| LAKELAND INDUSTRIES INC Item 1A Risk Factors 15 - ------- ------------ ITEM 1A RISK FACTORS - ---------------------- RISK FACTORS You should carefully consider the following risks before investing in our common stock |
| If any of the events referred to below actually occurs, our business, financial condition, liquidity and results of operations could suffer |
| In that case, the trading price of our common stock could decline 15 and you may lose all or part of your investment |
| You should also refer to the other information in this Form 10-K and Annual Report and in the documents we incorporate by reference into this Form 10-K and Annual Report, including our consolidated financial statements and the related notes |
| Risk Related to Our Business We rely on a limited number of suppliers and manufacturers for specific fabrics, including Tyvek(R) and Tychem(R), 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 |
| Our business is dependent to a significant degree upon close relationships with vendors and our ability to purchase raw materials at competitive prices |
| The loss of key vendor support, particularly support by DuPont for its Tyvek(R) products, could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| We do not have long-term supply contracts with DuPont or our other fabric suppliers |
| As a result, there can be no assurance that we will be able to acquire Tyvek(R), Tychem(R) and other raw materials and components at competitive prices or on competitive terms in the future |
| For example, certain materials that are high profile and in high demand may be allocated by vendors to their customers based upon the vendors &apos internal criteria, which are beyond our control |
| In fiscal 2006, we purchased approximately 74dtta01prca of the dollar value of our raw materials from DuPont, and Tyvek(R) constituted approximately 69dtta1prca of our cost of goods sold |
| For periods in 1985 and 1989, DuPont placed all purchasers of Tyvek(R) on "e allocation "e |
| "e Allocation "e is a circumstance in which demand outstrips supply and fabrics are sold based upon the amount a buyer purchased the prior year |
| This allocation limited our ability to meet demand for our products |
| There can be no assurance that an adequate supply of Tyvek(R) or Tychem(R) will be available in the future |
| Any shortage could adversely affect our ability to manufacture our products, and thus reduce our net sales |
| Other than DuPontapstas Tyvek(R) and TyChem(R) fabrics, we generally use standard fabrics and components in our products |
| We rely on non-affiliated suppliers and manufacturers for the supply of these fabrics and components that are incorporated in our products |
| If such suppliers or manufacturers experience financial, operational, manufacturing capacity or quality assurance difficulties, or if there is a disruption in our relationships, we will be required to locate alternative sources of supply |
| We cannot assure you that we will be able to locate such alternative sources |
| In addition, we do not have any long-term contracts with any of our suppliers for any of these components |
| Our inability to obtain sufficient quantities of these components, if and as required in the future, may result in: o Interruptions and delays in manufacturing and resulting cancellations of orders for our products; o Increases in fabrics or component prices that we may not be able to pass on to our customers; and o Our holding more inventory that normal because we cannot finish assembling our products until we have all of the components We are subject to risk as a result of our international manufacturing operations |
| Because most of our products are manufactured at our facilities located in China and Mexico, our operations are subject to risk inherent in doing business internationally |
| Such risks include the adverse effects on operations from war, international terrorism, civil disturbances, political instability, governmental activities and deprivation of contract and property rights |
| In particular, since 1978, the Chinese government has been reforming its economic and political systems, and we expect this to continue |
| Although we believe that these reforms have had a positive effect on the economic development of China and have improved our ability to successfully operate our facilities in China, we cannot assure you that these reforms will continue or that the Chinese government will not take actions that 16 impair our operations or assets in China |
| In addition, periods of international unrest may impede our ability to manufacture goods in other countries and could have a material adverse effect on our business and results of operations |
| Our results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates |
| Most of our assembly arrangements with our foreign-based subsidiaries or third party suppliers require payment to be made in US dollars |
| Any decrease in the value of the US dollar in relation to foreign currencies could increase the cost of the services provided to us upon contract expirations or supply renegotiations |
| There can be no assurance that we will be able to increase product prices to offset any such cost increases and any failure to do so could have a material adverse effect on our business, financial condition and results of operations |
| We are also exposed to foreign currency exchange rate risks as a result of our sales in foreign countries |
| Our net sales to customers in Canada and China were dlra8dtta1 million, in fiscal 2006 |
| Our sales in Canada are denominated in Canadian dollars |
| If the value of the US dollar increases relative to the Canadian dollar and we are unable to raise our prices proportionally, then our profit margins could decrease because of the exchange rate change |
| Although our fabric and compenent costs in China are denominated in the Chinese Yuan, this currency has historically been largely pegged to the US dollar, which has minimized our foreign currency exchange rate risk in China |
| Recently, however the Chinese Yuan has been allowed to float against to the US dollar, and therefore, we will be exposed to additional foreign currency exchange rate risk |
| This risk will also increase as we continue to increase our sales in other foreign countries |
| Rapid technological change could negatively affect sales of our products and our performance |
| The rapid development of fabric technology continually affects our apparel applications and may directly impact the performance of our products |
| For example, microporous film-based products have eroded the market share of Tyvek(R) in certain applications |
| We cannot assure you that we will successfully maintain or improve the effectiveness of our existing products, nor can we assure you that we will successfully identify new opportunities or continue to have the needed financial resources to develop new fabric or apparel manufacturing techniques in a timely or cost-effective manner |
| In addition, products manufactured by others may render our products obsolete or non-competitive |
| If any of these events occur, our business, prospects, financial condition and operating results will be materially and adversely affected |
| Acquisitions or future expansion could be unsuccessful |
| Mifflin Valley, Inc, a Pennsylvania company, acquired on August 1, 2005, and a portion of the assets of RFB Latex, an Indian company, which we have the option to acquire in autumn 2006 currently market high visibility clothing and chemically resistant gloves |
| These two new lines may accelerate our growth in the personal protective equipment market |
| This past and potential upcoming acquisition involve various risks, including: difficulties in integrating these companies &apos operations, technologies, and products, the risk of diverting managementapstas attention from normal daily operations of the business; potential difficulties in completing projects associated with in-process research and development; risks of entering markets in which we have limited experience and where competitors in such markets have stronger market positions; initial dependence on unfamiliar supply chains; and insufficient revenues to offset increased expenses associated with these acquisitions |
| In the future, we may seek to acquire additional selected safety products lines or safety-related businesses which 17 will complement our existing products |
| Our ability to acquire these businesses is dependent upon many factors, including our managementapstas relationship with the owners of these businesses, many of which are small and closely held by individual stockholders |
| In addition, we will be competing for acquisition and expansion opportunities with other companies, many of which have greater name recognition, marketing support and financial resources than us, which may result in fewer acquisition opportunities for us as well as higher acquisition prices |
| There can be no assurance that we will be able to identify, pursue or acquire any targeted business and, if acquired, there can be no assurance that we will be able to profitably manage additional businesses or successfully integrate acquired business into our company without substantial costs, delays and other operational or financial problems |
| If we proceed with any significant acquisition for cash, we may use a substantial portion of our available cash in order to consummate any such acquisition |
| We may also seek to finance any such acquisition through debt or equity financings, and there can be no assurance that such financings will be available on acceptable terms or at all |
| If consideration for an acquisition consists of equity securities, our stockholders could be diluted |
| If we borrow funds in order to finance an acquisition, we may not be able to obtain such funds on terms that are favorable to us |
| In addition, such indebtedness may limit our ability to operate our business as we currently intend because of restrictions placed on us under the terms of the indebtedness and because we may be required to dedicate a substantial portion of our cash flow to payments on the debt instead of to our operations, which may place us at a competitive disadvantage |
| Acquisitions involve a number of special risks in addition to those mentioned above, including the diversion of managementapstas attention to the assimilation of the operations and personnel of the acquired companies, the potential loss of key employees of acquired companies, potential exposure to unknown liabilities, adverse effects on our reported operating results, and the amortization or write down of acquired intangible assets |
| We cannot assure you that any acquisition by us will or will not occur, that if an acquisition does occur that it will not materially and adversely affect our results of operations or that any such acquisition will be successful in enhancing our business |
| If we are unable to manage our growth, our business could be adversely affected |
| Our operations and business have expanded substantially in recent years, with a large increase in employees and business areas in a short period of time |
| To manage our rapid growth properly, we have been and will be required to expend significant management and financial resources |
| There can be no assurance that our systems, procedures and controls will be adequate to support our operations as they expand |
| There can also be no assurance that our management will be able to manage our growth and operate a larger organization efficiently or profitably |
| To the extent that we are unable to mange growth efficiently and effectively or are unable to attract and retain additional qualified management personnel, our business, financial condition and results of operations could be materially and adversely affected |
| We must recruit and retain skilled employees, including our senior management, to succeed in our business |
| Our performance is substantially dependent on the continued services and performance of our senior management and certain other key personnel, including Christopher J Ryan, our chief executive officer, president, general counsel and secretary, and Gary Pokrassa, our chief financial officer, who has 36 years of financial and accounting experience, and James McCormick our Controller and treasurer, Greg Willis, our Executive Vice President, and Harvey Pride, Jr, our vice president in charge of manufacturing, due to their long experience in our industry |
| Our executive officers, other than CFO, have an average tenure with us of 18 years and an average of 21 years of experience in our industry |
| The loss of services of any of our executive officers or other key employees could have a material adverse effect on our business, financial condition and results of operations |
| In addition, any future expansion of our business will depend on our ability to identify, attract, hire, train, retain and motivate other highly skilled managerial, marketing, customer service and manufacturing personnel and our inability to do so could have a material adverse effect on our business, financial condition and results of operations |
| 18 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 sales are generally made on the basis of individual purchase orders, which may later be modified or canceled by the customer, rather than long-term commitments |
| We have historically been required to place firm orders for fabrics and components with our suppliers, prior to receiving an order for our products, based on our forecasts of customer demands |
| Our sales process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates, causing excess inventory to accrue or a lack of manufacturing capacity when needed |
| If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect or at all |
| As a result, we would have excess inventory, which would negatively impact our financial results |
| Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would lose sales opportunities, lose market share and damage our customer relationships |
| On occasion, we have been unable to adequately respond to delivery dates required by our customers because of the lead time needed for us to obtain required materials or to send fabrics to our assembly facilities in China and Mexico |
| We face competition from other companies, two of which have substantially greater resources than we do |
| Two of our competitors, DuPont and Kimberly Clark, have substantially greater financial, marketing and sales resources than we do |
| In addition, we believe that the barriers to entry in the reusable garments and gloves markets are relatively low |
| We cannot assure you that our present competitors or competitors that choose to enter the marketplace in the future will not exert significant competitive pressures |
| Such competition could have a material adverse effect on our net sales and results of operations |
| For further discussion of the competition we face in our business, see "e Business - Competition "e |
| Some of our sales are to foreign buyers, which exposes us to additional risks |
| We derived approximately 9dtta8prca of our net sales from customers located in foreign countries in fiscal 2006 |
| The additional risks of foreign sales include: o Potential adverse fluctuations in foreign currency exchange rates; o Higher credit risks; o Restrictive trade policies of foreign governments; o Currency nullification and weak banking institutions; o Changing economic conditions in local markets; o Political and economic instability in foreign markets; and o Changes in leadership of foreign governments |
| Some or all of these risks may negatively impact our results of operations and financial condition |
| Covenants in our credit facilities may restrict our financial and operating flexibility |
| We currently have one credit facility; o A five year dlra25 million revolving credit facility, of which we had dlra7dtta3 million of borrowings outstanding as 19 of January 31, 2006; and Our current credit facility requires, and any future credit facilities may also require, that we comply with specified financial covenants relating to interest coverage, debt coverage, minimum consolidated net worth, and earnings before interest, taxes, depreciation and amortization |
| Our ability to satisfy these financial covenants can be affected by events beyond our control, and we cannot assure you that we will meet the requirements of these covenants |
| These restrictive covenants could affect our financial and operational flexibility or impede our ability to operate or expand our business |
| Default under our credit facilities would allow the lenders to declare all amounts outstanding to be immediately due and payable |
| Our lenders have a security interest in substantially all of our assets to secure the debt under our current credit facilities, and it is likely that our future lenders will have security interests in our assets |
| If our lenders declare amounts outstanding under any credit facility to be due, the lenders could proceed against our assets |
| Any event of default, therefore, could have a material adverse effect on our business |
| 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 |
| Our operations require significant amounts of cash, and we may be required to seek additional capital, whether from sales of equity or by borrowing money, to fund acquisitions, for the future growth and development of our business or to fund our operations and inventory, particularly in the event of a market downturn |
| Although we have the ability until July 31, 2010 to borrow additional sums under our dlra25 million revolving credit facility, this facility contains a borrowing base provision and financial covenants that may limit the amount we can borrow thereunder or from other sources |
| We may not be able to replace or renew this credit facility upon its expiration on terms that are as favorable to us or at all |
| In addition, a number of factors could affect our ability to access debt or equity financing, including; o Our financial condition, strength and credit rating; o The financial markets &apos confidence in our management team and financial reporting; o General economic conditions and the conditions in the homeland security sector; and o Capital markets conditions |
| Even if available, additional financing could be costly or have adverse consequences |
| If additional funds are raised through the incurrence of debt, we will incur increased debt servicing costs and may become subject to additional restrictive financial and other covenants |
| We can give no assurance as to the terms or availability of additional capital |
| If we are not successful in obtaining sufficient capital, it could reduce our net sales and net income and adversely impact our financial position, and we may not be able to expand or operate our business as planned |
| A reduction in government funding for preparations for terrorist incidents that could adversely affect our net sales |
| As a general matter, a significant portion of our sales growth to our distributors is dependent upon resale by those distributors to customers that are funded in large part by federal, state and local government funding |
| Specifically, approximately 60prca of our high-end chemical suit sales is dependent on government funding |
| Congress passed the 2001 Assistance to Firefighters Grant Program and the Bioterrorism Preparedness and Response Act of 2002 |
| Both of these Acts provide for funding to fire and police departments and medical and emergency personnel to respond to terrorist incidents |
| Appropriations for these Acts by the federal government could be reduced or eliminated altogether |
| Any such reduction or elimination of federal funding, or any reductions in state or local funding, could cause sales of our products purchased by fire and police departments and medical and emergency personnel to decline |
| We may be subject to product liability claims, and insurance coverage could be inadequate or unavailable to 20 cover these claims |
| We manufacture products used for protection from hazardous or potentially lethal substances, such as chemical and biological toxins, fire, viruses and bacteria |
| The products that we manufacture are typically used in applications and situations that involve high levels of risk of personal injury |
| Failure to use our products for their intended purposes, failure to use our products properly or the malfunction of our products could result in serious bodily injury to or death of the user |
| In such cases, we may be subject to product liability claims arising from the design, manufacture or sale of our products |
| If these claims are decided against us and we are found to be liable, we may be required to pay substantial damages and our insurance costs may increase significantly as a result |
| We cannot assure you that our insurance coverage would be sufficient to cover the payment of any potential claim |
| In addition, we cannot assure you that this or any other insurance coverage will continue to be available or, if available, that we will be able to obtain it at a reasonable cost |
| Any material uninsured loss could have a material adverse effect on our financial condition, results of operations and cash flows |
| Environmental laws and regulations may subject us to significant liabilities |
| Our US operations, including our manufacturing facilities, are subject to federal, state and local environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal and remediation of certain materials, substances and wastes |
| Any violation of any of those laws and regulations could cause us to incur substantial liability to the Environmental Protection Agency, the state environmental agencies in any affected state or to any individuals affect by any such violation |
| Any such liability could have a material adverse effect on our financial condition and results of operations |
| The market price of our common stock may fluctuate widely |
| The market price of our common stock could be subject to significant fluctuations in response to quarter-to-quarter variation in our operating results, announcements of new products or services by us or our competitors, and other events or factors |
| For example, a shortfall in net sales or net income, or an increase in losses, from levels expected by securities analysts, could have an immediate and significant adverse effect on the market price and volume fluctuations that have particularly affected the market prices of many micro and small capitalization companies and that have often been unrelated or disproportionate to the operating performance of these companies |
| These fluctuations, as well as general economic and market conditions, may adversely affect the market price for our common stock |
| Our results of operations may vary widely from quarter to quarter |
| Our quarterly results of operations have varied and are expected to continue to vary in the future |
| These fluctuations may be caused by many factors, including: o Competitive pricing pressures; o Seasonal buying patterns resulting from the cyclical nature of the business of some of our customers; o The size and timing of individual sales; o Changes in the mix of products and services sold; o The timing of introductions and enhancements of products by us or our competitors; o Market acceptance of new products; o Technological changes in fabrics or production equipment used to make our products; o Changes in the mix of domestic and international sales; 21 o Personnel changes; o Our expansion of international operations; and o General industry and economic conditions |
| These variations could negatively impact our stock price |
| Compliance with the Sarbanes-Oxley Act of 2002 and rules and regulations relating to corporate governance and public disclosure may result in additional expenses and negatively impact our results of operations |
| The Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by the Securities and Exchange Commission and the Nasdaq Stock Market have greatly increased the scope, complexity and cost of corporate governance, reporting and disclosure practices for public companies, including our company |
| Keeping abreast of, and in compliance with, these laws, rules and regulations have required an increased amount of resources and management attention |
| In the future, this may result in increased general and administrative expenses and a diversion of management time and attention from sales-generating and other operating activities to compliance activities, which would negatively impact our results of operations |
| In addition, the corporate governance, reporting and disclosure laws, rules and regulations could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors |
| In particular, the Nasdaq Stock Market rules require a majority of our directors to be "e independent "e as determined by our board of directors in compliance with the Nasdaq rules |
| It therefore has become more difficult and significantly more expensive to attract such independent directors to our Board |
| 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 |
| As of April 12, 2006, our directors and executive officers beneficially owned approximately 19dtta2prca of the outstanding shares of our common stock |
| As a result of their ownership of common stock and their positions in our company, our directors and executive officers are able to exert significant influence on our company and on matters submitted to a vote by our stockholders |
| In particular, as of April 12, 2006, Raymond J Smith, our chairman of the board, and Christopher J Ryan, our chief executive officer, president, general counsel and secretary and a director, beneficially owned approximately 9dtta56prca and 6dtta52prca of our common stock, respectively |
| The ownership interests of our directors and executive officers, including Messrs |
| Smith and Ryan, could have the effect of delaying or preventing a change of control of our company that may be favored by our stockholders generally |
| Provisions in our restated certificate of incorporation and by-laws and Delaware law could make a merger, tender offer or proxy contest difficult |
| Our restated certificate of incorporation contains "e super majority "e voting and classified board provisions, authorized preferred stock that could be utilized to implement various "e poison pill "e defenses and a stockholder authorized, but as yet unused, Employee stock Ownership Plan, all of which may have the effect of discouraging a takeover of Lakeland which is not approved by our board of directors |
| Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibit us from engaging in a "e business combination "e with an "e interested stockholder "e for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in the prescribed manner |