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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 April 30, 2005
--------------
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 [X] NO [ ]
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 June 9, 2005 - 5,017,046 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 April 30, 2005 and January 31, 2005.............................2
Condensed Consolidated Statements of Income for the
Three Months Ended April 30, 2005 and 2004...........................................................3
Condensed Consolidated Statement of Stockholders' Equity - Three Months Ended April 30, 2005..........4
Condensed Consolidated Statements of Cash Flows - Three Months Ended April 30, 2005
and 2004..............................................................................................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 April 30, January 31,
2005 2005
(Unaudited)
Current assets:
Cash and cash equivalents (which includes $3,730,947 and
$3,711,320 of marketable securities at April 30, 2005 and
January 31, 2005, respectively) .......................... $ 8,680,060 $ 9,185,382
Accounts receivable, net of allowance for doubtful accounts
of $323,000 at April 30, 2005 and January 31, 2005 ....... 14,997,279 13,117,374
Inventories, net of reserves of $314,000 at April 30, 2005
and $396,000 at January 31, 2005 ......................... 31,101,768 30,906,023
Deferred income taxes ...................................... 960,734 960,734
Other current assets ....................................... 1,161,594 958,491
----------- -----------
Total current assets .............................. 56,901,435 55,128,004
Property and equipment, net of accumulated
depreciation of $5,518,000 at April 30, 2005
and $5,304,000 January 31, 2005 .......................... 6,774,118 5,014,240
Other assets ............................................... 234,323 171,010
----------- -----------
.................................................. $63,909,876 $60,313,254
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 5,078,174 $ 2,710,251
Accrued expenses and other current liabilities ............. 2,057,995 1,441,912
----------- -----------
Total current liabilities ............................. 7,136,169 4,152,163
Other long-term liabilities ................................ 507,830 495,330
Deferred income taxes ...................................... 86,229 86,229
Minority interest in Variable Interest Entities ............ -0- 1,112,861
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
5,017,046 shares at April 30, 2005 and 4,560,885 shares at
January 31, 2005 ......................................... 50,170 45,609
Additional paid-in capital ................................. 42,431,220 36,273,046
Retained earnings .......................................... 13,698,258(1) 18,148,016
----------- -----------
Total stockholders' equity ............................ 56,179,648 54,466,671
----------- -----------
$63,909,876 $60,313,254
=========== ===========
(1) A cumulative total of $11,612,824 has been transferred from retained
earnings to additional paid-in-capital and par value of common stock due
to 3 separate stock dividends paid in 2002, 2003 and 2005. As reflected in
the Condensed Consolidated Statement of Stockholders' Equity, $6,162,735
was included in the current quarter ended April 30, 2005.
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
April 30,
2005 2004
------------ ------------
Net sales .................................. $ 25,708,928 $ 26,838,023
Cost of goods sold ......................... 19,915,180 20,858,591
------------ ------------
Gross profit ............................... 5,793,748 5,979,432
Operating expenses ......................... 3,247,714 3,586,720
------------ ------------
Operating profit ........................... 2,546,034 2,392,712
Other income, net .......................... 23,462 9,460
Interest expense ........................... (430) (137,141)
------------ ------------
Income before minority interest ............ 2,569,066 2,265,031
Minority interest in net income of variable
interest entities .......................... -0- 118,696
------------ ------------
Income before income taxes ................. 2,569,066 2,146,335
Provision for income taxes ................. 856,089 721,000
------------ ------------
Net income ................................. $ 1,712,977 $ 1,425,335
============ ============
Net income per common share*:
Basic ............................. $ .34 $ .40
Diluted ........................... $ .34 $ .40
Weighted average common shares outstanding*:
Basic ............................. 5,017,046 3,601,318
Diluted ........................... 5,021,476 3,606,683
*Adjusted for the 10% stock dividend to shareholders of record on April 30, 2005
and reflects 1,280,750 shares offered to the public in June and July 2004.
The accompanying notes are an integral part of these financial statements.
3
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three months ended April 30, 2005
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
Balance, January 31, 2005 4,560,885 $ 45,609 $ 36,273,046 $ 18,148,016 $ 54,466,671
10% stock dividend 456,161 4,561 6,158,174 (6,162,735) -0-
Net Income -0- -0- -0- 1,712,977 1,712,977
--------- ------------ ------------ ------------ ------------
Balance, April 30,2005 5,017,046 $ 50,170 $ 42,431,220 $ 13,698,258 $56, 179,648
========= ============ ============ ============ ============
(Reflects the three separate 10% stock dividends issued on July 31, 2002,
2003 and April 30, 2005 which resulted in a cumluative transfer of
$11,612,824 from retained earnings to additional paid in capital and par
value of common stock). (See Note 1 to Condensed Condolidated Balance
Sheets)
The accompanying notes are an integral part of these financial statements.
4
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
April 30,
2005 2004
---- ----
Cash Flows from Operating Activities
Net income .................................................. $ 1,712,977 $ 1,425,335
Adjustments to reconcile net income to net cash provided
by operating activities:
Reserve for inventory obsolescence .......................... (82,240) 12,748
Depreciation and amortization ............................... 214,350 231,455
Minority interest in net income of variable interest entities -0- 118,696
(Increase) in accounts receivable ........................... (1,879,905) (1,456,042)
(Increase) in inventories ................................... (113,505) (1,235,395)
(Increase) decrease in other assets ......................... (266,416) 138,754
Increase in accounts payable, accrued
expenses and other liabilities ............................ 2,253,690 1,139,514
----------- -----------
Net cash provided by operating
activities ................................................ 1,838,951 375,065
----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment ......................... (2,344,273) (153,417)
----------- -----------
Net cash used in investing activities ....................... (2,344,273) (153,417)
----------- -----------
Cash Flows from Financing Activities:
Net borrowings under loan agreements ........................ -0- 106,689
----------- -----------
Net cash provided by financing activities ................... -0- 106,689
----------- -----------
Net (decrease) increase in cash and cash equivalants ........ (505,322) 328,337
Cash and cash equivalents at beginning of period ............ 9,185,382 2,445,271
----------- -----------
Cash and cash equivalents at end of period .................. $ 8,680,060 $ 2,773,608
=========== ===========
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 and accessories for the industrial protective clothing
and homeland security markets. The principal market for our products is the
United States. No customer accounted for more than 10% of net sales during the
three month periods ended April 30, 2005 and 2004, 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, 2005.
The results of operations for the three month periods ended April 30, 2005
and 2004, 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 leased property
and buildings to the Company and were owned by related parties, which have been
consolidated in our financial statements for the year ended January 31, 2005 are
River Group Holding Co., L.L.P. and POMS Holding Co. Several of the owners of
these entities were 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
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.
Creditors, or beneficial interest holders, of the consolidated variable interest
entities have no recourse to the general credit of the Company.
On April 25, 2005, the Company purchased property and buildings from POMS
Holding Co. for a net purchase price of $2,067,584. Reference is made to the
Company's filing on Form 8-K dated April 25, 2005. In April 2005, the Company
entered into a real estate purchase contract with River Group Holding Co. and
recorded the purchase on the April 30, 2005 financial statements. The purchase
of this property was completed on May 25, 2005. The Company deems any impact of
FIN 46R to be deminimis for the April 30, 2005 financial statements.
There are no variable interest entities in which the "Company" is not the
primary beneficiary.
4. Inventories:
Inventories consist of the following:
April 30, January 31,
2005 2005
---- ----
Raw materials.................. $ 11,388,446 $ 12,231,264
Work-in-process................ 3,403,855 2,614,710
Finished Goods................. 16,309,467 16,060,049
------------ -----------
............................... $ 31,101,768 $ 30,906,023
============ ============
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 April 30, 2005 and 2004, adjusted, retroactively, for the
10% Stock dividends to Shareholders on April 30, 2005.
7
Three Months Ended
April 30,
2005 2004
---- ----
Numerator
Net income ............................. $1,712,977 $1,425,335
========== ==========
Denominator
Denominator for basic earnings per share 5,017,046 3,601,318
(Weighted-average
shares)
Effect of dilutive securities ... 4,430 5,365
---------- ----------
Denominator for diluted earnings per share ...... 5,021,476 3,606,683
========== ==========
(adjusted weighted-average shares)
Basic earnings per share ........................ $ .34 $ .40
========== ==========
Diluted earnings per share ...................... $ .34 $ .40
========== ==========
Options to purchase 11,000 shares of the Company's common stock have been
excluded for the three months ended April 30, 2005, as their inclusion would be
anti-dilutive.
6. Revolving Credit Facility
At April 30, 2005, the balance outstanding under our $18 million revolving
credit facility amounted to $0. The balance was 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 February 28, 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 April 30, 2005.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 April 30, 2005.
7. Major Supplier
We purchased 75.6% of our raw materials from one supplier during the
three-month period ended April 30, 2005. 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(R), "Accounting
for Stock-Based Compensation" (SFAS 123(R)). 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
under these plans, consistent with the methodology prescribed by SFAS 123(R),
8
the effect on the Company's net income and earnings per share as reported would
be reduced for the quarters ended April 30, 2005 and 2004 to the pro forma
amounts indicated below:
Three Months Ended
April 30,
2005 2004
---- ----
Net income as reported $1,712,977 $1,425,335
Less:
Option expense based on fair value method 9,627 43,554
---------- ----------
Pro forma 1,703,350 1,381,781
========== ==========
Basic earnings per common share
As reported $ .34 $ .40
========== ==========
Pro forma $ .34 $ .38
========== ==========
Diluted earnings per common share
As reported $ .34 $ .40
========== ==========
Pro forma $ .34 $ .38
========== ==========
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 ended April 31, 2005 and 2004: expected volatility of 87% and 64%,
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 April 30, 2005 and 2004. Earnings per share have been
adjusted to reflect the 10% stock dividends to stockholders of record as of
April 30, 2005.
9. Manufacturing Segment Data
Domestic and international sales are as follows in millions of dollars:
Three Months Ended
April 30,
2005 2004
---- ----
Domestic $22.9 89.1% $24.0 89.7%
International 2.8 10.9% 2.8 10.3%
----- ----- ----- -----
Total $25.7 100% $26.8 100%
===== ===== ===== =====
We manage our operations by evaluating each of our geographic locations. Our
North American operations include our facilities in Decatur, Alabama (primarily
the distribution to customers of the bulk of our products and the manufacture of
our chemical, glove and disposable products), Celaya, Mexico (primarily
disposable, glove and chemical suit production) and St. Joseph, Missouri
(primarily woven products production). 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, 2005. We evaluate the performance of these
entities based on operating profit which is defined as income before income
taxes, interest expense and other income and expenses. We have small sales
9
forces in Canada, Europe and China 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
April 30,
(in millions of dollars)
2005 2004
---- ----
Net Sales:
North America $ 27.3 $ 26.6
China 2.0 2.3
Less inter-segment sales (3.6) (2.1)
------ ------
Consolidated sales $ 25.7 $ 26.8
====== ======
Operating Profit:
North America $ 2.1 $ 2.2
China .4 .2
Less inter-segment profit (loss) .0 .0
------ ------
Consolidated profit $ 2.5 $ 2.4
====== ======
Identifiable Assets (at Balance Sheet date or change
during quarter):
North America $ 55.1 $ 43.4
China 8.9 7.9
------ ------
Consolidated assets $ 64.0 $ 51.3
====== ======
Depreciation and Amortization Expense:
North America $ .11 $ .16
China .10 .07
------ ------
Consolidated depreciation expense $ .21 $ .23
====== ======
10. Effects of Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires that the fair value
of such equity instruments be recognized as an expense in the historical
financial statements as services are performed. Prior to SFAS No. 123(R), only
certain pro forma disclosures of fair value were required. The provisions of
this statement are effective for the first annual reporting period that begins
after June 15, 2005.
In November 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 151 "Inventory Costs." This statement amends Accounting
Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so
abnormal" criterion that under certain circumstances could have led to the
capitalization of these items. SFAS No. 151 requires that idle facility expense,
excess spoilage, double freight and re-handling costs be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." SFAS 151 also requires that allocation of fixed production overhead
expenses to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for all fiscal years beginning
after June 15, 2005. Management does not believe there will be a significant
impact as a result of adopting this statement.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Non-monetary Assets", an amendment of Accounting Principles Board ("APB")
Opinion No. 29, which differed from the International Accounting Standards
Board's ("IASB") method of accounting for exchanges of similar productive
assets. Statement No. 153 replaces the exception from fair value measurement in
APB No. 29, with a general exception from fair value measurement for exchanges
of non-monetary assets that do not have commercial substance. The
10
statement is to be applied prospectively and is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not believe that SFAS No. 153 will have a material impact on its results of
operations or cash flows.
11. Real Estate Purchases
In April 2005, the Company entered into two separate real estate purchase
contracts, one with POMS and one with River Group, both related parties. The
Company is purchasing the land and buildings in Decatur, Alabama that it has
leased from these related parties since their inception, POMS (1984) and River
Group (1999). The purchase price is $2,056,000 for the POMS property and
$925,000 for the River Group property pursuant to the average of three separate
and independent real estate appraisals. The partnerships were accounted for in
accordance with FIN46R and were reflected in the financial statements for the
fiscal year ended January 31, 2005.
In contemplation of the real estate purchases, the Company entered into an
agreement, dated March 4, 2005, with an officer of Lakeland (who is a partner in
POMS & River Group) to acquire his interest for $565,367 ($411,200 for POMS and
$154,167 for River Group), at the same proportional valuation as the overall
property.
On April 25, 2005 the Company closed on the real estate purchase contract
with POMS paying a net amount of $1,656,384 ($2,056,000-$411,200 already paid
+$11,584 in closing costs). The Company paid POMS the lease amount from February
1, 2005 until April 25, 2005 amounting to $86,157, which is charged to rent
expense.
On May 25, 2005 the Company closed on the real estate purchase contract
with River Group paying a net amount of $774,519 ($925,000-$154,167 already paid
+$3,686 in closing costs). The Company paid River Group the lease amount from
February 1, 2005 until May 25, 2005 amounting to $63,157, which is charged to
rent expense.
At April 30, 2005, the Company recorded the asset land value of $230,000,
the asset building value of $2,751,000, closing costs of $11,584 and a payable
to River Group in the amount of $770,833. The Company recorded the purchase of
the land and building from River Group as of April 30, 2005, since the contract
of sale was finalized and the closing was pending the release of an easement on
the property. Total rent expense for the two properties for the three months
ended April 30, 2005 amounted to $135,933. The Company will record depreciation
on each of the two properties from the closing date forward.
Upon conclusion of these two real estate purchase contracts, the Company
no longer has related party transactions requiring the recording of variable
interest entities under FIN46R. Other than the above entries, the Company has
not recorded the effects of FIN46R in the current fiscal year. The Company deems
any such impact to be immaterial.
Building purchase in New York:
On May 10, 2005 the Company purchased a 6,250 square foot office
condominium to serve as its Corporate Headquarters. The purchase price was
$640,000 plus $9,161 in closing costs. The lease on its current location
amounted to $51,202 annually and was to expire on June 30, 2005. The new address
is 701 Koehler Suite 7, Ronkonkoma, NY 11779.
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, 2005.
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
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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 and homeland security
markets. 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 third quarter of fiscal 2006. 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 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 our sales of high-end
chemical protective suits, fire fighting and heat protective apparel, gloves and
arm guards, and reusable woven garments. Sales are recognized when goods are
shipped to our distributors at which time title and the risk of loss passes.
Sales are reduced for sales returns and allowances. Payment terms are generally
net 30 days for United States sales and net 90 days for international sales.
Inventories. Inventories include freight-in, materials, labor and overhead
costs and are stated at the lower of cost (on a first-in, first-out basis) or
market. Provision is made for slow-moving, obsolete or unusable inventory.
Allowance for Doubtful Accounts. We establish an allowance for doubtful
accounts to provide for accounts receivable that may not be collectible. In
establishing the allowance for doubtful accounts, we analyze the collectibility
of individual large or past due accounts customer-by-customer. We establish
reserves for accounts that we determine to be doubtful of collection.
Income Taxes and Valuation Reserves. We are required to estimate our
income taxes in each of the jurisdictions in which we operate as part of
preparing our consolidated financial statements. This involves estimating the
actual current tax in addition to assessing temporary differences resulting from
differing treatments for tax and financial accounting purposes. These
differences, together with net operating loss carry forwards 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.
Self-Insured Liabilities. We have a self-insurance program for certain
employee health benefits. The cost of such benefits is recognized as expense
based on claims filed in each reporting period and an estimate of claims
incurred but not reported during such period. Our estimate of claims incurred
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but not reported is based upon historical trends. If more claims are made than
were estimated or if the costs of actual claims increases beyond what was
anticipated, reserves recorded may not be sufficient and additional accruals may
be required in future periods. We maintain separate insurance to cover the
excess liability over set single claim amounts and aggregate annual claim
amounts.
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Item 2. LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant Balance Sheet Fluctuation April 30, 2005 as compared to January 31,
2005
Accounts receivable increased due to the increase in sales during the quarter
ended April 30, 2005 as compared to the fourth quarter of fiscal 2005.
Inventories leveled off as the building of finished goods inventory for our
seasonally strong fourth and first quarters of fiscal 2005 and 2006, ceased and
as the purchasing of raw material reserves due to the increase in cost of raw
material effective January 3, 2005, also ceased. Plant, property and equipment
increased due to the purchase of $3.0 million of land and buildings that were
formally carried in our consolidation as variable interest entities. The
increase in accounts payable includes $770,833 for the purchase of the River
Group property, which was closed May 25, 2005 and additional material purchases
for inventory amounting to approximately $2.0 million.
Three months ended April 30, 2005 as compared to the three months ended April
30, 2004
Net Sales. Net sales decreased $1.1 million, or 4.2%, to $25.7 million for the
three months ended April 30, 2005 from $26.8 million for the three months ended
April 30, 2004. The decrease was primarily due to supply chain delivery problems
incurred in receiving finished goods from our China subsidiaries, and softness
in government purchases of Chemical protective garments from that of the prior
year. These decreases were partially offset by an increase in sales by our
Canadian and European subsidiaries.
Gross Profit. Gross profit decreased $0.2 million, or 3.1%, to $5.8 million for
the three months ended April 30, 2005 from $6.0 million for the three months
ended April 30, 2004. Gross profit as a percentage of net sales increased to
22.5% for the three months ended April 30, 2005 from 22.3% for the three months
ended April 30, 2004, primarily due to the continuation of cost reduction
programs shifting production from the US to China and Mexico, partially offset
by rising raw material costs.
Operating Expenses. Operating expenses decreased $0.3 million, or 9.5%, to $3.3
million for the three months ended April 30, 2005 from $3.6 million for the
three months ended April 30, 2004. As a percent of sales, operating expenses
decreased to 12.6% for the three months ended April 30, 2005 from 13.4% for the
three months ended April 30, 2004. The $0.3 million decrease in operating
expenses in the three months ended April 30, 2005 as compared to the three
months ended April 30, 2004 was principally due to a increases (decreases) in:
Sales commissions($0.25 million)
Sales related expenses $0.08 million
Insurance ($0.34 million)
Pension reversal ($0.05 million)
Consulting $.083 million
Professional fees $.046 million
All other G & A $.131 million
The above increases in consulting and professional fees are a result of
compliance with Sarbanes-Oxley requirements.
Interest Expense. Interest expense decreased by $0.137 million for the three
months ended April 30, 2005 as compared to the three months ended April 30, 2004
because we paid off our credit facility in full on June 18, 2004 using 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 $0.2 million, or 18.7%, to $.9
million for the three months ended April 30. 2005 from $0.7 million for the
three months ended April 30, 2004. Our effective tax rate was 33.3% and 31.8% in
the three months ended April 30, 2005 and 2004, 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
decreased $0.1 million for the three months ended April 30, 2005 as a result of
the purchase in fiscal 2006 of the related party property that was
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accounted for under FIN46R during fiscal 2005. As a result, those entities were
consolidated in our statement of income for the three months ended April 30,
2004.
Net Income. Net income increased $0.28 million, or 20.2%, to $1.71 million for
the three months ended April 30, 2005 from $1.43 million for the three months
ended April 30, 2004. The increase in net income resulted from cost reduction
programs and the continuing production shifts from the U.S. to China and Mexico,
partially offset by rising raw material costs.
Liquidity and Capital Resources
Cash Flows
----------
As of April 30, 2005 we had short-term marketable securities and cash
equivalents of $8.7 million and working capital of $49.8 million, a decrease of
$0.5 million and $1.2 million, respectively, from January 31, 2005. 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 secondary stock offering completed in June 2004. 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 $1.8 million for the three
months ended April 30, 2005 was due primarily to net income from operations of
$1.7 million offset in part by a increase in accounts payable of $2.2 million,
an increase in inventories of $0.2 million and an increase in accounts
receivable of $1.9 million. Net cash provided by operating activities of $0.4
million for the three months ended April 30, 2004 was due primarily to net
income from operations of $1.4 million and an increase in accounts payable of
$1.1 million, offset in part by an increase in inventories of $1.2 million and
an increase in accounts receivable of $1.5 million.
Net cash used in investing activities of $2.3 million and $0.15 million in
the three months ended April 30, 2005 and 2004, respectively, was due to
purchases of property and equipment. Net cash provided by financing activities
in the three months ended April 30, 2004 was primarily attributable to
borrowings under our credit facilities.
Credit Facilities
-----------------
We currently have two credit facilities:
o an $18 million revolving credit facility, of which we had no
borrowings outstanding as of April 30, 2005; and
o a $3 million revolving credit facility (the availability of
which reduces incrementally over its 3-year term), of which we
had no borrowings outstanding as of April 30, 2005.
In November 1999, we entered into a 5-year $3 million term loan which we repaid
in full on March 31, 2003.
Our $18 million revolving credit facility permits us to borrow up to the
lower of $18 million and a borrowing base determined by reference to a
percentage of our eligible accounts receivable and inventory. Our $18 million
revolving credit facility expires on July 31, 2005, and the outstanding balance
was paid in full on June 18, 2004 using the proceeds from our Secondary Stock
Offering. Borrowings under this revolving credit facility bear interest at the
London Interbank Offering Rate (LIBOR) plus 2% and were zero at January 31,
2005. As of April 15, 2005, we had $18 million of borrowing availability under
this revolving credit facility.
In January 2004, we entered into a new 3-year $3 million revolving credit
facility which expires on February 28, 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 had no borrowings outstanding
under this facility at January 31, 2005. As of April 30, 2005, we had $2.08
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
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be immediately due and payable. Our lenders have a security interest in
substantially all of our assets to secure the debt under our credit facilities.
As of April 30, 2005, we were in compliance with all covenants contained in our
credit facilities.
We believe that our current cash position of $8.7 million, our cash flow
from operations along with borrowing availability under our $3 million revolving
credit facility, as well as the expected renewal of our 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.
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 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. Our capital expenditures are expected to
be approximately $4.8 million in total; $3.6 million to purchase our Decatur
Alabama facilities and similar facilities adjacent to our New York corporate
headquarters (all currently rented for $615,000 annually) and $1.2 million for
capital equipment primarily computer equipment and apparel manufacturing
equipment in fiscal 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in market risk from that disclosed in our
Annual Report on Form 10-K for the fiscal year ended January 31, 2005.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - Lakeland Industries, Inc.'s
Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of Lakeland Industries, Inc.'s disclosure controls and procedures
(as defined in Rule 13a-15(e) or 15d-15(c) under the Securities Exchange Act) as
of the end of the period covered by this report, have concluded that, based on
the evaluation of these controls and procedures, the Company's disclosure
controls and procedures were effective.
Changes in Internal Control Over Financial Reporting - Lakeland Industries,
Inc.'s management, with the participation of Lakeland Industries, Inc.'s Chief
Executive Officer and Chief Financial Officer, has evaluated whether any change
in the Company's internal control over financial reporting occurred during the
first quarter of fiscal 2006. Based on that evaluation, management concluded
that there has been no change in Lakeland Industries, Inc.'s internal control
over financial reporting during the first quarter of fiscal 2006 that has
materially affected, or is reasonably likely to materially affect, Lakeland
Industries, Inc.'s internal control over financial reporting.
Through the fifteen months ended April 30, 2005 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 overall Sarbanes-Oxley
Act compliance and more specifically Section 404, in February 2004. The total
amount expensed so far is approximately $454,000 and is expected to increase in
fiscal 2006 by $250,000 due to the hiring of additional accounting personnel.
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PART II. OTHER INFORMATION
Items 1 through 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K:
a - 10.12, Employment agreement, dated May 23, 2005, between
Lakeland Industries, Inc. and James McCormick.
10.15, Employment agreement, dated May 23, 2005, between
Lakeland Industries, Inc. and Gregory Willis.
b - On April 15, 2005, the Company filed a Form 8-K for the
purpose of furnishing under Items 7 and 8 a press release
announcing results of operations for the fiscal year ended
January 31, 2005.
On April 11, 2005, the Company filed a Form 8-K under Item
2.02, relating to a Notice of Teleconference call for 5:00 PM
April 15, 2005.
On April 26, 2005, the Company filed a Form 8-K under Item 7
and 8 regarding the purchase of the land and buildings of its
hub operation in Decatur, Alabama.
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SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LAKELAND INDUSTRIES, INC.
-------------------------
(Registrant)
Date: June 9, 2005 /s/ Christopher J. Ryan
-----------------------
Christopher J. Ryan,
Chief Executive Officer, President,
Secretary and General Counsel
(Principal Executive Officer and Authorized Signatory)
Date: June 9, 2005 /s/ Gary Pokrassa
-----------------
Gary Pokrassa,
Chief Financial Officer
(Principal Accounting Officer and Authorized Signatory)
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