Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 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) (IRS Employer Identification Number)
711-2 Koehler Avenue, Ronkonkoma, New York 11779
(Address of principal executive offices)
(631) 981-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock, $.01 par value, outstanding at September 13, 2004 -
4,560,885 shares.
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-Q
The following information of the Registrant and its subsidiaries is
submitted herewith:
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements (unaudited):
Page
----
Introduction .............................................................................. 1
Condensed Consolidated Balance Sheets July 31, 2004 and January 31, 2004 .................. 2
Condensed Consolidated Statements of Income for the
Six Months Ended July 31, 2004 and 2003 ................................................... 3
Condensed Consolidated Statement of Stockholders' Equity - Six Months Ended July 31, 2004 . 4
Condensed Consolidated Statements of Cash Flows - Six Months Ended July 31, 2004
and 2003 .................................................................................. 5
Notes to Condensed Consolidated Financial Statements ...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................ 13
Item 4. Controls and Procedures ................................................................... 13
PART II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K .......................................................... 14
Signature Page .................................................................................... 15
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Introduction
CAUTIONARY STATEMENTS
This report may include "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are all statements other than
statements of historical fact included in this report, including, without
limitation, the statements under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position and liquidity, the Company's strategic
alternatives, future capital needs, development and capital expenditures
(including the amount and nature thereof), future net revenues, business
strategies, and other plans and objectives of management of the Company for
future operations and activities.
Forward-looking statements are based on certain assumptions and analyses
made by the Company in light of its experience and its perception of historical
trends, current conditions, expected future developments and other factors it
believes are appropriate under the circumstances. These statements are subject
to a number of assumptions, risks and uncertainties, and factors in the
Company's other filings with the Securities and Exchange Commission (the
"commission"), general economic and business conditions, the business
opportunities that may be presented to and pursued by the Company, changes in
law or regulations and other factors, many of which are beyond the control of
the Company. Readers are cautioned that these statements are not guarantees of
future performance, and the actual results or developments may differ materially
from those projected in any forward-looking statements. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS July 31, January 31,
2004 2004
(Unaudited)
Current assets:
Cash and cash equivalents ............................. $ 6,106,573 $ 2,445,271
Marketable Securities ................................. 4,477,578 0
Accounts receivable, net of allowance for
doubtful accounts of $323,000 at July 31, 2004 and
at January 31, 2004 ................................. 12,032,648 12,570,320
Inventories ........................................... 29,214,216 26,265,807
Deferred income taxes ................................. 790,272 790,272
Other current assets .................................. 773,663 1,213,104
----------- -----------
Total current assets ............................ 53,394,950 43,284,774
Property and equipment, net of accumulated
depreciation of $4,864,000 at July 31, 2004
and $4,511,000 January 31, 2004 ..................... 5,127,214 3,921,308
Other assets .......................................... 146,555 97,745
----------- -----------
$58,668,719 $47,303,827
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 2,945,838 $ 3,461,353
Current portion of long-term liabilities .............. -- 16,784,781
Accrued expenses and other current liabilities ........ 1,703,769 1,263,044
----------- -----------
Total current liabilities ......................... 4,649,607 21,509,178
Other long-term liabilities ........................... 522,147 517,147
Deferred income taxes ................................. 250,532 250,532
Minority interest in Variable Interest Entities ....... 1,228,043 --
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par; authorized
1,500,000 shares (none issued)
Common stock, $.01 par; authorized
10,000,000 shares; issued and outstanding
4,560,885 and 3,273,925shares at July 31, 2004
and at January 31, 2004, respectively ............. 45,609 32,739
Additional paid-in capital ............................ 36,273,046 11,862,461
Retained earnings ..................................... 15,699,735 13,131,770
----------- -----------
Total stockholders' equity ........................ 52,018,390 25,026,970
----------- -----------
$58,668,719 $47,303,827
=========== ===========
The accompanying notes are an integral part of these financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
July 31, July 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales ...................................... $ 22,845,169 $ 23,289,944 $ 49,683,192 $ 47,114,830
Cost of goods sold ............................. 17,983,098 18,596,614 38,841,689 38,325,684
------------ ------------ ------------ ------------
Gross profit ................................... 4,862,071 4,693,330 10,841,503 8,789,146
Operating expenses ............................. 2,990,264 3,209,938 6,576,984 5,833,100
------------ ------------ ------------ ------------
Operating profit ............................... 1,871,807 1,483,392 4,264,519 2,956,046
Other income, net .............................. 849 29,784 10,309 45,226
Interest expense ............................... (69,316) (143,201) (206,457) (280,997)
------------ ------------ ------------ ------------
Income before income taxes ..................... 1,803,340 1,369,975 4,068,371 2,720,275
Provision for income taxes ..................... 485,000 379,829 1,206,000 865,829
------------ ------------ ------------ ------------
Income before minority interest ................ 1,318,340 990,146 2,862,371 1,854,446
Minority interest in net income of variable
interest entities ............................ 175,710 -- 294,406 --
------------ ------------ ------------ ------------
Net income ..................................... $ 1,142,630 $ 990,146 $ 2,567,965 $ 1,854,446
============ ============ ============ ============
Net income per common share*:
Basic ..................................... $ .30 $ .30 $ .72 $ .57
============ ============ ============ ============
Diluted ................................... $ .30 $ .30 $ .72 $ .57
============ ============ ============ ============
Weighted average common shares outstanding*:
Basic ..................................... 3,864,987 3,268,867 3,569,456 3,266,431
============ ============ ============ ============
Diluted ................................... 3,870,790 3,276,480 3,574,796 3,270,976
============ ============ ============ ============
*Adjusted for the 10% stock dividend to shareholders of record on July 31, 2003.
The accompanying notes are an integral part of these financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six months ended July 31, 2004
Common Stock Additional
paid-in Retained
Shares Amount capital earnings Total
--------- ------- ----------- ----------- -----------
Balance, January 31, 2004 3,273,925 $32,739 $11,862,461 $13,131,770 $25,026,970
Exercise of Stock Options 6,210 62 54,370 -- 54,432
Proceeds from Secondary
Stock offering, Net of Expenses 1,280,750 12,808 24,356,215 -- 24,369,023
Net income 2,567,965 2,567,965
--------- ------- ----------- ----------- -----------
Balance, July 31, 2004 4,560,885 45,609 $36,273,046 $15,699,735 $52,018,390
========= ======= =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
July 31,
2004 2003
------------ -----------
Cash Flows from Operating Activities:
Net income ................................................ $ 2,567,965 $ 1,854,446
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for bad debts ................................. -- (53,000)
Depreciation and amortization ........................... 436,664 403,100
Decrease in accounts receivable ........................... 537,672 (1,359,935)
(Increase) decrease in inventories ........................ (2,948,409) 2,717,108
Decrease (Increase) in other assets ....................... 390,631 (374,516)
Decrease (increase) in accounts payable, accrued
expenses and other liabilities .......................... (29,439) 726,110
------------ -----------
Net cash provided by operating
activities .............................................. 955,084 3,913,313
------------ -----------
Cash Flows from Investing Activities:
Purchases of property and equipment ....................... (454,878) (598,947)
Purchase of marketable securities ......................... (4,477,578) --
------------ -----------
Net cash used in investing activities ..................... (4,932,456) (598,947)
------------ -----------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options ................... 54,432 19,945
Proceeds from secondary stock offering .................... 24,369,023 --
Repayments under loan agreements .......................... (16,784,781) (2,722,239)
------------ -----------
Net cash provided by (used in) financing activities ....... 7,638,674 (2,702,294)
------------ -----------
Net increase (decrease) in cash ........................... 3,661,302 612,072
Cash and cash equivalents at beginning of period .......... 2,445,271 1,474,135
------------ -----------
Cash and cash equivalents at end of period ................ $ 6,106,573 $ 2,086,207
============ ===========
The accompanying notes are an integral part of these financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware
corporation, organized in April 1982, manufactures and sells a comprehensive
line of safety garments accessories for the industrial protective clothing
market. The principal market for the Company's products is the United States. No
customer accounted for more than 10% of net sales during the six month periods
ended July 31, 2004 and 2003, respectively.
2. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and reflect all adjustments which are, in
the opinion of management, necessary to present fairly the consolidated
financial information required therein. Certain information and note disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") have been
condensed or omitted pursuant to such rules and regulations. While the Company
believes that the disclosures are adequate to make the information presented not
misleading, it is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended January 31, 2004.
The results of operations for the six month periods ended July 31, 2004
and 2003, respectively, are not necessarily indicative of the results to be
expected for the full year.
3. Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Laidlaw Adams & Peck,
Inc., 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), Lakeland Industries Europe Ltd. (a
British Corporation) and Lakeland de Mexico S.A. de C.V (a Mexican corporation).
All significant inter-company accounts and transactions have been eliminated.
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 March 15, 2004 for variable interest
entities created before February 1, 2003.
Effective February 1, 2004 the Company adopted this pronouncement. As a
result, certain entities which leased property to the Company and are owned by
related parties were determined to be Variable Interest Entities and have been
consolidated since the Company's April 30, 2004 quarterly financial statements.
This consolidation had no impact on the Company's net income and resulted in
increases at July 31, 2004 in cash of $0.06 million, property and equipment, net
of $1.2 million, and minority interest of $1.2 million. Creditors, or beneficial
interest holders, of the consolidated variable interest entities have no
recourse to the general credit of the Company.
The Company accounts for marketable securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
Company determines the appropriate classification of all marketable securities
as held-to-maturity, available-for-sale or trading at the time of purchase and
re-
evaluates such classification as of each balance sheet date. At July 31, 2004
all the Company's investments in marketable securities were classified as
available-for-sale, and as a result, were reported at fair value which does not
significantly differ from cost.
4. Inventories:
Inventories consist of the following:
July 31, January 31,
2004 2004
----------- -----------
Raw materials .......... $12,379,196 $10,868,816
Work-in-process ........ 2,598,478 2,279,444
Finished Goods ......... 14,236,542 13,117,547
----------- -----------
$29,214,216 $26,265,807
=========== ===========
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.
5. Earnings Per Share:
On June 18, 2004 the Company concluded its secondary public stock offering
issuing an additional 1,100,000 shares of common stock. On July 1, 2004 the
underwriter exercised its over allotment option whereby the Company issued an
additional 180,750 shares of common stock.
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 diluted earnings per share calculation takes
into account the shares that may be issued upon exercise of stock options,
reduced by the shares that may be repurchased with the funds received from the
exercise, based on the average price during the period.
The following table sets forth the computation of basic and diluted
earnings per share at July 31, adjusted, retroactively, for the 10% Stock
dividends to Shareholders on July 31, 2003 and 2002, respectively:
Three Months Ended Six Months Ended
July 31, July 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Numerator
Net income ................................. $1,142,630 $ 990,146 $2,567,965 $1,854,446
========== ========== ========== ==========
Denominator
Denominator for basic earnings per share
(Weighted-average shares) ......... 3,864,987 3,268,867 3,569,456 3,266,431
Effect of dilutive securities:
Stock options ........................ 5,803 7,613 5,340 4,545
---------- ---------- ---------- ----------
Denominator for diluted earnings per share
(adjusted weighted-average shares) ......... 3,870,790 3,276,480 3,574,796 3,270,976
========== ========== ========== ==========
Basic earnings per share ................... $ 0.30 $ 0.30 $ 0.72 $ 0.57
========== ========== ========== ==========
Diluted earnings per share ................. $ 0.30 $ 0.30 $ 0.72 $ 0.57
========== ========== ========== ==========
Options to purchase 1,210 shares of the Company's common stock have been
excluded for the six months ended July 31, 2003, as their inclusion would be
antidilutive.
6. Revolving Credit Facility:
At July 31, 2004, the balance outstanding under the Company's $18 million
revolving credit facility amounted to $0. The balance was paid in full on June
18, 2004 upon the Company receiving the proceeds from its Secondary Stock
Offering. This credit facility, which is subject to borrowings based on a
percentage of eligible accounts receivable and inventory, as defined, was set to
expire on July 31, 2004; however, in May 2004 it was extended through July 31,
2005. Borrowings under the facility bear interest at a rate per annum equal to
LIBOR
plus 2%. In January 2004, the Company entered into a new 3-year $3 million
revolving credit facility which expires on January 31, 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%. There were no
borrowings outstanding under either facility at July 31, 2004.The credit
facilities are collateralized by substantially all of the assets of the Company.
The credit facilities contain financial covenants, including, but not limited
to, minimum levels of earnings and maintenance of minimum tangible net worth and
certain other ratios at all times, with respect to which the Company was in
compliance at July 31, 2004.
7. Major Supplier
The Company purchased approximately 76.7% of its raw materials from one
supplier during the six-month period ended July 31, 2004. The Company expects
this relationship to continue for the foreseeable future. If required, similar
raw materials could be purchased from other sources; although, the Company's
competitive position in the marketplace could be adversely affected.
8. 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-Base 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 quarters ended July 31,
2004 and 2003 to the pro forma amounts indicated below:
Three Months Ended Six Months Ended
July 31, July 31,
2004 2003 2004 2003
----------- ----------- ----------- -------------
Net income $ 1,142,630 $ 990,146 $ 2,567,965 $ 1,854,446
As reported
Less:
Option expense based on fair value method 11,186 9,022 11,186 27,946
----------- ----------- ----------- -------------
Pro forma $ 1,131,444 $ 981,124 $ 2,556,779 $ 1,826,500
=========== =========== =========== =============
Basic earnings per common share
As reported $ 0.30 $ 0.30 $ 0.72 $ 0.57
=========== =========== =========== =============
Pro forma $ 0.29 $ 0.30 $ 0.72 $ 0.57
=========== =========== =========== =============
Diluted earnings per common share
As reported $ 0.30 $ 0.30 $ 0.72 $ 0.57
=========== =========== =========== =============
Pro forma $ 0.29 $ 0.30 $ 0.72 $ 0.56
=========== =========== =========== =============
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
quarters and six months ended July 31, 2004 and 2003: expected volatility of 87%
and 60%, respectively; risk-free interest rate of 3.6% and 2.93%, respectively;
expected dividend yield of 0.0%; and expected life of six years. All stock-based
awards were fully vested at July 31, 2004 and 2003. Earnings per share have been
adjusted to reflect the 10% stock dividends to stockholders of record as of July
31, 2003 and 2002.
9. Revenue Recognition and Manufacturing Segment Data
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 in millions of dollars:
Three Months Ended Six Months Ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
Domestic $21.5 94.3% $21.3 91.4% $45.6 91.7% $44.5 94.5%
International 1.3 5.7% 2.0 8.6% 4.1 8.3% 2.6 5.5%
----- ----- ----- ----- ----- ----- ----- -----
Total $22.8 100% $23.3 100% $49.7 100% $47.1 100%
===== ===== ===== ===== ===== ===== ===== =====
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 to the Company's
Annual Report on Form 10-K for the year ended January 31, 2004. The Company
evaluates the performance of these entities based on operating profit which is
defined as income before income taxes, interest expense and other income and
expenses. The Company has a small sales force in Canada and Europe who sell and
distribute products shipped from the United States. The table below represents
information about reported manufacturing segments for the six months noted
therein:
Six Months Ended July 31,
(in millions of dollars)
2004 2003
------- -------
Net Sales:
North America $ 50.9 $ 48.3
China 4.2 2.5
Less inter-segment profit (loss) (5.4) (3.7)
------- -------
Consolidated sales $ 49.7 $ 47.1
======= =======
Operating Profit:
North America $ 3.7 $ 2.6
China .6 .4
Less inter-segment profit (loss) -- --
------- -------
Consolidated profit $ 4.3 $ 3.0
======= =======
Identifiable Assets:
North America $ 50.5 $ 36.7
China 8.2 6.0
------- -------
Consolidated assets $ 58.7 $ 42.7
======= =======
Depreciation and Amortization Expense:
North America $ .3 $ .3
China .1 .1
------- -------
Consolidated depreciation expense $ .4 $ .4
======= =======
10. 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 June15,
2003. The adoption of SFAS No. 150 did not have any impact on our consolidated
financial statements for the six months ended July 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
pronouncement, FIN 46R, which clarified certain provisions and modified the
effective date from July 1, 2003 to March 15, 2004 for variable interest
entities created before February 1, 2003. The Company has adopted this
pronouncement as of February 1, 2004.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits", to improve
financial statement disclosures for defined benefit plans. The company has
adopted SFAS No. 132 and disclosure requirements as described in Note 7 to the
Company's Annual Report on Form 10-K for the year ended January 31, 2004.
Interim disclosure of net pension costs are not material.
Item 2. LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Six Months Ended July 31, 2004 Compared to the Six Months Ended July 31, 2003
Net Sales. Net sales increased $2.6 million, or 5.0%, to $49.7 million for
the six months ended July 31, 2004 from $47.1 million for the six months ended
July 31, 2003. The increase was due primarily to an increase in our market share
in our Tyvek(R)-based product lines. 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.
Gross Profit. Gross profit increased $2 million, or 23.4%, to $10.8
million for the six months ended July 31, 2004 from $8.8 million for the six
months ended July 31, 2003. Gross profit as a percent of net sales increased to
21.8% for the six months ended July 31, 2004 from 18.7% for the six months ended
July 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 and will continue to shift production
to these lower-cost facilities.
Operating Expenses. Operating expenses increased $.8 million, or 12.7%, to
$6.6 million for the six months ended July 31, 2004 from $5.8 million for the
six months ended July 31, 2003. As a percent of net sales, operating expenses
increased to 13.7% for the six months ended July 31, 2004 from 12.4% for the six
months ended July 31, 2003. The $0.8 million increase in operating expenses in
the six months ended July 31, 2004 compared to the six months ended July 31,
2003 was principally due to an increase in freight of $.1 million, commissions
of $.12 million, salaries of $.3 million, trade shows and travel and
entertainment of $.13 million, currency fluctuation of $.05 million, license and
fees of $.07 million and printing of $.08 million.
Interest Expense. Interest decreased by $0.075 million for the six months
ended July 31, 2004 compared to the six months ended July 31, 2003 due to the
credit facility being paid in full on June 18, 2004, as a result of the
completion of the Company's Secondary Stock Offering.
Income Tax Expense. Income tax expense consists of federal, state and
foreign income taxes. Income tax expense increased $0.3 million, or 39.4%, to
$1.2 million for the six months ended July 31, 2004 from $0.9 million for the
six months ended July 31, 2003. Our effective tax rate was 29.6% and 31.8% in
the six months ended July 31, 2004 and 2003, respectively. Our effective tax
rate varied from the federal statutory rate of 34% due primarily to lower
foreign tax rates.
Minority interest. Minority interest in net income of variable interest
entities increased to $0.3 million for the six months ended July 31, 2004 as a
result of our adoption on Financial Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," effective February 1, 2004.
Subsequent to our adoption of FIN 46R, we determined that certain entities from
which we lease real property and which are owned by related parties are variable
interest entities governed by FIN 46R. As a result, these entities have been
consolidated in our statement of income for the six months ended July 31, 2004.
Net Income. Net income increased $0.7 million, or 38.5%, to $2.6 million
for the six months ended July 31, 2004 from $1.9 million for the six months
ended July 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.
Three Months Ended July 31, 2004 Compared to the Three Months Ended July 31,
2003
Net Sales. Net sales decreased $.5 million, or 1.9%, to $22.8 million for
the three months ended July 31, 2004 from $23.3 million for the three months
ended July 31, 2003. The decrease was due primarily to the prior year period
receiving the benefit of an estimated $1.5 million in SARS related sales that
were not repeated in the current year period. The current year period sales also
decreased due to an estimated $400,000 downturn in sales caused by the moving of
our woven production facilities from the USA to China.
Gross Profit. Gross profit increased $.2 million, or 3.6%, to $4.9 million
for the three months ended July 31, 2004 from $4.7 million for the three months
ended July 31, 2003. Gross profit as a percent of net sales increased to 21.3%
for the three months ended July 31, 2004 from 20.2% for the three months ended
July 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 and will continue to shift production
to these lower-cost facilities.
Operating Expenses. Operating expenses remained relatively constant at
$3.0 million for the three months ended July 31, 2004 and for the three months
ended July 31, 2003 as cost savings continue. As a percent of net sales,
operating expenses decreased to 13.1% for the three months ended July 31, 2004
from 13.8% for the three months ended July 31, 2003.
Interest Expense. Interest expense decreased by .07 million to $.07
million for the three months ended July 31, 2004 from $.14 million the three
months ended July 31, 2003 due to the payoff of the loan balance using funds
received from the Company's Secondary Public Offering concluded on June 18,
2004.
Income Tax Expense. Income tax expense consists of federal, state and
foreign income taxes. Income tax expense increased $0.1 million, or 26.9%, to
$0.5 million for the three months ended July 31, 2004 from $0.4 million for the
three months ended July 31, 2003. Our effective tax rate was 26.9% and 27.7% in
the three months ended July 31, 2004 and 2003, respectively. Our effective tax
rate varied from the federal statutory rate of 34% due primarily to lower
foreign tax rates.
Minority interest. Minority interest in net income of variable interest
entities increased to $.02 million for the three months ended July 31, 2004 as a
result of our adoption on Interpretation No. 46R (FIN 46R), "Consolidation of
Variable Interest Entities," effective February 1, 2004. Subsequent to our
adoption of FIN 46R, we determined that certain entities from which we lease
real property and which are owned by related parties are variable interest
entities governed by FIN 46R. As a result, these entities have been consolidated
in our statement of income for the three months ended July 31, 2004.
Net Income. Net income increased $0.1 million, or 15.4%, to $1.1 million
for the three months ended July 31, 2004 from $1.0 million for the three months
ended July 31, 2003. The increase in net income was the result of increased
productivity and decreased expenses as a result of shifts in production to our
China facilities and reduced interest expense.
Liquidity and Capital Resources
Cash Flows
As of July 31, 2004 we had cash and cash equivalents and marketable
securities of $10.6 million and working capital of $48.7 million, an increase of
$8.1 million and $26.9 million, respectively, from January 31, 2004. In May
2004, we extended the expiration date of our $18 million revolving credit
facility to July 31, 2005. The increase in working capital at July 31, 2004 from
January 31, 2004 was due primarily to the pay down of the loan balances on June
18, 2004 upon the completion of the Company's Secondary Stock Offering. 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 and the cash received from the above mentioned offering. 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 $1.0 million for the six
months ended July 31, 2004 was due primarily to net income from operations of
$2.6 million, a decrease in accounts receivable of $.5 million and a decrease
in other assets of $.4 million, offset in part by an increase in inventories of
$2.9 million. Net cash provided by operating activities of $3.9 million for the
six months ended July 31, 2003 was primarily attributable to net income from
operations of $1.9 million and a decrease in inventories of $2.7 million, offset
in part by an increase in accounts payable of $.7 million and a decrease in
accounts receivable of $1.3 million.
Net cash used in investing activities of $4.9 million and $0.6 million in
the six months ended July 31, 2004 and 2003, respectively, was due to purchases
of property and equipment and the purchase of marketable securities.
Net cash provided by financing activities of $7.6 million in the six
months ended July 31, 2004 and net cash used by financing activities of $2.7
million in the six months ended July 31, 2003 was primarily attributable to the
proceeds from the secondary public offering and the payoff on June 18, 2004 of
the revolving credit facility balance and repayments under our credit
facilities.
Credit Facilities
We currently have two credit facilities:
o an $18 million revolving credit facility, under which we had
no borrowings outstanding as of July 31, 2004; and
o a $3 million revolving credit facility (the availability of
which reduces incrementally over its 3-year term), under which
we had no borrowings outstanding as of July 31, 2004.
Our $18 million revolving credit facility permits us to borrow up to the
lower of $18 million or a borrowing base determined by reference to a percentage
of our eligible accounts receivable and inventory. Our $18 million revolving
credit facility now expires on July 31, 2005, and was classified as a long-term
liability on our balance sheet at April 30, 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 July 31, 2004, we had $18 million of borrowing availability
under this revolving credit facility, since the outstanding balance was paid in
full on June 18, 2004.
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 July 31, 2004. As of July 31, 2004, we had
$2.58 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 July 31, 2004, we were in compliance with all covenants contained in our
credit facilities.
We believe that cash flow from operations and the cash received from the
Company's secondary stock offering, along with borrowing availability under our
$18 million revolving credit facility and our $3 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 after its current expiration or that any renewal will
be on 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in our market risk from that
disclosed in our Annual Report on Form 10-K for the fiscal year ended January
31, 2004.
Item 4. Controls and Procedures
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-15(e) and 15d-15(e) under the Exchange Act), as of the end
of the period covered by this Quarterly Report on Form 10-Q. 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.
During the quarter ended July 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 fiscal 2005.
PART II. OTHER INFORMATION
Items 1 - 3 and 5 are not applicable.
Item 2. On June 18, 2004 the Company concluded its secondary public stock
offering issuing an additional 1,100,00 shares of common stock. Only
July 1, 2004 the underwriter exercised its over allotment option
whereby the Company issued an additional 180,750 shares of common
stock. After deducting underwriting discounts and commissions and
the offering expenses, the net proceeds from the offering to the
Company were approximately $24.4 million.
The Company has used proceeds from the offering to repay debt of
$16.6 million under the Company's $18 million revolving credit
facility. The remaining $7.8 million of the proceeds to the Company
from
offering are invested in cash investments and short-term investment
grade debt securities. The Company anticipates using the balance of
the proceeds from the offering for general corporate purposes.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company (the "Annual
Meeting") was held on June 16, 2004 in Ronkonkoma, New York. The
Company had 3,273,925 shares of common stock outstanding as of April
23, 2004, the record date for the Annual Meeting.
Proposal 1 - Election of Directors
The candidates listed below were duly elected to the Board of
Directors at the Annual Meeting by the tally indicated.
Candidate Votes in Favor Votes Withheld
--------- -------------- --------------
Raymond J. Smith 3,177,142 49,973
Walter J. Raleigh 3,203,326 23,789
Proposal 2 - Ratification of Auditors for fiscal 2005:
Votes in Favor Votes Withheld Abstain
-------------- -------------- -------
Pricewaterhouse Coopers LLP 3,218,263 7,614 1,238
Item 6. Exhibits and Reports on Form 8-K:
a - 10.6 Lease dated July 1, 2004 between Lakeland Industries,
Inc. and JBJ Realty.
b - On May 20, 2004, the Company filed a Form 8-K, under Item 5,
relating to renewal of its commercial line of credit and
record sales for the first quarter ended April 30, 2004.
On May 27, the Company filed a Form 8-K for the purpose of
furnishing under Items 5 and 7 a press release reporting
guidance for fiscal year 2005.
On June 14, 2004, the Company filed a Form 8-K for the purpose
of furnishing under Items 7 and 12 a press release announcing
results of operations for the 1st Quarter ended April 30,
2004.
On June 17, 2004, the Company filed a Form 8-K for the purpose
of furnishing under Items 5 and 7 a press release announcing
the Company's public offering of 1,100,000 shares of common
stock, plus up to an additional 180,750 shares upon exercise
of an over allotment option.
__________SIGNATURES__________
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LAKELAND INDUSTRIES, INC.
-------------------------
(Registrant)
Date: September 13, 2004 /s/ Christopher J. Ryan
------------------------------
Christopher J. Ryan,
Chief Executive Officer, President
Secretary and General Counsel
(Principle Executive Officer and
Authorized Signatory)
Date: September 13, 2004 /s/ James M. McCormick
------------------------------
James M. McCormick,
Chief Financial Officer and Treasurer
(Principal Accounting Officer and
Authorized Signatory)