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 October 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 Koehler Avenue, Suite 2, 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 December 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 October 31, 2004 and January 31, 2004.......................2
Condensed Consolidated Statements of Income for the
Nine Months and for the Three Months Ended October 31, 2004 and 2003..............................3
Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended October 31, 2004.....4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 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.......................................16
Item 4. Controls and Procedures .........................................................................16
PART II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K ................................................................16
Signature Page.............................................................................................17
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.
1
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS October 31, January 31,
2004 2004
(Unaudited)
Current assets:
Cash and cash equivalents .................................. $ 4,844,215 $ 2,445,271
Marketable Securities ...................................... 5,894,303 --
Accounts receivable, net of allowance for
doubtful accounts of $323,000 at October 31, 2004 and
at January 31, 2004 ...................................... 13,757,055 12,570,320
Inventories, net of reserves of $562,000 at October 31,2004
and $417,000 at January 31, 2004 .......................... 28,641,185 26,265,807
Deferred income taxes ...................................... 790,272 790,272
Other current assets ....................................... 778,393 1,213,104
----------- -----------
Total current assets ............................ 54,705,423 43,284,774
Property and equipment, net of accumulated
depreciation of $5,080,000 at October 31, 2004
and $4,511,000 January 31, 2004 .......................... 5,060,568 3,921,308
Other assets ............................................... 74,422 97,745
----------- -----------
$59,840,413 $47,303,827
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 3,099,376 $ 3,461,353
Borrowings under revolving credit facility ................. -- 16,784,781
Accrued expenses and other current liabilities ............. 1,492,289 1,263,044
----------- -----------
Total current liabilities ............................ 4,591,665 21,509,178
Other long-term liabilities ................................ 534,647 517,147
Deferred income taxes ...................................... 250,532 250,532
Minority interest in Variable Interest Entities ............ 1,254,793 --
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 3,273,925 shares at October 31, 2004
and at January 31, 2004, respectively ................ 45,609 32,739
Additional paid-in capital ................................. 36,273,046 11,862,461
Retained earnings .......................................... 16,890,121 13,131,770
----------- -----------
Total stockholders' equity ........................... 53,208,776 25,026,970
----------- -----------
$59,840,413 $47,303,827
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
October 31, October 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales .................................. $ 22,416,174 $ 21,332,430 $ 72,099,366 $ 68,447,260
Cost of goods sold ......................... 17,491,311 16,831,208 56,333,000 55,156,892
------------ ------------ ------------ ------------
Gross profit ............................... 4,924,863 4,501,222 15,766,366 13,290,368
Operating expenses ......................... 2,923,614 3,034,538 9,500,598 8,867,638
------------ ------------ ------------ ------------
Operating profit ........................... 2,001,249 1,466,684 6,265,768 4,422,730
Other income, net .......................... 15,291 14,417 25,600 59,643
Interest expense ........................... (568) (118,650) (207,025) (399,647)
------------ ------------ ------------ ------------
Income before income taxes ................. 2,015,972 1,362,451 6,084,343 4,082,726
Provision for income taxes ................. 698,400 492,171 1,904,400 1,358,000
------------ ------------ ------------ ------------
Income before minority interest ............ 1,317,572 870,280 4,179,943 2,724,726
Minority interest in net income of variable
interest entities ........................ 127,186 -- 421,592 --
------------ ------------ ------------ ------------
Net income ................................. $ 1,190,386 $ 870,280 $ 3,758,351 $ 2,724,726
============ ============ ============ ============
Net income per common share*:
Basic ................................ $ .26 $ .27 $ .96 $ .83
============ ============ ============ ============
Diluted .............................. $ .26 $ .27 $ .96 $ .83
============ ============ ============ ============
Weighted average common shares outstanding*:
Basic ................................ 4,560,885 3,268,991 3,899,932 3,268,351
============ ============ ============ ============
Diluted .............................. 4,562,436 3,274,429 3,904,009 3,274,480
============ ============ ============ ============
*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.
3
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine months ended October 31, 2004
Additional
Common Stock 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 3,758,351 3,758,351
--------- ---------- ----------- ----------- -----------
Balance, October 31,2004 4,560,885 $ 45,609 $36,273,046 $16,890,121 $53,208,776
========= ========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
4
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
October 31,
2004 2003
---- ----
Cash Flows from Operating Activities:
Net income ............................................. $ 3,758,351 $ 2,724,726
Adjustments to reconcile net income to net cash provided
by operating activities:
Reserve for inventory obsolescence ................... 145,000 60,000
Provision for bad debts .............................. -- (20,000)
Depreciation and amortization ........................ 687,617 602,555
Increase in accounts receivable ........................ (1,186,735) (1,750,738)
(Increase) decrease in inventories ..................... (2,520,378) 1,239,778
(Increase) decrease in other assets .................... 458,034 (335,081)
(Decrease) increase in accounts payable, accrued
expenses and other liabilities ....................... (13,219) 180,761
------------ -----------
Net cash provided by operating
activities ........................................... 1,328,670 2,702,001
------------ -----------
Cash Flows from Investing Activities:
Purchases of property and equipment .................... (674,097) (880,886)
Purchase of marketable securities ...................... (5,894,303) --
------------ -----------
Net cash used in investing activities .................. (6,568,400) (880,886)
------------ -----------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options ................ 54,432 20,000
Proceeds from secondary stock offering ................. 24,369,023 --
Repayments under loan agreements ....................... (16,784,781) (848,072)
------------ -----------
Net cash provided by (used in) financing activities .... 7,638,674 (828,072)
------------ -----------
Net increase in cash ................................... 2,398,944 993,043
Cash and cash equivalents at beginning of period ....... 2,445,271 1,474,135
------------ -----------
Cash and cash equivalents at end of period ............. $ 4,844,215 $ 2,467,178
============ ===========
The accompanying notes are an integral part of these financial statements.
5
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware
corporation, organized in April 1982, manufactures and sells a comprehensive
line of safety garments accessories for the industrial protective clothing
market. The principal market for our products is the United States. No customer
accounted for more than 10% of net sales during the nine month periods ended
October 31, 2004 and 2003, respectively.
2. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by us, 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 we believe
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 our 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 nine and three month periods ended
October 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 were effective immediately for all variable
interest entities created after January 31, 2003, or in which we obtain an
interest after that date. In December 2003, the FASB issued a revision to this
pronouncement, FIN 46R, which clarified certain provisions and modified the
effective date from October 1, 2003 to March 15, 2004 for variable interest
entities created before February 1, 2003. The two entities which lease property
to the Company and are owned by related parties, which have now been
consolidated in our financial statements are River Group Holding Co., L.L.P. and
POMS Holding Co. The owners of these entities are directors and officers of
Lakeland. Under FIN 46, it is likely that leases between an entity and its
related parties would be considered a variable interest, even if there is no
residual value guarantee or purchase option. The FASB staff's view is that these
elements are implied in a related-party lease even though they may not be
explicitly stated in the lease agreement.
6
There are no variable interest entities in which we hold a variable
interest but we are not the primary beneficiary.
Effective February 1, 2004 we 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 our net income and resulted in increases at
October 31, 2004 in cash of $0.06 million, property and equipment, net of $1.2
million, and minority interest of $1.3 million. Creditors, or beneficial
interest holders, of the consolidated variable interest entities have no
recourse to the general credit of the Company.
We account for marketable securities in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". We determine
the appropriate classification of all marketable securities as held-to-maturity,
available-for-sale or trading at the time of purchase and re-evaluate such
classification as of each balance sheet date. At October 31, 2004 all our
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:
October 31, January 31,
2004 2004
---- ----
Raw materials ........... $10,699,541 $10,868,816
Work-in-process ......... 2,571,358 2,279,444
Finished Goods .......... 15,370,286 13,117,547
----------- -----------
$28,641,185 $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 we concluded a 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 we 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 October 31, adjusted, retroactively, for the 10% Stock
dividends to Shareholders on July 31, 2003 and 2002, respectively:
7
Three Months Ended Nine Months Ended
October 31, October 31,
2004 2003 2004 2003
---- ---- ---- ----
Numerator
Net income $1,190,386 $ 870,280 $3,758,351 $2,724,726
========== ========== ========== ==========
Denominator
Denominator for basic earnings per share
(Weighted-average shares) 4,560,885 3,268,991 3,899,932 3,268,351
Effect of dilutive securities:
Stock options 1,551 5,438 4,077 6,129
---------- ---------- ---------- ----------
Denominator for diluted earnings per share
(adjusted weighted-average shares) 4,562,436 3,274,429 3,904,009 3,274,480
========== ========== ========== ==========
Basic earnings per share $ 0.26 $ 0.27 $ 0.96 $ 0.83
========== ========== ========== ==========
Diluted earnings per share $ 0.26 $ 0.27 $ 0.96 $ 0.83
========== ========== ========== ==========
Options to purchase 1,210 shares of the Company's common stock have been
excluded for the nine months ended October 31, 2003, as their inclusion would be
antidilutive.
6. Revolving Credit Facility
At October 31, 2004, the balance outstanding under our $18 million revolving
credit facility amounted to $0. The balance had been paid in full on June 18,
2004 using the proceeds from our June 18, 2004 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, we 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 October 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 October 31, 2004.
7. Major Supplier
We purchased approximately 74.7% of our raw materials from one supplier
during the nine-month period ended October 31, 2004. We expect this relationship
to continue for the foreseeable future. If required, similar raw materials could
be purchased from other sources; however, our competitive position in the
marketplace could be adversely affected.
8. Stock Based Compensation
We have 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. We have
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 we had elected to recognize
compensation expense based upon the fair value at the date of grant for awards
8
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 October 31, 2004 and 2003 to the pro forma
amounts indicated below:
Three Months Ended Nine Months Ended
October 31, October 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $1,190,386 $ 870,280 $3,758,351 $2,724,726
Less:
Option expense based on fair value method -- -- 11,186 27,946
---------- ---------- ---------- ----------
Pro forma $1,190,386 $ 870,280 $3,747,165 $2,696,780
========== ========== ========== ==========
Basic earnings per common share
As reported $ 0.26 $ 0.27 $ 0.96 $ 0.83
========== ========== ========== ==========
Pro forma $ 0.26 $ 0.27 $ 0.96 $ 0.83
========== ========== ========== ==========
Diluted earnings per common share
As reported $ 0.26 $ 0.27 $ 0.96 $ 0.83
========== ========== ========== ==========
Pro forma $ 0.26 $ 0.27 $ 0.96 $ 0.82
========== ========== ========== ==========
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 nine months ended October 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 October 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. Manufacturing Segment Data
Domestic and international sales are as follows in millions of dollars:
Three Months Ended Nine Months Ended
October 31, October 31,
2004 2003 2004 2003
---- ---- ---- ----
Domestic $20.5 91.5% $17.8 83.2% $66.1 91.7% $62.3 90.9%
International 1.9 8.5% 3.6 16.8% 6.0 8.3% 6.2 9.1%
----- ---- ----- ---- ----- ---- ----- ----
Total $22.4 100% $21.4 100% $72.1 100% $68.5 100%
===== ==== ===== ==== ===== ==== ===== ====
We manage our operations by evaluating each of our geographic locations. Our
North American operations include our facilities in Decatur, Alabama (primarily
disposables, chemical suit and glove production and distribution of the bulk of
our products), Celaya, Mexico (primarily disposable, chemical suit, and glove
production) and St. Joseph, Missouri (primarily woven products). We also
maintain three manufacturing facilities in China (primarily disposable and
chemical suit production). Our China facilities and our 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. We
evaluate the performance of these entities based on operating profit which is
defined as income before income taxes, interest expense and other
9
income and expenses. We have a small sales force in Canada and Europe who sell
and distribute products shipped from the United States, Mexico or China. The
table below represents information about reported manufacturing segments for the
three and nine months noted therein:
Three Months Ended Nine Months Ended
October 31 October 31,
(in millions of dollars) (in millions of dollars)
2004 2003 2004 2003
---- ---- ---- ----
Net Sales:
North America $25.2 $23.8 $76.1 $72.1
China 1.4 1.1 5.6 3.6
Less inter-segment sales (4.2) (3.5) (9.6) (7.2)
----- ----- ----- -----
Consolidated sales $22.4 $21.4 $72.1 $68.5
===== ===== ===== =====
Operating Profit:
North America $ 1.9 $ 1.1 $ 5.6 $ 3.7
China .2 .3 .8 .7
Less inter-segment profit (loss) (.1) -- (.1) --
----- ----- ----- -----
Consolidated profit $ 2.0 $ 1.4 $ 6.3 $ 4.4
===== ===== ===== =====
Identifiable Assets (at Balance Sheet date or change
during quarter):
North America $ 1.1 $ 1.9 $51.6 $38.6
China .1 .3 8.2 6.3
----- ----- ----- -----
Consolidated assets $ 1.2 $ 2.2 $59.8 $44.9
===== ===== ===== =====
Depreciation and Amortization Expense:
North America $ .13 $ .10 $ .43 $ .40
China .16 .10 .26 .20
----- ----- ----- -----
Consolidated depreciation expense $ .29 $ .20 $ .69 $ .60
===== ===== ===== =====
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 nine months ended October 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
10
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 October 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. The two entities which lease property to
the Company and are owned by related parties, which were consolidated in our
financial statements are River Group Holding Co., L.L.P. and POMS Holding Co.
Ownership of these entities is held by of directors and officers of Lakeland.
Under FIN 46, it is likely that leases between an entity and its related parties
would be considered a variable interest, even if there is no residual value
guarantee or purchase option. The FASB staff's view is that these elements are
implied in a related-party lease even though they may not be explicitly stated
in the lease agreement.
There are no variable interest entities in which we hold a variable
interest but we are not primary beneficiary.
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 disclosures of net pension costs are not material.
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 appeared in Form 10-K and Annual Report and in the documents that were
incorporated by reference into Form 10-K for the year ended January 31, 2004.
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 800 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.
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 fourth 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
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
11
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.
Revenue Recognition. We derive our sales primarily from our 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 to our distributors 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. Sales are made to third party distributors. Terms are FOB
shipping point. There is no right of return on the sale of products. Our return
authorization is required before products can be returned. Such return
authorizations are determined on a case by case basis.
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 at risk, including with few
exceptions, domestic customer accounts over 90 days in arrears. Additionally, we
consider our historical bad debt experience and current economic trends in
evaluating whether to establish an allowance for a particular account. Our
collection history has been excellent and write-offs have been minimal. We
collect the majority (approximately 90% to 95%) of our receivables in 60 days
after each year end.
Inventories. Inventories include freight-in, materials, labor and overhead
costs and are stated at the lower of cost (computed on a standard cost basis,
which approximates average cost) or market. Provision is made for slow-moving,
obsolete or unusable inventory. We evaluate a need for inventory provisions by
evaluating both the net realizable value of its inventory based on recent
product sales as well as evaluating slow moving inventory based on inventory
turns by product. Write-offs of inventory have not exceeded reserves
established.
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 healthcare benefits. The cost of such benefits is recognized as an
expense based on claims filed in each reporting period plus an estimate of
claims incurred but not reported (IBNR) during such period. Our IBNR claims are
based on historical trends of claims
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received. The actual claims paid did not significantly differ from the
respective year end accrual amounts. The plan provides that we pay the first
$30,000 of claims per employee. We have obtained insurance for excess claims
from $30,001 to $1 million per employee, with total aggregate annual claim
insurance capped at $1.5 million and this cap has never been exceeded. We record
such insurance premiums as incurred.
Item 2. LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Significant Balance Sheet Fluctuation October 31, 2004 as compared to January
31, 2004
Balance Sheet Accounts. The increase in cash, cash equivalents and marketable
securities and the decrease in the current portion of long-term liabilities is
the direct result of funds received from the Company's secondary public offering
and the payoff of our credit facility balance on June 18, 2004. Accounts
receivable increased due to increased sales. Inventories increased as we build
our finished goods inventory for our seasonally strong fourth and first quarters
for fiscal 2005 and 2006. We also built raw material reserves due to an
anticipated increase in the cost of these raw materials. Plant property and
equipment increased as a result of adopting FIN 46R in which we recorded $1.2
million of buildings in our consolidation of variable interest entities.
Nine Months Ended October 31, 2004 Compared to the Nine Months Ended October 31,
2003
Net Sales. Net sales increased $3.6 million, or 5.3%, to $72.1 million for
the nine months ended October 31, 2004 from $68.5 million for the nine months
ended October 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 $2.5 million, or 18.6%, to $15.8
million for the nine months ended October 31, 2004 from $13.3 million for the
nine months ended October 31, 2003. Gross profit as a percent of net sales
increased to 21.9% for the nine months ended October 31, 2004 from 19.4% for the
nine months ended October 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 $.6 million, or 7.1% to
$9.5 million for the nine months ended October 31, 2004 from $8.9 million for
the nine months ended October 31, 2003. As a percent of net sales, operating
expenses increased to 13.2% for the nine months ended October 31, 2004 from
12.9% for the nine months ended October 31, 2003. The $.6 million increase in
operating expenses in the nine months ended October 31, 2004 compared to the
nine months ended October 31, 2003 was principally due to an increase in:
o Salaries of $0.4 million
o Freight of $0.2 million
o Sales Commissions of $0.08 million
o Sales related expenses of $0.08 million
o Currency Fluctuations of $0.07 million
o Licenses and Fees of $0.07 million
o Advertising Expenses of $0.05 million
o Consulting Fees of $0.04 million
which above increases of $0.99 million were offset by:
o a minority interest reclassification of $0.4 million,
leaving a net increase of $0.6 million.
Interest Expense. Interest expense decreased by $.2 million for the nine months
ended October 31, 2004
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compared to the nine months ended October 31, 2003 because we paid off our
credit facility in full on June 18, 2004, from the proceeds of our Secondary
Stock Offering.
Income Tax Expense. Income tax expenses consist of federal, state and
foreign income taxes. Income tax expense increased $.5 million, or 40%, to $1.9
million for the nine months ended October 31, 2004 from $1.4 million for the
nine months ended October 31, 2003. Our effective tax rate was 31.3% and 33.3%
in the nine months ended October 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 $.4 million for the nine months ended October 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 partially 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 nine months ended
October 31, 2004.
Net Income. Net income increased $1.1 million, or 38%, to $3.8 million for
the nine months ended October 31, 2004 from $2.7 million for the nine months
ended October 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 cost and expenses due
to higher volumes of our products being sold.
Three Months Ended October 31, 2004 Compared to the Three Months Ended
October 31, 2003
Net Sales. Net sales increased $1.1 million, or 5%, to $22.4 million for
the three months ended October 31, 2004 from $21.3 million for the three months
ended October 31, 2003. The increase was due primarily to an increase of $1.0
million in our chemical and disposable products sold and an increase of $.3
million in sales of disposable products in our UK subsidiary. This was partially
offset by a decrease in our woven goods sales of $.2 million, due to a
manufacturing relocation, as mentioned last quarter.
Gross Profit. Gross profit increased $.4 million, or 9.4%, to $4.9 million
for the three months ended October 31, 2004 from $4.5 million for the three
months ended October 31, 2003. Gross profit as a percent of net sales increased
to 21.9% for the three months ended October 31, 2004 from 21.1% for the three
months ended October 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
approximately $3 million for the three months ended October 31, 2004 and for the
three months ended October 31, 2003 as cost savings continue. As a percent of
net sales, operating expenses decreased to 13% for the three months ended
October 31, 2004 from 14.2% for the three months ended October 31, 2003, as
sales increased without a corresponding increase in expenses.
Interest Expense. Interest expense decreased by $ .1 million for the three
months ended October 31, 2004 compared to the three months ended October 31,
2003 because we paid off our credit facilities from the proceeds of our
Secondary Public Offering.
Income Tax Expense. Income tax expenses consist of federal, state and
foreign income taxes. Income tax expense increased $.2 million, or 41.9% to $.7
million for the three months ended October 31, 2004 from $.5 million for the
three months ended October 31, 2003. Our effective tax rate was 34.6% and 36.1%
in the three months ended October 31, 2004 and 2003, respectively. Our effective
tax rate varied from the federal statutory rate of 34% due to higher US income
than foreign income during the period and the effect of various state income
taxes.
Minority interest. Minority interest in net income of variable interest
entities increased to $.1 million for the three months ended October 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 partially 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 October 31,
2004.
Net Income. Net income increased $.3 million, or 36.8% to $1.2 million for
the three months ended October 31, 2004 from $.9 million for the three months
ended October 31, 2003. The increase in net income was the result of increased
productivity as a result of shifts in production to our China facilities, flat
operating expenses, and an
14
increase in net sales and reduced interest expenses.
Liquidity and Capital Resources
Cash Flows
As of October 31, 2004 we had cash and cash equivalents and marketable
securities of $10,739,000 and working capital of $50,114,000, an increase of
$8,293,000 and $21,776,000, 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 October 31, 2004 from January
31, 2004 was due primarily to the repayment of our credit facilities on June 18,
2004 with the proceeds of our Secondary Stock Offering. Our primary sources of
funds for conducting our business activities have been from cash flow provided
by operations and the cash received from the above mentioned stock 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 $1.3 million for the nine
months ended October 31, 2004 was due primarily to net income from operations of
$3.8 million, a decrease in other assets of $.5 million, offset in part by an
increase in inventories of $2.4 million and an increase in accounts receivable
of $1.2 million. Net cash provided by operating activities of $2.7 million for
the nine months ended October 31, 2003 was primarily attributable to net income
from operations of $2.7 million, a decrease in inventories of $1.3 million, and
a decrease in accounts payable of $.2 million, offset in part by an increase in
other assets of $0.3 million and a decrease in accounts receivable of $1.8
million.
Net cash used in investing activities of $6.6 million and $1 million in
the nine months ended October 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 nine
months ended October 31, 2004 and net cash used in financing activities of $.8
million in the nine months ended October 31, 2003 was primarily attributable to
the proceeds from the secondary public offering and the payoff on June 18, 2004
of our revolving credit facilities, and the repayment on the loan agreement in
the 2003 period.
Credit Facilities
We currently have two credit facilities:
o an $18 million revolving credit facility, under which we had
no borrowings outstanding as of October 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 October 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
October 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 October 31, 2004. As of October 31, 2004, we
had $2.33 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
15
debt under our credit facilities. As of October 31, 2004, we were in compliance
with all covenants contained in our credit facilities.
We believe that our current cash position of $10.7 million, our cash flow
from operations 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
any future 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 improvements 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 of approximately
$121,000 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
Our 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.
Through the nine months ended October 31, 2004 additional expense has been
incurred relating to documenting and testing the systems of internal controls.
The company hired an internal auditor in July 2004 and has contracted with an
independent consultant for services related to Sarbanes-Oxley Act compliance
with Section 404, in February 2004. The total amount expensed so far is
approximately $100,000 and is expected to double by fiscal year end, due to the
hiring of additional accounting personnel.
During the quarter ended October 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 through 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K:
a - 10.14 Employment Agreement, dated November 29, 2004, between
Lakeland Industries, Inc. and Gary Pokrassa, CPA, filed herein.
b - On September 9, 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 2nd Quarter ended July 31, 2004.
On September 10, 2004, the Company filed a Form 8-K under Item 7.01,
relating to a Notice of Teleconference call for 10:00 AM September
10, 2004.
On December 6, 2004, the Company filed a Form 8-K under Item 4.01,
relating to a Change in Registrant's Certifying Accountant, from
PricewaterhouseCoopers LLP to Holtz Rubenstein Reminick, LLP.
16
_________________SIGNATURES_________________
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LAKELAND INDUSTRIES, INC.
-------------------------
(Registrant)
Date: December 15, 2004 /s/ Christopher J. Ryan
-----------------------
Christopher J. Ryan,
Chief Executive Officer, President,
Secretary and General Counsel
(Principal Executive Officer and Authorized
Signatory)
Date: December 15, 2004 /s/Gary Pokgrassa
-----------------
Gary Pokrassa,
Chief Financial Officer
(Principal Accounting Officer and Authorized
Signatory)
17