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LAKELAND INDUSTRIES INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following summary together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this Form 10-K and in the documents that we incorporate by reference into this Form 10-K. This document may contain certain "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Overview FY13 was a challenging year for management. The Company lost an officer contract dispute where we had substantial documentary evidence that the officer in question had breached his employment contract with Lakeland. Nonetheless, a Brazilian Arbitration Panel awarded this officer a $12.5 million judgment against Lakeland. According to our local counsel, arbitration decisions in Brazil are very difficult to successfully appeal. Subsequently, Lakeland successfully negotiated the judgment down to $8.5 million of which $6.0 million was payable over six years with no interest. As of April 1, 2013, the remaining liability associated with this arbitration judgment is $5.75 million and is payable at $250,000 a quarter over the next 5 ¾ years, with no interest. In addition, the Brazilian government devalued its currency by 10% in 2012 which greatly reduced our margins in Brazil on imported fabrics. Declining sales in FY13 led to quarterly losses in Brazil, which led to the necessity of writing off all goodwill, certain intangibles, and deferred tax assets of Brazil. These factors led to a default on the TD Bank loan, which in turn created substantial doubt about our ability to continue as a going concern. Thus, we engaged with new lenders and considered other options, such as the sale of the Company, the sale of assets which has occurred, and a refinance of the TD Bank loan. In May 2013, the Company accepted a commitment letter from a bank for a Senior Credit Facility subject to certain terms and conditions and is currently working towards closing this financing. However, no assurance can be given that this transaction or any other transaction will be consummated. We will continue pursuing all options to maximize stockholder value. As a result of the default under the TD Bank loan, and the risk that such loan could be called as immediately due and payable, we were unable to conclude that we would have the capital to continue our operations through January 31, 2014. Successful completion of the proposed new financing, in management's opinion, would relieve this condition. We manufacture and sell a comprehensive line of safety garments and accessories for the global industrial protective clothing markets. Our products are sold by our in-house sales force and independent sales representatives to a network of over 1,200 North American safety and mill supply distributors and end users and distributors internationally. These distributors in turn supply end user industrial customers, such as integrated oil, utilities, chemical/petrochemical, automobile, steel, glass, construction, smelting, janitorial, pharmaceutical and high technology electronics manufacturers. In addition, we supply federal, state and local governmental agencies and departments domestically and internationally, such as municipal fire and police departments, airport crash rescue units, the military, the Department of Homeland Security and the Centers for Disease Control and state and privately owned utilities and integratedoil companies. We have operated -facilities in Mexico since 1995, in China since 1996, in India since 2007 (now discontinued) and in Brazil since May 2008. Beginning in 1995, we moved the labor intensive sewing operation for our limited use/disposable protective clothing lines to these facilities. Our facilities and capabilities in China and Mexico allow access to a less expensive labor pool than is available in the United States and permit us to purchase certain raw materials at a lower cost than they are available domestically. As we have increasingly moved production of our products to our facilities in Mexico and China, we have seen improvements in the profit margins for these products. We have completed the process of moving of production of our reusable woven garments and gloves to these facilities by the second quarter of FY10. Our net sales from continuing operations attributable to customers outside the United States were $54.4 million and $45.8 million in FY13 and FY12, respectively. 28 We anticipate R&D expenses remaining flat at $240,000 in FY14 compared to FY13. This is due largely to expenses for a development project that we incurred in FY13 coupled with the anticipated elimination of several projects as a part of our product rationalization process, which is ongoing. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and disclosure of contingent assets and liabilities. We base estimates on our past experience and on various other assumptions that we believe to be reasonable under the circumstances, and we periodically evaluate these estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Going Concern. Our consolidated financial statements have been prepared using the accrual method of accounting in accordance with GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have sustained substantial operating losses since in FY13 and we are in default with our lender, TD Bank. During the year ended January 31, 2013, we had a net loss of $(26.3) million. These factors raise substantial doubt about our ability to continue as a going concern. We expect to continue to incur substantial additional operating losses from our Brazilian operations for at least the first half of FY14. Unless we are able to have in place a new credit facility, we believe that our current cash position of $6.7 million, our cash flow from operations and, borrowing in Brazil and the United Kingdom, may not be sufficient to meet our currently anticipated operating, capital expenditures and debt service requirements for at least the next 12 months. To this end, in May 2013, the Company accepted a commitment letter from a bank for a Senior Credit Facility subject to certain terms and conditions and is currently working towards closing this financing. However, no assurance can be given that this transaction or any other transaction willbe consummated. If management is unable to successfully implement its cost reduction strategies or to complete any other financing, that would impact our ability to continue as a going concern. Revenue Recognition. The Company derives its sales primarily from its limited use/disposable protective clothing and secondarily from its sales of high-end chemical protective suits, firefighting and heat protective apparel, gloves and arm guards and reusable woven garments. Sales are recognized when goods are shipped, at which time title and the risk of loss pass to the customer. Some sales in Brazil may be sold on terms with F.O.B. destination, which are recognized when received by the customer. Sales are reduced for sales returns and allowances. Payment terms are generally net 30 days for United States sales and net 90 days for international sales. Inventories. Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or market. Inventory is written down for slow-moving, obsolete or unusable inventory. In the year ended January 31, 2013, the Company changed its estimate used in calculating slow moving inventory in the US. Previously, the Company reserved for any item in excess of 5 years stock on hand based on annualized sales levels. The Company has determined that based on its needs to service customers, up to a two year supply may be needed. Therefore, the Company now writes down anything in excess of a two year supply. The change in estimate resulted in an additional write down of $288,000 at January 31, 2013. Most foreign operations consider inventory obsolete or slow-moving when more than one year supply exists. Allowance for Doubtful Accounts. Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: 29 Customer creditworthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. Past due balances over 90 days and other less creditworthy accounts are reviewed individually for collectability. If the financial condition of the Company's customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management's assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Income Taxes and Valuation Allowances. We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of preparing our consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carry forwards and tax credits, are recorded as deferred tax assets or liabilities on our balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be realized from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event we determine that we may not be able to realize all or part of our deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to net income in the period of such determination. Uncertain Tax Positions. In the event the Company determines that it may not be able to realize all or part of our deferred tax assets in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to income in the period of such determination. The Company recognizes tax positions that meet a "more likely than not" minimum recognition threshold. Valuation of Goodwill and Other Intangible Assets. Goodwill and indefinite lived, intangible assets are tested for impairment at least annually; however, these tests may be performed more frequently when events or changes in circumstances indicate the carrying amount may not be recoverable. Goodwill impairment is evaluated utilizing a two-step process as required by US GAAP. Factors that the Company considers important that could identify a potential impairment include: significant underperformance relative to expected historical or projected future operating results; significant changes in the overall business strategy; and significant negative industry or economic trends. The Company measures any potential impairment on a projected discounted cash flow method. Estimating future cash flows requires the Company's management to make projections that can differ materially from actual results. Impairment of Long-Lived Assets. The Company evaluates the carrying value of long-lived assets to be held and used when events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from the asset are separately identifiable and are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Foreign Currency Risks. The functional currency for the Brazil operation is the Brazil Real; the United Kingdom, the Euro; the trading company in China, the RenminBi; the Canada Real Estate, the Canadian dollar; and the Russia operation, the Russian Ruble and Kazakhstan Tenge. All other operations have the US dollar as its functional currency. Self-Insured Liabilities. We have a self-insurance program for certain employee health benefits. The cost of such benefits is recognized as expense based on claims filed in each reporting period and an estimate of claims incurred but not reported during such period. Our estimate of claims incurred but not reported is based upon historical trends. If more claims are made than were estimated or if the costs of actual claims increase beyond what was anticipated, reserves recorded may not be sufficient, and additional accruals may be required in future periods. We maintain separate insurance to cover the excess liability over set single claim amounts and aggregate annual claim amounts. 30 Results of Operations The following table sets forth our historical results of continuing operations for the years ended January 31, 2011, 2012 and 2013, as a percentage of our net sales from continuing operations. Year Ended January 31, 2012 2013Net sales from continuing operations 100.00 % 100.00 % Cost of goods sold from continuing operations 70.12 % 71.27 % Gross profit from continuing operations 29.88 % 28.73 % Operating expenses from continuing operations 28.07 % 29.81 % Operating profit (loss) from continuing operations 1.81 % (1.08 )% Interest expense, VAT tax charge, settlement of arbitration award and other income, net (0.94 )% (20.71 )% Income tax expense (benefit) from continuing operations (0.26 )% 5.29 % Net income (loss) from continuing operations 1.13 % (27.09 )% 31 Significant Balance Sheet Fluctuation January 31, 2013, as Compared to January 31, 2012 Balance Sheet Accounts. The increase in cash and cash equivalents of $1.0 million is primarily the result of normal fluctuations in cash management. Inventories decreased $6.4 million primarily due to sell off of remaining Tyvek inventory by January 31, 2013, overall inventory reduction program and the sale of inventory in Brazil built up for the Navy contract. The decrease in intangibles and goodwill of $9.3 million is due to the write down of these assets in Brazil. The decrease of $4.5 million in the current deferred tax assets is due to the creation of a valuation allowance for such accounts. The borrowing in Brazil was used for working capital. The increase in cash and cash equivalents of $1.0 million is primarily the result of careful cash management to enable Brazilian arbitration settlement payments through cash generated by current assets and liabilities, inventory and payables management. Trade payables increased in FY13 due to increased purchases of materials in China, Argentina and Chile with longer payment terms and cash management in the US. Year Ended January 31, 2013, Compared to the Year Ended January 31, 2012 For the Year For the Three Months Ended January 31, Ended January 31, Audited Unaudited 2013 2012 2013 2012Net sales from continuing operations 100.00 % 100.00 % 100.00 % 100.00 % Gross profit from continuing operations 28.73 % 29.88 % 23.92 % 26.35 % Operating expenses from continuing operations 29.81 % 28.07 % 30.22 % 32.45 % Operating profit (loss) from continuing operations (1.08 )% 1.81 % (6.30 )% (6.11) % Income (loss) before tax from continuing operations (21.80 )% 0.87 % (50.72 )% (8.27) % Net income (loss) from continuing operations (27.09 )% 1.13 % (75.10 )% (5.00) % Net Sales*. Net sales from continuing operations decreased $1.2 million, or 1.3%, to $95.1 million for the year ended January 31, 2013, compared to $96.3 million for the year ended January 31, 2012. The net decrease was mainly due to a $9.8 million decrease in domestic sales, partially offset by a $8.6 million increase in foreign sales. The net decrease in the US was comprised mainly of a decrease in US disposables sales, resulting from the loss of the Tyvek license from DuPont. This decrease in US sales was offset by significant increases in foreign sales, including a $1.2 million increase in sales by Qualytextil, SA in Brazil, a $3.2 million increase in European sales and a $1.8 million growth in combined Chile and Argentina sales. External sales from China were flat for the fourth quarter FY13 but were up for the full year 15.7%. Sales in Brazil have decreased in Q4FY13and we expect next fiscal year's sales to be lower in Brazil. Net sales from continuing operations in Q4 FY13 increased by $3.2 million, or 16.0%, to $23.4 million from Q4 of FY12. This increase was due to an increase in foreign sales, from $10.6 million in Q4 FY12 to $11.3 million in Q4 FY13 Of these amounts, sales in Brazil were $2.7 million and $2.7 million for Q4 ofFY12 and FY13, respectively. *For purposes of the Management's Discussion, the reference to "Q" shall mean "Quarter." Thus "Q2" means the second quarter of the applicable fiscal year. 32 Gross Profit. Gross profit from continuing operations decreased $1.5 million, or 5.1%, to $27.3 million for the year ended January 31, 2013, from $28.8 million for the year ended January 31, 2012. Gross profit as a percentage of net sales decreased to 28.7% for the year ended January 31, 2013, from 29.9% for the year ended January 31, 2012. The major factors driving the changes in gross margins were: · Disposables gross margin increased by 4.0 percentage points in FY13 compared with FY12. This increase was mainly due to changes in the sales mix to primarily Lakeland branded products this year, while last year had more than 50% of North American disposable sales were sales of DuPont products at a lower margin. This year's margin was lower than it otherwise would be as a result of lower volume and an increase in inventory reserves against Tyvek items remaining. · Brazil gross margin was 31.1% for this year compared with 42.8% last year, primarily due to issues with a contract with the Brazilian Navy. The Brazilian currency weakened significantly earlier in the year, thereby greatly increasing the cost of material purchased from a USA supplier. Further, due to the length of time elapsed since the bid was submitted in respect of the Navy contract, there were increases in the material cost, along with a need to change certain components at a higher cost. There were also similar issues with several utility contracts. · Glove margins increased 5.0 percentage points primarily from improved product mix. · Chemical margins were decreased by 8.5 percentage points due to different sales mix. · Canada gross margin decreased by 1.9 percentage point primarily due to discounting remaining Tyvek inventory. · UK margins decreased by 1.5 percentage points primarily from higher volume from larger sales at lower margins. · Argentina margins decreased by 9.2 percentage points due to lack of capital. · Chile margins increased by 8.1 percentage points as a result of stronger sales mix. Operating Expenses. Operating expenses from continuing operations increased $1.3 million, or 4.9%, to $28.3 million for the year ended January 31, 2013, from $27.0 million for the year ended January 31, 2012. As a percentage of net sales, operating expenses increased to 29.8% for the year ended January 31, 2013, from 28.1% for the year ended January 31, 2012. The increase in operating expenses in the year ended January 31, 2013, as compared to the year ended January 31,2012, included: · $0.7 million increase in sales salaries due to the hiring of additional sales people to support growth in the US, Asia, and South America. · $0.6 million increase in commissions, of which 0.5 million was in Brazil, relating to higher commissions on large bid contracts delivered in Q1-Q3 of FY13. · $0.1 million increase in sales administrative salaries due to increase in customer service capacity in Alabama. · $0.1 million increase in insurance due to increased claims experience. · $0.1 million increase in employee benefits due to increase in unemployment expense. · $0.1 million increase in bad debt resulting from one large account in Chile. · $0.2 million increase in professional fees as a result of the issues in Brazil. · (0.1) million decrease in administrative salaries, which includes a $0.6 million accrual for the contract termination of the President of the Brazilian subsidiary offset against $(0.7) million reduction in administrative salaries in Brazil, throughout the year, which is the result of our efforts to reduce costs. 10 employees inadministration and sales were terminated in Brazil in FY13. A new law was passed in Brazil resulting in lower payroll taxes, officers in Brazil took a 10% payroll cut for two quarters, and the depreciated currency resulted in lower payroll expense in Brazil. · $(0.2) million decrease in research and development due to large R&D expenses in FY12. · $(0.3) million in decreased freight out expense due to more consolidated shipping and better management oversight. 33 Operating Profit/(Loss). Operating profit/(loss) from continuing operations decreased by $2.7 million to $(1.0) million from $1.7 million for the prior year. Operating profit as a percentage of net sales decreased (1.1)% for the year ended January 31, 2013, from 1.8% for the year ended January 31, 2012, primarily due to sharply lower volume in disposables in the US due to the termination of the Company's Tyvek and Tychem supply agreement by DuPont, a $0.6 million charge for contract termination of the President of the Brazilian subsidiary, issues in Brazil with the Navy and other contracts caused by a currency devaluation earlier in the year and weak volume in Brazil, mainly due to lack of large bid contracts in Q4 of FY13. Without Brazil's FY13 operating loss of $1.6 million, the Company would have had operating income of $0.6 million. Interest Expense. Interest expense increased by $0.2 million for the year ended January 31, 2013, compared to the year ended January 31, 2012, because of term loan borrowing in 2012 to fund capital expansion in Brazil and Mexico outstanding throughout FY13 and also borrowing in Brazil at higher rates prevailing in Brazil and the US. Further, the Company paid higher interest rates on its TD facility in FY13 as a result of several amendments during FY13. Other Expenses - Net. The increase in other expenses resulted mainly from the $10.0 million write down of goodwill in Brazil and the $7.9 million arbitration settlement, with two of the former owners of the Company's subsidiary in Brazil. Income Tax Expense. Income tax expenses from continuing operations consist of federal, state and foreign income taxes. Income tax expense increased $5.3 million to $5.0 million for the year ended January 31, 2013, from $(0.3) million for the year ended January 31, 2012. Our effective tax rate was meaningless for the fiscal years ended January 31, 2013 and 2012. Our effective tax rate varied from the federal statutory rate of 34% due primarily to the $7.9 million arbitration settlement in Brazil, which did not get a tax benefit, $10.0 million goodwill write-off in Brazil and the establishment of a $4.5 million valuation allowance for deferred tax assets. Our income taxes in the current year were benefited by losses in the US and a "check-the-box" US tax benefit from the losses in India at a higher rate than most of the foreign income. Further, there was a $4.5 million valuation allowance charged to tax expense this year relating to the deferred tax asset. Net Income/(Loss). Net income/(loss) from continuing operations decreased $26.9 million to a loss of $(25.8) million for the year ended January 31, 2013, from $1.1 million for the year ended January 31, 2012. The decrease in net income was primarily a result of arbitration settlement and goodwill impairment charge in Brazil (see Notes 4 and 5 for full discussion). Fourth Quarter Results Continuing Operations The sales in Brazil in Q4 of FY13 and FY12 had no large bid sales and were approximately the same as prior year. The increase in sales in other foreign jurisdictions is primarily due to the introduction of new products and new marketing material targeting specific markets. Factors effecting 4QFY13 results included: · A goodwill impairment charge of $10.0 million in Brazil. · $0.6 million separation accrual in Brazil for a departing executive. · A loss of $0.2 million on foreign exchange in Brazil. · A valuation allowance for deferred tax in the amount of $4.5 million. · We continue to see price increases in our Chinese manufacturing operations with labor source availability a concern. · As a result of general elections in the fourth quarter, the public tenders were very weak in Brazil across all markets throughout the quarter resulting in weaker sales. · In Q4 we began initiatives to "right size" the Brazilian operation. This initiative is expected to be complete in Q1 FY14. About 70% of the severance and labor reductions costs were recognized in November and January of Q4. · Lakeland Europe and Lakeland China both experienced strong Q4 sales closing FY13 with record sales for each division. 34 Discontinued Operations In Q4FY12, the Company commenced its efforts to market its property in India. Based on the difficulty in marketing this property in Q4FY13, the Company determined carrying value exceeded projected undiscounted cash flows and recorded a loss of $800,000 to reduce carrying value to future value. Liquidity and Capital Resources Cash Flows As of January 31, 2013, we had cash and cash equivalents of $6.7 million and working capital of $36.0 million, an increase of $1.0 million and a decrease of $28.3 million, respectively, from January 31, 2012. We have operations in many foreign jurisdictions which may place restrictions on repatriation of cash to the US. We are planning various strategies to mitigate this issue. Our primary sources of funds for conducting our business activities have been from cash flow provided by (used in) operations and borrowings under our credit facilities described below. Much of our cash is overseas and not readily available. We require liquidity and working capital primarily to fund increases in inventories and accounts receivable associated with our net sales and, to a lesser extent, for capital expenditures. The decrease in working capital was primarily due to the reclassification of the TD Bank loan outstanding balances from long-term in FY12 to current liabilities in FY13. Net cash provided by continuing operating activities of $2.2 million for the year ended January 31, 2013, was due primarily to net loss of $26.3 million, offset by noncash charges of $7.9 million for the arbitration award less $1.8 million payments and fees, noncash $10.0 million goodwill impairment charge in Brazil and $3.8 million valuation allowance for deferred tax noncash charge, an increase in receivables of $1.5 million, a decrease in inventory of $4.6 million and increased payables of $1.8 million. Net cash used in continuing operating activities of $0.0 million for the year ended January 31, 2012, was due primarily to a net loss of $0.4 million, an increase in receivables of $1.3 million and decreased payables of $1.9 million. Net cash used in investing activities of $1.4 million and $4.9 million in the years ended January 31, 2013 and 2012, respectively, was due to the purchases and improvements to property and equipment in both years, in fiscal 2013 mainly in China and Mexico, and in fiscal 2012 mainly due to capital expansions in Brazil and Mexico. Net cash used in financing activities in the years ended January 31, 2013 and 2012 was primarily new borrowings under the term loan facility to fund the Brazilian and Mexican expansions, payments of $1.9 million, pursuant to the Brazil Settlement Agreement and borrowings in Brazil. Credit Facility As of January 31, 2013 we had one credit facility: a $17.5 million credit facility with TD Bank, expiring in June 2013, including a Revolver and Term Loans, of which we had borrowing outstanding under the revolver as of January 31, 2013 amounting to $9.6 million, expiring in June 2013 and a term loan facility of which we had $5.5 million outstanding as of January 31, 2013. As a result of the arbitration award issued against the Company in May 2012 and the subsequent entry into a Settlement Agreement (the "Brazilian Settlement Agreement") in respect thereof, as well as due to the recent operating results of the Company mentioned below, one or more events of default have occurred during the year under the TD Bank revolving credit facility and term loan facility, including an event of default for failure to comply with the minimum EBITDA covenant, which allow TD Bank, at its option, to accelerate the loan. Borrowings under the revolving credit facility bear interest at the London Interbank Offering Rate (LIBOR) plus 200 basis points and were 3.7% at January 31, 2013. Our TD Bank credit facility requires 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. 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 allows 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 credit facilities. On May 15, 2013, the Company accepted a commitment letter from a bank for a Senior Credit Facility subject to certain terms and conditions and is currently working towards closing this financing. However, no assurance can be given that this transaction or any other transaction will be consummated. 35 Unless we are able to have in place a new credit facility, we believe that our current cash position of $6.7 million, our cash flow from operations and, borrowing in Brazil and the United Kingdom, may not be sufficient to meet our currently anticipated operating, capital expenditures and debt service requirements for at least the next 12 months. CapitalExpenditures Our capital expenditures principally relate to purchases of building and equipment in Brazil and Mexico, manufacturing equipment, computer equipment and leasehold improvements. We anticipate FY14 capital expenditures to be approximately $1.0 million. Our facilities in China are not encumbered by commercial bank mortgages and, thus, Chinese commercial mortgage loans or the sale of a facility may be available with respect to these real estate assets if we need additional liquidity. There are no further specific plans for material capital expenditures in the fiscal year 2014. During FY13the AnQui City, China Weifang Lakeland factory expanded its operations substantially to accommodate the movement of the work in a leased facility, whose lease had expires. By bringing the two factories together, economies of scale were achieved. Contractual Obligations We had no off-balance sheet arrangements at January 31, 2013. As shown below, at January 31, 2013, our contractual cash obligations totaled approximately $19.8 million, including lease renewals entered into subsequent to January 31, 2013. Payments Due by Period One Year After 5 Total or Less 2 Years 3 Years 4 Years 5 Years Years Canada facility loan $ 1,398,566 $ 100,481 $ 100,481 $ 100,481 $ 100,481 $ 100,481 $ 896,161 Term loans - TD Bank 5,550,000 5,550,000 - - - - - Borrowings in Brazil 1,578,779 1,578,779 - - - - - Operating leases 1,261,530 499,169 175,568 109,125 76,168 66,000 335,500 Other liabilities 83,809 83,809 - - - - - Revolving credit facility 9,558,882 9,558,882 - - - - - Brazil Arbitration Settlement 5,710,691 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 710,691 Total $ 25,142,257 $ 18,371,120 $ 1,276,049 $ 1,209,606 $ 1,176,649 $ 1,166,481 $ 1,942,352 The TD facility is reflected as amended in October 2012 (See Note 6 to the financial statements included in this Form 10-K ) 36 Recent Accounting Developments The Company considers the applicability and impact of all accounting standards updates (ASUs). ASUs not listed below were determined to either not be applicable or to have a minimal impact on the consolidated financial statements. The FASB has issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in this ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to: • Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. • Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense. The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies and are effective for reporting periods beginning after December 15, 2013, for private companies. Early adoption is permitted. The FASB has issued Accounting Standards Update (ASU) No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification Subtopic 350-30, Intangibles-Goodwill and Other, General Intangibles Other than Goodwill. Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. 37 The FASB has issued Accounting Standards Update (ASU) No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more likely than not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles- Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The FASB has issued its U.S. GAAP Financial Reporting Taxonomy Implementation Guide - Subsequent Events. The guide is the first in a series of XBRL Implementation Guides, which are designed to help Taxonomy users understand how certain disclosures are structured within the Taxonomy. The purpose of the Implementation Guide is to demonstrate the modeling for disclosures required about events occurring subsequent to the end of a public company's reporting period. The modeling has been completed using the elements in the Taxonomy. The examples are not intended to encompass all of the potential modeling configurations or to dictate the appearance and structure of a company's XBRL documents. In addition to the Implementation Guide, the FASB also issued Definition Components & Structure, the first style guide of the FASB U.S. GAAP Financial Reporting Taxonomy Style Guide Series. Also available on the FASB website, the style guides provide additional insight into design criteria and are offered as a reference for users of the Taxonomy. The U.S. GAAP Financial Reporting Taxonomy is a list of computer-readable tags in XBRL that allows companies to tag precisely the thousands of pieces of financial data that are included in typical long-form financial statements and related footnote disclosures. The tags allow computers to automatically search for, assemble, and process data so it can be readily accessed and analyzed by investors, analysts, journalists, and regulators. In early 2010, the Financial Accounting Foundation assumed maintenance responsibilities for the Taxonomy, and, along with the FASB, assembled a team of technical staff dedicated to updating the Taxonomy for changes in U.S. GAAP, identifying best practices in Taxonomy extensions, and technical enhancements. 38 |