UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2005
----------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to_______________
Commission File Number: 0-15535
LAKELAND INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3115216
- ------------------------------ -------------------------------------
(State of incorporation) (IRS Employer Identification Number)
701 Koehler Avenue, Suite 7, Ronkonkoma, New York 11779
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(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 [X] NO [_]
Indicate by check mark whether the registrant is a shell company (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, 2005
- 5,017,046 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 (unaudited):
Page
----
Introduction..........................................................................................1
Condensed Consolidated Balance Sheets October 31, 2005 and January 31, 2005...........................2
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended October 31, 2005 and 2004................................................3
Condensed Consolidated Statement of Stockholders' Equity - Nine Months Ended October 31, 2005.........4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended October 31, 2005
and 2004..............................................................................................5
Notes to Condensed Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................18
Item 4. Controls and Procedures..............................................................................18
PART II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.....................................................................19
Signature Page..................................................................................................20
LAKELAND INDUSTRIES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements:
Introduction
------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This 10-Q may contain certain forward-looking statements. When used in
this 10-Q or in any other presentation, statements which are not historical in
nature, including the words "anticipate," "estimate," "should," "expect,"
"believe," "intend," "project" and similar expressions are intended to identify
forward-looking statements. They also include statements containing a projection
of sales, earnings or losses, capital expenditures, dividends, capital structure
or other financial terms.
The forward-looking statements in this 10-Q are based upon our
management's beliefs, assumptions and expectations of our future operations and
economic performance, taking into account the information currently available to
us. These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties, some of which are not currently
known to us, that may cause our actual results, performance or financial
condition to be materially different from the expectations of future results,
performance or financial condition we express or imply in any forward-looking
statements. Some of the important factors that could cause our actual results,
performance or financial condition to differ materially from expectations are:
o Our ability to obtain fabrics and components from suppliers and
manufacturers at competitive prices;
o Risks associated with our international manufacturing operations;
o Potential fluctuations in foreign currency exchange rates;
o Our ability to respond to rapid technological change;
o Our ability to identify and complete acquisitions or future
expansion;
o Our ability to manage our growth;
o Our ability to recruit and retain skilled employees, including our
senior management;
o Our ability to accurately estimate customer demand;
o Competition from other companies, including some with greater
resources;
o Risks associated with sales to foreign buyers;
o Restrictions on our financial and operating flexibility as a result
of covenants in our credit facilitates;
o Our ability to obtain additional funding to expand or operate our
business as planned;
o The impact of a decline in federal funding for preparations for
terrorist incidents;
o The impact of potential product liability claims;
o Liabilities under environmental laws and regulations;
o Fluctuations in the price of our common stock;
o Variations in our quarterly results of operations;
o The cost of compliance with the Sarbanes-Oxley Act of 2002 and rules
and regulations relating to corporate governance and public
disclosure;
o The significant influence of our directors and executive officer on
our company and on matters subject to a vote of our stockholders;
o The limited liquidity of our common stock;
o The other factors referenced in this 10-Q, including, without
limitation, in the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and
"Business."
We believe these forward-looking statements are reasonable; however, you should
not place undue reliance on any forward-looking statements, which are based on
current expectations. Furthermore, forward-looking statements speak only as of
the date they are made. We undertake no obligation to publicly update or revise
any forward-looking statements after the date of this 10-Q, whether as a result
of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this Form
10-Q might not occur. We qualify any and all of our forward-looking statements
entirely by these cautionary factors.
1
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS October 31, 2005 January 31, 2005
(Unaudited)
Current assets:
Cash and cash equivalents
(which includes $0 and
$3,711,320 of marketable securities at October 31,
2005 and January 31, 2005, respectively) $ 4,423,092 $ 9,185,382
Accounts receivable, net of allowance for doubtful
accounts of $337,000 at October 31, 2005 and
$323,000 at January 31, 2005 12,875,181 13,117,374
Inventories, net of reserves of $359,000 at October 31,
2005 and $396,000 at January 31, 2005 46,081,776 30,906,023
Deferred income taxes 960,734 960,734
Other current assets 784,635 958,491
----------- -----------
Total current assets 65,125,418 55,128,004
Property and equipment, net of accumulated
depreciation of $5,934,000 at October 31, 2005
and $5,304,000 January 31, 2005 7,429,325 5,014,240
Goodwill 840,777 --
Other assets 291,934 171,010
----------- -----------
$73,687,454 $60,313,254
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,957,389 $ 2,710,251
Payable to seller of Mifflin Valley 141,828 --
Accrued expenses and other current liabilities 1,427,417 1,441,912
----------- -----------
Total current liabilities 5,526,634 4,152,163
Other long-term liabilities 532,830 495,330
Deferred income taxes 86,229 86,229
Minority interest in Variable Interest Entities -- 1,112,861
Amount outstanding under revolving credit arrangement 8,401,000 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par; authorized 1,500,000 shares
(none issued)
Common stock, $.01 par; authorized 10,000,000 shares;
issued and outstanding 5,017,046 shares at October
31, 2005 and 4,560,885 shares at January 31, 2005 50,170 45,609
Additional paid-in capital 42,431,220 36,273,046
Retained earnings 16,659,371(1) 18,148,016
----------- -----------
Total stockholders' equity 59,140,761 54,466,671
----------- -----------
$73,687,454 $60,313,254
----------- -----------
(1) A cumulative total of $11,612,824 has been transferred from retained
earnings to additional paid-in-capital and par value of common stock due to
three separate stock dividends paid in 2002, 2003 and 2005. As reflected in the
Condensed Consolidated Statement of Stockholders' Equity, $6,162,735 was
included in the quarter ended April 30, 2005.
The accompanying notes are an integral part of these financial statements.
2
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
October 31, October 31,
2005 2004 2005 2004
---- ---- ---- ----
Net sales $ 22,717,196 $ 22,416,174 $ 73,515,270 $ 72,099,366
Cost of goods sold 17,034,455 17,491,311 55,870,020 56,333,000
------------ ------------ ------------ ------------
Gross profit 5,682,741 4,924,863 17,645,250 15,766,366
Operating expenses 3,652,724 2,923,614 10,862,850 9,500,598
------------ ------------ ------------ ------------
Operating profit 2,030,017 2,001,249 6,782,400 6,265,768
Interest and other income, net 47,104 15,291 136,128 25,600
Interest expense (38,842) (568) (42,854) (207,025)
------------ ------------ ------------ ------------
Income before minority interest 2,038,279 2,015,972 6,875,674 6,084,343
Minority interest in net income of
variable interest entities * * -- 127,186 -- 421,592
------------ ------------ ------------ ------------
Income before income taxes 2,038,279 1,888,786 6,875,674 5,662,751
Provision for income taxes 725,376 698,400 2,201,584 1,904,400
------------ ------------ ------------ ------------
Net income $ 1,312,903 $ 1,190,386 $ 4,674,090 $ 3,758,351
------------ ------------ ------------ ------------
Net income per common share*:
Basic $ .26 $ .24 $ .93 $ .88
------------ ------------ ------------ ------------
Diluted $ .26 $ .24 $ .93 $ .88
------------ ------------ ------------ ------------
Weighted average common shares outstanding*:
Basic 5,017,046 5,016,974 5,017,046 4,289,925
Diluted 5,021,917 5,018,680 5,021,484 4,294,410
*Adjusted for the 10% stock dividend to shareholders of record on April 30, 2005
and reflects 1,280,750 shares offered to the public in June and July 2004.
* * Properties owned by related parties were purchased by the Company in April
2005, thus the Company deemed the impact of FIN46R to be deminimus for the
October 31, 2005 financial statements.
The accompanying notes are an integral part of these financial statements.
3
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine months ended October 31, 2005
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
Balance, January 31, 2005 4,560,885 $ 45,609 $ 36,273,046 $ 18,148,016 $ 54,466,671
10% stock dividend 456,161 4,561 6,158,174 (6,162,735) --
Net Income -- -- -- 4,674,090 4,674,090
------------ ------------ ------------ ------------ ------------
Balance October 31,2005 5,017,046 $ 50,170 $ 42,431,220 $ 16,659,371 $ 59,140,761
------------ ------------ ------------ ------------ ------------
(Reflects the three separate 10% stock dividends issued on July 31, 2002,
2003 and April 30, 2005 which resulted in a cumulative transfer of
$11,612,824 from retained earnings to additional paid-in capital and par
value of common stock). (See Note 1 to Condensed Consolidated Balance
Sheets).
The accompanying notes are an integral part of these financial statements.
4
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
October 31,
2005 2004
---- ----
Cash Flows from Operating Activities
Net income ....................................................... $ 4,674,090 $ 3,758,351
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Reserve for inventory obsolescence ............................... (37,000) 145,000
Depreciation and amortization .................................. 726,686 687,617
(Increase) decrease in accounts receivable ....................... 605,524 (1,186,735)
(Increase) in inventories * ...................................... (14,526,167) (2,520,378)
(Increase) decrease in other assets .............................. 149,822 458,034
Increase (decrease) in accounts payable, accrued
expenses and other liabilities ............................... 1,010,064 (13,219)
Net cash (used in)provided by operating
activities .................................................. (7,396,982) 1,328,670
Cash Flows from Investing Activities:
Purchases of property and equipment .............................. (4,000,457) (674,097)
Purchase of Mifflin Valley ....................................... (1,765,852) --
Purchase of marketable securities ................................ -- (5,894,303)
Net cash used in investing activities ............................ (5,766,309) (6,568,400)
Cash Flows from Financing Activities:
Proceeds from exercise of stock options .......................... -- 54,432
Proceeds from secondary stock offerings .......................... -- 24,369,023
Borrowings (repayments) under loan agreements .................... 8,401,000 (16,784,781)
Net cash provided by financing activities ........................ 8,401,000 7,638,674
Net (decrease) increase in cash .................................. (4,762,290) 2,398,944
Cash and cash equivalents at beginning of period ................. 9,185,382 2,445,271
Cash and cash equivalents at end of period ....................... $ 4,423,092 $ 4,844,215
* Inventory increased as production increased for the second half demand and
accelerated purchases made on raw materials in anticipation of the July 1, 2005
and November 15, 2005 price increases.
The accompanying notes are an integral part of these 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, manufactures and sells a comprehensive
line of safety garments and accessories for the industrial protective clothing
and homeland security markets. The principal market for our products is the
United States. No customer accounted for more than 10% of net sales during the
nine month periods ended October 31, 2005 and 2004, respectively.
2. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by us, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all adjustments 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. While we believe
that the disclosures are adequate to make the information presented not
misleading, it is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended January 31, 2005.
Certain reclassifications between cost of goods sold and operating
expenses were made to the first quarter of fiscal year 2006, in order to be
consistent with the second quarter and year to date of fiscal 2006
classifications for the Mexico and China subsidiaries.
The results of operations for the nine month periods ended October 31,
2005 and 2004, respectively, 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., and Subsidiary (MeiYang Protective Products Co., Ltd., a Chinese
Corporation), Lakeland Protective Wear, Inc. (a Canadian corporation), Weifang
Lakeland Safety Products Co. Ltd. (a Chinese corporation), Qing Dao Maytung
Healthcare Co., Ltd. (a Chinese corporation), Lakeland Industries Europe Ltd. (a
British Corporation), Lakeland de Mexico S.A. de C.V (a Mexican corporation),
Mifflin Valley, Inc. (a Delaware Corporation) and RFB Lakeland Private Ltd. (an
Indian corporation). All significant inter-company accounts and transactions
have been eliminated.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". This interpretation provides guidance with respect
to the consolidation of certain entities, referred to as variable interest
entities, in which an investor is subject to a majority of the risk of loss from
the variable interest entity's activities, or is entitled to receive a majority
of the variable interest entity's residual returns. This interpretation also
provides guidance with respect to the disclosure of variable interest entities
in which an investor maintains an interest but is not required to consolidate.
The provisions of the interpretation were effective immediately for all variable
interest entities created after January 31, 2003, or in which we obtained an
interest after that date. In December 2003, the FASB issued a revision to this
6
pronouncement, FIN 46R, which clarified certain provisions and modified the
effective date from October 1, 2003 to March 15, 2004 for variable interest
entities created before February 1, 2003. The two entities which leased property
and buildings to the Company and were owned by related parties, were
consolidated in our financial statements for the year ended January 31, 2005 are
River Group Holding Co., L.L.P. and POMS Holding Co. Several of the owners of
these entities were directors and officers of Lakeland. Under FIN 46, it is
likely that leases between an entity and its related parties would be considered
a variable interest, even if there is no residual value guarantee or purchase
option. The FASB staff's view is that these elements are implied in a
related-party lease even though they may not be explicitly stated in the lease
agreement.
Effective February 1, 2004 we adopted this pronouncement. As a result,
certain entities which leased property to the Company and were owned by related
parties were determined to be Variable Interest Entities and have been
consolidated since the Company's April 30, 2004 quarterly financial statements.
Creditors, or beneficial interest holders, of the consolidated variable interest
entities have no recourse to the general credit of the Company.
On April 25, 2005, the Company purchased property and buildings from POMS
Holding Co. for a net purchase price of $2,067,584. Reference is made to the
Company's filing on Form 8-K dated April 25, 2005.
In April 2005, the Company entered into a real estate purchase contract
with River Group Holding Co. to purchase a warehouse and the real property
underlying it for $928,686. The Company recorded the purchase on it's April 30,
2005 financial statements. The purchase of this property was completed on May
25, 2005. Thus, the Company deemed the impact of FIN 46R to be de minimis for
the October 31, 2005 financial statements.
There are no variable interest entities in which the "Company" is not the
primary beneficiary.
4. Business Combinations
On August 1, 2005, the Company acquired the assets and operations and
assumed certain liabilities of Mifflin Valley, Inc., ("Mifflin") of Shillington,
PA for an initial purchase price of $1.58 million, subject to certain
adjustments. Final payment was made in November 2005 following the audit of a
closing date balance sheet. The final price amounted to $1.86 million and
included adjustments for the payoff of a revolving loan of $.186 million and
adjustments for inventory, fixed asset values and allowance for doubtful
accounts. Mifflin did approximately $2.6 million of sales in 2004, and $1.5
million for the six months ended June 30, 2005. Mifflin is a manufacturer of
protective clothing specializing in safety and visibility, largely for the
Emergency Services market, and also for the entire public safety and traffic
control market. Mifflin specializes in customized garments to suit customers'
needs, coupled with quality, service, price and delivery. Mifflin's products
include flame retardant garments for the Fire Industry, Nomex clothing for
utilities, and high visibility reflective outerwear for Departments of
Transportation. The purchase was effective as of July 1, 2005 and the results of
Mifflin's operations have been included since July 1 in the Company's reported
results, adding approximately $1.115 million in revenue for the four months
ended October 31, 2005 and $0.02 to earnings per share to the actual reported
results. Had the transaction taken place on February 1, 2005, on a proforma
basis, there would have been an increase in the reported amounts as follows:
Nine months ended October 31, 2005
Pro Forma Results Combined with Mifflin Valley Additions resulting from Mifflin Valley
---------------------------------------------- ---------------------------------------
Sales $75,630,270 $ 2,125,000
Net Income 4,923,090 249,000
Earning per share $ 0.93 $ 0.05
Had the transaction taken place on February 1, 2004, on a proforma basis,
the effect on the reported amounts for the nine months ended October 31, 2004 is
considered to be insignificant.
7
5. Inventories:
Inventories consist of the following:
October 31, January 31,
2005 2005
---- ----
Raw materials ................ $20,577,046 $12,231,264
Work-in-process .............. 3,112,170 2,614,710
Finished Goods ............... 22,392,560 16,060,049
----------- -----------
.............................. $46,081,776 $30,906,023
----------- -----------
Inventories include freight-in, materials, labor and overhead costs and
are stated at the lower of cost (on a first-in-first-out basis) or market.
6. Earnings Per Share:
Basic earnings per share are based on the weighted average number of
common shares outstanding without consideration of common stock equivalents.
Diluted earnings per share are based on the weighted average number of common
and common stock equivalents. The diluted earnings per share calculation takes
into account the shares that may be issued upon exercise of stock options,
reduced by the shares that may be repurchased with the funds received from the
exercise, based on the average price during the period.
The following table sets forth the computation of basic and diluted
earnings per share at October 31, 2005 and 2004, adjusted, retroactively, for
the 10% Stock dividends to Shareholders on April 30, 2005.
Three Months Ended Nine Months Ended
October 31, October 31,
2005 2004 2005 2004
---- ---- ---- ----
Numerator
Net income ............................. $1,312,903 $1,190,386 $4,674,090 $3,758,351
Denominator
Denominator for basic earnings per share 5,017,046 5,016,974 5,017,046 4,289,925
(Weighted-average shares)
Effect of dilutive securities ... 4,871 1,706 4,438 4,485
---------- ---------- ---------- ----------
Denominator for diluted earnings per share ...... 5,021,917 5,018,680 5,021,484 4,294,410
---------- ---------- ---------- ----------
(adjusted weighted-average shares)
Basic earnings per share ........................ $ .26 $ .24 $ .93 $ .88
---------- ---------- ---------- ----------
Diluted earnings per share ...................... $ .26 $ .24 $ .93 $ .88
---------- ---------- ---------- ----------
Options to purchase 11,000 shares of the Company's common stock have been
excluded for the nine months ended October 31, 2005, as their inclusion would be
anti-dilutive.
8
7. Revolving Credit Facility
At October 31, 2005, the balance outstanding under our new $25 million
five year revolving credit facility amounted to $8.401 million. The credit
facility is collateralized by substantially all of the assets of the Company.
The credit facility contains financial covenants, including, but not limited to,
fixed charge ratio, funded debt to EBIDTA ratio, inventory and accounts
receivable collateral coverage ratio, with respect to which the Company was in
compliance at October 31, 2005 and for the period then ended. The weighted
average interest rate for the nine month period ended October 31, 2005 was
4.39%.
8. Major Supplier
We purchased 75.6% of our raw materials from one supplier during the
nine-month period ended October 31, 2005. We expect this relationship to
continue for the foreseeable future. If required, similar raw materials could be
purchased from other sources; however, our competitive position in the
marketplace could be adversely affected.
9. Stock Based Compensation
We have adopted the disclosure provisions of SFAS No. 123(R), "Accounting
for Stock-Based Compensation" (SFAS 123(R)). In compliance with SFAS 123(R), 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. We have
also adopted the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This pronouncement
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reporting results. If we 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(R),
the Company's net income and earnings per share as reported would be reduced for
the quarters and nine months ended October 31, 2005 and 2004 to the pro forma
amounts indicated below:
Three Months Ended Nine Months Ended
October 31, October 31,
2005 2004 2005 2004
---- ---- ---- ----
Net income as reported $ 1,312,903 $ 1,190,386 $ 4,674,090 $ 3,758,351
Less:
Option expense based on fair value method -- -- 9,627 11,186
----------- ----------- ----------- -----------
Pro forma $ 1,312,903 $ 1,190,386 $ 4,664,463 $ 3,747,155
----------- ----------- ----------- -----------
Basic earnings per common share
As reported $ .26 $ .24 $ .93 $ .88
----------- ----------- ----------- -----------
Pro forma $ .26 $ .24 $ .93 $ .87
----------- ----------- ----------- -----------
Diluted earnings per common share
As reported $ .27 $ .24 $ .93 $ .88
----------- ----------- ----------- -----------
Pro forma $ .27 $ .24 $ .93 $ .87
----------- ----------- ----------- -----------
9
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
quarters and nine months ended October 31, 2005 and 2004: expected volatility of
87% and 64%, respectively; risk-free interest rate of 3.6% and 2.93%,
respectively; expected dividend yield of 0.0%; and expected life of six years.
All stock-based awards were fully vested at October 31, 2005 and 2004. Earnings
per share and options granted have been adjusted to reflect the 10% stock
dividends to stockholders of record as of April 30, 2005. During the three
months ended October 31, 2005, no options were granted or exercised.
10. Manufacturing Segment Data
Domestic and international sales are as follows in millions of dollars:
Three Months Ended Nine Months Ended
October 31, October 31,
2005 2004 2005 2004
---- ---- ---- ----
Domestic 20.7 91.2 $20.5 91.5% 65.7 89.4 $66.1 91.7%
International 2.0 8.8 1.9 8.5% 7.8 10.6 6.0 8.3%
----- ----- ----- ----- ----- ----- ----- -----
Total 22.7 100% $22.4 100% 73.5 100% $72.1 100%
----- ----- ----- ----- ----- ----- ----- -----
We manage our operations by evaluating each of our geographic locations. Our
North American operations include our facilities in Decatur, Alabama (primarily
the distribution to customers of the bulk of our products and the manufacture of
our chemical, glove and disposable products), Celaya, Mexico (primarily
disposable, glove and chemical suit production) and St. Joseph, Missouri and
Shillington, Pennsylvania (primarily woven products production). We also
maintain three manufacturing facilities in China (primarily disposable and
chemical suit production). Our China facilities and our Decatur, Alabama
facility produce the majority of the Company's products. The accounting policies
of these operating entities are the same as those described in Note 1 to the
Company's Annual Report on Form 10-K for the year ended January 31, 2005. We
evaluate the performance of these entities based on operating profit which is
defined as income before income taxes, interest expense and other income and
expenses. We have small sales forces in Canada, Europe and China which sell and
distribute products shipped from the United States, Mexico or China. The table
below represents information about reported manufacturing segments for the three
and nine months noted therein:
Three Months Ended Nine Months Ended
October 31, October 31,
(in millions of dollars) (in millions of Dollars)
2005 2004 2005 2004
---- ---- ---- ----
Net Sales:
North America $ 23.8 $ 25.2 $ 77.7 $ 76.1
China 2.1 1.4 6.9 5.6
Less inter-segment sales (3.2) (4.2) (11.1) (9.6)
-------- -------- -------- --------
Consolidated sales $ 22.7 $ 22.4 73.5 $ 72.1
-------- -------- -------- --------
Operating Profit:
North America $ 2.0 $ 1.9 $ 5.8 $ 5.6
China (.0) .2 1.1 .8
Less inter-segment profit (loss) (.1) (.1) (.2) (.1)
-------- -------- -------- --------
Consolidated profit $ 1.9 $ 2.0 $ 6.7 $ 6.3
-------- -------- -------- --------
Identifiable Assets (at Balance Sheet date or change
during quarter):
North America $ 6.8 $ 1.1 $ 63.9 $ 51.6
China -- .1 9.8 8.2
-------- -------- -------- --------
Consolidated assets $ 6.8 $ 1.2 $ 73.7 $ 59.8
-------- -------- -------- --------
Depreciation and Amortization Expense:
North America $ .1 $ .1 $ .4 $ .4
China .1 .2 .3 .3
-------- -------- -------- --------
Consolidated depreciation expense $ .2 $ .3 $ .7 $ .7
-------- -------- -------- --------
10
11. Effects of Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires that the fair value
of such equity instruments be recognized as an expense in the historical
financial statements as services are performed. Prior to SFAS No. 123(R), only
certain pro forma disclosures of fair value were required. The provisions of
this statement are effective for the first annual reporting period that begins
after June 15, 2005. Management does not believe there will be a significant
impact as a result of adopting this statement
In November 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 151 "Inventory Costs." This statement amends Accounting
Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so
abnormal" criterion that under certain circumstances could have led to the
capitalization of these items. SFAS No. 151 requires that idle facility expense,
excess spoilage, double freight and re-handling costs be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." SFAS 151 also requires that allocation of fixed production overhead
expenses to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for all fiscal years beginning
after June 15, 2005. Management does not believe there will be a significant
impact as a result of adopting this statement.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of
Non-monetary Assets", an amendment of Accounting Principles Board ("APB")
Opinion No. 29, which differed from the International Accounting Standards
Board's ("IASB") method of accounting for exchanges of similar productive
assets. Statement No. 153 replaces the exception from fair value measurement in
APB No. 29, with a general exception from fair value measurement for exchanges
of non-monetary assets that do not have commercial substance. The statement is
to be applied prospectively and is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not
believe that SFAS No. 153 will have a material impact on its results of
operations or cash flows.
12. Real Estate Purchases
In April 2005, the Company entered into two separate real estate purchase
contracts, one with POMS and one with River Group, both related parties. The
Company has purchased the land and buildings in Decatur, Alabama that it has
leased from these related parties since their inception, POMS (1984) and River
Group (1999). The purchase price was $2,056,000 for the POMS property and
$925,000 for the River Group property determined by averaging three separate and
independent real estate appraisals. The partnerships were accounted for in
accordance with FIN46R and were reflected in the financial statements for the
fiscal year ended January 31, 2005.
11
In contemplation of the real estate purchases, the Company entered into an
agreement, dated March 4, 2005, with an officer of Lakeland (who is a partner in
POMS & River Group) to acquire his interest for $565,367 ($411,200 for POMS and
$154,167 for River Group), at the same proportional valuation as the overall
property.
On April 25, 2005 the Company closed on the real estate purchase contract
with POMS paying a net amount of $1,656,384 ($2,056,000-$411,200 already paid
+$11,584 in closing costs). The Company paid rent from February 1, 2005 until
April 25, 2005 of $86,157, which is charged to rent expense.
On May 25, 2005 the Company closed on the real estate purchase contract
with River Group paying a net amount of $774,519 ($925,000-$154,167 already paid
+$3,686 in closing costs). The Company paid River Group rent from February 1,
2005 until May 25, 2005 amounting to $63,157, which is charged to rent expense.
At April 30, 2005, the Company recorded the asset land value of $230,000,
the asset building value of $2,751,000, closing costs of $11,584 and a payable
to River Group in the amount of $770,833. The Company recorded the purchase of
the land and building from River Group as of April 30, 2005, since the contract
of sale was finalized and the closing was deferred only until the release of an
easement on the property. Total rent expense for the two properties for the nine
months ended October 31, 2005 amounted to $146,577. The Company recorded
depreciation on each of the two properties from the closing date forward.
Upon conclusion of these two real estate purchase contracts, the Company
no longer has related party transactions requiring the recording of variable
interest entities under FIN46R. Other than the above entries, the Company has
not recorded the effects of FIN46R in the current fiscal year. The Company deems
any such impact to be immaterial.
Building purchase in New York:
On May 10, 2005 the Company purchased a 6,250 square foot office
condominium to serve as its Corporate Headquarters. The purchase price was
$640,000 plus $9,161 in closing costs. The lease on its previous location
amounted to $51,202 annually and expired on June 30, 2005. The new address is
701 Koehler Avenue, Suite 7, Ronkonkoma, NY 11779.
13. Related Party Transactions
In connection with the asset purchase agreement, dated July 2005, between the
Company and Mifflin Valley, Inc., the Company entered into a five year lease
agreement with the seller (now an employee of the Company) to rent the
manufacturing facility of an annual rental of $55,560, or a per square foot
rental of $3.00. This amount was obtained prior to the acquisition from an
independent appraisal of the fair market rental value per square feet. In
addition the company will at January 1, 2006 be renting 12,000 sq ft of
warehouse space in PA from this employee, on a month by month basis, for the
monthly amount of $3.35 per square foot.
14. Formation of New Subsidiary
During the quarter ended October 31, 2005, a new subsidiary RFB Lakeland Private
LTD. (an Indian Corporation) was formed to execute the supply agreement with RFB
Latex Private LTD. dated October 25, 2005, and to exercise the option to buy its
industrial glove business for $2.7 million after one year, if certain conditions
are met and approved by the Company's Board of Directors. The Company's minimum
commitment is approximately $250,000.
15. Contingencies - Tax Audit
The Company's Federal Income Tax returns for the fiscal years ended January 31,
2003 and 2004 are currently under audit by the Internal Revenue Service. The
final results of these audits cannot be estimated by management. It is
anticipated that the audits will be concluded by the end of Fiscal 2006.
12
Item 2. LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of
Financial Condition and Results of Operations
You should read the following summary together with the more detailed
business information and consolidated financial statements and related notes
that appeared in Form 10-K and Annual Report and in the documents that were
incorporated by reference into Form 10-K for the year ended January 31, 2005.
This document may contain certain "forward-looking" information within the
meaning of the Private Securities Litigation Reform Act of 1995. This
information involves risks and uncertainties. Our actual results may differ
materially from the results discussed in the forward-looking statements.
Overview
We manufacture and sell a comprehensive line of safety garments and
accessories for the industrial protective clothing and homeland security
markets. Our products are sold by our in-house sales force and independent sales
representatives to a network of over 800 safety and mill supply distributors.
These distributors in turn supply end user industrial customers such as
chemical/petrochemical, automobile, steel, glass, construction, smelting,
janitorial, pharmaceutical and high technology electronics manufacturers, as
well as hospitals and laboratories. In addition, we supply federal, state and
local governmental agencies and departments such as fire and police departments,
airport crash rescue units, the Department of Defense, Central Intelligence
Agenc0y, Federal Bureau of Investigation and the Centers for Disease Control.
We have operated manufacturing facilities in Mexico since 1995 and in
China since 1996. Beginning in 1995, we moved the labor intensive sewing
operation for our limited use/disposable protective clothing lines to these
facilities. Our facilities and capabilities in China and Mexico allow access to
a less expensive labor pool than is available in the United States and permit us
to purchase certain raw materials at a lower cost than they are available
domestically. As we have increasingly moved production of our products to our
facilities in Mexico and China, we have seen improvements in the profit margins
for these products. We are at the half way point of moving production of our
reusable woven garments and gloves to these facilities and expect to complete
this process by the third quarter of fiscal 2007. As a result, we expect to see
profit margin improvements for these product lines as well.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, net sales
and expenses, and disclosure of contingent assets and liabilities. We base
estimates on our past experience and on various other assumptions that we
believe to be reasonable under the circumstances and we periodically evaluate
these estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition. We derive our sales primarily from our limited
use/disposable protective clothing and secondarily from our sales of high-end
chemical protective suits, fire fighting and heat protective apparel, gloves and
arm guards, and reusable woven garments. Sales are recognized when goods are
shipped to our distributors at which time title and the risk of loss passes.
Sales are reduced for sales returns and allowances. Payment terms are generally
net 30 days for United States sales and net 90 days for international sales.
Inventories. Inventories include freight-in, materials, labor and overhead
costs and are stated at the lower of cost (on a first-in, first-out basis) or
market. Provision is made for slow-moving, obsolete or unusable inventory.
Allowance for Doubtful Accounts. We establish an allowance for doubtful
accounts to provide for accounts receivable that may not be collectible. In
establishing the allowance for doubtful accounts, we analyze the collectibility
of individual large or past due accounts customer-by-customer. We establish
reserves for accounts that we determine to be doubtful of collection.
13
Income Taxes and Valuation Reserves. We are required to estimate our
income taxes in each of the jurisdictions in which we operate as part of
preparing our consolidated financial statements. This involves estimating the
actual current tax in addition to assessing temporary differences resulting from
differing treatments for tax and financial accounting purposes. These
differences, together with net operating loss carry forwards and tax credits,
are recorded as deferred tax assets or liabilities on our balance sheet. A
judgment must then be made of the likelihood that any deferred tax assets will
be realized from future taxable income. A valuation allowance may be required to
reduce deferred tax assets to the amount that is more likely than not to be
realized. In the event we determine that we may not be able to realize all or
part of our deferred tax asset in the future, or that new estimates indicate
that a previously recorded valuation allowance is no longer required, an
adjustment to the deferred tax asset is charged or credited to net income in the
period of such determination. The Company's Federal Income Tax returns for the
fiscal years ended January 31, 2003 and 2004 are currently under audit by the
Internal Revenue Service. The final results of these audits cannot be estimated
by management. It is anticipated that the audits will be concluded by the end of
Fiscal 2006.
Valuation of Goodwill and Other Intangible Assets. On February 1, 2002, we
adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets," which provides that goodwill and other intangible
assets are no longer amortized, but are assessed for impairment annually and
upon occurrence of an event that indicates impairment may have occurred.
Goodwill impairment is evaluated utilizing a two-step process as required by
SFAS No. 142. Factors that we consider important that could identify a potential
impairment include: significant underperformance relative to expected historical
or projected future operating results; significant changes in the overall
business strategy; and significant negative industry or economic trends. When we
determine that the carrying value of intangibles and goodwill may not be
recoverable based upon one or more of these indicators of impairment, we measure
any potential impairment based on a projected discounted cash flow method.
Estimating future cash flows requires our management to make projections that
can differ materially from actual results.
In July 2005 (in a transaction which closed August 1, 2005) the Company
purchased Mifflin Valley, Inc. As a result of this purchase Goodwill was
recorded in the amount of $840,777, after reflecting certain adjustments per the
contract, resulting in a total purchase price of $1,907,680 of which $141,828
has been paid in November, 2005.
Self-Insured Liabilities. We have a self-insurance program for certain employee
health benefits. The cost of such benefits is recognized as expense based on
claims filed in each reporting period and an estimate of claims incurred but not
reported during such period. Our estimate of claims incurred but not reported is
based upon historical trends. If more claims are made than were estimated or if
the costs of actual claims increases beyond what was anticipated, reserves
recorded may not be sufficient and additional accruals may be required in future
periods. We maintain separate insurance to cover the excess liability over set
single claim amounts and aggregate annual claim amounts.
14
Significant Balance Sheet Fluctuation October 31, 2005 as compared to January
31, 2005
Cash and cash equivalents decreased by $4.76 million as the Company
purchased real property in Alabama and New York and acquired Mifflin Valley in
Pennsylvania. Inventory increased $15.1 million as production increased for the
second half demand and accelerated purchases made on raw materials in
anticipation of the July 1, 2005 and November 2005 price increases. Goodwill of
$.841 million recorded in October 2005 relates to the acquisition of Mifflin
Valley, Inc.
Accounts payable increased with the accelerated purchase of raw materials
and a payable of $.141 million for the purchase of Mifflin Valley, Inc. At
October 31, 2005 the Company had an outstanding loan balance of $8.401 million
under its new facility with Wachovia Bank, N.A. Total stockholder's equity
increased by the net income for the period of $4.67 million
Nine months ended October 31, 2005 as compared to the nine months ended October
31, 2004
Net Sales. Net sales increased $1.4 million, or 1.96% to $73.5 million for the
nine months ended October 31, 2005 from $72.1 million for the nine months ended
October 31, 2004. The increase was primarily due to the inclusion of Mifflin
Valley Inc results of $1.1 million, and to customers buying forward as a result
of our selling price increase effective June 20, 2005, on Tyvek and TyChem
garments. Continued growth in sales by our Canadian and UK subsidiaries and the
acquisition of Mifflin Valley, Inc. added to this increase, offset partially by
decreased sales in chemical protection garments due to a softness in government
purchasing.
Gross Profit. Gross profit increased $1.8 million or 11.9% to $17.6 million for
the nine months ended October 31, 2005 from $15.8 million for the nine months
ended October 31, 2004. Gross profit as a percentage of net sales increased to
23.9% for the nine months ended October 31, 2005 from 21.9% for the nine months
ended October 31, 2004, primarily due to the continuation of cost reduction
programs shifting production from the US to China and Mexico, a selling price
increase on our Tyvek lines on June 20, 2005, and the inclusion of Mifflin
Valley, Inc results which have a higher margin than Lakeland overall, partially
offset by rising raw material costs.
Operating Expenses. Operating expenses increased $1.4 million, or 14.3% to $10.9
million for the nine months ended October 31, 2005 from $9.5 million for the
nine months ended October 31, 2005. As a percent of sales, operating expenses
increased to 14.8% for the nine months ended October 31, 2005 from 13.2% for the
nine months ended October 31, 2004. The $1.4 million increase in operating
expenses in the nine months ended October 31, 2005 as compared to the nine
months ended October 31, 2004 was principally due to increases (decreases) in:
Salaries $0.517 million
Sales commissions $(0.355 million)
Sales related expenses $0.215 million
Insurance $(0.032 million)
Pension reversal $(0.048 million)
Consulting $0.140 million
Professional fees $0.211 million
All other G&A $0.185 million
Freight expenses $0.077 million
Bad debt expenses $0.035 million
Currency fluctuation $0.034 million
Minority interest $0.422 million
The above increases in Consulting and Professional Fees are principally a
result of compliance with the Sarbanes-Oxley requirements.
Increase in Minority Interest results from the credit of $.422 million in
the prior year which no longer applies.
15
The above increases in salaries, sales related expenses and other G+A are
in part due to the inclusion of the operations of Mifflin Valley Inc for the
four months July through October 2005.
In addition, in its third fiscal quarter the Company reclassified certain
employees' salary previously included in cost of goods sold to administration on
selling expenses. This was done to more closely match the Company's costing
system, and totaled approximately $100,000. Previous year's results were not
reclassified.
Interest Expenses. Interest expenses decreased by $0.164 million for the nine
months ended October 31, 2005 as compared to the nine months ended October 31,
2004 because we paid off our credit facility in full on June 18, 2004 using the
proceeds of our secondary stock offering.
Income Tax Expense. Income tax expenses consist of federal, state, and foreign
income taxes. Income tax expenses increased $0.297 million, or 15.6%, to $2.20
million for the nine months ended October 31, 2005 from $1.904 million for the
nine months ended October 31, 2004. Our effective tax rate was 32.0% and 33.6%
for the nine months ended October 31, 2005 and 2004, respectively. Our effective
tax rate varied from the federal statutory rate of 34% due primarily to lower
foreign taxes, partially offset by state taxes. Our effective tax rate declined
due to an increase in production in China.
Minority Interest. Minority interest in net income of variable interest entities
decreased $0.422 million for the nine months ended October 31, 2005 as a result
of the purchase in fiscal 2006 of the related party property that was accounted
for under FIN46R during fiscal 2005. As a result, those entities were
consolidated in our statement of income for the nine months ended October 31,
2004.
Net Income. Net income increased $0.916 million, or 24.4% to $4.674 million for
the nine months ended October 31, 2005 from $3.758 million for the nine months
ended October 31, 2004. The increase in net income primarily resulted from cost
reduction programs and the continuing production shifts from the U.S. to China
and Mexico, partially offset by rising raw material costs.
Three months ended October 31, 2005 as compared to the three months ended
October 31, 2004
Net Sales. Net sales increased $.3 million, or 1.3%, to $22.7 million for the
three months ended October 31, 2005 from $22.4 million for the three months
ended October 31, 2004. Sales increased due to the Mifflin Valley, Inc.
acquisition and to continued sales growth and customer base in our Canadian and
U.K. subsidiaries. This increase was partially offset by a decrease in chemical
suit sales due to a shift to more low-end garments and fewer high-end, higher
margin garments sold in the second quarter last year and for the loss of
business in the Southeast US due to hurricanes closing distribution and end
users.
Gross Profit. Gross profit increased $.758 million, or 15.4%, to $5.7 million
for the three months ended October 31, 2005 from $4.9 million for the three
months ended October 31, 2004. Gross profit as a percentage of net sales
increased to 25.0% for the three months ended October 31, 2005 from 22.0% for
the three months ended October 31, 2004, as cost saving programs continued, a
full quarter of higher selling prices was incurred, further shifts of production
to Mexico and China, and the inclusion of Mifflin Valley, Inc. results which
have a higher margin than Lakeland overall.
Operating Expenses. Operating expenses increased $0.73 million, or 24.9% to $3.7
million for the three months ended October 31, 2005 from $2.9 million for the
three months ended October 31, 2004. As a percent of sales, operating expenses
increased to 16.1% for the three months ended October 31, 2005 from 13.1% for
the three months ended October 31, 2004. The $.73 million increase in operating
expenses in the three months ended October 31, 2005 as compared to the three
months ended October 31, 2004 was principally due to increases (decreases) in:
Sales related expenses $0.125 million
Salaries $0.399 million
Consulting $0.027 million
Professional fees $0.043 million
All other G&A $0.092 million
Payroll Taxes $0.044 million
Minority Interest $0.127 million
16
The above increases in Consulting and Professional Fees are annually a
result of compliance with Sarbanes-Oxley requirements. The increase in minority
interest results from the credit of operating expenses in the prior year no
longer applicable.
The above increases in salaries, sales related expenses and other G+A are
in part due to the inclusion of the operations of Mifflin Valley Inc for the
quarter ended October 31, 2005.
In addition, in its third fiscal quarter the Company reclassified certain
employees' salary previously included in cost of goods sold to administration on
selling expenses. This was done to more closely match the Company's costing
system, and totaled approximately $100,000. Previous year's results were not
reclassified.
Interest Expense. Interest expenses increased by $0.04 million for the three
months ended October 31, 2005 as compared to the three months ended October 31,
2004. Borrowings under our new credit facility were incurred for the purchase of
raw materials before the November 2005 price increase.
Income Tax Expenses. Income tax expenses consist of federal, state and foreign
income taxes. Income tax expense increased $0.027 million, or 3.9% to $0.725
million for the three months ended October 31, 2005 from $0.698 million for the
three months ended October 31, 2004. Our effective tax rates were 35.6% and
36.9% in the three months ended October 31, 2005 and 2004, respectively. Our
effective tax rate varied from the federal statutory rate of 34% due primarily
to lower foreign tax rates, partially offset by state taxes. Our effective tax
rate declined due to an increase in production in China.
Minority Interest. Minority interest in net income of variable interest entities
decreased $0.127 million for the three months ended October 31, 2005 as a result
of the purchase in fiscal 2006 of the related party property that was accounted
for under FIN46R during fiscal 2005. As a result, those entities were
consolidated in our statement of income for the three months ended October 31,
2005.
Net Income. Net income increased $0.123 million, or 10.3% to $1.31 million for
the three months ended October 31, 2005 from $1.19 million for the three months
ended October 31, 2004. The increase in net income primarily resulted from cost
reduction programs and the continuing production shifts from the U.S. to China
and Mexico, and the June 20, 2005 selling price increase, partially offset by
rising raw materials.
Liquidity and Capital Resources
Cash Flows
----------
As of October 31, 2005 we had cash and cash equivalents of $4.4 million
and working capital of $59.6 million, a decrease of $4.7 million and an increase
of $0.8 million, respectively, from January 31, 2005. Our primary sources of
funds for conducting our business activities have been from cash flow provided
by operations and borrowings under our credit facilities described below. We
require liquidity and working capital primarily to fund increases in inventories
and accounts receivable associated with our net sales and, to a lesser extent,
for capital expenditures.
We have built up inventory in part for seasonal reasons (the third quarter
being seasonally slow) in anticipation of the traditionally busier fourth and
first quarters; and in part to take advantage of a vendor raw material price
increase which took effect in November. We believe that by sustaining higher
levels of inventory, we gain a competitive advantage in the marketplace.
Net cash used in operating activities of $7.4 million for the nine months
ended October 31, 2005 was due primarily to net income from operations of $4.7
million, an increase in accounts payable of $1.01 million, offset by an increase
in inventories of $14.5 million and an decrease in accounts receivable of $0.605
million. Net cash used in investing activities of $5.8 million in the nine
months ended October 31, 2005, was due to purchases of property and equipment
and the Mifflin Valley acquisition in 2005.
Net cash provided by operating activities of $1.33 million for the nine
months ended October 31, 2004 was due primarily to net income from operations of
$3.8 million, an increase in accounts receivable of $1.19 million, and an
decrease in accounts payable of $0.013 million, and an increase in inventories
of $2.5 million. Net cash used in investing activities of $6.6 million in the
nine months ended October 31, 2004, was due to marketable securities in 2004.
17
Net cash provided by financing activities in the nine months ended October
31, 2004 was primarily attributable to borrowings under our credit facilities
and to the proceeds from the secondary stock offering in 2004.
We currently have one credit facility - a $25 million revolving credit, of
which we had $8.401 million of borrowings outstanding as of October 31, 2005. On
July 10, 2005 the Company entered into a $25 million five year secured revolving
loan agreement to replace the former two facilities, one of which was to expire
on July 31, 2005. Our credit facility requires that we comply with specified
financial covenants relating to fixed charge ratio, debt to EBIDTA coverage, and
inventory and accounts receivable collateral coverage ratios. These restrictive
covenants could affect our financial and operational flexibility or impede our
ability to operate or expand our business. Default under our credit facility
would allow the lender to declare all amounts outstanding to be immediately due
and payable. Our lender has a security interest in substantially all of our
assets to secure the debt under our credit facility. As of October 31, 2005, we
were in compliance with all covenants contained in our credit facility.
We believe that our current cash position of $4.4 million, our cash flow
from operations along with borrowing availability under our $25 million
revolving credit facility will be sufficient to meet our currently anticipated
operating, capital expenditures and debt service requirements for at least the
next 12 months.
Capital Expenditures
--------------------
Our capital expenditures principally relate to purchases of manufacturing
equipment, computer equipment, and leasehold improvements, as well as payments
related to the construction of our facilities in China. Our facilities in China
are not encumbered by commercial bank mortgages and thus Chinese commercial
mortgage loans may be available with respect to these real estate assets if we
need additional liquidity. Our capital expenditures are expected to be
approximately $4.8 million in total; $3.6 million to purchase our Decatur
Alabama facilities and similar facilities adjacent to our New York corporate
headquarters (all of which were rented for $615,000 annually) and $1.2 million
for capital equipment, primarily computer equipment and apparel manufacturing
equipment in fiscal 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in market risk from that disclosed
in our Annual Report on Form 10-K for the fiscal year ended January 31,
2005.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - Lakeland Industries,
Inc.'s Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of Lakeland Industries, Inc.'s disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(c) under
the Securities Exchange Act) as of the end of the period covered by this
report, have concluded that, based on the evaluation of these controls and
procedures, the Company's disclosure controls and procedures were
effective.
Changes in Internal Control Over Financial Reporting - Lakeland
Industries, Inc.'s management, with the participation of Lakeland
Industries, Inc.'s Chief Executive Officer and Chief Financial Officer,
has evaluated whether any change in the Company's internal control over
financial reporting occurred during the third quarter of fiscal 2006.
Based on that evaluation, management concluded that there has been no
change in Lakeland Industries, Inc.'s internal control over financial
reporting during the third quarter of fiscal 2006 that has materially
affected, or is reasonably likely to materially affect, Lakeland
Industries, Inc.'s internal control over financial reporting.
Through the twenty one months ended October 31, 2005 additional expense
has been incurred relating to documenting and testing the systems of internal
controls. The Company hired an internal auditor in July 2004 and has contracted
with an independent consultant for services related to overall Sarbanes-Oxley
Act compliance and more specifically Section 404, in February 2004. The total
amount expensed so far is approximately $581,000 and was expected to increase in
fiscal 2006 by $250,000 due to the hiring of additional accounting personnel.
PART II. OTHER INFORMATION
Items 1, 2, 3,4 and 5 are not applicable.
18
Item 6. Exhibits and Reports on Form 8-K:
a - 10.14* Employment Agreement, dated November 29, 2005,
between Lakeland Industries, Inc. and Gary Pokrassa, CPA.
10.18* Supply Agreement between Lakeland Industries, Inc.
subsidiary RFB Lakeland Industries Private Ltd. and RFB latex
Private Ltd. and Option to Purchase its Industrial Glove
business after one year.
10.19* Option to Purchase and Other Agreement between RFB
Lakeland Industries Private Limited and RFB Latex Limited
10.20* Asset Purchase Agreement Upon Exercise Of Option
between Lakeland Industries, Inc, and RFB Lakeland Industries
Private Limited
10.21* Employment Agreement, between RFB Lakeland Industries
Private Limited and P.S. Ratra
10.22* Employment Agreement, between RFB Lakeland Industries
Private Limited and Kamal Ratra
10.23* Shareholders Agreement, between Lakeland Industries,
Inc. and P.S. Ratra
b - On September 1, 2005, the Company filed a Form 8-K under
Item 2.02, relating to a Notice of Teleconference call for
4:30 PM September 7, 2005.
On September 7, 2005, the Company filed a Form 8-K for the
purpose of furnishing under Items 2.02 and 9.01 a press
release announcing results of operations for the quarter ended
July 31, 2005.
On October 12, 2005, the Company filed a Form 8-K under Item
2.01 regarding the signing of Supply Agreement with RFB Latex
Private Ltd. (an Indian Corporation), with an option to buy
its Industrial Glvoe business for $2.7 million after one year.
On October 25, 2005, the Company filed a Form 8-K under Item
8.01 regarding the increase in its Tyvek General Protection
and Tychem Contamination Control Garment prices.
---------------------
* Filed herein
19
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, 2005 /s/ Christopher J. Ryan
-----------------------
Christopher J. Ryan,
Chief Executive Officer, President,
Secretary and General Counsel
(Principal Executive Officer and
Authorized Signatory)
Date: December 12, 2005 /s/Gary Pokrassa
----------------
Gary Pokrassa,
Chief Financial Officer
(Principal Accounting Officer and
Authorized Signatory)
20