Third Quarter Fiscal Year 2010 Financial Results Review

Net Sales. Net sales decreased $2.9 million, or 11.4%, to $22.3 million for the three months ended October 31, 2009, from $25.2 million for the three months ended October 31, 2008. The net decrease was comprised of a 26% decrease in domestic sales partially offset by a 25% increase in foreign sales. International revenues for 3QFY10 were $8.0 million, an increase of $1.6 million from $6.4 million in the same period of fiscal 2009. Domestic revenues for 3QFY10 were $14.3 million, a decrease of $4.5 million from fiscal 2009. As a percentage of 3QFY10 consolidated sales, international revenues accounted for 36%, an increase from 25% for the same period of fiscal 2009, and domestic revenues accounted for 64%, a decrease from 75% in the 2009 period.

International growth was led by sales at Qualytextil, representing the Company’s operations in Brazil, which increased by $0.9 million or 38.5% to $3.4 million in 3QFY10 as compared with $2.4 million in 3QFY09 and $3.2 million in 2QFY10. External sales from China increased by $0.4 million, or 24%, from the same quarter in fiscal 2009 driven by sales to Australia; an expansive domestic sales effort in China commenced in the fall of 2009 which is not expected to materially impact revenues for several more months as the sales channel ramps up. For 3QFY10 as compared with 3QFY09, Canadian sales increased by $0.1 million, or 3.5%; UK sales increased by $0.2 million, or 23.8%; Chile sales increased by $0.2 million, or 78.9%; and US domestic sales decreased by $5.2 million or 26.6%.

Gross Profit. Gross profit decreased $1.5 million or 21.1% to $5.7 million for the three months ended October 31, 2009, from $7.2 million for the three months ended October 31, 2008. Gross profit as a percentage of net sales decreased to 25.4% for the three months ended October 31, 2009, from 28.5% for the three months ended October 31, 2008. The major factors driving the changes in gross margins were:

• Disposables gross margins declined by 10 percentage points in Q3 this year compared with Q3 last year. This decline was mainly due to higher priced raw materials and an extremely aggressive pricing environment coupled with lower volume, partially offset by labor cutbacks for the production of garments.
• Brazil gross margin was 41.1% for Q3 this year compared with 49.3% last year. Several features were at play, including complications associated with sourcing of third party foreign products and currency fluctuations affecting the costing and importing of foreign raw materials.
• Glove division reduction in volume coupled with inventory write-offs.
• Continued gross losses of $0.2 million from India in Q3FY10.
• Chemical and Reflective margins were lower than the prior year mainly due to lower volume.
• Canada gross margin increased by 16.1 percentage points mainly resulting from more favorable exchange rates and local competitive pricing climate.
• UK and Europe margins increased by 24 percentage points mainly resulting from exchange rate differentials.
• Chile margins increased by 10.2 percentage points mainly resulting from higher volume and several larger sales orders.

Operating Expenses. Operating expenses increased $0.36 million, or 7.0% to $5.5 million for the three months ended October 31, 2009 from $5.1 million for the three months ended October 31, 2008. On a sequential basis, operating expenses declined $0.5 million, or 9.2% from $6.0 million in the fiscal second quarter. As a percentage of sales, operating expenses increased to 24.5% for the three months ended October 31, 2009 from 20.3% for the three months ended October 31, 2008. Excluding Qualytextil in Brazil, operating expenses declined $0.2 million for Q3 FY2010 compared with Q3 FY2009. Major changes in operating expenses include the following:

• $(0.1) million - officers salaries declined, reflecting the retirement of Ray Smith to become a non-employee director and Chairman of the Board, and also reflecting an 8% across the board reduction in total officer compensation.
• $(0.1) million - freight out declined, mainly resulting from lower volume.
• $(0.1) million – consulting fees were reduced, resulting from using interns and revising Sarbanes Oxley procedures.
• $(0.1) million reduction in foreign exchange cost resulting from the Company’s hedging program and more favorable rates.
• $(0.2) million - sales commissions declined, mainly resulting from lower volume.
• $0.2 million increase due to severance pay in August resulting from a reduction in force.
• $0.2 million – increase in operating costs in China were the result of the large increase in direct international sales made by China; these costs are now allocated to SG&A costs (previously allocated to cost of goods sold).
• $0.3 million – miscellaneous increases.
• $0.4 million -- start-up expenses in Brazil in connection with Qualytextil gearing up to sell Lakeland branded products. This includes hiring 20 sales and logistical support staff, printing of catalogs, lease of two new distribution centers and increased travel expense.
• $0.1 million -- in additional freight out and commissions in Brazil resulting from higher sales volume in Brazil.