UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedOctoberJuly 31, 20112012
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________
Commission File Number: 0-15535
LAKELAND INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 13-3115216 | |
| (State of incorporation) | (IRS Employer Identification Number) |
| 701 Koehler Avenue, Suite 7, Ronkonkoma, New York | 11779 | |
| (Address of principal executive offices) | (Zip Code) |
(631) 981-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx Noo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-b-2 of the Exchange Act. Check one.
Large accelerated filer¨ | Accelerated filer¨ |
Nonaccelerated filer¨ | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-212b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at | |
| Common Stock, $0.01 par value per share |
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
FORM 10-Q
The following information of the Registrant and its subsidiaries is submitted herewith:
| Page | ||||
| PART I - FINANCIAL INFORMATION: | ||||
| Item 1. | Financial Statements: | |||
| Introduction | 3 | |||
| Condensed Consolidated Statements of Operations | ||||
| Three | 5 | |||
| Condensed Consolidated Statements of Comprehensive Income | ||||
| Three | 6 | |||
| Condensed Consolidated Balance Sheets | ||||
| July 31, | 7 | |||
| Condensed Consolidated Statement of Stockholders' Equity | ||||
| Six Months Ended | 8 | |||
| Condensed Consolidated Statement of Cash Flows | ||||
| Six Months Ended | 9 | |||
| Notes to Condensed Consolidated Financial Statements | 10 | |||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 25 | ||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 32 | ||
| Item 4. | Controls and Procedures | 32 | ||
| PART II - OTHER INFORMATION: | ||||
| Item 1. | Legal Proceedings | 32 | ||
| Item 1A. | Risk Factors | 34 | ||
| Item 3. | Defaults Upon Senior Securities | 34 | ||
| Item 5. | Other Information | 34 | ||
| Item 6. | Exhibits | 35 | ||
| Signature Pages | 36 | |||
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Introduction
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q may contain certain forward-looking statements. When used in this Form 10-Q or in any other presentation, statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “project” and similar expressions, are intended to identify forward-looking statements. They also include statements containing a projection of sales, earnings or losses, capital expenditures, dividends, capital structure or other financial terms.
The forward-looking statements in this Form 10-Q are based upon our management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into account the information currently available to us. These statements are not statements of fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. Some of the important factors that could cause our actual results, performance or financial condition to differ materially from expectations are:
| · | The effect of the recent settlement of the Brazilian arbitration proceeding pursuant to which we are required to pay out approximately $8.5 million over six years; |
| · | Risks associated with our failure to be in compliance with certain covenants in our loan agreement with TD Bank; |
| · | Our ability to obtain fabrics and components from suppliers and manufacturers at competitive prices or prices that vary from quarter to quarter; |
| · | Risks associated with our international manufacturing and start-up sales operations; |
| · | Potential fluctuations in foreign currency exchange rates; |
| · | Our ability to respond to rapid technological change; |
| · | Our ability to identify and complete acquisitions or future expansion; |
| · | Our ability to manage our growth; |
| · | Our ability to recruit and retain skilled employees, including our senior management; |
| · | Our ability to accurately estimate customer demand; |
| · | Competition from other companies, including some with greater resources; |
| · | Risks associated with sales to foreign buyers; |
| · | Restrictions on our financial and operating flexibility as a result of covenants in our credit facilities; |
| · | Our ability to obtain additional funding to expand or operate our business as planned; |
| · | The impact of potential product liability claims; |
| · | Liabilities under environmental laws and regulations; |
| · | Fluctuations in the price of our common stock; |
| · | Variations in our quarterly results of operations; |
| · | The cost of compliance with the Sarbanes-Oxley Act of 2002 and rules and regulations relating to corporate governance and public disclosure; |
| · | The significant influence of our directors and executive officers on our |
| · | The impact of a decline in federal funding for preparations for terrorist incidents; |
| · | The limited liquidity of our common stock; |
| · | The other factors referenced in this Form 10-Q, including, without limitation, in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of |
We believe these forward-looking statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. Furthermore, forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q might not occur. We qualify any and all of our forward-looking statements entirely by these cautionary factors.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months and Ninesix months ended OctoberJuly 31, 20112012 and 2010
| THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
| October 31, | October 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Net sales | $ | 24,744,033 | $ | 25,680,587 | $ | 76,162,356 | $ | 74,693,511 | ||||||||
| Cost of goods sold | 17,330,988 | 18,494,839 | 52,688,619 | 52,649,619 | ||||||||||||
| Gross profit | 7,413,045 | 7,185,748 | 23,473,737 | 22,043,892 | ||||||||||||
| Operating expenses | 7,184,167 | 6,280,544 | 20,594,448 | 19,642,005 | ||||||||||||
| Operating profit | 228,878 | 905,204 | 2,879,289 | 2,401,887 | ||||||||||||
| VAT tax charge Brazil | — | — | — | (1,583,247 | ) | |||||||||||
| Interest and other income, net | (12,328 | ) | 15,602 | 53,302 | 49,867 | |||||||||||
| Interest expense | (161,914 | ) | (77,362 | ) | (425,471 | ) | (255,635 | ) | ||||||||
| Income from continuing operations before income taxes | 54,636 | 843,444 | 2,507,120 | 612,872 | ||||||||||||
| Provision (benefit) for income taxes | (90,998 | ) | 144,125 | 411,650 | 453,345 | |||||||||||
| Income from continuing operations | 145,634 | 699,319 | 2,095,470 | 159,527 | ||||||||||||
| Discontinued operations: | ||||||||||||||||
| Loss from operations of discontinued India glove manufacturing facility (including loss on disposal of $880,694 in 2011) | (1,128,390 | ) | (78,855 | ) | (1,445,026 | ) | (444,024 | ) | ||||||||
| Income tax benefit | (406,120 | ) | (28,388 | ) | (520,210 | ) | (159,849 | ) | ||||||||
| Loss on discontinued operations | (722,270 | ) | (50,467 | ) | (924,816 | ) | (284,175 | ) | ||||||||
| Net income (loss) | $ | (576,636 | ) | $ | 648,852 | $ | 1,170,654 | $ | (124,648 | ) | ||||||
| Earnings (loss) per share-basic | ||||||||||||||||
| Income from continuing operations | $ | 0.03 | $ | 0.13 | $ | 0.40 | $ | 0.03 | ||||||||
| Discontinued operations | $ | (0.13 | ) | $ | (0.01 | ) | $ | (0.18 | ) | $ | (0.05 | ) | ||||
| Net income (loss) | $ | (0.11 | ) | $ | 0.12 | $ | 0.22 | $ | (0.02 | ) | ||||||
| Earnings (loss) per share - Diluted | ||||||||||||||||
| Income from continuing operations | $ | 0.03 | $ | 0.13 | $ | 0.39 | $ | 0.03 | ||||||||
| Discontinued operations | $ | (0.13 | ) | $ | (0.01 | ) | $ | (0.17 | ) | $ | (0.05 | ) | ||||
| Net income (loss) | $ | (0.11 | ) | $ | 0.12 | $ | 0.22 | $ | (0.02 | ) | ||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 5,225,020 | 5,440,520 | 5,224,371 | 5,440,396 | ||||||||||||
| Diluted | 5,356,835 | 5,546,389 | 5,348,172 | 5,513,939 | ||||||||||||
| THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Net sales from continuing operations | $ | 23,499,324 | $ | 25,833,494 | $ | 47,480,035 | $ | 51,418,322 | ||||||||
| Cost of goods sold from continuing operations | 16,368,100 | 18,034,941 | 33,037,451 | 35,357,630 | ||||||||||||
| Gross profit from continuing operations | 7,131,224 | 7,798,553 | 14,442,584 | 16,060,692 | ||||||||||||
| Operating expenses from continuing operations | 6,979,251 | 6,973,430 | 14,265,673 | 13,659,132 | ||||||||||||
| Operating profit from continuing operations | 151,973 | 825,123 | 176,911 | 2,401,560 | ||||||||||||
| Foreign Exchange charge gain (loss) Brazil | (375,741 | ) | 28,083 | (691,528 | ) | 248,850 | ||||||||||
| Arbitration judgment in Brazil | 2,126,153 | — | (7,873,847 | ) | — | |||||||||||
| Other income (loss), net | (26,385 | ) | 19,447 | 32,989 | 68,923 | |||||||||||
| Interest expense | (259,453 | ) | (140,251 | ) | (495,846 | ) | (258,632 | ) | ||||||||
| Income (loss) from continuing operations before income taxes | 1,616,547 | 732,402 | (8,851,321 | ) | 2,460,701 | |||||||||||
| Provision (benefit) for income taxes | (27,283 | ) | 97,856 | (373,684 | ) | 505,606 | ||||||||||
| Income (loss) from continuing operations | 1,643,830 | 634,546 | (8,477,637 | ) | 1,955,095 | |||||||||||
| Discontinued operations: | ||||||||||||||||
| Loss from operations of discontinued India glove manufacturing facility | — | (79,293 | ) | — | (324,854 | ) | ||||||||||
| Provision (benefit) for income taxes | — | (28,545 | ) | — | (116,948 | ) | ||||||||||
| Loss on discontinued operations | — | (50,748 | ) | — | (207,906 | ) | ||||||||||
| Net Income (loss) | $ | 1,643,830 | $ | 583,798 | $ | (8,477,637 | ) | $ | 1,747,189 | |||||||
| Earnings (loss) per share - Basic | ||||||||||||||||
| Income (loss) from continuing operations | 0.31 | $ | 0.12 | $ | (1.62 | ) | $ | 0.37 | ||||||||
| Discontinued operations | — | $ | (.01 | ) | — | $ | (.04 | ) | ||||||||
| Net income (loss) | 0.31 | $ | 0.11 | $ | (1.62 | ) | $ | 0.33 | ||||||||
| Earnings (loss) per share - Diluted | ||||||||||||||||
| Income (loss) from continuing operations | $ | 0.30 | $ | 0.12 | $ | (1.62 | ) | $ | 0.37 | |||||||
| Discontinued operations | — | $ | (.01 | ) | — | $ | (.04 | ) | ||||||||
| Income (loss) net income | $ | 0.30 | $ | 0.11 | $ | (1.62 | ) | $ | 0.33 | |||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 5,271,997 | 5,225,020 | 5,235,957 | 5,223,890 | ||||||||||||
| Diluted | 5,441,167 | 5,345,728 | 5,235,957 | 5,340,978 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three and Ninesix months ended OctoberJuly 31, 20112012 and 2010
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 31 | October 31 | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Net income (loss) | $ | (576,636 | ) | $ | 648,852 | $ | 1,170,654 | $ | (124,648 | ) | ||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Cash flow hedge in China | 40,698 | — | 108,375 | — | ||||||||||||
| Foreign currency translation adjustments: | ||||||||||||||||
| Lakeland Brazil, S.A. | (1,904,804 | ) | 504,978 | (678,905 | ) | 1,333,788 | ||||||||||
| Canada | (25,641 | ) | 4,396 | (263 | ) | 26,861 | ||||||||||
| United Kingdom | (94,165 | ) | 34,850 | 11,494 | (73,660 | ) | ||||||||||
| China | 19,908 | 55,018 | 46,645 | 59,991 | ||||||||||||
| Russia/Kazakhstan | (36,022 | ) | — | (25,950 | ) | — | ||||||||||
| Other comprehensive income (loss) | (2,000,026 | ) | 599,242 | (538,604 | ) | 1,346,980 | ||||||||||
| Comprehensive income (loss) | $ | (2,576,662 | ) | $ | 1,248,094 | $ | 632.050 | $ | 1,222,332 | |||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Net income (loss) | $ | 1,643,830 | $ | 583,798 | $ | (8,477,637 | ) | $ | 1,747,189 | |||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Cash flow hedge in China | (127,094 | ) | 11,695 | (230,866 | ) | 67,676 | ||||||||||
| Foreign currency translation adjustments: | ||||||||||||||||
| Lakeland Brazil, S.A. | $ | (1,613,795 | ) | $ | 104,813 | $ | (3,429,066 | ) | $ | 1,225,899 | ||||||
| Canada | (8,938 | ) | (6,839 | ) | (3,405 | ) | 25,379 | |||||||||
| United Kingdom | (150,809 | ) | (55,066 | ) | (128,954 | ) | 105,659 | |||||||||
| China | (31,688 | ) | 11,410 | (22,082 | ) | 26,738 | ||||||||||
| Russia/Kazakhstan | (51,179 | ) | (1,880 | ) | (60,048 | ) | 10,071 | |||||||||
| Other comprehensive income (loss) | (1,983,503 | ) | 64,133 | (3,874,421 | ) | 1,461,422 | ||||||||||
| Comprehensive income (loss) | $ | (339,673 | ) | $ | 647,931 | $ | (12,352,058 | ) | $ | 3,208,611 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 20112012 (unaudited) and January 31, 2011
October 31, 2011 | January 31, 2011 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,946,651 | $ | 5,953,069 | ||||
Accounts receivable, net of allowance for doubtful accounts of $222,300 at October 31, 2011 and $210,100 at January 31, 2011 | 15,242,845 | 14,377,188 | ||||||
| Inventories, net of reserves of $1,458,000 at October 31, 2011 and $1,495,000 at January 31, 2011 | 47,312,694 | 45,295,295 | ||||||
| Deferred income taxes | 2,262,174 | 2,296,941 | ||||||
| Assets of discontinued operation in India | 2,980,841 | 3,669,601 | ||||||
| Prepaid income and VAT tax | 1,225,235 | 1,814,691 | ||||||
| Other current assets | 1,832,480 | 2,318,214 | ||||||
| Total current assets | 76,802,920 | 75,724,999 | ||||||
| Property and equipment, net | 13,588,861 | 11,096,329 | ||||||
| Intangibles and other assets, net | 8,739,949 | 8,256,904 | ||||||
| Goodwill | 6,258,740 | 6,297,751 | ||||||
| Total assets | $ | 105,390,470 | $ | 101,375,983 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 5,389,716 | $ | 6,474,468 | ||||
| Accrued compensation and benefits | 1,934,763 | 1,411,599 | ||||||
| Other accrued expenses | 730,529 | 2,697,445 | ||||||
| Liabilities of discontinued operation in India | 366,207 | 33,940 | ||||||
| Current maturity of long-term debt and short-term borrowing | 1,455,508 | 100,050 | ||||||
| Total current liabilities | 9,876,723 | 10,717,502 | ||||||
| Borrowings under revolving credit facility | 12,705,632 | 11,485,698 | ||||||
| Other long-term debt | 4,483,941 | 1,592,461 | ||||||
| Other liabilities | 102,345 | 103,270 | ||||||
| VAT taxes payable long-term | 3,312,846 | 3,309,811 | ||||||
| Total liabilities | 30,481,487 | 27,208,742 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders' equity: | ||||||||
Preferred stock, $.01 par; authorized 1,500,000 shares (none issued) | — | — | ||||||
Common stock, $.01 par; authorized 10,000,000 shares, issued, 5,581,678 and 5,568,744; outstanding, 5,225,237 and 5,254,303 at October 31, 2011 and January 31, 2011, respectively | 55,817 | 55,687 | ||||||
| Treasury stock, at cost, 356,441 shares at October 31, 2011 and 314,441 shares at January 31, 2011 | (3,352,291 | ) | (3,012,920 | ) | ||||
| Additional paid-in capital | 50,728,547 | 50,279,613 | ||||||
| Retained earnings | 27,363,703 | 26,193,049 | ||||||
| Other comprehensive income | 113,207 | 651,812 | ||||||
| Total stockholders' equity | 74,908,983 | 74,167,241 | ||||||
| Total liabilities and stockholders’ equity | $ | 105,390,470 | $ | 101,375,983 | ||||
| July 31, 2012 | January 31, 2012 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 6,462,363 | $ | 5,711,038 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $271,000 at July 31, 2012 and $270,200 at January 31, 2012 | 14,365,294 | 12,576,362 | ||||||
| Inventories, net of reserves of $1,823,000 at July 31, 2012 and $1,601,000 at January 31, 2012 | 43,019,214 | 45,668,355 | ||||||
| Deferred income taxes | 4,671,481 | 3,987,671 | ||||||
| Assets of discontinued operation in India | 1,922,505 | 1,998,570 | ||||||
| Prepaid income and VAT tax | 1,998,251 | 1,772,806 | ||||||
| Other current assets | 1,938,651 | 1,993,151 | ||||||
| Total current assets | 74,377,759 | 73,707,953 | ||||||
| Property and equipment, net | 13,792,540 | 13,914,826 | ||||||
| Prepaid VAT and other taxes, noncurrent | 2,428,492 | 2,791,107 | ||||||
| Security deposits | 1,414,620 | 1,330,679 | ||||||
| Intangibles and other assets, net | 3,867,965 | 4,527,335 | ||||||
| Goodwill | 5,496,557 | 6,132,954 | ||||||
| Total assets | $ | 101,377,933 | $ | 102,404,854 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 8,203,955 | $ | 4,600,437 | ||||
| Accrued compensation and benefits | 1,567,562 | 1,304,818 | ||||||
| Other accrued expenses | 1,997,122 | 1,584,894 | ||||||
| Liabilities of discontinued operation in India | 32,480 | 64,780 | ||||||
| Current maturity of long-term debt | 99,881 | 860,451 | ||||||
| Current maturity of arbitration settlement | 1,760,346 | — | ||||||
| Short-term borrowing | 1,383,289 | 1,037,808 | ||||||
| Term loans to TD Bank | 6,080,000 | — | ||||||
| Borrowings under revolving credit facility | 9,058,882 | — | ||||||
| Total current liabilities | 30,183,517 | 9,453,188 | ||||||
| Accrued Arbitration Award in Brazil (net of current maturities) | 5,257,133 | — | ||||||
| Borrowings under revolving credit facility | — | 11,457,807 | ||||||
| Other long-term debt | 1,568,323 | 4,814,682 | ||||||
| Other liabilities-accrued legal fees in Brazil | 84,301 | 99,367 | ||||||
| VAT taxes payable long-term | 3,322,826 | 3,312,953 | ||||||
| Total liabilities | 40,416,100 | 29,137,997 | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $.01 par; authorized 1,500,000 shares (none issued) | — | — | ||||||
| Common stock, $.01 par; authorized 10,000,000 shares, issued, 5,686,302 and 5,581,919, outstanding, 5,329,861 and 5,225,478 at July 31, 2012 and January 31, 2012, respectively | 56,863 | 55,819 | ||||||
| Treasury stock, at cost, 356,441 shares at July 31, 2012 and at January 31, 2012 | (3,352,291 | ) | (3,352,291 | ) | ||||
| Additional paid-in capital | 50,818,584 | 50,772,594 | ||||||
| Retained earnings | 17,338,587 | 25,816,224 | ||||||
| Accumulated other comprehensive loss | (3,899,910 | ) | (25,489 | ) | ||||
| Total stockholders' equity | 60,961,833 | 73,266,857 | ||||||
| Total liabilities and stockholders’ equity | $ | 101,377,933 | $ | 102,404,854 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Certain reclassifications of prior period data have been made to conform to current period classifications.
| 7 |
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six months ended OctoberJuly 31, 2011
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| Balance, January 31, 2011 | 5,568,744 | $ | 55,687 | (314,441 | ) | $ | (3,012,920 | ) | $ | 50,279,613 | $ | 26,193,049 | $ | 651,812 | $ | 74,167,241 | ||||||||||||||||
| Net income | — | — | — | — | — | 1,170,654 | — | 1,170,654 | ||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | (538,605 | ) | (538,605 | ) | ||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Grant of director stock options | — | — | — | — | 18,548 | — | — | 18,548 | ||||||||||||||||||||||||
| Restricted Stock issued at par | 12,934 | 130 | — | — | (130 | ) | — | — | — | |||||||||||||||||||||||
| Restricted Stock Plan: | ||||||||||||||||||||||||||||||||
| 2006 Plan | — | — | — | — | 4,253 | — | — | 4,253 | ||||||||||||||||||||||||
| 2009 Plan | — | — | — | — | 476,692 | — | — | 476,692 | ||||||||||||||||||||||||
| Shares returned to Company in lieu of payroll taxes | — | — | — | — | (50,429 | ) | — | — | (50,429 | ) | ||||||||||||||||||||||
| Stock Buy-back Program | — | — | (42,000 | ) | (339,371 | ) | — | — | — | (339,371 | ) | |||||||||||||||||||||
| Balance October 31, 2011 | 5,581,678 | $ | 55,817 | (356,441 | ) | $ | (3,352,291 | ) | $ | 50,728,547 | $ | 27,363,703 | $ | 113,207 | $ | 74,908,983 | ||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| Balance, January 31, 2012 | 5,581,919 | $ | 55,819 | (356,441 | ) | $ | (3,352,291 | ) | $ | 50,772,594 | $ | 25,816,224 | $ | (25,489 | ) | $ | 73,266,857 | |||||||||||||||
| Net loss | — | — | — | — | — | (8,477,637 | ) | — | (8,477,637 | ) | ||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (3,874,421 | ) | (3,874,421 | ) | ||||||||||||||||||||||
| Stock-based compensation: | ||||||||||||||||||||||||||||||||
| Grant of director stock options | — | — | — | — | 24,630 | — | — | 24,630 | ||||||||||||||||||||||||
| Restricted stock issued at par | 104,383 | 1,044 | — | — | (1,044 | ) | — | — | — | |||||||||||||||||||||||
| Return of shares in lieu of payroll tax withholding | — | — | — | — | (129,844 | ) | — | — | (129,844 | ) | ||||||||||||||||||||||
| Restricted Stock Plan: | ||||||||||||||||||||||||||||||||
| 2009 Plan | — | — | — | — | 100,129 | — | — | 100,129 | ||||||||||||||||||||||||
| 2012 Plan | — | — | — | — | 52,119 | — | — | 52,119 | ||||||||||||||||||||||||
| Balance July 31, 2012 | 5,686,302 | $ | 56,863 | (356,441 | ) | $ | (3,352,291 | ) | $ | 50,818,584 | $ | 17,338,587 | $ | (3,899,910 | ) | $ | 60,961,833 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended OctoberJuly 31, 20112012 and 2010
| NINE MONTHS ENDED | ||||||||
| October 31, | ||||||||
| 2011 | 2010 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) | $ | 1,170,654 | $ | (124,648 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Stock-based compensation | 499,493 | 591,751 | ||||||
| Provision for doubtful accounts | — | (6,509 | ) | |||||
| Provision for inventory obsolescence | (37,000 | ) | 260,614 | |||||
| Depreciation and amortization | 1,207,135 | 1,478,761 | ||||||
| Deferred income tax | 28,786 | 3,169,278 | ||||||
| Loss on disposal of discontinued operations | 880,694 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | (1,030,161 | ) | (1,220,955 | ) | ||||
| (Increase) decrease in inventories | (2,158,394 | ) | 44,913 | |||||
| (Increase) decrease in other assets | 597,111 | (2,719,667 | ) | |||||
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | (2,545,306 | ) | 3,968,722 | |||||
| Net cash provided by (used in) operating activities | (1,386,988 | ) | 5,442,260 | |||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of property and equipment | (3,593,674 | ) | (1,235,789 | ) | ||||
| Net cash used in investing activities | (3,593,674 | ) | (1,235,789 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Purchases of stock under stock repurchase program | (339,371 | ) | — | |||||
| Net (payments) borrowings under loan agreements | 5,460,961 | (3,720,830 | ) | |||||
| Cash paid for taxes in lieu of shares issued under restricted stock program | (50,429 | ) | — | |||||
| Net cash provided by (used in) financing activities | 5,071,161 | (3,720,830 | ) | |||||
| Effect of exchange rate changes on cash | (96,917 | ) | (123,913 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | (6,418 | ) | 361,728 | |||||
| Cash and cash equivalents at beginning of period | 5,953,069 | 5,093,380 | ||||||
| Cash and cash equivalents at end of period | $ | 5,946,651 | $ | 5,455,108 | ||||
| For the Six Months Ended July 31, | ||||||||
| As restated | ||||||||
| 2012 | 2011 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (8,477,637 | ) | $ | 1,747,189 | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | ||||||||
| Arbitration award in Brazil | 7,017,479 | — | ||||||
| Provision for inventory obsolescence | 222,000 | (109,000 | ) | |||||
| Provision for doubtful accounts | 1,000 | 102,800 | ||||||
| Deferred income taxes | (927,766 | ) | 84,348 | |||||
| Depreciation and amortization | 746,556 | 824,525 | ||||||
| Stock based and restricted stock compensation | 176,878 | 367,882 | ||||||
| (Increase) decrease in operating assets | ||||||||
| Accounts receivable | (2,419,650 | ) | (2,016,917 | ) | ||||
| Inventories | 665,891 | (3,882,318 | ) | |||||
| Prepaid income taxes and other current assets | (505,120 | ) | 338,352 | |||||
| Other assets | (1,899 | ) | (112,379 | ) | ||||
| Assets of discontinued operations | 76,065 | — | ||||||
| Increase (decrease) in operating liabilities | ||||||||
| Accounts payable | 4,613,763 | (457,279 | ) | |||||
| Accrued expenses and other liabilities | 900,099 | (957,705 | ) | |||||
| Liabilities of discontinued operations | (32,300 | ) | — | |||||
| Net cash provided by (used in) operating activities | 2,055,359 | (4,070,502 | ) | |||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (1,074,199 | ) | (1,126,926 | ) | ||||
| Net cash used in investing activities | (1,074,199 | ) | (1,126,926 | ) | ||||
| Cash flows from financing activities | ||||||||
| Net borrowings under credit agreement, net of reclassification to term loans | 146,075 | 4,595,317 | ||||||
| Proceeds from term loans | — | 1,500,000 | ||||||
| Canada loan repayments | (150,100 | ) | (51,650 | ) | ||||
| Purchases of stock under stock repurchase program | — | (339,371 | ) | |||||
| Other liabilities | (15,067 | ) | 7,769 | |||||
| Shares returned in lieu of taxes under restricted stock program-cash paid | (129,844 | ) | (50,429 | ) | ||||
| VAT taxes payable | 9,873 | 4,634 | ||||||
| Net cash provided by (used in) financing activities | (139,063 | ) | 5,666,270 | |||||
| Effect of exchange rate changes on cash | (90,772 | ) | 117,178 | |||||
| Net increase in cash and cash equivalents | 751,325 | 586,020 | ||||||
| Cash and cash equivalents at beginning of period | 5,711,038 | 6,074,505 | ||||||
| Cash and cash equivalents at end of period | $ | 6,462,363 | $ | 6,660,525 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Certain reclassifications of prior period data have been made to conform to current period classification.
| 9 |
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | Business |
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware corporation organized in April 1982, manufactures and sells a comprehensive line of safety garments and accessories for the industrial protective clothing and homeland security markets. The principal market for our products is in the United States. No customer accounted for more than 10% of net sales during the nine-monthsix-month periods ended OctoberJuly 31, 20112012 and 2010.
| 2. | Basis of Presentation |
The condensed consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments (consisting of only normal and recurring adjustments) which are, in the opinion of management, necessary to present fairly the condensed consolidated financial information required therein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended January 31, 2011.
The results of operations for the three-monththree and nine-monthsix-month periods ended OctoberJuly 31, 2011,2012 are not necessarily indicative of the results to be expected for the full year.
In this Form 10-Q, “FY” means fiscal year; thus, for example, FY13 refers to the fiscal year ending January 31, 2013.
| 3. | Principles of Consolidation |
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
| Inventories: |
Inventories consist of the following:
| October 31, 2011 | January 31, 2011 | |||||||
| Raw materials | $ | 21,844,777 | $ | 17,830,675 | ||||
| Work-in-process | 2,026,618 | 2,796,825 | ||||||
| Finished goods | 23,441,299 | 24,667,795 | ||||||
| $ | 47,312,694 | $ | 45,295,295 | |||||
| July 31, | January 31, | |||||||
| 2012 | 2012 | |||||||
| Raw materials | $ | 18,335,643 | $ | 21,213,423 | ||||
| Work-in-process | 2,659,855 | 1,790,510 | ||||||
| Finished goods | 22,023,716 | 22,664,422 | ||||||
| $ | 43,019,214 | $ | 45,668,355 | |||||
Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or market.
| 5. | Earnings Per Share: |
Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share are based on the weighted average number of common and common stock equivalents. The diluted earnings per share calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from thetheir exercise, based on the average price during the period.
The following table sets forth the computation of basic and diluted earnings per share for “Income for continuing operations” at OctoberJuly 31, 20112012 and 2010 as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 31, | October 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Numerator | ||||||||||||||||
| Net income from continuing operations | $ | 145,634 | $ | 699,319 | $ | 2,095,470 | $ | 159,527 | ||||||||
| Denominator | ||||||||||||||||
| Denominator for basic earnings per share | ||||||||||||||||
| (weighted-average shares which reflect 356,441 and 355,041 and 125,322 and 125,322 shares in the treasury as a result of the stock repurchase program for the three months and nine months in each of 2011 and 2010, respectively | 5,225,020 | 5,440,520 | 5,224,371 | 5,440,396 | ||||||||||||
| Effect of dilutive securities from restricted stock plan and from dilutive effect of stock options | 131,815 | 105,869 | 123,801 | 73,543 | ||||||||||||
| Denominator for diluted earnings per share (adjusted weighted average shares) | 5,356,835 | 5,546,389 | 5,348,172 | 5,513,939 | ||||||||||||
| Basic earnings per share from continuing operations | $ | 0.03 | $ | 0.13 | $ | 0.40 | $ | (0.03 | ) | |||||||
| Diluted earnings per share from continuing operations | $ | 0.03 | $ | 0.13 | $ | 0.39 | $ | (0.03 | ) | |||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Numerator | ||||||||||||||||
| Net income (loss) | $ | 1,643,830 | $ | 634,546 | $ | (8,477,637 | ) | $ | 1,955,095 | |||||||
| Denominator | ||||||||||||||||
| Denominator for basic earnings per share | ||||||||||||||||
| (Weighted-average shares which reflect 356,441 and 354,364 and 125,322 and 125,322 weighted average common shares in the treasury as a result of the stock repurchase program for the three months and six months in each of 2012 and 2011, respectively | 5,271,997 | 5,225,020 | 5,235,957 | 5,223,890 | ||||||||||||
| Effect of dilutive securities from restricted stock plan and from dilutive effect of stock options | 169,170 | 120,708 | — | 117,088 | ||||||||||||
| Denominator for diluted earnings per share | 5,441,167 | 5,345,728 | 5,235,957 | 5,340,978 | ||||||||||||
| (adjusted weighted average shares) | ||||||||||||||||
| Basic earnings (loss) per share | $ | 0.31 | $ | 0.11 | $ | (1.62 | ) | $ | 0.37 | |||||||
| Diluted earnings (loss) per share | $ | 0.30 | $ | 0.12 | $ | (1.62 | ) | $ | 0.37 | |||||||
| 6. | Revolving Credit Facility |
At OctoberJuly 31, 2011,2012, the total balance outstanding under our revolving credit facility amounted to $12.7$9.1 million. In January 2010, the Company entered into a new one-year $23.5 million revolving credit facility with TD Bank, N.A. In January 2011, TD Bank, N.A. agreed to a two-year extension to expire January 2013. In2013 and in June 2011, TD Bank, N.A. agreed to extend the term to June 2014 and add a $6.5 million term loan facility to be used to fund capital expansion in Brazil, Mexico and Argentina, as well as the ability to refinance existing debt in Canada. In April 2012, TD Bank, N.A. agreed to add a $3.0 million term loan facility to be used to refinance a portion of the revolver. Borrowings under this $6.5$9.5 million term loan facility are in the form of a five-year term loan.
| 7. | Major Supplier |
We purchased 11.9% of our cost of goods sold from one supplier during the six-month period ended OctoberJuly 31, 2011, and 25.7% and 6.8%2012. We did not purchase in excess of total purchases for the nine-month period ended October 31, 2010.
| 8. | Employee Stock Compensation |
Shares of share options and shares to its Directors for up to 60,000 shares ofour common stock asmay currently be awarded under our 2012 stock compensation. All stock options under this Plan are granted at the fair market value of the common stock at the grant date. This date is fixed only once a year upon a Board member’s re-election to the Board at the Annual Shareholders’ meeting. Director’s stock options vest ratably over a six-month period and generally expire six years from the grant date.
| Nature and terms | ||
| Restricted Stock Plan - employees | Long-term incentive compensation-three-year plan. Employees are granted potential share awards at the beginning of the three-year cycle at baseline and maximum amounts. The level of award and final vesting is based on the Board of Director’s opinion as to the performance of the Company and management in the entire three year cycle. All vesting is three-year “cliff” vesting - there is no partial vesting. The valuation is based on the stock price at the grant date and amortized to expense over the three-year period. | |
| Restricted Stock Plan – Directors | Long-term incentive compensation-three-year plan. Directors are granted potential share awards at the beginning of the three-year cycle at baseline and maximum amounts. The level of award and final vesting is based on the Board of Director’s opinion as to the performance of the Company and management in the entire three-year cycle. All vesting is three-year “cliff” vesting-there is no partial vesting. The valuation is based on the stock price at the grant date and amortized to expense over the three-year period. | |
| Matching award program | All participating employees are eligible to receive one share of restricted stock awarded for each two shares of Lakeland stock purchased on the open market. Such restricted shares are subject to three-year time vesting. The valuation is based on the stock price at the grant date and amortized to expense over the three-year period. | |
| Bonus in stock program - employees | All participating employees are eligible to elect to receive any cash bonus in shares of restricted stock. Such restricted shares are subject to two-year time vesting. The valuation is based on the stock price at the grant date and amortized to expense over the two-year period. Since the employee is giving up cash for unvested shares, the amount of shares awarded is 133% of the cash amount based on the grant date stock price. | |
| Director fee in stock program | All directors are eligible to elect to receive any director fees in shares of restricted stock. Such restricted shares are subject to two- year time vesting. The valuation is based on the stock price at the grant date and amortized to expense over the two-year period. Since the director is giving up cash for unvested shares, the amount of shares awarded is 133% of the cash amount based on the grant date stock price. | |
| Non-employee director stock option plan | The plan provides for an automatic one-time grant of options to purchase 5,000 shares of common stock to each nonemployee director newly elected or appointed. 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 nonemployee 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 that date. |
| Stock Options | Number of Shares | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||
| Outstanding at January 31, 2011 | 12,200 | $ | 9.02 | 3.61 years | $ | 17,030 | |||||||
| Granted during the nine-months ended October 31, 2011 | 5,000 | $ | 8.28 | 6.00 years | $ | 0 | |||||||
| Outstanding at October 31, 2011 | 17,200 | $ | 7.26 | 3.58 years | $ | 8,000 | |||||||
| Exercisable at October 31, 2011 | 17,200 | $ | 7.26 | 3.58 years | $ | 8,000 | |||||||
Equity Incentive Plan”). A total of 253,000 shares of restricted stock were authorized under this plan. Plans
On June 17, 2009, the stockholders of the Company authorized the issuance of 253,000 shares under a new restricted stock plan (the “2009 Equity Incentive Plan”). Under the restricted stock plans,2009 Equity Incentive Plan, eligible employees and directors arewere eligible to be awarded performance-based restricted shares of the Companycompany common stock. The amount recorded as expense for the performance-based grants of restricted stock are based upon an estimate made at the end of each reporting period as to the most probable outcome of this plan at the end of the three-year performance period.period (e.g., baseline, maximum or zero). In addition to the grants with vesting based solely on performance, certain awards pursuant to the plan have a time-based vesting requirement, under which awards vest from two to three years after grant issuance, subject to continuous employment and certain other conditions. Restricted stock has no voting rights until fully vested and issued, and the underlying shares are not considered to be issued and outstanding until vested.
Under the 2009 Equity Incentive Plan, the Company has issued 104,989 fully vested shares as of July 31, 2012. The Company has granted up to a maximum of 241,74435,989 restricted stock awards as of OctoberJuly 31, 2011.2012. All of these restricted stock awards are nonvested at OctoberJuly 31, 2011 (182,675 shares at “baseline”),2012 and have a weighted average grant date fair value of $7.45. Under the 2006 Equity Incentive Plan, there are also outstanding as of October 31, 2011, unvested grants of 338 shares under the stock purchase match program.$8.36. The Company recognizes expense related to performance-based awards over the requisite service period using the straight-line attribution method based on the outcome that is probable.
On June 20, 2012, the stockholders of the Company authorized 310,000 shares under the Company’s 2012 Stock Incentive Plan the (“2012 Equity Incentive Plan”). Under the 2012 Incentive Plan, eligible employees and directors may be awarded restricted stock, restricted stock units, performance shares, performance units and other share-based awards. The amount recorded as expense for the performance-based grants of restricted stock are based upon an estimate made at the end of each reporting period as to the most probable outcome of this plan at the end of the three-year performance period (e.g., baseline, maximum or zero). In addition to the grants with vesting based solely on performance, certain awards pursuant to the plan have a time-based vesting requirement, under which awards vest from two to three years after grant issuance, subject to continuous employment and certain other conditions. Restricted stock has no voting rights until fully vested and issued, and the underlying shares are not considered to be issued and outstanding until vested.
Under the 2012 Equity Incentive Plan, the Company has granted 216,172 restricted stock awards as of July 31, 2012, assuming all maximum awards are achieved. All of these restricted stock awards are nonvested at July 31, 2012 (154,672 shares at “baseline”), and have a weighted average grant date fair value of $6.44. The Company recognizes expense related to performance-based awards over the requisite service period using the straight-line attribution method based on the outcome that is probable.
As of OctoberJuly 31, 2011,2012, unrecognized stock-based compensation expense related to restricted stock awards totaled $830,855, consisting of $212 remaining under$72,708 pursuant to the 20062009 Equity Incentive Plan and $830,643 under$1,337,239 pursuant to the 20092012 Equity Incentive Plan, before income taxes, based on the maximum performance award level, less what has been charged to expense on a cumulative basis through OctoberJuly 31, 2011,2012, which was set at baseline. Such unrecognized stock-based compensation expense related to restricted stock awards totaled $358,095$72,708 for the 2009 Equity Incentive Plan and $941,179 for the 2012 Equity Incentive Plan at the baseline performance level. The cost of these nonvested awards is expected to be recognized over a weighted-average period of three years. The Board has estimated its current performance level to be at the baseline level, and expenses have been recorded accordingly. The performance based awards are not considered stock equivalents for earnings per share (“EPS”) calculation purposes.
The following table represents our stock options granted, exercised and forfeited during the six months ended July 31, 2012.
| Stock Options | Number of Shares | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at January 31, 2012 | 18,200 | $ | 7.31 | 3.38 years | $ | 10,230 | ||||||||||
| Granted during the six months ended July 31, 2012 | 10,000 | $ | 6.44 | 5.89 years | $ | 12,600 | ||||||||||
| Outstanding at July 31, 2012 | 26,000 | $ | 7.51 | 4.33 years | $ | 20,050 | ||||||||||
| Exercisable at July 31, 2012 | 26,000 | $ | 7.51 | 4.33 years | $ | 20,050 | ||||||||||
| Reserved for future issuance: | ||||||||||||||||
| Directors’ Plan | 21,300 | |||||||||||||||
There were no exercises or forfeitures during the six-months ended July 31, 2012.
Stock-Based Compensation
The Company recognized total stock-based compensation costs of $499,493$176,878 and $591,751$367,882 for the nine monthssix-months ended OctoberJuly 31, 20112012 and 2010,2011, respectively, of which $4,253$0 and $43,257$4,029 result from the 2006 Equity Incentive Plan, $100,129 and $476,692 and $548,494$330,397 result from the 2009 Equity Incentive Plan, $52,119 and $0 result from the 2012 Equity Incentive Plan and $24,630 and $33,456, from the Directors Option Plan, for the nine monthssix-months ended OctoberJuly 31, 2012 and 2011, and 2010, respectively, and $18,548 and $0, respectively, from the Director Option Plan.respectively. These amounts are reflected in selling, general and administrative expenses. The total income tax benefit recognized for stock-based compensation arrangements was $179,817$64,560 and $213,031$134,277 for the nine monthssix-months ended OctoberJuly 31, 2012 and 2011, and 2010, respectively.
| Total Restricted Shares | Outstanding unvested grants at maximum at beginning of FY12 | Granted during FY12 through October 31, 2011 | Becoming Vested during FY12 through October 31, 2011 | Forfeited during FY12 through October 31, 2011 | Outstanding unvested grants at maximum at October 31, 2011 | |||||||||||||||
| Restricted stock grants - employees | 137,123 | 8,014 | - | - | 145,137 | |||||||||||||||
| Restricted stock grants - directors | 63,184 | 4,686 | - | (4,686 | ) | 63,184 | ||||||||||||||
| Matching award program | 3,058 | 3,000 | (2,220 | ) | - | 3,838 | ||||||||||||||
| Bonus in stock - employees | 19,479 | 22,801 | (16,479 | ) | - | 25,801 | ||||||||||||||
| Retainer in stock - directors | - | 4,122 | - | - | 4,122 | |||||||||||||||
| Total restricted stock plan | 222,844 | 42,623 | (18,699 | ) | (4,686 | ) | 242,082 | |||||||||||||
| Shares under 2009 plan | Outstanding unvested grants at maximum at beginning of FY12 | Granted during FY12 through October 31, 2011 | Becoming Vested during FY12 through October 31, 2011 | Forfeited during FY12 through October 31, 2011 | Outstanding unvested grants at maximum at October 31, 2011 | |||||||||||||||
| Restricted stock grants - employees | 137,123 | 8,014 | - | - | 145,137 | |||||||||||||||
| Restricted stock grants - directors | 63,184 | 4,686 | - | (4,686 | ) | 63,184 | ||||||||||||||
| Matching award program | 500 | 3,000 | - | - | 3,500 | |||||||||||||||
| Bonus in stock - employees | 3,000 | 22,801 | - | - | 25,801 | |||||||||||||||
| Retainer in stock - directors | - | 4,122 | - | - | 4,122 | |||||||||||||||
| Total restricted stock plan | 203,807 | 42,623 | - | (4,686 | ) | 241,744 | ||||||||||||||
| Shares under 2006 Plan | Outstanding unvested grants at maximum at beginning of FY12 | Granted during FY12 through October 31, 2011 | Becoming Vested during FY12 through October 31, 2011 | Forfeited during FY12 through October 31, 2011 | Outstanding unvested grants at maximum at October 31, 2011 | |||||||||||||||
| Restricted stock grants - employees | - | - | - | - | - | |||||||||||||||
| Restricted stock grants - directors | - | - | - | - | - | |||||||||||||||
| Matching award program | 2,558 | - | (2,220 | ) | - | 338 | ||||||||||||||
| Bonus in stock - employees | 16,479 | - | (16,479 | ) | - | - | ||||||||||||||
| Retainer in stock - directors | - | - | - | - | - | |||||||||||||||
| Total restricted stock plan | 19,037 | - | (18,699 | ) | - | 338 | ||||||||||||||
| Weighted average grant date fair value | ||||||||||||||||||||
| Shares under 2009 Equity Incentive Plan | Outstanding unvested grants at maximum at beginning of FY12 | Granted during FY12 through October 31, 2011 | Becoming Vested during FY12 through October 31, 2011 | Forfeited during FY12 through October 31, 2011 | Outstanding unvested grants at maximum at October 31, 2011 | |||||||||||||||
| Restricted stock grants - employees | $ | 8.00 | $ | 8.00 | $ | - | $ | - | $ | 8.00 | ||||||||||
| Restricted stock grants - directors | $ | 8.00 | $ | 8.00 | $ | - | $ | 8.00 | $ | 8.00 | ||||||||||
| Matching award program | $ | 9.03 | $ | 7.99 | $ | - | $ | - | $ | 8.14 | ||||||||||
| Bonus in stock - employees | $ | 9.31 | $ | 8.39 | $ | - | $ | - | $ | 8.50 | ||||||||||
| Retainer in stock - directors | $ | - | $ | 8.17 | $ | - | $ | - | $ | 8.17 | ||||||||||
| Shares under 2006 Equity Incentive Plan | Outstanding unvested grants at maximum at beginning of FY12 | Granted during FY12 through October 31, 2011 | Becoming Vested during FY12 through October 31, 2011 | Forfeited during FY12 through October 31, 2011 | Outstanding unvested grants at maximum at October 31, 2011 | |||||||||||||||
| Restricted stock grants - employees | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Restricted stock grants - directors | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Matching award program | $ | 10.56 | $ | - | $ | 10.95 | $ | - | $ | 7.98 | ||||||||||
| Bonus in stock - employees | $ | 5.63 | $ | - | $ | 5.63 | $ | - | $ | - | ||||||||||
| Retainer in stock - directors | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Overall weighted average per share - all plans | ||||||||||||||||||||
| Restricted stock grants - employees | $ | 8.00 | $ | 8.00 | ||||||||||||||||
| Restricted stock grants - directors | $ | 8.00 | $ | 8.00 | ||||||||||||||||
| Matching award program | $ | 10.31 | $ | 8.14 | ||||||||||||||||
| Bonus in stock - employees | $ | 6.20 | $ | 8.50 | ||||||||||||||||
| Retainer in stock - directors | $ | - | $ | 8.17 | ||||||||||||||||
| Total restricted stock plan | ||||||||||||||||||||
| Shares under 2009 Plan | Outstanding unvested grants at maximum at beginning of FY13 | Granted during FY13 through July 31, 2012 | Becoming Vested during FY13 through July 31, 2012 | Forfeited during FY13 through July 31, 2012 | Outstanding unvested grants at maximum at July 31, 2013 | |||||||||||||||
| Restricted stock grants - employees | 129,536 | — | 79,313 | 50,223 | — | |||||||||||||||
| Restricted stock grants - directors | 63,184 | — | 45,232 | 17,952 | — | |||||||||||||||
| Matching award program | 3,500 | — | — | — | 3,500 | |||||||||||||||
| Bonus in stock - employees | 25,801 | — | — | — | 25,801 | |||||||||||||||
| Retainer in stock - directors | 5,572 | 1,116 | — | — | 6,688 | |||||||||||||||
| Total restricted stock plan | 227,593 | 1,116 | 124,545 | 68,175 | 35,989 | |||||||||||||||
| Weighted average grant date fair value | $ | 8.07 | $ | 10.45 | $ | 8.00 | $ | 8.00 | $ | 8.36 | ||||||||||
| Shares under 2012 Plan | Outstanding unvested grants at maximum at beginning of FY13 | Granted during FY13 through July 31, 2012 | Becoming Vested during FY13 through July 31, 2012 | Forfeited during FY13 through July 31, 2012 | Outstanding unvested grants at maximum at July 31, 2013 | |||||||||||||||
| Restricted stock grants - employees | — | 164,500 | — | — | 164,500 | |||||||||||||||
| Restricted stock grants - directors | — | 49,500 | — | — | 49,500 | |||||||||||||||
| Matching award program | — | — | — | — | — | |||||||||||||||
| Bonus in stock – employees | — | — | — | — | — | |||||||||||||||
| Retainer in stock – directors | — | 2,172 | — | — | 2,172 | |||||||||||||||
| Weighted average grant date fair value | — | $ | 6.44 | — | — | $ | 6.44 | |||||||||||||
| 9. | Manufacturing Segment Data |
Domestic and international sales from continuing operations are as follows in millions of dollars:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||
| October 31, | October 31, | |||||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||||
| Domestic | $ | 12.7 | 51 | % | $ | 16.2 | 63 | % | $ | 41.0 | 53 | % | $ | 45.8 | 61 | % | ||||||||||||||||||
| International | 12.0 | 49 | % | 9.5 | 37 | % | 35.2 | 47 | % | 28.9 | 39 | % | ||||||||||||||||||||||
| Total | $ | 24.7 | 100 | % | $ | 25.7 | 100 | % | $ | 76.2 | 100 | % | $ | 74.7 | 100 | % | ||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| July 31, | July 31, | |||||||||||||||||||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
| Domestic | $ | 9,088,224 | 38.7 | % | $ | 13,543,528 | 52.4 | % | $ | 18,861,184 | 39.7 | % | $ | 28,244,316 | 54.9 | % | ||||||||||||||||
| International | 14,411,100 | 61.3 | % | 12,289,966 | 47.6 | % | 28,618,851 | 60.3 | % | 23,174,006 | 45.1 | % | ||||||||||||||||||||
| Total | $ | 23,499,324 | 100.0 | % | $ | 25,833,494 | 100.0 | % | $ | 47,480,035 | 100.0 | % | $ | 51,418,322 | 100.0 | % | ||||||||||||||||
We manage our operations by evaluating each of our geographic locations. Our North American operations include our facilities in Decatur, Alabama (primarily the distribution to customers of the bulk of our products and the manufacture of our chemical, glove and disposable products), Jerez,Celaya, Mexico (primarily disposable, glove and chemical suit production) and St. Joseph, Missouri and Sinking Spring, Pennsylvania (primarily woven products production). We also maintain three manufacturing companiesfacilities in China (primarily disposable and chemical suit production), a wovens manufacturing facility in Brazil and a glove manufacturing facility in New Delhi, India (about to be closed). Our China facilities and Brazil facilitiesour Decatur, Alabama facility produce the majoritythemajority of the Company’s revenues.products. The accounting policies of these operating entities are the same as those described in Note 1 to our Annual Report on Form 10-K for the fiscal year ended January 31, 2011.2012. We evaluate the performance of these entities based on operating profit, which is defined as income before income taxes, interest expense and other income and expenses. We have sales forces in Canada, Europe, Latin AmericaChile and China, which sell and distribute products shipped from the United States, Mexico Brazil or China. The table below represents information about reported manufacturing segments for the three-month and nine-monthsix-month periods noted therein:
Three Months Ended October 31 (in millions of dollars) | Nine Months Ended October 31 (in millions of dollars) | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Net Sales from Continuing Operations: | ||||||||||||||||
| USA | $ | 13.61 | $ | 16.44 | $ | 44.36 | $ | 47.52 | ||||||||
| Other foreign | 4.37 | 3.72 | 14.09 | 11.56 | ||||||||||||
| China | 6.54 | 9.12 | 21.35 | 24.10 | ||||||||||||
| Brazil | 4.87 | 3.11 | 12.96 | 8.96 | ||||||||||||
| Less intersegment sales | (4.65 | ) | (6.71 | ) | (16.60 | ) | (17.45 | ) | ||||||||
| Consolidated sales | $ | 24.74 | $ | 25.68 | $ | 76.16 | $ | 74.69 | ||||||||
| External Sales from Continuing Operations: | ||||||||||||||||
| USA | $ | 12.88 | $ | 16.10 | $ | 41.36 | $ | 45.83 | ||||||||
| Other foreign | 3.65 | 2.65 | 11.85 | 8.71 | ||||||||||||
| China | 3.34 | 3.82 | 9.99 | 11.19 | ||||||||||||
| Brazil | 4.87 | 3.11 | 12.96 | 8.96 | ||||||||||||
| Consolidated external sales | $ | 24.74 | $ | 25.68 | $ | 76.16 | $ | 74.69 | ||||||||
| Intersegment Sales from Continuing Operations: | ||||||||||||||||
| USA | $ | 0.73 | $ | 0.34 | $ | 3.0 | $ | 1.69 | ||||||||
| Other foreign | 0.72 | 1.07 | 2.24 | 2.85 | ||||||||||||
| China | 3.20 | 5.30 | 11.36 | 12.91 | ||||||||||||
| Brazil | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
| Consolidated intersegment sales | $ | 4.65 | $ | 6.71 | $ | 16.60 | $ | 17.45 | ||||||||
| Operating Profit from Continuing Operations: | ||||||||||||||||
| USA | $ | (0.60 | ) | $ | .24 | $ | (0.45 | ) | $ | 0.21 | ||||||
| Other foreign | 0.09 | (0.09 | ) | 0.49 | (0.05 | ) | ||||||||||
| China | 0.46 | 1.37 | 1.94 | 3.25 | ||||||||||||
| Brazil | 0.11 | 0.08 | 0.17 | (0.07 | ) | |||||||||||
| Less intersegment profit | 0.17 | (.70 | ) | 0.73 | (0.94 | ) | ||||||||||
| Consolidated operating profit | $ | 0.23 | $ | .90 | $ | 2.88 | $ | 2.40 | ||||||||
| Depreciation and Amortization Expense from Continuing Operations: | ||||||||||||||||
| USA | $ | 0.16 | $ | 0.18 | $ | 0.51 | $ | 0.57 | ||||||||
| Other foreign | 0.04 | 0.04 | 0.11 | 0.09 | ||||||||||||
| China | 0.08 | 0.06 | 0.24 | 0.24 | ||||||||||||
| Brazil | 0.10 | 0.08 | 0.35 | 0.25 | ||||||||||||
| Consolidated depreciation and amortization expense | $ | 0.38 | $ | 0.36 | $ | 1.21 | $ | 1.15 | ||||||||
| Interest Expense from Continuing Operations: | ||||||||||||||||
| USA | $ | 0.11 | $ | 0.03 | $ | 0.27 | $ | 0.09 | ||||||||
| Other foreign | 0.06 | 0.05 | 0.18 | 0.15 | ||||||||||||
| China | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
| Brazil | 0.08 | 0.04 | 0.18 | 0.16 | ||||||||||||
| Less intersegment | (0.09 | ) | (0.05 | ) | (0.21 | ) | (0.14 | ) | ||||||||
| Consolidated interest expense | $ | 0.16 | $ | 0.07 | $ | 0.42 | $ | 0.26 | ||||||||
| Income Tax Expense from Continuing Operations: | ||||||||||||||||
| USA | $ | (0.28 | ) | $ | 0.09 | $ | (0.29 | ) | $ | 0.16 | ||||||
| Other foreign | 0.05 | (0.37 | ) | 0.19 | (0.29 | ) | ||||||||||
| China | 0.18 | 0.31 | 0.56 | 0.78 | ||||||||||||
| Brazil | (0.06 | ) | 0.37 | (0.20 | ) | 0.16 | ||||||||||
| Less intersegment | 0.02 | (0.26 | ) | 0.15 | (0.36 | ) | ||||||||||
| Consolidated income tax expense | $ | (0.09 | ) | $ | 0.14 | $ | 0.41 | $ | 0.45 | |||||||
| Total Assets (at Balance Sheet Date): | ||||||||||||||||
| USA | — | — | $ | 37.43 | $ | 36.78 | ||||||||||
| Other foreign | — | — | 14.75 | 12.90 | ||||||||||||
| China | — | — | 22.32 | 18.14 | ||||||||||||
| India | — | — | 3.73 | 4.63 | ||||||||||||
| Brazil | — | — | 27.16 | 22.75 | ||||||||||||
| Consolidated assets | — | — | $ | 105.39 | $ | 95.20 | ||||||||||
| Long-lived Assets (at Balance Sheet Date) | ||||||||||||||||
| USA | — | — | $ | 5.33 | $ | 4.14 | ||||||||||
| Other foreign | — | — | 0.03 | 1.40 | ||||||||||||
| China | — | — | 2.49 | 2.29 | ||||||||||||
| India | — | — | 2.49 | 2.89 | ||||||||||||
| Brazil | — | — | 3.25 | 3.06 | ||||||||||||
| Consolidated long-lived assets | — | — | $ | 13.59 | $ | 13.78 | ||||||||||
| Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Net Sales from Continuing Operations: | ||||||||||||||||
| USA | $ | 9,985,821 | $ | 15,196,314 | $ | 20,579,964 | $ | 30,752,896 | ||||||||
| Other foreign | 5,983,909 | 5,009,038 | 11,507,122 | 9,728,051 | ||||||||||||
| China | 10,103,401 | 8,248,211 | 18,265,261 | 14,807,174 | ||||||||||||
| Brazil | 4,698,670 | 4,027,675 | 9,889,430 | 8,083,407 | ||||||||||||
| Less intersegment | (7,272,477 | ) | (6,647,744 | ) | (12,761,742 | ) | (11,953,206 | ) | ||||||||
| Consolidated | $ | 23,499,324 | $ | 25,833,494 | $ | 47,480,035 | $ | 51,418,322 | ||||||||
| External Sales from Continuing Operations: | ||||||||||||||||
| USA | $ | 9,088,224 | $ | 13,543,528 | $ | 18,861,184 | $ | 28,244,316 | ||||||||
| Other foreign | 5,426,378 | 4,456,834 | 10,482,564 | 8,668,064 | ||||||||||||
| China | 4,289,766 | 3,805,457 | 8,250,571 | 6,422,535 | ||||||||||||
| Brazil | 4,694,956 | 4,027,675 | 9,885,716 | 8,083,407 | ||||||||||||
| Consolidated | $ | 23,499,324 | $ | 25,833,494 | $ | 47,480,035 | $ | 51,418,322 | ||||||||
| Intersegment Sales from Continuing Operations: | ||||||||||||||||
| USA | $ | 897,597 | $ | 1,652,786 | $ | 1,718,780 | $ | 2,508,581 | ||||||||
| Other foreign | 557,531 | 552,204 | 1,024,558 | 1,059,986 | ||||||||||||
| China | 5,813,635 | 4,442,754 | 10,014,690 | 8,384,639 | ||||||||||||
| Brazil | 3,714 | — | 3,714 | — | ||||||||||||
| Consolidated | $ | 7,272,477 | $ | 6,647,744 | $ | 12,761,742 | $ | 11,953,206 | ||||||||
| Operating Profit (Loss) from Continuing Operations: | ||||||||||||||||
| USA | $ | (787,508 | ) | $ | (229,293 | ) | $ | (2,253,179 | ) | $ | 147,326 | |||||
| Other foreign | 207,151 | 192,201 | 436,547 | 399,867 | ||||||||||||
| China | 310,743 | 800,517 | 1,142,978 | 1,473,904 | ||||||||||||
| Brazil | (243,260 | ) | (109,820 | ) | 131,290 | (188,274 | ) | |||||||||
| Less intersegment | 664,847 | 171,518 | 719,275 | 568,737 | ||||||||||||
| Consolidated | $ | 151,973 | $ | 825,123 | $ | 176,911 | $ | 2,401,560 | ||||||||
| Depreciation and Amortization Expense from Continuing Operations: | ||||||||||||||||
| USA | $ | 151,868 | $ | 163,231 | $ | 290,989 | $ | 353,114 | ||||||||
| Other foreign | 54,425 | 36,463 | 104,237 | 70,433 | ||||||||||||
| China | 84,808 | 80,625 | 171,968 | 157,530 | ||||||||||||
| Brazil | 80,565 | 125,392 | 179,362 | 243,448 | ||||||||||||
| Consolidated | $ | 371,666 | $ | 405,711 | $ | 746,556 | $ | 824,525 | ||||||||
| Interest Expense from Continuing Operations: | ||||||||||||||||
| USA | $ | 145,544 | $ | 87,599 | $ | 245,566 | $ | 161,702 | ||||||||
| Other foreign | 51,214 | 57,611 | 103,537 | 115,904 | ||||||||||||
| China | — | — | — | — | ||||||||||||
| Brazil | 281,418 | 53,894 | 515,370 | 96,667 | ||||||||||||
| Less intersegment | (218,723 | ) | (58,853 | ) | (368,627 | ) | (115,641 | ) | ||||||||
| Consolidated | $ | 259,453 | $ | 140,251 | $ | 495,846 | $ | 258,632 | ||||||||
| Income Tax Expense (Benefit) from Continuing Operations: | ||||||||||||||||
| USA | $ | (241,936 | ) | $ | (94,055 | ) | $ | (745,327 | ) | $ | (19,769 | ) | ||||
| Other foreign | 62,953 | 47,082 | 122,621 | 259,379 | ||||||||||||
| China | 211,151 | 228,269 | 365,721 | 380,623 | ||||||||||||
| Brazil | (194,413 | ) | (90,989 | ) | (281,268 | ) | (138,445 | ) | ||||||||
| Less intersegment | 134,962 | 7,549 | 164,569 | 23,818 | ||||||||||||
| Consolidated | $ | (27,283 | ) | $ | 97,856 | $ | (373,684 | ) | $ | 505,606 | ||||||
| Total Assets (at Balance Sheet Date): | ||||||||||||||||
| USA | — | — | $ | 31,851,220 | $ | 41,027,491 | ||||||||||
| Other foreign | — | — | 17,266,496 | 15,503,646 | ||||||||||||
| China | — | — | 24,960,350 | 21,845,949 | ||||||||||||
| India assets of discontinued operations | — | — | 1,922,505 | 1,998,570 | ||||||||||||
| Brazil | — | — | 25,377,362 | 29,652,744 | ||||||||||||
| Consolidated | — | — | $ | 101,377,933 | $ | 110,028,400 | ||||||||||
| Long-lived Assets (at Balance Sheet Date) | ||||||||||||||||
| USA | — | — | $ | 5,185,067 | $ | 3,960,687 | ||||||||||
| Other foreign | — | — | 3,241,461 | 2,611,349 | ||||||||||||
| China | — | — | 2,735,270 | 2,492,448 | ||||||||||||
| Brazil | — | — | 2,630,742 | 2,830,649 | ||||||||||||
| India | — | — | — | — | ||||||||||||
| Consolidated | — | — | $ | 13,792,540 | $ | 11,895,133 | ||||||||||
| 10. | Income Tax Audit/Change in Accounting Estimate |
Effective February 1, 2007, the Company establishesadopted the new guidance issued by the Financial Accounting Standards Board (“FASB”) dealing with accounting for uncertainty in income taxes. This guidance prescribes recognition thresholds that must be met before a liability for tax returnposition is recognized in the financial statements and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under guidance, an entity may only recognize or continue to recognize tax positions in which there is uncertainty as to whetherthat meet a "more likely than not" threshold.
There was no activity during FY12 or notFY13, and the position will ultimately be sustained. Amounts for uncertain tax positions are adjusted in quarters when new information becomes available or when positions are effectively settled.liability at July 31, 2012, was $0. The Company recognizesCompany’s policy is to recognize interest expense and penalties related to these unrecognizedincome tax benefits withinissues as components of income tax expense.
The Company is subject to USUSA federal income tax, as well as income tax in multiple USUSA state and local jurisdictions and a number of foreign jurisdictions. The Company’s federal income tax returns for the fiscal years ended January 31, 2003, 2004, 2005 and 2007through FY07 have been audited by the Internal Revenue Service (“IRS”). The FY07 audit has been completed by the IRS and the Company has received a final “No Change Letter” from the IRS for FY07 dated August 20, 2009.. The Company has received notice from the IRS on March 21, 2011, that it will shortly commence an audit for the FY09 tax return.
Our three major foreign tax jurisdictions are China, Canada and Brazil. According to China tax regulatory framework, there is no statute of limitationslimitation on fraud or any criminal activities to deceive tax authorities. However, the general practice is going back five years, and general practice for records maintenance is 15 years. Our China subsidiaries were audited during the tax year 2007 for the tax years 2006, 2005 and 2004. Those audits were conducted in the ordinary course of business. China tax authorities did not perform tax audits in the ordinary course of business during tax years 2008, 2009, 2010 or during the current year as of current filing date. China tax authorities performed a fraud audit, but the scope was limited to the fraud activities found in late FY09 as discussed more fully in Note 15 to the Company’s Form 10-K for the year ended January 31, 2010. This audit covered tax years from 2003 through 2008. We have reached a settlement with the Chinese Government in January 2009. China tax authorities have performed limited reviews on all China subsidiaries as of tax years 2008, 2009, 2010 and 20102011 with no significant issues noted. WeAs of this statement filing date, we believe our tax positions are reasonably stated, and we do not anticipate any future tax liability from FY12 or earlier operations.
Lakeland Protective Wear, Inc., our Canadian subsidiary, follows Canada tax regulatory framework recording its tax expense and tax deferred assets or liabilities. As of this statement filing date, we believe the Company’s tax situation is reasonably stated, and we do not anticipate future tax liability.
The Company’s Brazilian subsidiary is currently under a tax audit, which raised some issues regarding the tax impact related to the merger held in 2008 and the resulting goodwill resulting from the structure which was set up at the company'sCompany's Brazilian counsel's suggestion. The Company has not received anya formal communicationclaim from the authorities. Since there is no formal claim received,authorities in the amount of USD$1.1 million ($R2.3 million) (mostly fines and there may not be suchpenalty). The Company has filed a claimlawsuit in anyorder to cancel this claim. We are still in first administrative level, in case management and counsel are at this time and are unable to determine the likely outcome of any such potential claim and whetherloss we can appeal for other administrative level. Management believes it is probable, possible or remote that any significant liability might be incurred. However, thiswe will have success in our defense at the administrative level. In case we go to Judicial Level, management believes the chance of loss is remote.
The structure of our 2008 acquisition is relatively common in acquisitions of Brazilian operations made by non-Brazilian companies. In general, acquisitions with this structure have survived challenge by the taxing authorities in Brazil. The cumulative amount of tax benefits recognized on the company’sCompany’s books through OctoberJuly 31, 2011,2012, resulting from the tax deduction of the goodwill amortization is approximately USD$730,000.
| 11. | Derivative Instruments and Foreign Currency Exposure |
The Company has foreign currency exposure, principally through sales in Canada, Brazil, China, Argentina, Chile and the UK, and production in Brazil, Mexico and China. Management has commenced a derivative instrument program to partially offset this risk by purchasing forward contracts to sell the Canadian Dollar, the Chilean Peso, the Euro, the Great Britain Pound and the Argentina Peso other than the cash flow hedge discussed below. Such contracts are largely timed to expire with the last day of the fiscal quarter, with a new contract purchased on the first day of the following quarter, to match the operating cycle of the Company. Management has decided not to hedge its long position in the Chinese Yuan orYuan. Management previously had not hedged the Brazilian Real.Real, but commenced doing so in May 2012. We designated the forward contracts as derivatives not designated as hedgingnonhedging instruments with loss and gain recognized in the current earnings. In the three-monthsthree and six-months ended OctoberJuly 31, 2011,2012, the Company sustained a pre-tax loss on foreign exchange in Brazil of $340,000$(375,741) or $(0.05)$(0.07) per share and $(691,528) or $(0.13) per share, respectively included in netpre-tax income from continuing operations. In the three and six months ended OctoberJuly 31, 2010,2011, the Company recorded a gain on foreign exchange in Brazil of $161,000$28,083 or $0.03$0.005 per share and $248,850 or $0.05 per share, respectively included in netpre-tax income from continuing operations.
The Company accounts for its foreign exchange derivative instruments by recognizing all derivatives as either assets or liabilities at fair value, which may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses from changes in the fair value of derivative instruments.
Currently, we have two types of derivatives to manage the risk of foreign currency fluctuations. We enter into forward contracts with financial institutions to manage our currency exposure related to netcertain assets and liabilities denominated in foreign currencies. Those forward contracts derivatives not designated as hedging instruments are generally settled quarterly.quarterly or monthly. Gain and loss on forward contracts are includingincluded in current earnings. We also enter cash flow hedge contracts with financial institutions to manage our currency exposure on future cash payments denominated in foreign currencies. The effective portion of gain or loss on cash flow hedge is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. Our hedge positions are summarized below:
Derivatives not designated as hedging instruments
Foreign Exchange Forward Contracts
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 31, 2011 | October 31, 2010 | October 31, 2011 | October 31, 2010 | |||||||||||||
| Notional Value in USD | $ | 3,444,100 | $ | 2,836,935 | $ | 9,950,406 | $ | 6,622,888 | ||||||||
| Gain and loss reported in current operating income (expense) | $ | 41,307 | $ | (118,147 | ) | $ | (130,927 | ) | $ | (198,007 | ) | |||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| July 31, 2012 | July 31, 2011 | April 30, 2012 | April 30, 2011 | |||||||||||||
| Notional Value in USD | $ | 22,822 | $ | 3,635 | $ | 25,326 | $ | 6,506 | ||||||||
| Gain and loss reported in current operating income (expense) | $ | 2 | $ | 14 | $ | (56 | ) | $ | (172 | ) | ||||||
The above fluctuations among the periods are mainly from our new program started in May 2012 on Brazilian currency hedge. Total outstanding balance from foreign exchange forward contracts as of Octoberbalances on the above derivatives are $6,681,960 and $0 for the periods ended July 31, 2012 and 2011, or October 31, 2010
Derivatives designated as hedging instruments
Asset Derivative from Foreign Currency Cash Flow Hedge
As of October 31, 2011 | Reported in balance sheet | ||||
| Notional value in USD | $ | 9,539,425 | |||
| Gain and loss reported in equity as other comprehensive income | $ | 87,615 | Other assets | ||
| As of July 31, 2012 | As of January 31, 2012 | |||||||
| Notional value in USD | $ | 8,719 | $ | 6,904 | ||||
| Gain and (loss) reported in equity as other comprehensive income | $ | (108 | ) | $ | 123 | |||
| Reported in Balance Sheet | Other payables | Other assets | ||||||
Effect of Derivative on Income Statement from Foreign Currency Cash Flow Hedge
Nine Months Ended October 31, 2011 | Three Months Ended October 31, 2011 | |||||||
| Gain reclassed from other comprehensive income into current earnings during three months ended October 31, 2011 reported in operating income | $ | 30,243 | $ | — | ||||
| Six Months Ended July 31, 2012 | Six Months Ended July 31, 2011 | |||||||
| Gain reclassed from other comprehensive income into current earnings during six months ended July 31, 2012 reported in operating income | $ | 10 | $ | 32 | ||||
The cash flow hedge is designed to hedge the payments made in Euros and USDUSA dollars to our China subsidiaries. AsFair value of October 31, 2011, there$107,552 and $123,313 were no open fair value hedge contracts, and $87,614 has been recorded as other asset to account for the valueliability and other assets as of cash flow hedge. There was no cash flow hedge in fiscal 2011.
12.
VAT Tax Issue in BrazilAsserted Claims
VAT tax in Brazil is both at the federal and state level, but the larger amount is at the state level. We commenced operations in Brazil in May 2008 through an acquisition of Lakeland Brasil,Qualytextil, S.A. (“Qualytextil”, “QT”QT”). At the time of the acquisition, and going back to 2004, the acquired company used a port facility in a neighboring state (Recife-Pernambuco), rather than its own, in order to take advantage of incentives, in the form of a discounted VAT tax, to use such neighboring port facility. We continued this practice until April 2009. The practice was stopped largely for economic reasons, resulting from additional trucking costs and longer lead time. The Bahia state auditors (state of domicile for the Lakeland operations in Brazil) initially reviewed the period from 2004-2006 and filed a claim for unpaid VAT taxes in October 2009. The claim asserted that the state VAT taxes are owed to the state of domicile of the ultimate importer/user and disregarded the fact that the VAT taxes had already been paid to the neighboring state.
The audit notice from Bahia claimingclaimed that the taxes paid to Recife/PernambucoRecife-Pernambuco should have been paid to Bahia in the amount of R$4.8 million and assessed fines and interest of an additional R$5.6 million for a total of R$10.4 million (approximately US$3.0 million, $3.5 million and $6.5 million, respectively).
Bahia had announced an amnesty for this tax whereby R$3.5 million (US$1.9 million) of the taxes claimed were paid by QT by the end of the month of May 2010, and the interest and penalties related thereto were forgiven. According to fiscal regulation of Brazil, $R2.1 million (US$1.1 million) of this amnesty payment has since been partially recouped as credits against future taxes due.
| <——————-BRL——————-> | <——————-USD —————-> | |||||||||||||||||||||||
| Foreign exchange rate | 1.82 | 1.82 | 1.82 | |||||||||||||||||||||
Total Paid Or To Be Paid Into Government Under Amnesty Program | Total Not Available For Credit1 | Available For Credit2 | Total Paid Or To Be Paid Into Government Under Amnesty Program | Total Not Available For Credit¹ | Available For Credit2 | |||||||||||||||||||
| Original claim 2004-2006 | 3,474,843 | 1,419,572 | 2,055,270 | 1,909,254 | 779,985 | 1,129,269 | ||||||||||||||||||
| Second claim | ||||||||||||||||||||||||
| Pre-acquisition 2007-April 2008 | 2,371,196 | 981,185 | 1,390,011 | 1,302,855 | 539,112 | 763,743 | ||||||||||||||||||
| Post-acquisition May 2008-April 2009 | 3,580,403 | 1,481,546 | 2,098,857 | 1,967,255 | 814,037 | 1,153,218 | ||||||||||||||||||
| Totals | 9,426,442 | 3,882,303 | 5,544,139 | 5,179,364 | 2,133,134 | 3,046,230 | ||||||||||||||||||
| Escrow released from one seller released escrow | 1,000,795 | 1,000,795 | - | 549,887 | 549,887 | - | ||||||||||||||||||
| Charged to expense at April 30, 2010 | - | 2,881,508 | - | - | 1,583,246 | - | ||||||||||||||||||
An audit for the 2007-2009 period has been completed by the State of Bahia. In October 2010, the Company received a claim for 2007-2009 from the State of Bahia for taxes of R$6.2 (US$3.9)3.1) million and fines and penalties of R$4.96.1 (US$3.1)3.0) million, for a total of R$11.112.3 (US$6.9)6.2) million, which had been expected per above. The Company intends to defend and wait for the next amnesty period. Of these claims, our attorney informs us that R$0.4 (US$0.3)0.2) million in respect of fines and penalties will be successfully defended based on state auditor misunderstanding.
Lakeland intends to apply for amnesty and make any necessary payments upon the forthcoming, anticipated amnesty periods imposed by the local Brazilian authorities. Of this R$6.2 (US$3.9)3.1) million exposure, R$3.4 (US$2.1)1.7) million is eligible for future credit. The R$2.8 (US$1.7) million balance is subject to indemnification from the Seller of QT to the
Company and the Company is in the process of pursuing this claim through an arbitration proceeding in progress. Also, there is $0.1 million our attorney informs us is a mistake made by the state auditor, which he believes will be successfully defended.
Set forth below are the total amounts of potential tax liability from both the first and second claims, the amount of payments already made into amnesty or scheduled for future payment, which are not eligible for future credit (essentially the discount allowed as an incentive by the neighboring state), less the amount of VAT taxes actually paid which are available as a credit and the amounts of the escrow released by one of the three sellers of the Brazilian company acquired by the Company. The foregoing forms the basis for the US$1.6 million charge to expense recorded by Lakeland in the first quarter of fiscal 2011.
| BRL (millions) | USD (millions) | |||||||||||||||||||||||
| Foreign exchange rate | 1.82 | 1.82 | 1.82 | |||||||||||||||||||||
| Total Paid Or To Be Paid Into Government Under Amnesty Program | Total Not Available For Credit1 | Available For Credit2 | Total Paid Or To Be Paid Into Government Under Amnesty Program | Total Not Available For Credit¹ | Available For Credit2 | |||||||||||||||||||
| Original claim 2004-2006 | 3.5 | 1.4 | 2.1 | 1.9 | 0.8 | 1.1 | ||||||||||||||||||
| Second claim | ||||||||||||||||||||||||
| Preacquisition 2007-April 2008 | 2.4 | 1.0 | 1.4 | 1.3 | 0.5 | 0.8 | ||||||||||||||||||
| Postacquisition May 2008-April 2009 | 3.3 | 1.4 | 1.9 | 1.8 | 0.8 | 1.0 | ||||||||||||||||||
| Totals | 9.2 | 3.8 | 5.4 | 5.0 | 2.1 | 2.9 | ||||||||||||||||||
| Escrow released from one seller | 1.0 | 1.0 | - | 0.5 | 0.5 | - | ||||||||||||||||||
| Charged to expense at April 30, 2010 | - | 2.8 | - | - | 1.6 | - | ||||||||||||||||||
¹ Essentially represents the discount originally offered as incentive by the neighboring state.
2The amount allowed as credit against future payments represents the VAT taxes actually previously paid to the neighboring state.
Of these claims, our attorney informs us that R$1.0 (US$0.6) million will be successfully defended based on a lapse of statute of limitations and R$0.3 (US$0.2) million based on state auditor misunderstanding. No accrual has been made for these items.
The total taxes paid into the amnesty program on May 31, 2010 were R$3.5 (US$2.2) million.
Future Accounting for Funds
Following payment into the amnesty program, the taxes were since recouped via credits against future taxes due. The Company does not expect any further charges to expense other than as described below:
In addition to the direct cost of the additional tax liability accrued per above, there are several additional costs which will be future costs. There will be interest costs on the cash paid during the period from the payment to the state and the credit to be subsequently used which has been and will be charged to expense as incurred. There will be legal fees to defend and resolve this legal matter before the state, which will be charged to expense as incurred. Further, there will be a loss of an incentive known as “desenvolve”3 as a result of using the credit rather than cash payments for the future VAT taxes. The “desenvolve” has already been reflected in the operating results subsequent to May 2010 through August 2011 when the initial credit was exhausted and the Company resumed normal monthly cash payments for VAT taxes. This has been reflected as a reduction in the gross margin in the ensuing period through August 2011. This is not a cost but a lost discount.
3A definition of this term“Desenvolve” is givenan incentive remaining from Brazil’s hyperinflationary days about 10 years ago. It is based on page 57the net ICMS (VAT) tax payable. (QT pays ICMS to suppliers on raw materials, bills and collects ICMS from customers, takes credit for ICMS paid to suppliers and remits the difference. The net amount payable is payable 30% immediately and 70% for up to five years.The “desenvolve” is an incentive to pay the 70% quickly, like a cash discount. If the full amount is paid immediately, there is an 80% discount of the January 31, 2011, Form 10-K.70% (or 56% of the total).
| 20 |
Summary of Cash Flow Requirements: (R$ millions and US$ millions)
| Claim period/description | Taxes | Fines and penalties | Maximum judicial deposit | |||||||||||||
| 2004-2006 not paid into amnesty and being defended. Management does not plan to pay this into amnesty | R$ | 1.3 | R$ | 1.9 | R$ | 3.2 | US$ | 1.9 | ||||||||
2007-2009 claim by State of Bahia (1) | R$ | 6.2 | R$ | 5.7 | R$ | 11.9 | US$ | 7.0 | ||||||||
| TOTAL | R$ | 7.5 | R$ | 7.6 | R$ | 15.1 | US$ | 8.8 | ||||||||
| Claim period/description | Taxes | Fines and penalties | Maximum judicial deposit | ||||||
| 2004-2006 not paid into amnesty and being defended. Management does not plan to pay this into amnesty | R$1.3 | R$1.9 | R$3.2 | US$1.6 | |||||
| 2007-2009 claim by State of Bahia (1) | R$6.2 | R$6.1 | R$12.3 | US$6.2 | |||||
| TOTAL | R$7.5 | R$8.0 | R$15.5 | US$7.8 | |||||
(1)
Our attorney informs us that based on the slow progress so far in the administrative proceedings for the 2007-2009 claim,R$3.1 (US$1.6) million 2004-2006 Judicial deposit Quarter Three Fiscal year 2013 (around Sept, 2012)
R$6.2 (US$3.1) million 2007-2009 claim into amnesty From Quarter Three Fiscal year 2013 to Quarter Four Fiscal Year 2013
Further, management believes it will behas been able to satisfy the R$3.1 (US$1.9)1.6) million judicial depositdeposits by pledging real estate owned rather than paying cash.
At the next amnesty period:
| · | If before judicial process - still administration proceeding - the Company would pay |
| · | If after judicial process commences - the amount of the judicial deposit previously remitted would be reclassified to the taxes at issue, and the excess submitted to cover fines and interest would be refunded to QT. As above, the taxes would be recouped via credits against future taxes on future imports, but we would lose desenvolve |
| · | The desenvolve |
Balance Sheet Treatment
The Company has reflected the above items on its OctoberJuly 31, 2011,2012, balance sheet as follows:
| (R$ millions) | US$ millions | |||||||||
| Noncurrent assets | VAT taxes eligible for future credit | $ | 3.5 | $ | 2.2 | |||||
| Long-term liabilities | Taxes payable | $ | 6.0 | $ | 3.3 | |||||
| (R$ millions) | US$ millions | ||||||
| Noncurrent assets | VAT taxes eligible for future credit | 3.4 | 1.7 | ||||
| Long-term liabilities | Taxes payable | 6.2 | 3.0 |
13. Termination of License Agreement with DuPont
The Company received notice, dated July 12, 2011, from E.I. DuPont de Nemours and Company (“DuPont”) stating that DuPont has terminatedis terminating the DuPont Wholesaler Agreement dated January 1, 2011. DuPont has fulfilled orders for purchases of finished garments containing Tychem® and Tyvek® through September 10, 2011.
14. Brazil Management and Share Purchase Agreement
Lakeland Industries, Inc. and its wholly-owned subsidiary, Lakeland Brasil S.A. (“Lakeland Brasil” and together with Lakeland Industries, Inc., the “Company”) were parties to an arbitration proceeding in Brazil involving the Company and two former officers (the “former officers”) of Lakeland Brasil. On May 19, 2010,8, 2012, the president and V.P.Company received notice of Operations (the “two terminated sellers”)an arbitral award in favor of the former officers as described below. On May 12, 2012, the Company filed a request for clarification seeking a modification of the award or to have it set aside. However, no such relief was awarded to the Company.
The arbitration proceeding arose out of the acquisition by the Company in 2008 of Qualytextil, S.A., a company of which the former officers were owners. In connection with the acquisition, the Company entered into management agreements with the former officers and agreed to pay the former officers a supplemental purchase price payment (“QT”SPP”), Lakeland’s Brazil subsidiary,calculated based upon the 2010 EBITDA of the acquired company, subject to a cap (the “Maximum SPP”). Based upon actual results for 2010 as contractually specified, the Company determined that no SPP would be payable. Contractual provisions further provided for the former officers to be paid the Maximum SPP in the event that either of them were terminated by the Company without cause even if a SPP would not otherwise be payable. In May 2010, the Company terminated the former officers for cause.
In the arbitration proceeding, the former officers sought a determination that they were terminated by the Company without cause as a resultand, therefore, entitled to be paid their portion of numerous documented breachesthe Maximum SPP and the monthly remuneration that they would have been paid from the date of termination through the end of their Management Agreements (“MA”contractual employment period on December 31, 2011. On May 8, 2012, the Company received the arbitration decision which accepted the former officers’ requests to declare that their employments were terminated without cause and determined that, among other things, the non-compete clauses of each of the stock purchase agreement and management agreements were null and non-applicable. The Company was ordered to pay to the former officers damages representing their portion of the Maximum SPP in the aggregate amount of R$18,037,500 (approximately US$9 million at current exchange rates) and monthly remuneration from the date of termination through December 31, 2011, which the Company estimates at an aggregate amount of R$1,150,000 (US$580,000). The arbitration panel further ordered that the Company pay the former officers approximately R$450,000 (US$226,000) from an escrow account established in connection with the acquisition and the Company is responsible for payment of 85% of the costs and arbitrators’ fees associated with the arbitration. The arbitration award, with all taxes, expenses, interest and applicable adjustments to date amounts to R$25,148,252 (approximately US$ 12,575,000) as adjusted for inflation, plus interest and penalties.
On September 11, 2012, the Company and the former officers entered into a settlement agreement (the “Settlement Agreement”) which fully and finally resolves all alleged outstanding claims against the Company arising from the arbitration proceeding. Pursuant to the Settlement Agreement, the Company agreed to pay to the former officers an aggregate of approximately US $8.5 million (the “Settlement Amount”) over a period of six (6) years. The Settlement Amount is payable in combined Brazilian Real and United States dollars as follows: (i) R$3 million (approximately US $1.5 million) was paid on the effective date of the Settlement Agreement, of which amount (A) R$2.294 million (approximately US $1.15 million) in cash was released from the escrow account established in connection with QTthe Qualytextil, S.A. acquisition, and misrepresentations(B) R$706,000 (approximately US $350,000) was paid directly by the Company; (ii) R$2 million (approximately US $1.0 million) is payable on or before December 31, 2012; and (iii) the balance of $6.0 million of the Settlement Amount will be made in their Share PurchaseUnited States dollars consisting of 24 consecutive quarterly installments of US $250,000 beginning on March 31, 2013. In the event the Company fails to pay the remainder of the Settlement Amount in accordance with terms of the Settlement Agreement, (“SPA”)the former officers will be entitled to seek payment by the Company of R$25,148,252.47 (approximately US $12,575,000) as adjusted for inflation, plus interest and penalties, less prior payments, which represents the original arbitral award inclusive of all taxes, expenses, interest and applicable adjustments.
In addition, pursuant to the Settlement Agreement, as additional security for payment of the Settlement Amount, Lakeland Brasil agreed to grant the former officers a second mortgage interest on certain of its property in Brazil, which mortgage is expressly behind the lien securing the payment of tax debts to a state within Brazil related to certain notices of tax assessment on such property (see Note 12). Lakeland also agreed to become a co-obligor, in lieu of a guarantor, for payment of the Settlement Amount.
Previously, the Company recorded a current liability of US $10,000,000 in respect of the arbitration proceeding. The Company has recorded a revised settlement liability at net present value of $7.0 million, by applying a risk-free interest rate of 1.58% to discount the non-interest bearing payment schedule. Together with Lakeland. estimated total fees for the settlement of $856,000, the total cost for the settlement is now estimated at $7.9 million and a $2.1 million reduction in the $10 million charge taken at the first quarter of FY13 has been recorded.
As a result of these breachesthe Settlement Agreement, one or more events of default are continuing under the Company’s loan and misrepresentations, Lakelandsecurity agreement (the “Loan Agreement”) with TD Bank, N.A. (“TD Bank”) and TD Bank may, at its option, accelerate the loan. There is currently approximately $15.1 million outstanding under the Loan Agreement. While TD Bank has taken the positionorally indicated that it iswould not obligated to pay their share or 65% of any Supplemental Purchase Price (“SPP”) due in 2011 pursuantobject to the SPA. These two sellers’ shares constitute 35% and 30%, respectively,Company’s payment of the SPP totals, if any, which may beportion of the Settlement Amount due upon execution of the Settlement Agreement, it has not expressly waived the events of default under the SPA.Loan Agreement. The former Chief Financial OfficerCompany continues to be in discussions with TD Bank about resolution of QT has been promotedthese matters and is continuing to President of QT. He holdsotherwise operate within the remaining 35%terms of the SPA and SPP totals.
The Company continues to strongly believe that the Brazilian arbitration decision is inconsistent with the underlying facts. However, the Company entered into the Settlement Agreement to eliminate the uncertainty, burden, risk, expense and distraction of legal feesfurther arbitration or litigation
The Company further believes that its available resources, together with additional outside funding through debt or equity financings or asset sales, will enable it to make timely payment of the Settlement Amount and other related costs.
The legal and arbitration fees are being charged to expense as incurred.
15. Goodwill
The changes in the carrying amount of goodwill during fiscal year 2012 are summarized in the following:
| USA | Brazil | Total | ||||||||||
| Balance as of January 31, 2011 | $ | 871,296 | $ | 5,426,455 | $ | 6,297,751 | ||||||
| During fiscal year 2012 through October 31, 2011 | ||||||||||||
| Effect of foreign currency translation | - | (39,011 | ) | (39,011 | ) | |||||||
| Balance as of October 31, 2011 | $ | 871,296 | $ | 5,387,444 | $ | 6,258,740 | ||||||
| USA | Brazil | Total | ||||||||||
| Balance as of January 31, 2012 | $ | 871,297 | $ | 5,261,657 | $ | 6,132,954 | ||||||
| During fiscal year 2013 through July 31, 2012 | ||||||||||||
| Effect of foreign currency translation | - | (636,397 | ) | (636,397 | ) | |||||||
| Balance as of July 31, 2012 | $ | 871,297 | $ | 4,625,260 | $ | 5,496,557 | ||||||
16. Recent Accounting Pronouncements
In June 2011, the FASB issued amendments to the presentation of comprehensive income, which becomebecame effective for interim and annual periods beginning after December 15, 2011. The amendments eliminateeliminated the currentprevious reporting option of displaying components of other comprehensive income within the statement of changes in stockholders’ equity. Under the new guidance, the Company will be required to present either a single continuous statement of comprehensive income or an income statement immediately followed by a statement of comprehensive income. Also, both presentation methods require thatIn addition, the amendment requires the reclassification adjustments from other comprehensive income to net income be shown on the face of the financial statements.
17. Discontinued Operations in India
The Company decided to discontinue operations in its India glove manufacturing facility and put the assets and business up for sale. The Company decided to sell this division primarily because it has incurred significant operating losses since inception, and the Company has been unsuccessful in developing sufficient sales to reach at least break even. The Company iswas attempting to sell the operations as an ongoing operation but if unsuccessful, is preparing for a shutdown ofshut down its operations by January 2012.
Prior year financial statements for the three and ninesix months ended OctoberJuly 31, 2010,2011, have been restated to present the operations of the India glove manufacturing subsidiary as a discontinued operation.
In conjunction with the discontinuance of operations in FY12, the Company recognized a pretax loss on disposal of $880,694,$1.7 million, primarily consisting of $585,000$0.9 million in fixed asset write-downs, $0.4 million in inventory write-downs $145,494and $0.1 million in professional fees relating to the sale and $0.3 million in shutdown expenses and $150,000 in operations in Q4 until shutdown.expenses. The assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued operations in India” and Liabilities“Liabilities of discontinued operations in India;India,” respectively, in the accompanying Balance Sheets at OctoberJuly 31, 20112012 and January 31, 2011,2012, and consist of the following:
| October 31, 2011 | January 31, 2011 | |||||||
| Cash | $ | 193,110 | $ | 121,436 | ||||
| Accounts receivable | 70,606 | 100,254 | ||||||
| Inventory | 190,013 | 622,480 | ||||||
| Other current asset | 36,084 | 20,371 | ||||||
| Property/equipment | 2,491,028 | 2,805,060 | ||||||
| Total assets of discontinued operations | 2,980,841 | 3,669,601 | ||||||
| Liabilities of discontinued operations | ||||||||
| Accounts payable | 46,290 | 29,467 | ||||||
| Other liabilities | 319,917 | 4,473 | ||||||
| Total liabilities of discontinued operations | 366,207 | 33,940 | ||||||
| Net assets of discontinued operations | $ | 2,614,634 | $ | 3,635,661 | ||||
| July 31, 2012 | January 31, 2012 | |||||||
| Cash | $ | 159,152 | $ | 230,502 | ||||
| Accounts receivable | 665 | 6,772 | ||||||
| Inventory | 214,409 | 200,000 | ||||||
| Other current asset | 22,724 | 27,262 | ||||||
| Property and equipment | 1,525,555 | 1,534,034 | ||||||
| Total assets of discontinued operations | 1,922,505 | 1,998,570 | ||||||
| Liabilities of discontinued operations: | ||||||||
| Accounts payable | 10,063 | 5,715 | ||||||
| Other liabilities | 22,417 | 59,065 | ||||||
| Total liabilities of discontinued operations | 32,480 | 64,780 | ||||||
| Net assets of discontinued operations | $ | 1,890,025 | $ | 1,933,790 | ||||
The following table illustrates the reporting of the discontinued operations reclassified on the face of the Statements of Operations for the three and ninesix months ended OctoberJuly 31, 20112012 and 2010:
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Net sales | $ | 225,307 | $ | 612,563 | $ | 742,055 | $ | 1,513,754 | ||||||||
| Cost of goods sold | 372,691 | 611,139 | 1,056,757 | 1,694,900 | ||||||||||||
| Gross profit | (147,384 | ) | 1,424 | (314,702 | ) | (181,146 | ) | |||||||||
| Operating expense | 100,312 | 80,278 | 249,630 | 262,878 | ||||||||||||
| Operating profit | (247,696 | ) | (78,855 | ) | (564,332 | ) | (444,024 | ) | ||||||||
| Shutdown expense accrual | 880,694 | — | 880,694 | — | ||||||||||||
| Loss from discontinued operations before income taxes | (1,128,390 | ) | (78,855 | ) | (1,445,026 | ) | (444,024 | ) | ||||||||
| Benefit from income taxes from discontinued operations | 406,120 | 28,388 | 520,210 | 159,849 | ||||||||||||
| Net loss from discontinued operations | (722,270 | ) | (50,467 | ) | (924,816 | ) | (284,648 | ) | ||||||||
| Details of shut down expense: | ||||||||||||||||
| Inventory write down | $ | 585,000 | ||||||||||||||
| Cost associated with shut down | 145,694 | |||||||||||||||
| Operating expense accrual | 150,000 | |||||||||||||||
| $ | 880,694 | |||||||||||||||
| Six Months Ended July 31, | ||||||||
| 2012 | 2011 | |||||||
| Net sales | — | $ | 516,748 | |||||
| Cost of goods sold | — | 684,067 | ||||||
| Gross profit (loss) | — | (167,319 | ) | |||||
| Operating expense | — | (157,535 | ) | |||||
| Operating loss | — | (324,854 | ) | |||||
| Shutdown expense accrual | — | |||||||
| Loss from discontinued operations before income taxes | — | (324,854 | ) | |||||
| Benefit from income taxes from discontinued operations | — | 116,948 | ||||||
| Net loss from discontinued operations | — | $ | (207,906 | ) | ||||
The above amounts presented for the previous fiscal year have been reclassified to conform to the current presentation.
Item 2. Management’s2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Form 10-Q 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 customer service group, our regional sales managers and independent sales representatives to a network of over 1,200 North American safety and mill supply distributors. These distributors in turn supply end user industrial customers, such as integrated oil, chemical/petrochemical, utilities, automobile, steel, glass, construction, smelting, munition plants, janitorial, pharmaceutical, mortuaries and high technology electronics manufacturers, as well as scientific and medical laboratories. In addition, we supply federal, state and local governmental agencies and departments, such as fire and law enforcement, airport crash rescue units, the Department of Defense, the Department of Homeland Security and the Centers for Disease Control.
We have operated manufacturing facilities in Mexico since 1995, in China since 1996 in India since 2007 and in Brazil since 2008. 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 are available domestically. As we have increasingly moved production of our products to our facilities in China, Mexico and China,Brazil (other than issues with the Navy contract as discussed herein), we have seen improvements in the profit margins for these products. We completedproducts except for cost increases early in the movingsecond quarter of productionFY13 for which transfer pricing has been adjusted effective in the third quarter of our reusable woven garments and gloves to these facilities in fiscal 2010. As a result, we have seen cost improvements for these particular product lines as well and, as a result, we expect to see continuing profit margin improvements for these product lines over time.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and disclosure of contingent assets and liabilities. We base estimates on our past experience and on various other assumptions that we believe to be reasonable under the circumstances, and we periodically evaluate these estimates.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
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, firefighting 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 pass 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.Substantially all the Company’s sales outside Brazil are made through distributors. There are no significant differences across product lines or customers in different geographical areas in the manner in which the Company’s sales are made.
Lakeland offers a growth rebate to certain distributors each year on a calendar - yearcalendar-year basis. Sales are tracked on a monthly basis, and accruals are based on sales growth over the prior year. The growth rebate accrual is booked on a monthly basis as a reduction to revenue and an increase to liabilities if the accrual is increased and the reverse if the trend goes in the opposite direction over the prior year in a given month. Based on volume and products purchased, distributors can earn anywhere from 1% to 4% rebates in the form of either a quarterly or annual credit to their account, depending on the specific agreement. In estimating the accrual needed, management tracks sales growth over the prior year.
Our sales are generally final; however, requests for return of goods can be made and must be received within 90 days from invoice date. No returns will be accepted without a written authorization. Return products may be subject to a restocking charge and must be shipped freight prepaid. Any special made-to-order items are not returnable. Customer returns have historically been insignificant.
Customer pricing is subject to change on a 30-day notice; exceptions based on meeting competitors’ pricing are considered on a case-by-case basis.
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
. Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company recognizes losses when information available before the financial statements are issued or available to be issued indicates that it is probable that an asset has been impaired based on criteria noted above at the date of the financial statements, and the amount of the loss can be reasonably estimated. Management considers the following factors when determining the collectability of specific customer accounts:Customer creditworthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms
Uncertain Tax Positions. The Company adopted the guidance for uncertainly in income taxes effective February 1, 2007. This guidance prescribes recognition thresholds that must be met before a tax benefit is recognized in the financial statements and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under this guidance, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold.
Income Taxes and Valuation Allowances.
We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of preparing our consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carry forwards and tax credits, are recorded as deferred tax assets or liabilities on our balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be realized from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event we determine that we may not be able to realize all or part of our deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to net income in the period of such determination.Valuation of Goodwill and Other Intangible Assets.
Goodwill and indefinite lived, intangible assets are tested for impairment at least annually; however, these tests may be performed more frequently when events or changes in circumstances indicate the carrying amount may not be recoverable. Goodwill impairment is evaluated utilizing a two-step process as required by US GAAP. Factors that the Company considers 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. The Company measures any potential impairment 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.Foreign Currency Risks. The functional currency for the Brazil operation is the Brazil Real; the United Kingdom, the Euro;Euro, the trading company in China, the RenminBi; the Canada Real Estate, the Canadian dollar;dollar, and the Russia operation, the Russian Ruble.
Impairment of Long-Lived Assets
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 increase 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.Loss Contingencies
. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.If the assessment of a contingency indicates that it is probable that a material loss has been or is probable of being incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Significant Balance Sheet Fluctuation OctoberJuly 31, 2011,2012, As Compared to January 31, 2011
Cash increased by $0.8 million as TD borrowings increased by $0.8 million at July 31, 2012, with all TD borrowings including $6.1 million in term loans now classified as current. Accounts receivables increased $1.8 million, primarily due to the increase of sales in the six months ended July 31, 2012 in Brazil of $1.8 million or 22.3% from the six months ended January 31, 2012, primarily resulting from our Brazilian Navy contract. Inventory decreased by $6,418$2.6 million, including the $1.6 million of which decrease was in the U.S., with $0.8 million in chemical, as borrowings under the revolving credit facilitywe changed our inventory mix to Lakeland branded products only. Our wovens division inventory decreased $1.0 million as a planned reduction as we physically moved this division from Missouri to Alabama. Accounts payables increased by $1.2$3.6 million at October 31, 2011. Borrowings under the new term loan facility increased by $3.7 million. Increased borrowing was utilizeddue primarily to fund capital expenditures in Mexico and Brazil. Accounts receivable increased by $0.9the $1.7 million mainly resulting from an increase in salesChina payables as more materials are sourced and purchased in China and in Brazil in respect of raw material for the monthNavy Contract, all of October.
At OctoberJuly 31, 2011,2012, the Company had an outstanding loan balance of $12.7$9.1 million under its revolving facility with TD Bank, N.A. compared with $11.5 million at January 2011 and borrowings of $3.7 million on its new31, 2012. The term note.loan balance at July 31, 2012 was $6.1 million. Total stockholders’ equity increased $0.7decreased $12.3 million principally due to the net income for the period of $1.2 millionarbitration award in Brazil and the changes in foreign exchange translations in other comprehensive income of $(0.5)$3.9 million.
Three Months Ended Octobermonths ended July 31, 20112012, As Compared to the Three Months Ended OctoberJuly 31, 2010
Net Sales.
Net salesGross Profit.
Gross profit| Disposables margins increased 6.8 percentage points in the second quarter of FY13 over the second quarter of FY12, resulting mainly from changed sales mix of nearly all Lakeland branded products this year, while last year had more than 50% sales of DuPont products at a lower margin. This year’s margin was lower than it otherwise would be as a result of lower volume and an increase in inventory reserves against Tyvek items remaining. |
| * | China manufacturing gross margin at our Weifang plant decreased 10 percentage points over last year due to a 12% labor cost increase and the negative impact to margins from sales to our UK operations in Euros. |
| * | China margins in our Beijing Trading Company increased 2.8 percentage points, based on continued strong operations. |
| * | Brazil margin decreased by |
| 28 |
Operating Expenses.
Operating expenses| $ 0.3 | |
| $ 0.1 | million increase in professional fees, due to additional legal matters relating to various compliance issues and also several personnel terminations. |
| $ | million decreased equity compensation resulting from a reversal of expenses relating to foreign participants, who were compensated in cash in their local countries. |
| $(0.1) | million decrease in freight out, |
| $(0.2) |
Operating Profit
. Operating profitArbitration Judgment in Brazil.As a result of the settlement of the Brazilian arbitration matter in September 2012 a positive adjustment of $2.1 million was impacted by a droprecorded in intersegment sales and indirect container shipments to the US from China.
Interest Expense
Income Tax Expense
. Income tax expenses consist of federal, state and foreign income taxes. Income tax expensesNet Income (Loss). Net income increased by $1.1 million to $1.6 million for the three months ended OctoberJuly 31, 2010. Our effective tax rate for quarter three fiscal 2012, was due to near consolidated breakeven taxable income and goodwill write-offs in Brazil.
Six months ended OctoberJuly 31, 2010. The decrease in net income primarily resulted from the discontinuance of India and foreign exchange losses in Brazil, along with lower disposables sales and gross margins.
Net Sales.
Net sales from continuing operationsGross Profit.
Gross profit from continuing operations| Disposables gross margins increased 5.1 percentage points in the second quarter of FY13 over in the second quarter of FY12, resulting mainly from changed sales mix of nearly all Lakeland branded products this year, while last year had more than 50% sales derived from lower margin DuPont products. This year’s margin was lower than it otherwise would have been mainly as a result of lower volume. |
| * | China manufacturing gross margins at our Weifang plant decreased by |
| * | China margins in our Beijing Trading Company increased 3.3 percentage points based on continued strong operations. |
| * | Brazil margins decreased by 4.3 percentage points in the |
| * | Wovens gross margins decreased by approximately 8.5 percentage points in the six months ended July 2012 over the prior year |
| Chemical |
Operating Expenses.
Operating expenses from continuing operations increased| $ 0.6 |
| $ 0.5 | ||
| $ 0.2 | million increase in selling, general and administrative costs reallocated back to China to reflect growth in domestic China sales | |
| $ 0.1 | million increase in |
| $(0.1) | |
| $(0.2) |
| $(0.2) |
| $(0.3) |
Operating Profit
. Operating profit from continuing operationsArbitration Judgment in Brazil.As a drop in intersegment salesresult of the decision of the arbitration matter and indirect container shipments to the US from China.
Interest Expenses
. Interest expenses from continuing operations increased by $0.2 million for theIncome Tax Expense from Continuing Operations
Income from Continuing Operations
Liquidity and Capital Resources
Cash Flows.
As ofNet cash used inprovided by operating activities of $1.4$2.1 million for the ninesix months ended OctoberJuly 31, 2011,2012 was due primarily to net incomea $4.6 million increase in accounts payable mainly in China as they source directly from operationslocal suppliers and in Brazil as part of $1.2 million,the Navy contract, partially offset by an increase in inventories of $2.2a $0.4 million and an increase in accounts receivable of $1.0 million. Net cash used in investing activities of $3.6 million inmainly resulting from the nine months ended October 31, 2011, was mainly due to purchases of property and equipment and expansion in Brazil and Mexico.
We currently have one revolving credit facility a $23.5 million revolving credit,with TD Bank of which $12.7$9.1 million of borrowings were outstanding as of OctoberJuly 31, 2011, and one2012. In April 2012, TD Bank, N.A. agreed to provide a $3.0 million term loan facility, ofin addition to the existing $6.5 million term loan facility, to be used to refinance a portion of which $3.7the revolver. Borrowings under this $9.5 million was outstanding at October 31, 2011.term loan facility are in the form of a five-year term loan, with maturity June 2014. Our revolving credit and term loan facility requireswith TD Bank (the “loan facility”) requires that we comply with specified financial covenants relating to fixed charge ratio, funded debt to EBIDTA coverage and inventory and accounts receivable collateral coverage ratios. These restrictive covenants could affect our financial and operational flexibility or impede our ability to operate or expand our business. Default under our creditloan facility would allow the lenderTD Bank to declare all amounts outstanding to be immediately due and payable. Our lender has a security interest in substantially all of our assets to secure the debt under our creditloan facility. As of October 31, 2011, we wereWe are currently in compliancedefault with all covenants contained in our loan facility resulting from the Arbitration award in Brazil (and subsequent Settlement Agreement) and financial covenants. While we are in discussions with TD Bank about resolution of these matters, we continue to otherwise operate within the terms of the credit facility.
We believe that our current cash position of $5.9 million, our cash flow from operations, alongwe have available resources, together with borrowing availabilityadditional outside funding through debt or equity financings or asset sales, which will enable us to satisfy the payments required under our $23.5 million revolving credit facility,the Settlement Agreement and $6.5 million term loan facility will be sufficientenable us to meet our currently anticipated operating, capital expenditures and debt service requirements for at least the next 12 months.
Capital Expenditures.
Our capital expenditures principally relate to purchases ofForeign Currency Exposure.
The Company has foreign currency exposure, principally through its investment in Brazil, sales in China, Canada and the UKHealth Care Reform.
During March 2010, a comprehensive health care reform legislation was signed into law in theItem 3. Quantitative and Qualitative Disclosures aboutAbout Market Risk
There have been no significant changes in market risk from that disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011.
Item 4. Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of OctoberJuly 31, 2011.2012. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of OctoberJuly 31, 2011.
Changes in Internal Control over Financial Reporting
There hashave been no changes in Lakeland Industries, Inc.’s internal control over financial reporting that occurred during Lakeland’s thirdsecond quarter of 2011fiscal 2013 that hashave materially affected, or isare reasonably likely to materially affect, Lakeland Industries, Inc.’s internal control over financial reporting.
PART IIII. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and its wholly-owned subsidiary, Lakeland Brasil S.A. (“Lakeland Brasil” and together with Lakeland Industries, Inc., the “Company”) were parties to an arbitration proceeding in Brazil involving the Company and two former officers (the “former officers”) of Lakeland Brasil. On May 8, 2012, the Company received notice of an arbitral award in favor of the former officers. Subsequently, on May 14, 2012, the Company filed a request for clarification seeking a modification of the award or to have it set aside. However, no such relief was awarded to the Company.
The arbitration proceeding arose out of the acquisition by the Company in 2008 of Qualytextil, S.A., a company of which the former officers were owners. In connection with the acquisition, the Company entered into management agreements with the former officers and agreed to pay the former officers a supplemental purchase price payment (“SPP”), calculated based upon the 2010 EBITDA of the acquired company, subject to a cap (the “Maximum SPP”). Based upon actual results for 2010 as contractually specified, the Company determined that no SPP would be payable. Contractual provisions further provided for the former officers to be paid the Maximum SPP in the event that either of them were terminated by the Company without cause even if a SPP would not otherwise be payable. In May 2010, the Company terminated the former officers for cause.
In the arbitration proceeding, the former officers sought a determination that they were terminated by the Company without cause and, therefore, entitled to be paid their portion of the Maximum SPP and the monthly remuneration that they would have been paid from the date of termination through the end of their contractual employment period on December 31, 2011. On May 8, 2012, the Company received the arbitration decision which accepted the former officers’ requests to declare that their employments were terminated without cause and determined that, among other things, the non-compete clauses of each of the stock purchase agreement and management agreements were null and non-applicable. The Company was ordered to pay to the former officers damages representing their portion of the Maximum SPP in the aggregate amount of R$18,037,500 (approximately US$9 million at current exchange rates) and monthly remuneration from the date of termination through December 31, 2011, which the Company estimates at an aggregate amount of R$1,150,000 (US$580,000). The arbitration panel further ordered that the Company pay the former officers approximately R$450,000 (US$226,000) from an escrow account established in connection with the acquisition and the Company is responsible for payment of 85% of the costs and arbitrators’ fees associated with the arbitration. The arbitration award, with all taxes, expenses, interest and applicable adjustments to date amounts to R$25,148,252 (approximately US$12,575,000) as adjusted for inflation, plus interest and penalties.
On September 11, 2012, the Company and the former officers entered into a settlement agreement (the “Settlement Agreement”) which fully and finally resolves all alleged outstanding claims against the Company arising from the arbitration proceeding. Pursuant to the Settlement Agreement, the Company agreed to pay to the former officers an aggregate of approximately US $8.5 million (the “Settlement Amount”) over a period of six (6) years. The Settlement Amount is payable in combined Brazilian Real and United States dollars as follows: (i) R$3 million (approximately US$1.5 million) was paid on the effective date of the Settlement Agreement, of which amount (A) R$2.294 million (approximately US$1.15 million) in cash was released from the escrow account established in connection with the Qualytextil, S.A. acquisition, and (B) R$706,000 (approximately US$350,000) was paid directly by the Company; (ii) R$2 million (approximately US$1.0 million) is payable on or before December 31, 2012; and (iii) the balance of $6.0 million of the Settlement Amount will be made in United States dollars consisting of 24 consecutive quarterly installments of US$250,000 beginning on March 31, 2013. [In the event the Company fails to pay the remainder of the Settlement Amount in accordance with terms of the Settlement Agreement, the former officers will be entitled to seek payment by the Company of R$25,148,252.47 (approximately US$12,575,000) as adjusted for inflation, plus interest and penalties, less prior payments, which represents the original arbitral award inclusive of all taxes, expenses, interest and applicable adjustments.]
In addition, pursuant to the Settlement Agreement, as additional security for payment of the Settlement Amount, Lakeland Brasil agreed to grant the former officers a second mortgage interest on certain of its property in Brazil, which mortgage is expressly behind the lien securing the payment of tax debts to a state within Brazil related to certain notices of tax assessment on such property. Lakeland also agreed to become a co-obligor, in lieu of a guarantor, for payment of the Settlement Amount.
The Company continues to strongly believe that the Brazilian arbitration decision is inconsistent with the underlying facts. However, the Company entered into the Settlement Agreement to eliminate the uncertainty, burden, risk, expense and distraction of further arbitration or litigation.
Item 1A. Risk Factors.
The following risk factor supplements the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended January 31, 2012:
As a result of the Company’s recent settlement of its arbitration proceeding in Brazil, the Company will be required to obtain additional capital, for which there can be no assurance, and its loan with TD Bank may become accelerated. In the event that the Company is unable to obtain the requisite capital or in the event the TD Bank loan is accelerated, the Company’s financial condition and results of operations would be materially impaired.
As further described under Part II, Item 1 2, 3“Legal Proceedings,” the Company, on September 11, 2012, entered into a Settlement Agreement with two former officers of its Brazilian subsidiary, Lakeland Brasil, pursuant to which the Company agreed to pay to the former officers an aggregate of approximately US$8.5 million (the “Settlement Amount”) over a period of six (6) years, of which approximately US$1,500,000 was paid upon execution of the Settlement Agreement. [In the event the Company fails to pay the remainder of the Settlement Amount in accordance with terms of the Settlement Agreement, the former officers will be entitled to seek payment by the Company of R$25,148,252.47 (approximately US$12,575,000) as adjusted for inflation, plus interest and 5penalties, less prior payments, which represents the original arbitral award inclusive of all taxes, expenses, interest and applicable adjustments.]
The Company believes that its available resources, together with additional outside funding through debt or equity financings or asset sales, will enable it to make timely payment of the Settlement Amount and continue its operations on a viable basis. There can, however, be no assurance that such outside funding will ultimately be obtained. The Company is continuing to work with Raymond James & Associates, Inc. in its evaluation of a broad range of financial and strategic alternatives for the Company. In addition, even if the Company were to pay such amounts, there nonetheless could be a material adverse effect on its liquidity and thereby materially adversely affect operations.
In addition, as a result of the Settlement Agreement, one or more events of default are continuing under the Company’s Loan Agreement with TD Bank and TD Bank may, at its option, accelerate the loan. There is approximately $15.1 million as of July 31, 2012 outstanding under the Loan Agreement. While TD Bank has orally indicated that it would not applicable.object to the Company’s payment of the portion of the Settlement Amount due upon execution of the Settlement Agreement, it has not expressly waived the events of default under the Loan Agreement. The Company continues to be in discussions with TD Bank about resolution of these matters and is continuing to otherwise operate within the terms of the Loan Agreement, however, no assurance can be given that the Company will work out a satisfactory arrangement with TD Bank or that TD Bank will not accelerate the loan.
Item 3. Defaults Upon Senior Securities.
As a result of the arbitration proceeding and the Settlement Agreement and the recent operating results of the Company, an event of default has occurred and is continuing under the Company’s Loan Agreement with TD Bank for failure of the Company to comply with the financial covenants, including minimum EBITDA requirements, under its Loan Agreement, as discussed above in Item 1A of Part II. TD Bank may, at its option, accelerate the loan. There is currently approximately $15,139,000 outstanding under the Loan Agreement. All scheduled payments of principal and interest under the Loan Agreement have been made.
Item 5. Other Information
We hereby incorporate by reference the information relating to the Settlement Agreement contained in Note 14, “Brazil Management and Share Purchase Agreement - Arbitration and Subsequent Event” of the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this quarterly report.
Item 6. Exhibits
| Exhibits: | ||
| Settlement Agreement | ||
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL instance Document* | |
| 101.SCH | XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | XBRL Taxonomy Extension Definitions Document* | |
| 101.DEF | XBRL Taxonomy Extension Labels Document* | |
| 101.LAB | XBRL Taxonomy Extension Labels Document* | |
| 101.PRE | XBRL Taxonomy Extension Presentations Document* |
| * | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed”. |
_________________SIGNATURES_________________
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LAKELAND INDUSTRIES, INC. | |
| (Registrant) | |
| Date: | /s/ Christopher J. Ryan |
| Christopher J. Ryan, | |
| Chief Executive Officer, President and Secretary | |
| Date: | /s/Gary Pokrassa |
| Gary Pokrassa, | |
| Chief Financial Officer | |
| (Principal |
| 36 |