LAKELAND INDUSTRIES, INC. |
Delaware | | 13-3115216 |
(State of incorporation) | | (IRS Employer Identification Number) |
| | |
701 Koehler Avenue, Suite 7, Ronkonkoma, New York (Address of principal executive offices) | | 11779 (Zip Code) |
Large accelerated filer ¨ | Accelerated filer ¨ |
Nonaccelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company x |
Class | | Outstanding at December 10, 2013 |
Common Stock, $0.01 par value per share | | 5,355,286 shares |
| | Page |
PART I - FINANCIAL INFORMATION: | | |
| | |
Item 1. | Financial Statements: | |
| | |
| Introduction | 3 |
| | |
| Condensed Consolidated Statements of Operations | |
| Three and Nine Months Ended October 31, 2013 and 2012 | 5 |
| | |
| Condensed Consolidated Statements of Comprehensive Income | |
| Three and Nine Months Ended October 31, 2013 and 2012 | 6 |
| | |
| Condensed Consolidated Balance Sheets | |
| October 31, 2013 and January 31, 2013 | 7 |
| | |
| Condensed Consolidated Statement of Stockholders' Equity | |
| Nine Months Ended October 31, 2013 | 8 |
| | |
| Condensed Consolidated Statement of Cash Flows | |
| Nine Months Ended October 31, 2013 and 2012 | 9 |
| | |
| Notes to Condensed Consolidated Financial Statements | 10 |
| | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 27 |
| | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 35 |
| | |
Item 4. | Controls and Procedures | 36 |
| | |
PART II - OTHER INFORMATION: | | |
| | |
Item 1. | Legal Proceedings | 36 |
| | |
Item 6. | Exhibits | 37 |
| | |
Signature Pages | 38 |
· | Covenants in our credit facilities may restrict our financial and operating flexibility. | |
· | We may need additional funds and, if we are unable to obtain these funds, we may not be able to expand or operate our business as planned. | |
· | We incurred significant losses in FY13, and losses in Q1 and Q3 of FY14, and there can be no assurance that such losses will not continue. | |
· | We are required to make substantial quarterly cash payments through December 31, 2018 in respect of the settlement agreement, as described in Note 13 herein. | |
· | We are subject to risk as a result of our international manufacturing operations. | |
· | Our results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates. | |
· | Our results of operations may vary widely from quarter to quarter. | |
· | Rapid technological change could negatively affect sales of our products, inventory levels and our performance. | |
· | Because we do not have long-term commitments from many of our customers, we must estimate customer demand, and errors in our estimates could negatively impact our inventory levels and net sales. | |
· | Our operations are substantially dependent upon key personnel. | |
· | We rely on a limited number of suppliers and manufacturers for specific fabrics, and we may not be able to obtain substitute suppliers and manufacturers on terms that are as favorable, or at all, if our supplies are interrupted. | |
· | We deal in countries where corruption is an obstacle. Particularly in Brazil, in the industry in which we operate, corruption is an obstacle. | |
· | We face competition from other companies, a number of which have substantially greater resources than we do. | |
· | Some of our sales are to foreign buyers, which exposes us to additional risks. | |
· | A significant reduction in government funding for preparations for terrorist incidents could adversely affect our net sales. | |
· | We may be subject to product liability claims, and insurance coverage could be inadequate or unavailable to cover these claims. | |
· | Environmental laws and regulations may subject us to significant liabilities. | |
· | The market price of our common stock may fluctuate widely. |
3 | ||
· | Our directors and executive officers have the ability to exert significant influence on our Company and on matters subject to a vote of our stockholders. | |
· | ||
· | If we fail to maintain proper and effective internal controls or are unable to remediate a material weakness in our internal controls, our ability to produce accurate and timely financial statements could be impaired, and investors’ views of us could be harmed. | |
· | Acquisitions could be unsuccessful. | |
· | Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information and adversely impact our reputation and results of operations. | |
· | The other factors referenced in this Form 10-Q, including, without limitation, in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the factors described under “Risk Factors” disclosed in our fiscal 2013 Form 10-K. |
4 | ||
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | October 31, | | October 31, | | ||||||||
| | 2013 | | 2012 | | 2013 | | 2012 | | ||||
Net sales | | $ | 22,787,344 | | $ | 24,238,573 | | $ | 69,163,340 | | $ | 71,718,608 | |
Cost of goods sold | | | 17,744,932 | | | 16,951,519 | | | 50,579,123 | | | 49,988,970 | |
Gross profit | | | 5,042,412 | | | 7,287,054 | | | 18,584,217 | | | 21,729,638 | |
Operating expenses | | | 6,072,620 | | | 7,019,656 | | | 18,554,319 | | | 21,285,329 | |
Operating profit (loss) | | | (1,030,208) | | | 267,398 | | | 29,898 | | | 444,309 | |
Foreign Exchange gain (loss) Brazil | | | 115,764 | | | (61,791) | | | (271,647) | | | (840,319) | |
Arbitration judgment in Brazil | | | | | | | | | | | | (7,873,847) | |
Other income, net | | | 57,259 | | | 51,972 | | | 20,668 | | | 171,961 | |
Interest expense | | | (649,436) | | | (270,273) | | | (1,390,623) | | | (766,119) | |
Income (loss) before taxes | | | (1,506,621) | | | (12,694) | | | (1,611,704) | | | (8,864,015) | |
Income tax expense (benefit) | | | 328,859 | | | (295,340) | | | (3,103,143) | | | (669,024) | |
Net income (loss) | | $ | (1,835,480) | | $ | 282,646 | | $ | 1,491,439 | | $ | (8,194,991) | |
Net income (loss) per common share | | | | | | | | | | | | | |
Basic | | $ | (0.31) | | $ | 0.05 | | $ | 0.27 | | $ | (1.55) | |
Diluted | | $ | (0.31) | | $ | 0.05 | | $ | 0.26 | | $ | (1.55) | |
Weighted average common shares outstanding: | | | | | | | | | | | | | |
Basic | | | 5,919,253 | | | 5,330,286 | | | 5,607,654 | | | 5,276,288 | |
Diluted | | | 5,919,253 | | | 5,367,243 | | | 5,715,151 | | | 5,276,288 | |
5 | ||
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | October 31, | | October 31, | | ||||||||
| | 2013 | | 2012 | | 2013 | | 2012 | | ||||
Net income (loss) | | $ | (1,835,480) | | $ | 282,646 | | $ | 1,491,439 | | $ | (8,194,991) | |
Other comprehensive income (loss): | | | | | | | | | | | | | |
Cash flow hedge in China | | | (25,286) | | | 119,150 | | | (59,078) | | | (111,715) | |
Foreign currency translation adjustments: | | | | | | | | | | | | | |
Lakeland Brazil, S.A. | | $ | 241,417 | | $ | 446,945 | | $ | (560,243) | | $ | (2,982,122) | |
Canada | | | (68,356) | | | 2,037 | | | (98,345) | | | (1,367) | |
United Kingdom | | | 28,665 | | | 54,826 | | | (153,978) | | | (74,128) | |
China | | | (178,526) | | | 44,066 | | | (133,066) | | | 21,984 | |
Russia/Kazakhstan | | | (10,832) | | | 8,895 | | | (74,216) | | | (51,154) | |
Other comprehensive income (loss) | | | (12,918) | | | 675,919 | | | (1,078,926) | | | (3,198,502) | |
| | | | | | | | | | | | | |
Comprehensive income (loss) | | $ | (1,848,398) | | $ | 958,565 | | $ | 412,513 | | $ | (11,393,493) | |
6 | ||
| | October 31, 2013 | | January 31, 2013 | | ||
| | (Unaudited) | | | | | |
ASSETS | | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | | $ | 5,019,217 | | $ | 6,736,962 | |
Accounts receivable, net of allowance for doubtful accounts of $244,700 and $342,100 at October 31, 2013 and January 31, 2013, respectively | | | 15,047,307 | | | 13,782,908 | |
Inventories | | | 40,440,287 | | | 39,270,675 | |
Deferred income tax | | | 4,593,753 | | | | |
Assets of discontinued operations in India | | | 19,920 | | | 813,182 | |
Prepaid income tax | | | 628,413 | | | 1,564,834 | |
Other current assets | | | 2,484,489 | | | 1,703,322 | |
Total current assets | | | 68,233,386 | | | 63,871,883 | |
Property and equipment, net | | | 12,571,924 | | | 14,089,987 | |
Prepaid VAT and other taxes, noncurrent | | | 2,417,197 | | | 2,461,386 | |
Security deposits | | | 1,461,437 | | | 1,546,250 | |
Other assets, net (mainly prepaid financing fees) | | | 1,782,583 | | | 477,200 | |
Goodwill | | | 871,297 | | | 871,297 | |
Total assets | | $ | 87,337,824 | | $ | 83,318,003 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
Current liabilities | | | | | | | |
Accounts payable | | $ | 9,241,610 | | $ | 6,704,001 | |
Accrued compensation and benefits | | | 1,299,789 | | | 975,758 | |
Other accrued expenses | | | 2,509,583 | | | 2,409,453 | |
Liabilities of discontinued operations in India | | | | | | 25,041 | |
Current maturity of long-term debt | | | 50,000 | | | 100,481 | |
Current maturity of arbitration settlement | | | 1,000,000 | | | 1,000,000 | |
Short-term borrowing | | | 2,700,699 | | | 7,128,779 | |
Borrowings under revolving credit facility | | | 11,790,905 | | | 9,558,882 | |
Total current liabilities | | | 28,592,586 | | | 27,902,395 | |
Arbitration award in Brazil (net of current maturities) | | | 4,008,691 | | | 4,710,691 | |
Canadian loan | | | 1,011,776 | | | 1,298,085 | |
Subordinated debt, net of OID | | | 1,538,621 | | | | |
Other liabilities - accrued legal fees in Brazil | | | 78,457 | | | 86,911 | |
VAT taxes payable long term | | | 3,330,354 | | | 3,328,820 | |
Total liabilities | | | 38,560,485 | | | 37,326,902 | |
Stockholders’ equity: | | | | | | | |
Preferred stock, $.01 par; authorized 1,500,000 shares - (none issued) | | | | | | | |
Common stock, $.01 par; authorized 10,000,000 shares, issued 5,711,727 and 5,688,600; outstanding 5,355,286 and 5,332,159 at October 31, 2013 and January 31, 2013, respectively | | | 57,117 | | | 56,886 | |
Treasury stock, at cost; 356,441 shares at October 31, 2013 and January 31, 2013 | | | (3,352,291) | | | (3,352,291) | |
Additional paid-in capital | | | 53,346,559 | | | 50,973,065 | |
Retained earnings (deficit) | | | 1,018,995 | | | (472,444) | |
Accumulated other comprehensive loss | | | (2,293,041) | | | (1,214,115) | |
Total stockholders' equity | | | 48,777,339 | | | 45,991,101 | |
Total liabilities and stockholders' equity | | $ | 87,337,824 | | $ | 83,318,003 | |
7 | ||
| | Common Stock | | Treasury Stock | | Additional Paid-in | | Retained Earnings | | Accumulated Other Comprehensive | | | | ||||||||||||
| | Shares | | Amount | | Shares | | Amount | | Capital | | (Deficit) | | Income (Loss) | | Total | | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, January 31, 2013 | | | 5,688,600 | | $ | 56,886 | | | (356,441) | | $ | (3,352,291) | | $ | 50,973,065 | | $ | (472,444) | | $ | (1,214,115) | | $ | 45,991,101 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | 1,491,439 | | | | | $ | 1,491,439 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive (loss) | | | | | | | | | | | | | | | | | | | | | (1,078,926) | | | (1,078,926) | |
Stock-based compensation: | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock issued at par | | | 23,127 | | | 231 | | | | | | | | | (231) | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock plan | | | | | | | | | | | | | | | 179,002 | | | | | | | | | 179,002 | |
Warrant issued to subordinated debt lender-valuation treated as Original Issue Discount (OID) (566,015 shares) | | | | | | | | | | | | | | | 2,235,406 | | | | | | | | | 2,235,406 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Legal fees associated with Warrant | | | | | | | | | | | | | | | (9,000) | | | | | | | | | (9,000) | |
Return of shares in lieu of payroll tax withholding | | | | | | | | | | | | | | | (31,683) | | | | | | | | | (31,683) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance October 31, 2013 | | | 5,711,727 | | $ | 57,117 | | | (356,441) | | $ | (3,352,291) | | $ | 53,346,559 | | $ | 1,018,995 | | $ | (2,293,041) | | $ | 48,777,339 | |
8 | ||
| | For the Nine Months Ended October 31, | | ||||
| | 2013 | | 2012 | | ||
Cash flows from operating activities: | | | | | | | |
Net income (loss) | | $ | 1,491,439 | | $ | (8,194,991) | |
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities | | | | | | | |
Arbitration award in Brazil | | | | | | 7,873,847 | |
Provision for inventory obsolescence | | | 617,890 | | | 300,000 | |
Provision for doubtful accounts | | | (97,327) | | | (30,000) | |
Deferred income taxes | | | (4,635,499) | | | (1,209,562) | |
Deferred taxes long-term | | | 1,534 | | | | |
Depreciation and amortization | | | 1,226,422 | | | 1,128,784 | |
Interest expense resulting from amortization of warrant OID | | | 149,024 | | | | |
Stock based and restricted stock compensation | | | 179,002 | | | 353,635 | |
(Increase) decrease in operating assets | | | | | | | |
Accounts receivable | | | (1,278,455) | | | (3,416,523) | |
Inventories | | | (2,553,057) | | | 2,591,044 | |
Prepaid income taxes and other current assets | | | 936,421 | | | (760,075) | |
Other assets-mainly prepaid fees from financing transaction | | | (2,507,068) | | | (370,858) | |
Cash received from sale of discontinued operations | | | 428,827 | | | | |
Assets of discontinued operations | | | 364,435 | | | 8,507 | |
Increase (decrease) in operating liabilities | | | | | | | |
Accounts payable | | | 2,797,213 | | | 3,482,073 | |
Accrued expenses and other liabilities | | | 568,456 | | | 408,254 | |
Arbitration award in Brazil, net of imputed interest | | | (702,000) | | | (503,539) | |
Liabilities of discontinued operations | | | (25,041) | | | (45,129) | |
Net cash provided by (used in) operating activities | | | (3,037,784) | | | 1,615,467 | |
Cash flows from investing activities: | | | | | | | |
Proceeds from sales of Qingdao net of cost of shutdown | | | 903,662 | | | | |
Purchases of property and equipment | | | (682,227) | | | (1,291,197) | |
Net cash provided by (used in) investing activities | | | 221,435 | | | (1,291,197) | |
Cash flows from financing activities: | | | | | | | |
Net borrowings under credit agreement (revolver) | | | 11,790,905 | | | (1,898,925) | |
Proceeds from term loans, net of repayments | | | | | | 2,280,000 | |
TD Bank and BDC repayments at closing of new financing | | | (15,108,882) | | | | |
Canada loan repayments | | | (1,398,566) | | | (175,150) | |
Canada borrowings | | | 1,121,317 | | | | |
Subordinated debt financing including warrant valuation | | | 3,500,000 | | | | |
Legal fees associated with the warrant OID | | | (9,000) | | | | |
Borrowings in Brazil | | | 159,462 | | | | |
Repayments in Brazil | | | (606,432) | | | (542,489) | |
UK borrowings, net | | | 915,750 | | | | |
China borrowings, net | | | 804,922 | | | | |
Other liabilities | | | (8,454) | | | (15,558) | |
Shares returned in lieu of taxes under restricted stock program | | | (31,683) | | | (131,223) | |
VAT taxes payable | | | | | | 10,040 | |
Net cash provided by (used in) financing activities | | | 1,129,339 | | | (473,305) | |
Effect of exchange rate changes on cash | | | (30,735) | | | (10,268) | |
Net (decrease) in cash and cash equivalents | | | (1,717,745) | | | (159,303) | |
Cash and cash equivalents at beginning of year | | | 6,736,962 | | | 5,711,038 | |
Cash and cash equivalents at end of year | | $ | 5,019,217 | | $ | 5,551,735 | |
9 | ||
| | October 31, 2013 | | January 31, 2013 | | ||
| | | | | | | |
Raw materials | | $ | 17,059,057 | | $ | 16,361,872 | |
Work-in-process | | | 1,640,632 | | | 1,812,788 | |
Finished goods | | | 21,740,598 | | | 21,096,015 | |
| | $ | 40,440,287 | | $ | 39,270,675 | |
10 | ||
11 | ||
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | October 31, | | October 31, | | ||||||||
| | 2013 | | 2012 | | 2013 | | 2012 | | ||||
Numerator | | | | | | | | | | | | | |
Net profit (loss) from continuing operations | | $ | (1,835,480) | | $ | 282,646 | | $ | 1,491,439 | | $ | (8,194,991) | |
Denominator | | | | | | | | | | | | | |
Denominator for basic earnings (loss) per share | | | | | | | | | | | | | |
Weighted-average shares outstanding before common share equivalents | | | 5,353,238 | | | 5,330,286 | | | 5,345,610 | | | 5,276,288 | |
Weighted average common equivalent shares resulting from the warrant issued June 28, 2013 to the subordinated debt lender LKL Investments LLC | | | 566,015 | | | | | | 262,044 | | | | |
Total weighted average, including common equivalent shares | | | 5,919,253 | | | 5,330,286 | | | 5,607,654 | | | 5,276,288 | |
| | | | | | | | | | | | | |
Effect of dilutive securities from restricted stock plan and from dilutive effect of stock options | | | | | | 36,957 | | | 107,497 | | | | |
Denominator for diluted earnings (loss) per share (adjusted weighted average shares) | | | 5,919,253 | | | 5,367,243 | | | 5,715,151 | | | 5,276,288 | |
Basic earnings ( loss) per share from continuing operations | | $ | (0.31) | | $ | 0.05 | | $ | 0.27 | | $ | (1.55) | |
Diluted earnings (loss) per share from continuing operations | | $ | (0.31) | | $ | 0.05 | | $ | 0.26 | | $ | (1.55) | |
12 | ||
| ⋅ | Borrowers are both Lakeland Industries, Inc. and its Canadian operating subsidiary Lakeland Protective Wear Inc. |
| ⋅ | Borrowing pursuant to a revolving credit facility subject to a borrowing base calculated as the sum of: |
| o | 85% of eligible accounts receivable as defined |
| o | The lesser of 60% of eligible inventory as defined or 85% of net orderly liquidation value of inventory |
| o | In transit inventory in bound to the US up to a cap of $1,000,000, subject to a satisfactory appraisal of Alabama real estate, which was received and resolved in August 2013. |
| o | Receivables and inventory held by the Canadian operating subsidiary to be included, up to a cap of $2 million of availability |
| o | Amount available at closing was approximately $12.3 million |
| ⋅ | Collateral |
| o | A perfected first security lien on all of the Borrowers United States and Canadian assets, other than its Mexican plant and the Canadian warehouse |
| o | Pledge of 65% of Lakeland US stock in all foreign subsidiaries other than 100% pledge of stock of its Canadian subsidiaries |
| ⋅ | Collection |
| o | All customers of Borrowers must remit to a lockbox controlled by Senior Lender or into a blocked account with all collection proceeds applied against the outstanding loan balance |
| ⋅ | Maturity |
| o | An initial term of three years from June 28, 2013 (the “Closing Date”) |
| o | Prepayment penalties of 3%, if prepaid prior to the first anniversary of Closing Date; 2% if prior to the second anniversary and 1% if prior to the third anniversary of the Closing Date |
| ⋅ | Interest Rate |
| o | Rate equal to LIBOR rate plus 525 basis points |
| o | Initial rate and rate at October 31, 2013 of 6.25% |
| o | Floor rate of 6.25% |
| ⋅ | Fees: Borrowers shall pay to the Lender the following fees: |
| o | Origination fee of $225,000, paid on the Closing Date and being amortized over the term of loan and is included in other assets in the accompanying balance sheet |
| o | 0.50% per annum on unused portion of commitment |
| o | A non-refundable collateral monitoring fee in the amount of $3,000 per month |
| o | All legal and other out of pocket costs |
| ⋅ | Financial Covenants |
| o | Borrowers covenanted that, from the Closing Date until the commitment termination date and full payment of the obligations to Senior Lender, Lakeland Industries, Inc. (the parent company), together with its subsidiaries on a consolidated basis, excluding its Brazilian subsidiary, shall comply with the following additional covenants: |
| ⋅ | Fixed Charge Coverage Ratio. At the end of each fiscal quarter of Borrowers, commencing with the fiscal quarter ending July 31, 2013, Borrowers shall maintain a Fixed Charge Coverage Ratio of not less than 1.1 to 1.00 for the four quarter period then ending. |
| ⋅ | Minimum Quarterly Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”). Borrowers shall achieve, on a rolling basis excluding the operations of the Borrower’s Brazilian subsidiary, EBITDA of not less than the following as of the end of each quarter as follows: |
| o | July 31, 2013 for the two quarters then ended, $2.1 million; |
| o | October 31, 2013 for the three quarters then ended, $3.15 million, |
| o | January 31, 2014 for the four quarters then ended, and thereafter, $4.1 million |
| ⋅ | Capital Expenditures. Borrowers shall not during any fiscal year make capital expenditures in an amount exceeding $1 million in the aggregate |
| ⋅ | The Company is in compliance with all loan covenants of the Senior Debt at October 31, 2013. |
13 | ||
| ⋅ | Other Covenants |
| o | Standard financial reporting requirements as defined |
| o | Limitation on amounts that can be advanced to or on behalf of Brazilian operations, limited to $200,000 for fiscal year ended January 2014 and nothing thereafter |
| o | Limitation on total net investment in foreign subsidiaries of a maximum of $1.0 million per annum |
| ⋅ | Subordinated Loan Agreement |
| o | Maturity date: June 28, 2018 |
| o | Interest at 12.0% per annum through and including December 27, 2016, increased to 16% per annum on December 28, 2016 and 20% per annum on December 28, 2017. Until the first anniversary of the Closing Date, all interest shall either be paid in kind (PIK) or paid in shares of common stock of Lakeland, valued at 100% of the then market value, at the election of the Junior Lender |
| o | All loan costs associated with the Subordinated Debt are included with the deferred debt costs from the Senior Loan and are being amortized over the life of the Senior Loan |
| o | Warrant to purchase 566,015 shares of Common Stock (subject to adjustment), exercisable at $0.01 per share |
| o | Warrant is subject to customary anti-dilution adjustment provisions, including for issuances of Common Stock or Common Stock equivalents at a price less than $5.00 per share, computed on a weighted average basis, subject to a hard cap limitation of 1,068,506 shares on total number of shares to be issued from a combination of warrants, interest shares and price-protection anti-dilution adjustments. The Company is allowed to issue up to 500,000 shares without triggering this provision, to allow for restricted shares and other new compensatory issuances. |
| o | Warrant exercise period is five years from the Closing Date |
| o | Registration Rights: the Company commits to filing with the Securities and Exchange Commission a registration statement covering the shares issuable in connection with the subordinated loan transaction within 90 days of the Closing Date and to have it effective no later than 180 days from the Closing Date, which requirement has been complied with |
| o | Investor Rights: Junior lender will have the right to designate one board member or a board observer, subject to certain conditions. As of December 12, 2013, the Junior lender has not exercised this right |
| o | Subject to Senior Lender Subordination Agreement, the subordinated loan, may be repaid in increments of $500,000 with Senior Lender approval, on or after June 28, 2014 |
| o | Early Termination Fees; Applicable Termination Percentage: |
| ⋅ | (a) Upon early repayment of the Term Loan, Borrowers shall be obligated to pay, in addition to all of the other Obligations then outstanding, an amount equal to the product obtained by multiplying $3,500,000 by the applicable percentage set forth below: |
| ⋅ | 5.00% if the effective date of termination occurs on or before June 28, 2014 |
| ⋅ | 3.00% if the effective date of termination occurs after June 28, 2014 but on or before June 28 2015; or |
| ⋅ | 1.00% if the effective date of termination occurs after June 28, 2015 but on or before June 28, 2016 |
| ⋅ | Upon acceleration of the loan following a Change of Control, Borrowers shall be obligated to pay an additional fee equal to $35,000 |
| o | Financial covenants setback 10% from those in the Senior Loan Agreement |
| o | Second priority lien on substantially all of the assets of the Company in the United States and Canada, except a first lien on Mexican facility |
| o | The Company is in compliance with all covenants of the Subordinated Debt at October 31, 2013. |
14 | ||
15 | ||
16 | ||
| | Nature and terms |
| | |
Nonemployee Director Stock Option Plan | | The plan provides for an automatic one-time grant of options to purchase 5,000 shares of common stock to each nonemployee director newly elected or appointed. Options are granted at not less than fair market value, become exercisable commencing six months from the date of grant and expire six years from the date of grant. In addition, all nonemployee directors re-elected to the Company’s Board of Directors at any annual meeting of the stockholders will automatically be granted additional options to purchase 1,000 shares of common stock on that date. Such plan expired at December 31, 2012, as to any new awards. Existing options will expire based on individual award dates. |
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Restricted Stock Plan employees | | Long-term incentive compensation three-year plan. Employees are granted potential share awards at the beginning of the three-year cycle at baseline and maximum amounts. The level of award and final vesting is based on the Board of Director’s opinion as to the performance of the Company and management in the entire three-year cycle. All vesting is three-year “cliff” vesting - there is no early vesting. The valuation is based on the stock price at the grant date and amortized to expense over the three-year period. |
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Restricted Stock Plan directors | | Long-term incentive compensation three-year plan. Directors are granted potential share awards at the beginning of the three-year cycle at baseline and maximum amounts. The level of award and final vesting is based on the Board of Director’s opinion as to the performance of the Company and management in the entire three-year cycle. All vesting is three-year “cliff” vesting - there is no early vesting. The valuation is based on the stock price at the grant date and amortized to expense over the three-year period. |
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Matching award program | | All participating employees are eligible to receive one share of restricted stock awarded for each two shares of Lakeland stock purchased on the open market. Such restricted shares are subject to three-year time vesting. The valuation is based on the stock price at the grant date and amortized to expense over the three-year period. |
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Compensation in stock in lieu of cash program - employees | | All participating employees are eligible to elect to receive any cash bonus in shares of restricted stock. Such restricted shares are subject to two-year time vesting. The valuation is based on the stock price at the grant date and amortized to expense over the two-year period. Since the employee is giving up cash for unvested shares, the amount of shares awarded is 133% of the cash amount based on the grant date stock price. The Chief Executive Officer, Chief Financial Officer and the Chief Operating Officer of the Company have all elected to take 30% of their cash compensation in restricted stock pursuant to this program, commencing in October 2012 and ending in July 2013. |
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Director fee in stock program | | All directors are eligible to elect to receive any director fees in shares of restricted stock. Such restricted shares are subject to two-year time vesting. The valuation is based on the stock price at the grant date and amortized to expense over the two-year period. Since the director is giving up cash for unvested shares, the amount of shares awarded is 133% of the cash amount based on the grant date stock price. |
17 | ||
Stock Options | | Number of Shares | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | | ||||
Outstanding at January 31, 2013 | | | 24,000 | | $ | 7.47 | | | 3.95 years | | $ | 1,300 | |
Granted during the nine months ended October 31, 2013 | | | | | | | | | | | | | |
Outstanding at October 31, 2013 | | | 24,000 | | $ | 7.47 | | | 3.20 years | | | | |
Exercisable at October 31, 2013 | | | 24,000 | | $ | 7.47 | | | 3.20 years | | | | |
| | | | | | | | | | | | | |
Reserved for future issuance: | | | | | | | | | | | | | |
Directors’ Plan (expired on December 31, 2012) | | | | | | | | | | | | | |
18 | ||
Shares under 2012 Equity Plan | | Outstanding unvested grants at maximum(a) at beginning of FY14 | | Granted during FY14 through October 31, 2013 | | Vested during FY14 through October 31, 2013 | | Forfeited during FY14 through October 31, 2013 | | Outstanding unvested grants at maximum(a) at October 31, 2013 | | |||||
Restricted stock grants employees | | | 164,500 | | | | | | | | | | | | 164,500 | |
Restricted stock grants directors | | | 49,500 | | | | | | | | | | | | 49,500 | |
Matching award program | | | | | | | | | | | | | | | | |
Compensation in stock in lieu of cash - employees | | | 21,517 | | | 33,672 | | | | | | | | | 55,189 | |
Retainer in stock - directors | | | 6,601 | | | 6,484 | | | | | | | | | 13,085 | |
Total restricted stock plan | | | 242,118 | | | 40,156 | | | | | | | | | 282,274 | |
| | | | | | | | | | | | | | | | |
Weighted average grant date fair value | | $ | 6.34 | | $ | 4.17 | | $ | | | $ | | | $ | 6.03 | |
Shares under 2009 Equity Plan | | Outstanding unvested grants at maximum(a) at beginning of FY14 | | Granted during FY14 through October 31, 2013 | | Vested during FY14 through October 31, 2013 | | Forfeited during FY14 through October 31, 2013 | | Outstanding unvested grants at maximum(a) at October 31, 2013 | | |||||
Restricted stock grants -employees | | | | | | | | | | | | | | | | |
Restricted stock grants - directors | | | | | | | | | | | | | | | | |
Matching award program | | | 3,500 | | | | | | 500 | | | | | | 3,000 | |
Compensation in stock in lieu of cash - employees | | | 26,090 | | | | | | 26,090 | | | | | | | |
Retainer in stock - directors | | | 6,688 | | | | | | 4,122 | | | | | | 2,566 | |
Total restricted stock plan | | | 36,278 | | | | | | 30,712 | | | | | | 5,566 | |
| | | | | | | | | | | | | | | | |
Weighted average grant date fair value | | $ | 8.27 | | | | | $ | 8.16 | | | | | $ | 8.86 | |
19 | ||
| | Three Months Ended | | | Nine Months Ended | | ||||||||||||||||||||||
| | October 31, | | | October 31, | | ||||||||||||||||||||||
| | 2013 | | | 2012 | | | 2013 | | | 2012 | | ||||||||||||||||
Domestic | | $ | 11.5 | | | 50 | % | | $ | 9.8 | | | 41 | % | | $ | 35.7 | | | 52 | % | | $ | 28.7 | | | 40 | % |
International | | | 11.3 | | | 50 | % | | | 14.4 | | | 59 | % | | | 33.5 | | | 48 | % | | | 43.0 | | | 60 | % |
Total | | $ | 22.8 | | | 100 | % | | $ | 24.2 | | | 100 | % | | $ | 69.2 | | | 100 | % | | $ | 71.7 | | | 100 | % |
| | Three Months Ended October 31 (in millions of dollars) | | Nine Months Ended October 31 (in millions of dollars) | | ||||||||
| | 2013 | | 2012 | | 2013 | | 2012 | | ||||
Net Sales: | | | | | | | | | | | | | |
USA | | $ | 12.40 | | $ | 10.58 | | $ | 37.60 | | $ | 30.77 | |
Other foreign | | | 5.36 | | | 5.99 | | | 17.48 | | | 16.44 | |
Mexico | | | 0.90 | | | 0.69 | | | 2.35 | | | 1.75 | |
China | | | 11.17 | | | 9.53 | | | 32.53 | | | 27.79 | |
Brazil | | | 1.91 | | | 4.28 | | | 5.40 | | | 14.17 | |
Corporate | | | 0.37 | | | 0.14 | | | 1.50 | | | 0.53 | |
Less intersegment sales | | | (9.32) | | | (6.97) | | | (27.70) | | | (19.73) | |
Consolidated sales | | $ | 22.79 | | $ | 24.24 | | $ | 69.16 | | $ | 71.72 | |
External Sales: | | | | | | | | | | | | | |
USA | | $ | 11.47 | | $ | 9.83 | | $ | 35.65 | | $ | 28.69 | |
Other foreign | | | 5.14 | | | 5.69 | | | 16.02 | | | 15.91 | |
Mexico | | | 0.38 | | | 0.24 | | | 0.88 | | | 0.50 | |
China | | | 3.90 | | | 4.20 | | | 11.29 | | | 12.45 | |
Brazil | | | 1.90 | | | 4.28 | | | 5.32 | | | 14.17 | |
Consolidated external sales | | $ | 22.79 | | $ | 24.24 | | $ | 69.16 | | $ | 71.72 | |
Intersegment Sales: | | | | | | | | | | | | | |
USA | | $ | 0.93 | | $ | 0.75 | | $ | 1.95 | | $ | 2.08 | |
Other foreign | | | 0.21 | | | 0.30 | | | 1.50 | | | 0.53 | |
Mexico | | | 0.52 | | | 0.45 | | | 1.47 | | | 1.25 | |
China | | | 7.27 | | | 5.33 | | | 21.24 | | | 15.34 | |
Brazil | | | 0.02 | | | 0.00 | | | 0.08 | | | 0.00 | |
Corporate | | | 0.37 | | | 0.14 | | | 1.46 | | | 0.53 | |
Consolidated intersegment sales | | $ | 9.32 | | $ | 6.97 | | $ | 27.70 | | $ | 19.73 | |
Operating Profit (Loss): | | | | | | | | | | | | | |
USA | | $ | 1.07 | | $ | 0.40 | | $ | 4.20 | | $ | 0.52 | |
Other foreign | | | 0.06 | | | 0.42 | | | 0.56 | | | 0.91 | |
Mexico | | | 0.04 | | | 0.01 | | | (0.03) | | | (0.05) | |
China | | | 1.06 | | | 1.01 | | | 2.65 | | | 2.15 | |
Brazil | | | (1.93) | | | (0.37) | | | (3.74) | | | (0.24) | |
Corporate | | | (1.25) | | | (1.25) | | | (3.61) | | | (3.62) | |
Less intersegment profit | | | (0.08) | | | 0.05 | | | 0.00 | | | 0.77 | |
Consolidated operating profit | | $ | (1.03) | | $ | 0.27 | | $ | 0.03 | | $ | 0.44 | |
20 | ||
| | 2013 | | 2012 | | 2013 | | 2012 | | ||||
Depreciation and Amortization Expense: | | | | | | | | | | | | | |
USA | | $ | 0.05 | | $ | 0.07 | | $ | 0.16 | | $ | 0.20 | |
Other foreign | | | 0.04 | | | 0.03 | | | 0.14 | | | 0.13 | |
Mexico | | | 0.01 | | | 0.01 | | | 0.04 | | | 0.03 | |
China | | | 0.08 | | | 0.09 | | | 0.20 | | | 0.26 | |
Brazil | | | 0.09 | | | 0.09 | | | 0.28 | | | 0.27 | |
Corporate | | | 0.19 | | | 0.09 | | | 0.42 | | | 0.24 | |
Less intersegment | | | (0.01) | | | 0.00 | | | (0.01) | | | 0.00 | |
Consolidated depreciation and amortization expense | | $ | 0.45 | | $ | 0.38 | | $ | 1.23 | | $ | 1.13 | |
Interest Expense: | | | | | | | | | | | | | |
USA | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | |
Other foreign | | | 0.04 | | | 0.04 | | | 0.12 | | | 0.12 | |
Mexico | | | 0.03 | | | 0.01 | | | 0.07 | | | 0.04 | |
Brazil | | | 0.34 | | | 0.24 | | | 0.87 | | | 0.76 | |
Corporate | | | 0.33 | | | 0.17 | | | 0.74 | | | 0.41 | |
Less intersegment | | | (0.09) | | | (0.19) | | | (0.41) | | | (0.56) | |
Consolidated interest expense | | $ | 0.65 | | $ | 0.27 | | $ | 1.39 | | $ | 0.77 | |
Income Tax Expense (Benefits): | | | | | | | | | | | | | |
USA | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | |
Other foreign | | | 0.17 | | | 0.02 | | | 0.33 | | | 0.13 | |
Mexico | | | 0.00 | | | 0.00 | | | 0.01 | | | 0.01 | |
China | | | 0.25 | | | 0.03 | | | 0.73 | | | 0.40 | |
Brazil | | | 0.00 | | | (0.14) | | | 0.00 | | | (0.43) | |
Corporate | | | (0.04) | | | (0.32) | | | (3.91) | | | (1.06) | |
Less intersegment | | | (0.05) | | | 0.11 | | | (0.26) | | | 0.28 | |
Consolidated income tax benefit | | $ | 0.33 | | $ | (0.30) | | $ | (3.10) | | $ | (0.67) | |
| | October 31 | | ||||
| | 2013 | | 2012 | | ||
| | (in millions of dollars) | | ||||
| | (Unaudited) | | | | | |
Total Assets: | | | | | | | |
USA | | $ | 28.63 | | $ | 23.66 | |
Other foreign | | | 19.93 | | | 13.19 | |
Mexico | | | 3.69 | | | 3.59 | |
China | | | 26.16 | | | 26.66 | |
India | | | (1.12) | | | 1.61 | |
Brazil | | | 8.65 | | | 14.14 | |
Corporate | | | 1.40 | | | 0.47 | |
Consolidated assets | | $ | 87.34 | | $ | 83.32 | |
Long-Lived Assets: | | | | | | | |
USA | | $ | 2.39 | | $ | 2.55 | |
Other foreign | | | 2.25 | | | 2.38 | |
Mexico | | | 2.11 | | | 2.21 | |
China | | | 2.63 | | | 3.28 | |
India | | | 0.02 | | | | |
Brazil | | | 2.21 | | | 2.75 | |
Corporate | | | 0.97 | | | 0.92 | |
Consolidated long-lived assets | | $ | 12.58 | | $ | 14.09 | |
21 | ||
22 | ||
| | Three Months Ended October 31, | | Nine Months Ended October 31, | | ||||||||
| | 2013 | | 2012 | | 2013 | | 2012 | | ||||
Notional Value in USD | | $ | 1,000 | | $ | 11,175 | | $ | 6,587 | | $ | 36,501 | |
Gain and loss reported in current operating income (expense) | | $ | (42) | | $ | 205 | | $ | 81 | | $ | 261 | |
| | As of October 31, 2013 | | As of January 31, 2013 | | ||
| | | | | | | |
Notional value in USD | | $ | 412,440 | | $ | 6,944,040 | |
Gain reported in equity as other comprehensive income | | | (59,078) | | | 38,513 | |
| | Nine Months Ended October 31, 2013 | | Nine Months Ended October 31, 2012 | | ||
Gain reclassifed from other comprehensive income into current earnings during three months ended October 31, 2013, reported in operating income | | $ | 85 | | $ | 33 | |
23 | ||
24 | ||
Principle | | Interest | | Penalty | | Total | | Approximate for Totals | | Loss Possibility | Strategy | Collateral | | |||||||
R$ | | R$ | | R$ | | R$ | | US $ | | | | | | | | |||||
| | | | | | | | | | | | | | | | | | | | |
| 305,897 | | | 310,182 | | | 181,089 | | | 797,168 | | | 362,000 | | Remote | | To wait Judicial Process | | New Land | |
| 573,457 | | | 754,401 | | | 344,074 | | | 1,671,932 | | | 760,000 | | Remote | | To wait Judicial Process | | Plant | |
| 6,209,836 | | | 3,142,429 | | | 3,511,156 | | | 12,863,422 | | | 5,847,000 | | Probable | | To wait Judicial Process and offer Judicial Deposit (approx. 3% net sales) | | - | |
| 402,071 | | | 528,891 | | | 241,242 | | | 1,172,204 | | | 533,000 | | Remote | | To wait Judicial Process | | New Land | |
| 285,009 | | | 78,135 | | | 171,005 | | | 534,149 | | | 243,000 | | Loss Agreed | | *Accept State Amnesty (8 installments, approx. BRL 42K) | | - | |
| 7,776,270 | | | 4,814,038 | | | 4,448,567 | | | 17,038,875 | | | 7,745,000 | | | | *After State Amnesty Accepted | | | |
| | PRINCIPAL | | INTEREST | | PENALTY | | TOTAL | | | | State Requirements | | |||||
| | | | | | | | | | | | | | | | | | |
| | | 285,009 | | | 15,626 | | | 34,200 | | | 334,835 | | | | | 8 Installments | |
Total | | | 285,009 | | | 15,626 | | | 34,200 | | | 334,835 | | | 152,000 | | | |
25 | ||
| | Remaining Assets Held for Sale as of | | ||||
| | October 31, 2013 | | January 31, 2013 | | ||
Inventory | | $ | | | $ | 85,170 | |
Other current asset | | | | | | 10,024 | |
Property and equipment | | | 19,920 | | | 717,988 | |
Total assets of discontinued operations | | | 19,920 | | | 813,182 | |
Liabilities of discontinued operations: | | | | | | | |
Accounts payable | | | | | | 2,759 | |
Other liabilities | | | | | | 22,282 | |
Total liabilities of discontinued operations | | | | | | 25,041 | |
| | | | | | | |
Net assets of discontinued operations | | $ | 19,920 | | $ | 788,141 | |
26 | ||
27 | ||
28 | ||
29 | ||
· | Brazil gross margin was a gross loss of (46.7) percentage points for this year compared with 27.1% last year resulting from several large bid contracts at a high margin last year, and heavy discounting in this year to promote sales, an inventory write-down of $1.2 million as explained above, along with sales of raw material below cost to raise cash for Brazil. | |
· | Disposables gross margin increased by 3.5 percentage points due to higher volume resulting from conversion of customers to Lakeland branded product with a higher gross, a price increase and adjustments in transfer pricing, partially offset by a $368,000 reduction in inventory valuation due to changes in overhead rates, and a $375,000 addition to reserves for one discontinued product line. | |
· | Argentina gross margin decreased by 15 percentage points mainly due to poor volume resulting from lack of working capital and government controls over imports. | |
· | Higher margins in chemical sales were reflective of a different sales mix. | |
· | UK margins were up by 2.1 percentage points reflecting higher volume and improved sales mix. | |
· | Gloves margin decreased by 3.4 percentage points, mainly resulting from an increase in inventory reserves for Nitrosal gloves. |
30 | ||
$ | (0.3) | | million decrease in commissions primarily in Brazil as a result of reduced volume and no large bid contracts |
$ | (0.3) | | million decrease in payroll administrative salaries due to reductions in Brazil |
$ | (0.2) | | million decrease in equity compensation reflecting the current estimation of zero performance level |
$ | (0.2) | | million decrease in currency fluctuation expense |
$ | 0.1 | | million increase in amortization reflecting the financing completed in Q2 |
31 | ||
· | Brazil gross margin was a loss of (8.9)% for this year compared with 33.7% last year resulting from several large bid contracts at a high margin last year, and heavy discounting in this year to promote sales, an inventory write-down of $1.2 million as explained above, and sales of raw material below cost to raise cash for Brazil. | |
· | Disposables gross margin increased by 5.3 percentage points due to higher volume resulting from conversion of customers to Lakeland branded products with a higher gross, a price increase and adjustments in transfer pricing, partially offset by a $368,000 reduction in inventory valuation due to changes in overhead rates, and a $375,000 addition to reserves for the discontinued product line. | |
· | Wovens gross margin increased 11.5 percentage points in FY14 compared with FY13. This increase was mainly due to the FY13 inventory write-downs resulting from the closure of the Missouri plant, disruptions, inefficiencies and a shortage following the move. | |
· | Chemical gross margins increased 7.1 percentage points in FY14 compared with FY13. This increase is primarily due to the conversion of customers to Lakeland brand products with higher gross margins and adjustments in transfer pricing. | |
· | Argentina gross margin decreased by 13.9 percentage points mainly due to poor volume resulting from lack of working capital and government controls on imports. | |
· | China gross margins decreased 3.3 percentage points primarily due to the accrual of shutdown costs in our Qingdao facility, offset by an increase in higher margin domestic China and Asia Pacific sales. | |
· | Gloves margin decreased by 5.4 percentage points mainly resulting from an increase in inventory reserves for Nitrosol gloves. |
| $(1.0) | million decrease in sales commission mainly resulting from two large bid contracts in Brazil last year which resulted in high commissions |
| $(0.7) | million reduction in payroll administrative expense and payroll taxes primarily in Brazil as the labor complement was adjusted and lower Brazilian volume overall |
| $(0.4) | million reduction in China operating expense reclassified from cost of goods sold, mainly resulting from less operating expense from the sale of the Qingdao operation |
| $(0.2) | million reduction to bad debt expense due to expense incurred in Argentina in FY13 |
| $(0.2) | million decrease in equity compensation expense due to FY13 change from baseline to zero on the 2012 Restricted Stock Plan |
| $(0.2) | million decrease to miscellaneous general and administrative expenses |
| $(0.1) | million reduction in officer cash salaries as officers voluntarily received one third of compensation in the form of restricted stock |
| $(0.1) | million decrease in travel expenses as fewer trade shows were attended in FY14 |
| $(0.1) | million reduction to research and development as compared to FY13 |
| $(0.1) | million reduction in freight out resulting from sales mix |
| $0.2 | million increase in bank fees and amortization related to the new financing in the US in Q2 |
32 | ||
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34 | ||
35 | ||
36 | ||
31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 | | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 | | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS | | XBRL instance Document |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | XBRL Taxonomy Extension Definitions Document |
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101.DEF | | XBRL Taxonomy Extension Labels Document |
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101.LAB | | XBRL Taxonomy Extension Labels Document |
| | |
101.PRE | | XBRL Taxonomy Extension Presentations Document |
37 | ||
| | LAKELAND INDUSTRIES, INC. |
| | (Registrant) |
| | |
| | |
Date: December 12, 2013 | | /s/ Christopher J. Ryan |
| | Christopher J. Ryan, |
| | Chief Executive Officer, President and Secretary |
| | (Principal Executive Officer and Authorized Signatory) |
| | |
Date: December 12, 2013 | | /s/Gary Pokrassa |
| | Gary Pokrassa, |
| | Chief Financial Officer |
| | (Principal Accounting Officer and Authorized Signatory) |
38 | ||