UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 20052006
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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
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LAKELAND INDUSTRIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3115216
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(State of Incorporation) (I.R.S. Employer Identification Number)
711701 Koehler Ave., Suite 2,7, Ronkonkoma, NY 11779
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(Address of Principal Executive Offices)
(631) 981-9700
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(Registrant's telephone number, including area code)
711 Koehler Ave., Suite 2, Ronkonkoma, NY 11779
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12 (b)12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:Act
Title of Class - Common Stock $0.01 Par Value
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(TitleName of class)Exchange on which listed - NASDAQ
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S - KS-K (ss. 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10 - K10-K or any amendment to this Form 10-K10-K. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer
an accelerated file or a non- accelerated filer (as defined in Rule 12-b-2 of
the Exchange ActAct).
Large accelerated filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2)12-b-2 of the Exchange Act). YesYes|_| No |X|
No |_|
TheAs of July 29, 2005, the aggregate market value of the Common Stock outstanding andregistrant's common
stock held by non-affiliates (as defined in Rule 405 under the Securities Exchange Act of
1934) of the Registrant,registrant was $65,777,000 based uponon the
closing price of the Common Stockcommon stock as reported byon the NASDAQNational Association of
Securities Dealers Automated Quotation System National Market on NASDAQ onSystem.
Indicate the last day of the
registrant's most recently completed second quarter (July 31, 2004) was
approximately $82,092,000 (based on 3,658,295 shares held by non-affiliates).
The number of shares outstanding of each of the Registrant'sissuer's classes
of common stock, $.01as of the latest practicable date.
Class Outstanding at April 17, 2006
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Common Stock, $0.01 par value on April 15, 2005 was 4,560,885.per share 5,017,046
1
DOCUMENTS INCORPORATED BY REFERENCE
Certain portionsDocument Parts Into Which Incorporated
-------- -----------------------------
Annual Report to Stockholders for the Fiscal Parts [I, II, and IV]
Year Ended January 31, 2006 (Annual Report)
Portions of the Registrant's Definitive Proxy Statement relating to its 2006 Annual
Stockholders' Meeting to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than May 30, 2005,(for the Annual Meeting of Stockholders to be held June
15, 2005),subsequently - are incorporated by reference
toand Part III of this Annual Report on
Form 10-K. 1Except with respect to the Information
specifically incorporated by reference in this Form 10-K, the registrant's
definitive proxy statement is not deemed to be filed as part of this Form 10-K.
2
LAKELAND INDUSTRIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PART 1:
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Cautionary Statement regarding Forward-Looking Information Page
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Item I1 Business
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Overview --------4
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Industry Overview and Consolidation 5
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Business Strategy 7
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Our Competitive Strengths 9
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Products --------10
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Quality Control 13
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Marketing and Sales 13
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Research and Development 14
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Suppliers and Materials 14
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Competition 14
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Seasonality 14
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Patents and Trademarks 15
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Employees 15
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Environmental Matters 15
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Available Information 15
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Item 1A Risk Factors 15
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Item 1B Unresolved Staff Comments 22
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Item 2 Properties 25
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Item 3 Legal Proceedings 25
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Item 4 Submission of Matters to a Vote of Security Holders 25
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PART II:
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Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters 25
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Item 6 Selected Financial Data 26
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Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 28
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Item 7A Quantitative and Qualitative Disclosure about Market Risk 36
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Item 8 Financial Statements and Supplementary Data 36
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Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 64
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Item 9A Controls and Procedures 64
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Item 9B Other Information 65
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PART III:
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Item 10 Directors and Executive Officers of the Registrant 65
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Item 11 Executive Compensation 68
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Item 12 Security Ownership of Certain Beneficial Owners and Management 68
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Item 13 Certain Relationships and Related Transactions 68
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Item 14 Principal Accounting Fees and Services 69
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PART IV:
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Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K 70
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Signatures
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Signatures----------
Certification under Exchange Act Rules 13a - ----------
Certification under Exchange Act Rules 13a -14(b) and 15d- 14(b) and 15d- 14(b)73
23
This Annual Report on Form 10-K contains forward-looking statements that
are made pursuant to the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve risks,
uncertainties and assumptions as described from time to time in registration
statements, annual reports and other periodic reports and filings of the Company
filed with the Securities and Exchange Commission. All statements, other than
statements of historical facts, which address the Company's expectations of
sources of capital or which express the Company's expectation for the future
with respect to financial performance or operating strategies, can be identified
as forward-looking statements. As a result, there can be no assurance that the
Company's future results will not be materially different from those described
herein as "believed,""anticipated,""estimated" or "expected," which reflect the
current views of the Company with respect to future events. We caution readers
that these forward-looking statements speak only as of the date hereof. The
Company hereby expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any such statements to reflect any change
in the Company's expectations or any change in events, conditions or
circumstances on which such statement is based.
PART I
Lakeland Industries, Inc. (the "Company" or "Lakeland," "we," "our," or "us")
was incorporated in the State of Delaware in 1986. Our executive offices are
located at 711701 Koehler Avenue, Suite 2,7, Ronkonkoma, New York 11779, and our
telephone number is (631) 981-9700. Our web site is located at www.lakeland.com.
Information contained on our web site is not part of this report.
ITEM 1. BUSINESS
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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 customer service group our regional sales forcemanagers 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, munition plants, janitorial, pharmaceutical and high
technology electronics manufacturers, as well as hospitals and laboratories. In
addition, we supply federal, state and local governmental agencies and
departments such as fire and police departments, airport crash rescue units, the
Department of Defense, Central Intelligence Agency, Federal Bureau of
Investigation, U.S. Secret Service and the Centers for Disease Control. In fiscal 2005,2006, we had net
sales of $95.3$98.7 million and earnings per share of $1.23,$1.26, which represent a growth
rate of 6.25%3.6% and 10.8%11.6%, respectively, over our previous fiscal year. Our net
sales attributable to customers outside the United States were $5.7 million, $8.0 million,
$9.0 million and $9.0$10.5 million, in fiscal 2003,2004, fiscal 20042005 and fiscal 2005,2006,
respectively.
Our major product categories and their applications are described below:
Limited Use/Disposable Protective Clothing. We manufacture a complete line
of limited use/disposable protective garments offered in coveralls, lab coats,
shirts, pants, hoods, aprons, sleeves and smocks. These garments are made from
several non-woven fabrics, primarily Tyvek(R) and TyvekQCTychem (both DuPont
manufactured fabrics) and also our proprietary fabrics Micromax and Micromax NS
manufactured pursuant to customer order. These garments provide protection from
low-risk contaminants or irritants, such as chemicals, pesticides, fertilizers,
paint, grease and dust, and from limited exposure to hazardous waste and toxic
chemicals, including acids, asbestos, lead and hydro-carbons (or PCBs) that pose
health risks after exposure for long periods of time. Additional applications
include protection from viruses and bacteria, such as AIDS, streptococcus, SARS
and hepatitis, at hospitals, clinics and emergency rescue sites and use in clean
room environments to prevent human contamination in the manufacturing processes.
This is our largest product line.
High-End Chemical Protective Suits. We manufacture heavy duty chemical
suits made from TyChem(R) SL, TK and TyChem(R) BR, and F, which are DuPont manufactured
fabrics.fabrics and Pyrolon CRFR. These suits are worn by individuals on
4
hazardous material teams to provide protection from powerful, highly
concentrated and hazardous or potentially lethal chemical and biological toxins,
such as toxic wastes at Super Fund sites, toxic chemical spills or biological
discharges, chemical or biological warfare weapons (such as saran gas, anthrax
or ricin), and chemicals and petro-chemicals present during the cleaning of
refineries
3
and nuclear facilities. These suits can be used in conjunction with a
fire protective shell that we manufacture to protect the user from both chemical
and flash fire hazards. Homeland Security measures and government funding of
personal protective equipment for first responders to terrorist threats or
attack have recently resulted in increased demand for our high-end chemical
suits and we believe demand for these suits will continue to increase in the
future.future as state and local Bioterrorism grants begin to be spent.
Fire Fighting and Heat Protective Apparel. We manufacture an extensive
line of fire fighting and heat protective apparel for use by fire fighters and
other individuals that work in extreme heat environments. Our branded fire
fighting apparel Fyrepel(TM) is sold to local municipalities and industrial fire
fighting teams. Our heat protective aluminized fire suits are manufactured from
Nomex(R), a fire and heat resistant material, and Kevlar(R), a cut and heat
resistant, high-strength, lightweight, flexible and durable material both
produced by DuPont. This apparel is also used for maintenance of extreme high
temperature equipment, such as coke ovens, kilns, glass furnaces, refinery
installations and smelting plants, as well as for military and airport crash and
rescue teams.
Gloves and Arm Guards. We manufacture gloves and arm guards from Kevlar(R)
and Spectra(R), a cut resistant fibers made by DuPont and Honeywell respectively.respectively
as well as engineered composite yarns with Microgard antimicrobial for food
service markets. Our gloves are used primarily in the automotive, glass, and metal
fabrication and food service industries to protect the wearer's hand and arms
from lacerations and heat without sacrificing manual dexterity or comfort.
Reusable Woven Garments. We manufacture a line of reusable and washable
woven garments that complement our fire fighting and heat protective apparel
offerings and provide alternatives to our limited use/disposable protective
clothing lines. Product lines include electrostatic dissipative apparel used in
the automotive industry for control of static electricity in the manufacturing
process, clean room apparel to prevent human contamination in the manufacturing
processes, hospital garments to protect against blood borne pathogens and
bacteria such as AIDS, streptococcus and hepatitis, and flame resistant Nomex(R) coveralls and FR cotton coveralls used
in chemical and petroleum plants and for wild landwildland fire fighting.fighting and extrication
suits.
We believe we are one of the largest independent customers of DuPont's
Tyvek(R) and TyChem(R) apparel grade material. We purchase Tyvek(R) and
TyChem(R) under North American licensing agreements and other DuPont materials,
such as Kevlar(R), under international licensing agreements. While we have
operated under these trademark agreements since 1995, we have been a significant
customer of these DuPont materials since 1982. The trademark agreements require
certain quality standards and the identification of the DuPont trademark on the
finished product manufactured by us. We believe this brand identification with
DuPont and Tyvek(R) significantly benefits the marketing of our largest product
line, as over the past 30 years Tyvek(R) has become known as the standard for
limited use/disposable protective clothing. We believe our relationship with
DuPont to be excellent.
We maintain manufacturing facilities in Decatur, Alabama; Celaya, Mexico;
AnQui City, China; Jiaozhou, China; New Delhi, India, Shillington, PA, and St.
Joseph, Missouri, where our products are designed, manufactured and sold. We
also have a relationship with a sewing subcontractor in Mexico, which we can
utilize for unexpected production surges. Our China, Mexico, and MexicoIndia
facilities allow us to take advantage of favorable labor and suppliercomponent costs,
thereby increasing our profit margins on products manufactured in these
facilities. Our China and Mexico facilities are designed for the manufacture of
limited use/disposable protective clothing as well as our high-end chemical
protective suits. We have significantly improved our profit margins in these
product lines by shifting production to our international facilities and we are
currently expanding our international manufacturing capabilities to include our
gloves and reusable woven protective apparel product lines.
Industry Overview
According to Global Industry Analysts, Inc., the global market for
industrial work clothing iswas projected to be approximately $6.3 billion in 2005,
and is projected to grow at a compound annual growth rate of approximately 6.5%.
Our primary market, North America, is the largest market, expected to make up
over one-third, or approximately $2.0 billion, of the global market. The
industrial work clothing market includes our limited use/disposable protective
or safety clothing, our high-end chemical protective suits, our fire fighting
and heat protective apparel and our reusable woven garments.
Global Industry
Analysts, Inc. estimates that the market for gloves was over $2.6 billion
worldwide in 2003.
The industrial protective safety clothing market has evolved over the past
35 years as a result of governmental regulations and requirements and commercial
product development. In 1970, Congress enacted the Occupational
5
Safety and Health Act, or OSHA, which requires employers to supply protective
clothing in certain work environments. Almost two million workers are subject to
OSHA standards today. Certain states have also enacted worker safety laws that
supplement OSHA standards and requirements.
The advent of OSHA coincided with DuPont's development of Tyvek(R) which,
for the first time, allowed for the economical production of lightweight,
disposable protective clothing. The attraction of disposable garments grew in
the
4
late 1970s as a result of increases in labor and material costs of producing
cloth garments and the promulgation of federal, state and local safety
regulations.
In 1990, additional standards proposed and developed by the National Fire
Protection Association and the American Society for Testing and Materials were
adopted by OSHA. These standards identify four levels of protection, A through
D, and specify the equipment and clothing required to adequately protect the
wearer at each level:
o Level A requires total encapsulation in a vapor proof chemical suit with
self contained breathing apparatus, or SCBA, and appropriate accessories.
o Level B calls for SCBA or a positive pressure supplied respirator with
escape SCBA, plus hooded chemical resistant clothing (coveralls), one or
two piece chemical splash suit, or disposable chemical resistant
coveralls.
o Level C requires hooded chemical resistant clothing, such as coveralls,
two piece chemical splash suit, or disposable chemical resistant
coveralls.
o Level D involves work and/or training situations that require minimal
coverall protection.
In response to the terrorist attacks that took place on September 11,
2001, the federal government has provided for additional protective equipment
funding through programs that are part of the Homeland Security initiative. The
Fire Act of 2002 created the federal Assistance to Firefighters Grant Program,
or AFGP, to provide funds directly to local fire districts to help improve their
readiness and capability to respond to terrorist attacks. Funds are allocated
under AFGP to the following areas: fire operations/firefighter safety; fire
prevention; emergency medical services; and firefighting vehicle acquisition.
AFGP will provide more than $1.8$2.15 billion in funding through 2005, with
approximately $750 million appropriated for 2003, $750 million in 2004, and $650
million more in 2005.2005 and $648 million in 2006. The Bio Terrorism Preparedness
and Response Act of 2002, which we refer to as the Bio Terrorism Act,
appropriated $337$3.643 billion for Bioterrorism Preparedness and $1.641 billion for
Bioterrorism Hospital Preparedness between 2002 and 2005. Hospital Preparedness
is where we expect to see most of our garment sales. The 2006 appropriations
bill provides $550 million for bio-defense equipment and another $770Hospital Preparedness. The $514.6 million to purchase equipment for first
responders, such as fire, police, medical and military personnel. These bio
terrorismof
bioterrorism hospital preparedness monies appropriated in 2005 are expected to
be disbursed in late 20052006 and 2006.2007, and the funding for 2006 should be disbursed in
2007 and 2008.
Recently, federal and state purchasing of industrial protective clothing
and federal grants to fire departments have increased demand for industrial
protective clothing to protect first responders against actual or threatened
terrorist incidents. Specific events such as the 2002 U.S. Winter Olympics, the
SARS epidemic in 2003 the anthrax letters incidents in 2001 and the ricin letter
incidents in 2004 have also resulted in increased demand for our products.
Industry Consolidation
The industrial protective clothing industry is highly fragmented and
consists of a large number of small, closely-held family businesses. DuPont,
Lakeland and Kimberly Clark are the dominant disposable industrial protective
apparel manufacturers. Since 1997, the markets for manufacturing and
distribution have consolidated. A number of large distributors with access to
capital have acquired smaller distributors. The acquisitions include Vallen
Corporation's acquisitions of Safety Centers, Inc., All Supplies, Inc., Shepco
Manufacturing Co., and Century Safety (Canada) and Hagemeyer's acquisition of
Vallen Corporation; W.W. Grainger's acquisitions of Allied Safety, Inc., Lab
Safety Supply, Inc., Acklands Limited, Gempler's safety supply division and Ben
Meadows, Inc.; Air Gas' acquisitions of Rutland Tool & Supply Co., Inc., IPCO
Safety Supply, Inc., Lyon Safety, Inc., Safety Supply, Inc., Safety West, Inc.
and Delta Safety Supply, Inc.; and Fischer Scientific's acquisitions of Safety
Services of America, Cole-Parner, Retsch and Emergo.
As these safety distributors consolidate and grow, we believe they are
looking to reduce the number of safety manufacturing vendors they deal with and
support, while at the same time shifting the burden of end user selling to
6
the manufacturer. This creates a significant capital availability issue for
small safety manufacturers as end user selling is more expensive, per sales
dollar, than selling to safety distributors. As a result, the manufacturing
sector in this industry is seeing follow-on consolidation. DuPont has acquired
Marmac Manufacturing, Inc., Kappler, Inc., Cellucup, Melco, Mfg., and Regal
Manufacturing since 1998, while in the related safety product industries
Norcross Safety Products L.L.C. has acquired Morning Pride, Ranger-Servus,
Salisbury, North and Pro Warrington and Christian Dalloz has acquired Bacou, USA
which itself acquired Uvex Safety, Inc., Survivair, Howard Leight, Perfect Fit,
Biosystems, Fenzy, Titmus, Optrel, OxBridge and Delta Protection.
We believe a larger industrial protective clothing manufacturer has
competitive advantages over a smaller competitor 5
including:
o economies of scale when selling to end users, either through the use of a
direct sales force or independent representation groups;
o broader product offerings that facilitate cross-selling opportunities;
o the ability to employ dedicated protective apparel training and selling
teams;
o the ability to offer volume and growth incentives to safety distributors;
and
o access to international sales.
We believe we have a substantial opportunity to pursue acquisitions in the
industrial protective clothing industry, particularly because many smaller
manufacturers share customers with us.
Business Strategy
Key elements of our strategy include:
o IncreaseDealing with Price Increases in cost of Raw Material and potential decrease in
gross profits.
OurMaterials. One major supplier, DuPont,
increased the costprice of Tyvek and
related raw materialsfabrics by 3.7% commencingin January, 1,2005, by 4 to 6%
in June 2005 and by 4.9% in November 2005. However, in June of 2005 DuPont
is also onepublished new garment price increases of our major competitors in the industrial
protective clothing market. To date DuPont has not raised4% to 6%, depending on
style, and again increased garment prices in November 2005 by 6%. These
increases were mostly predicated upon increases in oil and natural gas
which are prime components in the manufacturing of Tyvek. We react to such
increases by increasing our fiscal 2006. Therefore,inventories of Tyvek roll goods prior to such
announced increases. Additionally, we have negotiated discounts on such
roll goods based upon volume purchases. Nonetheless, Tyvek garment pricing
to prime volume accounts was competitive in order
to maintain our market share we may absorb this increased raw
material cost until such time as garment prices increase.
Thus, fiscal 2006 may absorb a costthe fourth quarter of sales increase without
an offset in revenues, which may have a negative effect on
gross profit and gross profit as a percentage of sales in fiscal
2006. In order to offset this decrease in gross profit,any negative effect of these prices increases we
are continuing the operating cost reduction programsprogram already in effect and
have initiated new measures.
For example:
1) Certain SG&A expenses have been revamped that will
render a net cost savings.
2) In contrast1. We continue to last year, we will not incur interest
expense onpress our raw material and component
suppliers for price reductions and better payment terms.
2. We are sourcing more raw materials and components from
our China based operations as opposed to sourcing in
Europe and North America.
3. We are re-engineering many products so as to reduce the
revolving credit facilities.
3) We have also negotiated cost decreasesamount of raw materials used and reduce the direct labor
in other
non-DuPont raw materials.
4) The company intends to acquire the real estate it
utilizes in Decatur, Alabama and Ronkonkoma, NY, thereby
eliminating rent expense of $615,000 annually, the
saving from which will be partially offset by an
increase in depreciation expense.such products.
o Increase Sales to the First Responder Market. Our high-end chemical
protective suits meet all of the regulatory standards and requirements and
are particularly well qualified to provide protection to first responders
to chemical or biological attacks. For example, our products have been
used for response to recent threats such as the 2001 anthrax letters and
the 2004 ricin letters. A portion of appropriations for the Fire Act of
2002 and the
7
Bio Terrorism Act of 2002 are available for purchase of products for first
responders that we manufacture, and we intend toare aggressively targettargeting this Homeland
Security market.
o Improve Marketing in Existing Markets. We believe significant growth
opportunities are available to us through the better positioning,
marketing and enhanced cross-selling of our reusable woven protective
clothing, glove and arm guards and high-end chemical suit product lines,
along with our limited use/disposable lines.lines as a bundled offering. This
allows our customers one stop shopping using combined freight shipments.
o Decrease Manufacturing Expenses by Moving Production to International
Facilities. We have additional opportunities to take advantage of our low
cost production capabilities in Mexico and China. Beginning in 1995, we
successfully moved the labor intensive sewing operation for our limited
use/disposable protective clothing lines to these facilities. Beginning
January 1, 2005, pursuant to the United States 6
World Trade Organization
Treaty with China, the reduction in quota requirements and tariffs imposed
by the U.S. and Canada on textiles goods such as our reusable woven
garments and gloves are scheduled to be removed, makinghave made it more cost effective to move production for these
product lines to our assembly facilities in China. We are in the early
stages ofhalf way through
this process and expect to complete this process by the thirdfourth quarter of
fiscal 2006.2007. As a result, we expect to see profit margin improvements for
these product lines, which will allow us to compete more effectively as
the quota restrictions are removed.removed and tariffs lowered. There are currently no
items we produce in China subject to quotas. There are only a few minor
items in our Mifflin Valley line which would presently fall into quota
restraints. At this time, no such items are produced in China.
o Increase International Sales Opportunities. We also intend to increase our
penetration of the International markets for our product lines. We have
recently opened new sales offices in Beijing, China; Tokyo, Japan; and
Santiago, Chile: Our sales in our existing Canadian and United Kingdom
operations grew by 21.5% and 35.9% respectively in fiscal 2006.
o Emphasize Customer Service. We continue to offer a high level of customer
service to distinguish our products and to create customer loyalty. We
offer well-trained and experienced sales and support personnel, on-time
delivery and accommodation of custom and rush orders. We also seek to extensively
advertise our brand names.
o Acquisitions. We believe that the protective clothing market is fragmented
and presents the opportunity to acquire businesses that offer comparable
products or specialty products that we do not offer. We intend to consider
acquisitions that afford us economies of scale, enhanced opportunity for
cross-selling, expanded product offerings and an increased market
presence. We currently have no lettersan option to purchase for $2.75 million the
plant and machinery of intent or
understandings with respect to any potential acquisitions.the Indian glove operation, that we are presently
leasing and at which we are producing gloves. We also acquired Mifflin
Valley, Inc., a manufacturer of high visibility protective clothing in
August 2005.
o Introduction of New Products. We continue our history of product
development and innovation by introducing new proprietary products across
all our product lines. Our innovations have included Micromax(R)
disposable protective clothing line, our Despro(TM) patented glove design,
Microgard antimicrobial products for food service and our engineered
composite glove products for high cut and abrasion, our Thermbar glove and
sleeve products for heat protection, Grapolator(TM) sleeve lines for hand
and arm cut protection and our Thermbar(TM) Mock Twist glove for hand and
arm heat protection. We own seven14 patents on fabrics and production machinery
and have eight9 additional patents in application. We will continue to dedicate
resources to research and development.
o Increase Penetration of the North American Tyvek(R) Market. We intend to
increase our sales of Tyvek(R)-based garments by introducing Tyvek(R) in
industries which have generally used woven reusable garments, such as food
processing and food service industries including kitchens, grocery stores
and chicken and fishery slaughter operations. We believe that limited
use/disposable garments are more effective at preventing contamination
than reusable garments that are exposed to possible contamination while in
transit or while being laundered. We also plan to expand our sales of
Tyvek(R)-based products and marketing efforts in Mexico and Canada.
Industrial safety gear utilized in U.S. manufacturing often gains
acceptance as standard equipment for new facilities and factories operated
by U.S. companies in other countries.
8
Our Competitive Strengths
Our competitive strengths include:
o Industry Reputation. We devote significant resources to creating customer
loyalty by accommodating custom and rush orders and focusing on on-time
delivery. Additionally, our ISO 9001 certified facilities manufacture
high-quality products. As a result of these factors, we believe that we
have an excellent reputation in the industry.
o Long-standing Relationship with DuPont. We believe we are the largest
independent customer for DuPont's Tyvek(R) and TyChem(R) material for use
in the industrial protective clothing market. Our trademark agreements
with DuPont for Tyvek(R), TyChem(R) and Kevlar(R) require certain quality
standards and the identification of the DuPont brand on the finished
product. We believe this brand identification with DuPont significantly
benefits the marketing of our product lines, as over the past 30 years
Tyvek(R) has become known as the standard for limited use/disposable
protective clothing. We believe our relationship with DuPont to be
excellent.
o International Manufacturing Capabilities. We have operated our own
manufacturing facilities in Mexico since 1995 and in China since 1996. Our
three facilities in China total over 160,000 sq. ft. of manufacturing,
warehousing and administrative space while our facility in Mexico totals
over 25,000 sq. 7
ft. of manufacturing, warehousing and administrative
space. Our facilities and capabilities in China and Mexico allow access to
a less expensive labor pool than is available in the United States and
permitpermits us to purchase certain raw materials at a lower cost than they are
available domestically.
o India. We are currently leasing a 30,155 square foot facility in New
Delhi, India where we are producing nitrile, latex and neoprene gloves
which are being sold in Europe and South America presently. We intend to
enter the North American market in autumn 2006 with a newly designed line
of gloves. We have an option to purchase this facility after November
2006, if we are satisfied with its production and quality.
o Sales Offices. We have sales offices around the world to service various
major markets, Toronto, Canada for Canada, Newport, United Kingdom for the
European Common Market, Beijing, China for China and Southeast Asia,
Tokyo, Japan for Japan and Santiago, Chile for the South American market.
o Comprehensive Inventory. We have a large product offering with numerous
specifications, such as size, styles and pockets, and maintain a large
inventory of each in order to satisfy customer orders in a timely manner.
Many of our customers traditionally make purchases of industrial
protective gear with expectations of immediate delivery. We believe our
ability to provide timely service for these customers enhances our
reputation in the industry and positions us strongly for repeat business,
particularly in our limited use/disposable protective clothing product lines.
o Manufacturing Flexibility. By locating labor-intensive manufacturing
processes such as sewing in Mexico and China, and by utilizing sewing
sub-contractors, we have the ability to increase production without
substantial additional capital expenditures. Our manufacturing systems
allow us flexibility for unexpected production surges and alternative
capacity in the event any of our independent contractors become
unavailable.
o Experienced Management Team. We have an experienced management team. Our
executive officers other than the CFO average greater than 2021 years of
experience in the industrial protective clothing market. The knowledge,
relationships and reputation of our management team helps us maintain and
build our customer base.
89
Products
The following table summarizes our principal product lines, the raw
materials used to manufacture them, their applications and end markets:
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Product Line Raw Material Protection Against End Market
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Limited use/disposable o Tyvek(R) and laminates o Contaminants, o Chemical/petrochemicalpetrochemic
protective clothing laminates of Polyethylene, irritants, metals, al industries
Polyethylene,Spunlaced Polyester, chemicals, fertilizers, o Automotive and
Spunlaced Polyester, fertilizers, pharmaceutical
SMS, Polypropylene, pesticides, acids, industriespharmaceutical
and Company Micromax, asbestos, PCBs, lead, industries
Micromax, Micromax dioxin and many other o Public utilities
NS, Pyrolon(R), and lead, dioxin andhazardous chemicals o Government (terrorist
other non-woven many other hazardous (terrorist response)
fabrics chemicals o Janitorial o Viruses and bacteria response)
fabrics (AIDS, o Janitorial
streptococcus,SARS o Medical Facilities
bacteria (AIDS,
streptococcus,SARS
and hepatitis)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
High-end chemical protective o TyChem(R)QC o Chemical spills o Hazardous material
suits o TyChem(R) SL o Toxic chemicals used teams
o TyChem(R) TK in manufacturing o Chemical and nuclear
o TyChem(R) F processes industries
o TyChem(R) BR processes nuclear industries
o Other Lakeland o Terrorist attacks, o Fire departments
patented co-polymero Pyrolon CRFR biological warfare o Government (first
laminateso Other Lakeland (anthrax and ricin) responders)
patented co-polymer
laminates
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fire fighting and heat o PBI o Fire, burns and o Municipal, corporate
protective apparel o Nomex(R) excessive heat and volunteer fire
o Millenia(R) departments
o Basofil(R) o Wildland fire fighting
o Advance o Hot equipment
o Indura(R) Ultrasoft maintenance personnel
o Aluminized Nomex(R) and industrial fire
o Aluminized Kevlar(R) departments
o Oil well fires
o Airport crash rescue
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gloves and arm guards ((1)) o Kevlar(R) yarns o Cuts, lacerations, heat o Automotive, glass and
o Spectra(R) yarns and chemical irritants and metal fabrication
o Kevlar(R) wrapped industries
steel industries core yarns o Chemical plants
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Reusable woven garments o Staticsorb carbon o Protects manufactured o Hospital and industrial
thread with polyester products from human facilities
o Cotton polyester contamination or static o Clean room environments
blends electrical charge environmentso Emergency medical
o Cotton o Bacteria, viruses and o Emergency medicalambulance services
o Polyester blood borne pathogens ambulance serviceso Chemical and refining
o Nomex(R)/FR o Chemical and Cottons o Protection from flash
refining
fires
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
--------
(1) Industrial grade Nitrile, Latex, Neoprene, Buytl and other combinations
thereof will be added to our product line if we exercise our option to acquire
the Indian glove facility we are working with now. These industrial gloves are
used to protect workers from hazardous chemicals and will complement our line of
cut resistant Kevlar and Spectra string knit gloves.
10
Limited Use/Disposable Protective Clothing
We manufacture a complete line of limited use/disposable protective
garments, including coveralls, laboratory coats, shirts, pants, hoods, aprons,
sleeves, arm guards, caps, and smocks. Limited use garments can also be coated
or laminated to increase splash protection against many inorganic acids, bases
and other liquid chemicals. Limited use garments are made from several non-woven
fabrics, including Tyvek(R) and TyvekTyChem QC (both DuPont fabrics) and our own
trademarked fabrics such as Pyrolon(R) Plus 2, XT, CRFR, Micromax(R), Micromax
NS, Safegard "76" (R), Zonegard,Zonegard(R), Body Gard(R), RyTex(R) and TomTex(R), which
are made of spunlaced polyester, polypropylene and polyethylene materials,
laminates, films and derivatives. We incorporate many seaming and taping
techniques depending on the level of protection needed in the end use
application.
Typical users of these garments include chemical plants, petrochemical
refineries and related installations, automotive
9
manufacturers, pharmaceutical
companies, construction companies, coal and oil power generation utilities and
telephone utility companies. Numerous smaller industries use these garments for
specific safety applications unique to their businesses. Additional applications
include protection from viruses and bacteria, such as AIDS, streptococcus, SARS
and hepatitis, at hospitals, clinics and emergency rescue sites and use in clean
room environments to prevent human contamination in the manufacturing processes.
Our limited use/disposable protective clothing products range in unit
price from $.04 for shoe covers to approximately $14.00 for a TyChem(R) QC
laminated hood and booted coverall. Our largest selling item, a standard white
Tyvek(R) coverall, sells for approximately $2.75$2.50 to $3.75 per garment. By
comparison, similar reusable cloth coveralls range in price from $30.00 to
$60.00, exclusive of laundering, maintenance and shrinkage expenses.
We cut, warehouse and sell our limited use/disposable garments primarily
at our Decatur, Alabama and China facilities.facilities and warehouse in Las Vegas, NV and
Shillington, PA. The fabric is cut into required patterns at our Decatur plant
and shipped to our Mexico facility for assembly. Our assembly facilities in
China or Mexico and independent contractors sew and package the finished
garments and return them primarily to our Decatur, Alabama plant, normally
within one to eight weeks, for immediate shipment to the customer.
We presently utilize nineone independent domestic sewing contractorscontractor and one
international contractor under agreements that are terminable at will by either
party. In fiscal 2004,2006, no independent sewing contractor accounted for more than
5% of our production of limited use/disposable garments. We believe that we can
obtain adequate alternative production capacity should any of our independent
contractors become unavailable.
The capacity of our facilities, complemented by the availability of
ourexisting and other available independent sewing contractors, allow us to reduce
by 10%5%, or alternately increase by 20%10%, our production capacity without incurring
large on going costs typical of many manufacturing operations. This allows us to
react quickly to changing unit demand for our products.
High-End Chemical Protective Suits
We manufacture heavy-duty chemical suits made from DuPont TyChem(R) QC,
SL, TK, TyChem F and TyChem(R) BR fabrics. These suits are worn by individuals
on hazardous material teams to provide protection from powerful, highly
concentrated and hazardous or potentially lethal chemical and biological toxins,
such as toxic wastes at Super Fund sites, toxic chemical spills or biological
discharges, chemical or biological warfare weapons (such as anthrax, ricin, or
ricin)saran gas), and chemicals and petro-chemicals present during the cleaning of
refineries and nuclear facilities. Our line of chemical suits range in cost from
$24 per coverall to $1,926.$1192. The chemical suits can be used in conjunction with a
fire protective shell that we manufacture to protect the user from both chemical
and flash fire hazards. We have also introduced two garments approved by the
National Fire Protection Agency (NFPA) for varying levels of protection that are
manufactured from DuPont materials:
o TyChem(R) TK - a co-polymer film laminated to a durable spun bonded
substrate. This garment offers the broadest temperature range for limited
use garments of -94(degree)F to 194(degree)F. TyChem(R) TK meets all OSHA
Level A requirements. It is available in National Fire Protection Agency
1991-2000 certified versions when worn with an aluminized over cover.
o TyChem(R) BR - meets all OSHA Level B and all National Fire Protection
Agency 1994 fabric requirements and offers splash protection against a
wide array of chemicals.
We manufacture chemical protective clothing at our facilities in Decatur,
Alabama, Mexico and China. Using fabrics such as TyChem(R) SL, TyChem(R) TK,
TyChem F, and TyChem(R) BR, we design, cut, glue and/or sew the
11
materials to meet customer purchase orders.
The federal government, through the Fire Act of 2002, appropriated
approximately $750 million in 2003 to fire departments in the United States and
its territories to fund the purchase of, among other things, personal protective
equipment, including our fire fighting and heat protective apparel and high-end
chemical protective suits. An additional $750 million was appropriated for 2004,
and $650 million for 2005.2005 and $648 million for 2006. The Bio Terrorism Preparedness
and Response Act of 2002 includes an appropriationincluded appropriations of $337$3.643 billion for
Bioterrorism Preparedness and $1.641 billion for Bioterrorism Hospital
Preparedness between 2002 and 2005. Hospital Preparedness is where we expect to
see most of our garment sales. The 2006 appropriations bill provides $550
million for bio-defense equipment and
$770 million to purchase equipment for first responders, such as fire, police,
medical and military personnel. Purchases of equipment under these
appropriations will include our personal protective equipment and are expected
to be made in late 2005 and in 2006.Hospital Preparedness.
Fire Fighting and Heat Protective Apparel
We manufacture an extensive line of products to protect individuals who
work in high heat environments. Our heat 10
protective aluminized fire suit product
lines include the following:
o Fire entry suit - to allow total flame entry when dealing with
volatile and highly flammable products.
o Kiln entry suit - to protect kiln maintenance workers from extreme heat.
o Proximity suits - to give protection in high heat areas where exposure to
hot liquids, steam or hot vapors is possible.
o Approach suits - to protect personnel engaged in maintenance, repair and
operational tasks where temperatures do not exceed 200(degree)F ambient,
with a radiant heat exposure up to 2,000(degree)F.
We manufacture fire fighter protective apparel for domestic and foreign
fire departments. We developed the popular Sterling Heights(TM) style (short
coat and bib pants) bunker gear. Crash rescue continues to be a major market for
us, as we were one of the first manufacturers to supply military and civilian
markets with airport fire fighting protection.
Our fire suits range in price from $480 for standard fire department turn
out gear to $2,000 for a fire entry suit. Approximately half70% of our heat
protective clothing is currently manufactured at our facility in St. Joseph,
Missouri with the remainder being made in our China facilities. Our Fyrepel(TM)
brand of fire fighting apparel continues to benefit from ongoing research and
development investment, as we seek to address the ergonomic needs of stressful
occupations. Additionally, we have introduced a new line of turnout gear
manufactured in China in order to compliment our US line.
Gloves and Arm Guards
We manufacture and sell specially designed gloves and arm guards made from
Kevlar(R), a cut and heat resistant material produced by DuPont, Spectra(R), a
cut resistant fiber made by Honeywell, and our proprietary patented yarns. We
are one of only seven companies licensed in North America to sell 100% Kevlar(R)
gloves, which are high strength, lightweight, flexible and durable. Kevlar(R)
gloves offer a better overall level of protection and lower worker injury rates,
and are more cost effective, than traditional leather, canvas or coated work
gloves. Kevlar(R) gloves, which can withstand temperatures of up to 400(degree)F
and are cut resistant enough to allow workers to safely handle sharp or jagged
unfinished sheet metal, are used primarily in the automotive, glass and metal
fabrication industries. Our higher end Kevlar(R) and Spectra(R) gloves range in
price from $37 to $240 for a dozen pair.
We manufacture gloves primarily at our MexicanAlabama and AlabamaMexican facilities, and
we are shifting lower cost yarn production to our China facilities. We expectcompleted
our shift of glove production to completeMexico this shift by the second quarter ofyear and will continue shifting
more to our Chinese facilities and our Indian glove facility (if we exercise our
option to acquire) in this fiscal 2006 as quotasyear and tariffs
on products of this type expire.next fiscal year. Foreign production
will allow lower fabric and labor costs.
We have applied forreceived patents on manufacturing processes that provide hand
protection to the areas of a glove where it is most neededwears out prematurely in various
applications. For example, while the top or backareas of athe thumb crotch, and index fingers are
made heavier than the balance of the glove generally does not
require the same thickness as the palm or thumb of aproviding increased wear protection
and longer glove gloves typically
have a uniform level of yarn protection.life reducing overall glove costs. This proprietary
manufacturing process allows us to produce our gloves more economically.economically and
provide a greater value to our end user.
Reusable Woven Garments
We manufacture and market a line of reusable and washable woven garments
that complement our fire fighting
12
and heat protective apparel offerings and provide alternatives to our limited
use/disposable protective clothing lines and give us access to the much larger
woven industrial and health care-related markets. Cloth reusable garments are
favored by customers for certain uses or applications because of familiarity
with and acceptance of these fabrics and woven cloth's heavier weight,
durability and longevity. These products allow us to supply and satisfy a wider
range of safety and customer needs. Our product lines include the following:
o Electrostatic dissipative apparel - used primarily in the automotive
industry.
o Clean room apparel - used in semiconductor manufacturing and
pharmaceutical manufacturing to protect against human contamination.
o Flame resistant Nomex(R)/FR Cotton coveralls/pants/jackets - used in
chemical and petroleum plants and for wild land firefighting.
11
o Hospital garments - used to protect against blood borne
pathogensCotton and common bacteria.Polycotton coveralls, lab coats, pants, and shirts.
Our reusable woven garments range in price from $10 to $100 per garment.
We manufacture and sell woven cloth garments at our facilities in China and St.
Joseph, Missouri. We are continuing to relocate highly repetitive sewing
processes for our high volume, standard product lines such as woven protective
coveralls and electrostatic dissipative apparelhigh visibility vests and shirts to our facilities in China where
lower fabric and labor costs allow increased profit margins. We expect the
relocation process to be substantially complete by the thirdfourth quarter of fiscal
2006.2007.
High Visibility Clothing
In August 2005, we acquired the assets of Mifflin Valley, Inc. of
Shillington, PA. Mifflin is a manufacturer of protective clothing specializing
in safety and visibility, largely for the Emergency Services market, but also
for the entire public safety and traffic control market. Mifflin's high
visibility products include Flame Retardant garments for the Fire Industry,
Nomex clothing for utilities, and high visibility Reflective Outerwear for
Departments of Transportation. Mifflin products are our strategic fit for our
Woven and Fire Line of garments and we expect higher than normal sales growth
out of this subsidiary as our existing sales force starts promoting this new
line.
Quality Control
Our Alabama, Missouri, Mexico and China manufacturing facilities are ISO
9001 certified. ISO standards are internationally recognized quality
manufacturing standards established by the International Organization for
Standardization based in Geneva, Switzerland. To obtain our ISO registration,
our factories were independently audited to test our compliance with the
applicable standards. In order to maintain registration, our factories receive
regular announced inspections by an independent certification organization. We
believe that the ISO 9001 certification makes us more competitive in the
marketplace, as customers increasingly recognize the standard as an indication
of product quality.
Marketing and Sales
We employ an in-house sales force of 17 people, 3 regional sales managers
and utilize 42 independent sales representatives. These employees and
representatives call on over 800 safety and mill supply distributors nationwide
in order to promote and provide product information for and sell our products.
Distributors buy our products for resale and typically maintain inventory at the
local level in order to assure quick response times and the ability to service
their customers properly. Our sales employees and independent representatives
have consistent communication with end users and decision makers at the
distribution level, thereby allowing us valuable feedback on market perception
of our products, as well as information about new developments in our industry.
During fiscal 2005,2006, one single distributor accounted for 5.7%5% of our net sales. No
other single distributor accounted for more than 5% of our net sales.
We seek to maximize the efficiency of our established distribution network
through direct promotion of our products at the end user level. We advertise
primarily through trade publications and our promotional activities include
sales catalogs, mailings to end users, a nationwide publicity program and our
Internet web site. We exhibit at both regional and national trade shows such as
the National Safety Congress and the American Industrial Hygienists Convention.
13
Research and Development
We continue to evaluate and engineer new or innovative products. In the
past three years we have introduced the Micromax(R) line of disposable
protective clothing; a newly configured line of fire retardant work coveralls
and fire turn-out gear; a SARS protective medical gown for Chinese hospital
personnel; the Despro(TM), Grapolator(TM) and Kut Buster(TM)Microgard-anti microbial cut
protective glove and sleeve lines;lines for food service; and our patented
Thermbar(TM) Mock Twist that provides heat protection for temperatures up to
600(degree)F. We own seven14 patents on various fabrics, patterns and production
machinery. We plan to continue investing in research and development to improve
protective apparel fabrics and the manufacturing equipment used to make apparel.
Specifically, we plan to continue to develop new specially knit and coated
gloves, woven gowns for industrial and medical uses, fire retardant cotton
fabrics and protective non-woven fabrics. During fiscal 2003, 2004, 2005 and 2005,2006, we
spent approximately $164,000, $82,000, $89,000, and $89,000$90,000 respectively, on research and
development.
Suppliers and Materials
Our largest supplier is DuPont, from whom we purchase Tyvek(R) under North
American trademark licensing agreements and Kevlar(R) under international
trademark licensing agreements. Commencing in 1995, anticipating the expiration
of certain patents on its proprietary materials, DuPont offered certain
customers of these materials the opportunity to enter into two year trademark
licensing agreements. We entered into such agreements and have renewed them
continually since. In fiscal 2005,2006, we purchased approximately 74.7%74.1% of the
dollar value of our materials from DuPont, and Tyvek(R) constituted
approximately 55.5%64.4% of our cost of goods sold and approximately 67.5%69.1% of the dollar value of
our raw material purchases. We believe our relationship with DuPont to be
excellent and expect to continue our licenses.Tyvek/Tychem trade mark licenses with DuPont have been
extended until January 31, 2008.
We do not have long-term, formal agreements with any other suppliers of
non-woven fabric raw materials used by us in the production of our limited
use/disposable protective clothing product lines. Materials such as
polypropylene, polyethylene, polyvinyl chloride, spun laced polyester and their
derivatives are available from thirty or more major mills. Flame retardant
fabrics are also available from a number of both domestic and international
mills. The accessories used in the production of our disposable garments, such
as thread, boxes, snaps and elastics are obtained from unaffiliated
12
suppliers.
We have not experienced difficulty in obtaining our requirements for these
commodity component items.
We have not experienced difficulty in obtaining materials, including
cotton, polyester and nylon, used in the production of reusable non-wovens and
commodity gloves. We obtain Spectra(R) yarn used in our super cut-resistant
Dextra Guard gloves from Honeywell, and we believe Honeywell will be able to
meet our needs for this material in the future. We obtain Kevlar(R), used in the
production of our specialty safety gloves, from independent mills that purchase
the fiber from DuPont. Our use of Kevlar(R) is subject to thean international
trademark licensing agreements described above.agreement with DuPont.
Materials used in our fire and heat protective suits include glass fabric,
aluminized glass, Nomex(R), aluminized Nomex(R), Kevlar(R), aluminized
Kevlar(R), polybenzimidazole and Gortex, as well as combinations utilizing
neoprene coatings. Traditional chemical protective suits are made of Viton,
butyl rubber and polyvinyl chloride, all of which are available from multiple
sources. Advanced chemical protective suits are made from Tyvek(R)TyChem(R) SL, TyChem(R) TK and
BR fabrics, which we obtain from DuPont, and our patented fabrics. We have not
experienced difficulty obtaining any of these materials.
Competition
Our business is highly competitive.competitive due to large competitors who have
monopolistic positions in the fabrics that are standards in the industry. We
believe that the barriers to entry in the reusable garments and glove markets
are relatively low. We face competition in some of our other product markets
from large established companies that have greater financial, managerial,research and
development, sales and technical resources. Where larger competitors, such as
DuPont and Kimberly Clark, offer products that are directly competitive with our
products, particularly as part of an established line of products, there can be
no assurance that we can successfully compete for sales and customers. Larger
competitors also may be able to benefit from economies of scale and
technological innovation and may introduce new products that compete with our
products.
Seasonality
Our operations have historically been seasonal, with higher sales
generally occurring in February, March, April and May when scheduled maintenance
on nuclear, coal, oil and gas fired utilities, chemical, petrochemical and
smelting facilities, and other heavy industrial manufacturing plants occurs,
primarily due to coolermoderate spring temperatures. Sales decline during the warmer
summer and vacation months and generally increase from Labor Day
14
through February with slight declines during holidays. As a result of this
seasonality in our sales, we have historically experienced a corresponding
seasonality in our working capital, specifically inventories, with peak
inventories occurring between September and March coinciding with lead times
required to accommodate the spring maintenance schedules. We believe that by
sustaining higher levels of inventory, we gain a competitive advantage in the
marketplace. Certain of our large customers seek sole sourcing to avoid sourcing
their requirements from multiple vendors whose prices, delivery times and
quality standards differ.
In recent years, due to increased demand by first responders for our
chemical suits and fire gear, our historical seasonal pattern has shifted.
Governmental disbursements are dependent upon budgetary processes and grant
administration processes that do not follow our traditional seasonal sales
patterns. Due to the size and timing of these governmental orders, our net
sales, results of operations, working capital requirements and cash flows can
vary between different reporting periods. As a result, we expect to experience
increased variability in net sales, net income, working capital requirements and
cash flows on a quarterly basis.
Patents and Trademarks
We own sixteen14 patents and have nine9 patents in the application and approval
process with the U.S. Patent and Trademark Office. We own 11 Trademarks and have
9 Trademarks in the application and approval process. Additionally, a Patent
Corporation Treaty application was filed for our Unilayer Glove Fabrics which
involves technology using a robotic knitter that allows us to knit a glove using
stronger or weaker yarns in different parts of the glove, as necessary,
depending on the expected wear. Intellectual property rights that apply to our
various products include patents, trade secrets, trademarks and to a lesslesser
extent copyrights. We maintain an active program to protect our technology by
ensuring respect for our intellectual property rights. We presently have no
contracts with these unions
Employees
As of March 31, 2005,2006, we had approximately 1,4581,634 full time employees,
1,176,1,348, or 80.7%82.50%, of whom were employed in our international facilities and 282,286,
or 19.3%17.50%, of whom were employed in our domestic facilities. An aggregate of 643582
of our employees, representing a majority of our employees in our Mexico
facility and in each of our China facilities, are members of unions. We are not
currently a party to any collective bargaining agreements. We believe our
employee relations to be excellent. We presently have no contracts with these
unions.
Environmental Matters
13
We are subject to various foreign, federal, state and local environmental
protection, chemical control, and health and safety laws and regulations, and we
incur costs to comply with those laws. We own and lease real property, and
certain environmental laws hold current or previous owners or operators of
businesses and real property responsible for contamination on or originating
from property, even if they did not know of or were not responsible for the
contamination. The presence of hazardous substances on any of our properties or
the failure to meet environmental regulatory requirements could affect our
ability to use or to sell the property or to use the property as collateral for
borrowing, and could result in substantial remediation or compliance costs. If
hazardous substances are released from or located on any of our properties, we
could incur substantial costs and damages.
Although we have not in the past had any material costs or damages
associated with environmental claims or compliance and we do not currently
anticipate any such costs or damages, we cannot assure you that we will not
incur material costs or damages in the future, as a result of the discovery of
new facts or conditions, acquisition of new properties, the release of hazardous
substances, a change in interpretation of existing environmental laws or the
adoption of new environmental laws.
Available Information
We make available free of charge through our Internet website,
www.lakeland.com, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission.
ITEM 1A. RISK FACTORS
- ----------------------
RISK FACTORS
You should carefully consider the following risks before investing in our
common stock. These are not the only risks that we may face. If any of the
events referred to below actually occurs, our business, financial condition,
liquidity and results of operations could suffer. In that case, the trading
price of our common stock could decline
15
and you may lose all or part of your investment. You should also refer to the
other information in this Form 10-K and Annual Report and in the documents we
incorporate by reference into this Form 10-K and Annual Report, including our
consolidated financial statements and the related notes.
Risk Related to Our Business
We rely on a limited number of suppliers and manufacturers for specific fabrics,
including Tyvek(R) and Tychem(R), and we may not be able to obtain substitute
suppliers and manufacturers on terms that are as favorable, or at all, if our
supplies are interrupted.
Our business is dependent to a significant degree upon close relationships
with vendors and our ability to purchase raw materials at competitive prices.
The loss of key vendor support, particularly support by DuPont for its Tyvek(R)
products, could have a material adverse effect on our business, financial
condition, results of operations and cash flows. We do not have long-term supply
contracts with DuPont or our other fabric suppliers. In addition, DuPont also
uses Tyvek(R) and Tychem (R) in some of its own products which compete directly
with our products. As a result, there can be no assurance that we will be able
to acquire Tyvek(R), Tychem(R) and other raw materials and components at
competitive prices or on competitive terms in the future. For example, certain
materials that are high profile and in high demand may be allocated by vendors
to their customers based upon the vendors' internal criteria, which are beyond
our control.
In fiscal 2006, we purchased approximately 74.01% of the dollar value of
our raw materials from DuPont, and Tyvek(R) constituted approximately 69.1% of
our cost of goods sold. For periods in 1985 and 1989, DuPont placed all
purchasers of Tyvek(R) on "allocation." "Allocation" is a circumstance in which
demand outstrips supply and fabrics are sold based upon the amount a buyer
purchased the prior year. This allocation limited our ability to meet demand for
our products. There can be no assurance that an adequate supply of Tyvek(R) or
Tychem(R) will be available in the future. Any shortage could adversely affect
our ability to manufacture our products, and thus reduce our net sales.
Other than DuPont's Tyvek(R) and TyChem(R) fabrics, we generally use
standard fabrics and components in our products. We rely on non-affiliated
suppliers and manufacturers for the supply of these fabrics and components that
are incorporated in our products. If such suppliers or manufacturers experience
financial, operational, manufacturing capacity or quality assurance
difficulties, or if there is a disruption in our relationships, we will be
required to locate alternative sources of supply. We cannot assure you that we
will be able to locate such alternative sources. In addition, we do not have any
long-term contracts with any of our suppliers for any of these components. Our
inability to obtain sufficient quantities of these components, if and as
required in the future, may result in:
o Interruptions and delays in manufacturing and resulting
cancellations of orders for our products;
o Increases in fabrics or component prices that we may not be able to
pass on to our customers; and
o Our holding more inventory that normal because we cannot finish
assembling our products until we have all of the components
We are subject to risk as a result of our international manufacturing
operations.
Because most of our products are manufactured at our facilities located in
China and Mexico, our operations are subject to risk inherent in doing business
internationally. Such risks include the adverse effects on operations from war,
international terrorism, civil disturbances, political instability, governmental
activities and deprivation of contract and property rights. In particular, since
1978, the Chinese government has been reforming its economic and political
systems, and we expect this to continue. Although we believe that these reforms
have had a positive effect on the economic development of China and have
improved our ability to successfully operate our facilities in China, we cannot
assure you that these reforms will continue or that the Chinese government will
not take actions that
16
impair our operations or assets in China. In addition, periods of international
unrest may impede our ability to manufacture goods in other countries and could
have a material adverse effect on our business and results of operations.
Our results of operations could be negatively affected by potential fluctuations
in foreign currency exchange rates.
Most of our assembly arrangements with our foreign-based subsidiaries or
third party suppliers require payment to be made in U.S. dollars. These payments
aggregated $9.9 million in fiscal 2006. Any decrease in the value of the U.S.
dollar in relation to foreign currencies could increase the cost of the services
provided to us upon contract expirations or supply renegotiations. There can be
no assurance that we will be able to increase product prices to offset any such
cost increases and any failure to do so could have a material adverse effect on
our business, financial condition and results of operations.
We are also exposed to foreign currency exchange rate risks as a result of
our sales in foreign countries. Our net sales to customers in Canada and China
were $8.1 million, in fiscal 2006. Our sales in Canada are denominated in
Canadian dollars. If the value of the U.S. dollar increases relative to the
Canadian dollar and we are unable to raise our prices proportionally, then our
profit margins could decrease because of the exchange rate change. Although our
fabric and compenent costs in China are denominated in the Chinese Yuan, this
currency has historically been largely pegged to the U.S. dollar, which has
minimized our foreign currency exchange rate risk in China. Recently, however
the Chinese Yuan has been allowed to float against to the U.S. dollar, and
therefore, we will be exposed to additional foreign currency exchange rate risk.
This risk will also increase as we continue to increase our sales in other
foreign countries. See "Management's Discussion and Analysis of Financial
condition and Results of Operations - Quantitative and Qualitative Disclosures
About Market Risk - Foreign Currency Risk."
Rapid technological change could negatively affect sales of our products and our
performance.
The rapid development of fabric technology continually affects our apparel
applications and may directly impact the performance of our products. For
example, microporous film-based products have eroded the market share of
Tyvek(R) in certain applications. We cannot assure you that we will successfully
maintain or improve the effectiveness of our existing products, nor can we
assure you that we will successfully identify new opportunities or continue to
have the needed financial resources to develop new fabric or apparel
manufacturing techniques in a timely or cost-effective manner. In addition,
products manufactured by others may render our products obsolete or
non-competitive. If any of these events occur, our business, prospects,
financial condition and operating results will be materially and adversely
affected.
Acquisitions or future expansion could be unsuccessful.
Mifflin Valley, Inc., a Pennsylvania company, acquired on August 1, 2005,
and a portion of the assets of RFB Latex, an Indian company, which we have the
option to acquire in autumn 2006 currently market high visibility clothing and
chemically resistant gloves. These two new lines may accelerate our growth in
the personal protective equipment market. This past and potential upcoming
acquisition involve various risks, including: difficulties in integrating these
companies' operations, technologies, and products, the risk of diverting
management's attention from normal daily operations of the business; potential
difficulties in completing projects associated with in-process research and
development; risks of entering markets in which we have limited experience and
where competitors in such markets have stronger market positions; initial
dependence on unfamiliar supply chains; and insufficient revenues to offset
increased expenses associated with these acquisitions.
In the future, we may seek to acquire additional selected safety products
lines or safety-related businesses which
17
will complement our existing products. Our ability to acquire these businesses
is dependent upon many factors, including our management's relationship with the
owners of these businesses, many of which are small and closely held by
individual stockholders. In addition, we will be competing for acquisition and
expansion opportunities with other companies, many of which have greater name
recognition, marketing support and financial resources than us, which may result
in fewer acquisition opportunities for us as well as higher acquisition prices.
There can be no assurance that we will be able to identify, pursue or acquire
any targeted business and, if acquired, there can be no assurance that we will
be able to profitably manage additional businesses or successfully integrate
acquired business into our company without substantial costs, delays and other
operational or financial problems.
If we proceed with any significant acquisition for cash, we may use a
substantial portion of our available cash in order to consummate any such
acquisition. We may also seek to finance any such acquisition through debt or
equity financings, and there can be no assurance that such financings will be
available on acceptable terms or at all. If consideration for an acquisition
consists of equity securities, our stockholders could be diluted. If we borrow
funds in order to finance an acquisition, we may not be able to obtain such
funds on terms that are favorable to us. In addition, such indebtedness may
limit our ability to operate our business as we currently intend because of
restrictions placed on us under the terms of the indebtedness and because we may
be required to dedicate a substantial portion of our cash flow to payments on
the debt instead of to our operations, which may place us at a competitive
disadvantage.
Acquisitions involve a number of special risks in addition to those
mentioned above, including the diversion of management's attention to the
assimilation of the operations and personnel of the acquired companies, the
potential loss of key employees of acquired companies, potential exposure to
unknown liabilities, adverse effects on our reported operating results, and the
amortization or write down of acquired intangible assets. We cannot assure you
that any acquisition by us will or will not occur, that if an acquisition does
occur that it will not materially and adversely affect our results of operations
or that any such acquisition will be successful in enhancing our business.
If we are unable to manage our growth, our business could be adversely affected.
Our operations and business have expanded substantially in recent years,
with a large increase in employees and business areas in a short period of time.
To manage our rapid growth properly, we have been and will be required to expend
significant management and financial resources. There can be no assurance that
our systems, procedures and controls will be adequate to support our operations
as they expand. There can also be no assurance that our management will be able
to manage our growth and operate a larger organization efficiently or
profitably. To the extent that we are unable to mange growth efficiently and
effectively or are unable to attract and retain additional qualified management
personnel, our business, financial condition and results of operations could be
materially and adversely affected.
We must recruit and retain skilled employees, including our senior management,
to succeed in our business.
Our performance is substantially dependent on the continued services and
performance of our senior management and certain other key personnel, including
Christopher J. Ryan, our chief executive officer, president, general counsel and
secretary, and Gary Pokrassa, our chief financial officer, who has 36 years of
financial and accounting experience, and James McCormick our Controller and
treasurer, Greg Willis, our Executive Vice President, and Harvey Pride, Jr., our
vice president in charge of manufacturing, due to their long experience in our
industry. Our executive officers, other than CFO, have an average tenure with us
of 18 years and an average of 21 years of experience in our industry. The loss
of services of any of our executive officers or other key employees could have a
material adverse effect on our business, financial condition and results of
operations. In addition, any future expansion of our business will depend on our
ability to identify, attract, hire, train, retain and motivate other highly
skilled managerial, marketing, customer service and manufacturing personnel and
our inability to do so could have a material adverse effect on our business,
financial condition and results of operations.
18
Because we do not have long-term commitments from many of our customers, we must
estimate customer demand and errors in our estimates could negatively impact our
inventory levels and net sales.
Our sales are generally made on the basis of individual purchase orders,
which may later be modified or canceled by the customer, rather than long-term
commitments. We have historically been required to place firm orders for fabrics
and components with our suppliers, prior to receiving an order for our products,
based on our forecasts of customer demands. Our sales process requires us to
make multiple demand forecast assumptions, each of which may introduce error
into our estimates, causing excess inventory to accrue or a lack of
manufacturing capacity when needed. If we overestimate customer demand, we may
allocate resources to manufacturing products that we may not be able to sell
when we expect or at all. As a result, we would have excess inventory, which
would negatively impact our financial results. Conversely, if we underestimate
customer demand or if insufficient manufacturing capacity is available, we would
lose sales opportunities, lose market share and damage our customer
relationships. On occasion, we have been unable to adequately respond to
delivery dates required by our customers because of the lead time needed for us
to obtain required materials or to send fabrics to our assembly facilities in
China and Mexico.
We face competition from other companies, two of which have substantially
greater resources than we do.
Two of our competitors, DuPont and Kimberly Clark, have substantially
greater financial, marketing and sales resources than we do. In addition, we
believe that the barriers to entry in the reusable garments and gloves markets
are relatively low. We cannot assure you that our present competitors or
competitors that choose to enter the marketplace in the future will not exert
significant competitive pressures. Such competition could have a material
adverse effect on our net sales and results of operations. For further
discussion of the competition we face in our business, see "Business -
Competition."
Some of our sales are to foreign buyers, which exposes us to additional risks.
We derived approximately 9.8% of our net sales from customers located in
foreign countries in fiscal 2006. We intend to increase the amount of foreign
sales we make in the future. The additional risks of foreign sales include: o
Potential adverse fluctuations in foreign currency exchange rates; o Higher
credit risks; o Restrictive trade policies of foreign governments; o Currency
nullification and weak banking institutions; o Changing economic conditions in
local markets; o Political and economic instability in foreign markets; and o
Changes in leadership of foreign governments.
Some or all of these risks may negatively impact our results of operations and
financial condition.
Covenants in our credit facilities may restrict our financial and operating
flexibility.
We currently have one credit facility;
o A five year $25 million revolving credit facility, of which we had
$7.3 million of borrowings outstanding as
19
of January 31, 2006; and
Our current credit facility requires, and any future credit facilities may
also 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. Our ability to satisfy
these financial covenants can be affected by events beyond our control, and we
cannot assure you that we will meet the requirements of these covenants. These
restrictive covenants could affect our financial and operational flexibility or
impede our ability to operate or expand our business. Default under our credit
facilities would allow the lenders to declare all amounts outstanding to be
immediately due and payable. Our lenders have a security interest in
substantially all of our assets to secure the debt under our current credit
facilities, and it is likely that our future lenders will have security
interests in our assets. If our lenders declare amounts outstanding under any
credit facility to be due, the lenders could proceed against our assets. Any
event of default, therefore, could have a material adverse effect on our
business.
We may need additional funds, and if we are unable to obtain these funds, we may
not be able to expand or operate our business as planned.
Our operations require significant amounts of cash, and we may be required
to seek additional capital, whether from sales of equity or by borrowing money,
to fund acquisitions, for the future growth and development of our business or
to fund our operations and inventory, particularly in the event of a market
downturn. Although we have the ability until July 31, 2010 to borrow additional
sums under our $25 million revolving credit facility, this facility contains a
borrowing base provision and financial covenants that may limit the amount we
can borrow thereunder or from other sources. We may not be able to replace or
renew this credit facility upon its expiration on terms that are as favorable to
us or at all. In addition, a number of factors could affect our ability to
access debt or equity financing, including; o Our financial condition, strength
and credit rating; o The financial markets' confidence in our management team
and financial reporting; o General economic conditions and the conditions in the
homeland security sector; and o Capital markets conditions.
Even if available, additional financing could be costly or have adverse
consequences. If additional funds are raised through the incurrence of debt, we
will incur increased debt servicing costs and may become subject to additional
restrictive financial and other covenants. We can give no assurance as to the
terms or availability of additional capital. If we are not successful in
obtaining sufficient capital, it could reduce our net sales and net income and
adversely impact our financial position, and we may not be able to expand or
operate our business as planned.
A reduction in government funding for preparations for terrorist incidents that
could adversely affect our net sales.
As a general matter, a significant portion of our sales growth to our
distributors is dependent upon resale by those distributors to customers that
are funded in large part by federal, state and local government funding.
Specifically, approximately 60% of our high-end chemical suit sales is dependent
on government funding. Congress passed the 2001 Assistance to Firefighters Grant
Program and the Bioterrorism Preparedness and Response Act of 2002. Both of
these Acts provide for funding to fire and police departments and medical and
emergency personnel to respond to terrorist incidents. Appropriations for these
Acts by the federal government could be reduced or eliminated altogether. Any
such reduction or elimination of federal funding, or any reductions in state or
local funding, could cause sales of our products purchased by fire and police
departments and medical and emergency personnel to decline.
We may be subject to product liability claims, and insurance coverage could be
inadequate or unavailable to
20
cover these claims.
We manufacture products used for protection from hazardous or potentially
lethal substances, such as chemical and biological toxins, fire, viruses and
bacteria. The products that we manufacture are typically used in applications
and situations that involve high levels of risk of personal injury. Failure to
use our products for their intended purposes, failure to use our products
properly or the malfunction of our products could result in serious bodily
injury to or death of the user. In such cases, we may be subject to product
liability claims arising from the design, manufacture or sale of our products.
If these claims are decided against us and we are found to be liable, we may be
required to pay substantial damages and our insurance costs may increase
significantly as a result. We cannot assure you that our insurance coverage
would be sufficient to cover the payment of any potential claim. In addition, we
cannot assure you that this or any other insurance coverage will continue to be
available or, if available, that we will be able to obtain it at a reasonable
cost. Any material uninsured loss could have a material adverse effect on our
financial condition, results of operations and cash flows.
Environmental laws and regulations may subject us to significant liabilities.
Our U.S. operations, including our manufacturing facilities, are subject
to federal, state and local environmental laws and regulations relating to the
discharge, storage, treatment, handling, disposal and remediation of certain
materials, substances and wastes. Any violation of any of those laws and
regulations could cause us to incur substantial liability to the Environmental
Protection Agency, the state environmental agencies in any affected state or to
any individuals affect by any such violation. Any such liability could have a
material adverse effect on our financial condition and results of operations.
The market price of our common stock may fluctuate widely.
The market price of our common stock could be subject to significant
fluctuations in response to quarter-to-quarter variation in our operating
results, announcements of new products or services by us or our competitors, and
other events or factors. For example, a shortfall in net sales or net income, or
an increase in losses, from levels expected by securities analysts, could have
an immediate and significant adverse effect on the market price and volume
fluctuations that have particularly affected the market prices of many micro and
small capitalization companies and that have often been unrelated or
disproportionate to the operating performance of these companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the market price for our common stock.
Our results of operations may vary widely from quarter to quarter.
Our quarterly results of operations have varied and are expected to
continue to vary in the future. These fluctuations may be caused by many
factors, including:
o Competitive pricing pressures;
o Seasonal buying patterns resulting from the cyclical nature of the
business of some of our customers;
o The size and timing of individual sales;
o Changes in the mix of products and services sold;
o The timing of introductions and enhancements of products by us or
our competitors;
o Market acceptance of new products;
o Technological changes in fabrics or production equipment used to
make our products;
o Changes in the mix of domestic and international sales;
21
o Personnel changes;
o Our expansion of international operations; and
o General industry and economic conditions.
These variations could negatively impact our stock price.
Compliance with the Sarbanes-Oxley Act of 2002 and rules and regulations
relating to corporate governance and public disclosure may result in additional
expenses and negatively impact our results of operations.
The Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by
the Securities and Exchange Commission and the Nasdaq Stock Market have greatly
increased the scope, complexity and cost of corporate governance, reporting and
disclosure practices for public companies, including our company. Keeping
abreast of, and in compliance with, these laws, rules and regulations have
required an increased amount of resources and management attention. In the
future, this may result in increased general and administrative expenses and a
diversion of management time and attention from sales-generating and other
operating activities to compliance activities, which would negatively impact our
results of operations.
In addition, the corporate governance, reporting and disclosure laws,
rules and regulations could also make it more difficult for us to attract and
retain qualified executive officers and members of our board of directors. In
particular, the Nasdaq Stock Market rules require a majority of our directors to
be "independent" as determined by our board of directors in compliance with the
Nasdaq rules. It therefore has become more difficult and significantly more
expensive to attract such independent directors to our Board.
Our directors and executive officers have the ability to exert significant
influence on our company and on matters subject to a vote of our stockholders.
As of April 12, 2006, our directors and executive officers beneficially
owned approximately 19.2% of the outstanding shares of our common stock. As a
result of their ownership of common stock and their positions in our company,
our directors and executive officers are able to exert significant influence on
our company and on matters submitted to a vote by our stockholders. In
particular, as of April 12, 2006, Raymond J. Smith, our chairman of the board,
and Christopher J. Ryan, our chief executive officer, president, general counsel
and secretary and a director, beneficially owned approximately 9.56% and 6.52%
of our common stock, respectively. The ownership interests of our directors and
executive officers, including Messrs. Smith and Ryan, could have the effect of
delaying or preventing a change of control of our company that may be favored by
our stockholders generally.
Provisions in our restated certificate of incorporation and by-laws and Delaware
law could make a merger, tender offer or proxy contest difficult.
Our restated certificate of incorporation contains "super majority" voting
and classified board provisions, authorized preferred stock that could be
utilized to implement various "poison pill" defenses and a stockholder
authorized, but as yet unused, Employee stock Ownership Plan, all of which may
have the effect of discouraging a takeover of Lakeland which is not approved by
our board of directors. Further, we are subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law, which prohibit us from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
the prescribed manner. For a description of these provisions, see "Description
of Capital Stock - Anti-Takeover Provisions."
ITEM 1B: UNRESOLVED STAFF COMMENTS
- ----------------------------------
None.
22
ITEM 2. PROPERTIES
- ------------------
We believe that our owned and leased facilities are suitable for the
operations we conduct in each of them. Each manufacturing facility is well
maintained and capable of supporting higher levels of production. The table
below sets forth certain information about our principal facilities.
Estimated
Square
Address Feet Annual Rent Lease Expiration Principal Activity
- ------- ------------ ------------------- -------------------- ------------------------------ --------- ----------- ---------------- ------------------
Weifang Lakeland Safety Products 65,000 Owned(1) N/A Manufacturing
Co., Ltd. Administration
Xiao Shi Village Engineering
AnQui City, Shandong Province
PRC 262100
Qing Dao MayTung 90,415 Owned(1) N/A Manufacturing
Healthcare Co., Ltd Administration
Yinghai Industrial Park Warehousing
Jiaozhou, Shandong Province
PRC 266318
Meiyang Protective Products Co., Ltd. 9,360 $3,630$3,727 12/31/0506 Manufacturing
Xiao Shi Village
AnQui City, Shandong Province
PRC 262100
UnilandWoven Products Division 44,000 $96,000 7/31/0607 Manufacturing
2401 SW Parkway Administration
St. Joseph, MO 64503 Warehousing
Lakeland de Mexico S.A. de C.V. 14,057 $59,400 7/31/07 Manufacturing
(Luis Gomez Guzman - former Administration
employee) Administrationand and Warehousing
Poniente, Mza 8, Lote 11 and and Warehousing12,853 $46,220
Ciudad Industrial, S/No.
Celaya, Guanajuato 38010 12,853 $46,220
Mexico
Lakeland Protective Wear Canada 12,000 Approximately 11/30/07 Sales
5109-B7 Harvestor Road $86,000 (varies with Administration
Burlington, ON L7L5Y9 $86,000 (varies withexchange rates) Warehousing
Canada
exchange rates)Lakeland Industries, Inc. 6,250 Owned N/A Administration
Headquarters Studio
701-7 Koehler Avenue Sales
Ronkonkoma, NY 11779
Lakeland Industries, Inc. 91,788 Owned N/A Manufacturing
202 Pride Lane Administration
Decatur, AL 35603 Engineering
Warehousing
1423
Estimated
Square
Address Feet Annual Rent Lease Expiration Principal Activity
- ------- ------------- ------------------- -------------------- ------------------------------ --------- ----------- ---------------- ------------------
Lakeland Industries, Inc. 4,362 $43,402 6/30/05 Administration
Headquarters
711-2 Koehler Avenue
Ronkonkoma, NY 11779
Lakeland Industries, Inc. 900 $7,800 6/30/05 Studio
751-4 Koehler Avenue49,500 Owned N/A Warehousing
Ronkonkoma, NY 11779
Lakeland Industries, Inc. 91,788 $364,900 3/31/09 Manufacturing
(POMS Holding Co.- related party) Administration
202 Pride Lane Engineering
Decatur, AL 35603 Warehousing
Lakeland Industries, Inc. 49,500 $199,100 3/31/09 Warehousing
(River Group Holding Co., Ltd - Administration
related Party)
3428 Valley Ave. (201 1/2 Pride Lane) Administration
Decatur, AL 35603
Lakeland Industries, Inc. 2,400 $18,000 3/31/09 Sales
(Harvey Pride, Jr. - officer- related Administration
party)
201 Pride Lane, SW
Decatur, AL 35603
Lakeland Industries Europe Ltd. 2,4704,940 Approximately $25,528$48,600 1/31/08 Warehouse
Wallingfen Park (varies with exchange Sales
236 Main Road exchange rates)
Newport, East Yorkshire
HU15 2RH U United Kingdom
Lakeland Industries 12,000 $40,200 (Leased from Month to Month Warehouse
Route 227 & 73 D. Gallen an employee)
Blandon, PA 19510
Mifflin Valley, Inc. 18,520 $55,560 (Leased from 7/31/10 Manufacturing
31 South Sterley Street M. Gallen an employee) Warehouse, Sales
Shillington, PA 19607 Administration
RFB Lakeland Industries Pvt. Ltd 30,155 $12,000 11/30/06 Manufacturing
Plots 81, 50 and 24 Warehouse
Noida Special Economic Zone
New Delhi, India
Lakeland Industries Inc., Agencia En 904 $12,000 03/01/2008 Warehouse
Chile
Los Algarrobos n(0) 2228 Sales
Comuna de Santiago
Codigo Postal 8361401
Santiago, Chile
- --------------------------
(1) We own the buildings in which we conduct our manufacturing operations and
lease the land underlying the buildings from the Chinese government. We
have 4342 years and 4847 years remaining under the leases with respect to the
AnQui City and Jiaozhou facilities, respectively.
Our facilities in Decatur, Alabama; Celaya, Mexico; AnQui, China;
Jiaozhou, China; and St. Joseph, Missouri, and Shillington, Pennsylvania contain
equipment used for the design, development and manufacture and sale of our
products. Our operations in Burlington, Canada andCanada; Newport, United KingdomKingdom; and
Santiago, Chile are primarily sales and warehousing operations receiving goods
for resale from our manufacturing facilities around the world. We had $1.4 million, $1.9
million, $2.2 million and $2.2$0 million of long-lived assets, net located in China
and $0.21 million, $0.17 million, $0.13 million and $.13$0 million of long-lived assets located in
Mexico as of January 31, 2003, 2004, 2005 and 2005.2006.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
From time to time, we are a party to litigation arising in the ordinary
course of our business. We are not currently a party to any litigation that we
believe could reasonably be expected to have a material adverse effect on our
results of operations, financial condition or cash flows.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
15
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
- -------------------------------------------------------------------------
MATTERS
- -------
Our common stock is currently traded on the Nasdaq National Market under
the symbol "LAKE". The following table sets forth for the periods indicated the
high and low sales prices for our common stock as reported by the Nasdaq
National Market. The stock prices in the table below have been adjusted for
periods prior to July 31, 2003 to reflect our 10% stock dividends to
stockholders of record on July 31, 2002, and July 31, 2003.2003 and April 30, 2005.
Price Range of
Common Stock
----------------------------------------
High Low
-------- --------
Fiscal 20062007
First Quarter (through April 12, 2005)2006) $ 21.4520.75 $ 17.0018.23
Fiscal 2006
First Quarter ................................. $ 19.50 $ 12.27
Second Quarter ................................ 16.15 12.80
Third Quarter ................................. 18.89 15.13
Fourth Quarter ................................ 20.65 17.54
Fiscal 2005
First Quarter.......................................Quarter ................................. $ 27.5625.05 $ 14.4513.13
Second Quarter...................................... 26.00 15.87Quarter ................................ 23.63 14.42
Third Quarter....................................... 23.54 15.51Quarter ................................. 21.40 14.10
Fourth Quarter...................................... 21.00 16.21
Fiscal 2004
First Quarter....................................... $ 8.44 $ 6.14
Second Quarter...................................... 10.92 7.73
Third Quarter....................................... 12.99 9.67
Fourth Quarter...................................... 18.87 11.78Quarter ................................ 19.09 14.73
Holders
- -------
Holders of our Common Stock are entitled to one (1) vote for each share
held on all matters submitted to a vote of the stockholders. No cumulative
voting with respect to the election of directors is permitted by our Articles of
Incorporation. The Common Stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon our liquidation, dissolution or
winding -up, the assets legally available for distribution to stockholders are
distributable ratably among the holders of the Common Stock after payment of
liquidation preferences, if any, on any outstanding stock that may be issued in
the future having prior rights on such distributions and payment of other claims
of creditors. Each share of Common Stock outstanding as of the date of this
Annual Report is validly issued, fully paid and non-assessable.
On April 12, 20052006 the last reported sale price of our common stock on the
Nasdaq National Market was $17.65$18.88 per share. As of April 12, 2005,2006, there were
approximately 7978 record holders of shares of our common stock.
Dividend Policy
- ---------------
In the past, we have declared dividends in stock to our stockholders. We
paid a 10% dividend in additional shares of our common stock to holders of
record on July 31, 2002, on July 31, 2003 and on April 30, 2005. We may pay
stock dividends in future years at the discretion of our board of directors.
We have never paid any cash dividends on our common stock and we currently
intend to retain any future earnings for use in our business. The payment and
rate of future dividends, if any, are subject to the discretion of our board of
directors and will depend upon our earnings, financial condition, capital
requirements, contractual restrictions under our credit facilities and other
factors.
In the past, we have declared dividends in stock to our stockholders. We
paid a 10% dividend in additional shares of our common stock to holders of
record on July 31, 2002 and another 10% dividend in additional shares of our
common stock to holders of record on July 31, 2003. On November 17, 2004 the
Company announced a stock split on an 11 for 10 basis in the form of a stock
dividend. The record date is to be April 30, 2005 and the pay date is to be May
30, 2005. We may pay stock dividends in future years at the discretion of our
board of directors.25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------------------------------------------------------------
The following selected consolidated financial data as of and for our
fiscal years 2001, 2002, 2003, 2004, 2005 and 20052006 have been derived from our audited
consolidated financial statements, which have been audited by Grant Thornton LLP
as of and for the fiscal years ended January 31, 2001 and 2002 and by
PricewaterhouseCoopers LLP as of and for the fiscal years ended January 31, 2003
and 2004 and by Holtz Rubenstein Reminick LLP for 2005.2005 and 2006. You should read
the information set forth below in conjunction with our "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes included in this Form 10-K.
16
Year Ended January 31,
------------------------------------------------------------------
2001-----------------------------------------------------------------------
2002 2003 2004 2005 ---------- ---------- ---------- ---------- ----------2006
(in thousands, except share and per share data)
Income Statement Data:
Net sales .............................. $ 76,108.................................... $ 76,431 $ 77,826 $ 89,717 $ 95,320 $ 98,740
Costs of goods sold .................... 64,798.......................... 63,294 62,867 71,741 74,924 ---------- ---------- ---------- ---------- ----------74,818
----------- ----------- ----------- ----------- -----------
Gross profit ....................... 11,310........................ 13,137 14,959 17,976 20,396 ---------- ---------- ---------- ---------- ----------23,922
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling and shipping 4,825................ 5,414 6,338 7,342 7,871 8,301
General and administrative 3,794.......... 4,134 4,262 4,596 4,871 6,119
Impairment of goodwill ............. --.............. -- -- 249 -- ---------- ---------- ---------- ---------- ------------
----------- ----------- ----------- ----------- -----------
Total operating expenses ........... 8,619............ 9,548 10,600 12,187 12,742 ---------- ---------- ---------- ---------- ----------14,420
----------- ----------- ----------- ----------- -----------
Operating profit ................... 2,691.................... 3,589 4,359 5,789 7,654 ---------- ---------- ---------- ---------- ----------9,502
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest expense (1,248).................... (882) (643) (535) (207) (167)
Interest income 27..................... 18 20 19 18 49
Other income 15........................ 91 40 24 98 ---------- ---------- ---------- ---------- ----------384
----------- ----------- ----------- ----------- -----------
Total other expense (1,206)................. (773) (583) (492) (91) ---------- ---------- ---------- ---------- ----------266
----------- ----------- ----------- ----------- -----------
Income before minority interest 1,485.............. 2,816 3,776 5,297 7,563 9,768
Minority interest in net income of variable
interest entities --............................ -- -- -- 494 ---------- ---------- ---------- ---------- ------------
----------- ----------- ----------- ----------- -----------
Income before income taxes 1,485.......... 2,816 3,776 5,297 7,069 9,768
Income tax expense ..................... 362expenses .......................... 846 1,172 1,659 2,053 ---------- ---------- ---------- ---------- ----------3,439
----------- ----------- ----------- ----------- -----------
Net Income $ 1,123................................... $ 1,970 $ 2,604 $ 3,638 $ 5,016 ========== ========== ========== ========== ==========$ 6,329
=========== =========== =========== =========== ===========
Net income per common share (Basic)(1) ....... $ 0.350.56 $ 0.610.73 $ 0.801.01 $ 1.111.12 $ 1.23
========== ========== ========== ========== ==========1.26
=========== =========== =========== =========== ===========
Net income per common share (Diluted)(1) ................................ $ 0.350.55 $ 0.610.72 $ 0.801.01 $ 1.111.12 $ 1.23
========== ========== ========== ========== ==========1.26
=========== =========== =========== =========== ===========
Weighted average common shares outstanding(1):
Basic ............................... 3,545,252 3,587,228 3,595,406 4,471,687 5,017,046
=========== =========== =========== =========== ===========
Diluted ............................. 3,200,990 3,222,956 3,261,116 3,268,551 4,065,170
========== ========== ========== ========== ==========
Diluted ........................... 3,227,265 3,247,290 3,269,039 3,275,501 4,069,949
========== ========== ========== ========== ==========3,572,019 3,595,943 3,603,051 4,476,944 5,021,887
=========== =========== =========== =========== ===========
Balance Sheet Data (at period end):
Current assets ......................... $ 36,099............................... $ 39,545 $ 38,859 $ 43,285 $ 55,128 $ 63,719
Total assets ........................... 38,628................................. 42,417 42,823 47,304 60,313 72,464
Current liabilities .................... 20,052.......................... 22,778 20,934 21,509 4,152 3,839
Long-term liabilities .................. 2,039........................ 912 529 768 1,695 7,829
Stockholders' equity ................... 16,537......................... 18,727 21,359 25,027 54,467 60,796
26
- ---------------------
(1) Adjusted for periods prior to July 31, 2003April 30, 2005 to reflect our 10% stock
dividends to stockholders of record as of July 31, 2002, and July 31, 2003.2003,
and April 30, 2005. Earnings per share have been restated in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
17Repurchase of Securities
We did not repurchase any of our Common Stock or other securities during
our fiscal year ending January 31, 2006.
27
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------------
OPERATIONS
- ----------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following summary together with the more detailed
business information and consolidated financial statements and related notes
that appear elsewhere in this Form 10-K and Annual Report and in the documents
that we incorporate by reference into this Form 10-K. This document may contain
certain "forward-looking" information within the meaning of the Private
Securities Litigation Reform Act of 1995. This information involves risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements.
Overview
We manufacture and sell a comprehensive line of safety garments and
accessories for the industrial protective clothing market. Our products are sold
by our in-house sales force and independent sales representatives to a network
of over 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. Our net sales attributable
to customers outside the United States were $5.7 million,
$8.0 million, $9.0 million and $9.0$9.6
million, in fiscal 2003,2004, fiscal 20042005 and fiscal 2005,2006, respectively.
Our sales of limited use/disposable protective clothing grew approximately
2.86%2.4% in the year ended January 31, 20052006 compared to the year ended January 31,
2004,2005, and our expectation is to see continued growth. We expect that
distributors will continue to stock more inventory as economic conditions in the
United States continue to improve. We also expect our net sales to increase as
we introduce our Tyvek(R)-based products into new industries in which the use of
Tyvek(R) is not widespread. In addition, our net sales are driven in part by
government funding and health-related events. Our net sales attributable to
chemical suits increased 39.7%decreased 27.0% in the year ended January 31, 20052006 compared to
the year ended January 31, 2004.2005. These sales increasesdecreases were due primarily to a
lull in government spending utilizing Fire Act monies and delays by state and
local governmental purchasers in spending their Bio-Terrorism monies. These
governmental sales are driven primarily by grants from the federal government
under the Fire Act of 2002 and the Bio Terrorism Preparedness and Response Act
of 2002 as part of the Homeland Security initiatives. During fiscal 2004, as a
result of the SARS virus outbreak in various cities in 2003, we sold
approximately $1.1 million of SARS-related garments in China, Toronto, Hong Kong
and Taiwan. The Centers for Disease Control has recommended protective garments
be used to protect healthcare workers in the fight against the spread of the
SARS virus.virus and the Avian Flu. In the event of future outbreaks of SARS or other
similar contagious viruses, such as avian fluAvian Flu in 2005, we have positioned
ourselves with increased production capacity.
We have operated manufacturing facilities in Mexico since 1995 and in
China since 1996. Beginning in 1995, we moved the labor intensive sewing
operation for our limited use/disposable protective clothing lines to these
facilities. Our facilities and capabilities in China and Mexico allow access to
a less expensive labor pool than is available in the United States and permit us
to purchase certain raw materials at a lower cost than they are available
domestically. As we have increasingly moved production of our products to our
facilities in Mexico and China, we have seen improvements in the profit margins
for these products. We are in the early stagesmiddle of the process of moving production of
our reusable woven garments and gloves to these facilities and expect to
complete this process by the thirdfourth quarter of fiscal 2006.2007. As a result, we
expect to see profit margin improvements for these product lines as well.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our audited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of our financial statements in conformity
with accounting principles generally accepted in the United States requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, net sales and expenses, and disclosure of contingent assets and
liabilities. We base estimates on our past experience and on various other
assumptions that we believe to be reasonable under the circumstances and we
periodically evaluate these estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in
28
the preparation of our consolidated financial statements.
18
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 carryforwardscarry 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.
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 havehad no remaining goodwill
recorded as of January 31, 2004. In August 2005 we purchased Mifflin Valley, a
manufacturing facility in Pennsylvania. This purchase resulted in the recording
of $871,297 in Goodwill as of January 31, 2006.
Self-Insured Liabilities. We have a self-insurance program for certain
employee health benefits. The cost of such benefits is recognized as expense
based on claims filed in each reporting period and an estimate of claims
incurred but not reported during such period. Our estimate of claims incurred
but not reported 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.
1929
Results of Operations
The following table set forth our historical results of operations for the
years ended January 31, 2003, 2004, 2005 and 20052006 as a percentage of our net sales.
Year Ended January 31,
--------------------------
2003 2004 2005 2006
------ ------ ------
Net sales ............................................................................................................ 100.0% 100.0% 100.0%
Cost of goods sold ................................................ 80.8%.......................................... 80.0% 78.6% 75.8%
------ ------ ------
Gross profit .................................................. 19.2%............................................ 20.0% 21.4% 24.2%
Operating expenses ................................................ 13.6%.......................................... 13.6% 13.4% 14.6%
Operating profit .............................................. 5.6%........................................ 6.4% 8.0% 9.6%
Interest expense, net ............................................. 0.8%....................................... 0.5% 0.2% 0.2%
Minority interest in net income of variable interest entities ..... -0- -0- (0.5)% -0-
Income tax expense ................................................ 1.5%.......................................... 1.8% 2.2% 3.5%
------ ------ ------
Net income .................................................... 3.3%.............................................. 4.1% 5.3% 6.4%
Significant Balance Sheet Fluctuation January 31, 20052006 as
compared to January 31, 20042005
Balance Sheet Accounts. The increasedecrease in cash, cash equivalents and marketable
securities and the decreaseincrease in borrowings under the current portion of long-term liabilitiesrevolving credit agreement
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 increasedprincipally due to increased sales. Inventories increasedthe increase in inventories as we build our finished goods
inventory for our seasonally strong fourth and first quarters for fiscal 20052006
and 2006.2007. We also built raw material reserves due to an anticipated increase in
the cost of these raw materials. Accounts receivable increased due to increased
January sales. Plant property and equipment increased as a result of adoptingpurchasing
$3.0 million of facilities in Alabama in April and May 2005 that had been
subject to FIN 46R, in which we recorded $1.1 million of buildings in our
consolidation of variable interest entities.entities in the previous fiscal year. A
corporate headquarters was also purchased in New York for $649,000 in May 2005.
Year Ended January 31, 2006 Compared to the Year Ended January 31, 2005
Net Sales. Net sales increased $3.4 million, or 3.6%, to $98.7 million for
the January 31, 2006 year ended from $95.3 million for the year ending January
31, 2005. The increase was due primarily to an increase in the sales in our core
non-woven disposable products line and secondarily by our fire and glove lines
respectively. Increased sales were also driven by an improving U.S. and Canadian
economy which increased demand for our products, particularly in the industrial
non-woven disposable markets we serve, the acquisition of Mifflin Valley, Inc.
in July 2005, offset by decreased demand for our chemical protective suits for
Homeland Security purposes which decreased month over month from February 2005
to October 2006 but then started increasing from November 2005 to our fiscal
year ended January 31, 2006.
Gross Profit. Gross Profit increased $3.5 million, or 17.3%, to $23.9
million for the year ended January 31, 2006 from $20.4 million for the year
ended January 31, 2005. Gross profit as a percent of net sales increased to
24.3% for the year ended January 31, 2006 from 21.4% for the year ended January
31, 2005, primarily because of cost reductions achieved by shifting production
of additional Tyvek(R)-based products and chemical suits to China and Mexico and
changes in product mix. We have increasingly shifted and will continue to shift
production to these lower-cost facilities in order to increase our margins.
Operating Expenses. Operating expenses increased $1.7 million, or 13.2% to
$14.4 million for the year ended January 31, 2006 from $12.7 million for the
year ended January 31, 2005. As a percent of net sales, operating expenses
increased to 14.6% for the year ended January 31, 2006 from 13.4% for the year
ended January 31, 2005. The $1.7 million increase in operating expenses in the
year ended January 31, 2006 compared to the year ended January 31, 2005 was
principally due to an increase in:
o Salaries of $0.64 million
30
o Freight of $0.06 million
o Sales Commissions of $(.42) million
o Pension Expense $(.12) million
o Sales related expenses of $.28 million
o Payroll Taxes of $0.09 million
o Currency Fluctuations of $0.12 million
o Professional Fees of $0.20 million
o Consulting fees of $0.12 million (pertaining to Sarbanes-Oxley
compliance)
o Other $0.23 million
o the absence in the current year of a minority interest
reclassification in the prior year of $0.5 million, leaving a net
increase of $1.7 million.
Operating Profit. Operating profit increased by $1.9 million, or 24.1%, to
9.5 million for the year ended 1/31/06, from $7.7 million for the prior year.
Operating income as a percent of net sales increased to 9.6% for the year ended
January 31, 2006 from 8.0% for the year ending January 31, 2005 primarily due to
the higher margins as discussed above.
Interest Expense. Interest expense decreased by $.04 million for the year
ended January 31, 2006 compared to the year ended January 31, 2005 because of
decreased borrowings and interest rates.
Minority Interest. Minority interest in net income of variable interest
entities decreased by $.5 million for the year ended January 31, 2006 as a
result of our adoption on Financial Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," effective February 1, 2004 and
then our purchasing such properties in fiscal year 2006. 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 were
consolidated in our statement of income for the year ended January 31, 2005.
These facilities were purchased in April and May 2005 thereby negating the
recording of variable interest entities in fiscal 2006.
Other Income - Net. Other income- net increased $0.29 million principally
as a result of the settlement by the Company as plaintiff for $0.26 million of
an outstanding litigation involving two former employees of the company.
Income Tax Expense. Income tax expenses consist of federal, state and
foreign income taxes. Income tax expense increased $1.4 million, or 67.5%, to
$3.4 million for the year ended January 31, 2006 from $2.1 million for the year
ended January 31, 2005. Our effective tax rate was 35.20% and 29.0% for the
years ended January 31, 2006 and 2005, respectively. Our effective tax rate
increased from the federal statutory rate of 34% due primarily to the
repatriation of $3.2 million in profits from our Chinese subsidiaries and a
reserve of $65,000 covering the portion of the claims of the IRS which can be
determined due to a recent audit. The resolution of the remainder of their
claims cannot be determined at this time.
Net Income. Net income increased $1.31 million or 26.2%, to $6.33 million
for the year ended January 31, 2006 from $5.02 million for the year ended
January 31, 2005. The increase in net income was the result of an increase in
net sales and productivity as a result of shifts in production to our China
facilities, partially offset by an increase in costs and expenses due to higher
sales and increases in our tax rates as mentioned above.
Year ended January 31, 2005 Compared to the Year Ended January 31, 2004
Net Sales. Net sales increased $5.6 million, or 6.2%, to $95.3 million for
the January 31, 2005 year ended from $89.7 million for the year ending January
31, 2004. The increase was due primarily to an increase in the sales of our
chemical suits and also an increase in our core non-woven disposable products
line. Increased sales were also driven
31
by an improving U.S. economy which increased demand for our products,
particularly in the industrial non-woven disposable markets we serve, and
increased demand for our chemical protective suits and fire turnout gear for
Homeland Security purposes.
Gross Profit. Gross Profit increased $2.4 million, or 13.5%, to $20.4
million for the year ended January 31, 2005 from $18 million for the year ended
January 31, 2004. Gross profit as a percent of net sales increased to 21.4% for
the year ended January 31, 2005 from 20% for the year ended January 31, 2004,
primarily because of cost reductions achieved by shifting production of
additional Tyvek(R)-based products and chemical suits to China and Mexico and
changes in the mix resulting from more sales of the higher margin chemical
suits. We have increasingly shifted and will continue to shift production to
these lower-cost facilities.
Operating Expenses. Operating expenses increased $0.55 million, or 4.5% to
$12.7 million for the year ended January 31, 2005 from $12.2 million for the
year ended January 31, 2004. As a percent of net sales, operating expenses
decreased to 13.4% for the year ended January, 2005 from 13.6% for the year
ended January 31, 2004. The $0.55million$0.55 million increase in operating expenses in the
year ended January 31, 2005 comparecompared to the year ended January 31, 2004 was
principally due to an increase in:
o Salaries of $0.35 million
o Freight of $0.3 million o Sales Commissions of $0.16 million
20
o Sales related expenses of $0.1 million
o Insurance expense of $(.14) million
o Currency Fluctuations of $0.06 million
o Licenses and Fees of $0.08 million o Advertising Expenses $(0.1)
million
o Consulting fees of $0.19 million (pertaining to Sarbanes-Oxley
compliance)
o Other $.05 million which above increases of $1.05 million were
offset by:
o a minority interest reclassification of $0.5 million, leaving a net
increase of $0.55 million.
Operating Profit. Operating profit increased by $1.9 million, or 32.2% to
$7.7 million, from $5.8 million for the prior year. Operating income as a
percent of net sales increased to 8.0% for the year ended January 31, 2005 from
6.5% for the year ending January 31, 2004 primarily due to increased margins as
discussed above.
Interest Expense. Interest expense decreased by $.3 million for the year
ended January 31, 2005 compared to the year ended January 31, 2004 because we
paid off our credit facility in full on June 18, 2004, from the proceeds of our
Secondary Stock Offering.
Minority Interest. Minority interest in net income of variable interest
entities increased to $.5 million for the year ended January 31, 2005 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 year ended January 31,
2005.
Income Tax Expense. Income tax expenses consist of federal, state and
foreign income taxes. Income tax expense increased $.4 million, or 23.7%, to
$2.1 million for the year ended January 31, 2005 from $1.7 million for the year
32
ended January 31, 2004. Our effective tax rate was 29.0% and 31.3% for the year
ended January 31, 2005 and 2004, respectively. Our effective tax rate varied
from the federal statutory rate of 34% due primarily to lower foreign tax rates,
inclusion of minority interest in net income of variable interest entities and
utilization of a tax carryforward.carry forward.
Net Income. Net income increased $1.4 million or 37.9%, to $5.0 million
for the year ended January 31, 2005 from $3.6 million for the year ended January
31, 2004. The increase in net income was the result of an increase in net sales
primarily in the chemical suits and increased productivity as a result of shifts
in production to our China facilities, partially offset by an increase in costs
and expenses due to higher sales.
Year Ended January 31, 2004 ComparedLiquidity and Capital Resources
Management measures our liquidity on the basis of our ability to Year Ended January 31, 2003
Net Sales. Net sales increased $11.9 million, or 15.3%,meet
short-term and long-term operational funding needs and fund additional
investments, including acquisitions. Significant factors affecting the
management of liquidity are cash flows from operating activities, capital
expenditures, access to $89.7 million
for the year ended January 31, 2004 from $77.8 million for the year ended
January 31, 2003. The increase was due primarilybank lines of credit and our ability to attract
long-term capital under satisfactory terms.
Internal cash generation, together with currently available cash and
investment and an ability to access credit lines if needed, are expected to be
sufficient to fund operations, capital expenditures, and any increase in our market
share in our Tyvek(R)-based product linesworking
capital that we would need to accommodate a higher level of business activity.
We are actively seeking to expand by acquisitions as well as an increase in the price of
these products beginning in May 2003. Increased sales were also driven by an
improving U.S. economy which increased demand for our products, particularly in
the industrial Tyvek(R) markets we serve, and increased demand for our chemical
protective suits and fire turnout gear for Homeland Security purposes. In
addition, as a result of the SARS outbreak, we sold our products for the first
time in domestic China, which amounted to $0.6 million in the year ended January
31, 2004.
Gross Profit. Gross profit increased $3.0 million, or 20.2%, to $18.0
million for the year ended January 31, 2004 from $15.0 million for the year
ended January 31, 2003. Gross profit as a percent of net sales increased to
20.0% for the year ended January 31, 2004 from 19.2% for the year ended January
31, 2003, primarily because of cost reductions achieved by shifting production
of additional Tyvek(R) -based products and chemical suits to China and Mexico.
We have increasingly shifted production to these lower-cost facilities. In
addition, we increased the pricethrough organic
growth of our Tyvek(R) -based products beginning in
May 2003, which contributedbusiness. While a significant acquisition may require additional
borrowings, equity financing or both, we believe that we would be able to an increase inobtain
financing on acceptable terms based, among other things, on our gross margins for these
products. In the
21
year ended January 31, 2004, we also determined that a portion of our inventory
was obsolete. As a result, we wrote off $0.4 million of inventory offsetting the
factors contributing to an increase in gross profit discussed above.
Operating Expenses. Operating expenses increased $1.6 million, or 15%, to
$12.2 million for the year ended January 31, 2004 from $10.6 million for the
year ended January 31, 2003. As a percent of net sales, operating expenses
remained constant at 13.6% for the year ended January 31, 2004earnings
performance and the year
ended January 31, 2003. The $1.6 million increase in operating expenses in the
year ended January 31, 2004 compared to the year ended January 31, 2003 was
principally due to increased expenses corresponding to our increase in net
sales, as well as impairment of goodwill of $0.2 million. This was offset by a
decrease in bad debt expense of $0.3 million in fiscal 2004 resulting from
improvement in the U.S. economy and a reorganization of our credit department.
Interest Expenses. Interest expenses decreased $0.1 million, or 16.8%, to
$0.5 million for the year ended January 31, 2004 from $0.6 million for the year
ended January 31, 2003. The decrease was primarily due to a decrease in average
monthly borrowings under our credit facilities.
Income Tax Expense. Income tax expense consists of federal, state and
foreign income taxes. Income tax expense increased $0.5 million, or 41.6%, to
$1.7 million for the year ended January 31, 2004 from $1.2 million for the year
ended January 31, 2003. The increase was due to a relative increase in our
income recognized in the United States as compared to the income recognized in
China, where income tax rates are lower. Our effective tax rate was 31.3% and
31.0% in the years ended January 31, 2004 and 2003, respectively. Our effective
tax rate varied from the federal statutory rate of 34% due primarily to lower
foreign tax rates.
Net Income. Net income increased $1.0 million, or 39.7%, to $3.6 million
for the year ended January 31, 2004 from $2.6 million for the year ended January
31, 2003. The increase in net income was the result of an increase in net sales
and increased productivity as a result of shifts in production to our China
facilities, partially offset by an increase in costs and expenses due to higher
volumes of our products being sold.
Liquidity and Capital Resourcescurrent financial position.
Cash Flows
As of January 31, 20052006 we had short-term marketable securitiescash and cash equivalents of $9.2$1.5 million
and working capital of $51$59.9 million, ana decrease and increase of $6.74$(7.7) million
and $29.2$8.9 million, respectively, from January 31, 2004.2005. 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.below. We
require liquidity and working capital primarily to fund increases in inventories
and accounts receivable associated with our net sales and, to a lesser extent,
for capital expenditures.
Net cash used in operating activities of $8.4 million for the year ended
January 31, 2006 was due primarily to net income from operations of $6.3
million, offset by an increase in inventories of $13.7 million, and an increase
in accounts receivable of $.7 million. Net cash provided by operating activities
of $0.5 million for the year ended January 31, 2005 was due primarily to net
income from operations of $5.0 million offset in part by a decrease in accounts
payable of $.4$0.4 million, an increase in inventories of $4.7 million ,and an
increase in accounts receivable of $.5$0.5 million and an increase in minority
interest liability of $0.5 million.
Net cash provided by operating activities of $2.2 million for the year ended January
31, 2004 was due primarily to net income from operations of $3.6 million and an
increase in accounts payable of $0.4 million, offset in part by an increase in
inventories of $0.8 million and an increase in accounts receivable of $2.2
million.
Net cash used in investing activities of $0.8$6.5 million and $1.4$0.8 million in
the years ended January 31, 20052006 and 2004,2005, respectively, was due to purchases of
property and equipment. Ne tequipment and the acquisition of Mifflin Valley. Net cash provided
by financing activities in the years ended January 31, 20052006 and 20042005 was
primarily attributable to payments and borrowings under our credit facilities and to the
secondary offering in fiscal 2005.
Credit Facilities
We currently have twoone credit facilities:facility:
o an $18a Five year, $25 million revolving credit facility, of which we had
no
borrowings outstanding as of April 15, 2005; and
o a $3January 31, 2006 amounting to $7.3 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 15, 2005.
In November 1999, we entered into a 5-year $3 million term loan which we repaid
in full on March 31, 2003.
22
Our $18$25 million revolving credit facility permits us to borrow up to the
lower of $18$25 million and a borrowing base determined by reference to a
percentage of our eligible accounts receivable and inventory. Our $18$25 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.2010. Borrowings under this
revolving credit facility bear interest at the London Interbank Offering Rate
(LIBOR) plus 2%60 basis points and were zero5.17% at January 31, 2005.2006. As of April 15, 2005,January
31, 2006, we had $18 million of borrowing availability under this revolving
credit facility.
In January 2004, we entered into a new 3-year $3 million revolvingOur 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 did not have any borrowings
outstanding under this facility at January 31, 2005. As of April 15, 2005, we
had $2.08 million of borrowing availability under this revolving credit
facility.
Our credit facilities requirerequires 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
33
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 15, 2005,January 31, 2006, we were in compliance with all covenants contained in
our credit facilities.
We believe that our current cash position of $9.2$1.5 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 $18$25 million
revolving credit facility will be sufficient to meet our currently anticipated
operating, capital expenditures and debt service requirements for at least the
next 12 months. Historically, we have been able to renew our primary credit facility on
acceptable terms, but there can be no assurance that such financing will
continue to be available or that any renewal will be on terms as favorable as
our current facility.
Capital Expenditures
Our capital expenditures principally relate to purchases of manufacturing
equipment, computer equipment, leasehold improvement and automobiles, as well as
payments related to the construction of our facilities in China. Our 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 $4.8$1.4 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.
232007.
34
Contractual Obligations
We had no off-balance sheet arrangements at January 31, 2005.2006. As shown
below, at January 31, 2005,2006, our contractual cash obligations totaled
approximately $4.3million,$7.7 million, including lease renewals entered into subsequent to
January 31, 2005.2006.
Payments Due by Period
-----------------------------------------------------------------------------------------------------------------------------------
Less than
-------------------
Total 1 Year 1-3 Years 4-5 Years After 5 Years
---------- ---------- ---------- ---------- -------------
(in thousands)
(in thousands)
Operating leases ..................... $ 711,500476,000 $ 115,334373,000 $ 596,166592,000 $ --3,000 $ --
Real Estate purchases ........ 3,621,000 3,621,000 -- -- --
Automobiles leased ........... 5,645 5,645 -- -- --
Revolving credit facility ....7,272,000 -- -- -- --7,272,000 --
========== ========== ========== ========== ==========
Total $4,338,145 $3,741,979................... $7,748,000 $ 596,166373,000 $ --592,000 $7,275,000 $ --
Seasonality
Our operations have historically been seasonal, with higher sales
generally occurring in February, March, April and May when scheduled maintenance
occurs on nuclear, coal, oil and gas fired utilities, chemical, petrochemical
and smelting facilities, and other heavy industrial manufacturing plants,
primarily due to cooler temperatures. Sales decline during the warmer summer and
vacation months, and generally increase from Labor Day through February with
slight declines during holidays. As a result of this seasonality in our sales,
we have historically experienced a corresponding seasonality in our working
capital, specifically inventories, with peak inventories occurring between
September and March coinciding with lead times required to accommodate the
spring maintenance schedules. We believe that by sustaining higher levels of
inventory, we gain a competitive advantage in the marketplace. Certain of our
large customers seek sole sourcing to avoid sourcing their requirements from
multiple vendors whose prices, delivery times and quality standards differ.
In recent years, due to increased demand by first responders for our
chemical suits and fire gear, our historical seasonal pattern has shifted.
Governmental disbursements are dependent upon budgetary processes and grant
administration processes that do not follow our traditional seasonal sales
patterns. Due to the size and timing of these governmental orders, our net
sales, results of operations, working capital requirements and cash flows can
vary between different reporting periods. As a result, we expect to experience
increased variability in net sales, net income, working capital requirements and
cash flows on a quarterly basis.
Effects of Recent Accounting Pronouncements
In 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 our first interimannual reporting period that begins
after June 15, 2005. If the Company had included the cost of employee stock
option compensation in our financial statements it would not have had a material
effect on our net income for the years ended January 31, 2006, 2005, 2004, and 2003.
In November 2004,2004.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
We are exposed to market risk, including changes in interest rates and
currency exchange rates. To manage the 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 ledvolatility relating to these exposures,
we seek to limit, 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
expensesextent possible, our non-U.S. dollar denominated
purchases.
Foreign Currency Risk
We are exposed 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
impactchanges in foreign currency exchange rates as a result
of adopting this statement.
On December 16, 2004,our purchases and sales in other countries. To manage the FASB issued SFAS No. 153, "Exchangevolatility relating
to foreign currency exchange rates, we seek to limit, to the extent possible,
our non-U.S. dollar denominated purchases and sales.
In connection with our operations in China, we purchase a significant
amount of Non-monetary Assets", an amendmentproducts from outside of 24
Accounting Principles Board ("APB") Opinion No. 29,the United States. However, our purchases in
China are primarily made in Chinese Yuan, the value of which differedhas been largely
pegged to the U.S. dollar for the last decade. However, the Chinese Yuan has
recently been decoupled from the International Accounting Standards Board's ("IASB") methodUS Dollar and allowed to float by the Chinese
government, and therefore, we will be exposed to additional foreign exchange
rate risk on our Chinese purchases.
Our primary risk from foreign currency exchange rate changes is presently
related to non-U.S. dollar denominated sales in Canada and, to a smaller extent,
in Europe. Our sales to customers in Canada are denominated in Canadian dollars.
If the value of accounting for
exchangesthe U.S. dollar increases relative to the Canadian dollar, then
our net sales could decrease as our products would be more expensive to our
Canadian customers because of similar productive assets. Statement No. 153 replaces the exception
from fair value measurementexchange rate change. Our sales in APB No. 29, with a general exception from fair
value measurement for exchanges of non-monetary assets thatChina are
denominated in the Chinese Yuan, however, our sales there are presently not
material. At this time, we do not have
commercial substance. The statement ismanage the foreign currency risk through the
use of derivative instruments. A 10% decrease in the value of the U.S. dollar
relative to be applied prospectivelyforeign currencies would increase the landed costs into the U.S.
but would make our selling price for international sales more attractive with
respect to foreign currencies. As non-U.S. dollar denominated international
purchases and is
effective for non-monetary asset exchanges occurringsales grow, exposure to volatility in fiscal periods beginning
after June 15, 2005. The Company does not believe that SFAS No. 153 willexchange rates could have a
material adverse impact on our financial results.
Interest Rate Risk
We are exposed to interest rate risk with respect to our credit
facilities, which have variable interest rates based upon the London Interbank
Offered Rate. At January 31, 2006, we had $7 million in borrowings outstanding
under this credit facility. If the interest rate applicable to this variable
rate debt rose 1% in the year ended January 31, 2006, our interest expense would
have increased and our income before income taxes would have decreased by less
than $70,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Index to Consolidated Financial Statements
------------------------------------------
Consolidated Financial Statements:
Page No.
--------
Report of Independent Registered Public Accounting Firm A-37
Report of Independent Registered Public Accounting Firm A-38
Consolidated Balance Sheets - January 31, 2006 and 2005 A-39
Consolidated Statements of Income for the years ended A-40
January 31, 2006, 2005 and 2004
Consolidated Statement of Stockholders' Equity for the years ended A-41
January 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended A-42
January 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements A-43 to A-63
Schedule II - Valuation and Qualifying Accounts A-64
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
36
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Lakeland Industries, Inc. and Subsidiaries
Ronkonkoma, New York
We have audited the accompanying consolidated balance sheets of Lakeland
Industries, Inc. and Subsidiaries ("Lakeland") as of January 31, 2006 and 2005
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. We have also audited the schedule listed in Item
15(a)(2) of this Form 10-K for the years ended January 31, 2006 and 2005. We
have also audited management's assessment, included in the accompanying
"Management's Report on Internal Control Over Financial Reporting", that
Lakeland Industries, Inc. and Subsidiaries maintained effective internal control
over financial reporting as of January 31, 2006, based on criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Lakeland's management is
responsible for these consolidated financial statements and schedule, for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on these consolidated financial
statements and the schedule, an opinion on management's assessment, and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Lakeland Industries, Inc. and Subsidiaries as of January 31, 2006 and 2005 and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein. Also
in our opinion, management's assessment that Lakeland maintained effective
internal control over financial reporting as of January 31, 2006, is fairly
stated, in all material respects, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Furthermore, in our opinion,
Lakeland maintained, in all material respects, effective internal control over
financial reporting as of January 31, 2006, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
/s/ Holtz Rubenstein Reminick LLP
Melville, New York
April 14, 2006
37
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Of Lakeland Industries, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the results of operations orand
the cash flows.flows of Lakeland Industries, Inc. and its subsidiaries for the year
ended January 31, 2004 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule for the year ended January 31, 2004 listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with related consolidated financial
information. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Melville, New York
April 2, 2004
38
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
---------------------------
January 31,
2006 2005
---- ----
Assets
Current assets
Cash and cash equivalents (which includes
$3,711,320 of marketable securities at January 31, 2005) $ 1,532,453 $ 9,185,382
Accounts receivable, net of allowance for doubtful accounts of
$323,000 at January 31, 2006 and 2005, respectively 14,221,281 13,117,374
Inventories, net of reserves of $365,000 and $396,000 at January
31, 2006 and 2005, respectively 45,243,490 30,906,023
Deferred income taxes 917,684 960,734
Other current assets 1,804,552 958,491
----------- -----------
Total current assets 63,719,460 55,128,004
Property and equipment, net 7,754,765 5,014,240
Other assets, net 118,330 171,010
Goodwill 871,297 --
----------- -----------
Total assets $72,463,852 $60,313,254
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 2,536,756 $ 2,710,251
Accrued compensation and benefits 866,765 842,319
Other accrued expenses 435,779 599,593
----------- -----------
Total current liabilities 3,839,300 4,152,163
Borrowings under revolving credit facility 7,272,000 --
Pension liability 469,534 495,330
Deferred income taxes 86,982 86,229
Minority interest in variable interest entity 1,112,861
----------- -----------
Total liabilities 11,667,816 5,846,583
----------- -----------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par; 1,500,000 shares
authorized; none issued
Common stock, $.01 par; 10,000,000 shares authorized; 5,017,046 and
4,560,885 shares issued and outstanding
at January 31, 2006 and 2005, respectively 50,170 45,609
Additional paid-in capital 42,431,221 36,273,046
Retained earnings 18,314,645 18,148,016
----------- -----------
Total stockholders' equity 60,796,036 54,466,671
----------- -----------
Total liabilities and stockholders' equity $72,463,852 $60,313,254
=========== ===========
The accompanying notes are an integral part of these financial statements.
39
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Fiscal years ended January 31,
2006 2005 2004
---- ---- ----
Net sales $ 98,740,066 $ 95,320,163 $ 89,717,162
Cost of goods sold 74,817,715 74,924,375 71,740,876
------------ ------------ ------------
Gross profit 23,922,351 20,395,788 17,976,286
------------ ------------ ------------
Operating expenses
Selling and shipping 8,301,216 7,871,423 7,342,017
General and administrative 6,118,722 4,870,302 4,596,437
Impairment of goodwill -- -- 248,834
------------ ------------ ------------
Total operating expenses 14,419,938 12,741,725 12,187,288
------------ ------------ ------------
Operating profit 9,502,413 7,654,063 5,788,998
------------ ------------ ------------
Other income (expense)
Interest expense (166,805) (207,912) (534,540)
Interest income 48,545 18,378 18,976
Other income - net 383,909 98,370 24,064
------------ ------------ ------------
Total other income (expense) 265,649 (91,164) (491,500)
------------ ------------ ------------
Income before minority interest 9,768,062 7,562,899 5,297,498
Minority interest in net income of
variable interest entities -- 493,558 --
------------ ------------ ------------
Income before income taxes 9,768,062 7,069,341 5,297,498
Income tax expense 3,438,698 2,053,095 1,659,064
------------ ------------ ------------
Net income $ 6,329,364 $ 5,016,246 $ 3,638,434
============ ============ ============
Net income per common share
Basic $ 1.26 $ 1.12 $ 1.01
============ ============ ============
Diluted $ 1.26 $ 1.12 $ 1.01
============ ============ ============
Weighted average common shares
outstanding
Basic 5,017,046 4,471,687 3,595,406
============ ============ ============
Diluted 5,021,887 4,476,944 3,603,051
============ ============ ============
The accompanying notes are an integral part of these financial statements.
40
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
Fiscal years ended January 31, 2006, 2005 and 2004
Common stock Additional
--------------------------- paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
Balance, January 31, 2003 2,969,107 $ 29,691 $ 8,762,673 $ 12,567,060 $ 21,359,424
Net income 3,638,434 3,638,434
Exercise of stock options 10,400 104 29,008 29,112
10% stock dividend 294,418 2,944 3,070,780 (3,073,724) --
------------ ------------ ------------ ------------ ------------
Balance, January 31, 2004 3,273,925 32,739 11,862,461 13,131,770 25,026,970
Exercise of stock options 6,210 62 54,370 -- 54,432
Net income 5,016,246 5,016,246
Proceeds from secondary
stock offering, net of expenses 1,280,750 12,808 24,356,215 -- 24,369,023
------------ ------------ ------------ ------------ ------------
Balance, January 31, 2005 4,560,885 $ 45,609 $ 36,273,046 $ 18,148,016 $ 54,466,671
Net Income 6,329,364 6,329,364
10% stock dividend 456,161 4,561 6,158,175 (6,162,735)
------------ ------------ ------------ ------------ ------------
Balance, January 31, 2006 5,017,046 $ 50,170 $ 42,431,221 $ 18,314,645 $ 60,796,036
------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
41
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Fiscal year ended January 31,
2006 2005 2004
---- ---- ----
Cash flows from operating activities
Net income $ 6,329,364 $ 5,016,246 $ 3,638,434
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Reserve for inventory obsolescence (31,000) (20,831) 63,000
Deferred income taxes 43,803 (334,795) 446,750
Depreciation and amortization 993,686 884,140 803,234
Minority interest in variable interest entity -- 493,558 --
Impairment of goodwill -- -- 248,834
(Increase) decrease in operating assets:
Accounts receivable (726,169) (547,054) (2,206,132)
Inventories (13,693,881) (4,619,385) (858,763)
Prepaid income taxes and other
current assets (1,046,265) 254,613 (663,540)
Other assets 323,427 (73,267) 260,256
Increase (decrease) in operating liabilities
--
Accounts payable (391,737) (751,102) 447,315
Accrued expenses and other liabilities (225,580) 157,083 3,444
------------ ------------ ------------
Net cash (used in) provided by
operating activities (8,424,352) 459,206 2,182,832
------------ ------------ ------------
Cash flows from investing activities
Purchase of Mifflin Valley (1,907,680) -- --
Purchases of property and equipment (4,592,897) (836,194) (1,367,707)
------------ ------------ ------------
Net cash used in investing activities (6,500,577) (836,194) (1,367,707)
------------ ------------ ------------
Cash flows from financing activities
Net borrowings (payments) under credit agreements 7,272,000 (16,784,781) 126,899
Distributions to minority interest in variable
interest entity (521,575) --
Proceeds from exercise of stock options 54,432 29,112
Proceeds from secondary stock offering 24,369,023 --
------------ ------------ ------------
Net cash provided by financing
activities 7,272,000 7,117,099 156,011
------------ ------------ ------------
Net (Decrease) increase in cash and cash equivalents (7,652,929) 6,740,111 971,136
Cash and cash equivalents at beginning of year 9,185,382 2,445,271 1,474,135
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,532,453 $ 9,185,382 $ 2,445,271
============ ============ ============
See notes for Supplemental Cash Flow information.
The accompanying notes are an integral part of these financial statements
42
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
1. - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------
Business
- --------
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware
corporation, organized in April 1982, manufactures and sells a comprehensive
line of safety garments and accessories for the industrial protective clothing
market. The principal market for the company's products is in the United States.
No customer accounted for more than 10% of net sales during the fiscal years
ended January 31, 2006, 2005 and 2004.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Laidlaw, Adams & Peck, Inc. and
Subsidiary (MeiYang Protective Products Co. Ltd., a Chinese corporation),
Lakeland Protective Wear, Inc. (a Canadian corporation), Weifang Lakeland Safety
Products Co., Ltd. (a Chinese corporation), Qing Dao Maytung Healthcare Co.,
Ltd. (a Chinese corporation), Lakeland Industries Europe Ltd. (a British
corporation), Mifflin Valley, Inc. (a Delaware Corporation), RFB Lakeland
Industries Private, Ltd (an Indian Corporation) and Lakeland de Mexico S.A. de
C.V. (a Mexican corporation). All significant intercompany 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 ("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 arewere 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 leaseleased 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 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. There are no collateralized assets
related to the variable interest entity recorded at January 31, 2005.
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, 2005.
Interim disclosures of net pensions costs are not material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
We are exposed to market risk, including changes in interest rates and
currency exchange rates. To manage the volatility relating to these exposures,
we seek to limit, to the extent possible, our non-U.S. dollar denominated
purchases.
Foreign Currency Risk
We are exposed to changes in foreign currency exchange rates as a result
of our purchases and sales in other countries. To manage the volatility relating
to foreign currency exchange rates, we seek to limit, to the extent possible,
our non-U.S. dollar denominated purchases and sales.
In connection with our operations in China, we purchase a significant
amount of products from outside of the United States. However, our purchases in
China are primarily made in Chinese Yuan, the value of which has been largely
pegged to the U.S. dollar for the last decade. As a result, any currency risks
related to these transactions are deemed to be immaterial to us as a whole.
Our primary risk from foreign currency exchange rate changes is presently
related to non-U.S. dollar denominated sales in Canada and, to a smaller extent,
in Europe. Our sales to customers in Canada are denominated in Canadian dollars.
If the value of the U.S. dollar increases relative to the Canadian dollar, then
our net sales could decrease as our products would be more expensive to our
Canadian customers because of the exchange rate change. Although our sales in
China are denominated in the Chinese Yuan, because this currency has been
largely pegged to the U.S. dollar, our foreign currency exchange rate risk in
China has been minimized. At this time, we do not manage the foreign currency
risk through the use of derivative instruments. A 10% decrease in the value of
the U.S. dollar relative to foreign currencies would not have a material impact
on our results of operations or financial position. As non-U.S. dollar
denominated international purchases and sales grow, exposure to volatility in
exchange rates could have a material adverse impact on our financial results.
25
Interest Rate Risk
We are exposed to interest rate risk with respect to our credit
facilities, which have variable interest rates based upon the London Interbank
Offered Rate. At January 31, 2005, we had no borrowings outstanding under these
credit facilities. If the interest rate applicable to this variable rate debt
rose 1% in the year ended January 31, 2005, our interest expense would have
increased and our income before income taxes would have decreased by less than
$200,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Index to Consolidated Financial Statements
------------------------------------------
Consolidated Financial Statements:
Page No.
--------
Report of Independent Registered Public Accounting Firm A-28
Report of Independent Registered Public Accounting Firm A-29
Consolidated Balance Sheets - January 31, 2005 and 2004 A-30
Consolidated Statements of Income for the years ended A-31
January 31, 2005, 2004 and 2003
Consolidated Statement of Stockholders' Equity for the years ended A-32
January 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended A-33
January 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements A-34 to 52
Schedule II - Valuation and Qualifying Accounts A-53
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
26
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Lakeland Industries, Inc. and Subsidiaries
Ronkonkoma, New York
We have audited the accompanying consolidated balance sheet of Lakeland
Industries, Inc. and Subsidiaries as of January 31, 2005 and the
related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. We have also audited the schedule listed in Item 15(a)(2) of
this Form 10-K for the year ended January 31, 2005. These consolidated financial
statements and schedule are the responsibilitycreditors of the Company's management. Our
responsibility isVIE had no recourse to express an opinion on these consolidated financial
statements and the schedule based on our audit.
We conducted our audit in accordance with the standardsgeneral credit of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statement and schedule. We believe that our audit
provides a reasonable basis for our opinion.Company.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Lakeland Industries, Inc. and Subsidiaries as of January 31, 2005 and the
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Holtz Rubenstein Reminick LLP
Melville, New York
April 7, 2005
27
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Board of Directors and Shareholders
of Lakeland Industries, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Lakeland Industries, Inc. and its subsidiaries at January 31, 2004, and the
results of their operations and their cash flows for each of the two years in
the period then ended in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule for the years ended January 31, 2004 and 2003
listed in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with related consolidated
financial information. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Melville, New York
April 2, 2004
28
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
---------------------------
January 31,
2005 2004
---- ----
Assets
Current assets
Cash and cash equivalents (which includes
$3,711,320 of marketable securities at January 31, 2005) $ 9,185,382 $ 2,445,271
Accounts receivable, net of allowance for doubtful accounts of
$323,000 at January 31, 2005 and 2004 respectively 13,117,374 12,570,320
Inventories, net of reserves of $396,000 at January 31, 2005 and 30,906,023 26,265,807
$417,000 at January 31, 2004
Deferred income taxes 960,734 790,272
Other current assets 958,491 1,213,104
----------- -----------
Total current assets 55,128,004 43,284,774
Property and equipment, net of accumulated depreciation of 5,014,240 3,921,308
$5,304,000 at January 31, 2005 and $4,511,000 at January
31, 2004
Other assets, net 171,010 97,745
----------- -----------
Total assets $60,313,254 $47,303,827
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 2,710,251 $ 3,461,353
Accrued compensation and benefits 842,319 796,285
Other accrued expenses 599,593 466,759
Borrowings under revolving credit facility -- 16,784,781
----------- -----------
Total current liabilities 4,152,163 21,509,178
Pension liability 495,330 517,147
Deferred income taxes 86,229 250,532
Minority interest in variable interest entity 1,112,861 --
----------- -----------
Total liabilities 5,846,583 22,276,857
----------- -----------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par; 1,500,000 shares
authorized; none issued
Common stock, $.01 par; 10,000,000 shares authorized;
4,560,885 and 3,273,925 shares issued and outstanding 45,609 32,739
at January 31, 2005 and 2004, respectively
Additional paid-in capital 36,273,046 11,862,461
Retained earnings 18,148,016 13,131,770
----------- -----------
Total stockholders' equity 54,466,671 25,026,970
----------- -----------
Total liabilities and stockholders' equity $60,313,254 $47,303,827
=========== ===========
The accompanying notes are an integral part of these financial statements.
29
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Fiscal years ended January 31,
2005 2004 2003
Net sales $95,320,163 $89,717,162 $77,825,717
Cost of goods sold 74,924,375 71,740,876 62,866,550
----------- ----------- -----------
Gross profit 20,395,788 17,976,286 14,959,167
----------- ----------- -----------
Operating expenses
Selling and shipping 7,871,423 7,342,017 6,337,726
General and administrative 4,870,302 4,596,437 4,262,707
Impairment of goodwill -0- 248,834 - 0 -
----------- ----------- -----------
Total operating expenses 12,741,725 12,187,288 10,600,433
----------- ----------- -----------
Operating profit 7,654,063 5,788,998 4,358,734
----------- ----------- -----------
Other income (expense)
Interest expense (207,912) (534,540) (642,595)
Interest income 18,378 18,976 20,245
Other income - net 98,370 24,064 39,555
----------- ----------- -----------
Total other expense (91,164) (491,500) (582,795)
----------- ----------- -----------
Income before minority interest 7,562,899 5,297,498 3,775,939
Minority interest in net income of
variable interest entities 493,558 -- --
----------- ----------- -----------
Income before income taxes 7,069,341 5,297,498 3,775,939
Income tax expense 2,053,095 1,659,064 1 ,171,881
----------- ----------- -----------
Net income $ 5,016,246 $ 3,638,434 $ 2,604,058
=========== =========== ===========
Net income per common share
Basic $ 1.23 $ 1.11 $ .80
=========== =========== ===========
Diluted $ 1.23 $ 1.11 $ .80
=========== =========== ===========
Weighted average common shares
outstanding
Basic 4,065,170 3,268,551 3,261,116
=========== =========== ===========
Diluted 4,069,949 3,275,501 3,269,039
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
30
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
Fiscal years ended January 31, 2005, 2004 and 2003
Common stock Additional
-------------------------- paid-in Retained
Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
Balance, January 31, 2002 2,684,600 $ 26,846 $ 6,360,741 $12,339,367 $18,726,954
Net income 2,604,058 2,604,058
Exercise of stock options 10,100 101 28,311 28,412
10% stock dividend 274,407 2,744 2,373,621 (2,376,365) --
----------- ----------- ----------- ----------- -----------
Balance, January 31, 2003 2,969,107 29,691 8,762,673 12,567,060 21,359,424
Net income 3,638,434 3,638,434
Exercise of stock options 10,400 104 29,008 29,112
10% stock dividend 294,418 2,944 3,070,780 (3,073,724) --
----------- ----------- ----------- ----------- -----------
Balance, January 31, 2004 3,273,925 32,739 11,862,461 13,131,770 25,026,970
Exercise of stock options 6,210 62 54,370 -- 54,432
Net income 5,016,246 5,016,246
Proceeds from secondary
stock offering, net of expenses 1,280,750 12,808 24,356,215 -- 24,369,023
----------- ----------- ----------- ----------- -----------
Balance, January 31, 2005 4,560,885 $ 45,609 $36,273,046 $18,148,016 $54,466,671
----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
31
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Fiscal year ended January 31,
2005 2004 2003
---- ---- ----
Cash flows from operating activities
Net income $ 5,016,246 $ 3,638,434 $ 2,604,058
Adjustments to reconcile net income to net cash
provided by operating activities
Reserve for inventory obsolescence (20,831) 63,000 254,000
Provision for bad debts -- -- (20,000)
Deferred income taxes (334,795) 446,750 (401,490)
Depreciation and amortization 884,140 803,234 595,384
Minority interest in variable interest entity 493,558 -- --
Impairment of goodwill -- 248,834 --
(Increase) decrease in operating assets
Accounts receivable (547,054) (2,206,132) (743,450)
Inventories (4,619,385) (858,763) 805,106
Prepaid income taxes and other
current assets 254,613 (663,540) 216,739
Other assets (73,267) 260,256 47,365
Increase (decrease) in operating liabilities
Accounts payable (751,102) 447,315 (1,913,434)
Accrued expenses and other liabilities 157,083 3,444 355,724
------------ ------------ ------------
Net cash provided by
operating activities 459,206 2,182,832 1,800,002
------------ ------------ ------------
Cash flows from investing activities
Purchases of property and equipment (836,194) (1,367,707) (1,733,759)
------------ ------------ ------------
Net cash used in investing activities (836,194) (1,367,707) (1,733,759)
------------ ------------ ------------
Cash flows from financing activities
Borrowings from related party to finance
construction of a building -- -- 168,099
Net borrowings (payments) under credit agreements (16,784,781) 126,899 (549,254)
Distributions to minority interest in variable interest
entity (521,575) -- --
Proceeds from exercise of stock options 54,432 29,112 28,412
Proceeds from secondary stock offering 24,369,023 -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities 7,117,099 156,011 (352,743)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,740,111 971,136 (286,500)
Cash and cash equivalents at beginning of year 2,445,271 1,474,135 1,760,635
------------ ------------ ------------
Cash, marketable securities and cash equivalents at end of year $ 9,185,382 $ 2,445,271 $ 1,474,135
============ ============ ============
See notes for Supplemental Cash Flow information.
The accompanying notes are an integral part of these financial statements
32
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2005, 2004 and 2003
1. - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Business
- --------
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware
corporation, organized in April 1982, manufactures and sells a comprehensive
line of safety garments and accessories for the industrial protective clothing
market. The principal market for the company's products is in the United States.
No customer accounted for more than 10% of net sales during the fiscal years
ended January 31, 2005, 2004 and 2003.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of2006 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
Productspurchased the property owned by River Group
Holding Co., Ltd. (a Chinese corporation), Qing Dao Maytung HealthcareL.L.P. and POMS Holding 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 intercompany accounts and transactions have been eliminated.
Revenue Recognition
- -------------------
The Company derives its sales primarily from its limited use/disposable
protective clothing and secondarily from its sales of high-end chemical
protective suits, fire fighting and heat protective apparel, gloves and arm
guards, and reusable woven garments. Sales are recognized when goods are shipped
at which time title and the risk of loss passes to the customer. Sales are
reduced for sales returns and allowances. Payment terms are generally net 30
days for United States sales and net 90 days for international sales. Domestic
and international sales are as follows:
Fiscal Years Ended January 31,
2005 2004 2003
-------- -------- --------
Domestic $86,320,000 90.6% $81,763,000 91.1% $72,126,000 92.7%
International 9,000,000 9.4% 7,954,000 8.9% 5,700,000 7.3%
----------- ------ ----------- ------ ----------- ------
Total $95,320,000 100.0% $89,717,000 100.0% $77,826,000 100.0.%
=========== ====== =========== ====== =========== ======
43
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
1. (continued)
- --------------
Fiscal Years Ended January 31,
2006 2005 2004
---- ---- ----
Domestic $89,107,000 90.2% $86,320,000 90.6% $81,763,000 91.1%
International 9,633,000 9.8% 9,000,000 9.4% 7,954,000 8.9%
----------- ----- ----------- ----- ----------- -----
Total $98,740,000 100.0% $95,320,000 100.0% $89,717,000 100.0%
=========== ===== =========== ===== =========== =====
Inventories
- -----------
Inventories include freight-in, materials, labor and overhead costs and
are stated at the lower of cost (on a first-in first-out basis) or market.
Provision is made for slow-moving, obsolete or unusable inventory.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives, on a straight-line basis.
Leasehold improvements and leasehold costs are amortized over the term of the
lease or service lives of the improvements, whichever is shorter. The costs of
additions and improvements which substantially extend the useful life of a
particular asset are capitalized. Repair and maintenance costs are charged to
expense. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the account and the gain or loss on
disposition is reflected in operating income.
33
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2005, 2004 and 2003
1. (continued)
- --------------
Self-Insured Liabilities. The Company has 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. This estimate is based upon
historical trends and amounted to $90,000 and $0 at January 31, 2005 and 2004,
respectively. The Company maintains separate insurance to cover the excess
liability over set single claim amounts and aggregate annual claim amounts.
Goodwill
- --------
On February 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which provides
that goodwill and other intangible assets will no longer be amortized, but are
assessed for impairment annually and upon occurrence of an event that indicates
impairment may have occurred. Goodwill impairment is evaluated, utilizing a
two-step process as required by SFAS No. 142. Factors that the Company considers
important that could identify a potential impairment include: significant under
performance relative to expected historical or projected future operating
results; significant changes in the overall business strategy; and significant
negative industry or economic trends. When the Company determines that the
carrying value of intangibles and goodwill may not be recoverable based upon one
or more of these indicators of impairment, the Company measures any potential
impairment based on a projected discounted cash flow method. Estimating future
cash flows requires the Company's management to make projections that can differ
materially from actual results.
In fiscal 2004, as a result of the Company's decision to move a portion of
our reusable woven garment assembly from the United States to China, the Company
reviewed this portion of its business for impairment. The impairment was
calculated based on estimating the fair value utilizing a discounted cash flow
analysis, resulting in an impairment of $0.2 million in fiscal 2004. The Company
had no remaining goodwill recorded at January 31, 2004. 34In June 2005 the Company
purchased Mifflin Valley, Inc, a Pennsylvania Manufacturer. This acquisition
resulted in the recording of $871,297 in Goodwill as of January 31, 2006.
Self-Insured Liabilities.
- -------------------------
The Company has 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. This estimate is based upon historical trends and
amounted to $120,000 and $90,000 at January 31, 2006 and 2005, respectively. The
Company maintains separate insurance to cover the excess liability over set
single claim amounts and aggregate annual claim amounts.
44
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 2004 and 20032004
1. (continued)
- --------------
Stock-Based Compensation
- ------------------------
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123"). In compliance with SFAS
123, the company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans and does not
recognize compensation expense for its employee stock-based compensation plans.
The Company has also adopted the disclosure provisions of SFAS No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure." This
pronouncement requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results. If the
Company had elected to recognize compensation expense based upon the fair value
at the date of grant for awards under these plans, consistent with the
methodology prescribed by SFAS 123, the effect on the Company's net income and
earnings per share as reported would be reduced for the years ended January 31,
2005, 2004 and 2003 to the pro forma amounts indicated below:
2005 2004 2003
---- ---- ----
Net income
As reported $5,016,246 $3,638,434 $2,604,058
Less:
Option expense based on fair value
method, net of tax benefit 91,331 28,344 --
---------- ---------- ----------
Pro forma $4,924,915 $3,610,090 $2,604,058
========== ========== ==========
Basic earnings per common share
As reported $ 1.23 $ 1.11 $ .80
Pro forma $ 1.21 $ 1.10 $ .80
Diluted earnings per common share
As reported $ 1.23 $ 1.11 $ .80
Pro forma $ 1.21 $ 1.10 $ .80
2006 2005 2004
---- ---- ----
Net income
As reported $ 6,329,364 $ 5,016,246 $ 3,638,434
Less:
Stock -based employee compensation
expense determined under fair value
based method, net of related tax benefit 9,627 91,331 28,344
----------- ----------- -----------
Net income, Pro forma $ 6,319,737 $ 4,924,915 $ 3,610,090
=========== =========== ===========
Basic earnings per common share
As reported $ 1.26 $ 1.12 $ 1.01
Pro forma $ 1.26 $ 1.10 $ 1.00
Diluted earnings per common share
As reported $ 1.26 $ 1.12 $ 1.01
Pro forma $ 1.26 $ 1.10 $ 1.00
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following assumptions for the
years ended January 31, 2006, 2005 and 2004: expected volatility of 87%, 58% and
57%, respectively; risk-free interest rate of 3.6%, 3.6% and 3.25%,
respectively; expected dividend yield of 0.0%; and expected life of six years.
All stock-based awards were fully vested at January 31, 2005, 2004 and 2003 and
7,000 new option grants were made during the year ended January 31, 2004. No
options were granted in 2003.2006. During fiscal 2005 1,000 Option Shares granted to
a Director upon re-election in June 2004 were cancelled upon his resignation in
November 2004. In November 2004 two new directors were appointed and granted
5,000 option shares each, which arewere not exercisable at January 31, 2005.
Earnings per share have been adjusted to reflect the 10% stock dividends to
stockholders of record as of April 30, 2005 and July 31, 2003
and 2002, but not the 10% dividend declared November 17, 2004 based on holders
of record as of April 30, 2005.2003.
Allowance for Doubtful Accounts
- -------------------------------
The Company establishes an allowance for doubtful accounts to provide for
accounts receivable that may not be collectible. In establishing the allowance
for doubtful accounts, the Company analyzes the collectibility of individual
large or past due accounts customer-by-customer. The Company establishes
reserves for accounts that it determines to be doubtful of collection.
3545
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 2004 and 20032004
1. (continued)
- --------------
Shipping and Handling Costs
- ---------------------------
For larger orders except in its Fyrepel product line, the Company absorbs
the cost of shipping and handling. For those customers who are billed the cost
of shipping and handling fees, such amounts are included in net sales. Shipping
and handling costs associated with outbound freight are included in selling and
shipping expenses and aggregated approximately $2,411,000, $2,355,000, $2,394,000, and
$1,835,000$2,394,000 in the fiscal years ended January 31, 2006, 2005 2004 and 2003,2004,
respectively.
Research and Development Costs
- ------------------------------
Research and development costs are expensed as incurred and included in
general and administrative expenses. Research and development expenses
aggregated approximately $90,000, $89,000, $82,000, and $164,000$82,000 in the fiscal years ended
January 31, 2006, 2005 and 2004, respectively, and 2003, respectively,were paid to contractors for
development of new raw materials.
Income Taxes
- ------------
The Company is required to estimate its income taxes in each of the
jurisdictions in which it operates as part of preparing the consolidated
financial statements. This involves estimating the actual current tax in
addition to assessing temporary differences resulting from differing treatments
for tax and financial accounting purposes. These differences, together with net
operating loss carryforwardscarry forwards and tax credits, are recorded as deferred tax
assets or liabilities on the Company's balance sheet. A judgment must then be
made of the likelihood that any deferred tax assets will be recovered from
future taxable income. A valuation allowance may be required to reduce deferred
tax assets to the amount that is more likely than not to be realized. In the
event the Company determines that it may not be able to realize all or part of
our deferred tax asset in the future, or that new estimates indicate that a
previously recorded valuation allowance is no longer required, an adjustment to
the deferred tax asset is charged or credited to income in the period of such
determination.
Earnings Per Share
- ------------------
Basic earnings per share are based on the weighted average number of
common shares outstanding without consideration of common stock equivalents.
Diluted earnings per share are based on the weighted average number of common
and common stock equivalents. The common stock equivalents for the years ended
January 31, 2006, 2005 and 2004 were 4,841, 5,257, and 2003 were 4,779 and 6,950 and 7,9237,645 respectively,
representing the dilutive effect of stock options. The diluted earnings per
share calculation takes into account the shares that may be issued upon exercise
of stock options, reduced by shares that may be repurchased with the funds
received from the exercise, based on the average price during the fiscal year
(as adjusted for the 10% stock dividend to holders of record April 30, 2005 and
July 31, 2003 and
2002)2003). Options to purchase 1,100 shares of the Company's common stock have been
excluded from the computation of diluted earnings per share in 2003 as their
inclusion would have been anti-dilutive.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred. Advertising costs (income)
amounted to $(43, 104), $(15,326), $86,603, and $(74,879)$86,603 in the fiscal years ended January
31, 2006, 2005 2004 and 2003,2004, respectively, net of co-op advertising allowance
received from DuPont. These reimbursements include some costs which are
classified in categories other than advertising such as payroll.
3646
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 2004 and 20032004
1. (continued)
- --------------
Statement of Cash Flows
- -----------------------
The Company considers highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market funds. The market value of the cash
equivalents approximates cost. Foreign denominated cash and cash equivalents
were approximately $2,707,000,$1,194,000, $2,707, 000, and $2,012,000 and $1,011,000 at January 31, 2006,
2005 2004 and 2003,2004, respectively.
Supplemental cash flow information for the years ended January 31 is as
follows:
2006 2005 2004
2003
---------- ---------- -------------- ---- ----
Interest paid $ 166,805 $ 207,912 $ 534,540
$ 642,595
Income taxes paid $3,402,723 $2,103,682 $1,303,513 $ 895,401
Concentration of Credit Risk
- ----------------------------
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of trade receivables.
Concentration of credit risk with respect to these receivables is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion across geographic areas principally within
the United States. The Company routinely addresses the financial strength of its
customers and, as a consequence, believes that its receivable credit risk
exposure is limited. The Company does not require customers to post collateral.
The largest foreign cash balances are deposited in HSBC in China and the
UK and in the TD Canada Trust Bank in Canada. The utilization of these larger
banking facilities minimizes risk of deposits held in foreign countries.
Foreign Operations and Foreign Currency Translation
- ---------------------------------------------------
The Company maintains manufacturing operations and uses independent
contractors in Mexico, India and the People's Republic of China. It also
maintains a sales and distribution entity located in Canada and the U.K. The
Company is vulnerable to currency risks in these countries. The functional
currency of foreign subsidiaries is the U.S. dollar.
The monetary assets and liabilities of the Company's foreign operations
are translated into U.S. dollars at current exchange rates, while non-monetary
items are translated at historical rates. Revenues and expenses are generally
translated at average exchange rates for the year. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred and aggregated approximately $66,000, $58,000, $29,000, and
$95,000$29,000 for the fiscal years ended January 31, 2006, 2005 2004 and 2003,2004,
respectively.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
year-end and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The most significant
estimates include the allowance for doubtful accounts and inventory reserves. It
is reasonably possible that events could occur during the upcoming year that
could change such estimates.
3747
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 2004 and 20032004
1. (continued)
- --------------
Fair value of Financial Instruments
- -----------------------------------
The Company's principal financial instrument consists of its outstanding
revolving credit facility and term loan. The Company believes that the carrying
amount of such debt approximates the fair value as the variable interest rates
approximate the current prevailing interest rate.
Effects of Recent Accounting Pronouncements
- -------------------------------------------
In 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 interimannual reporting period that begins after June 15, 2005.
On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No.
107"), which provides the Staff's views regarding interactions between SFAS No.
123R and certain SEC rules and regulations and provides interpretations of the
valuation of share-based payments for public companies. If the Company had
included the cost of employee stock option compensation in ourits financial
statements it would not have had a material effect on our net income for the
years ended January 31, 2006, 2005, 2004, and 2003.2004.
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,May 2005, the FASB issued SFAS No. 153, "Exchange154, "Accounting Changes and Error
Corrections - A Replacement of Non-monetary Assets", an amendment of Accounting Principles Board ("APB")APB Opinion No. 29, which differed from the International Accounting Standards
Board's ("IASB") method of accounting for exchanges of similar productive
assets.20 and FASB Statement No. 153 replaces3"
("SFAS No. 154"). SFAS No. 154 requires the exception from fair value measurementretrospective application to prior
periods' financial statements of changes in APBaccounting principle, unless it is
impracticable to determine either the period-specific effects or cumulative
effect of the accounting change. SFAS No. 29, with154 also requires that a general exception from fair value measurementchange in
depreciation, amortization, or depletion method for exchanges
of non-monetarylong-lived non-financial
assets that do not have commercial substance. The statement is
to be applied prospectively andaccounted for as a change in accounting estimate affected by a change
in accounting principle. SFAS No. 154 is effective for non-monetary asset exchanges
occurringaccounting changes and
corrections of errors made in fiscal periodsyears beginning after JuneDecember 15, 2005. The Company does not
believe that SFAS No. 153 will have a material impact on its results of
operations 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 were 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 directors and officers of Lakeland. Under
FIN 46, it is likely that leases between an entity and its related parties
38
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2005, 2004 and 2003
1. (continued)
- --------------
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. There are no collateralized assets
related to the variable interest entity recorded at January 31, 2005 and the
creditors of the VIE have no recourse to the general credit of the Company.
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, 2005.
Interim disclosures of net pensions costs are not material.
Comprehensive income (loss)
- ---------------------------
Comprehensive income (loss) refers to revenue, expenses, gains and losses
that under generally accepted accounting principles are included in
comprehensive income but are excluded from net income as these amounts are
recorded directly as an adjustment to stockholders' equity. At January 31, 2006,
2005 and 2004, there were no such adjustments required or such amounts were diminimus..de
minimus.
48
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
2 -INVENTORIES
- INVENTORIES
- -----------------------------
Inventories consist of the following at January 31:
2006 2005
2004---- ----
Raw materials $18,656,894 $12,231,264
Work-in-process 1,996,027 2,614,710
Finished goods 24,590,569 16,060,049
----------- -----------
Raw materials $12,231,264 $10,868,816
Work-in-process 2,614,710 2,279,444
Finished goods 16,060,049 13,117,547
----------- -----------$45,243,490 $30,906,023 $26,265,807
----------- -----------
3 - PROPERTY,-PROPERTY, PLANT AND EQUIPMENT
- -----------------------------------------------------------------
Property and equipment consist of the following at January 31:
Useful life
in years 2006 2005
2004
----------- ----------- ------------------- ---- ----
Machinery and equipment 3 - 10 $6,236,736 5,819,322$ 6,919,530 $ 6,236,736
Furniture and fixtures 3 - 10 294,087 249,971 205,216
Leasehold improvements Lease term 964,587 867,358
802,318Land and Building (in China) 20 2,153,592 1,823,027
1,605,737Land and Buildings (minority interest)interest in 2005) 39 3,623,471 1,140,878 -0-
----------- -----------
13,955,267 10,317,970 8,432,593
Less accumulated depreciation and amortization (6,200,502) (5,303,730) (4,511,285)
----------- -----------
$ 5,014,2407,754,765 $ 3,921,3085,014,240
=========== ===========
Depreciation expense incurred in fiscal 2006, 2005 2004 and 20032004 amounted to
$993,686, $884,140, $803,234, and $595,384$803,234 respectively. Net fixed assets in China were
approximately $2.2 million, $1.9$2.2 million, and $1.4$1.9 million as of January 31, 2006,
2005 2004 and 2003,2004, respectively. Net fixed assets in Mexico were approximately
$154,000, $133,000,and $168,000 at January 31, 2006, 2005 and 2004,
respectively.
3949
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
4-BUSINESS COMBINATIONS
- -----------------------
On August 1, 2005, the Company acquired the assets and operations and
assumed certain liabilities of Mifflin Valley, Inc., ("Mifflin") of Shillington,
PA for an initial purchase price of $1.6 million, subject to certain
adjustments. Final payment was made in November 2005 following the audit of a
closing date balance sheet. The final price amounted to $1.9 million and
included adjustments for the payoff of a revolving loan of $.2 million and
adjustments for inventory, fixed asset values and allowances for doubtful
accounts. Mifflin did approximately $2.6 million of sales in 2004, and 2003
4 - LONG-TERM$1.5
million for the six months ended June 30, 2005. Mifflin is a manufacturer of
protective clothing specializing in safety and visibility, largely for the
Emergency Services market, and also for the entire public safety and traffic
control market. Mifflin specializes in customized garments to suit customers'
needs, coupled with quality, service, price and delivery. Mifflin's products
include flame retardant garments for the Fire Industry, Nomex clothing for
utilities, and high visibility reflective outerwear for Departments of
Transportation. The purchase was effective as of July 1, 2005 and the results of
Mifflin's operations have been included since July 1, 2005 in the Company's
reported results , adding approximately $1.8 million in revenue for the seven
months ended January 31, 2006 and $.02 to earnings per share to the actual
reported results. Had the transaction taken place on February 1, 2005, on a
proforma basis, there would have been an increase in the reported amounts as
follows:
Twelve months ended January 31, 2006
Pro Forma Results Combined with Mifflin Valley Additional resulting from Mifflin Valley
---------------------------------------------- ----------------------------------------
Sales $100,043,000 $1,303,000
Net Income $ 6,411,000 $ 82,000
Earnings per share $ 1.28 $ 0.02
Had the transactions taken place on February 1, 2004, on a Pro Forma basis, the
effect on the reported amounts for the twelve months ended January 31, 2005 is
considered by management to be insignificant.
Condensed Balance Sheet Information:
Accounts receivable $ 363,000
Inventory 667,000
Equipment 216,000
Other assets 35,000
----------
Total assets 1,281,000
----------
Accounts payable 261,000
Other liabilities 185,000
----------
Total liabilities 446,000
----------
Net assets acquired 835,000
Purchase price 1,767,000
----------
Excess purchase price $ 932,000
==========
Allocated to:
Goodwill $ 871,000
Other intangibles 61,000
----------
$ 932,000
==========
The above goodwill is deductible for tax purposes to be amortized over a 15 year
life.
5 -LONG-TERM DEBT
- -----------------------------------
Revolving Credit Facility
In July 2005 the Company entered into a new $25 million five year
revolving credit facility with Wachovia Bank, N.A. At January 31, 2006, the
balance outstanding under this revolving credit facility amounted to $7.3
million. The credit facility is collateralized by substantially all of the
assets of the Company. The credit facility contains financial covenants,
including, but not limited to, fixed charge ratio, funded debt to EBIDTA ratio,
inventory and accounts receivable collateral coverage ratio, with respect to
which the Company was in compliance at January 31, 2006 and for the year then
ended. The weighted average interest rate for the year ended January 31, 2006
was 4.85%.
50
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
5. (continued)
- --------------
The Company's previous agreement with its lending institution, as amended,
providesprovided the Company with a revolving credit facility of $18 million. The
balance was paid in full on June 18, 2004 using the proceeds from the Company's
June 18, 2004 Secondary Stock Offering. This credit facility, which iswas subject
to a borrowing base calculated on a percentage of eligible accounts receivable
and inventory as defined, bearsbore interest at LIBOR plus 2% (4.69% at January 31,
2005) and pursuant to an amendment in May 2004 expiresexpired on July 31, 2005. The
agreement was amended on March 9, 2001 to (i) extend the maturity date to
October 31, 2001, (ii) modify the interest rate, and (iii) modify certain
financial covenants. The agreement was amended on July 12, 2001 to (i) extend
the maturity date to July 31, 2002, (ii) increase the amount available under the
revolving line of credit from $14 million to a percentage of eligible accounts
receivable and inventory as defined, up to a maximum of $18 million, (iii)
modify the interest rate, and (iv) modify a certain financial covenant. The
maximum amounts borrowed under the credit facility during the fiscal years ended
January 31, 2005 2004 and 20032004 were $17,000,000, $18,000,000, and $18,000,000 respectively, and
the average interest rates during the periods were 3.67%, and 3.20% and 3.73%,
respectively. At January 31, 2005, the Company had $18,000,000
in availability under the agreement.
In January 2004, the Company entered into a new 3-year $3 million
revolving credit facility which expires on 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%. The Company did not
have any borrowings outstanding under this facility at January 31, 2005 or 2004.
At January 31, 2005, the Company had $2,083,333 in availability under the
Agreement.
Term Loan
In November 1999, the Company entered into a $3,000,000, five-year term
loan which was paid in full in March 2003.
The credit facility is and the term loan was collateralized by substantially all of the assets
of the Company. The credit facility and term loan contain financial covenants,
including, but not limited to, minimum levels of earnings and maintenance of
minimum tangible net worth and other certain ratios at all times. The fees
incurred by the Company related to the credit facility amounted to $25,000,
$15,000 $63,000, and $63,000 during fiscal 2006, 2005 and 2004, and
2003, respectively.
5.6. - STOCKHOLDERS' EQUITY AND STOCK OPTIONS
- -------------------------------------------
On June 18, 2004 the company completed its secondary public offering by
issuing an additional 1,100,000 shares of its common stock. On July 1, 2004 an
additional 180,750 shares of its common stock was issued pursuant to the
over-allotment section of the prospectus dated June 14, 2004. The Company
received $24.4 million, net of related expenses of $.4 million. The Company used
$16.8 million to pay off the balance of its revolving credit facility.
40
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2005, 2004 and 2003
5. (continued)
- --------------
The Non-employee Directors' Option Plan (the "Directors' Plan") provides
for an automatic one-time grant of options to purchase 5,000 shares of common
stock to each non-employee director elected or appointed to the Board of
Directors. Under the Directors' Plan, 60,000 shares of common stock have been
authorized for issuance. Options are granted at not less than fair market value,
become exercisable commencing six months from the date of grant and expire six
years from the date of grant. In addition, all non-employee directors re-elected
to the Company's Board of Directors at any annual meeting of the stockholders
will automatically be granted additional options to purchase 1,000 shares of
common stock on each of such dates.
The Company's 1986 Incentive and Non-statutory Stock Option Plan (the
"Plan") provides for the granting of incentive stock options and non-statutory
options. The Plan provides for the grant of options to key employees to purchase
up to 400,000 shares of the Company's common stock, upon terms and conditions
determined by a committee of the Board of Directors, which administers the plan.
Options are granted at not less than fair market value (110 percent of fair
market value as to incentive stock options granted to ten percent stockholders)
and are exercisable over a period not to exceed ten years (five years as to
incentive stock options granted to ten percent stockholders). This plan expired
in May 2004.
51
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
6. (continued)
- --------------
Additional information with respect to the Company's plans for the fiscal
years ended January 31, 2006, 2005 2004 and 20032004 is summarized as follows:
2006
-----------------------------------------------------
Directors' Plan Plan
(Expired May 1, 2004)
-----------------------------------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares * price shares price
-------- ----- ------ -----
Shares under option
Outstanding at beginning of year 16,330 $13.87
10% stock dividend 1,633
------
Outstanding and exercisable at end of year 17,963 $12.61
======
Weighted-average remaining contractual 3.7 years
life of options outstanding
* Adjusted for the 10% stock dividend to stockholders of record as of
April 30, 2005
-------------------------------------------------
2005
--------------------------------------------------
Directors' Plan Plan (expired May 1, 2004)
---------------------------------------------------------------------------------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
-------- ---------- --------- -------- -------------------
Shares under option
Outstanding at beginning of year 12,540 $ 7.70
--
Granted 11,000 18.431 --18.43
Cancelled (1,000) 21.99
--
Exercised (6,210) 8.77
--
-------------
Outstanding and exercisable at end of year 16,330 13.87
--
======= ======
Weighted-average remaining
contractual life of options outstanding 4.7 years
outstanding
Weighted-average fair value per shares
of options granted during 2005 $13.87
4152
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
and 2003
5.6. (continued)
2004
------------------------------------------------------------------------------------------------
Directors' Plan Plan
------------------------------------------------------------------------------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
-------- --------- ----------------- --------- ---------
Shares under option
Outstanding at beginning of year 9,900 $ 4.71 4,455 $ 1.86
10% stock dividend 1,140 445
Granted 7,000 8.74
Exercised (5,500) 3.81 (4,900) 1.86
------- ---------------- ---------
Outstanding and exercisable at end of year 12,540 7.70 0
======= =======
Weighted-average remaining contractual
life of options outstanding 4.25 years
Weighted-average fair value per shares of
options granted during 2004 $ 7.70
2003
-------------------------------------------------
Directors' Plan Plan
-------------------------------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
-------- --------- -------- ---------
Shares under option
Outstanding at beginning of year 9,000 $ 5.48 13,900 $ 2.70
10% stock dividend 900 655
Exercised 0 (10,100) 2.82
------- -------
Outstanding and exercisable at end of year 9,900 4.71 4,455 1.86
======= ================ =========
Weighted-average remaining contractual
life of options outstanding 1.54.25 years
1 yearWeighted-average fair value per shares of
options granted during 2004 $ 7.70
42
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2005, 2004 and 2003
5. (continued)
Summarized information about stock options outstanding under the two plans
at January 31, 20052006 is as follows (as adjusted for the 10% stock dividends):
Options outstanding and exercisable
--------------------------------------------------------------------------------------------------------
Weighted-
Number Average
Outstanding Remaining Weighted-
Range of At Contractual Average
Exercise prices January 31, 20052006 Life in years Exercise price
--------------- ---------------- ------------- --------------
$4.91-$4.46-$5.53 3,630 1.85 $ 5.12
$8.74-$18.431 12,700 6.10 16.82
6.5.03 3,993 0.83 $4.65
$7.94 2,970 3.50 7.94
$16.76 11,000 4.80 16.76
Reserved Shares:
1986 Stock Option Plan 329,422
Directors Option Plan 32,604
-------
362,026
=======
53
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
7. - INCOME TAXES
- -----------------
The provision for income taxes is based on the following pre-tax income:
Year Ended January 31,
2006 2005 2004 2003
---- ---- ----
Domestic $5,398,768 $3,292,770 $2,905,060$ 7,896,736 $ 5,398,768 $ 3,292,770
Foreign 1,871,326 1,670,573 2,004,728
870,879
---------- ---------- --------------------- ----------- -----------
Total $7,069,341 $5,297,498 $3,775,939
========== ---------- ----------$ 9,768,062 $ 7,069,341 $ 5,297,498
----------- ----------- -----------
The provision for income taxes is summarized as follows:
Year endedEnded January 31,
2006 2005 2004
2003
---------- ---------- -------------- ---- ----
Current
Federal $1,661,606$ 2,563,836 $ 1,661,606 $ 699,069
$1,273,371
State 448,656 330,337 99,324
163,984
Foreign 382,403 395,917 413,921
136,016
---------- ---------- --------------------- ----------- -----------
3,394,895 2,387,860 1,212,314
1,573,371
Domestic deferredDeferred 43,803 (334,765) 446,750
(401,490)
---------- ---------- ----------
$2,053,095 $1,659,064 $1,171,881
========== ========== ==========
43----------- ----------- -----------
$ 3,438,698 $ 2,053,095 $ 1,659,064
=========== =========== ===========
54
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
and 2003
6.7. (continued)
The following is a reconciliation of the effective income tax rate to the
Federal statutory rate:
Year ended January 31,
2006 2005 2004
---- ---- ----
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal tax benefit 2.0% 2.5% 1.7%
Nondeductible expenses (.2)% (.2)% .6%
Repatriation of foreign earnings 1.7% -- --
Foreign tax rate differential (2.7)% (2.0)% (3.2)%
Contribution carry forward realized -- (4.0)% --
Other .4% (1.3)% (1.8)%
---------- ---------- ----------
Effective rate 35.2% 29.0% 31.3%
========== ---------- ----------
The tax effects of temporary differences which give rise to deferred tax
assets at January 31, 2006, 2005 and 2004 are summarized as follows:
January 31,
2006 2005 2004
---- ---- ----
Deferred tax assets
Inventories $ 688,800 $ 606,652 $ 639,156
Accounts receivable 120,703 122,740 122,740
Accrued compensation and other 108,181 231,342 28,376
---------- ---------- ----------
Gross deferred tax assets 917,684 960,734 790,272
---------- ---------- ----------
Deferred tax liabilities
Depreciation and other 86,982 86,229 250,532
---------- ---------- ----------
Gross deferred tax liabilities 86,982 86,229 250,532
---------- ---------- ----------
Net deferred tax asset $ 830,702 $ 874,505 $ 539,740
========== ========== ==========
In January 31,
2005 2004 2003
---- ---- ----
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net2006, the company repatriated through dividends to the parent,
approximately $3.2 million of Federal tax benefit 2.5% 1.7% 2.3%
Nondeductible expenses (.2)% .6% --
Taxes on foreign income which differcumulative earnings from the statutory rate (2.0)% (3.2)% (4.7)%
Contribution carryforward realized (4.0)% -- --
Other (1.3)% (1.8)% (.6)%
----- ----- -----
Effective rate 29.0% 31.3% 31.0%
----- ----- -----
The tax effectsits Chinese subsidiaries,
thereby incurring approximately $164,000 of temporary differences which give rise to deferred tax assets
at January 31, 2005, 2004 and 2003 are summarized as follows:
January 31,
2005 2004
---- ----
Deferred tax assets
Inventories $606,652 $639,156
Net operating loss carry forward -
foreign subsidiary 0 0
Accounts receivable 122,740 122,740
Accrued compensation and other 231,342 28,376
-------- --------
Gross deferred tax assets 960,734 790,272
-------- --------
Deferred tax liabilities
Depreciation and other 86,229 250,532
-------- --------
Gross deferred tax liabilities 86,229 250,532
-------- --------
Net deferred tax asset $874,505 $539,740
======== ========
At January 31, 2005, the remaining contribution carryforward amount is $85,992.
44additional US taxes.
55
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
and 2003
7.8. - BENEFIT PLANS
- ------------------
Defined Benefit Plan
The Company has a frozen defined benefit pension plan that covers former
employees of an acquired entity. The Company's funding policy is to contribute
annually the recommended amount based on computations made by its consulting
actuary as of January 31, 2006, 2005 2004 and 2003.2004.
The following table sets forth the plan's funded status for the fiscal
year ended January 31:
2006 2005
2004
---------- -------------- ----
Change in benefit obligation
- ----------------------------
Projected benefit obligation at beginning of year $1,194,855 $1,159,088$ 1,227,215 $ 1,194,855
Interest cost 81,214 79,046 76,727
Actuarial loss 7,361 1,141 3,819
Benefits paid (48,104) (47,827)
(44,779)
---------- ----------
Projected benefit----------- -----------
Benefit obligation at end of year $1,227,215 $1,194,855
========== ==========$ 1,267,686 $ 1,227,215
=========== ===========
Change in plan assets
- ---------------------
Fair value of plan assets at beginning of year $ 1,190,964 $ 988,994
$ 633,404
Actual investment return on plan assets270,287 225,797
366,369
Employer contributionscontribution -- 24,000 34,000
Benefits paid (48,104) (47,827)
(44,779)
---------- --------------------- -----------
Fair value of plan assets at end of year $1,190,964 $ 988,994
========== ==========1,413,147 $ 1,190,964
=========== ===========
Funded status
Pension LiabilityFunded Status $ (145,461) $ 36,251
205,861
Unrecognized net gain 614,998 459,452
321,514
Unrecognized netbenefit transition liability -- (373)
(10,228)
---------- --------------------- -----------
Accrued pension cost $ 469,534 $ 495,330
$ 517,147
========== ===================== ===========
The components of net periodic pension cost for the fiscal years ended
January 31 are summarized as follows:
2006 2005 2004 2003
---- ---- ----
Interest cost $ 81,214 $ 79,046 $ 76,727
$ 73,233
Actual returnExpected Return on plan assets (225,797)Plan Assets 93,353 78,300 (366,369) (86,591)
Net amortization and deferral 148,934(13,657) 1,437 326,217 52,178
--------- --------- ---------
Net periodic pensionbenefit cost $ (25,796) $ 2,183 $ 36,575 $ 38,820
========= ========= =========
An assumed discount rate of 6.75%, 6.75% and 6.75% was used in determining the actuarial
present value of benefit obligations for the years ended January
31, 2005, 2004 and 2003, respectively.all periods presented. The expected
long-term rate of return on plan assets was 8% for all periods presented. At
January 31, 2006, 2005 and 2004, approximately 19.1%, 25.1% and 2003, approximately 25.1%, 33.9% and 35.7%of the
plan's assets were held in mutual funds invested primarily in equity securities,
4556
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
8. (continued)
68.8%, 66.7% and 2003
7. (continued)
66.7%, 64.5% and 62.2%were invested in equity securities and debt instruments
and 8.2%5.1%, 1.6%8.2% and 2.1%1.6% were invested in money market and other instruments,
respectively.
Expected MonthlyAnnual Benefit Payments
Year Ending 1/31 Benefit Payments
---------------- ----------------
2006 $54,372
2007 $53,838$55,181
2008 $53,201$54,566
2009 $52,482$53,856
2010 $51,443
2011-2015 $345,811
2004$52,864
2011 $62,281
2012-2016 $367,383
2005 2006
---- ----
Benefit Obligations:
Accumulated benefit obligation $1,194,855 $1,227,215 $1,267,686
Vested accumulated benefit obligation $1,194,855 $1,227,215 $1,267,686
The Company's policy is to hold no more than 50% of its pension assets in
broadly held mutual funds, which invest, in a wide range of securities as well
as money market funds, with the remainder of the plan assets invested in equity
securities and debt instruments. The Company has utilized an expected long-term
rate of return of 8% which it deems appropriate as a result of the fact that the
actual rate of return on investments has not been less that 8% in the past 4
years. The Company does not expect its contributions for 20062007 to exceed $50,000.
Defined Contribution Plan
Pursuant to the terms of the Company's 401(k) plan, substantially all U.S.
employees over 21 years of age with a minimum period of service are eligible to
participate. The 401(k) plan is administered by the Company and provides for
voluntary employee contributions ranging from 1% to 15% of the employee's
compensation. The Company made discretionary contributions of $126,547, $118,696
$100,033, and $88,901$100,033 in the fiscal years ended January 31, 2006, 2005, and 2004,
and
2003, respectively.
8.9. - MAJOR SUPPLIER
- -------------------
The Company purchased approximately 74.7%74.0%, 77.4%74.7% and 76.3%77.4% of its raw
materials from one supplier under licensing agreements for the fiscal years
ended January 31, 2006, 2005 2004 and 2003,2004, respectively. The Company expects this
relationship to continue for the foreseeable future. If required similar raw
materials could be purchased from other sources; although, the Company's
competitive position in the marketplace could be affected.
9.10. - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------------------------------------
Employment Contracts
The Company has employment contracts with fivesix principal officers and the
Chairman of the Board of Directors, expiring through January 2007.April 30, 2008. Such
contracts are automatically renewable for two, one-year terms unless 30 to 120
days notice is given by either party. Pursuant to such contracts, the Company is
committed to aggregate annual base remuneration of $1,275,000$1.5 million and $1.2 million
for the fiscal years ended January 31, 20062007 and 2007.
462008, respectively.
57
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 2004 and 20032004
Leases
POMS Holding Co. ("POMS"), a partnership consisting of three directors and
one officer of Lakeland, who own 55% of the entity, and six non-affiliates, was
formed to lease both land and building to the Company because bank financing was
unavailable. POMS presently leasesleased to the Company a 91,788 square foot disposable garment
manufacturing facility in Decatur, Alabama. 20% of this space is highly improved
office space. Under a lease effective April 1, 2004 and expiring on March 31,
2009, the Company paid an annual rent of $364,900 and iswas the sole occupant of
the facility. The Company purchased this facility from POMS on April 25, 2005.
On April 1, 2004, the Company entered into a five-year lease agreement
(expiring March 31, 2009) with River Group Holding Co., L.L.C. for a 49,500 sq.
ft. warehouse facility located next to the existing facility in Decatur,
Alabama. River Group Holding Co., L.L.C. is a limited liability company
consisting of five directors and one officer of the Company. The annual rent for
this facility is $199,100 and the Company iswas the sole occupant of the facility.
The Company purchased this facility from River Group on May 25, 2005.
On March 1, 1999, the Company entered into a one-year (renewable for four
additional one year terms) lease agreement with Harvey Pride, Jr., an officer of
the Company, for a 2,400 sq. ft. customer service office for $18,000 annually
located next to the existing Decatur, Alabama facility mentioned above. This
lease was renewed on March 1, 2004 through March 31, 2009 at the same rental
rate and terms.
The Company believes that all rents paid to POMS, River Group Holding Co.,
L.L.C. and Harvey Pride, Jr. by the Company are comparable to what would be
charged by an unrelated party, as three different rent fairness appraisals were
performed in 1999, 2002 and 2004. The net rent paid to POMS and River Group
Holding Co., L.L.C. by the Company for the year entered January 31, 20042006
amounted to $564,000$116,000 and the total rent paid to Harvey Pride, Jr. by the Company
for use of the customer service office for the year ended January 31, 20042006
amounted to $18,000. The Company paid $59,400$74,808 to Luis Gomez Guzman, an employee
in Mexico (until December 2005), for rent on a building pursuant to a lease
expiring July 7, 2007 and in fiscal 2006 an 12,853 square foot addition was
built for additional annual rent of $46,220.$46, 416.
Total rental under all operating leases is summarized as follows:
Rentals
Gross paid to
rental related
expense parties
------- -------
Year ended January 31,
2006 $540,162 $328,420
2005 $893,862 $641,400893,862 641,400
2004 944,375 641,400
2003 827,187 641,400
Minimum annual rental commitments for the remaining term of the Company's
non-cancelable operating leases relating to manufacturing facilities, office
space and equipment rentals at January 31, 20052006 including lease renewals
subsequent to year-end are summarized as follows:
Year ending January 31,
2006 $448,000
2007 217,000$372,790
2008 43,500198,867
2009 20,000
2010 3,000
--------
$711,500
47$594,657
========
58
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
Real Estate Purchases
In April 2005, the Company entered into two separate real estate purchase
contracts, one with POMS and 2003
See subsequent event footnote regardingone with River Group, both related party transactionparties. The
Company has purchased the land and buildings in Decatur, Alabama that it had
leased from these related parties since their inception, POMS (1984) and River
Group (1999). The purchase price was $2,056,000 for the POMS property and
$925,000 for the River Group property determined by averaging 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 for a purchase price of $2,067,587. The Company paid rent from
February 1, 2005 until April 25, 2005 of $86,157, which was charged to rent
expense.
On May 25, 2005 the Company closed on the real estate purchase contract
with River Group for a purchase price of $928,686. The Company paid River Group
rent from February 1, 2005 until May 25, 2005 amounting to $63,157, which was
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 deferred only until the release of an
easement on the property. Total rent expense for the two properties from
February 1, 2005 until the dates of the sale amounted to $146,577. The Company
recorded 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 Marchthe 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 previous location
amounted to $51,202 annually and expired on June 30, 2005. Certain leases
require additional payments based upon increases in property taxes and other
expenses.
Litigation
The Company is involved in various litigation arising during the normal
course of business which, in the opinion of the management of the Company, will
not have a material effect on the Company's financial position, results of
operations, or cash flows.
10.59
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
11. OTHER RELATED PARTY TRANSACTIONS
- ------------------------------------
In 1997, An Qui Holding Co., L.L.C., or An Qui, a limited liability
company whose members include the Company, five directors and one officer of the
Company, provided financing for the construction of a 46,000 square foot
building in An Qui City, China and the lease of the real property underlying the
building for 50 years from the Chinese government to Weifang Lakeland Safety
Product Co., Ltd., or Weifang, one of the Company's subsidiaries.
In connection with the financing, Weifang agreed to make annual payments
to An Qui and to allocate a portion of the proceeds from any sale of the
property to An Qui. In 2002, An Qui relinquished its rights to the annual
payments and to its rights to proceeds from the sale of the property in exchange
for the amount of $406,185 (net of expenses). Weifang paid $222,645, $89,000 and
$94,400 of this amount to An Qui in December 2002, January 2003 and June 2003,
respectively. The Company now owns the building.
In 2001, An Qui also helped to finance the construction of the Company's
facility in Jiaozhou, China through a loan to one of the Company's Chinese
subsidiaries. The loan's interest rate was 9% per annum until May 30, 2003, when
the rate increased to 10% per annum. On June 19, 2003, the Company repaid this
construction loan by paying $168,100 (plus accrued interest) to An Qui and a
foreign investor who contributed to the loan.
Gallen Rent & Insurance
Mifflin Valley, Inc.
- --------------------
In July 2005 as part of the acquisition of Mifflin Valley Inc., the
Company entered into a five year lease with Michael Gallen (an employee) to
lease an 18,520 sq. ft. manufacturing facility in Shillington, PA for $55,560
annually or a per square foot rental of $3.00. This amount was obtained prior to
the acquisition from an independent appraisal of the fair market rental value
per square foot. In addition the Company, commencing January 1, 2006 is renting
12,000 sq ft of warehouse space in a second location is Pennsylvania from this
employee, on a month by month basis, for the monthly amount of $3.35 per square
foot. In addition, in January 2006 the Company entered into a month to month
lease with Donna Gallen (an employee and wife of Michael Gallen) for a 12,000
sq. ft. warehouse space in Blandon, PA for $40,200 annually. Mifflin Valley
utilizes the services of Gallen Insurance (an affiliate of Michael & Donna
Gallen) to provide certain insurance in Pennsylvania. Such payments for
insurance aggregated $4,728 in fiscal 2006.
Related Party-outside contractor
The Company leases its facility in Mexico from Louis Gomez Guzman, an
employee in Mexico until December 2005, pursuant to a lease expiring July 31,
2007 at an annual rental of $105,620.$121,224. Mr. Guzman is also acting as a contractor
for our Mexican facility. His company, Intermack, enables our Mexican facility
to increase or decrease production as required without the Company needing to
expand its facility. During fiscal 2005,2006, Lakeland de Mexico paid Intermack
$998,376$938,755 for services relating to contract production, and advanced $94,800 against such
services, which amount is included in Other Current Assets on the accompanying
balance sheet at January 31, 2005.
11.production.
12. MANUFACTURING SEGMENT DATA
- ------------------------------
The Company manages its operations by evaluating its geographic locations.
The Company's North American operations include its facilities in Decatur,
Alabama (primarily disposables, chemical suit and glove production), Celaya,
Mexico (primarily disposables, chemical suit and glove production) and St.
Joseph, Missouri (primarily woven products). The Company also maintains contract
manufacturing facilities in China (primarily disposable and chemical suit
production). The Company's China facilities and Celaya, Mexico facility produce
the majority of the Company's products. The accounting policies of these
operating entities are the same as those described in Note 1. The Company
evaluates the performance of these entities based on operating profit, which is
defined as income
4860
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 2004 and 20032004
before income taxes and other income and expenses. The Company has a small sales
force in Canada and Europe who distribute products shipped from the United
States and China, the table below represents information about reported
manufacturing segments for the years noted therein:
2006 2005 2004 2003
---- ---- ----
Net Sales:
North America $100,361,909$ 104,101,669 $ 100,361,909 $ 88,346,362
$ 76,718,179
China 9,205,660 7,411,651 4,753,853 3,896,680
Less inter-segment sales (14,567,263) (12,453,397) (3,383,053)
(2,789,142)
------------ ------------ ------------------------- ------------- -------------
Consolidated sales $ 98,740,066 $ 95,320,163 $ 89,717,162
$ 77,825,717
============ ============ ========================= ============= =============
Operating Profit:
North America $ 8,339,441 $ 7,067,855 $ 4,721,880
$ 3,588,852
China 1,151,340 921,208 1,255,118 963,382
Less intersegment profit 11,632 (335,000) (188,000)
(193,500)
------------ ------------ ------------------------- ------------- -------------
Consolidated profit $ 9,502,413 $ 7,654,063 $ 5,788,998
$ 4,358,734
============ ============ ========================= ============= =============
Identifiable Assets:
North America $ 66,746,660 $ 51,654,104 $ 40,211,021
$ 38,520,608
China 5,717,192 8,659,150 7,092,806
4,302,126
------------ ------------ ------------------------- ------------- -------------
Consolidated assets $ 72,463,852 $ 60,313,254 $ 47,303,827
$ 42,822,734
============ ============ ========================= ============= =============
Depreciation:
North America $ 548,868 $ 542,463 $ 535,572
$ 488,795
China 444,818 341,677 267,662
106,589
------------ ------------ ------------------------- ------------- -------------
Consolidated depreciation $ 993,686 $ 884,140 $ 803,234
$ 595,384
============ ============ ============
49============= ============= =============
61
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
and 2003
12. -13. UNAUDITED QUARTERLY RESULTS of OPERATIONS (In thousands, except for per
- --------------------------------------------------------------------------------------------------------------------------------------------------------
share amounts):
- ---------------
Fiscal Year Ended January 31, 2004: 1/31/04 10/31/03 7/31/03 4/30/03
Net Sales $21,270 $21,332 $23,290 $23,825
Cost of Sales 16,584 16,831 18,597 19,729
------- ------- ------- -------
Gross Profit $ 4,686 $ 4,501 $ 4,693 $ 4,096
======= ======= ======= =======
Net Income $ 914 $ 870 $ 990 $ 864
======= ======= ======= =======
Basic and Diluted income per
common share*:
Basic (a) $ 0.28 $ 0.27 $ 0.30 $ 0.29
======= ======= ======= =======
Diluted (a) $ 0.28 $ 0.27 $ 0.30 $ 0.29
======= ======= ======= =======
Fiscal Year Ended January 31, 2005: 1/31/05 10/31/04 7/31/04 4/30/04
Net Sales $23,221 $22,416 $22,845 $26,838
Cost of Sales 18,592 17,491 17,983 20,858
------- ------- ------- -------
Gross Profit $ 4,629 $ 4,925 $ 4,862 $ 5,980
======= ======= ======= =======
Net Income $ 1,258 $ 1,190 $ 1,143 $ 1,425
======= ======= ======= =======
Basic and Diluted income per
common share*:
Basic (a) $ 0.28 $ 0.26 $ 0.30 $ 0.44
======= ======= ======= =======
Diluted (a) $ 0.28 $ 0.26 $ 0.30 $ 0.43
======= ======= ======= =======
Fiscal Year Ended January 31, 2006: 1/31/06 10/31/05 7/31/05 4/30/05
Net Sales $ 25,226 $ 22,717 $ 25,089 $ 25,709
Cost of Sales 18,949 17,034 19,293 19,542
--------- --------- --------- ---------
Gross Profit $ 6,277 $ 5,683 $ 5,796 $ 6,167
========= ========= ========= =========
Net Income $ 1,655 $ 1,313 $ 1,648 $ 1,713
========= ========= ========= =========
Basic and Diluted income per
common share*:
Basic (a) $ 0.33 $ 0.26 $ 0.33 $ 0.34
========= ========= ========= =========
Diluted (a) $ 0.33 $ 0.26 $ 0.33 $ 0.34
========= ========= ========= =========
Certain reclassifications between cost of goods sold and operating
expenses were made to the first quarter of fiscal year 2006, in order to be
consistent with the second quarter and year to date of fiscal 2006
classifications for the Mexico and China subsidiaries.
Fiscal Year Ended January 31, 2005: 1/31/05 10/31/04 7/31/04 4/30/04
Net Sales $ 23,221 $ 22,416 $ 22,845 $ 26,838
Cost of Sales 18,592 17,491 17,983 20,858
--------- --------- --------- ---------
Gross Profit $ 4,629 $ 4,925 $ 4,862 $ 5,980
========= ========= ========= =========
Net Income $ 1,258 $ 1,190 $ 1,143 $ 1,425
========= ========= ========= =========
Basic and Diluted income per
common share*:
Basic (a) $ 0.25 $ 0.24 $ 0.27 $ 0.36
========= ========= ========= =========
Diluted (a) $ 0.25 $ 0.24 $ 0.27 $ 0.36
========= ========= ========= =========
(a) The sum of earnings per share for the four quarters may not equal earnings
per share for the full year due to changes in the average number of common
shares outstanding.
*Adjusted, retroactively, for the 10% stock dividends to shareholders of records
on April 30, 2005, July 31, 2003 and 2002.
13. SUBSEQUENT EVENT AND RELATED PARTY TRANSACTION
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 intends to purchase the buildings in Decatur, Alabama that it has leased
from these related parties since inception. The purchase price is $2,056,000 for
the POMS property and $925,000 for the River Group property. The purchases are
expected to be concluded by the end of April 2005. These
5062
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
January 31, 2006, 2005 and 2004
14. FORMATION OF NEW SUBSIDIARIES
- ---------------------------------
During the fiscal year ending January 31, 2006, a new subsidiary RFB
Lakeland Private LTD. (an Indian Corporation) was formed to execute the supply
agreement with RFB Latex LTD. dated October 25, 2005, and 2003
partnerships have been accountedto exercise the option
to buy its industrial glove business for in accordance with FIN46R$2.7 million after one year, if certain
conditions are met and have been
reflected inapproved by the financial statementsCompany's Board of Directors. The
Company's minimum commitment is approximately $250,000. As of January 31, 2006,
the Company has a receivable from RFB Latex of approximately $439,000.
15. CONTINGENCIES - TAX AUDIT
- -----------------------------
The Company's Federal Income Tax returns for the fiscal year 2005.
In contemplationyears ended
January 31, 2003 and 2004 are currently under audit by the Internal Revenue
Service. The final results of these audits cannot be estimated by management at
this time, but management does not believe that the results of the real estate purchases,audit will to
have a material effect on the Company entered into an
agreement, dated March 4, 2005, with an officerfinancial condition 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). The amount will be deducted from the respective
purchase prices mentioned above.
51Company.
63
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------
Column A Column B Column C Column D Column E
-------------------- -------- ---------------------- -------- ----------------------------- ---------- ---------
Additions
Balance at Charge to Charged to Balance at
Beginning costs and other end of
of period expenses accounts Deductions period
--------- -------- -------- ---------- --------- ---------- ---------- ----------------
Year ended January 31, 2006
Allowance for doubtful
account (a) $323,000 $323,000
======== ========
Allowance for slow moving inventory $396,000 $ 31,000 $365,000
======== ======== ========
Year ended January 31, 2005
Allowance for doubtful
account (a) $323,000 $ $ $323,000
======== ========
======== ========
Allowance for slow moving inventory $417,000 $ $ 21,000 $396,000
========
======== ======== ========
Year ended January 31, 2004
Allowance for doubtful
account (a) $343,000 $ -- $ 20,000 $323,000
========
======== ======== ========
Allowance for slow moving inventory $354,000 $ 63,000 -- $417,000
======== ======== ======== ========
Year ended January 31, 2003
Allowance for doubtful
account (a) $221,000 $369,717 $247,717 $343,000
======== ======== ======== ========
Allowance for slow moving inventory $100,000 $254,000 -- $354,000
========
======== ======== ========
- ------------------------------------
(a) Deducted from accounts receivable.
(b) Uncollectible accounts receivable charged against allowance.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On December 1, 2004, Lakeland Industries, Inc. (the "Company") dismissed
PricewaterhouseCoopers LLP ("PwC") as its independent registered public
accounting firm. The Audit Committee of the Board of Directors reviewed and
approved of the dismissal. On December 1, 2004, the Audit Committee of the Board
of Directors of the Company engaged Holtz Rubenstein Reminick, LLP ("Holtz
Rubenstein") as the Company's independent registered public accounting firm for
the fiscal year ending January 31, 2005.
The reports of PwC on the company's financial statements for the years
ended January 31, 2003 and 2004 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle.
During the years ended January 31, 2003 and 2004 and through December 1,
2004, there have been no disagreements with PwC on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolve to the satisfaction of PwC, would
have caused PwC to make reference thereto in their reports on the Company's
financial statements for such years.
No reportable event of the type described in Item 304(a) (l) (v) of
Regulation S-K occurred during the years ended January 31, 2003 and 2004 and
through December 1, 2004.
The Company provided PwC with a copy of this Form 8-K prior to its filing
with the Securities and Exchange Commission. The Company has received a letter
from PwC addressed to the Securities and Exchange Commission indicating whether
or not it agrees with the above statements. A copy of that letter, dated as of
December 3, 2004, was attached as Exhibit 16 on the December 1, 2004 Form 8-K.
During the Company's two fiscal years ended January 31, 2003 and 2004 and
the subsequent interim period through December 1, 2004, the company has not
consulted with Holtz Rubenstein regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's consolidated financial
statements, or any matter that was either the subject of a disagreement (as
defined in Item
52
304(a)(l)(iv) of Regulation S-K and the related instructions) or reportable
event (within the meaning of Item 304(a)(l)(v) of Regulation S-K).None
ITEM 9A. CONTROLS AND PROCEDURES
- --------------------------------
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the 1934 Act, under the
supervision and with the participation of our principal executive officer and
principal financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934
Act, as of January 31, 2005.2006. Based on this evaluation, our principal executive
officer and principal financial officer concluded that, as of January 31, 2005,2006,
our disclosure controls and procedures were effective in timely alerting them to
material information required to be included in our periodic SEC reports.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule 13a-15(f) of the
1934 Act. Management has assessed the effectiveness of our internal control over
financial reporting as of January 31, 20052006 based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As a result of this assessment,
management concluded that, as of January 31, 2005,2006, our internal control over
financial reporting was effective in providing reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles in the United States of America.
There were several areas
where we strengthened our controls as a result of this evaluation, including
some upgrades made in February 2005. Holtz Rubenstein Reminick LLP, the Company's independent registered public
accounting firm, has not
completed their work necessary to issue an attestation report onaudited management's assessment of the effectiveness of the
Company's internal control over financial reporting a copyas of which, when
complete, will beApril 14, 2006, as
stated in their report included as an amendment to this annual report on Form 10-K/A.herein.
64
Limitations on Controls
Management does not expect that our disclosure controls and procedures or
our internal control over financial reporting will prevent or detect all errors
and fraud. Any control system, no matter how well designed and operated, is
based upon certain assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no evaluation of controls
can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected.
Through the year ended January 31, 20052006 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 cumulative amount expensed so far
is approximately $292,000$708,000 and is expected to increase in the first quarter of
20062007 due to the hiring of additional accounting personnel and increased
professional fees.
ITEM 9B. OTHER INFORMATION
- --------------------------
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The following is a list of the names and ages of all of our directors and
executive officers, indicating all positions and offices they hold with us as of
April 15, 2005.2006. Our directors hold office for a three-year term and until their
successors have been elected and qualified. Our executive officers hold officeoffices
for one year or until their successors are elected by our board of directors.
53
Name Age Position
- ---- --- --------
Raymond J. Smith............. 66 Chairman of the Board of Directors
Christopher J. Ryan.......... 53
Name Age Position
- ---- --- --------
Raymond J. Smith.................................. 67 Chairman of the Board of Directors
Christopher J. Ryan............................... 54 Chief Executive Officer, President, Secretary,
General Counsel and Director
Gary Pokrassa..................................... 58 Chief Financial Officer
Gregory D. Willis................................. 49 Executive Vice President
Harvey Pride, Jr. ................................ 59 Vice President - Manufacturing
James M. McCormick................................ 58 Controller and Treasurer
Paul C. Smith..................................... 39 Vice President
John J. Collins................................... 63 Director
Eric O. Hallman................................... 62 Director
Michael E. Cirenza................................ 50 Director
John Kreft........................................ 55 Director
Stephen M. Bachelder ............................. 55 Director
Gary Pokrassa................ 57 Chief Financial Officer
Harvey Pride, Jr. ........... 58 Vice President - Manufacturing
James M. McCormick........... 57 Controller and Treasurer
Paul C. Smith................ 38 Vice President
John J. Collins.............. 62 Director
Eric O. Hallman.............. 61 Director
Michael E. Cirenza........... 49 Director
John Kreft................... 54 Director
Stephen M. Bachelder ........ 53 Director
Raymond J. Smith, one of our co-founders, has been Chairman of our board
of directors since our incorporation in 1982 and was President from 1982 to
January 31, 2004. Mr. Smith's term as a director will expire at our annual
meeting of stockholders in June 2007.
Christopher J. Ryan has served as our Chief Executive Officer since April
2004 and President since February 1, 2004, Secretary since April 1991, General
Counsel since February 2000 and a director since May 1986. Mr. Ryan was our
Executive Vice President - Finance from May 1986 until becoming our President on
February 1, 2004. From October 1989 until February 1991, Mr. Ryan was employed
by Sands Brothers and Rodman & Renshaw, Inc., bothan investment banking firms.firm. Prior to that, he was an
independent consultant with Laidlaw Holding Co., Inc., an investment banking
firm, from January 1989 until September 1989. From February 1987 to January
1989, Mr. Ryan was employed as the Managing Director of Corporate Finance for
Brean Murray, Foster Securities, Inc. He was employed from June 1985 to March 1986January
1987 as a Senior Vice President with the investment banking firm of Laidlaw
Adams Peck, Inc., a predecessor firm to Laidlaw Holdings, Inc. Mr. Ryan has
served as one of our directors since 1986 and his term as a director will expire
at our annual meeting of stockholders in June 2005.
65
Gary Pokrassa is a CPA with 3536 years experience in both public and private
accounting. Mr. Pokrassa was the CFO for Gristedes Foods, Inc. (AMEX-GRI) from
2000-2003 and Syndata Technologies from 1997-2000. Mr. Pokrassa received a BS in
Accounting from New York University and is a member of the American Institute of
Certified Public Accountants and the New York State Society of Certified Public
Accountants.
Gregory D. Willis has served as our Executive Vice President since May 1,
2005 and has held the position of National Sales Manager for us since November
1991. Prior to joining Lakeland he held the positions of National Sales Manager
and Global Marketing Manager for Kappler Inc. from 1983 to 1991. Mr. Willis
received his BBA degree in Business from Faulkner University and is currently a
member of ISEA and NFPA.
Harvey Pride, Jr. has been our Vice President of manufacturing since May
1986. He was Vice President of Ryland (our former subsidiary) from May 1982 to
June 1986 and President of Ryland until its merger into Lakeland on January 31,
1990.
James M. McCormick was our Vice President and Treasurer from May 1986 to
August 2003 and is presently Controller and Treasurer. Mr. McCormick acted as
Chief Financial Officer between April 2004 and November 2004. Between January
1986 and May 1986 Mr. McCormick was our Controller.
Paul C. Smith, son of Raymond J. Smith, has served as Vice President since
February 1, 2004. Prior to that, Mr. Smith was our Northeast Regional Sales
Manager since September 1998. From April 1994 until September 1998, Mr. Smith
was a sales representative for the Metropolitan Merchandising and Sales Co.
John J. Collins, Jr. was Executive Vice President of Chapdelaine GSI, a
government securities firm, from 1977 to January 1987. He was Senior Vice
President of Liberty Brokerage, a government securities firm, between January
1987 and November 1998. Presently, Mr. Collins is self employed, managing a
direct investment portfolio of small business enterprises for his own accounts.
Mr. Collins has served as one of our directors since 1986 and his term as a
director will expire at our annual meeting of stockholders in June 2006.
Eric O. Hallman was President of Naess Hallman Inc., a ship brokering
firm, from 1974 to 1991. Mr. Hallman was also affiliated between 1991 and 1992
with Finanshuset (U.S.A.), Inc., a ship brokering and international financial
services and consulting concern, and was an officer of Sylvan Lawrence, a real
estate development company, between 1992 and 1998. Between 1998 and 2000, Mr.
Hallman was President of PREMCO, a real estate management company, and currently
is Comptroller of the law firm Murphy, Bartol & O'Brien, LLP. Mr. Hallman has
served as one of our directors since our incorporation in 1982 and his term as a
director will expire at our annual meeting of stockholders in June 2006.
54
Walter J. Raleigh has served as one of our directors since 1991 and his
term as a director expired with his resignation in November 2004.
Michael E. Cirenza has been the Executive Vice President and Chief
Financial Officer of Country-Life LLC, a manufacturer and distributor of
vitamins and nutritional supplements, since September 2002. Mr. Cirenza was the
Chief Financial Officer and Chief Operating Officer of Resilien, Inc., an
independent distributor of computers, components and peripherals from January
2000 to September 2002. He was an Audit Partner with the international
accounting firm of Grant Thornton LLP from August 1993 to January 2000 and an
Audit Manager with Grant Thornton LLP from May 1989 to August 1993. Mr. Cirenza
was employed by the international accounting firm of Price Waterhouse from July
1980 to May 1989. Mr. Cirenza is a Certified Public Accountant in the State of
New York and a member of the American Institute of Certified Public Accountants
and the New York State Society of Certified Public Accountants. Mr. Cirenza has
served as one of our directors since June 18, 2003 and his term as a director
will expire at our annual meeting of stockholders in 2005.
John Kreft has been President of Kreft Interests, a Houston based private
investment firm, since 2001. Between 1998 and 2001, he was CEO of Baker Kreft
Securities, LLC, a NASD broker-dealer. From 1996 to 1998, he was a co-founder
and manager of TriCap Partners, a Houston based venture capital firm. From 1994
to 1996 he was employed as a director at Alex Brown and Sons. He also held
senior positions at CS First Boston including employment as a managing director
from 1989 to 1994. Mr. Kreft graduated from the Wharton School of Business in
1975.
Stephen M. Bachelder has been with Swiftview, Inc. a Portland based
software company since 1999 and President since 2002. From 1991-1999 Mr.
Bachelder ran a consulting firm advising software and hardware based companies
in the Pacific Northwest. Mr. Bachelder was the president and owner of an
Apparel Company, Bachelder Imports from 1982-1991 and worked in executive
positions for Giant Foods, Inc. and Pepsico, Inc. between 1976-1982. Mr.
Bachelder is a 1976 Graduate of the Harvard Business School.
66
Committees of the Board
Our board of directors has a designated Audit Committee that reviews the
scope and results of the audit and other services performed by our independent
accountants. The Audit Committee is comprised solely of independent directors
and consists of Messrs. Cirenza, Kreft, Bachelder, Hallman and Collins. The
board of directors has also designated a Compensation Committee that establishes
objectives for our senior executive officers, sets the compensation of
directors, executive officers and our other employees and is charged with the
administration of our employee benefit plans. The Compensation Committee is
comprised solely of independent directors and consists of Messrs. Cirenza,
Kreft, Bachelder, Collins and Hallman.
Compensation of Directors
Each non-employee director receives a fee of $5,000 per quarter for
attending meetings of our board of directors or committees of our board of
directors. Non-employee directors are reimbursed for their reasonable expenses
incurred in connection with attendance at or participation in such meetings. In
addition, under our 1995 Director Plan, each non-employee director who becomes a
director is granted an option to purchase 5,000 shares of our common stock.
Messrs. Raleigh, Hallman and Collins were each granted an option to purchase 5,000 shares
of our common stock under our previous 1986 Plan at the time of their respective
appointments or reelections to the board of directors. Such grants and the terms
thereof were renewed on April 18, 1997, May 5, 1996 and May 5, 1996,
respectively, in accordance with stockholder approval of the 1995 Director Plan
at our 1995 annual meeting of stockholders. Mr. Cirenza received an option to
purchase 5,000 shares of our common stock upon his election to our board of
directors in June 2003. Messrs. Kreft and Bachelder each received an option to
purchase 5,000 shares of our Common Stock upon appointment to our Board of
Directors.
Directors who are employees of Lakeland receive no additional compensation for
their service as directors. However, such directors are reimbursed for their
reasonable expenses incurred in connection with travel to or attendance at or
participation in meetings of our board of directors or committees of the board
of directors.
5567
ITEM 11. EXECUTIVE COMPENSATION
- ---------------------------------------------------------------
See information under the caption "Compensation of Executive Officers" in
the Company's Proxy Statement, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------------------------------------------------------------------------------
See the information under the caption "Voting Securities and Stock
Ownership of Officers, Directors and Principal Stockholders" in the Company's
Proxy Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------------------------------------------------------------
Related Party Leases
In the past, because our access to third party financing was insufficient,
we entered into arrangements with our directors and executive officers in order
to fund the construction or acquisition of our assembly facilities. In such
cases, we commissioned independent appraisals in 1999, 2002 and 2004 to ensure
that these arrangements approximated arrangements made on an arms length basis.
We believe that we currently have sufficient access to financing to fund our
current and anticipated facility needs, we do not anticipate entering into
additional arrangements with our directors or executive officers in the future
and we are examining alternatives for restructuring the ownership and/or the
financing of these facilities in a manner that would not involve our directors
or executive officers. We intend to conclude our examination of the alternative
ownership structures and financing arrangements by April 30, 2005 and to
implement any new arrangements, if possible. Any such restructuring or financing
would involve negotiations with, and require the agreement of, the entities
described below and their partners or members, including some of our officers
and directors, and we therefore cannot assure you that we will be able to
implement any such restructuring or financing.future.
A description of our current arrangements with our directors and executive
officers follows.
POMS Holding Co., or POMS, was formed in 1984 to lease both land and a
building to us because bank financing was unavailable. POMS is a partnership
whose partners include three of our directors, one of our officers and six other
individuals who were stockholders of Lakeland at the time of the formation of
POMS. Raymond J. Smith, the chairman of our board of directors, Harvey Pride,
Jr., our Vice President - Manufacturing, and John J. Collins and Eric O.
Hallman, both of whom are directors, have a 20%, 20%, 8.75% and 5% interest in
POMS, respectively. POMS presently leasesleased to us a 91,788 square foot disposable garment
manufacturing facility in Decatur, Alabama. Under a lease effective September 1,
1999, we paid an annual rent of $364,900. This lease was renewed on April 1,
2004 through March 31, 2009 at the same rental rate. We purchased this facility
from POMS on April 25, 2005.
On March 1, 1999, we entered into a one year (renewable for four
additional one year terms) lease agreement with Harvey Pride, Jr., our Vice
President - Manufacturing, for a 2,400 sq. ft. customer service office located
next to our existing Decatur, Alabama facility. We paid an annual rent of
$18,000 for this facility under the lease agreement in fiscal 2004 and 2005.
This lease was renewed on March 1, 2004 through March 31, 2009 at the same
rental rate.
On June 1, 1999, we entered into a five year lease agreement (expiring May
31, 2004) with River Group Holding Co., L.L.C. for a 49,500 sq. ft. warehouse
facility located next to our existing facility in Decatur, Alabama. River Group
Holding Co., L.L.C. is a limited liability company, the members of which are
Raymond Smith, John Collins, Eric Hallman, Walter Raleigh (a former Director),
Christopher Ryan and Harvey Pride, who all have an equal ownership interest. Mr.
Ryan is our Chief Executive Officer, President, Secretary, General Counsel and a
director of our company, Messrs. Smith, Collins Hallman and RaleighHallman are all directors of
our company, and Mr. Pride is our Vice President - Manufacturing. We paid an
annual rent of $199,100 for this facility in fiscal 2004 and 2005.facility. We arewere the sole occupant of the
facility. This lease was renewed on April 1, 2004 through March 31, 2009 at the
same rental rate. In March 2005 the Company entered into two real estate sale contracts, one
with POMS and one withWe purchased this facility from River Group both related parties. The Company intends to
purchase the buildings in Decatur, Alabama that it has leased from these related
parties since inception. The purchase price is $2,056,000 for the POMS property
and $925,000 for the River Group property. The sales are expected to be
concluded by the end of Marchon May 25, 2005. These partnerships are the variable interest
entities reflected in the financial statements for the fiscal year 2005.
In anticipation of the above, 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). The amount will be deducted from the respective purchase prices
mentioned above.
56
Related Party-outside contractor
The Company leases its facility in Mexico from Louis Gomez Guzman, an
employee in Mexico until December 2005, pursuant to a lease expiring July 31,
2007 at an annual rental of $105,620.$121,224. Mr. Guzman is also acting as a contractor
for our Mexican facility. His company, Intermack, enables our Mexican facility
to increase or decrease production as required without the Company needing to
expand its facility. During fiscal 2005,2006, Lakeland de Mexico paid Intermack
$998,376$938,755 for services relating to contract production, and advanced $94,800 against such
services, which amount is included in Other Current Assets on the accompanying
balance sheet at January 31, 2005..production.
Past Related Party Transactions
In 1997, An Qui Holding Co., L.L.C., or An Qui, a limited liability
company whose members include Lakeland, and Messrs. Smith, Collins, Hallman,
Raleigh, Ryan and Pride, provided financing for the construction of a 65,000
68
square foot building in An Qui City, China and the lease of the real property
underlying the building for 50 years from the Chinese government to Weifang
Lakeland Safety Product Co., Ltd., or Weifang, one of our subsidiaries. In
connection with the financing, Weifang agreed to make annual payments to An Qui
and to allocate a portion of the proceeds from any sale of the property to An
Qui. In 2002, An Qui relinquished its rights to the annual payments and to its
rights to proceeds from the sale of the property in exchange for the amount of
$406,185 (net of expenses). Weifang paid $222,645, $89,000 and $94,400 of this
amount to An Qui in December 2002, January 2003 and June 2003, respectively. Of
the $406,185 paid to An Qui, Messrs Smith, Collins, Hallman, Ryan and Pride each
received $44,421 and Mr. Raleigh received $39,792.
In 2001, An Qui also helped to finance the construction of our facility in
Jiaozhou, China through a loan to one of our Chinese subsidiaries. The loan bore
interest at the rate of 9% per annum until May 30, 2003, when the rate increased
to 10% per annum. On June 19, 2003, we repaid this construction loan by paying
$168,100 (plus accrued interest) to An Qui and a foreign investor who
contributed to the loan. Messrs. Smith, Collins, Hallman, Ryan and Pride, the
members of An Qui who participated in this transaction, were each repaid their
$26,000 investments plus interest of approximately $3,038.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- -----------------------------------------------------------------------------------------------
See the information under the caption "Report of the Audit Committee" in
the Company's Proxy Statement, which information is incorporated herein by
reference.
5769
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K
- -----------------------------------------------------------------------------------------------------------------------------------------------------
(a)The following documents are filed as part of this report:
1 Consolidated Financial Statements (See Page 27 of this report
which includes an index to the consolidated financial
statements)
2 Financial Statement Schedules:
Schedule II- Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable, not required, or because the required information is included in the
Consolidated Financial Statements or Notes thereto.
3. Exhibits:
Exhibit Description
3.1 Restated Certificate of Incorporation of Lakeland Industries,
Inc. (Incorporated by reference to Exhibit 3(a) of Lakeland
Industries, Inc.'s Registration Statement on Form S-18 (File No.
33-7512 NY))
3.2 Bylaws of Lakeland Industries Inc., as amended (Incorporated by
reference to Exhibit 3(b) of Lakeland Industries, Inc.'s
Registration Statement on Form S-18 (File No. 33-7512 NY))
10.1 Lease Agreement, dated April 1, 2004, between POMS Holding
Co., as lessor, and Lakeland Industries, Inc., as lessee
10.2 Lease Agreement, dated August 1, 2001, between Southwest
Parkway, Inc., as lessor, and Lakeland Industries, Inc., as
lessee (Incorporated by reference to Exhibit 10(b) of Lakeland
Industries, Inc.'s Annual Report on Form 10-K for the year ended
January 31, 2002)
10.3 Lakeland Industries, Inc. Stock Option Plan (Incorporated by
reference to Exhibit 10(n) of Lakeland's Registration Statement
on Form S-18 (File No. 33-7512 NY))
10.4 Employment Agreement, dated September 22, 2003, between Lakeland
Industries, Inc. and Raymond J. Smith (Incorporated by reference
to Exhibit 10(g) of Lakeland Industries, Inc.'s Quarterly Report
on Form 10-Q filed December 12, 2003)
10.510.5* Employment, dated DecemberFebruary 1, 2002,2006, agreement between Lakeland
Industries, Inc. and Harvey Pride, Jr.
10.6 Lease, dated April 16, 1999, between Lakeland Industries, Inc.
and JBJ Realty (Incorporated by reference to Exhibit 10(i) of
Lakeland Industries, Inc.'s Annual Report on Form 10-K for the
year ended January 31, 2002)
10.710.7* Employment Agreement, dated February 1, 2004,2006, between Lakeland
Industries, Inc. and Christopher J. Ryan
58
10.8 WCMA Reducing Revolver Loan and Security Agreement, dated
January 21, 2004, between Lakeland Industries, Inc. and
Merrill Lynch Business Financial Services Inc.
10.9 Lease Agreement, dated April 1, 2004, between River Group
Holding Co., LLP, as lessor, and Lakeland Industries, Inc., as
lessee
10.10 Lease Agreement, dated March 1, 2004, between Harvey Pride, Jr.,
as lessor, and Lakeland Industries, Inc., as lessee
70
10.11 Term Loan and Security Agreement, dated September 9, 1999,July 7, 2005, between
Lakeland Industries, Inc. and Merrill Lynch Business
Financial Services Inc.(IncorporatedWachovia Bank, N.A. (Incorporated
by reference to Exhibit 10(q)10.11 of Lakeland Industries, Inc.'s
AnnualQuarterly Report on Form 10-K for the year ended January 31, 2002)10-Q filed September 7, 2005)
10.12 Employment Agreement, dated December 1, 2002,May 23, 2005, between Lakeland
Industries, Inc. and James M. McCormick (Incorporated by
reference to Exhibit 10(r) of Lakeland Industries, Inc.'s
Quarterly Report on Form 10-Q filed December 13, 2002)June 9, 2005)
10.13 Employment Agreement, dated September 22, 2003, between Lakeland
Industries, Inc. and Paul C. Smith (Incorporated by reference to
Exhibit 10(s) of Lakeland Industries, Inc.'s Quarterly Report on
Form 10-Q filed December 12, 2003)
10.14 Employment Agreement, dated November 29, 2004,2005, between Lakeland
Industries, Inc. and Gary Pokrassa, CPA. (Incorporated by
reference to exhibit 10.14 of Lakeland Industries, Inc.
Quarterly Report on Form 10-Q filed December 12, 2005)
10.15 Employment Agreement, dated May 23, 2005, between Lakeland
Industries Inc., and Gregory D. Willis (Incorporated by
reference to exhibit 10.15 of Lakeland Industries, Inc.
Quarterly Report on Form 10-Q filed June 9, 2005)
10.16 Asset Purchase Agreement, dated July, 2005 between Lakeland
Industries, Inc. and Mifflin Valley, Inc. and Lease Agreement
and Employment Contract between Lakeland Industries, Inc., and
Michael Gallen (Incorporated by reference to exhibit 10.15,
10.16, and 10.17 of Lakeland Industries, Inc.'s Quarterly Report
on form 10-Q filed September 7, 2005)
10.17 Supply Agreement and Option to Purchase, between Lakeland
Industries, Inc.'s subsidiary RFB Lakeland Industries Private
Ltd. and RFB Latex Private, Ltd. (Incorporated by reference to
exhibits 10.18 and 10.19 of Lakeland Industries Inc.'s Quarterly
Report on form 10-Q filed December 12, 2005)
10.18 Asset Purchase Agreement upon exercising of option, between
Lakeland Industries, Inc. and RFB Lakeland Industries Private
Ltd. (Incorporated by reference to exhibits 10.20 of Lakeland
Industries Inc.'s Quarterly Report on form 10-Q filed December
12, 2005)
10.19 Employment Agreements, between RFB Lakeland Industries Private
Ltd. and P.S. Ratra and Kamal Ratra (Incorporated by reference
to exhibits 10.21 and 10.22 of Lakeland Industries, Inc.'s
Quarterly Report on Form 10-Q filed December 12, 2005)
10.20 Shareholder Agreement, between Lakeland Industries, Inc. and
P.S. Ratra (Incorporated by reference to exhibit 10.23 of
Lakeland Industries, Inc.'s Quarterly Report on form 10-Q filed
December 12, 2005)
71
10.21* Lease Agreement, dated March 1, 2006, between Carlos Tornquist
Bertrand, as lessor, and Lakeland Industries, Inc., as lessee
10.22* Lease Agreement, dated 2006, between Michael Robert Kendall,
June Jarvis, and Barnett Waddingham Trustees Limited, as lessor,
and Lakeland Industries, Inc., as lessee
14.1 Lakeland Industries, Inc. Code of Ethics
21.1 Subsidiaries of Lakeland Industries, Inc. (wholly-owned):
Lakeland Protective Wear, Inc.
Lakeland de Mexico S.A. de C.V.
Laidlaw, Adams & Peck, Inc. and Subsidiary (Meiyang
Protective Products Co., Ltd.)
Weifang Lakeland Safety Products Co. Ltd.
Qing Dao MayTung Healthcare Co., Ltd.
Lakeland Industries Europe Ltd.
Mifflin Valley, Inc.
RFB Lakeland Industries Private, Ltd.
(b)Reports on Form 8 - K.
The documents which we incorporate by reference consist of the documents
listed below that we have previously filed with the SEC:
A - On November 17, 2004 the company filed a Form 8-K regarding the
issuance of a press release for Lakeland's 10% stock dividend and the election
of two new directors.
59
B - On November 30, 2004 the company filed a Form 8-K regarding the
issuance of a press release for the retirement of a director and the hiring of a
new CFO.
C - On December 1, 20049, 2005 the Company filed a Form 8-K notifying of a change in certifying accountants.
Dnew
Employment Contract.
B - On December 3, 20046, 2005 the Company filed a Form 8-K reporting notice of
a teleconference call on December 13, 200412, 2005 to discuss the results of the
Company's third quarter ended October 31, 2004.
E2005.
C - On December 13, 200412, 2005 the companyCompany filed a Form 8-K regarding the
results offor operations of the Company's third quarter ended October 31, 2004.2005.
- ----------
60--------------------
* Enclosed herein
72
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 15, 200517, 2006
LAKELAND INDUSTRIES, INC.
By: /s/Christopher J. Ryan
---------------------------------------------------------------------------------
Christopher J. Ryan, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Name Title Date
- ---- ----- ----
/s/Raymond J. Smith Chairman of the Board April 15, 200517, 2006
- ----------------------------
Raymond J. Smith
/s/Christopher J. Ryan Chief Executive Officer, President, April 15, 200517, 2006
- ---------------------------- General Counsel, Secretary and Director
Christopher J. Ryan
/s/Gary Pokrassa Chief Financial Officer April 15, 200517, 2006
- ----------------------------
Gary Pokrassa
/s/James M. McCormick Controller and Treasurer April 15, 200517, 2006
- ----------------------------
James M. McCormick
/s/Eric O. Hallman Director April 15, 200517, 2006
- ----------------------------
Eric O. Hallman
/s/John J. Collins, Jr. Director April 15, 200517, 2006
- ----------------------------
John J. Collins, Jr.
/s/Michael E. Cirenza Director April 15, 200517, 2006
- ----------------------------
Michael E. Cirenza
/s/John Kreft Director April 15, 200517, 2006
- ----------------------------
John Kreft
/s/Stephen M. Bachelder Director April 15, 200517, 2006
- ----------------------------
Stephen M. Bachelder
6173