Exhibit 13
Dear Fellow Shareholders:
The fiscal year ended January 31, 1997 witnessed a significant
improvement in the operating results of your Company. Sales increased to a
record $41.8 million, compared with $40.2 million in the previous fiscal year.
Net income rose to $1,063,000, versus a prior-year net profit of $587,000. On a
per share basis, earnings reached $0.41, which represented a gain of 86% over
the $0.22 per share profit reported in fiscal 1996. Pre-tax profit margins
expanded to 3.8% of sales in the most recent fiscal year, compared with 2.4% for
the year ended January 31, 1996.
Management has taken a number of steps during the past 24 months to
strengthen Lakeland Industries' position as a leader in the protective garment
industry. We expanded our facilities in Decatur, Alabama, allowing us to
automate cutting operations, increase warehouse space for raw materials and
finished goods, and shorten response time to customers' orders. We opened a new
factory in Mexico, which allowed us to take advantage of lower offshore
manufacturing costs and enhance Lakeland's competitiveness within our industry.
The Company is now the recipient of nine patents covering proprietary fabrics
and machinery. We also established a new subsidiary which has begun to penetrate
the Canadian market. Our employees have worked diligently to refine our
manufacturing, sales and delivery systems, and your Company is considerably more
efficient than it was two years ago.
By teaming up with the Dupont company in a number of new licensing
agreements involving Tyvek(Registered) and Tychem(Registered) clothing, our most
popular products, we have forged a relationship with one of the world's largest
producers of specialized textile fibers and related products. Such solid
relationships with Dupont and other vendors provide us with reliable access to
raw materials, while offshore production capabilities should position Lakeland
as one of the most efficient manufacturers in the protective garment industry.
When combined with our strong lender relationships and creative sales and
marketing strategies, we believe your Company is poised to further improve its
operating performance and significantly enhance shareholder values in the
future.
In order to better communicate with customers and investors, Lakeland
Industries has established an award-winning website (Majon's Web Select Award)
on the Internet at http://www.lakeland.com, and we encourage you to visit the
site for a more comprehensive understanding of the Company and its entire
product line. We are also taking advantage of multimedia technology in our
marketing programs, as evidenced by the publication of product information and
catalogs in CD-ROM format.
In the United States, protective clothing products are routinely
required for many workers in the chemical, petrochemical, health care,
automotive, glass, cement and other industries which involve the handling of
hazardous materials and/or exposure to extreme environmental conditions. We
expect international markets for protective garments and related products to
expand significantly as national boundaries become less important in a worldwide
economy. Lakeland Industries, with its 14-year history as a quality manufacturer
and its excellent vendor/customer relationships with Dupont, is now well
positioned to take advantage of these international market opportunities.
On behalf of management and the Board of Directors, I would like to
thank all of our employees, customers, vendors and shareholders for their
continued support, and I look forward to reporting upon your Company's future
accomplishments. Respectfully submitted,
/s/ Raymond J. Smith
Raymond J. Smith
President and Chief Executive Officer
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
For the Years Ended January 31,
1997 1996 1995 1994 1993
INCOME STATEMENT DATA:
Net sales $41,792 $40,189 $35,185 $30,143 $26,512
Gross profit 7,237 6,288 6,346 4,763 3,885
Operating expenses (1) 5,212 4,882 4,704 4,739 4,281
Operating income (loss) 2,024 1,406 1,642 24 (396)
Income (loss) before income
taxes and cumulative effect of change
in accounting principle 1,576 956 2,000 (137) (701)
Income (loss) before
cumulative effect of change
in accounting principle 1,063 587 1,421 (278) (683)
Cumulative effect of change in
accounting principle (2) 241
------
Net income (loss) 1,063 587 1,421 (37) (683)
===== ===== ===== ====== =====
Earnings (loss) per share:
Income (loss) before cumulative
effect of change in accounting .41 .22 .54 (.11) (.27)
Cumulative effect of change in
accounting principle .10
===== ===== ===== ====== =====
Net earnings (loss) $.41 $.22 $.54 $(.01) $(.27)
===== ===== ===== ====== =====
Weighted average common
and common equivalent shares 2,607 2,637 2,641 2,550 2,550
BALANCE SHEET DATA (at end of year):
Working capital $14,018 $13,618 $7,190 $8,871 $5,008
Total assets 18,573 19,263 15,562 13,103 13,157
Current liabilities 2,920 3,894 6,813 2,464 5,752
L/T liabilities 5,746 6,492 441 3,680 615
Stockholders' equity $9,825 $8,762 $8,175 $6,754 $6,790
- ----------
(1)Includes a write-off of $583,669 in Notes receivable due from one customer in
1994.
(2) Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"),
which requires an asset and liability approach to accounting for income taxes.
The cumulative effect as of February 1, 1993, of the adoption of SFAS No. 109,
resulted in a fiscal 1994 benefit of $241,000 or $.10 per common share. Prior
year's financial statements were not restated.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Fiscal Year Ended January 31, 1997 Compared to Fiscal Year Ended January 31,
1996
Net sales for the year ended January 31, 1997 increased $1,603,000 or 3.99% to
$41,792,000 from $40,189,000 reported for the year ended January 31, 1996.
Increased prices and unit shipments of various protective garment products are
the principal reason for this upward movement in sales. This industry, however,
continues to be highly competitive. Net sales increased 13.7% during the quarter
ended January 31, 1997 as compared to the immediate preceding quarter,
principally as the result of the Company's ability to maintain inventory levels
to meet sales demand.
Gross profit as a percentage of net sales increased to 17.3% for the
year ended January 31, 1997 from 15.6% reported for the prior year, principally
due to the price increase instituted at the beginning of the fiscal year and
price stabilization. The prior year was negatively affected as a result of the
competitive and economic climate of the protective clothing industry. Margins
decreased to 14.8% during the quarter ended January 31, 1997 as compared to the
immediate preceding quarter as some products imported for sale during the fourth
quarter were sold at lower margins.
Operating expenses as a percentage of net sales increased to 12.5% for
year ended January 31, 1997 from 12.1% for the prior year, as sales continue to
increase without a corresponding increase in general and administrative expenses
as well as the prior year having benefited from a reduction in pension expense.
Interest expense remained the same consistent with outstanding
borrowings.
As a result of the foregoing, operating results increased to net income
of $1,063,000 for the year ended January 31, 1997 from net income of $587,000
for the year ended January 31, 1996.
Fiscal Year Ended January 31, 1996 Compared to Fiscal Year Ended January 31,
1995
Net sales for the year ended January 31, 1996 increased $5,004,000 or
14.2% to $40,189,000 from $35,185,000 reported for the year ended January 31,
1995. Increased prices and unit shipments of various protective garment products
are the principal reason for this upward movement in sales. This industry,
however, continues to be highly competitive. Net sales increased 14.6% during
the quarter ended January 31, 1996 as compared to the immediate preceding
quarter, principally as the result of the Company's ability to maintain
inventory levels to meet sales demand.
Gross profit as a percentage of net sales decreased to 15.6% for the
year ended January 31, 1996 from 18.0% reported for the prior year, principally
due to the erosion of the price increase instituted at the beginning of the
fiscal year. Both years were negatively affected as a result of the competitive
and economic climate of the protective clothing industry. Margins decreased to
12.1% during the quarter ended January 31, 1996 as compared to the immediate
preceding quarter as manufacturing difficulties were incurred during the fourth
quarter.
Operating expenses as a percentage of net sales decreased to 12.1% for
year ended January 31, 1996 from 13.4% for the prior year, as sales continue to
increase without a corresponding increase in general and administrative
expenses.
Interest expense increased as borrowings increased during the current
year, while other income decreased as the prior year included a $625,000 law
suit settlement.
As a result of the foregoing, operating results decreased to net income
of $587,000 for the year ended January 31, 1996 from net income of $1,421,000
for the year ended January 31, 1995.
3
LIQUIDITY AND CAPITAL RESOURCES
Lakeland has historically met its cash requirements through funds
generated from operations and borrowings under a revolving credit facility. On
August 30, 1995, the Company entered into a new $8 million facility with its
Bank. This facility matures on July 31, 1998. Interest charges under this credit
facility are calculated on various optional formulas using the prime rate,
LIBOR, banker's acceptances and letters of credit. The Company's January 31,
1997 balance sheet shows a strong current ratio and working capital position and
management believes that its positive financial position, together with its
credit agreement, will provide sufficient funds for operating purposes for the
next twelve months.
IMPACT OF INFLATION
Management believes inflation has not had a material effect on the
Company's operations or its financial condition. There can be no assurance,
however, that the Company's business will not be affected by inflation in the
future.
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Prior to September 9, 1986, there was no public market for the
Company's Common Stock. On September 9, 1986, the effective date of the
Company's initial public offering, the Company's Common Stock began trading in
the over-the-counter market. On June 2, 1987, the Company's Common Stock began
trading in the over-the-counter market as a National Market Issue. The Company's
Common Stock trades on The Nasdaq Stock Market under the symbol "LAKE". It is
listed in major publications under "Lakeland".
The following table sets forth the high and low trade prices, as
reported by NASDAQ for the last two fiscal years:
Fiscal 1997 Fiscal 1996
High Low High Low
---- --- ---- ---
First Quarter 4 1/4 3 1/8 6 1/8 4
Second Quarter 4 5/8 2 3/4 5 7/8 3 3/4
Third Quarter 4 1/16 3 4 7/8 3 1/4
Fourth Quarter 3 1/2 2 3/4 4 3/8 2 7/8
First Quarter fiscal 1998 3 3/4 2 13/16
(through April 18, 1997)
The Company has never declared or paid a cash dividend on its Common
Stock, and the Company has no present intention of declaring or paying any cash
dividends on its Common Stock in the foreseeable future.
The Company's revolving credit facility provides for certain
restrictions that, at January 31, 1997 prohibited the Company from paying any
cash dividends.
As of April 11, 1997, there were 129 holders of record of the Common
Stock of the Company. There are believed to be in excess of 500 beneficial
shareholders in addition to those of record, since over 1 million shares are
held in street name by Cede & Co. a large financial clearing house.
4
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Lakeland Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Lakeland
Industries, Inc. and Subsidiaries (the "Company") as of January 31, 1997 and
1996, and the related consolidated statements of income and retained earnings
and cash flows for each of the three years in the period ended January 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of January 31, 1997 and 1996, and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the
period ended January 31, 1997, in conformity with generally accepted accounting
principles.
We have also audited Schedule II - Valuation and Qualifying Accounts for each
of the three years in the period ended January 31, 1997. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
GRANT THORNTON LLP
Melville, New York
April 10, 1997
5
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
January 31,
ASSETS 1997 1996
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 504,940 $ 364,640
Accounts receivable, net of allowance for doubtful
accounts of $150,000 and $263,000 at January 31,
1997 and 1996, respectively 5,893,594 4,979,975
Inventories 9,894,156 11,244,241
Deferred income taxes 469,000 432,000
Other current assets 176,901 490,776
----------- -----------
Total current assets 16,938,591 17,511,632
PROPERTY AND EQUIPMENT, NET 989,667 1,026,203
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, net of accumulated amortization of $198,000
and $178,000 at January 31, 1997 and 1996, respectively 347,116 367,104
NOTE RECEIVABLE 140,298 147,921
OTHER ASSETS 157,444 209,872
----------- -----------
$18,573,116 $19,262,732
=========== ===========
The accompanying notes are an integral part of these statements.
6
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
January 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 2,534,999 $ 3,465,552
Accrued expenses and other current liabilities 335,314 378,524
Current portion of long-term liabilities 50,000 50,000
----------- -----------
Total current liabilities 2,920,313 3,894,076
LONG-TERM LIABILITIES 5,745,789 6,491,938
DEFERRED INCOME TAXES 82,000 115,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par; 1,500,000 shares
authorized; none issued
Common stock, $.01 par; 10,000,000 shares
authorized; 2,550,000 shares issued
and outstanding 25,500 25,500
Additional paid-in capital 5,981,226 5,981,226
Retained earnings 3,818,288 2,754,992
----------- -----------
9,825,014 8,761,718
----------- -----------
$18,573,116 $19,262,732
=========== ===========
The accompanying notes are an integral part of these statements.
7
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
Fiscal year ended January 31,
1997 1996 1995
------------ ------------ ------------
Net sales $ 41,792,469 $ 40,188,916 $ 35,184,994
Cost of goods sold 34,555,786 33,901,232 28,839,099
------------ ------------ ------------
Gross profit 7,236,683 6,287,684 6,345,895
------------ ------------ ------------
Operating expenses
Selling and shipping 2,569,702 2,691,193 2,288,602
General and administrative 2,625,866 2,163,621 2,315,611
Research and development 16,718 27,298 99,795
------------ ------------ ------------
Total operating expenses 5,212,286 4,882,112 4,704,008
------------ ------------ ------------
Operating profit 2,024,397 1,405,572 1,641,887
------------ ------------ ------------
Other (expense) income
Interest expense (510,757) (511,180) (304,613)
Interest income 27,293 19,938 632
Other income 35,363 41,292 662,572
------------ ------------ ------------
(448,101) (449,950) 358,591
------------ ------------ ------------
Income before income taxes 1,576,296 955,622 2,000,478
Income tax expense (513,000) (369,000) (579,000)
------------ ------------ ------------
NET INCOME 1,063,296 586,622 1,421,478
Retained earnings at beginning of year 2,754,992 2,168,370 746,892
------------ ------------ ------------
Retained earnings at end of year $ 3,818,288 $ 2,754,992 $ 2,168,370
============ ============ ============
Net income per common share $ .41 $ .22 $ .54
============ ============ ============
Average number of common shares outstanding 2,607,498 2,637,394 2,640,518
============ ============ ============
The accompanying notes are an integral part of these statements.
8
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended January 31,
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities
Net income $ 1,063,296 $ 586,622 $ 1,421,478
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Deferred income taxes (70,000) 5,000 (212,000)
Depreciation and amortization 342,963 272,135 266,565
Gain on sale of property (4,530)
(Increase) decrease in operating assets
Accounts receivable (913,620) (571,104) (353,872)
Inventories 1,350,085 (2,385,943) (2,157,905)
Other current assets 314,415 (329,725) 92,270
Other assets (46,653) 130,550 (8,444)
Increase (decrease) in operating liabilities
Accounts payable (930,553) 641,004 669,663
Accrued expenses and other liabilities 759 6,108 143,941
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,106,162 (1,645,353) (138,304)
----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment - net (283,358) (577,756) (84,099)
Payments on note receivable 7,082 6,015 2,048
Proceeds from sale of property 10,414 -- 33,063
----------- ----------- -----------
Net cash used in investing activities (265,862) (571,741) (48,988)
----------- ----------- -----------
Cash flows from financing activities
Net borrowings (reductions) under line of credit agreement (700,000) 2,485,150 295,904
Deferred financing costs -- (23,335) --
----------- ----------- -----------
Net cash (used in) provided by financing activities (700,000) 2,461,815 295,904
----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 140,300 244,721 108,612
Cash and cash equivalents at beginning of year 364,640 119,919 11,307
----------- ----------- -----------
Cash and cash equivalents at end of year $ 504,940 $ 364,640 $ 119,919
=========== =========== ===========
The accompanying notes are an integral part of these statements.
9
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1997, 1996 and 1995
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
1. Business
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware
corporation, organized in April 1982, is engaged primarily in the
manufacture of disposable and reusable protective work clothing. The
principal market for the Company's products is in the United States.
No customer accounted for more than 10% of net sales during the fiscal
years ended January 31, 1997, 1996 and 1995.
2. Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Fireland
Industries, Inc., Lakeland Protective Wear, Inc. (a Canadian
corporation) and Lakeland de Mexico S.A. de C.V. (a Mexican
corporation). All significant intercompany accounts and transactions
have been eliminated.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method.
4. Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the cost
of depreciable assets to operations over their estimated service
lives, on a straight-line basis. Leasehold improvements and leasehold
costs are amortized over the term of the lease or service lives of the
improvements, whichever is shorter. The costs of additions and
improvements which substantially extend the useful life of a
particular asset are capitalized. Repair and maintenance costs are
charged to expense.
5. Excess of Cost Over the Fair Value of Net Assets Acquired
The excess of cost over the fair value of net assets acquired
(goodwill) is amortized on a straight-line basis over a 30-year
period. On an ongoing basis, management reviews the valuation and
amortization of goodwill to determine possible impairment by
considering current operating results and comparing the carrying value
to the anticipated undiscounted future cash flows of the related
assets.
6. Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and
loss carryforwards and tax credit carryforwards for which income tax
benefits are expected to be realized in future years. A valuation
allowance is established to reduce deferred tax assets if it is more
likely than not that all, or some portion of, such deferred tax assets
will not be realized. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the
enactment date.
10
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE A (continued)
7. Income (Loss) Per Common Share
Income per share is based on the weighted average number of common
shares outstanding and common share equivalents.
8. Statement of Cash Flows
The Company considers highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market funds. The market value of the
cash equivalents approximates cost.
Supplemental cash flow information for the fiscal years ended January
31 was as follows:
1997 1996 1995
--------- --------- --------
Interest paid $494,102 $431,555 $304,676
Income taxes paid, net of refunds 325,242 618,853 665,488
9. Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to these receivables is
generally diversified due to the large number of entities comprising
the Company's customer base and their dispersion across geographic
areas within the United States. The Company routinely addresses the
financial strength of its customers and, as a consequence, believes
that its receivable credit risk exposure is limited.
10. Foreign Currency Translation
The monetary assets and liabilities of the Company's foreign
operations are translated into U.S. dollars at current exchange rates,
while nonmonetary items are translated at historical rates. Revenues
and expenses are generally translated at average exchange rates for
the year. Resulting translation adjustments are reflected as a
separate component of stockholders' equity. Transaction gains and
losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are
included in the results of operations as incurred.
11. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
year-end and the reported amounts of revenues and expenses
11
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE A (continued)
during the reporting period. Actual results could differ from those
estimates. The significant estimates include the allowance for
doubtful accounts and inventory reserves. It is reasonably possible
that events could occur during the upcoming year that could change
such estimates.
NOTE B - NOTE RECEIVABLE
In October 1994, the Company sold its Ohio facility to an unrelated third
party for $187,500 ($25,000 cash and a $162,500 mortgage note). The
selling price of the property approximated the net book value at the time
of sale. The mortgage note is payable in 47 consecutive monthly payments
of $1,523, including principal and interest at an annual rate of 8%, until
October 1998 when the entire unpaid balance of the indebtedness shall be
due and payable. This note is secured by a mortgage on real estate located
in the City of Newark, Licking County, Ohio.
NOTE C - INVENTORIES
Inventories consist of the following at January 31:
1997 1996
----------- -----------
Raw materials $2,669,254 $ 2,980,137
Work-in-process 3,124,141 3,225,272
Finished goods 4,100,761 5,038,832
--------- -----------
$9,894,156 $11,244,241
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at January 31:
Useful life
in years 1997 1996
----------- ----------- -----------
Machinery and equipment 10 $2,409,648 $2,180,832
Furniture and fixtures 5 - 10 157,722 148,814
Leasehold improvements Lease term 185,587 147,374
---------- ----------
2,752,957 2,477,020
Less accumulated depreciation and amortization 1,763,290 1,450,817
--------- ---------
$ 989,667 $1,026,203
========== =========
12
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Fair Value of
Financial Instruments," requires disclosure of the estimated fair value of
an entity's financial instrument assets and liabilities. The Company's
principal financial instrument consists of its three-year revolving credit
facility with a bank. The Company believes that the carrying amount of
such debt approximates the fair value as the variable interest rate
approximates the current prevailing interest rate. Additionally, the
Company's financial position has not substantially changed since the
August 1995 inception of such credit facility.
NOTE F - LONG-TERM LIABILITIES
Long-term liabilities consist of the following at January 31:
1997 1996
----------- -----------
Revolving credit facility $5,400,000 $6,100,000
Pension liability (Note J) 395,789 441,938
---------- ----------
5,795,789 6,541,938
Less current portion of pension liability 50,000 50,000
----------- -----------
Long-term liabilities $5,745,789 $6,491,938
========= =========
During August 1995, the Company entered into a $8,000,000, three-year
secured revolving credit facility with a bank, replacing the two-year
facility that was due to expire. Under this secured revolving credit
facility, which expires on July 31, 1998, the Company may borrow up to a
maximum of $8,000,000 based upon eligible accounts receivable and
inventories, as defined in the Agreement. Borrowings under the revolving
credit facility bear interest at a rate per annum equal to the prime
commercial lending rate or LIBOR plus 200 points (7.44% at January 31,
1997). Such interest is payable at the end of the respective interest
period, ranging from 30 to 180 days. A fee of 1/2% per annum is charged to
the Company on the unused portion of such facility. The loan is
collateralized by substantially all the assets of the Company. Deferred
financing fees of $20,000 are being amortized on a straight-line basis
over the three-year term of this facility. The revolving credit facility
also contains restrictive covenants, measurable on a quarterly or annual
basis, with respect to: tangible net worth, capital expenditures and
certain financial ratios, as defined. The revolving credit agreement
restricts the Company from declaring or paying any dividends. As of
January 31, 1997, the Company was in compliance with all covenants related
to this agreement.
The maximum amounts borrowed under the revolving lines of credit during
the fiscal years ended January 31, 1997 and 1996 were $7,000,000 and
$7,120,000, respectively, and the average interest rate for each period
then ended was 7.5% and 9.4%, respectively.
13
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Employment Contracts
The Company has employment contracts with three principal officers
expiring through February 2000. Such contracts are automatically
renewable for one- or two-year terms, unless 30 to 120 days' notice is
given by either party. Pursuant to such contracts, the Company is
committed to aggregate base remuneration of $515,000, $175,000 and
$175,000 for the fiscal years ended January 31, 1998, 1999 and 2000,
respectively.
2. Leases
The Company leases the majority of its premises under various
operating leases expiring through fiscal 2002. The lease for the
principal manufacturing facility (located in Decatur, Alabama) is with
a partnership whose partners are principal officers and stockholders
of the Company. This lease expires on August 31, 1999 and requires
annual payments of approximately $365,000 plus certain operating
expenses. In addition, the Company has several operating leases for
machinery and equipment. Total rental expense under all operating
leases is summarized as follows:
Total Rentals
Gross sublease paid to
rental rental related
expense income parties
------- --------- -------
Year ended January 31,
1997 581,161 $ 3,024 $392,160
1996 483,690 20,011 369,150
1995 340,171 13,169 249,300
Minimum annual rental commitments for the remaining term of the
Company's noncancellable operating leases relating to office space and
equipment rentals at January 31, 1997 are summarized as follows:
Year ending January 31,
1998 $ 622,795
1999 594,151
2000 383,885
2001 76,576
2002 8,062
------------
$1,685,469
============
Certain leases require additional payments based upon increases in
property taxes and other expenses.
14
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE G (continued)
3. Services Agreement
In August 1993, the Company entered into a services agreement with an
affiliated entity, principally owned by a principal officer and
stockholder of the Company. Pursuant to the terms of such agreement,
the affiliate provides professional and/or skilled labor to a division
of the Company, as needed, at contractual rates of compensation. Such
agreement is cancelable by either the Company or the affiliate upon
thirty days' written notice. Costs incurred by the Company in
connection with such agreement aggregated $426,000, $520,000 and
$654,000 for the fiscal years ended January 31, 1997, 1996 and 1995,
respectively.
4. Litigation
In January 1995, the Company received a $625,000 cash settlement
pursuant to an action filed against its prior legal counsel, involving
a number of causes of action relating to that law firm's
representation of the Company between 1987 and 1991. This amount is
included in "Other income" for the fiscal year ended January 31, 1995.
The Company is involved in various litigation arising during the
normal course of business which, in the opinion of the management of
the Company, will not have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
5. Self-insurance
The Company maintains a self-insurance program for that portion of
health care costs not covered by insurance. The Company is liable for
claims up to defined limits. Self-insurance costs are based upon the
aggregate of the liability for reported claims and an estimated
liability for claims incurred but not reported.
NOTE H - STOCKHOLDERS' EQUITY AND STOCK OPTIONS
A Nonemployee Directors' Option Plan (the "Directors' Plan") was adopted
by the Board of Directors and approved by the stockholders during the year
ended January 31, 1990. Under the Directors' Plan, 60,000 shares of common
stock have been authorized for issuance. The Directors' Plan provides for
an automatic one-time grant of options to purchase 5,000 shares of common
stock to each nonemployee director elected or appointed to the Board.
Options 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 be automatically granted additional
options to purchase 1,000 shares of common stock on each of such dates.
On May 1, 1986, the Company's 1986 Incentive and Nonstatutory Stock Option
Plan (the "Incentive Plan"), which provides for the granting of incentive
stock options and nonstatutory options, was adopted by the Board of
Directors and approved by the stockholders. This plan provides for the
grant of options to key employees and independent sales representatives to
purchase up to 400,000 shares of the Company's common stock, upon terms
and conditions determined by a committee of the Board of Directors which
administers the plan.
15
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE H (continued)
Options are granted at not less than fair market value (110 percent of
fair market value as to incentive stock options granted to ten percent
stockholders) and are exercisable over a period not to exceed ten years
(five years as to incentive stock options granted to ten percent
stockholders). On February 15, 1989, the Board of Directors approved a
restatement of the Incentive Plan to conform with certain changes required
by the Tax Reform Act of 1986. The Board of Directors also restated the
Incentive Plan to provide for stock appreciation rights and changed
provisions of the plan relative to option holders' rights upon termination
of employment with the Company and modified the language of the Incentive
Plan in other sections such as "Eligibility" and "Terms and Conditions of
Options." The restatement of the Incentive Plan was approved by the
stockholders.
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for
its stock-based compensation plans. If the Company had elected to
recognize compensation expense based upon the fair value at the date of
grant for awards under these plans consistent with the methodology
prescribed by SFAS 123, the effect on the Company's net income and
earnings per share for the year ended January 31, 1996 would not be
material in relation to the consolidated financial statements and the
Company's net income and earnings per share for the year ended January 31,
1997 would be reduced to the pro forma amounts indicated below:
Net income
As reported $1,063,296
Pro forma 974,555
Net income per common share
As reported $.41
Pro forma .37
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before fiscal 1995. The fair value of these options
was estimated at the date of grant using the Black-Scholes option-pricing
model with the following assumptions for the years ended January 31, 1997
and 1996, respectively: expected volatility of 57% and 43%; risk-free
interest rates of 7% and 6%; and expected life of six years for both
periods.
16
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE H (continued)
Additional information with respect to the Company's plans for the fiscal
years ended January 31, 1997, 1996 and 1995 is summarized as follows:
1997
-------------------------------------------------------------
Directors' Plan Incentive Plan
-------------------------- -------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
Shares price shares price
------ --------- ------ ---------
Shares under option
Outstanding at beginning of year 18,000 $1.90 150,000 $2.13
Granted - - 34,000 3.50
Expired - - (34,000) 2.50
------ -------
Outstanding at end of year 18,000 1.90 150,000 2.36
====== =======
Options exercisable at year-end 18,000 1.90 150,000 2.36
Weighted-average remaining contractual
life of options outstanding 1 year 4 years
Weighted-average fair value per share
of options granted during 1997 - 2.61
The exercise prices of options outstanding at January 31, 1997 ranged from
$1.37 to $4.25.
1996
-------------------------------------------------------------
Directors' Plan Incentive Plan
-------------------------- -------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
Shares price shares price
------ --------- ------ ---------
Shares under option
Outstanding at beginning of year 17,000 $1.76 150,000 $2.13
Granted 1,000 4.25 -
------ -------
Outstanding at end of year 18,000 1.90 150,000 2.13
====== =======
Options exercisable at year-end 18,000 1.90 150,000 2.13
Weighted-average fair value per share
of options granted during 1996 2.15 -
17
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE H (continued)
1995
-------------------------------------------------------------
Directors' Plan Incentive Plan
-------------------------- -------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
Shares price shares price
------ --------- ------ ---------
Shares under option
Outstanding at beginning of year 15,000 $1.48 150,000 $2.13
Granted 2,000 3.88 -
------ -------
Outstanding at end of year 17,000 1.76 150,000 2.13
====== =======
Options exercisable at year-end 17,000 1.76 150,000 2.13
NOTE I - INCOME TAXES
The provision for income taxes is summarized as follows:
Year ended January 31,
------------------------------------------------
1997 1996 1995
-------- -------- --------
Current
Federal $603,000 $382,000 $ 584,000
State (20,000) (18,000) 207,000
-------- --------- ---------
583,000 364,000 791,000
Deferred (70,000) 5,000 (212,000)
-------- --------- ---------
$513,000 $369,000 $ 579,000
======== ========= =========
18
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE I (continued)
The following is a reconciliation of the effective income tax rate to the
Federal statutory rate:
Year ended January 31,
----------------------------------------------
1997 1996 1995
------ ------ ------
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal tax benefit (.4) (.4) 4.6
Nondeductible expenses .8 1.7 .5
Operating loss generating no current tax benefit 1.8 2.5
Change in deferred assets/valuation allowance (4.4) .5 (10.0)
Other .7 .3 (.2)
------ ------ ------
Effective rate 32.5% 38.6% 28.9%
====== ====== ======
The tax effects of temporary differences which give rise to deferred tax
assets at January 31, 1997 and 1996 are summarized as follows:
January 31,
-----------------------------
1997 1996
------- -------
Deferred tax assets
Accounts receivable $ 57,000 $100,000
Inventories 302,500 271,300
Vacation accrual 37,500 36,300
Net operating loss carryforward - Canadian subsidiary 53,000 24,400
Accrued compensation 19,000
--------
Gross deferred tax assets 469,000 432,000
------- -------
Deferred tax liabilities
Depreciation 82,000 115,000
-------- -------
Gross deferred tax liabilities 82,000 115,000
------- -------
Net deferred tax asset $387,000 $317,000
======= =======
19
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE I (continued)
The net operating loss carryforwards applicable to the Company's Canadian
subsidiary expire in fiscal 2002 through 2004.
The Internal Revenue Service is currently auditing the Company's fiscal
1995 return. The State of Missouri is currently auditing the Company's
1993 to 1996 fiscal periods. The management of the Company does not expect
that these examinations will have a material adverse impact on the
consolidated financial statements.
NOTE J - DEFINED BENEFIT PENSION PLAN
A former subsidiary of the Company has a defined benefit pension plan
which the Company assumed in connection with an acquisition made in fiscal
1987. This plan covers substantially all of the former subsidiary's
employees. Benefits pursuant to this plan were frozen as of January 1,
1986.
The benefits earned are based on years of service and the employee's final
average annual salary which is based on the highest five consecutive of
the last ten years of employment prior to January 1, 1986. The Company's
funding policy is to contribute annually the recommended amount based on
computations made by its consulting actuary.
The components of the net periodic pension cost for the fiscal years ended
January 31 are summarized as follows:
1997 1996 1995
--------- -------- ---------
Normal cost $ 1,613 $ 1,613 $ 1,613
Interest cost on projected benefit obligation 62,259 60,611 56,692
Actual return on assets (92,226) (40,653) (4,322)
Net amortization and deferral 71,026 25,159 (8,529)
------- ------- ------
Net periodic pension cost $ 42,672 $ 46,730 $45,454
======= ======= ======
The following is a summary of the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at January 31:
1997 1996
---------- ----------
Actuarial present value of benefit obligation
Vested benefits $863,621 $842,701
------- -------
Projected benefit obligation 863,621 842,701
Plan assets at fair market value 467,832 400,763
------- -------
Projected benefit obligation in excess of plan assets 395,789 441,938
20
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1997, 1996 and 1995
NOTE J (continued)
1997 1996
---------- ----------
Unrecognized gain (loss) $ 16,945 $ (62,021)
Unrecognized net obligation at transition amortized
over a 15-year period (79,213) (89,068)
Required minimum liability (also included as a
component of other assets) 62,268 151,089
-------- -------
Pension cost liability (included in long-term liabilities) $395,789 $441,938
======= =======
An assumed discount rate of 7.5% was used in determining the actuarial
present value of benefit obligations for all periods presented. The
expected long-term rate of return on plan assets was 8% for all periods
presented. At January 31, 1997, approximately 73% of the plan's assets
were held in mutual funds invested primarily in equity securities,
approximately 14% was invested in money market instruments and the
remaining 13% was invested in equity securities and debt instruments.
NOTE K - MAJOR SUPPLIER
The Company purchased approximately 74% of its raw materials from one
supplier under licensing agreements. The Company expects this relationship
to continue for the foreseeable future. If required, similar raw materials
could be purchased from other sources.
21
>
CORPORATE INFORMATION
---------------------
Directors:
Raymond J. Smith, Chairman
Christopher J. Ryan
John J. Collins, Jr.
Senior Vice President of Liberty Brokerage, Inc.
Eric O. Hallman
Officer of Sylvan-Lawrence
Walter J. Raleigh
Senior Advisor to CMI Industries, Inc.
Market Makers:
Troster Singer Corp.
Legg Mason Wood Walker Inc.
G.V.R. Company
Mayer & Schweitzer Inc.
Nash Weiss/Div of Shatkin Inv.
Herzog, Heine, Geduld, Inc.
Mercer Bokert Buckman & Reid
Worldco L.L.C.
M.H. Meyerson & Co.
MPAC Capital Partners, L.P.
Wein Securities Corp.
Officers:
Raymond J. Smith, President
Christopher J. Ryan
Executive Vice President of Finance and Secretary
James M. McCormick
Vice President and Treasurer
Harvey Pride, Jr.
Vice President, Manufacturing
Auditors:
Grant Thornton LLP
Suite 3S01
One Huntington Quadrangle
Melville, NY 11747-4464
Counsel:
Law Offices of Thomas J. Smith
14 Briarwood Lane
Suffern, NY 10901-3602
Transfer Agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
NASDAQ symbol: LAKE
Executive Offices:
711-2 Koehler Ave.
Ronkonkoma, NY 11779
(516) 981-9700
Subsidiaries:
Fireland Industries, Inc.
Lakeland Protective Wear, Inc.
(Canada)
Lakeland de Mexico S.A. de C.V.
Exhibits to Lakeland Industries, Inc.'s 1997 Form 10-K are available to
shareholders for a fee equal to Lakeland's cost in furnishing such exhibits, on
written request to the Secretary, Lakeland Industries, Inc., 711-2 Koehler
Avenue, Ronkonkoma, New York 11779.
DextraGard TM, Forcefield TM, Interceptor TM, Checkmate TM, Heatex TM,
Pyrolon TM, Sterling Heights TM, Fyrepel TM, Highland TM, Impede TM, Chemland TM
and Uniland TM are trademarks of Lakeland Industries, Inc. Tyvek TM, Viton TM,
Barricade TM, Nomex TM, Kevlar TM, Delrin TM, TyChem TM and Teflon TM are
registered trademarks of E.I.DuPont de Nemours and Company. Saranex TM is a
registered trademark of Dow Chemical. Spectra TM is a registered trademark of
Allied Signal, Inc.
22
[LOGO]
Corporate Headquarters
711-2 Koehler Avenue
Ronkonkoma, NY U.S.A.11779-7410
Tel: 516-981-9700
Fax: 516-981-9751
E-Mail: 74313.1743@compuserve.com
Internet: http://www.lakeland.com
Lakeland Limited-Use Clothing
Customer Service
800-645-9291
Tel: 205-350-3873
Fax: 205-350-0773
Chemical Protective Clothing Division
Customer Service
800-645-9291
Tel: 205-350-3873
Fax: 205-350-3011
Hand/Arm Protection Division
Customer Service
800-886-8010
Tel: 205-351-9126
Fax: 205-353-9463
Woven Clothing Division
Customer Service
800-933-0115
Tel: 219-929-5536
Fax: 219-929-5562
Fire Protective Clothing Division
Customer Service
800-345-7845
Tel: 205-350-3107
Fax: 205-350-3011
Lakeland Protective Wear Inc. Canada
5109 Harvestor Road
Unit B-14
Burlington, Ontario L7L5Y9
800-489-9131
Tel: 905-634-6400
Fax: 905-634-6611