltd., or Weifang, one of the Company's subsidiaries. In connection
with the financing, Weifang agreed to make annual payments to An Qui and to
allocate a portion of the proceeds from any sale of the property to An Qui. In
2002, An Qui relinquished its rights to the annual payments and to its rights to
proceeds from the sale of the property in exchange for the amount of $406,185
(net of expenses). Weifang paid $222,645, $89,000 and $94,400 of this amount to
An Qui in December 2002, January 2003 and June 2003, respectively. The Company
now owns the building.
44
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2004, 2003 and 2002
10. (continued)
In 2001, An Qui also helped to finance the construction of the Company's
facility in Jiaozhou, China through a loan to one of the Company's Chinese
subsidiaries. The loan's interest rate was 9% per annum until May 30, 2003, when
the rate increased to 10% per annum. On June 19, 2003, the Company repaid this
construction loan by paying $168,100 (plus accrued interest) to An Qui and a
foreign investor who contributed to the loan.
11. MANUFACTURING SEGMENT DATA
The Company manages its operations by evaluating its geographic
locations. The Company's North American operations include its facilities in
Decatur, Alabama (primarily disposables,chemical suit and glove production),
Celaya, Mexico (primarily disposable chemical suit and glove production) and St.
Joseph, Missouri (primarily woven products). The company also maintains contract
manufacturing facilities in China (primarily disposable and chemical suit
production). The Company's China facilities and the Decatur, Alabama facility
produce the majority of the Company's products. The accounting policies of these
operating entities are the same as those described in Note 1. The Company
evaluates the performance of these entities based on operating profit which is
defined as income before income taxes and other income and expenses. The Company
has a small sales force in Canada and Europe who distribute products shipped
from the United States, the table below represents information about reported
manufacturing segments for the years noted therein:
2004 2003 2002
Net Sales:
North America $ 88,346,362 $ 76,718,179 $ 75,785,190
China 4,753,853 3,896,680 4,249,153
Less intersegment sales (3,383,053) (2,789,142) (3,603,098)
------------ ------------ ------------
Consolidated sales $ 89,717,162 $ 77,825,717 $ 76,431,245
============ ============ ============
Operating Profit:
North America $ 4,721,880 $ 3,588,852 $ 2,613,800
China 1,255,118 963,382 1,181,333
Less intersegment profit (188,000) (193,500) (206,000)
------------ ------------ ------------
Consolidated profit $ 5,788,998 $ 4,358,734 $ 3,589,133
============ ============ ============
Identifiable Assets:
North America $ 40,211,021 $ 38,520,608 $ 39,164,386
China 7,092,806 4,302,126 3,253,099
------------ ------------ ------------
Consolidated assets $ 47,303,827 $ 42,822,734 $ 42,417,485
============ ============ ============
Depreciation:
North America $ 535,572 $ 488,795 $ 558,203
China 267,662 106,589 131,766
------------ ------------ ------------
Consolidated depreciation $ 803,234 $ 595,384 $ 689,969
============ ============ ============
45
12. - UNAUDITED QUARTERLY RESULTS of OPERATIONS (In thousands, except for per
share amounts):
Fiscal Year Ended January 31, 2004: 1/31/04 10/31/03 7/31/03 4/30/03
Net Sales $ 21,270 $ 21,332 $ 23,290 $ 23,825
Cost of Sales 16,584 16,831 18,597 19,729
--------- --------- --------- ---------
Gross Profit $ 4,686 $ 4,501 $ 4,693 $ 4,096
========= ========= ========= =========
Net Income $ 914 $ 870 $ 990 $ 864
========= ========= ========= =========
Basic and Diluted income per
common share*:
Basic (b) $ 0.28 $ 0.27 $ 0.30 $ 0.29
========= ========= ========= =========
Diluted (b) $ 0.28 $ 0.27 $ 0.30 $ 0.29
========= ========= ========= =========
Fiscal Year Ended January 31, 2003: 1/31/03 10/31/02 7/31/02 4/30/02
Net Sales $ 19,684 $ 18,535 $ 18,964 $ 20,643
Cost of Sales(a) 15,993 15,084 15,321 16,469
--------- --------- --------- ---------
Gross Profit $ 3,691 $ 3,451 $ 3,643 $ 4,174
========= ========= ========= =========
Net Income $ 653 $ 496 $ 559 $ 896
========= ========= ========= =========
Basic and Diluted income per
common share*:
Basic (b) $ 0.20 $ 0.15 $ 0.17 $ 0.27
========= ========= ========= =========
Diluted (b) $ 0.20 $ 0.15 $ 0.17 $ 0.27
========= ========= ========= =========
(a) During the fourth quarter of fiscal 2003, the Company recorded an additional
inventory reserve of $254,000 related to slow moving and obsolete finished goods
inventory.
(b) The sum of earnings per share for the four quarters may not equal earnings
per share for the full year due to changes in the average number of common
shares outstanding.
*Adjusted, retroactively, for the 10% stock dividends to shareholders of records
on July 31, 2003 and 2002.
46
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------------------- -------- ----------------------- -------- --------
Additions
Balance at Charge to Charged to Balance at
Beginning costs and other end of
of period expenses accounts Deductions period
--------- -------- -------- ---------- ------
Year ended January 31, 2004
Allowance for doubtful
account (a) $343,000 $ -- $ 20,000 $323,000
======== ======== ======== ========
Allowance for slow moving inventory $354,000 $ 63,000 -- $417,000
======== ======== ======== ========
Year ended January 31, 2003
Allowance for doubtful
account (a) $221,000 $369,717 $247,717 $343,000
======== ======== ======== ========
Allowance for slow moving inventory $100,000 $254,000 $354,000
======== ======== ======== ========
Year ended January 31, 2002
Allowance for doubtful
account (a) $221,000 $ 83,965 $ 83,965 $221,000
======== ======== ======== ========
Allowance for slow moving inventory $100,000 $100,000
======== ======== ======== ========
- ----------
(a) Deducted from accounts receivable.
(b) Uncollectible accounts receivable charged against allowance.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
47
ITEM 9A. CONTROLS AND PROCEDURES
(a) The Company's chief executive officer and principal accounting
officer have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Exchange Act), as of the end of the period
covered by this Annual Report on Form 10-K. Based on such
evaluation, they have concluded that as of such date, our
disclosure controls and procedures are effective and designed
to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in applicable SEC rules and forms.
(b) During the quarter ended January 31, 2004, there were no
significant changes in our internal controls over financial
reporting or in other factors that have materially affected,
or are reasonably likely to materially affect, our internal
controls over financial reporting during 2004.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the names and ages of all of our directors and
executive officers, indicating all positions and offices they hold with us as of
April 28, 2004. Our directors hold office for a three-year term and until their
successors have been elected and qualified. Our executive officers hold office
for one year or until their successors are elected by our board of directors.
Name Age Position
- ---- --- --------
Raymond J. Smith.................................. 65 Chairman of the Board of Directors
Christopher J. Ryan............................... 52 Chief Executive Officer, President, Secretary,
General Counsel and Director
Harvey Pride, Jr. ................................ 57 Vice President - Manufacturing
James M. McCormick................................ 56 Chief Financial Officer and Treasurer
Paul C. Smith..................................... 37 Vice President
John J. Collins................................... 61 Director
Eric O. Hallman................................... 60 Director
Walter J. Raleigh................................. 76 Director
Michael E. Cirenza................................ 48 Director
Raymond J. Smith, one of our co-founders, has been Chairman of our board
of directors since our incorporation in 1982 and was President from 1982 to
January 31, 2004. Mr. Smith's term as a director will expire at our annual
meeting of stockholders in June 2004.
Christopher J. Ryan has served as our Chief Executive Officer since April
2004, and President since February 1, 2004, Secretary since April 1991, General
Counsel since February 2000 and a director since May 1986. Mr. Ryan was our
Executive Vice President - Finance from May 1986 until becoming our President on
February 1, 2004. From October 1989 until February 1991, Mr. Ryan was employed
by Sands Brothers and Rodman & Renshaw, Inc., both investment banking firms.
Prior to that, he was an independent consultant with Laidlaw Holding Co., Inc.,
an investment banking firm, from January 1989 until September 1989. From
February 1987 to January 1989, Mr. Ryan was employed as the Managing Director of
Corporate Finance for Brean Murray, Foster Securities, Inc. He was employed from
June 1985 to March 1986 as a Senior Vice President with the investment banking
firm of Laidlaw Adams Peck, Inc., a predecessor firm to Laidlaw Holdings, Inc.
Mr. Ryan has served as one of our directors since 1986 and his term as a
director will expire at our annual meeting of stockholders in June 2005.
Harvey Pride, Jr. has been our Vice President of manufacturing since May
1986. He was Vice President of Ryland (our former subsidiary) from May 1982 to
June 1986 and President of Ryland until its merger into Lakeland on January 31,
1990.
James M. McCormick was our Vice President and Treasurer from May 1986 to
August 2003 and is presently Chief Financial Officer and Treasurer. Mr McCormick
has been our Chief Financial Officer since April 2004. Between January 1986 and
May 1986 Mr. McCormick was our Controller.
Paul C. Smith, son of Raymond J. Smith, has served as Vice President since
February 1, 2004. Prior to that, Mr. Smith was our Northeast Regional Sales
Manager since September 1998. From April 1994 until September 1998, Mr. Smith
was
48
a sales representative for the Metropolitan Merchandising and Sales Co.
John J. Collins, Jr. was Executive Vice President of Chapdelaine GSI, a
government securities firm, from 1977 to January 1987. He was Senior Vice
President of Liberty Brokerage, a government securities firm, between January
1987 and November 1998. Presently, Mr. Collins is self employed, managing a
direct investment portfolio of small business enterprises for his own accounts.
Mr. Collins has served as one of our directors since 1986 and his term as a
director will expire at our annual meeting of stockholders in June 2006.
Eric O. Hallman was President of Naess Hallman Inc., a ship brokering
firm, from 1974 to 1991. Mr. Hallman was also affiliated between 1991 and 1992
with Finanshuset (U.S.A.), Inc., a ship brokering and international financial
services and consulting concern, and was an officer of Sylvan Lawrence, a real
estate development company, between 1992 and 1998. Between 1998 and 2000, Mr.
Hallman was President of PREMCO, a real estate management company, and currently
is Comptroller of the law firm Murphy, Bartol & O'Brien, LLP. Mr. Hallman has
served as one of our directors since our incorporation in 1982 and his term as a
director will expire at our annual meeting of stockholders in June 2006.
Walter J. Raleigh is a director of CMI Industries, Inc., the successor
company to Clinton Mills, Inc., and was President of Clinton Mills Sales, Co.
Division, N.Y. from 1974 to 1995. Clinton Mills was a textile manufacturer of
woven fabrics. Mr. Raleigh retired from Clinton Mills in 1995 and was a Senior
Adviser to CMI Industries, Inc. between 1995 and 2000. Mr. Raleigh has served as
one of our directors since 1991 and his term as a director will expire at our
annual meeting of stockholders in June 2004.
Michael E. Cirenza has been the Executive Vice President and Chief
Financial Officer of Consac Industries, Inc., a manufacturer and distributor of
vitamins and nutritional supplements, since September 2002. Mr. Cirenza was the
Chief Financial Officer and Chief Operating Officer of Resilien, Inc., an
independent distributor of computers, components and peripherals from January
2000 to September 2002. He was an Audit Partner with the international
accounting firm of Grant Thornton LLP from August 1993 to January 2000 and an
Audit Manager with Grant Thornton LLP from May 1989 to August 1993. Mr. Cirenza
was employed by the international accounting firm of Price Waterhouse from July
1980 to May 1989. Mr. Cirenza is a Certified Public Accountant in the State of
New York and a member of the American Institute of Certified Public Accountants
and the New York State Society of Certified Public Accountants. Mr. Cirenza has
served as one of our directors since June 18, 2003 and his term as a director
will expire at our annual meeting of stockholders in 2005.
Committees of the Board
Our board of directors has a designated Audit Committee that reviews the
scope and results of the audit and other services performed by our independent
accountants. The Audit Committee is comprised solely of independent directors
and consists of Messrs. Raleigh, Cirenza, Hallman and Collins. The board of
directors has also designated a Compensation Committee that establishes
objectives for our senior executive officers, sets the compensation of
directors, executive officers and our other employees and is charged with the
administration of our employee benefit plans. The Compensation Committee is
comprised solely of independent directors and consists of Messrs. Collins,
Hallman and Raleigh.
Compensation of Directors
Each non-employee director receives a fee of $3,000 per quarter for
attending meetings of our board of directors or committees of our board of
directors. Non-employee directors are reimbursed for their reasonable expenses
incurred in connection with attendance at or participation in such meetings. In
addition, under our 1995 Director Plan, each non-employee director who becomes a
director is granted an option to purchase 5,000 shares of our common stock.
Messrs. Raleigh, Hallman and Collins were each granted an option to purchase
5,000 shares of our common stock under our previous 1986 Plan at the time of
their respective appointments or reelections to the board of directors. Such
grants and the terms thereof were renewed on April 18, 1997, May 5, 1996 and May
5, 1996, respectively, in accordance with stockholder approval of the 1995
Director Plan at our 1995 annual meeting of stockholders. Mr. Cirenza received
an option to purchase 5,000 shares of our common stock upon his election to our
board of directors in June 2003.
Directors who are employees of Lakeland receive no additional compensation for
their service as directors. However, such directors are reimbursed for their
reasonable expenses incurred in connection with travel to or attendance at or
participation in meetings of our board of directors or committees of the board
of directors.
49
ITEM 11. EXECUTIVE COMPENSATION
See information under the caption "Compensation of Executive Officers" in
the Company's Proxy Statement, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information under the caption "Voting Securities and Stock
Ownership of Officers, Directors and Principal Stockholders" in the Company's
Proxy Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Leases
In the past, because our access to third party financing was insufficient,
we entered into arrangements with our directors and executive officers in order
to fund the construction or acquisition of our assembly facilities. In such
cases, we commissioned independent appraisals in 1999, 2002 and 2004 to ensure
that these arrangements approximated arrangements made on an arms length basis.
We believe that we currently have sufficient access to financing to fund our
current and anticipated facility needs, we do not anticipate entering into
additional arrangements with our directors or executive officers in the future
and we are examining alternatives for restructuring the ownership and/or the
financing of these facilities in a manner that would not involve our directors
or executive officers. We intend to conclude our examination of the alternative
ownership structures and financing arrangements by July 30, 2004 and to
implement any new arrangements by October 30, 2004, if possible. Any such
restructuring or financing would involve negotiations with, and require the
agreement of, the entities described below and their partners or members,
including some of our officers and directors, and we therefore cannot assure you
that we will be able to implement any such restructuring or financing. A
description of our current arrangements with our directors and executive
officers follows.
POMS Holding Co., or POMS, was formed in 1984 to lease both land and a
building to us because bank financing was unavailable. POMS is a partnership
whose partners include three of our directors, one of our officers and six other
individuals who were stockholders of Lakeland at the time of the formation of
POMS. Raymond J. Smith, the chairman of our board of directors, Harvey Pride,
Jr., our Vice President - Manufacturing, and John J. Collins and Eric O.
Hallman, both of whom are directors, have a 20%, 20%, 8.75% and 5% interest in
POMS, respectively. POMS presently leases to us a 91,788 square foot disposable
garment manufacturing facility in Decatur, Alabama. Under a lease effective
September 1, 1999, we paid an annual rent of $364,900. This lease was renewed on
April 1, 2004 through March 31, 2009 at the same rental rate.
On March 1, 1999, we entered into a one year (renewable for four
additional one year terms) lease agreement with Harvey Pride, Jr., our Vice
President - Manufacturing, for a 2,400 sq. ft. customer service office located
next to our existing Decatur, Alabama facility. We paid an annual rent of
$18,000 for this facility under the lease agreement in fiscal 2004. This lease
was renewed on March 1, 2004 through March 31, 2009 at the same rental rate.
On June 1, 1999, we entered into a five year lease agreement (expiring May
31, 2004) with River Group Holding Co., L.L.C. for a 49,500 sq. ft. warehouse
facility located next to our existing facility in Decatur, Alabama. River Group
Holding Co., L.L.C. is a limited liability company, the members of which are
Raymond Smith, John Collins, Eric Hallman, Walter Raleigh, Christopher Ryan and
Harvey Pride, who all have an equal ownership interest. Mr. Ryan is our Chief
Executive Officer, President, Secretary, General Counsel and a director of our
company, Messrs. Smith, Collins, Hallman and Raleigh are all directors of our
company, and Mr. Pride is our Vice President - Manufacturing. We paid an annual
rent of $199,100 for this facility in fiscal 2004. We are the sole occupant of
the facility. This lease was renewed on April 1, 2004 through March 31, 2009 at
the same rental rate.
Past Related Party Transactions
In 1997, An Qui Holding Co., L.L.C., or An Qui, a limited liability
company whose members include Lakeland, and Messrs. Smith, Collins, Hallman,
Raleigh, Ryan and Pride, provided financing for the construction of a 65,000
square foot building in An Qui City, China and the lease of the real property
underlying the building for 50 years from the Chinese government to Weifang
Lakeland Safety Product Co., Ltd., or Weifang, one of our subsidiaries. In
connection with the financing, Weifang agreed to make annual payments to An Qui
and to allocate a portion of the proceeds from any sale of the property to An
Qui. In 2002, An Qui relinquished its rights to the annual payments and to its
rights to proceeds from the sale of the property in exchange for the amount of
$406,185 (net of expenses). Weifang paid $222,645, $89,000 and $94,400 of this
amount to An Qui in December 2002, January 2003 and June 2003, respectively. Of
the $406,185 paid to An Qui, Messrs Smith, Collins, Hallman, Ryan and Pride each
received $44,421 and Mr. Raleigh received $39,792.
50
In 2001, An Qui also helped to finance the construction of our facility in
Jiaozhou, China through a loan to one of our Chinese subsidiaries. The loan bore
interest at the rate of 9% per annum until May 30, 2003, when the rate increased
to 10% per annum. On June 19, 2003, we repaid this construction loan by paying
$168,100 (plus accrued interest) to An Qui and a foreign investor who
contributed to the loan. Messrs. Smith, Collins, Hallman, Ryan and Pride, the
members of An Qui who participated in this transaction, were each repaid their
$26,000 investments plus interest of approximately $3,038.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
See the information under the caption "Report of the Audit Committee" in
the Company's Proxy Statement, which information is incorporated herein by
reference.
51
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K
(a) The following documents are filed as part of this report:
1 Consolidated Financial Statements (See Page 24 of this report
which includes an index to the consolidated financial
statements)
2 Financial Statement Schedules:
Schedule II- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not
required, or because the required intermation is included in the Consolidated
Financial Statements or Notes therto.
3. Exhibits:
Exhibit Description
3.1 Restated Certificate of Incorporation of Lakeland Industries,
Inc. (Incorporated by reference to Exhibit 3(a) of Lakeland
Industries, Inc.'s Registration Statement on Form S-18 (File
No. 33-7512 NY))
3.2 Bylaws of Lakeland Industries Inc., as amended (Incorporated
by reference to Exhibit 3(b) of Lakeland Industries, Inc.'s
Registration Statement on Form S-18 (File No. 33-7512 NY))
10.1* Lease Agreement, dated April 1, 2004, between POMS Holding
Co., as lessor, and Lakeland Industries, Inc., as lessee
10.2 Lease Agreement, dated August 1, 2001, between Southwest
Parkway, Inc., as lessor, and Lakeland Industries, Inc., as
lessee, (Incorporated by reference to Exhibit 10(b) of
Lakeland Industries, Inc.'s Annual Report on Form 10-K for the
year ended January 31, 2002)
10.3 Lakeland Industries, Inc. Stock Option Plan (Incorporated by
reference to Exhibit 10(n) of Lakeland's Registration
Statement on Form S-18 (File No. 33-7512 NY))
10.4 Employment Agreement, dated September 22, 2003, between
Lakeland Industries, Inc. and Raymond J. Smith (Incorporated
by reference to Exhibit 10(g) of Lakeland Industries, Inc.'s
Quarterly Report on Form 10-Q filed December 12, 2003)
10.5* Employment, dated December 1, 2002, agreement between Lakeland
Industries, Inc. and Harvey Pride, Jr.
10.6 Lease, dated April 16, 1999, between Lakeland Industries, Inc.
and JBJ Realty (Incorporated by reference to Exhibit 10(i) of
Lakeland Industries, Inc.'s Annual Report on Form 10-K for the
year ended January 31, 2002)
10.7* Employment Agreement, dated February 1, 2004, between Lakeland
Industries, Inc. and Christopher J. Ryan
10.8* WCMA Reducing Revolver Loan and Security Agreement, dated
January 21, 2004, between Lakeland Industries, Inc. and
Merrill Lynch Business Financial Services Inc.
10.9* Lease Agreement, dated April 1, 2004, between River Group
Holding Co.,
53
LLP, as lessor, and Lakeland Industries, Inc., as lessee
10.10* Lease Agreement, dated March 1, 2004, between Harvey Pride,
Jr., as lessor, and Lakeland Industries, Inc., as lessee
10.11 Term Loan and Security Agreement, dated September 9, 1999,
between Lakeland Industries, Inc. and Merrill Lynch Business
Financial Services Inc. (Incorporated by reference to Exhibit
10(q) of Lakeland Industries, Inc.'s Annual Report on Form
10-K for the year ended January 31, 2002)
10.12 Employment Agreement, dated December 1, 2002, between Lakeland
Industries, Inc. and James M. McCormick (Incorporated by
reference to Exhibit 10(r) of Lakeland Industries, Inc.'s
Quarterly Report on Form 10-Q filed December 13, 2002)
10.13 Employment Agreement, dated September 22, 2003, between
Lakeland Industries, Inc. and Paul C. Smith (Incorporated by
reference to Exhibit 10(s) of Lakeland Industries, Inc.'s
Quarterly Report on Form 10-Q filed December 12, 2003)
14.1* Lakeland Industries, Inc. Code of Ethics
21.1 Subsidiaries of Lakeland Industries, Inc. (wholly-owned):
Lakeland Protective Wear, Inc.
Lakeland de Mexico S.A. de C.V.
Laidlaw, Adams & Peck, Inc. and Subsidiary (Meiyang
Protective Products Co., Ltd.)
Weifang Lakeland Safety Products Co. Ltd.
Qing Dao MayTung Healthcare Co., Ltd.
Lakeland Industries Europe Ltd.
23.1* Consent of Grant Thornton LLP
23.2* Consent of PricewaterhouseCoopers LLP
(b) Report on Form 8 - K.
The documents which we incorporate by reference consist of the documents
listed below that we have previously filed with the SEC:
Current Report on Form 8-K filed on November 11, 2003.
- ----------
* Filed herewith.
54
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.
Dated: April 28, 2004
LAKELAND INDUSTRIES, INC.
By: /s/ Christopher J. Ryan
---------------------------
Christopher J. Ryan,
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Name Title Date
- ---- ----- ----
/s/ Raymond J. Smith Chairman of the Board April 26, 2004
- ---------------------------
Raymond J. Smith
/s/ Christopher J. Ryan Chief Executive Officer April 26, 2004
- --------------------------- President, General Counsel,
Christopher J. Ryan Secretary and Director
/s/ James M. McCormick Chief Financial Officer and April 26, 2004
- --------------------------- Treasurer (Principal Financial
James M. McCormick and Accounting Officer)
/s/ Eric O. Hallman Director April 26, 2004
- ---------------------------
Eric O. Hallman
/s/ John J. Collins, Jr. Director April 26, 2004
- ---------------------------
John J. Collins, Jr.
/s/ Walter J. Raleigh Director April 26, 2004
- ---------------------------
Walter J. Raleigh
/s/ Michael E. Cirenza Director April 26, 2004
- ---------------------------
Michael E. Cirenza
55