FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2003 ---------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number: 0-15535 LAKELAND INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 13-3115216 - ------------------------- ----------------------------------- (State of incorporation) (IRS Employer Identification Number) 711-2 Koehler Ave., Ronkonkoma, New York 11779 - -------------------------------------------------------------------------------- (Address of principal executive offices) (631) 981-9700 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act), YES [_] NO [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 par value, outstanding at December 12, 2003 - 3,268,991 shares. LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES FORM 10-Q The following information of the Registrant and its subsidiaries is submitted herewith: PART I - FINANCIAL INFORMATION: Item 1. Financial Statements: Page ---- Introduction ....................................................................................1 Condensed Consolidated Balance Sheets - October 31, 2003 (unaudited) and January 31, 2003...........2 Condensed Consolidated Statements of Income - Three Months and Nine Months Ended October 31, 2003 and 2002 (unaudited).........................................3 Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended October 31, 2003 (unaudited)..............................................4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 31, 2003 and 2002 (unaudited).........................................................5 Notes to Condensed Consolidated Financial Statements................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............9 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................11 Item 4. Controls and Procedures............................................................................12 PART II - OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K .................................................................12 Signatures Page ...................................................................................13 LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION --------------------- Item 1. Financial Statements: Introduction ------------ CAUTIONARY STATEMENTS This report may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical fact included in this report, including, without limitation, the statements under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position and liquidity, the Company's strategic alternatives, future capital needs, development and capital expenditures (including the amount and nature thereof), future net revenues, business strategies, and other plans and objectives of management of the Company for future operations and activities. Forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate under the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, and factors in the Company's other filings with the Securities and Exchange Commission (the "Commission"), general economic and business conditions, the business opportunities that may be presented to and pursued by the Company, changes in law or regulations and other factors, many of which are beyond the control of the Company. Readers are cautioned that these statements are not guarantees of future performance, and the actual results or developments may differ materially from those projected in 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. 1 LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS October 31, January 31, ASSETS 2003 2003 (Unaudited) Current Assets: ----------- ----------- Cash and cash equivalents......................................$2,467,178 $1,474,135 Accounts receivable, net of allowance for doubtful accounts of $323,000 and $343,000 at October 31, 2003 and January 31, 2003, respectively .........12,134,926 10,364,188 Inventories ...................................................24,170,266 25,470,044 Deferred income taxes ..........................................1,001,133 1,001,133 Other current assets ....................................... 644,558 549,564 ----------- ----------- Total current assets..................................40,418,061 38,859,064 Property and equipment, net of accumulated depreciation of $4,311,000 at October 31, 2003 and $3,708,000 at January 31, 2003............................3,635,164 3,356,835 Other assets.................................................. 846,922 606,835 ----------- ----------- Total Assets $44,900,147 $42,822,734 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable...............................................$3,212,507 $3,014,038 Current portion of long-term liabilities.......................15,809,810 16,657,882 Accrued expenses and other current liabilities.............. 1,227,798 1,262,175 ----------- ----------- Total current liabilities.................................20,250,115 20,934,095 Long-term liabilities ........................................... 531,239 514,572 Deferred income taxes.................................... 14,643 14,643 ----------- ----------- Total Liabilities 20,795,997 21,463,310 ----------- ----------- 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; 3,268,991 and 2,969,107 shares issued and outstanding at October 31, 2003 and January 31, 2003, respectively...........32,690 29,691 Additional paid-in capital.....................................11,853,043 8,762,673 Retained earnings..............................................12,218,417 12,567,060 ----------- ----------- Total stockholders' equity................................24,104,150 21,359,424 ----------- ----------- Total Liabilities and Stockholders' Equity $44,900,147 $42,822,734 =========== =========== See notes to condensed consolidated financial statements. 2 LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED October31, October 31, 2003 2002 2003 2002 ---- ---- ---- ---- Net sales..........................................$21,332,430 $18,534,900 $68,447,260 $58,142,368 Cost of goods sold................................. 16,831,208 15,083,441 55,156,892 46,873,895 ----------- ----------- ----------- ----------- Gross profit........................................ 4,501,222 3,451,459 13,290,368 11,268,473 Operating expenses.................................. 3,034,538 2,445,343 8,867,638 7,880,146 ----------- ----------- ----------- ----------- Operating profit.....................................1,466,684 1,006,116 4,422,730 3,388,327 Other income, net ................................. 14,417 4,090 59,643 44,593 Interest expense.................................... (118,650) (146,325) (399,647) (491,153) ----------- ----------- ----------- ----------- Income before income taxes ...................... 1,362,451 863,881 4,082,726 2,941,767 Provision for income taxes...................... 492,171 368,274 1,358,000 991,483 ----------- ----------- ----------- ----------- Net income .......................................... $870,280 $ 495,607 $2,724,726 $ 1,950,284 =========== =========== =========== =========== Net income per common share*: Basic.........................................$ .27 $ .15 $ .83 $ .60 Diluted.......................................$ .27 $ .15 $ .83 $ .60 Weighted average common shares outstanding*: Basic......................................... 3,268,991 3,262,993 3,268,351 3,259,957 =========== =========== =========== =========== Diluted....................................... 3,274,429 3,272,833 3,274,480 3,272,454 =========== =========== =========== =========== *Adjusted for the 10% stock dividend to shareholders of record on July 31, 2003 and 2002. See notes to condensed consolidated financial statements. 3 LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) Nine months ended October 31, 2003 Additional Common stock paid-in Retained Shares Amount capital earnings Total ------ ------ ------- -------- ----- Balance, January 31, 2003 2,969,107 $ 29,691 $ 8,762,673 $ 12,567,060 $ 21,359,424 Net income 2,724,726 2,724,726 Exercise of stock options 5,500 55 19,945 20,000 10% stock dividend 294,384 2,944 3,070,425 (3,073,369) -- --------- ------------ ------------ ------------ ------------ Balance, October 31, 2003 3,268,991 $ 32,690 $ 11,853,043 $ 12,218,417 $ 24,104,150 ========= ============ ============ ============ ============ See notes to condensed consolidated financial statements. 4 LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED October 31, 2003 2002 ---- ---- Cash Flows from Operating Activities: Net income ..................................................................... $2,724,726 $ 1,950,284 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debts ........................................................ (20,000) 245,042 Depreciation and amortization .................................................. 602,555 447,430 (Increase) decrease in accounts receivable ..................................... (1,750,738) 354,404 Decrease in inventories ....................................................... 1,299,778 1,033,664 (Increase) decrease in other current and non-current assets .................... (335,081) 169,314 Increase (decrease) in accounts payable, accrued expenses and other liabilities ............................................... 180,761 (1,134,022) ---------- ----------- Net cash provided by operating activities ................................................................... 2,702,001 3,066,116 ---------- ----------- Cash Flows from Investing Activities: Purchases of property and equipment ............................................ (880,886) (1,000,862) ---------- ----------- Net cash used in investing activities .......................................... (880,886) (1,000,862) ---------- ----------- Cash Flows from Financing Activities: Proceeds from exercise of stock options ........................................ 20,000 19,662 Net repayments under loan agreements ........................................... (848,072) (1,855,384) ---------- ----------- Net cash used in financing activities .......................................... (828,072) (1,835,722) ---------- ----------- Net increase in cash ........................................................... 993,043 229,532 Cash and cash equivalents at beginning of period ............................... 1,474,135 1,760,635 ---------- ----------- Cash and cash equivalents at end of period ..................................... $2,467,178 $ 1,990,167 ========== =========== Non Cash Financing Activity: Issuance of Stock Dividend ..................................................... 3,073,369 2,376,365 See notes to condensed consolidated financial statements. 5 LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Business...... Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware corporation, organized in April 1982, is engaged primarily in the manufacture of personal safety protective work clothing. The principal market for the Company's products is the United States. No customer accounted for more than 10% of net sales during the nine -month periods ended October 31, 2003 and 2002. 2. Basis of Presentation The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which are, in the opinion of management, necessary to present fairly the consolidated financial information required therein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended January 31, 2003. The results of operations for the three-month and nine-month periods ended October 31, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year. 3. Principles of Consolidation The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Laidlaw, Adams & Peck, Inc. (a Delaware Corporation), Lakeland Protective Wear, Inc. (a Canadian corporation), Lakeland de Mexico S.A. de C.V. (a Mexican corporation), Weifang Lakeland Safety Products, Co., Ltd. (a Chinese corporation), Qing Dao May Tung Healthcare Co., Ltd. ( a Chinese corporation), and Lakeland Industries Europe Ltd. (a U.K. Corporation). All significant intercompany accounts and transactions have been eliminated. 4. Inventories Inventories consist of the following: October 31, January 31, 2003 2003 ---- ---- Raw materials........................$8,863,673 $ 7,839,144 Work-in-process...................... 2,157,882 1,656,942 Finished goods.......................13,148,711 15,973,958 ---------- ----------- $25,470,044 $24,170,266 =========== =========== Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. 5. Stockholders' Equity (a) Stock split On April 28, 2003 and June 24, 2002, the Company announced a 10% stock dividend to shareholders of record on July 31, 2003 and 2002, respectively, with a distribution date of August 31, 2003 and August 30, 2002. Share and per share amounts have been restated to reflect the stock dividend for all periods presented. (b) Earnings per share 6 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 diluted earnings per share calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise based on the average price during the period. The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Nine Months Ended October 31, October 31, 2003 2002 2003 2002 ---- ---- ---- ---- Numerator Net income $ 870,280 $ 495,607 $ 2,724,726 $1,950,284 ========== ========== =========== ========== Denominator Denominator for basic earnings per share (Weighted-average shares) 3,268,991 3,262,993 3,268,351 3,259,957 Effect of dilutive securities: Stock options 5,438 9,840 6,129 12,497 ---------- ---------- ----------- ---------- Denominator for diluted earnings per share (adjusted weighted-average shares) 3,274,429 3,272,833 3,274,480 3,272,454 ========== ========== =========== ========== Basic earnings per share $ .27 $ .15 $ .83 $ .60 ========== ========== =========== ========== Diluted earnings per share $ .27 $ .15 $ .83 $ .60 ========== ========== =========== ========== Excluded from the calculation of earnings per share are options to purchase 0 and 1,210 shares at October 31, 2003 and 2002, respectively, as they were not exercisable or their inclusion would have been anti dilutive. 6. Credit Facility At October 31, 2003, the balance outstanding under the Company's $18 million revolving credit facility amounted to $15,809,810. This facility, which is based on a percentage of eligible accounts receivable and inventory, as defined, has been renewed and expires on July 31, 2004. Borrowings under the facility bear interest at a rate per annum equal to the one-month LIBOR plus 2%. The credit facility is collateralized by substantially all of the assets of the Company and guaranteed by certain of the Company's subsidiaries. The credit facility contains financial covenants, including, but not limited to, minimum levels of earnings and maintenance of minimum tangible net worth and other certain ratios at all times, for which the Company is in compliance. 7. Major Supplier The Company purchased approximately 71.9% and 74.0% of its raw materials from DuPont for the nine months ended October 31, 2003 and 2002, respectively. The Company has been purchasing such raw materials from DuPont for over twenty years, and as one of its largest customers in Tyvek, considers its relationship with this supplier to be excellent. 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 adversely affected. 7 8. Stock Based Compensation The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"as amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transaction and Disclosure"). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and does not recognize compensation expense for its employee stock-based compensation plans when awards are issued at a stock price that is at or above the current market price at the time of the grant. All stock-based awards were fully vested at January 31, 2003. During the nine months ended October 31, 2003 option shares were granted to three directors, upon election or re-election at the Company's Annual Meeting held on June 18, 2003. 9. Impact of Recently Issued Accounting Standards In May 2003, the FASB issued SFAS No.150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected included mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The initial adoption of SFAS No. 150 on August 1, 2003 did not have an impact on the Company's consolidated financial statements. The FASB issued Interpretation No.45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others' and Interpretation of FASB Statements No. 5,57 and 107 and Rescission of FASB Interpretation No. 34. This interpretation expands on the existing accounting guidance and disclosure requirements for most guarantees, including indemnifications. It requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the of the obligations it assumes under that guarantee if that amount is reasonably estimable, and must disclose that information in its interim and annual financial statements. The provisions for initial recognition and measurement of the liability are to be applied on a prospective basis to guarantees issued or modified on or after January 1, 2003. The Company's initial adoption of this statement on January 1, 2003, did not have an impact on its results of operations, financial position, or cash flows. Guarantees issued or modified after January 1, 2003, will be recognized at their fair value in the Company's financial statements. The Company has not issued any guarantees as of October 31, 2003. In January 2003, the Financial Accounting Standards Board ("FASB") issued interpretation No. 46, "Consolidation of Variable Interest Equities,"("FIN 46") which provides guidance on identifying and assessing interests in variable interest entities to decide whether to consolidate that entity. FIN 46 requires consolidation of existing unconsolidated variable interest entities if the entities do not effectively disperse risk among parties involved. The Company adopted the provisions of FIN 46 during the first quarter of 2003, as required, for any variable interest entities created after January 31, 2003. The adoption of this provision of FIN 46 did not have an impact on the Company's consolidated financial position and results of operations. The Company is required to adopt the provisions of FIN 46 for variable interests acquired before February 1, 2003 in the fourth quarter of fiscal 2004. 8 LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. Nine months ended October 31, 2003 compared to the nine months ended October 31, 2002. Net Sales. Net sales for the nine months ended October 31, 2003 increased $10,305,000, (or 17.7%), to $68,447,000 from $58,142,000 reported for the nine months ended October 31, 2002. The increase in sales was principally attributable to improving economic conditions, and partially to SARS related garment demand at our Toronto, Canada and Chinese subsidiaries and to the sales price increase effective May 12, 2003. Gross Profit. Gross profit for the nine months ended October 31, 2003, increased by $2,022,000, (or 17.9%) to $13,290,000 from $11,268,000 for the nine months ended October 31, 2002. Gross profit as a percentage of net sales remain at 19.4% for the nine months ended October 31, 2003 and that reported for the prior year's period. The principal factor affecting the current year's gross profit margins was that commencing March 1, 2003 the Company incurred an increase in the price of raw materials from DuPont, but could not impose a price increase on its products using these DuPont raw materials until May 12, 2003 due to market conditions. Operating Expenses. Operating expenses for the nine months ended October 31, 2003 increased by $988,000 (or 12.5%) to $8,868,000, (or 13% of net sales) from $7,880,000, (or 13.6% of net sales) for the nine months ended October 31, 2002. Operating expenses increased principally as a result of an increase in payrolls, freight, commissions, medical expenses, partially offset by a decrease in allowance for bad debts, R&D expense and VAT refunds received at the China Locations. Interest Expense. Interest expense for the nine months ended October 31, 2003 decreased by $91,000 or (18.5%) to $400,000 from $491,000 for the nine months ended October 31, 2002. This decrease was primarily due to a decrease in average borrowings under the Company's credit facility and to decreasing interest rates. Income Tax Expense. The effective tax rate for the nine months ended October 31, 2003 and 2002 of 33.3% and 33.7%, respectively, deviates from the Federal statutory rate of 34.0%, which is primarily attributable to differing foreign tax rates and tax refunds, and state income taxes. Net Income. As a result of the foregoing, net income increased to $2,725,000 (or 39.7%) for the nine months ended October 31, 2003, from net income of $1,950,000 for the nine months ended October 31, 2002. Three months ended October 31, 2003 compared to the three months ended October 31, 2002. Net Sales. Net sales for the three months ended October 31, 2003 increased $2,797,000, (or 15.1%) to $21,332,000 from $18,535,000 reported for the three months ended October 31, 2002. The increase in sales was principally attributable to improving economic conditions, to the sales price increase effective May 12, 2003 and to a lesser extent to SARS related garment demand at our Toronto, Canada and Chinese subsidiaries. Gross Profit. Gross profit for the three months ended October 31, 2003, increased by $1,050,000 (or 30.4%) to $4,501,000 from $3,451,000 for the three months ended October 31, 2002. Gross profit as a percentage of net sales increased to 21.1% for the three months ended October 31, 2003 from 18.6% reported for the prior year's period. The principal factor affecting gross profit margins was that the Company imposed a sales price increase on its products on May 12, 2003. During the three months ended October 31, 2003 an increase in inventory reserves was recorded. Operating Expenses. Operating expenses for the three months ended October 31, 2003 increased by $590,000 (or 24.1%) to $3,035,000, (or 14.2% of net sales) from $2,445,000, (or 13.2% of net sales) for the three months ended October 31, 2002. Operating expenses increased principally as a result of an increase in freight, commissions, payrolls, professional fees and insurance expenses, offset partially by VAT refunds received at the China locations. Interest Expense. Interest expense for the three months ended October 31, 2003 decreased by $27,000 (or 18.5%) to $119,000 from $146,000 for the three months ended October 31, 2002. This decrease was primarily due to a decrease in average borrowings under the Company's credit facility and to decreasing interest rates. Income Tax Expense. The effective tax rate for the three months ended October 31 2003 and 2002 of 36.1% and 42.6% respectively deviates from the Federal statutory rate of 34.0%, which is primarily attributable to differing foreign tax rates and tax refunds, and state income taxes. 9 Net Income. As a result of the foregoing net income increased to $870,000 (or 75%) for the three months ended October 31, 2003, from net income of $496,000 for the three months ended October 31, 2002. LIQUIDITY and CAPITAL RESOURCES - ------------------------------- Liquidity and Capital Resources. The Company's working capital is equal to $20,168,000 at October 31, 2003. 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 provided by operating activities was $2,702,000 for the nine months ended October 31, 2003 and was due primarily to an increase in accounts receivables of $1,771,000 a decrease in inventories of $1,300,000 and net income from operations of $2,725,000, and by a decrease in accounts payable, accrued expenses and other liabilities of $201,000. Net cash used in investing activities of $881,000 for the nine months ended October 31, 2003 was primarily attributable to construction costs in China. Net cash used in financing activities of $828,000 for the nine months ended October 31, 2003 was primarily attributable to borrowings in connection with the term loan and revolving credit facility. The revolving credit facility permits the Company to borrow up to a maximum of $18 million. The revolving credit agreement expires on July 31, 2004 and has therefore been classified as a short-term liability in the accompanying balance sheet at October 31, 2003. Borrowings under the revolving credit facility amounted to approximately $15,810,000 at October 31, 2003. The Company believes that cash flow from operations and the revolving credit facility will be sufficient to meet its currently anticipated operating, capital expenditures and debt service requirements for at least the next twelve months. Historically, the Company has been able to renew its' credit facility on acceptable terms, however, there can be no assurance that such financing will continue to be available. The Company is in compliance with all covenants under its credit agreement as of October 31, 2003. The Company made its last principal and interest payment on its $3 million term loan facility in April 2003, thereby extinguishing all long-term bank debt. Product Liability Claims have been de minimus over the last 10 years and those claims made have all been dismissed, except one that was settled in 1993 and paid by the Company's insurer. In fiscal 2004 the Company has $5 million of product liability insurance with a $10,000 deductible per occurrence. Presently only one product liability suit is outstanding. The Company's total exposure on this suit is $2,500. Suits are generally in the nature of minor chemical or fire burns where the garments are misused or plaintiffs mistakenly sue the Company, when indeed the Company's products are not involved. All costs of administering and litigating claims is handled by attorneys appointed and paid by the Company's insurer, other than the deductible amount per occurrence, which has ranged from $2,500 to $10,000 over the last 10 years. As of October 31, 2003, the company has $2,467,000 in cash and an unused credit line of $2,190,000. Capital spending for fiscal 2004 included the last payment of $94,500 on the Company's 53,300 square foot facility in An Qui, China and $243,000 on its 90,400 square foot facility in Jiaozhou, China; the latter amount to a construction company upon completion. New capital equipment expenditures (excluding buildings) for the remainder of fiscal 2004 are not expected to exceed $450,000. A reserve for a bond posting and settlement was recorded at January 31, 2003 in the amount of $48,000, relating to a dispute with Mexican officials over custom's law for companies in the maquiladora program. Fiscal 2003 included a reserve for a Canadian customs dispute of which approximately $12,000 remains. The Company has received notice from both government agencies that the disputes have been settled that no additional payments are required for these disputes. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Foreign Currency Activity and Interest Rates - -------------------------------------------- The Company's foreign exchange exposure is principally limited to the relationship of the U.S. Dollar to the Mexican Peso, Canadian Dollar, the Chinese RMB and the EURO. There have been no material changes to our market risks as disclosed in our Annual Report of Form 10-K for the year ended January 31, 2003. 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 its Canadian, and United Kingdom subsidiary sales. 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 and the United Kingdom. Impact of Recently Issued Accounting Standards - ---------------------------------------------- In May 2003, the FASB issued SFAS No.150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected included mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The initial adoption of SFAS No. 150 on August 1, 2003 did not have an impact on the Company's consolidated financial statements. The FASB issued Interpretation No.45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others' and Interpretation of FASB Statements No. 5,57 and 107 and Rescission of FASB Interpretation No. 34. This interpretation expands on the existing accounting guidance and disclosure requirements for most guarantees, including indemnifications. It requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the of the obligations it assumes under that guarantee if that amount is reasonably estimable, and must disclose that information in its interim and annual financial statements. The provisions for initial recognition and measurement of the liability are to be applied on a prospective basis to guarantees issued or modified on or after January 1, 2003. The Company's initial adoption of this statement on January 1, 2003, did not have an impact on its results of operations, financial position, or cash flows. Guarantees issued or modified after January 1, 2003, will be recognized at their fair value in the Company's financial statements. The Company has not issued any guarantees as of October 31, 2003. In January 2003, the Financial Accounting Standards Board ("FASB") issued interpretation No. 46, "Consolidation of Variable Interest Equities,"("FIN 46") which provides guidance on identifying and assessing interests in variable interest entities to decide whether to consolidate that entity. FIN 46 requires consolidation of existing unconsolidated variable interest entities if the entities do not effectively disperse risk among parties involved. The Company adopted the provisions of FIN 46 during the first quarter of 2003, as required, for any variable interest entities created after January 31, 2003. The adoption of this provision of FIN 46 did not have an impact on the Company's consolidated financial position and results of operations. The Company is required to adopt the provisions of FIN 46 for variable interests acquired before February 1, 2003 in the fourth quarter of fiscal 2004. Interest Rate Risk - ------------------ The Company is exposed to interest rate change market risk with respect to its credit facility with a financial institution which is priced based upon LIBOR. At October 31, 2003, $15,810,000 was outstanding under the term-loan and revolving credit facilities. Changes in the above described interest rates during fiscal 2004 will have a positive or negative effect on the Company's interest expense. Each 1% fluctuation in the above rates will increase or decrease interest expense for the Company by approximately $158,100. Each 1% fluctuation in interest rates earned would not increase or decrease interest income on these deposits by a significant amount. 11 Item 4. Controls and Procedures Pursuant to rules adopted by the SEC as directed by Section 302 of the Sarbanes-Oxley Act of 2002, the Company has performed an evaluation of its disclosure controls and procedures (as defined by Exchange Act Rules 13a-4) within 90 days of the date of the filing of this report. Based on this evaluation, the Company's Chief Executive Officer and Principal Accounting Offer have concluded that these procedures are effective in ensuring that information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In addition, there have not been any significant changes in internal controls or other factors that could significantly affect internal controls subsequent to the date of the Company's most recent evaluation. PART II. OTHER INFORMATION Items 1 through 5 are not applicable. Item 6. Exhibits and Reports on Form 8-K: a- 10(g) Employment Agreement between the Company and Raymond J. Smith, dated September 22, 2003. 10(s) Employment Agreement between the Company and Paul C. Smith, dated September 22, 2003. 31 and 32 Certifications Pursant to Section 302 of the Sarbanes-Oxley Act of 2002 b - None 12 _________________SIGNATURES_________________ Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LAKELAND INDUSTRIES, INC. ------------------------- (Registrant) Date: December 12, 2003 /s/Raymond J. Smith --------------------------------------- Raymond J. Smith, President and Chief Executive Officer Date: December 12, 2003 /s/Christopher J. Ryan --------------------------------------- Christopher J. Ryan, Executive Vice President, Secretary and General Counsel Date: December 12, 2003 /s/James M. McCormick --------------------------------------- James M. McCormick, Treasurer (Principal Accounting Officer) 13