Dear Fellow Shareholders:
It is my pleasure to tell you that the fiscal year ended January 31, 1998,
set new records for your company. Sales climbed to an all-time high of $47.3
million compared with $41.8 million in fiscal 1997. Net income increased to a
record $1,600,000 from the prior year's net profit of $1,063,000. Stated on a
diluted per share basis, earnings reached $0.61, which represented a gain of 49%
over the $0.41 per share profit in fiscal 1997.
Fiscal 1998 saw major progress regarding our ongoing plans to reduce
production costs while simultaneously improving the quality of our products. Our
new factory in Mexico, mentioned in last year's letter, is running at peak
efficiency. Augmenting the Mexican production is a new manufacturing facility in
China. The establishment of this factory further reduces the costs of several of
our major sales items. Also, it enables us to compete more efficiently with
foreign manufacturers both in the United States and Pacific Rim markets.
"Very proud" would be the phrase of choice to best describe my feelings
regarding the ISO 9002 certification of our Decatur, Alabama facility during
fiscal 1998. The entire staff worked diligently as a team, and because of their
cooperation and resolve, came through the exacting international certification
process with flying colors.
Another of this past year's significant accomplishments was the
installation and implementation of a new computer software package to serve the
entire corporation. It enables the company to maintain even better control over
its financial and inventory areas, and has already confronted and complied with
- -- two years ahead of time -- those potential computer problems generally
associated with the arrival of the year 2000.
Lakeland's relationships with its prime vendors continue to be firm and
cordial. The licensing program with DuPont involving our most popular products,
Tyvek(R) and Tychem(R), has proven to be very successful. We have been advised
by DuPont and other vendors that their preparation for the year 2000 is going
well. They do not expect major changes.
On the financial side, we concluded an agreement with a major financial
institution allowing us to fund safely the growth we have enjoyed during fiscal
1998 and that which lies in your company's promising future.
Importantly, we have enlarged our Internet web site to provide both
potential customers and shareholders the ability to see what Lakeland has to
offer by way of a full product line.
The markets we are selling to currently are expanding as more
manufacturers become aware of the savings they can realize by providing
employees with appropriate safety clothing. Additionally, we are seeing a much
larger interest in chemical- and biological-resistant clothing. This is due to
the unfortunate threat of increased terrorist activities using chemical and
biological agents throughout the world.
I would like to extend my personal thanks to the Board of Directors for
their valued advice and support of our efforts to steer Lakeland on a successful
course. I would like to thank as well the members of our management staff, all
of our employees worldwide, our vendors and our shareholders for their
unflagging support. We expect next year to be another record breaker for your
company.
Respectfully submitted,
/s/Raymond J. Smith
- -------------------
Raymond J. Smith
President and Chief Executive Officer
-1-
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
For the Years Ended January 31,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Net sales ............................. $ 47,263 $ 41,792 $ 40,189 $ 35,185 $ 30,143
Gross profit .......................... 9,195 7,237 6,288 6,346 4,763
Operating expenses (1) ................ 6,157 5,212 4,882 4,704 4,739
Operating profit ...................... 3,038 2,024 1,406 1,642 24
Income (loss) before income
taxes and cumulative effect of change
in accounting principle (2) .......... 2,590 1,576 956 2,000 (137)
Income (loss) before
cumulative effect of change
in accounting principle .............. 1,600 1,063 587 1,421 (278)
Cumulative effect of change in
accounting principle (3) ............. 241
Net income (loss) ..................... 1,600 1,063 587 1,421 (37)
Earnings (loss) per share - Basic (4)
Income (loss) before cumulative
effect of change in accounting ....... $ .63 $ .42 $ .23 $ .56 $ (.11)
Cumulative effect of change in
accounting principle ................. -- -- -- -- .10
----------- ----------- ----------- ----------- -----------
Net income (loss) ..................... $ .63 $ .42 $ .23 $ .56 ($ .01)
Earnings (loss) per share - Diluted (4)
Income (loss) before cumulative
effect of change in accounting ....... .61 .41 .22 .54 (0.11)
Cumulative effect of change in
accounting principle ................. -- -- -- -- 0.10
----------- ----------- ----------- ----------- -----------
Net Income (loss) ..................... $ .61 $ .41 $ .22 $ .54 ($ .01)
=========== =========== =========== =========== ===========
Weighted average common
shares outstanding:
Basic ......................... 2,558,541 2,550,000 2,550,000 2,550,000 2,550,000
Diluted ....................... 2,627,425 2,609,700 2,635,506 2,641,000 2,550,000
BALANCE SHEET DATA (at end of year):
Working capital ....................... $ 18,903 $ 14,018 $ 13,618 $ 7,190 $ 8,871
Total assets .......................... 25,812 18,573 19,263 15,562 13,103
Current liabilities ................... 5,007 2,920 3,894 6,813 2,464
L/T liabilities ....................... 9,217 5,746 6,492 441 3,680
Stockholders' equity .................. $ 11,518 $ 9,825 $ 8,762 $ 8,175 $ 6,754
(1) Includes a write-off of $583,669 in Notes receivable due from one customer
in 1994.
(2) Includes $625,000 gain recorded in 1995 relating to the favorable
settlement of an outstanding litigation.
(3) Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), which requires an asset and liability approach to accounting for
income taxes. The cumulative effect as of February 1, 1993, of the adoption
of SFAS No. 109, resulted in a fiscal 1994 benefit of $241,000.
(4) Earnings per share has been restated in accordance with SFAS No. 128,
"Earnings Per Share".
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Fiscal Year Ended January 31, 1998 Compared to Fiscal Year Ended January 31,
1997
Net sales for the year ended January 31, 1998 increased $5,471,000 or
13.1% to $47,263,000 from $41,792,000 reported for the year ended January 31,
1997. Increased prices and unit shipments of various protective garment products
are the principal reason for this upward movement in sales. This industry,
however, continues to be highly competitive. Net sales increased 10.2% during
the quarter ended January 31, 1998 as compared to the immediate preceding
quarter, principally as the result of the Company's ability to maintain
inventory levels to meet sales demand.
Gross profit as a percentage of net sales increased to 19.5% for the year
ended January 31, 1998 from 17.3% reported for the prior year, principally due
to price increases instituted at the beginning of the fiscal year and market
price stabilization during the course of the year. The prior year was negatively
affected as a result of the competitive and economic climate of the protective
clothing industry. Margins decreased to 16.5% during the quarter ended January
31, 1998 as compared to the immediate preceding quarter due to meeting
competitive pricing situations and additionally some products imported for sale
during the fourth quarter were sold at lower margins.
Operating expenses as a percentage of net sales increased to 13% for year
ended January 31, 1998 from 12.5% for the prior year, as sales continued to
increase at a rate of 13% without a corresponding increase in selling and
general and administrative expenses.
Interest expense decreased slightly consistent with outstanding
borrowings.
As a result of the foregoing, operating results increased to net income of
$1,600,000 (up 50.5%) for the year ended January 31, 1998 from net income of
$1,063,000 for the year ended January 31, 1997.
Fiscal Year Ended January 31, 1997 Compared to Fiscal Year Ended January 31,
1996
Net sales for the year ended January 31, 1997 increased $1,603,000 or
3.99% to $41,792,000 from $40,189,000 reported for the year ended January 31,
1996. Increased prices and unit shipments of various protective garment products
are the principal reason for this upward movement in sales. This industry,
however, continues to be highly competitive. Net sales increased 13.7% during
the quarter ended January 31, 1997 as compared to the immediate preceding
quarter, principally as the result of the Company's ability to maintain
inventory levels to meet sales demand.
Gross profit as a percentage of net sales increased to 17.3% for the year
ended January 31, 1997 from 15.6% reported for the prior year, principally due
to the price increase instituted at the beginning of the fiscal year and price
stabilization. The prior year was negatively affected as a result of the
competitive and economic climate of the protective clothing industry. Margins
decreased to 14.8% during the quarter ended January 31, 1997 as compared to the
immediate preceding quarter as some products imported for sale during the fourth
quarter were sold at lower margins.
Operating expenses as a percentage of net sales increased to 12.5% for
year ended January 31, 1997 from 12.1% for the prior year, as sales continue to
increase without a corresponding increase in selling and general and
administrative expenses as well as the prior year having benefited from a
reduction in pension expense.
Interest expense remained the same consistent with outstanding borrowings.
As a result of the foregoing, operating results increased to net income of
$1,063,000 for the year ended January 31, 1997 from net income of $587,000 for
the year ended January 31, 1996.
-3-
LIQUIDITY AND CAPITAL RESOURCES
Lakeland has historically met its cash requirements through funds
generated from operations and borrowings under a revolving credit facility. On
December 12, 1997, the Company entered into a new $10 million facility with a
financial institution. This facility matures on November 30, 1999. Interest
charges under this credit facility are calculated on various optional formulas
using LIBOR or the 30 day commercial paper rates, as defined. The Company's
January 31, 1998 balance sheet shows a strong current ratio and working capital
position and management believes that its positive financial position, together
with its new 2 year credit facility and proposed amendment to increase the
facility by $3 million, will provide sufficient funds for operating purposes for
the next twelve months.
The Company has substantially completed its program to prepare computer
systems and applications for the Year 2000. The Company expects to incur
additional internal staff costs as well as consulting and other expenses related
to enhancements necessary to complete the systems for the Year 2000. The Company
is also communicating with customers and suppliers with whom it conducts
business to help identify and resolve any potential Year 2000 issues. Management
has not quantified the remaining Year 2000 compliance and related expenses to be
incurred, however, management believes the remaining costs will not have a
material affect on its financial position.
IMPACT OF INFLATION
Management believes inflation has not had a material effect on the
Company's operations or its financial condition. There can be no assurance,
however, that the Company's business will not be affected by inflation in the
future.
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Prior to September 9, 1986, there was no public market for the Company's
Common Stock. On September 9, 1986, the effective date of the Company's initial
public offering, the Company's Common Stock began trading in the
over-the-counter market. On June 2, 1987, the Company's Common Stock began
trading in the over-the-counter market as a National Market Issue. The Company's
Common Stock trades on The Nasdaq Stock Market under the symbol "LAKE". It is
listed in major publications under "Lakeland".
The following table sets forth the high and low trade prices, as reported
by NASDAQ for the last two fiscal years:
Fiscal 1998 Fiscal 1997
-------------------------- -------------------------
High Low High Low
---- --- ---- ---
First Quarter 3 7/8 2 13/16 4 1/4 3 1/8
Second Quarter 5 9/16 3 15/32 4 5/8 2 3/4
Third Quarter 9 4 3/4 4 1/16 3
Fourth Quarter 10 6 3/4 3 1/2 2 3/4
First Quarter fiscal 1998 10 1/2 7 3/4 3 3/4 2 13/16
(through April 17, 1998)
The Company has never declared or paid a cash dividend on its Common
Stock, and the Company has no present intention of declaring or paying any cash
dividends on its Common Stock in the foreseeable future.
As of April 10, 1998, there were 135 holders of record of the Common Stock
of the Company. There are believed to be in excess of 500 beneficial
shareholders in addition to those of record, since over 1 million shares are
held in street name by Cede & Co. a large financial clearing house.
-4-
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Lakeland Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Lakeland
Industries, Inc. and Subsidiaries (the "Company") as of January 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended January 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of January 31, 1998 and 1997, and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the
period ended January 31, 1998, in conformity with generally accepted accounting
principles.
We have also audited Schedule II - Valuation and Qualifying Accounts for each of
the three years in the period ended January 31, 1998. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
/s/GRANT THORNTON LLP
- ---------------------
GRANT THORNTON LLP
Melville, New York
April 15, 1998
-5-
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
January 31,
ASSETS 1998 1997
----------- -----------
CURRENT ASSETS
Cash and cash equivalents ............................. $ 222,700 $ 504,940
Accounts receivable, net of allowance for doubtful
accounts of $203,000 and $150,000 at January 31,
1998 and 1997, respectively ....................... 6,953,538 5,893,594
Inventories ........................................... 15,858,052 9,894,156
Deferred income taxes ................................. 511,000 469,000
Other current assets .................................. 364,697 176,901
----------- -----------
Total current assets .............................. 23,909,987 16,938,591
PROPERTY AND EQUIPMENT, net ............................... 1,392,346 989,667
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, net of accumulated amortization of $218,000
and $198,000 at January 31, 1998 and 1997, respectively 327,120 347,116
OTHER ASSETS .............................................. 182,412 297,742
----------- -----------
$25,811,865 $18,573,116
=========== ===========
The accompanying notes are an integral part of these statements.
-6-
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
January 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- -----------
CURRENT LIABILITIES
Accounts payable ................................ $ 4,294,241 $ 2,534,999
Accrued compensation and benefits ............... 283,187 223,090
Other accrued expenses .......................... 379,143 112,224
Current portion of long-term liabilities ........ 50,000 50,000
----------- -----------
Total current liabilities ................. 5,006,571 2,920,313
LONG-TERM LIABILITIES ............................... 9,216,669 5,745,789
DEFERRED INCOME TAXES ............................... 71,000 82,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par; 1,500,000 shares
authorized; none issued
Common stock, $.01 par; 10,000,000 shares
authorized; 2,610,472 and 2,550,000 shares issued
and outstanding at January 31, 1998 and 1997,
respectively ................................ 26,105 25,500
Additional paid-in capital ...................... 6,073,358 5,981,226
Retained earnings ............................... 5,418,162 3,818,288
----------- -----------
11,517,625 9,825,014
----------- -----------
$25,811,865 $18,573,116
=========== ===========
The accompanying notes are an integral part of these statements.
-7-
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Fiscal year ended January 31,
1998 1997 1996
------------ ------------ ------------
Net sales ................................ $ 47,262,519 $ 41,792,469 $ 40,188,916
Cost of goods sold ....................... 38,067,351 34,555,786 33,901,232
------------ ------------ ------------
Gross profit ................... 9,195,168 7,236,683 6,287,684
------------ ------------ ------------
Operating expenses
Selling and shipping ................. 3,001,500 2,569,702 2,691,193
General and administrative ........... 3,155,605 2,625,866 2,163,621
Research and development ............. -- 16,718 27,298
------------ ------------ ------------
Total operating expenses ....... 6,157,105 5,212,286 4,882,112
------------ ------------ ------------
Operating profit ............... 3,038,063 2,024,397 1,405,572
------------ ------------ ------------
Other (expense) income
Interest expense ..................... (497,739) (510,757) (511,180)
Interest income ...................... 35,371 27,293 19,938
Other income ......................... 14,179 35,363 41,292
------------ ------------ ------------
(448,189) (448,101) (449,950)
------------ ------------ ------------
Income before income taxes ..... 2,589,874 1,576,296 955,622
Income tax expense ....................... (990,000) (513,000) (369,000)
------------ ------------ ------------
NET INCOME ..................... 1,599,874 1,063,296 586,622
Net income per common share
Basic ................................ $ .63 $ .42 $ .23
============ ============ ============
Diluted .............................. $ .61 $ .41 $ .22
============ ============ ============
Weighted average common shares outstanding
Basic ................................ 2,558,541 2,550,000 2,550,000
============ ============ ============
Diluted .............................. 2,627,425 2,609,700 2,635,506
============ ============ ============
The accompanying notes are an integral part of these statements.
-8-
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Fiscal years ended January 31, 1998, 1997 and 1996
Additional
Common stock paid-in Retained
Shares Amount capital earnings Total
--------- ----------- ----------- ----------- -----------
Balance, January 31, 1995 2,550,000 $ 25,500 $ 5,981,226 $ 2,168,370 $ 8,175,096
Net income .............. 586,622 586,622
--------- ----------- ----------- ----------- -----------
Balance, January 31, 1996 2,550,000 25,500 5,981,226 2,754,992 8,761,718
Net income .............. 1,063,296 1,063,296
--------- ----------- ----------- ----------- -----------
Balance, January 31, 1997 2,550,000 25,500 5,981,226 3,818,288 9,825,014
Net income .............. 1,599,874 1,599,874
Exercise of stock options 60,472 605 92,132 92,737
--------- ----------- ----------- ----------- -----------
Balance, January 31, 1998 2,610,472 $ 26,105 $ 6,073,358 $ 5,418,162 $11,517,625
========= =========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
-9-
Lakeland Industries, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended January 31,
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities
Net income ................................................ $ 1,599,874 $ 1,063,296 $ 586,622
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Deferred income taxes ..................................... (53,000) (70,000) 5,000
Depreciation and amortization ............................. 435,849 342,963 272,135
Gain on sale of property .................................. -- (4,530) --
(Increase) decrease in operating assets
Accounts receivable ....................................... (1,059,944) (913,620) (571,104)
Inventories ............................................... (5,963,896) 1,350,085 (2,385,943)
Other current assets ...................................... (54,602) 314,415
Other assets .............................................. 23,688 (46,653) 130,550
Increase (decrease) in operating liabilities
Accounts payable .......................................... 1,759,242 (930,553) 641,004
Accrued expenses and other liabilities .................... 355,463 759 6,108
----------- ----------- -----------
Net cash (used in) provided by operating activities ....... (2,957,326) 1,106,162 (1,645,353)
----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment - net ................. (803,487) (283,358) (577,756)
Principal payments on note receivable ..................... 7,104 7,082 6,015
Proceeds from sale of property ............................ -- 10,414 --
----------- ----------- -----------
Net cash used in investing activities ..................... (796,383) (265,862) (571,741)
----------- ----------- -----------
Cash flows from financing activities
Net borrowings (reductions) under line of credit agreements 3,416,232 (700,000) 2,485,150
Proceeds from exercise of stock options ................... 92,737 -- --
Deferred financing costs .................................. (37,500) -- (23,335)
----------- ----------- -----------
Net cash provided by (used in) financing activities ....... 3,471,469 (700,000) 2,461,815
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .......................................... (282,240) 140,300 244,721
Cash and cash equivalents at beginning of year ............ 504,940 364,640 119,919
----------- ----------- -----------
Cash and cash equivalents at end of year .................. $ 222,700 $ 504,940 $ 364,640
=========== =========== ===========
The accompanying notes are an integral part of these statements.
-10-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1998, 1997 and 1996
NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
1. Business
Lakeland Industries, Inc. and Subsidiaries (the "Company"), a
Delaware corporation, organized in April 1982, is engaged primarily
in the manufacture of disposable and reusable protective work
clothing. The principal market for the Company's products is in the
United States. No customer accounted for more than 10% of net sales
during the fiscal years ended January 31, 1998, 1997 and 1996.
2. Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Laidlaw,
Adams & Peck, Inc., (formerly Fireland Industries, Inc.), Lakeland
Protective Wear, Inc. (a Canadian corporation) and Lakeland de Mexico
S.A. de C.V. (a Mexican corporation). All significant intercompany
accounts and transactions have been eliminated.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method.
4. Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated service
lives, on a straight-line basis. Leasehold improvements and leasehold
costs are amortized over the term of the lease or service lives of
the improvements, whichever is shorter. The costs of additions and
improvements which substantially extend the useful life of a
particular asset are capitalized. Repair and maintenance costs are
charged to expense.
5. Excess of Cost Over the Fair Value of Net Assets Acquired
The excess of cost over the fair value of net assets acquired
(goodwill) is amortized on a straight-line basis over a 30-year
period. On an ongoing basis, management reviews the valuation and
amortization of goodwill to determine possible impairment by
considering current operating results and comparing the carrying
value to the anticipated undiscounted future cash flows of the
related assets.
6. Income Taxes
Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and
liabilities and loss carryforwards and tax credit carryforwards for
which income tax benefits are expected to be realized in future
years. A valuation allowance would be established to reduce deferred
tax assets if it is more likely than not that all, or some portion
of, such deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
-11-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE A (continued)
7. Earnings Per Share
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," which requires
public companies to present basic earnings per share and, if
applicable, diluted earnings per share. In accordance with SFAS No.
128, all comparative periods have been restated as of January 31,
1998. Basic earnings per share are based on the weighted average
number of common shares outstanding without consideration of
potential common stock. Diluted earnings per share are based on the
weighted average number of common and potential common shares
outstanding. The calculation takes into account the shares that may
be issued upon exercise of stock options, reduced by the shares that
may be repurchased with the funds received from the exercise, based
on the average price during the fiscal year.
8. Statement of Cash Flows
The Company considers highly liquid temporary cash investments with
an original maturity of three months or less to be cash equivalents.
Cash equivalents consist of money market funds. The market value of
the cash equivalents approximates cost.
Supplemental cash flow information for the fiscal years ended January
31 is as follows:
1998 1997 1996
---- ---- ----
Interest paid $446,550 $494,102 $431,555
Income taxes paid 825,648 325,242 618,853
9. Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade
receivables. Concentration of credit risk with respect to these
receivables is generally diversified due to the large number of
entities comprising the Company's customer base and their dispersion
across geographic areas within the United States. The Company
routinely addresses the financial strength of its customers and, as a
consequence, believes that its receivable credit risk exposure is
limited.
10. Foreign Operations and Foreign Currency Translation
The Company maintains manufacturing operations and uses independent
contractors in Mexico and the People's Republic of China. It also
maintains a sales and distribution entity located in Canada. The
Company is vulnerable to currency risks in these countries.
The monetary assets and liabilities of the Company's foreign
operations are translated into U.S. dollars at current exchange
rates, while nonmonetary items are translated at historical rates.
Revenues and expenses are generally translated at average exchange
rates for the year. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are included in the results of
operations as incurred.
-12-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE A (continued)
11. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
year-end and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The significant estimates include the allowance for doubtful accounts
and inventory reserves. It is reasonably possible that events could
occur during the upcoming year that could change such estimates.
12. New Pronouncement Not Yet Adopted
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits," which
is effective for the Company's fiscal year ending January 31, 1999.
This statement standardizes the disclosure requirements for pensions
and other postretirement benefits, requires additional information on
changes in the benefit obligation and fair values of plan assets and
eliminates certain disclosures that are no longer useful. Adoption of
SFAS No. 132 is not expected to have a material effect on the
Company's financial statements.
NOTE B - NOTE RECEIVABLE
In October 1994, the Company sold its Ohio facility to an unrelated
third party for $187,500 ($25,000 cash and a $162,500 mortgage note).
The selling price of the property approximated the net book value at
the time of sale. The mortgage note is payable in 47 consecutive
monthly payments of $1,523, including principal and interest at an
annual rate of 8%, until October 1998 when the entire unpaid balance
of the indebtedness shall be due and payable. This note is secured by
a mortgage on real estate located in the City of Newark, Licking
County, Ohio. The unpaid balance was $140,251 and $147,355 at January
31, 1998 and 1997, respectively.
NOTE C - INVENTORIES
Inventories consist of the following at January 31:
1998 1997
------------ ----------
Raw materials $ 2,672,719 $2,669,254
Work-in-process 4,168,376 3,124,141
Finished goods 9,016,957 4,100,761
------------ ----------
$ 15,858,052 $9,894,156
============ ==========
-13-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at January 31:
Useful life
in years 1998 1997
----------- ---------- ----------
Machinery and equipment 3 - 10 $3,076,002 $2,409,648
---------- ----------
Furniture and fixtures 3 - 10 223,190 157,722
Leasehold improvements Lease term 257,252 185,587
---------- ----------
3,556,444 2,752,957
Less accumulated depreciation and amortization 2,164,098 1,763,290
---------- ----------
$1,392,346 $ 989,667
========== ==========
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's principal financial instrument consists of its
outstanding revolving credit facility. The Company believes that the
carrying amount of such debt approximates the fair value as the
variable interest rate approximates the current prevailing interest
rate.
NOTE F - LONG-TERM LIABILITIES
Long-term liabilities consist of the following at January 31:
1998 1997
---------- ----------
Revolving credit facility $8,816,232 $5,400,000
Pension liability (Note K) 450,437 395,789
---------- ----------
9,266,669 5,795,789
Less current portion of pension liability 50,000 50,000
---------- ----------
Long-term liabilities $9,216,669 $5,745,789
========== ==========
During December 1997, the Company entered into a new $10,000,000
secured revolving credit facility (the "facility") with a financial
institution with an initial expiration date of November 30, 1999.
Borrowings under the facility bear interest at a rate per annum equal
to the one-month LIBOR or the 30-day commercial paper rate, as
defined, plus 1.75%, with interest payable monthly. At January 31,
1998, interest on outstanding borrowings was based on the commercial
paper rate option (7.2%). The facility is collateralized by
substantially all the assets of the Company and guaranteed by certain
of the Company's subsidiaries. The facility requires the Company to
maintain a minimum tangible net worth, at all times.
-14-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE F (continued)
During August 1995, the Company entered into an $8,000,000,
three-year secured revolving credit facility with a bank. Under this
secured revolving credit facility, which was replaced with the new
facility in December 1997, the Company's maximum available borrowings
were based upon eligible accounts receivable and inventories, as
defined. Borrowings under the revolving credit facility incurred
interest at a rate per annum equal to the prime commercial lending
rate or LIBOR plus 200 points. A fee of 1/2% per annum was charged to
the Company on the unused portion of such facility. The loan was
collateralized by substantially all the assets of the Company.
The maximum amounts borrowed under the revolving lines of credit
during the fiscal years ended January 31, 1998 and 1997 were
$10,000,000 and $7,000,000, respectively, and the average interest
rate during each period was 7.5%.
NOTE G - COMMITMENTS AND CONTINGENCIES
1. Employment Contracts
The Company has employment contracts with three principal officers
expiring through January 2001. Such contracts are automatically
renewable for one- or two-year terms, unless 30 to 120 days' notice
is given by either party. Pursuant to such contracts, the Company is
committed to aggregate base remuneration of $572,500, $572,500 and
$397,500 for the fiscal years ended January 31, 1999, 2000 and 2001,
respectively.
2. Leases
The Company leases the majority of its premises under various
operating leases expiring through fiscal 2003. The lease for the
manufacturing facility (located in Decatur, Alabama) is with a
partnership whose partners are principal officers and stockholders of
the Company. This lease expires on August 31, 1999 and requires
annual payments of approximately $365,000 plus certain operating
expenses. The Company also leases two manufacturing facilities
pursuant to month-to-month leases from an officer of the Company.
Monthly payments are $3,100. In addition, the Company has several
operating leases for machinery and equipment.
In January 1998, the Company entered into a month-to-month lease for
a manufacturing facility in the People's Republic of China. The
lessor is a partnership of which the Company's directors, one officer
and four employees hold partnership interests. This leasing
arrangement requires monthly payments of $3,024.
Total rental expense under all operating leases is summarized as
follows:
Total Rentals
Gross sublease paid to
rental rental related
expense income parties
------- ------ -------
Year ended January 31,
1998 $621,162 $ 9,704 $405,120
1997 581,161 3,024 392,160
1996 483,690 20,011 369,150
-15-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE G (continued)
Minimum annual rental commitments for the remaining term of the
Company's noncancellable operating leases relating to manufacturing
facilities, office space and equipment rentals at January 31, 1998
are summarized as follows:
Year ending January 31,
1999 $ 626,695
2000 411,815
2001 108,652
2002 35,902
2003 23,200
----------
$1,206,264
==========
Certain leases require additional payments based upon increases in
property taxes and other expenses.
3. Services Agreement
Pursuant to the terms of a services agreement with an affiliated
entity, principally owned by a principal officer and stockholder of
the Company, the affiliate provides professional and/or skilled labor
to a division of the Company, as needed, at contractual rates of
compensation. Such agreement is cancelable by either the Company or
the affiliate upon thirty days' written notice. Costs incurred by the
Company in connection with such agreement aggregated $552,000,
$426,000 and $520,000 for the fiscal years ended January 31, 1998,
1997 and 1996, respectively.
4. Litigation
The Company is involved in various litigation arising during the
normal course of business which, in the opinion of the management of
the Company, will not have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
5. Self-insurance
The Company maintains a self-insurance program for that portion of
health care costs not covered by insurance. The Company is liable for
claims up to defined limits. Self-insurance costs are based upon the
aggregate of the liability for reported claims and an estimated
liability for claims incurred but not reported.
NOTE H - STOCKHOLDERS' EQUITY AND STOCK OPTIONS
The Nonemployee Directors' Option Plan (the "Directors' Plan")
provides for an automatic one-time grant on options to purchase 5,000
shares of common stock to each nonemployee director elected or
appointed to the Board of Directors. Under the Directors' Plan,
60,000 shares of common stock have been authorized for issuance.
Options become exercisable commencing six months from the date of
grant and expire six years from the date of grant. In addition, all
nonemployee directors re-elected to the Company's Board of Directors
at any annual meeting of the stockholders will be automatically
granted additional options to
-16-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE H (continued)
purchase 1,000 shares of common stock on each of such dates. In April
1997, the Company extended the term on 5,000 expiring options for an
additional six years.
The Company's 1986 Incentive and Nonstatutory Stock Option Plan (the
"Incentive Plan") provides for the granting of incentive stock
options and nonstatutory options. The Incentive Plan provides for the
grant of options to key employees and independent sales
representatives to purchase up to 400,000 shares of the Company's
common stock, upon terms and conditions determined by a committee of
the Board of Directors which administers the plan. Options are
granted at not less than fair market value (110 percent of fair
market value as to incentive stock options granted to ten percent
stockholders) and are exercisable over a period not to exceed ten
years (five years as to incentive stock options granted to ten
percent stockholders).
The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The Company
applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans
and does not recognize compensation expense for its stock-based
compensation plans. If the Company had elected to recognize
compensation expense based upon the fair value at the date of grant
for awards under these plans consistent with the methodology
prescribed by SFAS 123, the effect on the Company's net income and
earnings per share for the year ended January 31, 1996 would not be
material in relation to the consolidated financial statements and the
Company's net income and earnings per share for the years ended
January 31, 1998 and 1997 would be reduced to the pro forma amounts
indicated below:
1998 1997
---------- ----------
Net income per common share
As reported $1,599,874 $1,063,296
Pro forma 1,584,144 974,555
Basic earnings per common share
As reported $.63 $.42
Pro forma .62 .38
Diluted earnings per common share
As reported $.61 $.41
Pro forma .60 .37
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for the years ended January 31, 1998, 1997 and 1996,
respectively: expected volatility of 52%, 57% and 43%; risk-free
interest rates of 6.5%, 7% and 6%; and expected life of six years for
all periods.
Additional information with respect to the Company's plans for the
fiscal years ended January 31, 1998, 1997 and 1996 is summarized as
follows:
-17-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE H (continued)
1998
-------------------------------------------------------------
Directors' Plan Incentive Plan
--------------------------- -------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
------ ----- ------ -----
Shares under option
Outstanding at beginning of year 18,000 $1.90 150,000 $2.36
Granted 7,000 3.78 - -
Exercised (10,000) 1.44 (50,472) 1.54
Expired (5,000) 1.56 - -
------- -------
Outstanding at end of year 10,000 3.85 99,528 2.77
======= =======
Options exercisable at year-end 10,000 3.85 99,528 2.77
Weighted-average remaining contractual
life of options outstanding 4.5 years 3.5 years
Weighted-average fair value per share
of options granted during 1998 2.25 -
1997
-------------------------------------------------------------
Directors' Plan Incentive Plan
--------------------------- -------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
------ ----- ------ -----
Shares under option
Outstanding at beginning of year 18,000 $1.90 150,000 $2.13
Granted - - 34,000 3.50
Expired - - (34,000) 2.50
Outstanding at end of year 18,000 1.90 150,000 2.36
------- -------
Options exercisable at year-end 18,000 1.90 150,000 2.36
======= =======
Weighted-average remaining contractual
life of options outstanding 1 year 4 years
Weighted-average fair value per share
of options granted during 1997 - 2.61
-18-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE H (continued)
1996
-------------------------------------------------------------
Directors' Plan Incentive Plan
--------------------------- -------------------------
Weighted- Weighted-
Number average Number average
of exercise of exercise
shares price shares price
------ ----- ------ -----
Shares under option
Outstanding at beginning of year 17,000 $1.76 150,000 $2.13
Granted 1,000 4.25 -
------ ----- ------- -----
Outstanding at end of year 18,000 1.90 150,000 2.13
====== ==== ======= =====
Options exercisable at year-end 18,000 1.90 150,000 2.13
Weighted-average fair value per share
of options granted during 1996 2.15 -
Summarized information about stock options outstanding under the two
plans at January 31, 1998 is as follows:
Options outstanding and exercisable
-----------------------------------------------
Weighted-
Number average
outstanding remaining Weighted-
at contractual average
Range of January life in exercise
exercise prices 31, 1998 years price
--------------- -------- ----- -----
$2.25 - $3.38 70,528 1.00 $2.45
3.39 - 5.12 39,000 7.50 3.62
------- ---- -----
$2.25 - $5.12 109,528 3.58 $2.88
-19-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE I - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share at January 31:
1998 1997 1996
---------- ---------- -----------
Numerator
Net income $1,599,874 $1,063,296 $ 586,622
========== ========== ===========
Denominator
Denominator for basic earnings per share
(weighted-average shares) 2,558,541 2,550,000 2,550,000
Effect of dilutive securities:
Stock options 68,884 59,700 85,506
---------- ---------- ----------
Denominator for diluted earnings per share
(adjusted weighted-average shares) and
assumed conversions 2,627,425 2,609,700 2,635,506
========== ========== ===========
Basic earnings per share $ .63 $ .42 $ .23
========== ========== ===========
Diluted earnings per share $ .61 $ .41 $ .22
========== ========== ===========
NOTE J - INCOME TAXES
The provision for income taxes is summarized as follows:
Year ended January 31,
-------------------------------------------------
1998 1997 1996
----------- -------- --------
Current
Federal $ 938,000 $603,000 $382,000
State 105,000 (20,000) (18,000)
----------- -------- --------
1,043,000 583,000 364,000
Deferred (53,000) (70,000) 5,000
----------- -------- --------
$ 990,000 $513,000 $369,000
=========== ======== ========
-20-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
The following is a reconciliation of the effective income tax rate to
the Federal statutory rate:
Year ended January 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal tax benefit 2.7 (.4) (.4)
Nondeductible expenses .5 .8 1.7
Operating losses generating no current tax benefit 2.5 1.8 2.5
Change in deferred assets (2.0) (4.4) .5
Other .5 .7 .3
---- ---- ----
Effective rate 38.2% 32.5% 38.6%
==== ==== ====
The tax effects of temporary differences which give rise to deferred
tax assets at January 31, 1998 and 1997 are summarized as follows:
January 31,
1998 1997
-------- --------
Deferred tax assets
Inventories ......................................... $284,000 $302,500
Net operating loss carryforward - Canadian subsidiary 100,500 53,000
Accounts receivable ................................. 75,000 57,000
Accrued compensation and other ...................... 51,500 56,500
-------- --------
Gross deferred tax assets ......................... 511,000 469,000
-------- --------
Deferred tax liabilities
Depreciation ........................................ 71,000 82,000
-------- --------
Gross deferred tax liabilities .................... 71,000 82,000
-------- --------
Net deferred tax asset .............................. $440,000 $387,000
======== ========
Net operating loss carryforwards of $287,000 applicable to the
Canadian subsidiary expire in fiscal 2003 through 2005.
-21-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE K - BENEFIT PLANS
Defined Benefit Plan
A former subsidiary of the Company has a defined benefit pension plan
which the Company assumed in connection with an acquisition made in
fiscal 1987. This plan covers substantially all of the former
subsidiary's employees. Benefits pursuant to this plan were frozen as
of January 1, 1986.
The benefits earned were based on years of service and the employee's
final average annual salary which was based on the highest five
consecutive of the last ten years of employment prior to January 1,
1986. The Company's funding policy is to contribute annually the
recommended amount based on computations made by its consulting
actuary.
The components of the net periodic pension cost for the fiscal years
ended January 31 are summarized as follows:
1998 1997 1996
--------- --------- ---------
Normal cost $ 1,613 $ 1,613 $ 1,613
Interest cost on projected benefit obligation 63,772 62,259 60,611
Actual return on assets (16,168) (92,226) (40,653)
Net amortization and deferral (10,771) 71,026 25,159
--------- --------- ---------
Net periodic pension cost $ 38,446 $ 42,672 $ 46,730
======== ======== ========
The following is a summary of the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at January
31:
1998 1997
--------- ---------
Actuarial present value of benefit obligations
Vested benefits $ 917,791 $ 863,621
--------- ---------
Projected benefit obligation 917,791 863,621
Plan assets at fair market value 467,354 467,832
--------- ---------
Projected benefit obligation in excess of plan assets 450,437 395,789
Unrecognized (loss) gain (19,112) 16,945
Unrecognized net obligation at transition amortized
over a 15-year period (69,358) (79,213)
Required minimum liability (also included as a
component of other assets) 88,470 62,268
--------- ---------
Pension cost liability (included in long-term liabilities) $ 450,437 $ 395,789
========= =========
-22-
Lakeland Industries, Inc.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
January 31, 1998, 1997 and 1996
NOTE K (continued)
An assumed discount rate of 7.5% was used in determining the
actuarial present value of benefit obligations for all periods
presented. The expected long-term rate of return on plan assets was
8% for all periods presented. At January 31, 1998, approximately 73%
of the plan's assets were held in mutual funds invested primarily in
equity securities, approximately 15% was invested in money market
instruments and the remaining 12% was invested in equity securities
and debt instruments.
Defined Contribution Plan
Pursuant to the terms of the Company's 401(k) plan, substantially all
employees over 21 years of age with a minimum period of service are
eligible to participate. The 401(k) plan is administered by the
Company and provides for voluntary employee contributions ranging
from 1% to 18% of the employee's compensation. The Company made
discretionary contributions of $18,950 in fiscal 1998.
NOTE L - MAJOR SUPPLIER
The Company purchased approximately 74% of its raw materials from one
supplier under licensing agreements. The Company expects this
relationship to continue for the foreseeable future. If required,
similar raw materials could be purchased from other sources.
-23-
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
Directors:
Raymond J. Smith, Chairman
Christopher J. Ryan
John J. Collins, Jr.
Senior Vice President of Liberty
Brokerage, Inc.
Eric O. Hallman
Officer of Sylvan -Lawrence
Walter J. Raleigh
Senior Advisor to CMI Industries, Inc.
Market Makers:
Troster Singer Corp.
Legg Mason Wood Walker Inc.
Mayer & Schweitzer Inc.
Nash Weiss/Div of Shatkin Inv.
Herzog, Heine, Geduld, Inc.
Officers:
Raymond J. Smith, President
Christopher J. Ryan
Executive Vice President of Finance
and Secretary
James M. McCormick
Vice President and Treasurer
Harvey Pride, Jr.
Vice President, Manufacturing
Auditors:
Grant Thornton LLP
Suite 3S01
One Huntington Quadrangle
Melville, NY 11747-4464
Counsel:
Law Offices of Thomas J. Smith
14 Briarwood Lane
Suffern, NY 10901-3602
Transfer Agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
NASDAQ symbol: LAKE
Executive Offices:
711-2 Koehler Ave.
Ronkonkoma, NY 11779
(516) 981-9700
Subsidiaries:
Lakeland Protective Wear, Inc.
(Canada)
Lakeland de Mexico S.A. de C.V.
Laidlaw, Adams & Peck, Inc.
Exhibits to Lakeland Industries, Inc.'s 1998 Form 10 - K are available to
shareholders for a fee equal to Lakeland's cost in furnishing such exhibits, on
written request to the Secretary, Lakeland Industries, Inc., 711-2 Koehler
Avenue, Ronkonkoma, New York 11779.
DextraGard TM, Forcefield TM, Interceptor TM, Checkmate TM, Heatex TM,
Pyrolon TM, Sterling Heights TM, Fyrepel TM, Highland TM, Chemland TM and
Uniland TM are trademarks of Lakeland Industries, Inc. Tyvek TM, Viton TM,
Barricade TM, Nomex TM, Kevlar TM, Delrin TM, TyChem TM and Teflon TM are
registered trademarks of E.I.DuPont de Nemours and Company. Saranex TM is a
registered trademark of Dow Chemical. Spectra TM is a registered trademark of
Allied Signal, Inc.
-24-