SELECTED FINANCIAL DATA
(In thousands, except per share and share amounts)
For the Years Ended January 31,
2000 1999 1998 1997 1996
INCOME STATEMENT DATA:
Net sales $58,644 $54,655 $47,263 $41,792 $40,189
Gross profit 10,488 10,374 9,195 7,237 6,288
Operating expenses 7,191 6,451 6,157 5,212 4,882
Operating profit 3,297 3,923 3,038 2,024 1,406
Income before income taxes 2,509 3,222 2,590 1,576 956
Net income 1,748 2,080 1,600 1,063 587
Earnings per share - Basic (1) $.66 $.79 $.63 $.42 $.23
==== ==== ==== ==== ====
Earnings per share - Diluted (1) $.65 $.77 $.61 $.41 $.22
==== ==== ==== ==== ====
Weighted average common shares
outstanding:
Basic 2,653,950 2,642,170 2,558,541 2,550,000 2,550,000
Diluted 2,673,449 2,690,920 2,627,425 2,609,700 2,635,506
BALANCE SHEET DATA (at end of year):
Working capital $15,859 $12,403 $18,903 $14,018 $13,618
Total assets 34,770 27,160 25,812 18,573 19,263
Current liabilities 16,601 12,915 5,007 2,920 3,894
Long-term liabilities 2,709 465 9,217 5,746 6,492
Stockholders' equity $15,405 $13,725 $11,518 $9,825 $8,762
- --------------------------------------------------------------------------------
(1) Earnings per share has been restated in accordance with SFAS No. 128,
"Earnings Per Share".
1
CAUTIONARY STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are all statements other
than statements of historical fact included in this report, including,
without limitation, the statements under the headings "Business,"
"Properties," "Market for Registrant's Common Stock and Related Stockholder
Matters," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding the Company's financial position and
liquidity, the Company's strategic alternatives, future capital needs,
development and capital expenditures (including the amount and nature
thereof), future net revenues, business strategies, and other plans and
objectives of management of the Company for future operations and
activities.
Forward-looking statements are based on certain assumptions and
analyses made by the Company in light of its experience and its perception
of historical trends, current conditions, expected future developments and
other factors it believes are appropriate under the circumstances. These
statements are subject to a number of assumptions, risks and uncertainties,
and factors in the Company's other filings with the Securities and Exchange
Commission (the "Commission"), general economic and business conditions,
the business opportunities that may be presented to and pursued by the
Company, changes in law or regulations and other factors, many of which are
beyond the control of the Company. Readers are cautioned that these
statements are not guarantees of future performance, and that actual
results or developments may differ materially from those projected in the
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations may include forward-looking statements
with respect to the Company's future financial performance. These
forward-looking statements are subject to various risks and uncertainties,
including the factors described elsewhere in this Report, that could cause
actual results to differ materially from historical results or those
currently anticipated.
Overview
The Company derives the majority of its revenues from the sale of its
Tyvek disposable limited/use garments and secondarily from the sales of its
cut and heat resistant gloves, woven reusable garments, heat and fire
protective clothing, and chemical suits all to safety and mill supply
distributors.
The Company generally recognizes revenues when it ships its product to
its customers. Cost of goods sold includes all direct costs to manufacture
the finished product, plus related costs associated with inland or ocean
freight on incoming raw materials, customs duty and warehousing, and
manufacturing overhead expenses. Selling expenses include all salaries for
sales and marketing staffs together with other related expenses such as
sales commissions, travel costs, trade shows, advertising and delivery
expenses. General and administrative expenses include salaries for
executives and administrative and MIS staff, together with related expenses
such as travel costs, non-manufacturing facilities costs and consulting and
professional fees.
2
Result of Operations
The following table sets forth items in the Company's consolidated
statement of operations as a percentage of revenues for the periods
indicated.
Years Ended January 31,
2000 1999 1998
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of Goods Sold 82.1 81.0 80.4
Selling, general and administrative expenses 12.3 11.8 13.0
Depreciation and amortization expense 1.0 1.0 .9
Operating profit 5.6 7.2 6.4
Interest expense, net 1.4 1.3 1.0
Income tax expense 1.3 2.1 2.1
Net income 3.0 3.8 3.4
EBITDA margin (1) 6.7 8.2 7.4
----------------------
(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
margin represents EBITDA expressed as a percentage of revenues.
Fiscal Year Ended January 31, 2000 Compared to Fiscal Year Ended January 31,
1999
Net Sales. Net sales for the year ended January 31, 2000 increased
$3,989,000 or 7.3% to $58,644,000 from $54,655,000 for the year ended January
31, 1999. The increase in sales was principally attributable to the Company's
ability to increase its production capacity and maintain higher inventory
levels.
Gross Profit. Gross profit for the year ended January 31, 2000 increased by
$114,000, or 1.1% to $10,488,000, or 18% of net sales, from $10,374,000, or 19%
of net sales, for the year ended January 31, 1999. Gross profit was relatively
consistent between years as a result of global manufacturing efficiencies,
however, the current year was negatively affected by relocation and expansion
which temporarily decreased these efficiencies. This industry is highly
competitive and margins (historically and) in the current year were vulnerable
to erosion resulting from new competition reduced selling prices.
Operating Expenses. Operating expenses for the year ended January 31, 2000
increased by $740,000 or 11.5%, to $7,191,000, or 12.3% of net sales, from
$6,451,000, or 11.8% of net sales, for the year ended January 31, 1999.
Operating expenses as a percentage of net sales increased to 12.3%, from 11.8%
as a result of increased sales volume. The increase in operating expenses was
mainly attributable to greater payroll expenses, increased sales commissions and
increased freight out, and the addition of in-house regional sales managers.
Interest Expense. Interest expense for the year ended January 31, 2000
increased by $47,619, or 6.2% to $821,333 from $773,714 for the year ended
January 31, 1999. The increase in interest expense was mainly due to higher
interest costs reflecting an increase in average borrowings under the Company's
credit facility and increasing interest rates.
Income Tax Expense. The effective tax rate of 30.8% deviates from the
Federal statutory rate of 34%, mainly attributable to foreign income generating
no current taxes or foreign jurisdiction with lower tax rates and the effect of
state income taxes.
Net Income. As a result of the foregoing, net income for the year ended
January 31, 2000 decreased by $332,000 or 16%, to net income of $1,748,000 from
net income of $2,080,000 for the year ended January 31, 1999.
Fiscal Year Ended January 31, 1999 Compared to Fiscal Year Ended January
31, 1998.
Net Sales. Net sales for the year ended January 31, 1999 increased
$7,392,000 or 15.6% to $54,655,000 from $47,263,000 for the year ended January
31, 1998. The increase in sales was principally attributable to the Company's
ability to increase its production capacity and maintain higher inventory levels
and the institution of a price increase on its Tyvek(TM) lines on March 1, 1998.
3
Gross Profit. Gross profit for the year ended January 31, 1999 increased by
$1,179,000, or 12.8% to $10,374,000, or 19% of net sales, from $9,195,000, or
19.5% of net sales, for the year ended January 31, 1998. Gross profit was
consistent between years as a result of global manufacturing efficiencies which
were offset by certain expense reclassifications.
Operating Expenses. Operating expenses for the year ended January 31, 1999
increased by $294,000 or 4.8%, to $6,451,000, or 11.8% of net sales, from
$6,157,000, or 13% of net sales, for the year ended January 31, 1998. Operating
expenses as a percentage of net sales decreased to 11.8%, from 13% as a result
of increased sales volume and the reclassification of certain expenses described
above. The increase in operating expenses was mainly attributable to greater
payroll expenses, increased sales commissions and increased freight out.
Interest Expense. Interest expense for the year ended January 31, 1999
increased by $275,975, or 55.4% to $773,714 from $497,739 for the year ended
January 31, 1998. The increase in interest expense was mainly due to higher
interest costs reflecting an increase in average borrowings under the Company's
credit facility.
Income Tax Expense. The effective tax rate of 35.4% deviates from the
Federal statutory rate of 34%, mainly attributable to state income taxes.
Net Income. As a result of the foregoing, net income for the year ended
January 31, 1999 increased by $480,000 or 30%, to net income of $2,080,000 from
net income of $1,600,000 for the year ended January 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources. The Company's working capital is equal to
$15,859,000 at January 31, 2000. The Company's primary sources of funds for
conducting its business activities have been from cash flow provided by
operations and borrowings under its credit facilities. The Company requires
liquidity and working capital primarily to fund increases in inventories and
accounts receivable associated with sales growth and, to a lesser extent, for
capital expenditures.
Net cash used in operating activities was $2,858,000 for the year ended
January 31, 2000 and was due primarily to the increase in inventories of
$6,356,000, and accounts receivable of $1,636,000, offset by the increase in
accounts payable and net income from operations of $1,748,000.
Net cash provided by financing activities of $3,122,000 was primarily
attributable to net borrowings of $3,242,000 during the year in connection with
the term loan and revolving credit facility.
The revolving credit facility permits the Company to borrow up to a maximum
of $13 million. The revolving credit agreement expires on November 30, 2000 and
has therefore been classified as a short-term liability in the accompanying
balance sheet at January 31, 2000. Borrowings under the revolving credit
facility amounted to approximately $11,070,000 at January 31, 2000. The five
year $3 million term-loan agreement entered into in November 1999, expires on
October 31, 2004.
The Company believes that cash flow from operations and the revolving
credit facility (upon renewal) will be sufficient to meet its currently
anticipated operating, capital expenditures and debt service requirements for at
least the next 12 months.
Foreign Currency Activity
The Company's foreign exchange exposure is principally limited to the
relationship of the U.S. Dollar to the Canadian Dollar.
Year 2000 Compliance
The Company did not experience any difficulties with its' computer
systems on January 31, 2000 or subsequently.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is exposed to market risk, including changes in interest rates
and currency exchange rates. To manage the volatility relating to these
exposures, the Company seeks to limit, to the extent possible its non-U.S.
dollar denominated purchases and sales. Foreign exchange risk occurs principally
only with regard to Canadian subsidiary sales.
4
Foreign Exchange Risk Management
As a multinational corporation, the Company is exposed to changes in
foreign exchange rates. As the Company's non- denominated U.S. dollar
international sales grow, exposure to volatility in exchange rates could have an
adverse impact on the Company's financial results. The Company's risk from
exchange rate changes is presently related to non-dollar denominated sales in
Canada.
Interest Rate Risk
The Company is exposed to interest rate change market risk with respect to
its term loan and revolving credit facility with a financial institution which
is priced based upon LIBOR or 30 day commercial paper interest rates. At January
31, 2000, $13,970,000 was outstanding under the term-loan and revolving credit
facilities. Changes in the above described interest rates during fiscal 2000
will have a positive or negative effect on the Company's interest expense. Each
1% fluctuation in one or both of the above rates will increase or decrease
interest expense for the Company by approximately $140,000. In addition, the
Company had $90,000 USD on deposit in a Chinese financial institution earning
interest at the rate of 4.3% and a $47,000 Money Market account in a Canadian
financial institution earning interest at the rate of 4.7%. Each 1% fluctuation
in interest rates earned would not increase or decrease interest income on these
deposits by a significant amount.
MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the Nasdaq National Market under the symbol
"LAKE". The following table sets forth for the periods indicated the high and
low sales prices for the Common Stock as reported by the Nasdaq National Market.
The Company has a January 31, fiscal year end.
Price Range
of Common Stock
High Low
Fiscal 2000
First Quarter ended April 30, 1999......................$6 3/4 $4
Second Quarter ended July 31, 1999..................... 6 3/4 4 3/4
Third Quarter ended October 31, 1999.................... 7 3/8 2 7/8
Fourth Quarter ended January 31, 2000................... 4 3/4 2 15/16
First Quarter Fiscal 2001 (through April 20, 2000)...... 4 3/4 3 13/16
Fiscal 1999
First Quarter ended April 30, 1998......................$10 1/2 $7 3/4
Second Quarter ended July 31, 1998...................... 11 3/8 9
Third Quarter ended Oct. 31, 1998....................... 9 7/8 5 7/8
Fourth Quarter ended January 31, 1999................... 8 5 7/8
As of April 17, 2000, there were approximately 106 record holders of shares
of Common Stock. There are believed to be in excess of 500 beneficial
shareholders in addition to those of record, since over 1.0 million shares are
held in "street" name by Cede & Co., a large financial clearing house.
The Company has never paid cash dividends on its common stock and does not
expect to pay such dividends in the foreseeable future. The Company currently
intends to retain any future earnings, for the operation and expansion of its
business. The payment and rate of future dividends, if any, are subject to the
discretion of the Board of Directors of the Company and will depend upon the
Company's earnings, financial condition, capital requirements, contractual
restrictions under its agreement with its institutional lender and other
factors.
5
CORPORATE INFORMATION
- ----------------------
Directors: Officers: Counsel:
Raymond J. Smith, Chairman Raymond J. Smith, President Law Offices of Thomas J. Smith
Christopher J. Ryan Christopher J. Ryan 14 Briarwood Lane
John J. Collins, Jr. Executive Vice President of Suffern, NY 10901-3602
Eric O. Hallman Finance and Secretary
Walter J. Raleigh James M. McCormick
. Vice President and Treasurer Transfer Agent:
Harvey Pride, Jr.
Market Makers: Vice President, Manufacturing Registrar and Transfer Company
10 Commerce Drive
Neuberger & Berman Cranford, NJ 07016
Herzog, Heine, Geduld, Inc. Auditors: NASDAQ symbol: LAKE
Donald & Co.
Knight Securities Grant Thornton LLP Executive Offices:
INCA Suite 3S01
USLD One Huntington Quadrangle 711-2 Koehler Ave.
ISLD Melville, NY 11747-4464 Ronkonkoma, NY 11779
STRK (516) 981-9700
.
Subsidiaries:
Lakeland Protective Wear, Inc.
Lakeland de Mexico S.A. de C.V.
Laidlaw, Adams & Peck, Inc.
Weifang Lakeland Safety Products,
Co. Ltd.
Exhibits to Lakeland Industries, Inc.'s fiscal 2000 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.
Thermbar(TM), Kut Buster(TM), Grapolator Mock Twist (TM), Safeguard
"76"(TM), Zone Guard(TM), RyTex(TM), TomTex(TM), DextraGard (TM), Forcefield
(TM), Interceptor (TM), Checkmate (TM), Heatex (TM), Pyrolon (TM), Sterling
Heights (TM), Fyrepel (TM), Highland (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.
6
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, 2000 and
1999, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended January 31, 2000.
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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall 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, 2000 and 1999, and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the
period ended January 31, 2000, in conformity with accounting principles
generally accepted in the United States.
We have also audited Schedule II - Valuation and Qualifying Accounts for each of
the three years in the period ended January 31, 2000. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
/s/ GRANT THORNTON LLP
- ----------------------
GRANT THORNTON LLP
Melville, New York
April 14, 2000
7
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
January 31,
ASSETS 2000 1999
------------ --------
CURRENT ASSETS
Cash and cash equivalents $ 650,541 $ 1,436,083
Accounts receivable, net of allowance for doubtful accounts of
$200,000 at January 31, 2000 and 1999, respectively 8,379,477 6,743,341
Inventories 22,467,395 16,110,910
Deferred income taxes 661,000 567,000
Other current assets 301,698 461,231
------------ ------------
Total current assets 32,460,111 25,318,565
PROPERTY AND EQUIPMENT, net 1,851,964 1,326,261
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of $256,000
and $236,000 at January 31, 2000 and 1999, respectively 288,810 308,798
OTHER ASSETS 169,365 206,847
------------ ------------
$34,770,250 $27,160,471
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,242,874 $ 1,455,190
Accrued compensation and benefits 502,785 429,874
Other accrued expenses 135,883 252,274
Current portion of long-term liabilities 11,719,681 10,777,863
---------- ----------
Total current liabilities 16,601,223 12,915,201
LONG-TERM LIABILITIES 2,708,643 464,762
DEFERRED INCOME TAXES 55,000 56,000
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; 2,644,000 and
2,660,500 shares issued and
outstanding at January 31, 2000 and 1999, respectively 26,440 26,605
Additional paid-in capital 6,132,491 6,199,656
Retained earnings 9,246,453 7,498,247
----------- -----------
15,405,384 13,724,508
---------- ----------
$34,770,250 $27,160,471
========== ==========
The accompanying notes are an integral part of these statements.
8
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Fiscal year ended January 31,
2000 1999 1998
------------ ------------ -------
Net sales $58,644,181 $54,655,135 $47,262,519
Cost of goods sold 48,155,753 44,281,126 38,067,351
---------- ---------- ----------
Gross profit 10,488,428 10,374,009 9,195,168
---------- ---------- -----------
Operating expenses
Selling and shipping 4,177,171 3,334,609 3,001,500
General and administrative 3,013,780 3,116,745 3,155,605
----------- ----------- -----------
Total operating expenses 7,190,951 6,451,354 6,157,105
----------- ----------- -----------
Operating profit 3,297,477 3,922,655 3,038,063
----------- ----------- -----------
Other (expense) income
Interest expense (821,333) (773,714) (497,739)
Interest income 25,716 46,176 35,371
Other income - net 7,346 26,968 14,179
-------------- ------------- -------------
Total other expense (788,271) (700,570) (448,189)
------------- ------------ ------------
Income before income taxes 2,509,206 3,222,085 2,589,874
Income tax expense (761,000) (1,142,000) (990,000)
------------- ----------- ------------
NET INCOME $ 1,748,206 $ 2,080,085 $ 1,599,874
=========== =========== ===========
Net income per common share
Basic .66 $.79 $.63
=== === ===
Diluted .65 $.77 $.61
=== === ===
Weighted average common shares outstanding
Basic 2,653,950 2,642,170 2,558,541
=========== =========== ===========
Diluted 2,673,449 2,690,920 2,627,425
=========== =========== ===========
The accompanying notes are an integral part of these statements.
9
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Fiscal years ended January 31, 2000, 1999 and 1998
Common stock Additional
------------------------ paid-in Retained
Shares Amount capital earnings Total
---------- ------ -------------------------------------------
Balance, January 31, 1997 2,550,000 $25,500 $5,981,226 $3,818,288 $9,825,014
Net income 1,599,874 1,599,874
Exercise of stock options 60,472 605 92,132 92,737
----------- -------- ---------- --------------- ------------
Balance, January 31, 1998 2,610,472 $26,105 $6,073,358 $5,418,162 $11,517,625
Net income 2,080,085 2,080,085
Exercise of stock options 50,028 500 126,298 126,798
----------- -------- ---------- --------------- ------------
Balance, January 31, 1999 2,660,500 26,605 6,199,656 7,498,247 13,724,508
Net income 1,748,206 1,748,206
Purchase and retirement of common stock (16,500) (165) (67,165) (67,330)
----------- -------- ----------- --------------- -------------
Balance, January 31, 2000 2,644,000 $26,440 $6,132,491 $9,246,453 $15,405,384
========= ====== ========= ========= ==========
The accompanying notes are an integral part of this statement.
10
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended January 31,
2000 1999 1998
------------ ----------- ----------
Cash flows from operating activities
Net income $ 1,748,206 $ 2,080,085 $ 1,599,874
Adjustments to reconcile net income to net cash
used in operating activities
Deferred income taxes (95,000) (71,000) (53,000)
Depreciation and amortization 598,095 534,673 435,849
(Increase) decrease in operating assets
Accounts receivable (1,636,136) 210,197 (1,059,944)
Inventories (6,356,485) (252,858) (5,963,896)
Other current assets 159,533 (236,785) (54,602)
Other assets (20,823) (18,808) 23,688
Increase (decrease) in operating liabilities
Accounts payable 2,787,684 (2,839,051) 1,759,242
Accrued expenses and other liabilities (43,480) 84,143 355,463
------------- ------------ -----------
Net cash used in operating activities (2,858,406) (509,404) (2,957,326)
----------- ----------- ----------
Cash flows from investing activities
Purchases of property and equipment - net (1,049,124) (388,393) (803,487)
Principal payments on note receivable 140,251 7,104
----------------- ----------- -------------
Net cash used in investing activities (1,049,124) (248,142) (796,383)
----------- ----------- -----------
Cash flows from financing activities
Net borrowings under credit agreements 3,241,818 1,911,631 3,416,232
Proceeds from exercise of stock options 126,798 92,737
Purchase and retirement of common stock (67,330)
Deferred financing costs (52,500) (67,500) (37,500)
------------- ------------ ------------
Net cash provided by financing activities 3,121,988 1,970,929 3,471,469
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (785,542) 1,213,383 (282,240)
Cash and cash equivalents at beginning of year 1,436,083 222,700 504,940
---------- ----------- -----------
Cash and cash equivalents at end of year $ 650,541 $ 1,436,083 $ 222,700
============ ========== ===========
The accompanying notes are an integral part of these statements.
11
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2000, 1999 and 1998
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 personal safety 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, 2000, 1999 and 1998.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, Laidlaw, Adams &
Peck, Inc. and Subsidiary (formerly Fireland Industries, Inc.),
Lakeland Protective Wear, Inc. (a Canadian corporation), Weifang
Lakeland Safety Products Co. Ltd. (a Chinese 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 would be 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.
12
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE A (continued)
7. Earnings Per Share
Basic earnings per share are based on the weighted average number of
common shares outstanding without consideration of potential common
shares. Diluted earnings per share are based on the weighted average
number of common and potential common shares outstanding. The potential
common shares for the years ended January 31, 2000, 1999 and 1998 were
19,499, 48,750 and 68,884, respectively, representing the dilutive
effect of stock options. The diluted earnings per share calculation
takes into account the shares that may be issued upon exercise of stock
options, reduced by the shares that may be repurchased with the funds
received from the exercise, based on the average price during the
fiscal year.
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. Foreign dominated cash and cash
equivalents were $476,000 and $1,253,000 at January 31, 2000 and 1999,
respectively.
Supplemental cash flow information for the fiscal years ended January
31, is as follows:
2000 1999 1998
------- ------- ------
Interest paid $783,664 $ 771,294 $446,550
Income taxes paid 693,456 1,387,778 825,648
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 principally within the United States. The Company routinely
addresses the financial strength of its customers and, as a
consequence, believes that its receivable credit risk exposure is
limited.
10. Foreign Operations and Foreign Currency Translation
The Company maintains manufacturing operations and uses independent
contractors in Mexico and the People's Republic of China. It also
maintains a sales and distribution entity located in Canada. The
Company is vulnerable to currency risks in these countries.
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. 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.
13
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE A (continued)
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 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 - INVENTORIES
Inventories consist of the following at January 31:
2000 1999
------------ ------------
Raw materials $ 3,180,556 $ 2,461,225
Work-in-process 5,538,608 3,618,901
Finished goods 13,748,231 10,030,784
---------- ----------
$22,467,395 $16,110,910
========== ==========
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at January 31:
Useful life
in years 2000 1999
----------- ----------- ----------
Machinery and equipment 3 - 10 $3,993,315 $3,432,145
Furniture and fixtures 3 - 10 255,790 249,423
Leasehold improvements Lease term 666,692 263,269
---------- ----------
4,915,797 3,944,837
Less accumulated depreciation and amortization 3,063,833 2,618,576
--------- ---------
$1,851,964 $1,326,261
========== =========
14
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's principal financial instrument consists of its outstanding
revolving credit facility and term loan. The Company believes that the
carrying amount of such debt approximates the fair value as the variable
interest rates approximate the current prevailing interest rate.
NOTE E - LONG-TERM LIABILITIES
Long-term liabilities consist of the following at January 31:
2000 1999
----------- -----------
Revolving credit facility $11,069,681 $10,727,863
Term loan 2,900,000
Pension liability (Note H) 458,643 514,762
------------ ------------
14,428,324 11,242,625
Less current portion 11,719,681 10,777,863
---------- ----------
Long-term liabilities $ 2,708,643 $ 464,762
=========== ============
During 1997, the Company entered into a $10,000,000 secured revolving
credit facility (the "credit facility") with a financial institution with
an initial expiration date of November 30, 1999. On May 1, 1998, the credit
facility was increased to $13,000,000. Effective September 23, 1998, the
credit facility was amended to provide for a temporary increase to
$16,000,000 through August 31, 1999. Amounts outstanding under the
$3,000,000 temporary credit facility were repaid on August 31, 1999. In
November 1999, the $13,000,000 credit facility was renewed for one year,
and a $3,000,000, five-year term loan (the "term loan") was entered into,
which replaced the repaid temporary credit facility. Borrowings under the
credit facility bear interest at a rate per annum equal to the one-month
LIBOR or the 30-day commercial paper rate, as defined, plus 1.75%, with
interest payable monthly. At January 31, 2000, interest on outstanding
credit facility borrowings was based on the commercial paper rate option
(7.47% at January 31, 2000). The term loan is payable in monthly
installments of $50,000 plus interest payable at the 30-day commercial
paper rate plus 2.45% (8.03% at January 31, 2000). The credit facility and
term loan are collateralized by substantially all the assets of the Company
and guaranteed by certain of the Company's subsidiaries. The credit
facility and term loan require the Company to maintain a minimum tangible
net worth, at all times.
The maximum amounts borrowed under the credit facility during the fiscal
years ended January 31, 2000 and 1999 were $12,900,000 and $12,800,000,
respectively, and the average interest rates during the periods were 7.3%
and 7.1%, respectively.
15
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE F - STOCKHOLDERS' EQUITY AND STOCK OPTIONS
The Nonemployee Directors' Option Plan (the "Directors' Plan") provides for
an automatic one-time grant of options to purchase 5,000 shares of common
stock to each nonemployee director elected or appointed to the Board of
Directors. Under the Directors' Plan, 60,000 shares of common stock have
been authorized for issuance. Options are granted at not less than fair
market value, become exercisable commencing six months from the date of
grant and expire six years from the date of grant. In addition, all
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 each of such dates. In
April 1997, the Company extended the term on 5,000 expiring options for an
additional six years.
The Company's 1986 Incentive and Nonstatutory Stock Option Plan (the
"Plan") provides for the granting of incentive stock options and
nonstatutory options. The 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.
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).
The Company has adopted the disclosure provisions of SFAS 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 as reported would be reduced for the years ended
January 31, 1999 and 1998 to the pro forma amounts indicated below:
1999 1998
----------- --------------
Net income
As reported $2,080,085 $1,599,874
Pro forma 2,073,495 1,584,144
Basic earnings per common share
As reported $.79 $.63
Pro forma .79 .62
Diluted earnings per common share
As reported $.77 $.61
Pro forma .77 .60
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, 1999 and 1998, respectively: expected
volatility of 60% and 52%; risk-free interest rates of 5.6% and 6.5%; and
expected life of six years for all periods.
16
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE F (continued)
Additional information with respect to the Company's plans for the fiscal
years ended January 31, 2000, 1999 and 1998 is summarized as follows:
2000
----------------------------------------------------------------
Directors' Plan Plan
---------------------------- --------------------------
Weighted- Weighted-
Number average Number average
Of exercise of exercise
Shares price shares price
------ ----- ------ -----
Shares under option
Outstanding at beginning of year 8,000 $4.81 52,500 $3.06
----- ------
Outstanding and exercisable at end of year 8,000 4.81 52,500 3.06
===== ======
Weighted-average remaining contractual
life of options outstanding 2.6 years 5 years
1999
----------------------------------------------------------------
Directors' Plan Plan
---------------------------- --------------------------
Weighted- Weighted-
Number average Number average
Of exercise of exercise
Shares price shares price
-------- -------------- --------- -----------
Shares under option
Outstanding at beginning of year 10,000 $ 3.85 99,528 $2.77
Granted 1,000 10.75 - -
Exercised (3,000) 3.58 (47,028) 2.47
------- -------
Outstanding and exercisable at end of year 8,000 4.81 52,500 3.06
======= =======
Weighted-average remaining contractual
life of options outstanding 3.6 years 6 years
Weighted-average fair value per share
of options granted during 1999 $ 6.59 -
17
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE F (continued)
1998
----------------------------------------------------------------
Directors' Plan Plan
---------------------------- -------------------------
Weighted- Weighted-
Number average Number average
Of exercise of exercise
Shares price shares price
-------- -------------- --------- -----------
Shares under option
Outstanding at beginning of year 18,000 $1.90 150,000 $2.36
Granted 7,000 3.78 - -
Exercised (10,000) 1.44 (50,472) 1.54
Expired (5,000) 1.56 - -
-------- -------------
Outstanding and exercisable at end of year 10,000 3.85 99,528 2.77
======= ========
Weighted-average remaining contractual
life of options outstanding 4.5 years 3.5 years
Weighted-average fair value per share
of options granted during 1998 $2.25 -
Summarized information about stock options outstanding under the two plans
at January 31, 2000 is as follows:
Options outstanding and exercisable
--------------------------------------------------------
Weighted-
Number average
Outstanding remaining Weighted-
at contractual average
Range of January life in exercise
exercise prices 31, 2000 years price
--------------- ------------- ----------- ----------
$2.25 - $3.38 21,500 3.90 $2.39
3.39 - 5.12 38,000 5.10 3.61
10.75 1,000 4.50 10.75
------
$2.25 - $10.75 60,500 4.69 3.29
======
18
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE G - INCOME TAXES
The provision for income taxes is summarized as follows:
Year ended January 31,
--------------------------------------------------
2000 1999 1998
----------- ----------- ----------
Current
Federal $ 756,000 $1,116,000 $ 938,000
State 100,000 97,000 105,000
-------- ----------- ----------
856,000 1,213,000 1,043,000
Deferred (95,000) (71,000) (53,000)
------- ----------- -----------
$ 761,000 $1,142,000 $ 990,000
======== ========= ==========
The following is a reconciliation of the effective income tax rate to the
Federal statutory rate:
Year ended January 31,
----------------------------------------------
2000 1999 1998
--------- --------- ------
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal tax benefit 2.7 2.0 2.7
Nondeductible expenses .8 .3 .5
Foreign operating results generating no current tax
(provision) benefit (2.4) (.6) 2.5
Change in deferred assets (3.8) (2.0)
Other (.5) (.3) .5
------ ---- ------
Effective rate 30.80% 35.4% 38.2%
===== ==== ====
19
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE G (continued)
The tax effects of temporary differences which give rise to deferred tax
assets at January 31, 2000 and 1999 are summarized as follows:
January 31,
------------------------------
2000 1999
--------- ---------
Deferred tax assets
Inventories $385,000 $265,000
Net operating loss carryforward - foreign subsidiaries 89,000 102,000
Accounts receivable 76,000 75,000
Accrued compensation and other 111,000 125,000
------- -------
Gross deferred tax assets 661,000 567,000
------- -------
Deferred tax liabilities
Depreciation 55,000 56,000
-------- --------
Gross deferred tax liabilities 55,000 56,000
-------- --------
Net deferred tax asset $606,000 $511,000
======= =======
Net operating loss carryforwards of $255,000 applicable to the foreign
subsidiaries expire in fiscal 2002 through 2007.
20
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE H - BENEFIT PLANS
Defined Benefit Plan
The Company has a frozen defined benefit pension plan that covers former
employees of an acquired entity. The Company's funding policy is to
contribute annually the recommended amount based on computations made by
its consulting actuary.
The following table sets forth the plan's funded status for the fiscal
years ended January 31:
2000 1999
---------- -------
Change in benefit obligation
Benefit obligation at beginning of year $ 960,634 $ 917,791
Service cost 1,613 1,613
Interest cost 70,579 67,649
Actuarial (gain)loss (32,185) 5,202
Benefits paid (39,149) (31,621)
---------- ---------
Benefit obligation at end of year $ 961,492 $ 960,634
======== ========
Change in plan assets
Fair value of plan assets at beginning of year $ 445,872 $ 467,354
Actual return on plan assets 87,626 (1,779)
Employer contributions 8,500 11,918
Benefits paid (39,149) (31,621)
---------- ---------
Fair value of plan assets at end of year $ 502,849 $ 445,872
======== ========
Funded status (underfunded)/accrued pension liability $(458,643) $(514,762)
======= ========
21
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE H (continued)
The components of net periodic pension cost for the fiscal years ended
January 31 are summarized as follows:
2000 1999 1998
--------- ---------- -------
Service cost $ 1,613 $ 1,613 $ 1,613
Interest cost 70,579 67,649 63,772
Actual return on plan assets (87,626) 1,779 (16,168)
Net amortization and deferral 62,896 (39,469) (10,771)
------- ------- -------
Net periodic pension cost $ 47,462 $ 31,572 $ 38,446
======= ======= =======
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, 2000, approximately 83% of the plan's assets was
held in mutual funds invested primarily in equity securities, 7% was
invested in equity securities and debt instruments and 10% was invested in
money market and other instruments.
Defined Contribution Plan
Pursuant to the terms of the Company's 401(k) plan, substantially all U.S.
employees over 21 years of age with a minimum period of service are
eligible to participate. The 401(k) plan is administered by the Company and
provides for voluntary employee contributions ranging from 1% to 15% of the
employee's compensation. The Company made discretionary contributions of
$57,642, $55,332 and $18,950 in the fiscal years ended January 31, 2000,
1999 and 1998 respectively.
NOTE I - MAJOR SUPPLIER
The Company purchased approximately 74% of its raw materials from one
supplier under licensing agreements for each of the years ended January 31,
2000, 1999 and 1998. The Company expects this relationship to continue for
the foreseeable future. If required, similar raw materials could be
purchased from other sources; although, the Company's competitive position
in the marketplace could be affected.
22
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE J - COMMITMENTS AND CONTINGENCIES
1. Employment Contracts
The Company has employment contracts with three principal officers
expiring through January 2003. 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 $612,500, $215,000 and
$215,000 for the fiscal years ended January 31, 2001, 2002 and 2003,
respectively.
2. Leases
The Company leases the majority of its premises under various operating
leases expiring through fiscal 2005. The leases for the manufacturing
facilities (located in Decatur, Alabama) are with two partnerships
whose partners are principal officers and stockholders of the Company.
One lease expires on August 31, 2004 and requires annual payments of
approximately $365,000 plus certain operating expenses and the second
lease expires on May 31, 2004 and requires annual payments of $199,104
plus certain operating expenses. The Company also leases one customer
service facility pursuant to a one-year lease (renewable at the
Company's option for four additional one-year terms), from an officer
of the Company. Monthly payments are $1,500. In addition, the Company
has several operating leases for machinery and equipment.
The Company has a one-year lease with a related partnership for a
manufacturing facility in the People's Republic of China. The related
lessor is a partnership in which the Company's directors, one officer
and four employees hold partnership interests. This related party
leasing arrangement requires monthly payments of approximately $4,081.
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,
2000 $808,852 $10,578 $545,136
1999 643,174 4,611 402,096
1998 621,162 9,704 405,120
23
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 2000, 1999 and 1998
NOTE J (continued)
Minimum annual rental commitments for the remaining term of the
Company's noncancellable operating leases relating to manufacturing
facilities, office space and equipment rentals at January 31, 2000 are
summarized as follows:
Year ending January 31,
2001 $ 794,000
2002 719,000
2003 632,000
2004 607,000
2005 282,000
----------
$3,034,000
==========
Certain leases require additional payments based upon increases in
property taxes and other expenses.
3. Services Agreement
Pursuant to the terms of a services agreement with an affiliated
entity, principally owned by a principal officer and stockholder of the
Company, the affiliate provided professional and/or skilled labor to
the Company, as needed, at contractual rates of compensation. Such
agreement was cancelable by either the Company or the affiliate upon
thirty-days' written notice. Costs incurred by the Company in
connection with such agreement aggregated $509,000 and $552,000 for the
fiscal years ended January 31, 1999 and 1998, respectively. This
agreement was terminated as of February 1, 1999.
4. Litigation
The Company is involved in various litigation arising during the normal
course of business which, in the opinion of the management of the
Company, will not have a material 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.
24
Lakeland Industries, Inc.
and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
of period expenses accounts Deductions period
----------- ---------- ----------- ---------- ---------
Year ended January 31, 2000
Allowance for doubtful
accounts (a) $200,000 $20,700 $20,700 (b) $200,000
======= ====== ====== =======
Year ended January 31, 1999
Allowance for doubtful
accounts (a) $203,000 $60,263 $63,263 (b) $200,000
======= ====== ====== =======
Year ended January 31, 1998
Allowance for doubtful
accounts (a) $150,000 $69,421 $16,421 (b) $203,000
======= ====== ====== =======
(a) Deducted from accounts receivable.
(b) Uncollectible accounts receivable charged against allowance.
25