EX-13 4 ex13_4-28.txt [LOGO] Lakeland Industries, Inc. Corporate Headquarters 711-2 Koehler Avenue Ronkonkoma, NY U.S.A.11779-7410 Tel: 631-981-9700 Fax: 631-981-9751 E-Mail: info@lakeland.com Internet: http://www.lakeland.com [GRAPHIC] Lakeland Industries, Inc. 2001 ANNUAL REPORT AND FORM 10-K [GRAPHIC] Safety. It's elusive, and often changing. Lakeland Industries, Inc. strives to make quality products that keep safety in hand. Our goal is to make sure that the work force of America goes home, safe and sound, ready for another day. contrasts... [PHOTO] To put your all into your job has always been a trait of the American worker. The work was often simple, but tough, and sometimes dangerous. Even one generation back, employees didn't enjoy the protection and production-enhancing peace of mind lent by modern, quality protective clothing. The total number of injury cases reported per 100 employees has dropped by nearly 50% from 1973-1999. [PHOTO] In contrast, today's work environment can be highly technical and complicated. Dangers from chemicals, vapors and particles that are inhaled are factors that were not present in the workplace of yesteryear. Employees are protected by a multitude of regulations and requirements. Among the new advances is the clothing worn on the job, with Lakeland at the forefront of protective clothing design and development. costs... In the Roaring Twenties, gloveless, bare-faced workers operated grinding mills and inhaled lungs full of all kinds of harmful particles. Both health and economic costs were high. [PHOTO] Among all operators and fabricators from 1992 to 1999, injury and illness cases have decreased 24.2%. [PHOTO] Lakeland's limited-use and disposable garments keep particulates away from those who grind, mill and spray. Our low cost limited use garments let employees work easily and safely. These days, they're covered correctly, particularly by Lakeland. Encapsulated suits offer reliable protection against today's workplace chemicals. These suits are disposable and do away with the expensive and risky practice of decontamination and re-use. Hot zones are set up around a contaminated area, which utilize various chemical protective garments. Lakeland is a leader in the development of chemical protective clothing products. In Lakeland garments, people are safer. [PHOTO] dangers... Among lost work time injuries and illnesses recorded by the Bureau of Labor, the number for chemical burns dropped 4,100 cases from 1993 to 1999. Part of this encouraging decrease is due to proper protective clothing. [PHOTO] Exposed skin spelled danger and sometimes disaster years ago. Knowledge of how chemicals reacted to our bodies was at best minimal. This photo, taken during World War II years, is mute testimony to the patterns of negligence that occurred at the time. The gloveless worker is taking an awful risk with her fingers and hands. [PHOTO] patterns... [PHOTO] Today, Lakeland materials and glove patterns are designed for maximum grip on the job at hand. Cut resistance can be built into the arm and hand protective product, while the glove dots provide grip while protecting workers' precious hands. [PHOTO] The man with the ladle is wearing a hat, goggles, gloves and shin guards, while handling molten steel. A lack of heat and respiratory protection made injuries commonplace. Technology has made it possible to design protective garments that drop injuries substantially in high risk work areas. This kiln worker is completely protected by aluminized heat protective clothing from head to foot. Air conditioned vests keep him cool physically and mentally. Dressing for the job is now part of the job. [PHOTO] Because more and more hot-spot workers are wearing quality protective gear, the number of lost-work time heat burns and scalds was reduced by 10,600 cases from 1993 to 1999. technology... science... [PHOTO] It was white shirts, trousers and ties for the "angels of mercy" in times past. The science of healing was unexposed to many of the deadly germs and bacteria that are threatening lives in the world of today. [PHOTO] The science of healing has been joined by the science of protection for the medical work force. Bloodborne pathogen protective wear is a must, along with splash resistance, high visibility, and comfort. 1930's turnout gear was "whatever." Street clothes were often used, and the turnout gear that existed at the time made advancing upon a fire a very uncomfortable task. [PHOTO] advances... [PHOTO] Turnout gear design has advanced into a highly specialized craft. Lightweight materials that offer superior protection greatly reduce the risk to fire injuries. One of the main causes of injuries to fire fighters is heat exhaustion. Lakeland is at the forefront of turnout gear design and is striving to reduce turnout gear weight. Dear Fellow Shareholders, Once again, it is with great pleasure that I extend a warm welcome to each of you, and do so on behalf of every Lakeland employee. Thanks to their dedication to the Company's many and diverse tasks, Lakeland has increased its sales for the sixth consecutive year. Revenues for the year just ended were $76.1 million compared to last year's $58.6 million; an increase of approximately 30 percent. I must report, however, that earnings decreased from $1.7 million to $1.1 last year, a reduction of 36 percent. Most of this decline in earnings came in the second half of the year and was attributable to several factors. First was the continued increase in Federal Reserve interest rates, the full impact of which arrived in the third and fourth quarters. A second factor was an irrational - some in the industry have used the term vicious - round of price cutting in the market during the third and, particularly, in the fourth quarter. In order to stay in the game and stave off the loss of business, we met this pressure cooker situation wherever possible. This strategy enabled us to keep our distributor system intact, while watching a major competitor go out of business in January, the final month of our fiscal year. We raised prices beginning February1, and expect them to take hold during the early part of fiscal 2002. The third factor that negatively influenced earnings was the conversion of our Fyrepel manufacturing from a contractor operation to an integral part of our St. Joseph, Missouri facility. This was necessary because the contractor we were using did not want to become registered for ISO 9000, which is demanded for NFPA (National Fire Protection Association) certification. At midyear, we moved all of the production equipment and inventory to St. Joseph and began the critical task of interviewing, hiring and training personnel to operate in what amounted to virtually a new factory. Those startup costs are now behind us, and we anticipate a very aggressive sales program on the fire garment line during this upcoming year. Finally, due to the change in factory location, an inordinate amount of testing by outside certification laboratories, such as UL Laboratories, was done to ensure that the garments produced met all of the specifications required by various government agencies as well as our own stringent quality levels. In spite of these additional hits upon earnings, we weathered the storm and enjoyed a successful year. The additional costs have been written off rather than capitalized. Pricing in our main markets appear to have stabilized and Federal Reserve rates have receded, which suggests that fiscal 2002 will be yet another successful year for Lakeland. Once again, I want to thank all of our employees, shareholders and, of course, our hardworking Board of Directors for the confidence and guidance that they have given to us during the past year. Sincerely, Raymond J. Smith President Lakeland Industries, Inc. SELECTED FINANCIAL DATA (In thousands, except per share and share amounts)
For the Years Ended January 31, 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Net sales $76,108 $58,644 $54,655 $47,263 $41,792 Gross profit 11,310 10,488 10,374 9,195 7,237 Operating expenses 8,619 7,191 6,451 6,157 5,212 Operating profit 2,691 3,297 3,923 3,038 2,024 Income before income taxes 1,485 2,509 3,222 2,590 1,576 Net income 1,123 1,748 2,080 1,600 1,063 Earnings per share - Basic (1) $.42 $.66 $.79 $.63 $.42 ==== ==== ==== ==== ==== Earnings per share - Diluted (1) $.42 $.65 $.77 $.61 $.41 ==== ==== ==== ==== ==== Weighted average common shares outstanding: Basic 2,645,446 2,653,950 2,642,170 2,558,541 2,550,000 Diluted 2,667,161 2,673,449 2,690,920 2,627,425 2,609,700 BALANCE SHEET DATA (at end of year): Working capital $16,047 $15,909 $12,403 $18,903 $14,018 Total assets 38,628 34,770 27,160 25,812 18,573 Current liabilities 20,052 16,551 12,915 5,007 2,920 Long-term liabilities 1,981 2,759 465 9,217 5,746 Stockholders' equity $16,537 $15,405 $13,725 $11,518 $9,825
---------- (1) Earnings per share has been restated in accordance with SFAS No. 128, "Earnings Per Share". 1 CAUTIONARY STATEMENTS -------------------------------------------------------------------------------- This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical fact included in this report, including, without limitation, the statements under the headings "Business," "Properties," "Market for Registrant's Common Stock and Related Stockholder Matters," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position and liquidity, the Company's strategic alternatives, future capital needs, development and capital expenditures (including the amount and nature thereof), future net revenues, business strategies, and other plans and objectives of management of the Company for future operations and activities. Forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate under the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, and factors in the Company's other filings with the Securities and Exchange Commission (the "Commission"), general economic and business conditions, the business opportunities that may be presented to and pursued by the Company, changes in law or regulations and other factors, many of which are beyond the control of the Company. Readers are cautioned that these statements are not guarantees of future performance, and that actual results or developments may differ materially from those projected in the forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- The following Management's Discussion and Analysis of Financial Condition and Results of Operations may include forward-looking statements with respect to the Company's future financial performance. These forward-looking statements are subject to various risks and uncertainties, including the factors described elsewhere in this Report, that could cause actual results to differ materially from historical results or those currently anticipated. Overview -------- The Company derives the majority of its revenues from the sale of its Tyvek disposable limited/use garments and secondarily from the sales of its cut and heat resistant gloves, woven reusable garments, heat and fire protective clothing, and chemical suits all to safety and mill supply distributors. The Company generally recognizes revenues when it ships its product to its customers. Cost of goods sold includes all direct costs to manufacture the finished product, plus related costs associated with inland or ocean freight on incoming raw materials, customs duty and warehousing, and manufacturing overhead expenses. Selling expenses include all salaries for sales and marketing staffs together with other related expenses such as sales commissions, travel costs, trade shows, advertising and delivery expenses. General and administrative expenses include salaries for executives and administrative and MIS staff, together with related expenses such as travel costs, non-manufacturing facilities costs and consulting and professional fees. Result of Operations -------------------- The following table sets forth items in the Company's consolidated statement of operations as a percentage of revenues for the periods indicated. 2
Years Ended January 31, 2001 2000 1999 --------- --------- --------- Revenues 100.0% 100.0 100.0% Cost of Goods Sold 85.1 82.1 81.0 Selling, general and administrative expenses 11.3 12.3 11.8 Depreciation and amortization expense .9 1.0 1.0 Operating profit 3.5 5.6 7.2 Interest expense, net 1.6 1.4 1.3 Income tax expense .48 1.3 2.1 Net income 1.5 3.0 3.8 EBITDA margin (1) 4.5 6.7 8.2
---------- (1) EDITDA (earnings before interest, taxes, depreciation and amortization) margin represents EBITDA expressed as a percentage of revenues. Fiscal Year Ended January 31, 2001 compared to Fiscal Year Ended January 31, 2000 -------------------------------------------------------------------------------- Net Sales. Net sales for the year ended January 31, 2001 increased $17,464,000 or 29.8% to $76,108,000 from $58,644,000 for the year ended January 31, 2000. The increase in sales was principally attributable to the Company's ability to increase its production capacity, maintain adequate inventory levels, and to the withdrawal of a major competitor from the TyvekTM markets, in which the Company secured certain business. The Company initiated a sales price increase effective with the commencement of fiscal 2002, which stimulated sales during the last month of fiscal 2001. Gross Profit. Gross profit for the year ended January 31, 2001 increased by $822,000, or 7.8% to $11,310,000, or 14.9% of net sales, from $10,488,000, or 17.9% of net sales, for the year ended January 31, 2000. The gross profit percentage decreased as a result of an increase in the cost of raw materials (from a major supplier [and now competitor] in February 2000) without a corresponding increase in selling prices. This was partially offset by manufacturing efficiencies (due to the use of automated equipment) and to higher sales volume. Competition increased during the second half of the year ended January 31, 2001, most severely in the fourth quarter as the industry's newest competitor lowered prices to gain market share. In most cases, the Company was forced to meet the competition. The second half of fiscal 2001 was also negatively affected by the relocation of manufacturing from an independent contractor to the company's facility in Missouri. Operating Expenses. Operating expenses for the year ended January 31, 2001 increased by $1,428,000 or 19.9%, to $8,619,000, or 11.3% of net sales, from $7,191,000, or 12.3% of net sales, for the year ended January 31, 2000. The increase in operating expenses is pricipally as a result of higher cost of freight, sales commissions, travel and show participation anduse of temporary help due to higher sales volume, and also to increased medial expense, research and development expense. Interest Expense. Interest expense for the year ended January 31, 2001 increased by $426,000, or 52% to $1,248,000 from $821,000 for the year ended January 31, 2000. Interest expense increase was principally due to higher interest costs reflecting and increase in average borrowings under the Company's credit facility and to increasing interest rates. Income Tax Expense. The effective tax rate for the year ended January 31, 2001 and 2000 of 24.4% and 30.3% respectively, deviates from the Federal statutory rate of 34%, mainly attributable to differing foreign tax rates and exemptions as well as to state income taxes. Net Income. As a result of the foregoing, net income for the year ended January 31, 2001 decreased by $625,000 to $1,123,000 from $1,748,000 for the year ended January 31, 2000. 3 Fiscal Year Ended January 31, 2000 compared to Fiscal Year Ended January 31, 1999 -------------------------------------------------------------------------------- Net Sales. Net sales for the year ended January 31, 2000 increased $3,989,000 or 7.3% to $58,644,000 from $54,655,000 for the year ended January 31, 1999. The increase in sales was principally attributable to the Company's ability to increase its production capacity and maintain higher inventory levels. Gross Profit. Gross profit for the year ended January 31, 2000 increased by $1,114,000, or 1.1% to $10,488,000, or 18% of net sales, from $10,374,000, or 19% of net sales, for the year ended January 31, 1999. Gross profit was consistent between years as a result of global manufacturing efficiencies, however, the current year was negatively affected by relocation and expansion which temporarily decreased these efficiencies. The industry is highly competitive and margins (historically and) in the current year were vulnerable to erosion resulting from new competition reduced selling prices. Operating Expenses. Operating expenses for the year ended January 31, 2000 increased by $740,000 or 11.5%, to $7,191,000, or 12.3% of net sales, from $6,451,000, or 11.8% of net sales, for the year ended January 31, 1999. Operating expenses as a percentage of net sales decreased to 12.3%, from 11.8% as a result of increased sales volume. The increase in operating expenses was mainly attributable to greater payroll expenses, increased sales commissions and increased freight out, and the addition of in-house regional sales managers. Interest Expense. Interest expense for the year ended January 31, 2000 increased by $47,619, or 6.2% to $821,333 from $773,714 for the year ended January 31, 1999. The increase in interest expense was mainly due to higher interest costs reflecting an increase in average borrowings under the Company's credit facility and increasing interest rates. Income Tax Expense. The effective tax rate of 30.8% deviates from the Federal statutory rate of 34%, mainly attributable to foreign income generating no current taxes or foreign jurisdiction with lower tax rates and the effect of state income taxes. Net Income. As a result of the foregoing, net income for the year ended January 31, 2000 decreased by $332,000 or 16%, to net income of $1,748,000 from net income of $2,080,000 for the year ended January 31, 1999. LIQUIDITY AND CAPITAL RESOURCES -------------------------------------------------------------------------------- Liquidity and Capital Resources.The Company's working capital is equal to $16,047,000 at January 31, 2001. The Company's primary sources of funds for conducting its business activities have been from cash flow provided by operations and borrowings under its credit facilities. The Company requires liquidity and working capital primarily to fund increases in inventories and accounts receivable associated with sales growth and, to a lesser extent, for capital expenditures. Net cash provided by operating activities was $412,000 for the year ended January 31, 2001 and was due primarily to the increase in inventories of $243,000, and accounts receivable of $2,509,000, and other current assets of $800,000, offset by the increase in accounts payable of $2,248,000 and net income from operations of $1,123,000. Net cash provided by financing activities of $473,000 was primarily attributable to net borrowings during the year in connection with the term loan and revolving credit facility. The revolving credit facility permits the Company to borrow up to a maximum of $14 million. The revolving credit agreement expires on October 31, 2001, and has therefore been classified as a short-term liability in the accompanying balance sheet at January 31, 2001. Borrowings under the revolving credit facility amounted to approximately $12,335,000 at January 31, 2001. The maturity date on the five year $3 million term-loan agreement entered into in November 1999 has been accelerated to expire on March 31, 2003. The Company believes that cash flow from operations and the revolving credit facility will be sufficient to meet its currently anticipated operating, capital expenditures and debt service requirements for at least the next 12 months. Foreign Currency Activity ------------------------- The Company's foreign exchange exposure is principally limited to the relationship of the U.S. Dollar to the Mexican Peso, Canadian Dollar and the Chinese RMB. 4 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -------------------------------------------------------------------------------- Market Risk ----------- The Company is exposed to market risk, including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, the Company seeks to limit, to the extent possible its non-U.S. dollar denominated purchases and sales. Foreign exchange risk occurs principally only with regard to Canadian subsidiary sales. Foreign Exchange Risk Management -------------------------------- As a multinational corporation, the Company is exposed to changes in foreign exchange rates. As the Company's non-denominated U.S. dollar international sales grow, exposure to volatility in exchange rates could have an adverse impact on the Company's financial results. The Company's risk from exchange rate changes is presently related to non-dollar denominated sales in Canada. Interest Rate Risk ------------------ The Company is exposed to interest rate change market risk with respect to its credit facility with a financial institution which is priced based upon LIBOR or 30 day commercial paper interest rates. At January 31, 2001, $14,435,000 was outstanding under the term-loan and revolving credit facilities. Changes in the above described interest rates during fiscal 2001 will have a positive or negative effect on the Company's interest expense. Each 1% fluctuation in one or both of the above rates will increase or decrease interest expense for the Company by approximately $145,000. Each 1% fluctuation in interest rates earned would not increase or decrease interest income on these deposits by a significant amount. Unaudited Quarterly Results of Operations (in thousands, except for per share amounts. --------------------------------------------------------------------------------
Fiscal Year Ended January 31, 2001: 1/31/01 10/31/00 7/31/00 4/30/00 ------- -------- ------- ------- Net Sales $20,130 $15,762 $18,109 $22,107 Cost of Sales 17,802 13,353 14,890 18,753 ------- -------- ------- ------- Gross Profit $ 2,328 $ 2,409 $ 3,219 $ 3,354 ======= ======= ======= ======= Net Income (loss) $ (64) $ 150 $ 376 $ 661 ======= ======= ======= ======= Basic and Diluted income per common share: Basic $ (.03) $ 0.06 $ 0.14 $ 0.25 ======= ======= ======= ======= Diluted $ (.03) $ 0.06 $ 0.14 $ 0.25 ======= ======= ======= ======= Fiscal Year Ended January 31, 2000: 1/31/00 10/31/99 7/31/99 4/30/99 ------- -------- ------- ------- Net Sales $15,559 $13,688 $13,941 $15,456 Cost of Sales 12,617 10,917 11,758 12,864 ------- -------- ------- ------- Gross Profit $ 2,942 $ 2,771 $ 2,183 $ 2,592 ======= ======= ======= ======= Net Income (loss) $ 648 $ 510 $ 86 $ 504 ======= ======= ======= ======= Basic and Diluted income per common share: Basic $ 0.25 $ 0.19 $ 0.03 $ 0.19 ======= ======= ======= ======= Diluted $ 0.24 $ 0.19 $ 0.03 $ 0.19 ======= ======= ======= =======
5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS -------------------------------------------------------------------------------- The Common Stock is listed on the Nasdaq National Market under the symbol "LAKE". The following table sets forth for the periods indicated the high and low sales prices for the Common Stock as reported by the Nasdaq National Market. The Company has a January 31, fiscal year end.
Price Range of Common Stock --------------------- High Low --------------------- Fiscal 2000 First Quarter ended April 30, 1999..................... $6 3/4 $4 Second Quarter ended July 31, 1999..................... 6 3/4 4 3/4 Third Quarter ended October 31, 1999................... 7 3/8 2 7/8 Fourth Quarter ended January 31, 2000.................. 4 3/4 2 15/16 Fiscal 2001 First Quarter ended April 30, 2000..................... 4 3/4 $3 3/4 Second Quarter ended July 31, 2000..................... 7 1/2 5 3/8 Third Quarter ended Oct. 31, 2000...................... 6 1/2 4 3/4 Fourth Quarter ended January 31, 2001.................. 5 1/4 3 3/8 First Quarter Fiscal 2002 (through April 20, 2001)..... 5 4 1/32
As of April 17, 2001, there were approximately 94 record holders of shares of Common Stock. There are believed to be in excess of 500 beneficial shareholders in addition to those of record, since over 1.0 million shares are held in "street" name by Cede & Co., a large financial clearing house. The Company has never paid cash dividends on its common stock and does not expect to pay such dividends in the foreseeable future. The Company currently intends to retain any future earnings, for the operation and expansion of its business. The payment and rate of future dividends, if any, are subject to the discretion of the Board of Directors of the Company and will depend upon the Company's earnings, financial condition, capital requirements, contractual restrictions under its agreement with its institutional lender and other factors. 6 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Lakeland Industries, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Lakeland Industries, Inc. and Subsidiaries (the "Company") as of January 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended January 31, 2001, in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended January 31, 2001. 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 6, 2001 7 Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
January 31, 2001 2000 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 784,578 $ 650,541 Accounts receivable, net of allowance for doubtful accounts of $221,000 and $200,000 at January 31, 2001 and 2000, respectively 10,858,288 8,379,477 Inventories 22,710,083 22,467,395 Prepaid income taxes 461,113 52,434 Deferred income taxes 624,000 661,000 Other current assets 660,777 249,264 ----------- ----------- Total current assets 36,098,839 32,460,111 PROPERTY AND EQUIPMENT, NET 1,978,070 1,851,964 EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net of accumulated amortization of $276,000 and $256,000 at January 31, 2001 and 2000, respectively 268,822 288,810 OTHER ASSETS 282,235 169,365 ----------- ----------- $38,627,966 $34,770,250 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 6,490,447 $ 4,242,874 Accrued compensation and benefits 418,320 502,785 Other accrued expenses 207,795 135,883 Current portion of long-term debt 12,935,416 11,669,681 ----------- ----------- Total current liabilities 20,051,978 16,551,223 LONG-TERM DEBT 1,499,207 2,300,000 PENSION LIABILITY 482,269 458,643 DEFERRED INCOME TAXES 58,000 55,000 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; 2,646,000 and 2,644,000 shares issued and outstanding at January 31, 2001 and 2000, respectively 26,460 26,440 Additional paid-in capital 6,140,221 6,132,491 Retained earnings 10,369,831 9,246,453 ----------- ----------- 16,536,512 15,405,384 ----------- ----------- $38,627,966 $34,770,250 =========== ===========
The accompanying notes are an integral part of these statements. 8 Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
Fiscal year ended January 31, 2001 2000 1999 ----------- ----------- ----------- Net sales $76,108,038 $58,644,181 $54,655,135 Cost of goods sold 64,797,943 48,155,753 44,281,126 ----------- ----------- ----------- Gross profit 11,310,095 10,488,428 10,374,009 ----------- ----------- ----------- Operating expenses Selling and shipping 4,825,331 4,177,171 3,334,609 General and administrative 3,793,745 3,013,780 3,116,745 ----------- ----------- ----------- Total operating expenses 8,619,076 7,190,951 6,451,354 ----------- ----------- ----------- Operating profit 2,691,019 3,297,477 3,922,655 ----------- ----------- ----------- Other income(expense) Interest expense (1,247,708) (821,333) (773,714) Interest income 26,595 25,716 46,176 Other income - net 15,472 7,346 26,968 ----------- ----------- ----------- Total other expense (1,205,641) (788,271) (700,570) ----------- ----------- ----------- Income before income taxes 1,485,378 2,509,206 3,222,085 Income tax expense (362,000) (761,000) (1,142,000) ----------- ----------- ----------- NET INCOME $ 1,123,378 $ 1,748,206 $ 2,080,085 =========== =========== =========== Net income per common share Basic $.42 $.66 $. 79 ==== ==== ===== Diluted $.42 $.65 $. 77 ==== ==== ===== Weighted average common shares outstanding Basic 2,645,446 2,653,950 2,642,170 ========= ========= ========= Diluted 2,667,161 2,673,449 2,690,920 ========= ========= =========
The accompanying notes are an integral part of these statements. 9 Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Fiscal years ended January 31, 2001, 2000 and 1999
Common stock Additional ------------------- paid-in Retained Shares Amount capital earnings Total --------- ------- ---------- ----------- ----------- Balance, January 31, 1998 2,610,472 $26,105 $6,073,358 $ 5,418,162 $11,517,625 Net income 2,080,085 2,080,085 Exercise of stock options 50,028 500 126,298 126,798 --------- ------- ---------- ----------- ----------- Balance, January 31, 1999 2,660,500 26,605 6,199,656 7,498,247 13,724,508 Net income 1,748,206 1,748,206 Purchase and retirement of common stock (16,500) (165) (67,165) (67,330) --------- ------- ---------- ----------- ----------- Balance, January 31, 2000 2,644,000 26,440 6,132,491 9,246,453 15,405,384 Net income 1,123,378 1,123,378 Exercise of stock options 2,000 20 7,730 7,750 --------- ------- ---------- ----------- ----------- Balance, January 31, 2001 2,646,000 $26,460 $6,140,221 $10,369,831 $16,536,512 ========= ======= ========== =========== ===========
The accompanying notes are an integral part of this statement. 10 Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal year ended January 31, 2001 2000 1999 ------------ ----------- ----------- Cash flows from operating activities Net income $ 1,123,378 $ 1,748,206 $ 2,080,085 Adjustments to reconcile net income to net cash provided by (used in) operating activities Deferred income taxes 40,000 (95,000) (71,000) Depreciation and amortization 699,304 598,095 534,673 Provision for bad debts 30,176 20,700 60,263 (Increase) decrease in operating assets Accounts receivable (2,508,987) (1,656,836) 149,934 Inventories (242,688) (6,356,485) (252,858) Other current assets (799,556) 159,533 (236,785) Other assets (187,882) (20,823) (18,808) Increase (decrease) in operating liabilities Accounts payable 2,247,573 2,787,684 (2,839,051) Accrued expenses and other liabilities 11,073 (43,480) 84,143 ------------ ----------- ----------- Net cash provided by (used in) operating activities 412,391 (2,858,406) (509,404) ------------ ----------- ----------- Cash flows from investing activities Purchases of property and equipment (751,046) (1,049,124) (388,393) Principal payments on note receivable 140,251 ------------ ----------- ----------- Net cash used in investing activities (751,046) (1,049,124) (248,142) ------------ ----------- ----------- Cash flows from financing activities Net borrowings under credit agreements 464,942 3,241,818 1,911,631 Proceeds from exercise of stock options 7,750 126,798 Purchase and retirement of common stock (67,330) Deferred financing costs (52,500) (67,500) ------------ ----------- ----------- Net cash provided by financing activities 472,692 3,121,988 1,970,929 ------------ ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 134,037 (785,542) 1,213,383 Cash and cash equivalents at beginning of year 650,541 1,436,083 222,700 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 784,578 $ 650,541 $ 1,436,083 ============ =========== ===========
The accompanying notes are an integral part of these statements. 11 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2001, 2000 and 1999 NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------------- 1. Business ----------- Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware corporation, organized in April 1982, is engaged primarily in the manufacture of personal safety protective work clothing. The principal market for the Company's products is in the United States. No customer accounted for more than 10% of net sales during the fiscal years ended January 31, 2001, 2000 and 1999. 2. Principles of Consolidation ------------------------------ The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Laidlaw, Adams & Peck, Inc. and Subsidiary (formerly Fireland Industries, Inc.), Lakeland Protective Wear, Inc. (a Canadian corporation), Weifang Lakeland Safety Products Co. Ltd. (a Chinese Corporation) and Lakeland de Mexico S.A. de C.V. (a Mexican corporation). All significant intercompany accounts and transactions have been eliminated. 3. Revenue Recognition ---------------------- Revenue is recognized upon shipment of goods to customers. 4. Inventories -------------- Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. 5. 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. 6. 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. 7. Income Taxes --------------- Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and loss carryforwards and tax credit carryforwards for which income tax benefits are expected to be realized in future years. A valuation allowance would be established to reduce deferred tax assets if it is more likely than not that all, or some portion of, such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. 12 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 2001, 2000 and 1999 NOTE A(continued) ----------------- 8. Earnings Per Share --------------------- Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of potential common shares. Diluted earnings per share are based on the weighted average number of common and potential common shares outstanding. The potential common shares for the years ended January 31, 2001, 2000 and 1999 were 21,715, 19,499 and 48,750, respectively, representing the dilutive effect of stock options. The diluted earnings per share calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the fiscal year. Options to purchase 5,000, 3,000 and 1,000 shares of the Company's common stock have been excluded from the computation of diluted earnings per share in 2001, 2000 and 1999, respectively, as their inclusion would have been antidilutive. 9. Statement of Cash Flows -------------------------- The Company considers highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of money market funds. The market value of the cash equivalents approximates cost. Foreign denominated cash and cash equivalents were $334,000 and $476,000 at January 31, 2001 and 2000, respectively. Supplemental cash flow information for the fiscal years ended January 31, is as follows: 2001 2000 1999 ---------- ---------- ------------ Interest paid $1,238,448 $ 783,664 $ 771,294 Income taxes paid 688,412 693,456 1,387,778 10. Concentration of Credit Risk -------------------------------- Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of trade receivables. Concentration of credit risk with respect to these receivables is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across geographic areas principally within the United States. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. 11. Foreign Operations and Foreign Currency Translation ------------------------------------------------------- The Company maintains manufacturing operations and uses independent contractors in Mexico and the People's Republic of China. It also maintains a sales and distribution entity located in Canada. The Company is vulnerable to currency risks in these countries. The monetary assets and liabilities of the Company's foreign operations are translated into U.S. dollars at current exchange rates, while nonmonetary items are translated at historical rates. Revenues and expenses are generally translated at average exchange rates for the year. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. 13 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 2001, 2000 and 1999 NOTE A(continued) ----------------- 12. Use of Estimates -------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 13. Reclassifications --------------------- Certain prior year amounts have been reclassified to conform with the 2001 presentation. NOTE B - INVENTORIES -------------------- Inventories consist of the following at January 31: 2001 2000 ----------- ----------- Raw materials $ 4,088,498 $ 3,180,556 Work-in-process 6,467,779 5,538,608 Finished goods 12,153,806 13,748,231 ----------- ----------- $22,710,083 $22,467,395 =========== =========== NOTE C - PROPERTY AND EQUIPMENT ------------------------------- Property and equipment consist of the following at January 31: Useful life in years 2001 2000 ----------- ----------- ----------- Machinery and equipment 3 - 10 $ 4,701,148 $ 3,993,315 Furniture and fixtures 3 - 10 261,737 255,790 Leasehold improvements Lease term 703,958 666,692 ----------- ----------- 5,666,843 4,915,797 Less accumulated depreciation and (3,688,773) (3,063,833) amortization ----------- ----------- $ 1,978,070 $ 1,851,964 =========== =========== NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS -------------------------------------------- The Company's principal financial instrument consists of its outstanding revolving credit facility and term loan. The Company believes that the carrying amount of such debt approximates the fair value as the variable interest rates approximate the current prevailing interest rate. 14 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) January 31, 2001, 2000 and 1999 NOTE E - LONG-TERM DEBT ----------------------- Long-term debt consist of the following at January 31: 2001 2000 ----------- ----------- Revolving credit facility $12,335,416 $11,069,681 Term loan 2,099,207 2,900,000 ----------- ----------- 14,434,623 13,969,681 Less current portion 12,935,416 11,669,681 ----------- ----------- Long-term debt $ 1,499,207 $ 2,300,000 =========== =========== During 1997, the Company entered into a $10,000,000 secured revolving credit facility (the "credit facility") with a financial institution with an initial expiration date of November 30, 1999. On May 1, 1998, the credit facility was increased to $13,000,000. Effective September 23, 1998, the credit facility was amended to provide for a temporary increase to $16,000,000 through August 31, 1999. Amounts outstanding under the $3,000,000 temporary credit facility were repaid on August 31, 1999. In November 1999, the $13,000,000 credit facility was renewed for one year, and a $3,000,000, five-year term loan (the "term loan") was entered into, which replaced the repaid temporary credit facility. In August 2000, the credit facility was increased to $14,000,000. Borrowings under the credit facility bore 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, 2001, interest on outstanding credit facility borrowings was based on the commercial paper rate option (7.3% at January 31, 2001). On March 9, 2001, the Company extended its agreement to October 31, 2001 and accelerated the term loan to expire in 24 months. In addition, the interest rate on the credit facility was changed to LIBOR or the 30-day commercial paper rate, as defined, plus 2.3%. The term loan is payable in monthly installments of $50,000, plus interest payable at the 30-day commercial paper rate plus 2.45% (8.0% at January 31, 2001) through March 2001; beginning April 2001, the monthly principal installments increase to $89,550. The credit facility and term loan are collateralized by substantially all the assets of the Company and guaranteed by certain of the Company's subsidiaries. The credit facility and term loan contain financial covenants, including, but not limited to, minimum levels of earnings and maintenance of minimum tangible net worth and other certain ratios at all times. The maximum amounts borrowed under the credit facility during the fiscal years ended January 31, 2001 and 2000 were $14,000,000 and $12,900,000, respectively, and the average interest rates during the periods were 8.1% and 7.3%, respectively. NOTE F - STOCKHOLDERS' EQUITY AND STOCK OPTIONS ----------------------------------------------- The Nonemployee Directors' Option Plan (the "Directors' Plan") provides for an automatic one-time grant of options to purchase 5,000 shares of common stock to each nonemployee director elected or appointed to the Board of Directors. Under the Directors' Plan, 60,000 shares of common stock have been authorized for issuance. Options are granted at not less than fair market value, become exercisable commencing six months from the date of grant and expire six years from the date of grant. In addition, all nonemployee directors re-elected to the Company's Board of Directors at any annual meeting of the stockholders will automatically be granted additional options to purchase 1,000 shares of common stock on each of such dates. In April 1997, the Company extended the term on 5,000 expiring options for an additional six years. The Company's 1986 Incentive and Nonstatutory Stock Option Plan (the "Plan") provides for the granting of incentive stock options and nonstatutory options. The Plan provides for the grant of options to key employees and independent sales representatives to purchase up to 400,000 shares of the Company's common stock, upon terms and conditions determined by a committee of the Board of Directors, which administers the plan. Options are granted at not less than fair market value (110 percent of fair market value as to incentive stock options granted to ten percent 15 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued) January 31, 2001, 2000 and 1999 NOTE F(continued) ----------------- stockholders) and are exercisable over a period not to exceed ten years (five years as to incentive stock options granted to ten percent stockholders). The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans. If the Company had elected to recognize compensation expense based upon the fair value at the date of grant for awards under these plans, consistent with the methodology prescribed by SFAS 123, the effect on the Company's net income and earnings per share as reported would be reduced for the years ended January 31, 2001 and 1999 to the pro forma amounts indicated below: 2001 1999 ---------- ---------- Net income As reported $1,123,378 $2,080,085 Pro forma 1,116,338 2,073,495 Basic earnings per common share As reported $.42 $.79 Pro forma .42 .79 Diluted earnings per common share As reported $.42 $.77 Pro forma .42 .77 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, 2001 and 1999: expected volatility of 55% and 60%, respectively; risk-free interest rate of 6.3% and 5.6%, respectively; expected dividend yield of 0.0% for all periods; and expected life of six years for all periods. No options were granted for the year ended January 31, 2000. Additional information with respect to the Company's plans for the fiscal years ended January 31, 2001, 2000 and 1999 is summarized as follows: 2001 ---------------------------------------- Directors' Plan Plan -------------------- ----------------- Weighted- Weighted- Number average Number average of exercise of exercise shares price shares price ------ --------- ------ --------- Shares under option Outstanding at beginning of year 8,000 $4.81 52,500 $3.06 Granted 2,000 5.94 Exercised (2,000) 3.88 ----- ------ Outstanding and exercisable at end of year 8,000 5.33 52,500 3.06 ===== ====== Weighted-average remaining contractual life of options outstanding 3.3 years 4 years Weighted-average fair value per shares of options granted during 2001 $5.94 16 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 2001, 2000 and 1999 NOTE F(continued) ----------------- 2000 ---------------------------------------- Directors' Plan Plan -------------------- ----------------- Weighted- Weighted- Number average Number average of exercise of exercise shares price shares price ------ --------- ------ --------- Shares under option Outstanding at beginning of year 8,000 $4.81 52,500 $3.06 Outstanding and exercisable at end of year 8,000 4.81 52,500 $3.06 Weighted-average remaining contract- ual life of options outstanding 2.6 years 5 years 1999 ---------------------------------------- Directors' Plan Plan -------------------- ----------------- Weighted- Weighted- Number average Number average of exercise of exercise shares price shares price ------ --------- ------ --------- Shares under option Outstanding at beginning of year 10,000 $ 3.85 99,528 $2.77 Granted 1,000 10.75 -- -- Exercised (3,000) 3.58 (47,028) 2.47 ------ ------- Outstanding and exercisable at end of year 8,000 4.81 52,500 3.06 ====== ======= Weighted-average remaining contract- ual life of options outstanding 3.6 years 6 years Weighted-average fair value per share of options granted during 1999 $ 6.59 -- 17 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 2001, 2000 and 1999 NOTE F(continued) ----------------- Summarized information about stock options outstanding under the two plans at January 31, 2001 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, 2001 years price --------------- ------------- ----------- --------- $2.25 - $3.38 21,500 2.90 $ 2.39 3.39 - 5.94 38,000 4.45 3.71 10.75 1,000 3.50 10.75 ------ $2.25 - $10.75 60,500 3.88 3.36 ====== NOTE G - INCOME TAXES --------------------- The provision for income taxes is summarized as follows: Year ended January 31, ------------------------------------------ 2001 2000 1999 -------- -------- ---------- Current Federal $189,000 $756,000 $1,116,000 State 27,000 100,000 97,000 Foreign 106,000 -------- -------- ---------- 322,000 856,000 1,213,000 Deferred 40,000 (95,000) (71,000) -------- -------- ---------- $362,000 $761,000 $1,142,000 ======== ======== ========== The following is a reconciliation of the effective income tax rate to the Federal statutory rate: Year ended January 31, ------------------------------- 2001 2000 1999 ------ ------ ------ Statutory rate 34.0% 34.0% 34.0% State income taxes, net of Federal tax benefit 1.2 2.7 2.0 Nondeductible expenses 1.1 .8 .3 Foreign operating results generating no current tax provision (12.5) (2.4) (.6) Change in deferred assets (3.8) Other .6 (1.0) (.3) ------ ------ ------ Effective rate 24.4% 30.3% 35.4% ====== ====== ====== 18 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 2001, 2000 and 1999 NOTE G(continued) ---------------- The tax effects of temporary differences which give rise to deferred tax assets at January 31, 2001 and 2000 are summarized as follows: January 31, --------------------------- 2001 2000 -------- --------- Deferred tax assets Inventories $391,000 $385,000 Net operating loss carryforward - foreign 29,000 89,000 subsidiary Accounts receivable 84,000 76,000 Accrued compensation and other 120,000 111,000 -------- -------- Gross deferred tax assets 624,000 661,000 -------- -------- Deferred tax liabilities Depreciation 58,000 55,000 -------- -------- Gross deferred tax liabilities 58,000 55,000 -------- -------- Net deferred tax asset $566,000 $606,000 ======== ======== Net operating loss carryforwards of $83,000 applicable to its foreign subsidiary in Canada expire in fiscal 2003 through 2007. NOTE H - BENEFIT PLANS ---------------------- Defined Benefit Plan The Company has a frozen defined benefit pension plan that covers former employees of an acquired entity. The Company's funding policy is to contribute annually the recommended amount based on computations made by its consulting actuary. The following table sets forth the plan's funded status for the fiscal years ended January 31: 2001 2000 --------- --------- Change in benefit obligation ---------------------------- Projected benefit obligation at beginning of year $ 961,492 $ 960,634 Service cost 1,613 Interest cost 70,546 70,579 Actuarial (gain)loss 874 (32,185) Benefits paid (41,750) (39,149) --------- --------- Projected benefit obligation at end of year $ 991,162 $ 961,492 ========= ========= Change in plan assets --------------------- Fair value of plan assets at beginning of year $ 502,849 $ 445,872 Actual return on plan assets 46,194 87,626 Employer contributions 1,600 8,500 Benefits paid (41,750) (39,149) --------- --------- Fair value of plan assets at end of year $ 508,893 $ 502,849 ========= ========= Funded status ------------- Pension liability $(482,269) $(458,643) ========= ========= 19 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 2001, 2000 and 1999 NOTE H(continued) ----------------- The components of net periodic pension cost for the fiscal years ended January 31 are summarized as follows: 2001 2000 1999 -------- --------- --------- Service cost $ 1,613 $ 1,613 Interest cost $ 70,546 70,579 67,649 Actual return on plan assets (46,194) (87,626) 1,779 Net amortization and deferral 17,451 62,896 (39,469) -------- --------- --------- Net periodic pension cost $ 41,803 $ 47,462 $ 31,572 ======== ========= ========= 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, 2001, approximately 59% of the plan's assets was held in mutual funds invested primarily in equity securities, 29% was invested in equity securities and debt instruments and 12% was invested in money market and other instruments. Defined Contribution Plan Pursuant to the terms of the Company's 401(k) plan, substantially all U.S. employees over 21 years of age with a minimum period of service are eligible to participate. The 401(k) plan is administered by the Company and provides for voluntary employee contributions ranging from 1% to 15% of the employee's compensation. The Company made discretionary contributions of $83,947, $57,642 and $55,332 in the fiscal years ended January 31, 2001, 2000 and 1999, respectively. NOTE I - MAJOR SUPPLIER ----------------------- The Company purchased approximately 77% and 74% of its raw materials from one supplier under licensing agreements for the year ended January 31, 2001 and years ended January 31, 2000 and 1999, respectively. The Company expects this relationship to continue for the foreseeable future. If required, similar raw materials could be purchased from other sources; although, the Company's competitive position in the marketplace could be affected. NOTE J - COMMITMENTS AND CONTINGENCIES -------------------------------------- 1. Employment Contracts The Company has employment contracts with four principal officers expiring through January 2003. Such contracts are automatically renewable for two-year terms unless 30 to 120 days' notice is given by either party. Pursuant to such contracts, the Company is committed to aggregate annual base remuneration of $747,500 and $350,000 for the fiscal years ended January 31, 2002 and 2003, respectively. 2. Leases The Company leases the majority of its premises under various operating leases expiring through fiscal 2005. The leases for the manufacturing facilities (located in Decatur, Alabama) are with two partnerships whose partners are principal officers and stockholders of the Company. One lease expires on August 31, 2004 and requires annual payments of approximately $365,000 plus certain operating expenses and the second lease expires on May 31, 2004 and requires annual payments of $199,104 plus certain operating expenses. The Company also leases one customer service facility pursuant to a one-year lease (renewable at the Company's option for four additional one-year terms), from an officer of the Company. Monthly payments are $1,500. In addition, the Company has several operating leases for machinery and equipment. 20 Lakeland Industries, Inc. andSubsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 2001, 2000 and 1999 NOTE J (continued) ----------------- The Company has a one-year lease with a related partnership for a manufacturing facility in the People's Republic of China. The related lessor is a partnership in which the Company's directors, one officer and four employees hold partnership interests. This related party leasing arrangement requires monthly payments of approximately $4,081. Total rental expense under all operating leases is summarized as follows: Total Rentals Gross sublease paid to rental rental related expense income parties ------- ------ ------- Year ended January 31, 2001 $817,366 $ 2,144 $582,004 2000 808,852 10,578 545,136 1999 643,174 4,611 402,096 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, 2001 are summarized as follows: Year ending January 31, 2002 $ 791,869 2003 650,464 2004 624,711 2005 300,311 ---------- $2,367,355 ========== Certain leases require additional payments based upon increases in property taxes and other expenses. 3. Services Agreement Pursuant to the terms of a services agreement with an affiliated entity, principally owned by a principal officer and stockholder of the Company, the affiliate provided professional and/or skilled labor to the Company, as needed, at contractual rates of compensation. Such agreement was cancelable by either the Company or the affiliate upon thirty-days' written notice. Costs incurred by the Company in connection with such agreement aggregated $509,000 for the fiscal year ended January 31, 1999. This agreement was terminated as of February 1, 1999. 4. Litigation The Company is involved in various litigation arising during the normal course of business which, in the opinion of the management of the Company, will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 5. Self-insurance The Company maintains a self-insurance program for that portion of health care costs not covered by insurance. The Company is liable for claims up to defined limits. Self-insurance costs are based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. 21 CORPORATE INFORMATION -------------------------------------------------------------------------------- Directors: --------- Raymond J. Smith, Chairman Christopher J. Ryan John J. Collins, Jr. Eric O. Hallman Walter J. Raleigh Officers: -------- Raymond J. Smith, President Christopher J. Ryan Executive Vice President, Secretary and General Counsel 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 Transfer Agent: -------------- Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 NASDAQ symbol: LAKE Executive Offices: ----------------- 711-2 Koehler Ave. Ronkonkoma, NY 11779 (631) 981-9700 Subsidiaries: ------------ Lakeland Protective Wear, Inc. Lakeland de Mexico S.A. de C.V. Laidlaw, Adams & Peck, Inc. Weifang Lakeland Safety Products, Co. Ltd. Exhibits to Lakeland Industries, Inc.'s fiscal 2001 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. ThermbarTM, Kut BusterTM, Grapolator Mock TwistTM, Safeguard "76"TM, Body GuardTM,, Zone GuardTM, RyTexTM, TomTexTM, DextraGardTM, ForcefieldTM, InterceptorTM, CheckmateTM, HeatexTM, PyrolonTM, Sterling HeightsTM, FyrepelTM, HighlandTM, ChemlandTM and UnilandTM are trademarks of Lakeland Industries, Inc. TyvekTM, VitonTM, BarricadeTM, NomexTM, Kevlar TM, DelrinTM, TyChemTM and TeflonTM are registered trademarks of E.I.DuPont de Nemours and Company. SaranexTM is a registered trademark of Dow Chemical. SpectraTM is a registered trademark of Allied Signal, Inc. 22