-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CjG+Ea5O7tys0hQ4eTCj62907N4v/PcS+9zIj7vG+6qDPh//crZEemqVp0zG9A5u j7YJAUOvxrrmRTyD7yTXMA== 0000914317-05-002809.txt : 20050907 0000914317-05-002809.hdr.sgml : 20050907 20050907160054 ACCESSION NUMBER: 0000914317-05-002809 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050731 FILED AS OF DATE: 20050907 DATE AS OF CHANGE: 20050907 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAKELAND INDUSTRIES INC CENTRAL INDEX KEY: 0000798081 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 133115216 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15535 FILM NUMBER: 051072886 BUSINESS ADDRESS: STREET 1: 711-2 KOEHLER AVENUE CITY: RONKONKOMA STATE: NY ZIP: 11779 BUSINESS PHONE: 5169819700 MAIL ADDRESS: STREET 1: 711- 2 KOEHLER AVENUE CITY: RONKONKOMA STATE: NY ZIP: 11779 10-Q 1 form10q-70529_lakeland.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2005 ------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to_______________ Commission File Number: 0-15535 LAKELAND INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 13-3115216 - ------------------------------ ------------------------------------- (State of incorporation) (IRS Employer Identification Number) 701 Koehler Avenue, Suite 7, Ronkonkoma, New York 11779 - -------------------------------------------------------------------------------- (Address of principal executive offices) 711 Koehler Avenue, Suite 2, Ronkonkoma, New York 11779 - -------------------------------------------------------------------------------- (Former name or address, if changed since last report) (631) 981-9700 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 par value, outstanding at September 7, 2005 - 5,017,046 shares. LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES FORM 10-Q The following information of the Registrant and its subsidiaries is submitted herewith: PART I - FINANCIAL INFORMATION: Item 1. Financial Statements (unaudited):
Page ---- Introduction ...................................................................................1 Condensed Consolidated Balance Sheets July 31, 2005 and January 31, 2005........................2 Condensed Consolidated Statements of Income for the Three and Six Months Ended July 31, 2005 and 2004..............................................3 Condensed Consolidated Statement of Stockholders' Equity - Six Months Ended July 31, 2005.......4 Condensed Consolidated Statements of Cash Flows - Six Months Ended July 31, 2005 and 2004........................................................................................5 Notes to Condensed Consolidated Financial Statements............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........12 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................17 Item 4. Controls and Procedures .......................................................................17 PART II - OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K ...........................................................17 Signature Page............................................................................................19
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION --------------------- Item 1. Financial Statements: Introduction ------------ CAUTIONARY STATEMENTS This report may include "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 heading "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 the actual results or developments may differ materially from those projected in any 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. 1
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS July 31, 2005 January 31, 2005 (Unaudited) Current assets: Cash and cash equivalents (which includes $0 and $3,711,320 of marketable securities at July 31, 2005 and January 31, 2005, respectively) $ 7,116,840 $ 9,185,382 Accounts receivable, net of allowance for doubtful accounts of $323,000 at July 31, 2005 and January 31, 2005 13,385,512 13,117,374 Inventories, net of reserves of $392,000 at July 31, 2005 and $396,000 at January 31, 2005 35,982,978 30,906,023 Deferred income taxes 960,734 960,734 Other current assets 948,811 958,491 ----------- ----------- Total current assets 58,394,875 55,128,004 Property and equipment, net of accumulated depreciation of $5,758,000 at July 31, 2005 and $5,304,000 January 31, 2005 7,315,519 5,014,240 Goodwill 889,876 -- Other assets 332,652 171,010 ----------- ----------- $66,932,922 $60,313,254 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 3,572,406 $ 2,710,251 Payable to seller of Mifflin Valley 1,746,439 -- Accrued expenses and other current liabilities 1,297,727 1,441,912 ----------- ----------- Total current liabilities 6,616,572 4,152,163 Other long-term liabilities 520,330 495,330 Deferred income taxes 86,229 86,229 Minority interest in Variable Interest Entities -- 1,112,861 Amount outstanding under revolving credit arrangement 1,881,933 -- Commitments and contingencies Stockholders' equity Preferred stock, $.01 par; authorized 1,500,000 shares (none issued) Common stock, $.01 par; authorized 10,000,000 shares; issued and outstanding 5,017,046 shares at July 31, 2005 and 4,560,885 shares at January 31, 2005 50,170 45,609 Additional paid-in capital 42,431,220 36,273,046 Retained earnings 15,346,468 (1) 18,148,016 ----------- ----------- Total stockholders' equity 57,827,858 54,466,671 ----------- ----------- $66,932,922 $60,313,254 ----------- -----------
(1) A cumulative total of $11,612,824 has been transferred from retained earnings to additional paid-in-capital and par value of common stock due to three separate stock dividends paid in 2002, 2003 and 2005. As reflected in the Condensed Consolidated Statement of Stockholders' Equity, $6,162,735 was included in the quarter ended April 30, 2005. The accompanying notes are an integral part of these financial statements. 2
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED July 31, July 31, 2005 2004 2005 2004 ---- ---- ---- ---- Net sales $ 25,089,146 $ 22,845,169 $ 50,798,074 $ 49,683,192 Cost of goods sold 19,293,516 17,983,098 38,835,565 38,841,689 ------------ ------------ ------------ ------------ Gross profit 5,795,630 4,862,071 11,962,509 10,841,503 Operating expenses 3,589,281 2,990,264 7,210,126 6,576,984 ------------ ------------ ------------ ------------ Operating profit 2,206,349 1,871,807 4,752,383 4,264,519 Interest and other income, net 65,562 849 89,024 10,309 Interest expense (3,582) (69,316) (4,012) (206,457) ------------ ------------ ------------ ------------ Income before minority interest 2,268,329 1,803,340 4,837,395 4,068,371 Minority interest in net income of variable interest entities * * -- 175,710 -- 294,406 ------------ ------------ ------------ ------------ Income before income taxes 2,268,329 1,627,630 4,837,395 3,773,965 Provision for income taxes 620,119 485,000 1,476,208 1,206,000 ------------ ------------ ------------ ------------ Net income $ 1,648,210 $ 1,142,630 $ 3,361,187 $ 2,567,965 ------------ ------------ ------------ ------------ Net income per common share*: Basic $ .33 $ .27 $ .67 $ .65 ------------ ------------ ------------ ------------ Diluted $ .33 $ .27 $ .67 $ .65 ------------ ------------ ------------ ------------ Weighted average common shares outstanding*: Basic 5,017,046 4,251,486 5,017,046 3,926,402 Diluted 5,021,058 4,257,869 5,021,267 3,932,276
*Adjusted for the 10% stock dividend to shareholders of record on April 30, 2005 and reflects 1,280,750 shares offered to the public in June and July 2004. * * Properties owned by related parties were purchased by the Company in April 2005, thus the Company deemed the impact of FIN46R to be deminimus for the July 31, 2005 financial statements. The accompanying notes are an integral part of these financial statements. 3
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) Six months ended July 31, 2005 Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total ------ ------ ------- -------- ----- Balance, January 31, 2005 4,560,885 $ 45,609 $ 36,273,046 $ 18,148,016 $ 54,466,671 10% stock dividend 456,161 4,561 6,158,174 (6,162,735) -- Net Income -- -- -- 3,361,187 3,361,187 ------------ ------------ ------------ ------------ ------------ Balance July 31,2005 5,017,046 $ 50,170 $ 42,431,220 $ 15,346,468 $ 57,827,858 ------------ ------------ ------------ ------------ ------------
(Reflects the three separate 10% stock dividends issued on July 31, 2002, 2003 and April 30, 2005 which resulted in a cumulative transfer of $11,612,824 from retained earnings to additional paid in capital and par value of common stock). (See note 1 to Condensed Consolidated Balance Sheets). The accompanying notes are an integral part of these financial statements. 4
LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED July 31, 2005 2004 ---- ---- Cash Flows from Operating Activities Net income ............................................... $ 3,361,187 $ 2,567,965 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Reserve for inventory obsolescence ..................... (4,601) -- Depreciation and amortization .......................... 467,000 436,664 Decrease in accounts receivable .......................... 109,600 537,672 (Increase) in inventories * .............................. (4,425,529) (2,948,409) (Increase) Decrease in other assets ...................... (87,522) 390,631 Decrease (increase) in accounts payable, accrued expenses and other liabilities ....................... 450,547 (29,439) ------------ ------------ Net cash (used in)provided by operating activities .......................................... (129,318) 955,084 Cash Flows from Investing Activities: Purchases of property and equipment ...................... (3,821,157) (454,878) Purchase of marketable securities ........................ -- (4,477,578) ------------ ------------ Net cash used in investing activities .................... (3,821,157) (4,932,456) ------------ ------------ Cash Flows from Financing Activities: Proceeds from exercise of stock options .................. -- 54,432 Proceeds from secondary stock offerings .................. -- 24,369,023 (Repayments) borrowing under loan agreements ............. 1,881,933 (16,784,781) ------------ ------------ Net cash provided by financing activities ................ 1,881,933 7,638,674 ------------ ------------ Net increase (decrease) in cash .......................... (2,068,542) 3,661,302 Cash and cash equivalents at beginning of period ......... 9,185,382 2,445,271 ------------ ------------ Cash and cash equivalents at end of period ............... $ 7,116,840 $ 6,106,573 ------------ ------------
* Inventory increased as production increased for the second half demand and accelerated purchases made on raw materials in anticipation of the July 1, 2005 price increase. The accompanying notes are an integral part of these financial statements. 5 LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Business Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware corporation, organized in April 1982, manufactures and sells a comprehensive line of safety garments and accessories for the industrial protective clothing and homeland security markets. The principal market for our products is the United States. No customer accounted for more than 10% of net sales during the six month periods ended July 31, 2005 and 2004, respectively. 2. Basis of Presentation The condensed consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which are, in the opinion of management, necessary to present fairly the consolidated financial information required therein. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended January 31, 2005. Certain reclassifications between cost of goods sold and operating expenses were made to the first quarter of fiscal year 2006,in order to be consistent with the second quarter and year to date of fiscal 2006 classifications for the Mexico and China subsidiaries. The results of operations for the six month periods ended July 31, 2005 and 2004, respectively, are not necessarily indicative of the results to be expected for the full year. 3. Principles of Consolidation The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Laidlaw Adams & Peck, Inc., and Subsidiary (MeiYang Protective Products Co., Ltd., a Chinese Corporation), Lakeland Protective Wear, Inc. (a Canadian corporation), Weifang Lakeland Safety Products Co. Ltd. (a Chinese corporation), Qing Dao Maytung Healthcare Co., Ltd. (a Chinese corporation), Lakeland Industries Europe Ltd. (a British Corporation), Lakeland de Mexico S.A. de C.V (a Mexican corporation) and Mifflin Valley, Inc. (A Delaware Corporation). All significant inter-company accounts and transactions have been eliminated. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". This interpretation provides guidance with respect 6 to the consolidation of certain entities, referred to as variable interest entities, in which an investor is subject to a majority of the risk of loss from the variable interest entity's activities, or is entitled to receive a majority of the variable interest entity's residual returns. This interpretation also provides guidance with respect to the disclosure of variable interest entities in which an investor maintains an interest but is not required to consolidate. The provisions of the interpretation were effective immediately for all variable interest entities created after January 31, 2003, or in which we obtain an interest after that date. In December 2003, the FASB issued a revision to this pronouncement, FIN 46R, which clarified certain provisions and modified the effective date from October 1, 2003 to March 15, 2004 for variable interest entities created before February 1, 2003. The two entities which leased property and buildings to the Company and were owned by related parties, which have been consolidated in our financial statements for the year ended January 31, 2005 are River Group Holding Co., L.L.P. and POMS Holding Co. Several of the owners of these entities were directors and officers of Lakeland. Under FIN 46, it is likely that leases between an entity and its related parties would be considered a variable interest, even if there is no residual value guarantee or purchase option. The FASB staff's view is that these elements are implied in a related-party lease even though they may not be explicitly stated in the lease agreement. Effective February 1, 2004 we adopted this pronouncement. As a result, certain entities which leased property to the Company and were owned by related parties were determined to be Variable Interest Entities and have been consolidated since the Company's April 30, 2004 quarterly financial statements. Creditors, or beneficial interest holders, of the consolidated variable interest entities have no recourse to the general credit of the Company. On April 25, 2005, the Company purchased property and buildings from POMS Holding Co. for a net purchase price of $2,067,584. Reference is made to the Company's filing on Form 8-K dated April 25, 2005. In April 2005, the Company entered into a real estate purchase contract with River Group Holding Co. to purchase a warehouse and the real property underlying it for $928,686. It recorded the purchase on the Company's April 30, 2005 financial statements. The purchase of this property was completed on May 25, 2005. Thus, the Company deemed the impact of FIN 46R to be deminimis for the July 31, 2005 financial statements. There are no variable interest entities in which the "Company" is not the primary beneficiary. 4. Business Combinations On August 1, 2005, the Company closed its contract to acquire the assets and operations and assume certain liabilities of Mifflin Valley, Inc., ("Mifflin") of Shillington, PA for an initial purchase price of $1.58 million, subject to certain adjustments. Mifflin did approximately $2.6 million of sales in 2004, and $1.5 million for the six months ended June 30, 2005. Mifflin is a manufacturer of protective clothing specializing in safety and visibility, largely for the Emergency Services market, but also for the entire public safety and traffic control market. Mifflin specializes in customized garments to suit customers' needs, coupled with quality, service, price and delivery. Mifflin's products include Flame Retardant garments for the Fire Industry, Nomex clothing for utilities, and High Visibility Reflective Outerwear for Departments of Transportation. The purchase was effective as of July 1, 2005 and the results of Mifflin's operations have been included since July 1 in the Company's reported results, adding approximately $257,000 in revenue for the month and $0.01 to earnings per share to the actual reported results. Had the transaction taken place on February 1, 2005, on a proforma basis, there would have been an increase in the reported amounts as follows: Quarter ended July 31, 2005 Six months ended July 31, 2005 Sales $ 505,000 $1,264,000 Net Income 136,000 163,000 Earning per share $ 0.01 $ 0.03 7 5. Inventories: Inventories consist of the following: July 31, January 31, 2005 2005 ---- ---- Raw materials ...... $14,681,895 $12,231,264 Work-in-process .... 3,385,339 2,614,710 Finished Goods ..... 17,915,744 16,060,049 ----------- ----------- .................... $35,982,978 $30,906,023 ----------- ----------- 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. 6. Earnings Per Share: On June 18, 2004 we concluded a secondary public stock offering issuing an additional 1,100,000 shares of common stock. On July 1, 2004 the underwriter exercised its over-allotment option whereby we issued an additional 180,750 shares of common stock. Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share are based on the weighted average number of common and common stock equivalents. 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 period. The following table sets forth the computation of basic and diluted earnings per share at July 31, 2005 and 2004, adjusted, retroactively, for the 10% Stock dividends to Shareholders on April 30, 2005.
Three Months Ended Six Months Ended July 31, July 31, 2005 2004 2005 2004 ---- ---- ---- ---- Numerator Net income ............................. $1,648,210 $1,142,630 $3,361,187 $2,567,965 ---------- ---------- ---------- ---------- Denominator Denominator for basic earnings per share 5,017,046 4,251,486 5,017,046 3,926,402 (Weighted-average shares) Effect of dilutive securities ... 4,012 6,383 4,221 5,874 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share ...... 5,021,058 4,257,869 5,021,267 3,932,276 ---------- ---------- ---------- ---------- (adjusted weighted-average shares) Basic earnings per share ........................ $ .33 $ .27 $ .67 $ .65 ---------- ---------- ---------- ---------- Diluted earnings per share ...................... $ .33 $ .27 $ .67 $ .65 ---------- ---------- ---------- ----------
Options to purchase 11,000 shares of the Company's common stock have been excluded for the three and six months ended July 31, 2005, as their inclusion would be anti-dilutive. 8 7. Revolving Credit Facility At July 31, 2005, the balance outstanding under our new $25 million five year revolving credit facility amounted to $1.88 million. The credit facility is collateralized by substantially all of the assets of the Company. The credit facility contains financial covenants, including, but not limited to, fixed charge ratio, funded debt to EBIDTA ratio, inventory and accounts receivable collateral coverage ratio, with respect to which the Company was in compliance at July 31, 2005 and for the period then ended. The weighted average interest rate for the six month period ended July 31, 2005 was 3.94% 8. Major Supplier We purchased 72.5% of our raw materials from one supplier during the six-month period ended July 31, 2005. We expect this relationship to continue for the foreseeable future. If required, similar raw materials could be purchased from other sources; however, our competitive position in the marketplace could be adversely affected. 9. Stock Based Compensation We have adopted the disclosure provisions of SFAS No. 123(R), "Accounting for Stock-Based Compensation" (SFAS 123(R)). In compliance with 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 employee stock-based compensation plans. We have also adopted the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This pronouncement requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. If we 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(R), the effect on the Company's net income and earnings per share as reported would be reduced for the quarters and six months ended July 31, 2005 and 2004 to the pro forma amounts indicated below:
Three Months Ended Six Months Ended July 31, July 31, 2005 2004 2005 2004 ---- ---- ---- ---- Net income as reported $ 1,648,210 $ 1,142,630 $ 3,361,187 $ 2,567,965 Less: Option expense based on fair value method -- 11,186 9,627 11,186 ----------- ----------- ----------- ----------- Pro forma $ 1,648,210 $ 1,131,444 $ 3,351,560 $ 2,556,779 ----------- ----------- ----------- ----------- Basic earnings per common share As reported $ .33 $ .27 $ .67 $ .65 ----------- ----------- ----------- ----------- Pro forma $ .33 $ .27 $ .67 $ .65 ----------- ----------- ----------- ----------- Diluted earnings per common share As reported $ .33 $ .27 $ .67 $ .65 ----------- ----------- ----------- ----------- Pro forma $ .33 $ .27 $ .67 $ .65 ----------- ----------- ----------- -----------
9 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 quarters and six months ended July 31, 2005 and 2004: expected volatility of 87% and 64%, respectively; risk-free interest rate of 3.6% and 2.93%, respectively; expected dividend yield of 0.0%; and expected life of six years. All stock-based awards were fully vested at July 31, 2005 and 2004. Earnings per share and options granted have been adjusted to reflect the 10% stock dividends to stockholders of record as of April 30, 2005. During the three months ended July 31, 2005, no options were granted or exercised. 10. Manufacturing Segment Data Domestic and international sales are as follows in millions of dollars: Three Months Ended Six Months Ended July 31, July 31, 2005 2004 2005 2004 ---- ---- ---- ---- Domestic $22.1 88.0% $21.5 94.3% $45.0 88.6% $45.6 91.7% International 3.0 12.0% 1.3 5.7% 5.8 11.4% 4.1 8.3% ----- ----- ----- ----- ----- ----- ----- Total $25.1 100% $22.8 100% $50.9 100% $49.7 100% ----- ----- ----- ----- ----- ----- ----- We manage our operations by evaluating each of our geographic locations. Our North American operations include our facilities in Decatur, Alabama (primarily the distribution to customers of the bulk of our products and the manufacture of our chemical, glove and disposable products), Celaya, Mexico (primarily disposable, glove and chemical suit production) and St. Joseph, Missouri (primarily woven products production). We also maintain three manufacturing facilities in China (primarily disposable and chemical suit production). Our China facilities and our Decatur, Alabama facility produce the majority of the Company's products. The accounting policies of these operating entities are the same as those described in Note 1 to the Company's Annual Report on Form 10-K for the year ended January 31, 2005. We evaluate the performance of these entities based on operating profit which is defined as income before income taxes, interest expense and other income and expenses. We have small sales forces in Canada, Europe and China who sell and distribute products shipped from the United States, Mexico or China. The table below represents information about reported manufacturing segments for the three and nine months noted therein:
Three Months Ended Six Months Ended July 31, July 31, (in millions of dollars)(in millions of Dollars) 2005 2004 2005 2004 ---- ---- ---- ---- Net Sales: North America $26.6 $24.3 $53.9 $50.9 China 2.8 1.9 4.8 4.2 Less inter-segment sales (4.3) (3.3) (7.9) (5.4) ----- ----- ----- ----- Consolidated sales $25.1 $22.9 50.8 $49.7 ----- ----- ----- ----- Operating Profit: North America $ 1.6 $ 1.5 $ 3.8 $ 3.7 China .7 .4 1.1 .6 Less inter-segment profit (loss) (.1) -- (.1) -- ----- ----- ----- ----- Consolidated profit $ 2.2 $ 1.9 $ 4.8 $ 4.3 ----- ----- ----- ----- Identifiable Assets (at Balance Sheet date or change during quarter): North America $2.00 $ 7.1 $57.1 $50.5 China .9 .3 9.8 8.2 ----- ----- ----- ----- Consolidated assets $2.90 $ 7.4 $66.9 $58.7 ----- ----- ----- ----- Depreciation and Amortization Expense: North America $ .19 $ .14 $ .3 $ .3 China .10 .03 .2 .1 ----- ----- ----- ----- Consolidated depreciation expense $ .29 $ .17 $ .5 $ .4 ----- ----- ----- -----
10 11. Effects of Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this statement are effective for the first annual reporting period that begins after June 15, 2005. Management does not believe there will be a significant impact as a result of adopting this statement In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151 "Inventory costs." This statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing" and removes the "so abnormal" criterion that under certain circumstances could have led to the capitalization of these items. SFAS No. 151 requires that idle facility expense, excess spoilage, double freight and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." SFAS 151 also requires that allocation of fixed production overhead expenses to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for all fiscal years beginning after June 15, 2005. Management does not believe there will be a significant impact as a result of adopting this statement. On December 16, 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary Assets", an amendment of Accounting Principles Board ("APB") Opinion No. 29, which differed from the International Accounting Standards Board's ("IASB") method of accounting for exchanges of similar productive assets. Statement No. 153 replaces the exception from fair value measurement in APB No. 29, with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. The statement is to be applied prospectively and is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe that SFAS No. 153 will have a material impact on its results of operations or cash flows. 12. Real Estate Purchases In April 2005, the Company entered into two separate real estate purchase contracts, one with POMS and one with River Group, both related parties. The Company has purchased the land and buildings in Decatur, Alabama that it has leased from these related parties since their inception, POMS (1984) and River Group (1999). The purchase price was $2,056,000 for the POMS property and $925,000 for the River Group property pursuant to the average of three separate and independent real estate appraisals. The partnerships were accounted for in accordance with FIN46R and were reflected in the financial statements for the fiscal year ended January 31, 2005. In contemplation of the real estate purchases, the Company entered into an agreement, dated March 4, 2005, with an officer of Lakeland (who is a partner in POMS & River Group) to acquire his interest for $565,367 ($411,200 for POMS and $154,167 for River Group), at the same proportional valuation as the overall property. 11 On April 25, 2005 the Company closed on the real estate purchase contract with POMS paying a net amount of $1,656,384 ($2,056,000-$411,200 already paid +$11,584 in closing costs). The Company paid POMS the lease amount from February 1, 2005 until April 25, 2005 amounting to $86,157, which is charged to rent expense. On May 25, 2005 the Company closed on the real estate purchase contract with River Group paying a net amount of $774,519 ($925,000-$154,167 already paid +$3,686 in closing costs). The Company paid River Group the lease amount from February 1, 2005 until May 25, 2005 amounting to $63,157, which is charged to rent expense. At April 30, 2005, the Company recorded the asset land value of $230,000, the asset building value of $2,751,000, closing costs of $11,584 and a payable to River Group in the amount of $770,833. The Company recorded the purchase of the land and building from River Group as of April 30, 2005, since the contract of sale was finalized and the closing was pending the release of an easement on the property. Total rent expense for the two properties for the six months ended July 31, 2005 amounted to $146,577. The Company recorded depreciation on each of the two properties from the closing date forward. Upon conclusion of these two real estate purchase contracts, the Company no longer has related party transactions requiring the recording of variable interest entities under FIN46R. Other than the above entries, the Company has not recorded the effects of FIN46R in the current fiscal year. The Company deems any such impact to be immaterial. Building purchase in New York: On May 10, 2005 the Company purchased a 6,250 square foot office condominium to serve as its Corporate Headquarters. The purchase price was $640,000 plus $9,161 in closing costs. The lease on its current location amounted to $51,202 annually and expired on June 30, 2005. The new address is 701 Koehler Suite 7, Ronkonkoma, NY 11779. 13. Related Party Transactions Along with the asset purchase agreement, dated July 2005, between the Company and Mifflin Valley, Inc., the Company entered into a five year lease agreement with the seller (now an employee of the Company) to rent the manufacturing facility at an annual rental of $55,560, or a per square foot rental of $3.00. This amount was obtained from an independent appraisal at the fair market rental value done prior to the acquisition. 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 appeared in Form 10-K and Annual Report and in the documents that were incorporated by reference into Form 10-K for the year ended January 31, 2005. 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 We manufacture and sell a comprehensive line of safety garments and accessories for the industrial protective clothing and homeland security markets. Our products are sold by our in-house sales force and independent sales representatives to a network of over 800 safety and mill supply distributors. These distributors in turn supply end user industrial customers such as chemical/petrochemical, automobile, steel, glass, construction, smelting, janitorial, pharmaceutical and high technology electronics manufacturers, as well as hospitals and laboratories. In addition, we supply federal, state and local governmental agencies and departments such as fire and police departments, airport crash rescue units, the Department of Defense, Central Intelligence Agency, Federal Bureau of Investigation, U.S. Secret Service and the Centers for Disease Control. 12 We have operated manufacturing facilities in Mexico since 1995 and in China since 1996. 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 are at the half way point of moving production of our reusable woven garments and gloves to these facilities and expect to complete this process by the third quarter of fiscal 2006. As a result, we expect to see profit margin improvements for these product lines as well. Critical Accounting Policies and Estimates 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. Revenue Recognition. We derive our sales primarily from our limited use/disposable protective clothing and secondarily from our sales of high-end chemical protective suits, fire fighting and heat protective apparel, gloves and arm guards, and reusable woven garments. Sales are recognized when goods are shipped to our distributors at which time title and the risk of loss passes. 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. Provision is made for slow-moving, obsolete or unusable inventory. Allowance for Doubtful Accounts. We establish an allowance for doubtful accounts to provide for accounts receivable that may not be collectible. In establishing the allowance for doubtful accounts, we analyze the collectibility of individual large or past due accounts customer-by-customer. We establish reserves for accounts that we determine to be doubtful of collection. Income Taxes and Valuation Reserves. 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. The Company's Federal Income Tax returns for the fiscal years ended January 31, 2003 and 2004 are currently under audit by the Internal Revenue Service. The final results of these audits cannot be estimated by management. It is anticipated that the audits will be concluded by the end of the third quarter of Fiscal 2006. Valuation of Goodwill and Other Intangible Assets. On February 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which provides that goodwill and other intangible assets are no longer amortized, but are assessed for impairment annually and upon occurrence of an event that indicates impairment may have occurred. Goodwill impairment is evaluated utilizing a two-step process as required by SFAS No. 142. Factors that we consider 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. When we determine that the carrying value of intangibles and goodwill may not be recoverable based upon one or more of these indicators of impairment, we measure any potential impairment based on a projected discounted cash flow method. Estimating future cash flows requires our management to make projections that can differ materially from actual results. 13 In July 2005 (in a transaction which closed August 1, 2005) the Company purchased Mifflin Valley, Inc. As a result of this purchase Goodwill was recorded in the amount of $889,876 at July 31, 2005. The transaction may be subject to certain adjustments. 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 increases 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. 14 Item 2. LAKELAND INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Significant Balance Sheet Fluctuation July 31, 2005 as compared to January 31, 2005 Cash and cash equivalents decreased by $2.07 million as the Company purchased real property in Alabama and New York. Inventory increased $5.08 million as production increased for the second half demand and accelerated purchases made on raw materials in anticipation of the July 1, 2005 price increase. Goodwill of $.89 million recorded in July 2005 relates to the acquisition of Mifflin Valley, Inc. Accounts payable increased with the accelerated purchase of raw materials and a payable of $1.7 million for the purchase of Mifflin Valley, Inc., concluded on August 1, 2005. At July 31, 2005 the Company had an outstanding loan balance of $1.88 million under its new facility with Wachovia Bank, N.A. Total stockholder's equity increased by the net income for the period of $3.36 million Six months ended July 31, 2005 as compared to the six months ended July 31, 2004 Net Sales. Net sales increased $1.1 million, or 2.2% to $50.8 million for the six months ended July 31, 2005 from $49.7 million for the six months ended July 31, 2004. The increase was primarily due to customers buying forward as a result of our selling price increase effective June 20, 2005, on Tyvek and TyChem garments. Continued growth in sales by our Canadian and UK subsidiaries and the acquisition of Mifflin Valley, Inc. added to this increase, offset partially by decreased sales in chemical protection garments due to a softness in government purchasing. Gross Profit. Gross profit increased $1.1 million or 10.3% to $12.0 million for the six months ended July 31, 2005 from $10.8 million for the six months ended July 31, 2004. Gross profit as a percentage of net sales increased to 23.6% for the six months ended July 31, 2005 from 21.8% for the six months ended July 31, 2004, primarily due to the continuation of cost reduction programs shifting production from the US to China and Mexico and a selling price increase on our Tyvek lines on June 20, 2005, partially offset by rising raw material costs. Operating Expenses. Operating expenses increased $0.63 million, or 9.6% to $7.2 million for the six months ended July 31, 2005 from $6.6 million for the six months ended July 31, 2005. As a percent of sales, operating expenses increased to 14.2% for the six months ended July 31, 2005 from 13.2% for the six months ended July 31, 2004. The $0.63 million increase in operating expenses in the six months ended July 31, 2005 as compared to the six months ended July 31, 2004 was principally due to increases (decreases) in: Salaries $0.118 million Sales commissions $(0.275 million) Sales related expenses $0.09 million Insurance $(0.044 million) Pension reversal $(0.048 million) Consulting $0.113 million Professional fees $0.168 million All other G&A $0.30 million Freight expenses $0.119 million Bad debt expenses $0.054 million Currency fluctuation $0.034 million The above increases in Consulting and Professional Fees are a result of compliance with Sarbanes-Oxley requirements. Interest Expenses. Interest expenses decreased by $0.202 million for the six months ended July 31, 2005 as compared to the six months ended July 31, 2004 because we paid off our credit facility in full on June 18, 2004 using the proceeds of our secondary stock offering. 15 Income Tax Expense. Income tax expenses consist of federal, state, and foreign income taxes. Income tax expenses increased $0.27 million, or 22.4%, to $1.48 million for the six months ended July 31, 2005 from $1.21 million for the six months ended July 31, 2004. Our effective tax rate was 30.5% and 32.0% for the six months ended July 31, 2005 and 2004, respectively. Our effective tax rate varied from the federal statutory rate of 34% due primarily to lower foreign taxes, partially offset by state taxes. Our effective tax rate declined due to an increase in production in China. Minority Interest. Minority interest in net income of variable interest entities decreased $0.1 million for the six months ended July 31, 2005 as a result of the purchase in fiscal 2006 of the related party property that was accounted for under FIN46R during fiscal 2005. As a result, those entities were consolidated in our statement of income for the six months ended July 31, 2004. Net Income. Net income increased $0.793 million, or 30.9% to $3.36 million for the six months ended July 31, 2005 from $2.57 million for the six months ended July 31, 2004. The increase in net income primarily resulted from cost reduction programs and the continuing production shifts from the U.S. to China and Mexico, partially offset by rising raw material costs. Three months ended July 31, 2005 as compared to the three months ended July 31, 2004 Net Sales. Net sales increased $2.2 million, or 9.8%, to $25.1 million for the three months ended July 31, 2005 from $22.8 million for the three months ended July 31, 2004. The increase was primarily due to customers buying forward as a result of our selling price increase effective June 20, 2005, on Tyvek and TyChem garments. Sales also increased due to the Mifflin Valley, Inc. acquisition and to continued sales growth and customer base in our Canadian and U.K. subsidiaries. This increase was partially offset by a decrease in chemical suit sales due to a shift to more low-end garments and fewer high-end, higher margin garments sold in the second quarter last year. Gross Profit. Gross profit increased $.93 million, or 19.2%, to $5.8 million for the three months ended July 31, 2005 from $4.9 million for the three months ended July 31, 2004. Gross profit as a percentage of net sales increased to 23.1% for the three months ended July 31, 2005 from 21.3% for the three months ended July 31, 2004. Operating Expenses. Operating expenses increased $0.6 million, or 20.0% to $3.6 million for the three months ended July 31, 2005 from $3.0 million for the three months ended July 31, 2004. As a percent of sales, operating expenses increased to 14.3% for the three months ended July 31, 2005 from 13.1% for the three months ended July 31, 2004. The $1.0 million increase in operating expenses in the three months ended July 31, 2005 as compared to the three months ended July 31, 2004 was principally due to increases (decreases) in: Freight expenses $0.058 million Salaries $0.087 million Insurance $0.112 million Consulting $0.030 million Professional fees $0.105 million All other G&A $0.143 million Currency fluctuation $0.027 million Bad Debts $0.038 million The above increases in Consulting and Professional Fees are a result of compliance with Sarbanes-Oxley requirements. Interest Expense. Interest expenses decreased by $0.07 million for the three months ended July 31, 2005 as compared to the three months ended July 31, 2004 because we paid off our credit facility in full on June 18, 2004 using the proceeds of our secondary stock offering. Income Tax Expenses. Income tax expenses consist of federal, state and foreign income taxes. Income tax expense increased $0.135 million, or 27.9% to $0.62 million for the three months ended July 31, 2005 from $0.485 million for the three months ended July 31, 2004. Our effective tax rate was 27.3% and 29.8% in the three months ended July 31, 2005 and 2004, respectively. Our effective tax rate varied from the federal statutory rate of 34% due 16 primarily to lower foreign tax rates, partially offset by state taxes. Our effective tax rate declined due to an increase in production in China. Minority Interest. Minority interest in net income of variable interest entities decreased $0.176 million for the three months ended July 31, 2005 as a result of the purchase in fiscal 2006 of the related party property that was accounted for under FIN46R during fiscal 2005. As a result, those entities were consolidated in our statement of income for the three months ended July 31, 2005. Net Income. Net income increased $0.51 million, or 44.2% to $1.65 million for the three months ended July 31, 2005 from $1.14 million for the three months ended July 31, 2004. The increase in net income primarily resulted from cost reduction programs and the continuing production shifts from the U.S. to China and Mexico, partially offset by rising raw materials. Liquidity and Capital Resources Cash Flows ---------- As of July 31, 2005 we had cash and cash equivalents of $7.1 million and working capital of $51.8 million, a decrease of $2.1 million and an increase of $0.8 million, respectively, from January 31, 2005. Our primary sources of funds for conducting our business activities have been from cash flow provided by operations and borrowings under our credit facilities described below. 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. Net cash used in operating activities of $0.13 million for the six months ended July 31, 2005 was due primarily to net income from operations of $3.4 million offset by a decrease in accounts payable of $0.45 million, an increase in inventories of $4.4 million and an decrease in accounts receivable of $0.11 million. Net cash provided by operating activities of $0.96 million for the six months ended July 31, 2004 was due primarily to net income from operations of $2.6 million, a decrease in accounts receivable of $0.54 million, and an increase in accounts payable of $0.029 million, offset in part by an increase in inventories of $2.9 million. Net cash used in investing activities of $3.8 million and $4.9 million in the six months ended July 31, 2005 and 2004, respectively, was due to purchases of property and equipment and for marketable securities in 2004. Net cash provided by financing activities in the six months ended July 31, 2004 was primarily attributable to borrowings under our credit facilities and to the proceeds from the secondary stock offering in 2004. We currently have one credit facility - a $25 million revolving credit, of which we had $1.88 million of borrowings outstanding as of July 31, 2005; on July 10, 2005 the Company entered into a $25 million five year secured revolving loan agreement to replace the former two facilities, one of which was to expire on July 31, 2005. Our credit facility requires that we comply with specified financial covenants relating to fixed charge ratio, debt to EBIDTA coverage, and inventory and accounts receivable collateral coverage ratios. These restrictive covenants could affect our financial and operational flexibility or impede our ability to operate or expand our business. Default under our credit facility would allow the lender to declare all amounts outstanding to be immediately due and payable. Our lender has a security interest in substantially all of our assets to secure the debt under our credit facility. As of July 31, 2005, we were in compliance with all covenants contained in our credit facility. We believe that our current cash position of $7.1 million, our cash flow from operations along with borrowing availability under our $25 million revolving credit facility will be sufficient to meet our currently anticipated operating, capital expenditures and debt service requirements for at least the next 12 months. Capital Expenditures -------------------- Our capital expenditures principally relate to purchases of manufacturing equipment, computer equipment, leasehold improvement and automobiles, as well as payments related to the construction of our facilities in China. Our facilities in China are not encumbered by commercial bank mortgages and thus Chinese commercial mortgage loans may be available with respect to these real estate assets if we need additional liquidity. Our capital expenditures are expected to be approximately $4.8 million in total; $3.6 million to purchase our Decatur Alabama facilities and similar facilities adjacent to our New York corporate headquarters (all currently rented for $615,000 annually) and $1.2 million for capital equipment primarily computer equipment and apparel manufacturing equipment in fiscal 2006. 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes in market risk from that disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2005. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures - Lakeland Industries, Inc.'s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of Lakeland Industries, Inc.'s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(c) under the Securities Exchange Act) as of the end of the period covered by this report, have concluded that, based on the evaluation of these controls and procedures, the Company's disclosure controls and procedures were effective. Changes in Internal Control Over Financial Reporting - Lakeland Industries, Inc.'s management, with the participation of Lakeland Industries, Inc.'s Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in the Company's internal control over financial reporting occurred during the second quarter of fiscal 2006. Based on that evaluation, management concluded that there has been no change in Lakeland Industries, Inc.'s internal control over financial reporting during the second quarter of fiscal 2006 that has materially affected, or is reasonably likely to materially affect, Lakeland Industries, Inc.'s internal control over financial reporting. Through the eighteen months ended July 31, 2005 additional expense has been incurred relating to documenting and testing the systems of internal controls. The Company hired an internal auditor in July 2004 and has contracted with an independent consultant for services related to overall Sarbanes-Oxley Act compliance and more specifically Section 404, in February 2004. The total amount expensed so far is approximately $521,000 and is expected to increase in fiscal 2006 by $250,000 due to the hiring of additional accounting personnel. PART II. OTHER INFORMATION Items 1, 2, 3 and 5 are not applicable. Item 4. Submission of Matters to a vote of Security Holders The annual meeting of shareholders of the Company (the "Annual Meeting") was held on June 15, 2005 in Ronkonkoma, New York. The Company had 4,560,885 shares of common stock outstanding as of April 25, 2005, the record date for the Annual Meeting. Proposal 1 - Election of Directors The candidates listed below were duly elected to the Board of Directors at the Annual Meeting by the tally indicated. Candidate Votes in Favor Votes Witheld ------------------------------------------------------------------------ Christopher J. Ryan 3,811,694 508,008 Michael E. Cirenza 4,283,854 35,848 John Kreft 4,283,959 35,749 Proposal 2 - Ratification of Auditors for fiscal 2005 and 2006 Holtz Rubenstein Reminick, LLP 4,285,189 34,513 Item 6. Exhibits and Reports on Form 8-K: a- 10.11*, Loan Agreement dated July 7, 2005 between Lakeland Industries, Inc. and Wachovia Bank, N.A. 10.15* Asset Purchase Agreement, dated July, 2005, between Lakeland Industries, Inc., and Mifflin Valley, Inc. 10.16* Lease Agreement, dated July 2005 between Lakeland Industries, Inc. and M. Gallen. 10.17* Employment Contract, dated July 2005, between Lakeland Industries, Inc. and M. Gallen. 18 b- On June 6, 2005, the Company filed a Form 8-K for the purpose of furnishing under Items 2.02 and 9.01 a press release announcing results of operations for the quarter ended April 30, 2005. On June 6, 2005, the Company filed a Form 8-K under Item 2.02, relating to a Notice of Teleconference call for 4:30 PM June 9, 2005. On July 11, 2005, the Company filed a Form 8-K under Item 1.01 regarding the closing on a $25 million secured revolving line of credit for a five year term with Wachovia Bank, N.A. On July 19, 2005, the Company filed a Form 8-K under Items 1.01 and 8.01 regarding the acquisition of Mifflin Valley, Inc., Lakeland joins New Russell Microcap Index and Lakeland raises garment prices. --------------------- * Filed herein 19 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LAKELAND INDUSTRIES, INC. (Registrant) Date: September 7, 2005 /s/ Christopher J. Ryan ----------------------- Christopher J. Ryan, Chief Executive Officer, President, Secretary and General Counsel (Principal Executive Officer and Authorized Signatory) Date: September 7, 2005 /s/Gary Pokrassa ---------------- Gary Pokrassa, Chief Financial Officer (Principal Accounting Officer and Authorized Signatory) 20 EX-10.11 2 ex10-11.txt LOAN AGREEMENT EXHIBIT 10.11 Wachovia Bank, National Association 12 East 49th Street, 20th Floor New York, New York 10017 (Hereinafter referred to as the "Bank") Lakeland Industries, Inc. Attn: Christopher J. Ryan, Chief Executive Officer and Gary Pokrassa, Chief Financial Officer 701-07 Koehler Avenue Ronkonkoma, New York 11779 (Individually and collectively "Borrower") This Loan Agreement ("Agreement") is entered into July 7, 2005, by and between Bank and Borrower. This Agreement applies to the loan or loans (individually and collectively, the "Loan") evidenced by a certain $25,000,000.00 Promissory Note from Borrower to Bank of even date herewith, or other notes subject hereto, as modified from time to time (whether one or more, the "Note"), the commercial letters of credit and standby letters of credit issued hereunder (each, a "Letter of Credit" and collectively, the "Letters of Credit") and all Loan Documents. The terms "Loan Documents" and "Obligations," as used in this Agreement, are defined in the Note. Relying upon the covenants, agreements, representations and warranties contained in this Agreement, Bank is willing to extend credit to Borrower upon the terms and subject to the conditions set forth herein, and Bank and Borrower agree as follows: LETTERS OF CREDIT. Upon the request of Borrower, Bank shall issue commercial Letters of Credit and standby Letters of Credit, provided, the aggregate amount available to be drawn under all Letters of Credit plus the aggregate amount of unreimbursed drawings under all Letters of Credit at any one time does not exceed $2,000,000.00, and further provided, no Letter of Credit shall expire more than 180 days after the date it is issued. Notwithstanding anything to the contrary contained herein, the aggregate outstanding principal balance of Advances (as defined in the Note) plus the aggregate amount available to be drawn under all Letters of Credit plus the aggregate amount of unreimbursed drawings under all Letters of Credit at any one time shall not exceed $25,000,000.00. The Letters of Credit are to be used by Borrower solely to for Borrower's general corporate purposes. Bank's obligation to issue Letters of Credit shall terminate if Borrower is in default (however denominated) under the Note or the other Loan Documents, or in any case, if not sooner terminated, on July 7, 2010. LETTER OF CREDIT FEES. Borrower shall pay to Bank, annually, in advance, at such times as Bank shall require, Bank's standard fees in connection with commercial Letters of Credit as in effect from time to time, for so long as such commercial Letter of Credit is outstanding, and with respect to standby Letters of Credit, at the time of issuance of each standby Letter of Credit, a fee equal to 1.25% per annum on the face amount of each standby Letter of Credit, for so long as such standby Letter of Credit is outstanding. REPRESENTATIONS. Borrower represents that from the date of this Agreement and until final payment in full of the Obligations: Accurate Information. All information now and hereafter furnished to Bank, including information set forth in a certain Borrower Information Certificate dated May 19, 2005 (the "Borrower Information Certificate"), is and will be true, correct and complete. Any such information relating to Borrower's financial condition will accurately reflect Borrower's financial condition as of the date(s) thereof, (including all contingent liabilities of every type), and Borrower further represents that its financial condition has not changed materially or adversely since the date(s) of such documents. Authorization; Non-Contravention. The execution, delivery and performance by Borrower and any guarantor, as applicable, of this Agreement and other Loan Documents to which it is a party are within its power, have been duly authorized as may be required and, if necessary, by making appropriate filings with any governmental agency or unit and are the legal, binding, valid and enforceable obligations of Borrower and any guarantors; and do not (i) contravene, or constitute (with or without the giving of notice or lapse of time or both) a violation of any provision of applicable law, a violation of the organizational documents of Borrower or any guarantor, or a default under any agreement, judgment, injunction, order, decree or other instrument binding upon or affecting Borrower or any guarantor, (ii) result in the creation or imposition of any lien (other than the lien(s) created by the Loan Documents) on any of Borrower's or any guarantor's assets, or (iii) give cause for the acceleration of any obligations of Borrower or any guarantor to any other creditor. Asset Ownership. Borrower has good and marketable title to all of the properties and assets reflected on the balance sheets and financial statements supplied Bank by Borrower, and all such properties and assets are free and clear of mortgages, security deeds, pledges, liens, charges, and all other encumbrances, except as disclosed on Exhibit B attached hereto or otherwise disclosed to Bank by Borrower in writing and approved by Bank ("Permitted Liens"). To Borrower's knowledge, no default has occurred under any Permitted Liens and no claims or interests adverse to Borrower's present rights in its properties and assets have arisen. Discharge of Liens and Taxes. Borrower has duly filed, paid and/or discharged all taxes or other claims that may become a lien on any of its property or assets, except to the extent that such items are being appropriately contested in good faith and an adequate reserve for the payment thereof is being maintained. Sufficiency of Capital. Borrower is not, and after consummation of this Agreement and after giving effect to all indebtedness incurred and liens created by Borrower in connection with the Note and any other Loan Documents, will not be, insolvent within the meaning of 11 U.S.C. ss. 101, as in effect from time to time. Compliance with Laws. Borrower is in compliance in all respects with all federal, state and local laws, rules and regulations applicable to its properties, operations, business, and finances, including, without limitation, any federal or state laws relating to liquor (including 18 U.S.C. ss. 3617, et seq.) or narcotics (including 21 U.S.C. ss. 801, et seq.) and/or any commercial crimes; all applicable federal, state and local laws and regulations intended to protect the environment; and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), if applicable. Organization and Authority. Each corporation, partnership or limited liability company Borrower and/or guarantor, as applicable, is duly created, validly existing and in good standing under the laws of the state of its organization, and has all powers, governmental licenses, authorizations, consents and approvals required to operate its business as now conducted. Each corporation, partnership or limited liability company Borrower and/or guarantor, as applicable, is duly qualified, licensed and in good standing in each jurisdiction where qualification or licensing is required by the nature of its business or the character and location of its property, business or customers, and in which the failure to so qualify or be licensed, as the case may be, in the aggregate, could have a material adverse effect on the business, financial position, results of operations, properties or prospects of Borrower or any such guarantor. No Litigation. There are no pending or threatened suits, claims or demands against Borrower or any guarantor that: (i) have not been disclosed to Bank by Borrower in writing, and approved by Bank, or (ii) could reasonably be expected to have a material adverse effect on Borrower's results of operation, financial condition or cash flow. ERISA. Each employee pension benefit plan, as defined in ERISA, maintained by Borrower meets, as of the date hereof, the minimum funding standards of ERISA and all applicable regulations thereto and requirements thereof, and of the Internal Revenue Code of 1986, as amended. No "Prohibited Transaction" or "Reportable Event" (as both terms are defined by ERISA) has occurred with respect to any such plan. AFFIRMATIVE COVENANTS. Borrower agrees that from the date hereof and until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, Borrower will: Access to Books and Records. Allow Bank, or its agents, during normal business hours, access to the books, records and such other documents of Borrower as Bank shall reasonably require, and allow Bank, at Borrower's expense, to inspect, audit and examine the same and to make extracts therefrom and to make copies thereof. Accounts Payable Aging. Deliver to Bank, from time to time hereafter but not less than quarterly within 45 days of the end of each such period, a detailed payables report including aging of payables by total, vendor names and addresses, a reconciliation statement, and the original date of each invoice. Accounts Receivable Aging. Deliver to Bank, from time to time hereafter but not less than quarterly within 45 days of the end of each such period, a detailed receivables report including totals, customer names and addresses, a reconciliation statement, and the original date of each invoice. Business Continuity. Conduct its business in substantially the same manner and locations as such Page 2 business is now and has previously been conducted. Certificate of Full Compliance From Accountant. Deliver to Bank, with the annual financial statements required herein, a certification by Borrower's independent certified public accountant that Borrower is in full compliance with the Loan Documents. Compliance with Other Agreements. Comply with all terms and conditions contained in this Agreement, and any other Loan Documents, and swap agreements, if applicable, as defined in the 11 U.S.C. ss. 101, as in effect from time to time. Estoppel Certificate. Furnish, within 15 days after request by Bank, a written statement duly acknowledged of the amount due under the Loan and whether offsets or defenses exist against the Obligations. Insurance. Maintain adequate insurance coverage with respect to its properties and business against loss or damage of the kinds and in the amounts customarily insured against by companies of established reputation engaged in the same or similar businesses including, without limitation, commercial general liability insurance, workers compensation insurance, and business interruption insurance; all acquired in such amounts and from such companies as Bank may reasonably require. Inventory Reports. Deliver to Bank, from time to time hereafter but not less than quarterly within 45 days of the end of each such period, an inventory report showing individual values for raw materials, work-in-progress, finished products and any inventory obsolescence. Management Letter. Borrower shall deliver to Bank within 120 days after the close of each fiscal year, its Management Letter, in form and substance acceptable to Bank, prepared by Borrower's independent certified public accountant. Maintain Properties. Maintain, preserve and keep its property in good repair, working order and condition, making all replacements, additions and improvements thereto necessary for the proper conduct of its business, unless prohibited by the Loan Documents. Non-Default Certificate From Borrower. Deliver to Bank, with the Financial Statements required below, a certificate signed by a principal financial officer of Borrower warranting that no "Default" as specified in the Loan Documents nor any event which, upon the giving of notice or lapse of time or both, would constitute such a Default, has occurred and demonstrating Borrower's compliance with the financial covenants contained herein. Notice of Default and Other Notices. (a) Notice of Default. Furnish to Bank immediately upon becoming aware of the existence of any condition or event which constitutes a Default (as defined in the Loan Documents) or any event which, upon the giving of notice or lapse of time or both, may become a Default, written notice specifying the nature and period of existence thereof and the action which Borrower is taking or proposes to take with respect thereto. (b) Other Notices. Promptly notify Bank in writing of (i) any material adverse change in its financial condition or its business; (ii) any default under any material agreement, contract or other instrument to which it is a party or by which any of its properties are bound, or any acceleration of the maturity of any indebtedness owing by Borrower; (iii) any material adverse claim against or affecting Borrower or any part of its properties; (iv) the commencement of, and any material determination in, any litigation with any third party or any proceeding before any governmental agency or unit affecting Borrower with a claim or demand in excess of $100,000.00; and (v) at least 30 days prior thereto, any change in Borrower's name or address as shown above, and/or any change in Borrower's structure. Other Financial Information. Deliver promptly such other information regarding the operation, business affairs, and financial condition of Borrower which Bank may reasonably request. Payment of Debts. Pay and discharge when due, and before subject to penalty or further charge, and otherwise satisfy before maturity or delinquency, all obligations, debts, taxes, and liabilities of whatever nature or amount, except those which Borrower in good faith disputes. Reports and Proxies. Deliver to Bank, promptly, a copy of all financial statements, reports, notices, and proxy statements, sent by Borrower to stockholders, and all regular or periodic reports required to be filed by Borrower with any governmental agency or authority. NEGATIVE COVENANTS. Borrower agrees that from the date hereof and until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, Borrower will not: Change in Fiscal Year. Change its fiscal year. Change of Control. Make or suffer a change of ownership that effectively changes control of Borrower from current ownership. Encumbrances. Create, assume, or permit to exist any mortgage, security deed, deed of trust, pledge, lien, charge or other encumbrance on any of its assets, whether now owned or hereafter acquired, other than: (i) security interests required by the Loan Documents; (ii) liens for taxes contested in good faith; or (iii) Permitted Liens. Guarantees. Guarantee or otherwise become responsible for obligations of any other person or persons, other than the endorsement of checks and drafts for collection in the ordinary course of business. Investments. Purchase any stock, securities, or evidence of indebtedness of any other person or entity except investments in direct obligations of the United States Government, other highly liquid investments graded Page 3 AAA or the equivalent within the United States of America (and with exception for certain investments held in China and Mexico), and certificates of deposit of United States commercial banks having a tier 1 capital ratio of not less than 6% and then in an amount not exceeding 10% of the issuing bank's unimpaired capital and surplus, or other specific investment options, to be determined. Default on Other Contracts or Obligations. Default on any material contract with or obligation when due to a third party or default in the performance of any obligation to a third party incurred for money borrowed. Government Intervention. Permit the assertion or making of any seizure, vesting or intervention by or under authority of any governmental entity, as a result of which the management of Borrower or any guarantor is displaced of its authority in the conduct of its respective business or such business is curtailed or materially impaired. Judgment Entered. Permit the entry of any monetary judgment or the assessment against, the filing of any tax lien against, or the issuance of any writ of garnishment or attachment against any property of or debts due Borrower in an amount in excess of $100,000.00 which is not discharged or execution is not stayed within 45 days of entry. Prepayment of Other Debt. Retire any long-term debt entered into prior to the date of this Agreement at a date in advance of its legal obligation to do so. Retire or Repurchase Capital Stock. Retire or otherwise acquire any of its capital stock in excess of $1,000,000.00 or pay annual cash dividends in excess of $1,000,000.00 annually. ANNUAL FINANCIAL STATEMENTS. Borrower shall deliver to Bank, within 120 days after the close of each fiscal year, audited financial statements reflecting its operations during such fiscal year, including, without limitation, a balance sheet, profit and loss statement and statement of cash flows, with supporting schedules; all on a consolidated basis with respect to Borrower and its subsidiaries, affiliates and parent or holding company, as applicable, and in reasonable detail, prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year. All such statements shall be examined by an independent certified public accountant acceptable to Bank. The opinion of such independent certified public accountant shall not be acceptable to Bank if qualified due to any limitations in scope imposed by Borrower or any other person or entity. Any other qualification of the opinion by the accountant shall render the acceptability of the financial statements subject to Bank's approval other than a consistency exception due to a change in accounting by a governmental or professional entity required for Borrower to remain in compliance. Any consolidating financial statements provided by Borrower shall be management-prepared. PERIODIC FINANCIAL STATEMENTS. Borrower shall deliver to Bank, within 45 days after the end of each fiscal quarter, unaudited management-prepared quarterly financial statements including, without limitation, a balance sheet, profit and loss statement and statement of cash flows, with supporting schedules; all on a consolidated basis with respect to Borrower and its subsidiaries, affiliates and parent or holding company, as applicable, all in reasonable detail and prepared in conformity with generally accepted accounting principles, applied on a basis consistent with that of the preceding year. Such statements shall be certified as to their correctness by a principal financial officer of Borrower and in each case, if audited statements are required, subject to audit and year-end adjustments. TAX RETURNS. Borrower shall deliver to Bank, within 30 days of filing, complete copies of federal and state tax returns, as applicable, together with all schedules thereto, each of which shall be signed and certified by Borrower to be true and complete copies of such returns. In the event an extension is filed, Borrower shall deliver a copy of the extension within 30 days of filing. FINANCIAL COVENANTS. Borrower agrees to the following provisions from the date hereof until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, and each of the following covenants shall be calculated on a consolidated basis, using the financial information for Borrower, its subsidiaries, affiliates and its holding or parent company, as applicable: (a) Funded Debt to EBITDA Ratio. Borrower shall, at all times, maintain a Funded Debt to EBITDA Ratio of not more than 3.50 to 1.00. This covenant shall be tested quarterly, with EBITDA calculated on a rolling four quarters basis. "Funded Debt to EBITDA Ratio" shall mean the sum of all Funded Debt divided by the sum of earnings before interest, taxes, depreciation and amortization. "Funded Debt" shall mean, as applied to any person or entity, the sum of all indebtedness for borrowed money (including, without limitation, capital lease and synthetic lease obligations, subordinated debt Page 4 (including debt subordinated to the Bank), and unreimbursed drawings under letters of credit), or any other monetary obligation evidenced by a note, bond, debenture or other agreement or similar instrument of that person or entity. (b) Fixed Charge Coverage Ratio. Borrower shall, at all times, maintain a Fixed Charge Coverage Ratio of not less than 1.50 to 1.00. This covenant shall be calculated at Borrower's fiscal year end and quarterly, on a rolling four quarters basis. "Fixed Charge Coverage Ratio" shall mean the sum of earnings before interest, taxes, depreciation and amortization plus other non-cash expenses minus dividends, cash taxes paid, unfunded capital expenditures (i.e., capital expenditures not funded with bank debt or other forms of equipment financing) and non-cash income divided by the sum of current maturities of long-term debt plus current maturities of capital lease obligations plus interest expense. (c) Collateral Coverage Ratio. Borrower shall, at all times, maintain a ratio of (a) Total Borrower Accounts plus Total Borrower Inventory to (b) total outstanding Obligations under the Note, of not less than 1.00 to 1.00. This covenant shall be tested quarterly. "Total Borrower Accounts" shall mean all Accounts owing to Borrower, less intercompany accounts receivables, for the tested period. "Accounts" has the -------- meaning set forth in the Uniform Commercial Code (or any successor statute) as presently and hereafter enacted under the law of the State of New York (the "Code"), but shall not include Accounts owing to any subsidiary or affiliate of Borrower, or any other party other than Borrower. "Total Borrower Inventory" shall mean all Inventory owned by Borrower and located within the United States of America for the tested period. "Inventory" --------- has the meaning set forth in the Code, but shall not include: (a) Inventory owned by any subsidiary or affiliate of Borrower, or any other party other than Borrower; and (b) Inventory that is not located at a location identified and certified by Borrower on the Borrower Information Certificate as being within the United States of America. ADDITIONAL COVENANTS. Borrower agrees to the following provisions from the date hereof until final payment in full of the Obligations, unless Bank shall otherwise consent in writing, and each of the following covenants shall be calculated on a consolidated basis, using the financial information for Borrower, its subsidiaries, affiliates and its holding or parent company, as applicable: (a) Limitation on Debt. Borrower and each guarantor shall not, directly or indirectly, create, incur, assume or become liable for any additional indebtedness, whether contingent or direct. (b) Deposit Relationship. Borrower shall maintain its primary depository account and cash management account with Bank. (c) Leases. Borrower shall not incur, create, or assume any direct or indirect liability for the payment of rent or otherwise, under any lease or rental arrangement (excluding capitalized leases) if immediately thereafter the sum of such lease or rental payments to be made by Borrower during any 12-month period is increased by $250,000.00 in the aggregate. (d) Loans and Advances. Borrower shall not, during any fiscal year, make loans or advances, excepting ordinary course of business travel and expense advances, to any person or entity, which total more than $250,000.00 in the aggregate. (e) Permitted Acquisitions. Borrower shall be permitted to make an acquisition of assets or a targeted entity (collectively "Permitted Acquisitions") provided that (i) the acquisition consideration for any single Permitted Acquisition as well as the aggregate acquisition consideration for all Permitted Acquisitions over the term of the facility shall be subject to certain limitations as referenced below, (ii) no Default exists or would exist after giving effect thereto, and (iii) the Borrower has complied with all documentation requirements for a Permitted Acquisition, including but not limited to financial statements of the target entity to be acquired, copy of the relevant purchase agreement, and a pro forma balance sheet and income statement of the Borrower after giving effect to the proposed acquisition. Advances for Page 5 Permitted Acquisitions shall not exceed $8,000,000.00 for an individual transaction, or $15,000,000.00 in the aggregate during any twelve month period. The target company shall be in the same line of business as Borrower, and shall involve assets and operations domiciled in the United States, or in the case of a foreign acquisition, the business to be acquired shall be acquired by the Borrower or a guarantor. The Bank shall, in any event, receive an enforceable first priority security interest, in Bank's sole judgment, in all assets acquired by Borrower or such guarantor. With regard to foreign acquisitions only, during the term of the Note, Advances for Permitted Acquisitions with respect to which Bank shall not receive an enforceable first priority security interest, in Bank's sole judgment, shall not exceed $5,000,000.00. CONDITIONS PRECEDENT. The obligations of Bank to make the loan and any advances pursuant to this Agreement are subject to the following conditions precedent: Letter of Credit Documents. Receipt by Bank of all documents required by Bank in connection with Letters of Credit, including without limitation, applications therefor, all in form satisfactory to Bank. Additional Documents. Receipt by Bank of such additional supporting documents as Bank or its counsel may reasonably request. IN WITNESS WHEREOF, Borrower and Bank, on the day and year first written above, have caused this Agreement to be executed under seal. Borrower Lakeland Industries, Inc. CORPORATE By: /s/Christopher J. Ryan SEAL -------------------------------------------- Christopher J. Ryan, Chief Executive Officer Bank Wachovia Bank, National Association CORPORATE By: /s/Renato Gomez SEAL -------------------------------------------- Renato Gomez, Vice President Page 6 State of New York City/County of _________________ Corporate Acknowledgment On the _____ day of _______________ in the year 2005 before me, the undersigned, a Notary Public in and for said State, personally appeared Christopher J. Ryan personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. , Notary Public --------------------------------------- Notary Seal ------------------------------------------------------- (Printed Name of Notary) My Commission Expires: -------------------------------- Page 7 State of New York County of _________________ Bank Acknowledgment On the _____ day of _______________ in the year 2005 before me, the undersigned, a Notary Public in and for said State, personally appeared Renato Gomez personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. In witness whereof I hereunto set my hand. , Notary Public --------------------------------------- Notary Seal ------------------------------------------------------- (Printed Name of Notary) My Commission Expires: -------------------------------- Page 8 EXHIBIT A NON-DEFAULT CERTIFICATE In accordance with the terms of the Loan Documents dated July 7, 2005 by and between Wachovia Bank, National Association and Lakeland Industries, Inc. ("Borrower"), I hereby certify that: 1. I am the Chief Financial Officer of Borrower; 2. The enclosed financial statements are prepared in accordance with generally accepted accounting principles; 3. No Default (as defined in the Loan Documents) or any event which, upon the giving of notice or lapse of time or both, would constitute such a Default, has occurred. 4. Borrower is in compliance with the Financial Covenant(s) set forth in the Loan Documents, as demonstrated by the calculations contained in the Covenant Compliance Certificate attached hereto as Schedule 1. /s/Gary Pokrassa - ------------------------------ Name: Gary Pokrassa Title: Chief Financial Officer Page 9 SCHEDULE 1 COVENANT COMPLIANCE CERTIFICATE Borrower Name: Lakeland Industries, Inc. For the fiscal ________________________ ended ____________________ ALL CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN IN THE LOAN DOCUMENTS. COVENANT ACTUAL REQUIRED - -------- ------ -------- Funded Debt to EBIDTA not more than _____ to 1.00 (a) Funded Debt ------- (b) net income ------- (c) interest ------- (d) taxes ------- (e) depreciation ------- (f) amortization -------
(a) divided by the sum of (b) plus (c) plus (d) plus (e) plus (f) equals Funded Debt to EBIDTA of ______ Compliance? Yes No Leases 12 month aggregate 12 month aggregate increase: ______ increase not to exceed $________ Compliance? Yes No Loans and Advances ______ Not to Exceed Aggregate of $______ Compliance? Yes No
CALCULATIONS FOR ROLLING FOUR QUARTERS COVENANT ----------------------------------------------- COMPLIANCE FOR THE QUARTER ENDED ________________ Borrower Name: Lakeland Industries, Inc. INSTRUCTIONS: THIS IS A ROLLING FOUR-QUARTER CALCULATION. THE COLUMN LABELED Q1 SHOULD CONTAIN INFORMATION FOR THE MOST RECENTLY ENDED QUARTER (I.E., MATCHES THE DATE ABOVE). Q2 SHOULD CONTAIN INFORMATION FOR THE IMMEDIATELY PRECEDING QUARTER-END, AND SO ON FOR Q3 AND Q4. MOST RECENT QUARTER PRECEDING THREE QUARTERS - ---- ------ ------- --------- ----- -------- COVENANT: Q1 Q2 Q3 Q4 TOTAL - -------- Fixed Charge Coverage Ratio --------------------------- (a) net income ----- ----- ----- ----- ----- (b) interest ----- ----- ----- ----- ----- (c) taxes ----- ----- ----- ----- ----- (d) depreciation ----- ----- ----- ----- ----- (e) amortization ----- ----- ----- ----- ----- (f) other non-cash expenses ----- ----- ----- ----- ----- (g) dividends ----- ----- ----- ----- ----- (h) cash taxes ----- ----- ----- ----- ----- (i) unfunded capex ----- ----- ----- ----- ----- (j) non-cash income ----- ----- ----- ----- ----- (k) CMLTD* ----- ----- ----- ----- ----- (l) CMCLO** ----- ----- ----- ----- ----- (m) interest expense ----- ----- ----- ----- ----- Fixed Charge Coverage Ratio equals the sum of the Totals of (a) plus (b) plus (c) plus (d) plus (e) plus (f) minus (g) minus (h) minus (i) minus (j) divided by the sum of the Totals of (k) plus (l) plus (m). Fixed Charge Coverage Ratio for period is ______ to 1.00. The required Fixed Charge Coverage Ratio is not less than 1.50 to 1.00. Compliance? ___Yes ___No - ---------- * Current Maturities of Long Term Debt ** Current Maturities of Capital Lease Obligations Page 2 CALCULATIONS FOR THE COLLATERAL COVERAGE RATIO COMPLIANCE FOR THE QUARTER ENDED____________________ Borrower Name: Lakeland Industries, Inc. Inventory (US Based) Category Amount Borrower Owned Disposables ----------- Contractors WIP-US --------- Warehouse FG --------- Warehouse RM --------- Contractor RM-US --------- Samples & Misc FG --------- WIP Cutting Room --------- WIP Snap Dept --------- (a) Sub-Total --------- Gloves & Sleeves ---------------- Warehouse FG --------- Warehouse RM --------- WIP Decatur --------- (b) Sub-Total --------- Chemical Suits -------------- Warehouse FG --------- Warehouse RM --------- WIP Decatur --------- (c) Sub-Total --------- Fire Suits & Wovens ------------------- Warehouse FG --------- Warehouse RM --------- WIP@Uniland - ----------- --------- (d) Sub-total --------- Page 3 (e) Total (a+b+c+d) --------- Accounts Receivable Amount Borrower Owned Receivables --------- Less Intercompany Receivables ( ) --------- (f) Net Borrower Owned Receivables --------- (g) Total Facility Outstandings --------- The sum of the totals of (e) plus (f) divided by (g) equals a Collateral Coverage Ratio of ________. The required collateral coverage ratio is not less than 1.00 to 1.00. Compliance? ____Yes ______No The undersigned hereby certifies that the values of the Inventory and Accounts Receivable referenced above as of the fiscal period ended _______________ are true, accurate and complete as of this __ day of ________, 20__. Lakeland Industries, Inc. By: /s/Gary Pokrassa ------------------------------ Name: Gary Pokrassa Title: Chief Financial Officer Page 4 EXHIBIT B PERMITTED LIENS Page 5 EX-10.15 3 ex10-15.txt ASSET PURCHASE AGREEMENT EXHIBIT 10.15 AGREEMENT dated as of July 18th, 2005, (herein, together with the Exhibits attached hereto and the Lists to be delivered pursuant hereto referred to as the "Agreement") by and among Lakeland Industries, Inc, a Delaware corporation ("Parent"), Mifflin Valley, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent ("Buyer"), Mifflin Valley Inc, a Pennsylvania corporation ("Seller") and Michael Gallen ("Shareholder"). In reliance upon the representations and warranties made herein and in consideration of the mutual agreements herein contained, Buyer and Parent, on the one hand, and Seller and the Shareholder, on the other hand, hereby agree as follows: 1. Transfer of Business, Properties and Assets of Seller and Certain ----------------------------------------------- Related Matters. (a) Sale and Transfer of Business, Properties and Assets. Subject to ----------------------------------------------------- the terms and conditions of this Agreement, and in reliance on the representations, warranties, undertakings (including the Undertaking, as hereinafter defined) and agreements of Buyer and Parent made or deemed to be made hereunder, and in consideration of the purchase by Buyer described below and the Undertaking by Buyer, Seller hereby agrees to sell, transfer, convey, assign and deliver to Buyer at the Closing all of its then existing business, properties and assets, as a going concern, including, without limitation, the properties, assets and other rights referred to in the bill of sale (the "Bill of Sale") in the form of Exhibit A hereto, but excluding the Excluded Assets (such business, properties, assets and other rights of Seller to be purchased and sold hereunder being hereinafter referred to as the "Purchased Assets"). As used in this Agreement, the term Excluded Assets shall mean those assets listed on Exhibit B hereto. (b) Purchase Price. Subject to the terms and conditions of this --------------- Agreement, and in reliance on the representations, warranties, undertakings and agreements of Seller made or deemed to be made hereunder, and in consideration of such sale, conveyance, transfer, assignment and delivery, Buyer agrees: (i) To pay to Seller an amount equal to $1,580,000.00 (being hereinafter referred to as the "Initial Purchase Price"). (ii) Except as expressly provided for herein, to undertake, assume and agree to perform and otherwise pay, satisfy and discharge in accordance with their respective terms, and to indemnify and hold Seller harmless with respect to, all of the debts, liabilities and obligations of Seller specified in the undertaking to be executed by Buyer and delivered to Seller at the closing provided for in Section 2 hereof (herein called the "Closing" and the date of which is herein called the "Closing Date") substantially in the form attached hereto as Exhibit C (the "Undertaking"). As used herein, the term "Accounts Receivable" shall mean the aggregate amount of accounts receivable of Seller, determined in accordance with generally accepted accounting principles consistently applied throughout the period involved. (iii) June 30, 2005, is hereinafter referred to as the "Effective Date". A Balance Sheet as of June 30, 2005 (the "Audited Effective Date Balance Sheet") and the Profit & Loss Statement for the period from January 1, 2005, to the Effective Date of the Seller (the "2005 Interim P&L") are both to be prepared pursuant to Generally Accepted Accounting Principles (GAAP) as applied in the United States. The Audited Effective Date Balance Sheet shall be audited by Holtz Rubenstein Reminick, LLP, the cost of which shall be borne by Buyer. Based on the Audited Effective Date Balance Sheet, the Initial Purchase Price shall be adjusted to determine a Final Purchase Price, the ("Final Purchase Price") as set forth herein, the cost of which shall be borne by Buyer. (iv) The Final Purchase Price shall be determined by the amount reflected as Shareholder Equity on the Audited Effective Date Balance Sheet. An adjustment to the Initial Purchase Price shall be made should such Shareholder Equity be greater or less than $600,000 (the "Adjustment"), which Adjustment shall be paid within 10 business days of receipt of the Audited Effective Date Balance Sheet, except as provided for in Section 1(b)(vi) herein. The Adjustment shall be computed as follows: should the Shareholder Equity as reflected on the Audited Effective Date Balance Sheet be less than $600,000, the Seller shall pay the difference to the Buyer; Should the Shareholder Equity be greater than $600,000, the Buyer shall pay the difference to the Seller. (v) An amount of $75,000 shall be reserved (the "Reserve") at Closing in an escrow account that shall be applied towards indemnifying Buyer against any breach by Seller of its representations and warranties set forth in this Agreement. The escrow shall be set up by Buyer and Seller. The Reserve shall be liquidated and paid to Seller as follows: 50% six months after the date of the Closing and the balance one year following the closing. In the case any item shall be charged to this Reserve, Seller shall be given notice and the opportunity to contest and correct or resolve the item. (vi) In the event either Buyer or Seller in good faith, believes that the Audited Effective Date Balance Sheet has not been prepared in accordance with GAAP or is otherwise erroneous, such party shall have 10 business days from the receipt of the Audited Effective Date Balance Sheet in which to appeal. In such case, the parties shall engage a second independent CPA firm, acceptable to both sides, to opine on the item or items in dispute. Both parties will be bound by the opinion of such second CPA firm, with the fees of such firm to be paid by the side ruled unsuccessful in the appeal. (vii) Seller's accounts receivable and inventory. The net value of --------------------------------------------- Seller's Account Receivable and Inventory shall be reflected on the Audited Effective Date Balance Sheet after deduction for appropriate reserves as mutually agreed to reflect uncollectible and aged accounts receivable and to reflect obsolete and slow-moving inventory, it being agreed that inventories will be stated on Seller's books at the lower of cost (determined in accordance with customary inventory pricing practices and procedures for Seller utilizing Seller's standard cost system but also in compliance with GAAP as applied in the United States) or market. (c) Allocation of Purchase Price. The Purchase Price described in ----------------------------- Section 1(b) above will be initially allocated pursuant to the assets and liabilities as reflected on the Audited Effective Date Balance Sheet; $61,000.00 then shall be allocated to Seller's and the Shareholder' agreement not to compete with the business transferred to Buyer as set forth in Section 13 hereof. Buyer and Parent, on the one hand, and Seller, on the other hand, represent, warrant, and agree that such allocation was determined through arm's length negotiations. Buyer and Parent, on the one hand, and Seller, on the other hand, each agrees that it will adopt and utilize the amounts allocated to each asset or class of assets described in the immediately preceding sentence for purposes of all federal, state and other income tax returns filed by it and that it will not voluntarily take any position inconsistent therewith upon examination of any such tax return, in any claim, in any litigation or otherwise with respect to such income tax returns. Notwithstanding any other provision of this Agreement, the foregoing representation, warranty and agreement shall survive the Closing Date without limitation. (d) Payment of Purchase Price. At the Closing, Buyer will deliver to ------------------------- Seller a check drawn against immediately available funds in an amount equal to $1,505,000.00, pursuant to the amount determined under Section 1(b). The remainder of the Initial Purchase Price, $75,000, shall be paid by Buyer at Closing but held in escrow pursuant to Section 1(b)(v). The Adjustment, pursuant to the Audited Effective Date Balance Sheet, subject to adjustment as provided in Section 1(b)(vi), shall be paid after the Closing pursuant to Section 1(b)(vi). The Reserve shall be liquidated pursuant to Section 1(b)(v). 2 (e) Instruments of Conveyance, Transfer, Assumption, Etc. Seller shall ---------------------------------------------------- properly execute and deliver to Buyer at the Closing: (i) the Bill of Sale; (ii) assignments and consents to assignments, in form reasonably satisfactory to Buyer with respect to each of the contracts and other agreements and rights to be assigned to Buyer hereunder which require for such assignment the consent or waiver of any third party [and as to which Buyer shall have requested the obtaining of such consent or waiver]; and (iii) a lease otherwise reasonably satisfactory in form and substance to counsel for Buyer and Parent to the real property being leased hereunder in accordance with Section 4(i). Simultaneously with the Closing, Seller shall take all steps requisite to put Buyer in actual possession and operating control of the Purchased Assets, including, without limitation, disclosure to such persons as Buyer and Parent may designate of Seller's trade secrets, formulae and other proprietary information pertaining to the business of Seller. Buyer shall properly execute and deliver the Undertaking to Seller at the Closing. Seller and Buyer shall each properly execute and deliver to the other at the Closing the following additional documents, each dated the Closing Date (all of which, together with this Agreement, the Bill of Sale, and the Undertaking, are hereinafter sometimes referred to as the "Agreements"): (f) Further Assurances. At the Closing and from time to time after the ------------------ Closing, (i) at the request of Buyer and without further consideration, Seller shall promptly execute and deliver to Buyer such certificates and other instruments of sale, conveyance, assignment and transfer, and take such other action, as may reasonably be required by Buyer more effectively to confirm any obligation assumed by Buyer pursuant to the Undertaking and to sell, convey, assign and transfer to and vest in Buyer or to put Buyer in possession of the Purchased Assets and (ii) at the request of Seller and without further consideration, Buyer shall promptly execute and deliver to Seller such certificates and other instruments, of assumption, and take such other action, as may reasonably be required by Seller more effectively to confirm and carry out the assumption by Buyer of the obligations of Seller assumed by Buyer pursuant to the Undertaking. 2. Closing. The Closing of the transactions provided for in Section 1 ------- hereof will take place at the offices of Kozloff Stoudt or at such other place, time as may be agreed upon by Buyer, Parent and Seller, on August 1, 2005, unless extended by mutual agreement of both Buyer and Seller. 3. Termination. Anything contained in this Agreement other than in this ----------- Section 3 to the contrary notwithstanding, this Agreement may be terminated prior to the Closing Date (a) by mutual consent in writing of Buyer and Parent, on the one hand, and Seller, on the other hand, or (b) by Buyer, Parent or Seller if, due to causes beyond the control of any of the parties to this Agreement, the Closing does not occur on August 1, 2005, or on or before such later date as may be agreed upon in writing by the parties hereto. Termination pursuant to this Section 3 shall be without liability of any kind on the part of either party hereto, and in such event each party shall bear and pay all costs and expenses incurred by it in connection with this Agreement and the transactions contemplated hereby. 4. Representations and Warranties by Seller and the Shareholder. Seller ------------------------------------------------------------- and the Shareholder represent and warrant jointly and not severally that: 3 (a) To the best knowledge of Seller and Shareholder, Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Pennsylvania and has all power and authority to carry on its business as now being conducted and to own its properties and is duly licensed or qualified and in good standing as a foreign corporation in each jurisdiction in which its failure to qualify would have a materially adverse effect on the business, financial condition, operations or prospects of Seller. (b) Seller has full corporate power and authority to enter into each of the Agreements to the extent it is a party thereto and to consummate the transactions contemplated hereby. The execution, delivery and performance by Seller of each of the Agreements to which Seller is a party have been duly authorized by all requisite corporate action; each of the Agreements to which Seller is a party has been duly executed and delivered by Seller and (assuming due execution and delivery by the other party thereto) constitutes a valid and binding obligation of Seller, enforceable in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium, and other laws affecting creditors' rights generally from time to time in effect. (c) The instruments of conveyance and transfer to be executed by Seller and delivered to Buyer at the Closing will be valid in accordance with their terms and effective to assign, transfer and convey to Buyer at the Closing all of the then existing business of Seller and properties, assets and other rights of Seller used in its business, including such title as is specified in Sections 4(h) and 4(i), but excluding the Excluded Assets. (d) Seller is not a party to, subject to or bound by any agreement or any judgment, award, order, writ, injunction or decree of any court, governmental body or arbitrator which would conflict with or be breached by the execution, delivery or performance by Seller of this Agreement or which could prevent the carrying out of this Agreement. (e) Except as disclosed on Lists 10 and 11, neither Seller nor any of the properties, assets and other rights referred to in the Bill of Sale is a party to, subject to or bound by any agreement or any judgment, award, order, writ, injunction or decree of any court or of any governmental body or of any arbitrator which could prevent the use by Buyer of the properties, assets and other rights referred to in the Bill of Sale or materially adversely affect the conduct by Buyer of the business of Seller, in each case in accordance with present practices, after the Closing Date or which, by operation of law, or pursuant to its terms, would be breached, terminate, lapse, or be subject to termination upon the consummation of the transactions contemplated herein absent the consent or other action of any third party or agency. (f) Except as disclosed on List 10, there is no action, suit or governmental, administrative, arbitration or regulatory proceeding or investigation pending or, to the best of Seller's knowledge, threatened against or relating to Seller which could have a materially adverse effect on its business, financial condition, operations or prospects, the Purchased Assets or the transactions contemplated by this Agreement. (g) To the best knowledge of Seller and Shareholder, Seller (A) has delivered to Buyer complete, correct and detailed lists, in form and substance reasonably acceptable to Buyer, as of the date of this Agreement, specifying with respect to the business, properties, assets and obligations of the Seller each and every material item in the following categories referred to below, and (B) has delivered, or shall deliver as part of the due diligence process, to Buyer true and complete copies of the documents and other materials that underlie such lists: (i) List 1 - presently outstanding written contracts, agreements, ------ commitments and bids (other than those included in List 4); written and oral ------ leases (other than leases disclosed in List 8); security deposits under leases; ------ licenses; franchises; dealership, service, agency and other agreements which, in each case, involve the receipt or payment of more than $2,500; and, with 4 respect to each item in each category referred to above, a specification as to whether the consent of any third person or agency is required for the effective assignment thereof; (ii) List 2 - machinery, equipment, tools, dies, furniture, ------- furnishings, leasehold improvements, vehicles, buildings and other tangible physical assets and fixtures and the location of such (other than items in any of the foregoing categories having a value of not more than $500 in the aggregate); (iii) List 3 - (A) the policies of insurance presently in force (other ------ than those required to be set forth in List 4) and, without restricting the ------ generality of the foregoing, those covering Seller's public and product liability and its personnel, properties, buildings, machinery, equipment, furniture, fixtures and operations, specifying with respect to each such policy, the name of the insurer, type of coverage, term of policy, limits of liability and annual premium, (B) Seller's premiums and losses, by year, by type of coverage, for the past five years based on information received from Seller's insurance carrier(s), (C) all outstanding insurance claims by Seller for damage to or loss of its property or income which have been referred to insurers or which Seller believes to be covered by commercial insurance, (D) general comprehensive liability policies carried by Seller for the past five years, including excess liability policies, and (E) any agreements, arrangements or commitments under which Seller indemnifies any other person (with the exception of any obligation arising in connection with lease, purchase or sale transactions arising in the ordinary course of Seller's business) in which the maximum exposure exceeds $1,000 or pursuant to which Seller is required to carry insurance for the benefit of any other person; (iv) List 4 - names, current annual compensation rates (including ------ bonuses and commissions), accrued bonus, accrued sick leave and accrued severance pay of all present salaried employees of Seller; aggregate accrued vacation pay; the current base salary rate of each of such individuals; employment, managerial, advisory or consulting agreements and confidentiality or other agreements protecting proprietary processes, formulae or information; copies of all pension, profit-sharing, thrift, or other retirement plans, employee stock ownership plans, deferred compensation, stock ownership, stock purchase, performance share, individual or group bonus or other deferred or incentive plans, severance plans, hospitalization, insurance, vacation, death benefit, collective bargaining, union or other employee association agreements, or other similar plans in each case covering employees of Seller and as amended to date, and all amendments thereto prior to the Closing Date, agreements, arrangements, commitments or understandings providing for any employee benefit, the latest annual report (on Form 5500, if applicable) for each plan, the most recent actuarial valuations with respect to all defined benefit plans, copies of all Internal Revenue Service determination letters regarding such plans, all such reports, actuarial valuations and determination letters as may be made, received or issued prior to the Closing Date, the annual cost of each such plan or arrangement and a summary description with respect to the funding of each such welfare benefit plan or arrangement; all other contracts and relationships with or with respect to, and all other obligations or liabilities with any employee (or other individual with whom Seller has a business relationship) of Seller; and all disclosures required by Section 4(m) hereof; (v) List 5 - individual refundable deposits, prepaid expenses, ------- deferred charges and "other assets" in excess of $200; (vi) List 6 - all loans or advances made by Seller to any person in ------ excess of $100 except (A) normal travel advances or other reasonable expense advances to an officer or employee of Seller, or (B) pursuant to normal business dealings with the customers of Seller; (vii) List 7 - liens, encumbrances, charges, restrictions, claims and ------ security interests with respect to the business, assets and property to be transferred hereunder which do not constitute real property; 5 (viii) List 8 - each and every parcel of real property or interest ------ therein owned in whole or in part by Seller or held for the benefit of Seller under a title-holding agreement or held under a lease; and complete and correct copies of each and every of the following, if any, in the possession of Seller will be made available for review by Buyer: (A) title reports, title binders, survey documents and data affording information or opinions with respect to, certifying to, or evidencing the extent, current title, title history, title marketability, use, possession, restriction or regulation, if any (governmental or otherwise), and compliance with applicable laws, of (x) the real property or (y) any estate or interest in (or in the nature of) real property or in a land or building lease or chattel real; (B) deed or title-holding or trust agreements, if any, under which any of the parcels may have been conveyed to Seller or under which the same may be held for the benefit of Seller; and (C) leases; except as noted in such list, all such buildings, structures, leasehold improvements and the equipment therein currently are used by or useful to Seller in the ordinary course of business and, except as so noted and except for normal wear and tear, there are no material defects with respect thereto which would impair the day-to-day use by Buyer of any such buildings, structures, leasehold improvements or equipment or which would subject Buyer to material liability under applicable law; (ix) List 9 - except for any Excluded Assets listed on Exhibit B, ------ trademark registrations and applications and notices of infringement therefor, service mark registrations (which list shall include but not be limited to indications of length of use of each trade and service mark as well as identification of product(s) on which each trade and service mark is used, and registration numbers, registration and renewal dates, affidavit of use filings), patents and patent applications, copyrights, and applications therefor (including information as to expiration dates of all the foregoing where applicable) presently owned, in whole or in part, by Seller and used or useful in Seller's business; and all trademark licenses, service mark licenses, copyright licenses, royalty agreements, patent licenses, assignments, grants and contracts with employees or others relating in whole or in part to disclosure, assignment, registering or patenting of any trademarks, service marks, copyrights, inventions, discoveries, improvements, processes, formulae, trade secrets or other know-how and used or useful in Seller's business. To the best of Seller's knowledge, except as noted in such list: (i) the foregoing trademarks, service marks, copyrights, licenses, assignments, grants, agreements and contracts are valid; (ii) the foregoing trademark registrations, service mark registrations, copyright registrations and patents have been duly issued and have not been cancelled, abandoned or otherwise terminated; (iii) the foregoing trademark applications, service mark applications, copyright applications and patent applications have been duly filed; (iv) Seller is not in default under any of the foregoing licenses or agreements other than defaults, if any, which will not result in any material loss or liability; and (v) all such licenses and agreements are binding in accordance with their terms; (x) List 10 - all litigation, governmental or regulatory proceedings, ------- investigations or labor disputes pending or to the best of Seller's knowledge, threatened against Seller, the officers or directors of Seller as such officers or directors, or any of the business, assets or properties of Seller to be transferred pursuant hereto or to which Seller or its officers or directors as such officers or directors, is a party, as plaintiff, defendant or otherwise; and (xi) List 11 - all federal, state, local and foreign governmental ------- licenses and permits necessary in the conduct of Seller's business; each jurisdiction in which the nature of the business of Seller requires Seller to qualify to do business as a foreign corporation; all federal, state, local and foreign governmental or judicial consents, orders, decrees and other compliance agreements under which Seller is operating or bound; all reports of inspection of Seller's businesses and properties from January 1, 2002 to the date hereof under all applicable federal, state and local health and safety laws and regulations; and copies of all of the foregoing and correspondence relating thereto. (xii) List 12 - Seller will provide a schedule to Buyer listing all ------- distributions of cash to Seller or Shareholder of Seller other than payment of wages and salary made from 6 January 1, 2005 until the Closing Date; such schedule shall be provided to Buyer no later than the day prior to closing. (xiii) List 13 - Seller will provide a schedule listing all items of ------- the machinery, tools, equipment and other tangible physical assets to be transferred by Seller hereunder (other than items of inventory) which are NOT in good working order, normal wear and tear excepted, are NOT being used or are NOT useful in the business of Seller at its present level of activity and are NOT in an operating condition sufficient to conduct the business of Seller substantially as now being conducted. (h) Except as disclosed on List 7, Seller has title to the properties, assets and other rights referred to in the Bill of Sale and that do not constitute real property, free and clear of all liens and encumbrances other than a security interest in favor of Sovereign Bank which will be released or discharged at Closing. (i) Except for, (A) such imperfections of title which do not materially affect the use or value thereof, (B) liens of current taxes not yet delinquent or being contested in good faith, and (C) except as may be described in List 8 hereto, Seller has good and marketable title to the properties constituting real property to be transferred to Buyer hereunder. (j) Seller has heretofore furnished Buyer with copies of (i) unaudited balance sheets as at, and statements of earnings for each of Seller's three prior fiscal years ended, respectively, December 31, 2004, December 31, 2003, and December 31, 2002; (ii) an unaudited balance sheet and statement of earnings for Seller's fiscal quarter ended March 31, 2005; and (iii) an unaudited balance sheet as of April 30, 2005 and an unaudited statement of earnings for Seller's four fiscal months ended April 30, 2005. To the best knowledge of Seller and Shareholder, the foregoing financial statements present fairly the financial condition of Seller at such dates and the results of its operations for the periods then ended. (k) To the best knowledge of Seller and Shareholder, Seller has made and will make available for inspection by Buyer all books of account with respect to the conduct of its business. Seller has heretofore furnished Buyer with copies of its Federal and state tax returns for the years ended December 31, 2004, 2003 and 2002. (1) Seller has filed (or has obtained extensions of the time by which it is required to file) all United States federal income tax returns and all other federal, state and local tax returns required to be filed by it and has paid all taxes shown due on the returns so filed as well as all other taxes, assessments and governmental charges which have become due, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. (m) with regard to those plans listed on List 4 which are employee pension benefit plans within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("Pension Plans") and employee welfare benefit plans within the meaning of Section 3(1) of ERISA ("Welfare Plans") and except as set forth in List 4: (i) Seller has in all respects performed all obligations required to be performed by it under, is not in default under, is not in violation of, and has no knowledge of any default or violations by any other party to, any of the Pension Plans and Welfare Plans (hereinafter, collectively, the "Seller's Employee Plans") which obligations, defaults or violations are material to the financial condition, results of operations, business or prospects of Seller. (ii) None of the Seller's Employee Plans which cover or covered employees of Seller, nor any trust created thereunder, nor any trustee or administrator thereof, nor any "party in interest" nor any "disqualified person" with respect thereto, has engaged in one or more "prohibited transactions" as such term is defined in Section 4975 of the Code or Section 406 of ERISA, which could subject such Seller's Employee Plans, or any of them, or Seller or any such 7 trust or any trustee or administrator thereof, or any party dealing with such Seller's Employee Plans or any such trust, or any of the employees of Seller to a tax or penalty on prohibited transactions imposed by said Section 4975 of the Code or Section 502(i) of ERISA which, singly or in the aggregate, are material to the financial condition, results of operations, business or prospects of Seller. (iii) No judicial proceedings have been initiated to terminate any Pension Plans subject to Title IV of ERISA which cover or covered employees of Seller or any of the trusts related thereto; nor have there been any "Reportable Events", as that term is defined in Section 4043 of ERISA and the regulations thereunder, with respect to such plans. (The foregoing representation is to be made as of a date five days prior to the Closing Date with regard to the existence of a "Reportable Event" described in Section 4043(b)(3) of ERISA.) (iv) Seller has not incurred, nor has it any reason to expect to incur, any liability to the Pension Benefit Guaranty Corporation which would be material to the financial condition, results of operations, business or prospects of Seller. (v) There are no actions, suits or claims pending (other than routine claims for benefits in the ordinary course), or, to the knowledge of Seller, threatened and Seller has no reason to expect any such actions, suits or claims (other than routine claims for benefits in the ordinary course) to arise against any of Seller's Employee Plans or against the assets of any such Plan which actions, suits or claims might, singly or in the aggregate, materially and adversely affect the financial condition, results of operations, business or prospects of Seller. (vi) There are not and will not as of the Closing Date be any liens encumbrances, charges, claims or security interests with respect to the Purchased Assets, and any additions thereto or improvements thereon, arising out of any liabilities in connection with any of Seller's Employee Plans. (vii) As of the Closing Date, all participants in the Pension Plans who become employees of Buyer shall be 100 percent vested in their full accrued benefits through the Closing Date under such plans and either (A) annuity contracts shall be purchased on behalf of and distributed to each participant in such Pension Plans which will provide for the payment of such accrued benefit or (B) to the extent permitted by law and such Pension Plans, cash in an amount equal to such accrued benefit shall be distributed to each such participant. (viii) Since September 1, 1974, Seller has not contributed to a multi-employer plan within the meaning of Section 3(37) of ERISA covering employees of the Seller. (n) To the best of Seller's knowledge and except as disclosed on List 9, none of the processes currently used by Seller with respect to the business, properties and assets to be transferred hereunder or any of its properties or products contracted or sold by Seller with respect thereto, or trademarks, trade names, labels or other marks or copyrights used by Seller with respect thereto, materially infringe the patent, industrial property, trademark, trade name, label, other mark, right or copyright of any other person or entity, and Seller has not received any notice of adverse claim by any third party with respect thereto. Seller has license agreements in force to the extent necessary to permit its full use of all of the processes used by it with respect to the business, properties and assets to be transferred hereunder and to permit such operations and sales in accordance with its present and planned practices. (o) Except as specifically disclosed in writing by Seller to Buyer or Buyer's independent certified public accountants and reflected in the calculation of the Inventory Amount, Seller's inventories of raw materials, in-process and finished products being transferred hereunder conform in all respects with Seller's applicable specifications and warranties and are not obsolete; all in-process and finished products in such inventories have been produced in compliance with 8 Seller's applicable quality control procedures and all finished products in such inventories are merchantable and are fit for the purpose intended; and all information furnished to the independent certified public accountants and other representatives of Buyer for the purpose of determining the Inventory Amount under Section 15 is complete and correct. (p) Except as disclosed in List 13 as described in Section 4(g)(xiii) above, the machinery, tools, equipment and other tangible physical assets to be transferred by Seller hereunder (other than items of inventory) are in good working order, normal wear and tear excepted, are being used or are useful in the business of Seller at its present level of activity and are in an operating condition sufficient to conduct the business of Seller substantially as now being conducted. (q) Since December 31, 2004, there has been no material adverse change in the financial condition, assets, liabilities (contingent or otherwise), results of operations, business or business prospects of Seller. Seller has conducted its business in the normal course of business: since December 31, 2004 there have been no unusual arrangements with customers or vendors, no dividends to shareholder other than reasonable amounts to pay actual and estimated taxes, and no additional borrowing over the amount outstanding as of December 31, 2004. Notwithstanding the foregoing, Seller has the right to distribute cash in such manner as Seller shall determine prior to the Closing Date; and has or shall provide a schedule to Buyer listing each such cash distribution no later than the day prior to closing. (r) Vacation pay accrued for employees of Seller as of June 30, 2005, is estimated to total approximately Eleven Thousand Four Hundred Three and 76/100 Dollars ($11,403.76). This estimate was determined as follows: Vacation pay for Seller's employee population as of May 18, 2005, was computed for the period ending June 30, 2005. From this total, vacation earned and paid prior to May 18, 2005, and vacation days requested by employees and committed to be honored by management of Seller and paid prior to June 30, 2005, were subtracted from vacation pay. The resulting total does not account for new hires or terminated employees vacation entitlement between May 18, 2005, and June 30, 2005. (s) No representation or warranty by Seller or the Shareholder contained in this Agreement and no statement contained in any certificate, list, exhibit or other instrument specified in this Agreement or otherwise furnished to Buyer in connection with the transactions contemplated hereby, whether heretofore furnished to Buyer or hereafter required to be furnished to Buyer, is, or will be when furnished, inaccurate, incomplete, misleading or untrue in any material respect. 5. Representations and Warranties by Buyer and Parent. Buyer and Parent --------------------------------------------------- each represent and warrant that: (a) Buyer and Parent are duly organized and validly existing corporations in good standing under the laws of the State of Delaware, and Buyer is qualified to do business as a foreign corporation and is in good standing in the State of Pennsylvania. (b) Buyer and Parent each has full corporate power and authority to enter into each of the Agreements to the extent it is a party thereto and to consummate the transactions contemplated hereby; the execution, delivery and performance by each of Buyer and Parent of each of the Agreements to which it is a party have been duly authorized by all requisite corporate action on the part of Buyer and Parent; each of the Agreements to which it is a party has been duly executed and. delivered by Buyer or Parent, as the case may be, and (assuming due execution and delivery by Seller of those Agreements to which it is a party) constitutes a valid and binding obligation of Buyer or Parent, as the case may be, enforceable in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors' rights generally from time to time in effect. 9 (c) The Undertaking executed and delivered to Seller by Buyer at the Closing is valid in accordance with its terms and is effective to provide, as between Buyer and Seller, for the assumption by Buyer of all of the obligations and liabilities of Seller specified therein which are valid and binding obligations and liabilities of Seller. (d) Neither Buyer nor Parent is a party to, subject to or bound by any material agreement or any judgment, award, order, writ, injunction, or decree of any court, governmental body or arbitrator which would conflict with or be breached by the execution, delivery or performance by it of this Agreement or which could prevent the carrying out of this Agreement. (e) There is no action, suit or governmental, administrative, arbitration or regulatory proceeding or investigation pending or, to the best of Buyer's and Parent's knowledge, threatened against or relating to Buyer or Parent which could have a materially adverse effect on the transactions contemplated by this Agreement. 6. Conditions Precedent to Obligations of Buyer. Buyer need not consummate -------------------------------------------- the transactions contemplated by this Agreement unless the following conditions shall be fulfilled: (a) All proceedings taken in connection with the transactions contemplated herein and all instruments and documents required in connection therewith or incident thereto shall be reasonably satisfactory in form and substance to Christopher J. Ryan and/or Harold Poster, counsels for Buyer. (b) Except for changes in the ordinary course of business or as otherwise contemplated or permitted by this Agreement, the representations and warranties of Seller and the Shareholder contained herein or in any certificate or document delivered to Buyer and/or Parent pursuant hereto shall be deemed to have been made again at and as of the Closing Date and shall then be true in all material respects; Seller shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date; and Buyer and Parent shall have been furnished with certificates of appropriate officers of Seller dated as of the Closing Date certifying to the fulfillment of the foregoing conditions. (c) Buyer and Parent shall have been furnished with an opinion dated as of the Closing Date of Kozloff Stoudt, counsel for Seller, to the effect that, under the laws of the Commonwealth of Pennsylvania: (i) Seller is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and to the best of such counsel's knowledge, has all power and authority to carryon its business as now being conducted and to own its properties; (ii) Seller has full corporate power and authority to enter into each of the Agreements to the extent it is a party thereto and to consummate the transactions contemplated hereby and thereby; the execution, delivery and performance by Seller of the Agreements to which it is a party have been duly authorized by all requisite corporate action on the part of Seller; each of the Agreements to which it is a party have been duly executed and delivered by Seller and except as provided in such opinion (assuming due execution and delivery by the other party thereto) constitutes a valid and binding obligation of Seller, enforceable in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium, and other laws affecting creditors' rights generally from time to time in effect and general principles of equity; 10 (iii) the instruments of conveyance and transfer executed by Seller and delivered to Buyer at the Closing have been duly authorized and executed by Seller and are valid in accordance with their terms and effective to assign, transfer and convey to Buyer at the Closing all of the Purchased Assets; (iv) to the best of such counsel's knowledge and to the extent that any of the following would materially and adversely affect the business of Seller, neither Seller nor any of the properties, assets and other rights referred to in the Bill of Sale is subject to or bound by any agreement or any judgment, award, order, writ, injunction or decree of any court or of any governmental body or of any arbitrator to which Seller is a party or which specifically refers to Seller and notice of which has been delivered to Seller which could prevent the use by Buyer of the properties, assets and other rights referred to in the Bill of Sale or the conduct by Buyer of the business of Seller, in each case in accordance with present practices, after the Closing Date or which, by operation of law, or pursuant to its terms, would be breached, terminate, lapse, or be subject to termination upon the consummation of the transactions contemplated herein absent the consent or other action of any third person or agency; and (v) except as provided in such opinion, counsel does not know of any action, suit or governmental, administrative, arbitration or regulatory proceeding or investigation pending or threatened against or relating to Seller. In rendering the foregoing opinions, Kozloff Stoudt may rely upon information and certificates provided by one or more officers of Seller and of certificates provided by public officials and such opinions shall be subject to such conditions and limitations as Kozloff Stoudt may proscribe. (d) No action, suit or proceeding before any court or governmental or regulatory authority shall be pending, no investigation by any governmental or regulatory authority shall have been commenced, and no action, suit or proceeding by any governmental or regulatory authority shall have been threatened, against Buyer or Seller or Parent or any of the principals, officers or directors of any of them, seeking to restrain, prevent or change the transactions contemplated hereby or questioning the legality or validity of any such transactions or seeking material damages in connection with any such transactions. (e) All consents of third parties including, without limitation, governmental authorities and self-regulatory agencies, and all filings with and notifications of governmental authorities, regulatory agencies (including non-governmental self-regulatory agencies) or other entities which regulate the business of Seller or Buyer or Parent, necessary on the part of Seller or Buyer or Parent, or their respective subsidiaries or affiliates, to the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and to permit the continued operation of the respective businesses of Seller and Buyer and their respective subsidiaries in substantially the same manner after the Closing Date as theretofore conducted, other than routine post-closing notifications or filings, shall have been obtained or effected. (f) All consents required for the assignment of all contracts, patents, trademarks, copyrights and other intangibles and other agreements necessary for the continued operation of the business of Seller after the Closing Date on substantially the same basis as presently operated shall have been obtained. (g) The employment agreement executed and delivered by Michael Gallen shall be in full force and effect and there shall not have occurred any default or repudiation thereof. (h) Individuals holding not less than one hundred percent (100%) of the voting stock of Seller shall have executed this Agreement. 11 7. Conditions Precedent to Obligations of Seller. Seller need not -------------------------------------------------- consummate the transactions contemplated hereby unless the following conditions shall be fulfilled: (a) All proceedings taken in connection with the transactions contemplated herein and all instruments and documents required in connection therewith or incident thereto shall be reasonably satisfactory in form and substance to Kozloff Stoudt, counsel for Seller. (b) Except for changes in the ordinary course of business or as otherwise contemplated or permitted by this Agreement, the representations and warranties of Buyer and Parent contained herein or in any certificate or document delivered to Seller pursuant hereto shall be deemed to have been made again at and as of the Closing Date and shall then be true in all material respects; Buyer and Parent shall have performed and complied in all material respects with all agreements and, conditions required by this Agreement to be performed or complied with by them prior to or at the Closing Date; and Seller shall have been furnished with certificates of appropriate officers of Buyer and Parent dated as of the Closing Date certifying to the fulfillment of the foregoing conditions. (c) Seller shall have been furnished with an opinion dated as of the Closing Date of counsel for Buyer and Parent, to the effect that: (i) Buyer and Parent are duly organized and validly existing corporations in good standing under the laws of the State of Delaware, and Buyer is qualified to do business as a foreign corporation and is in good standing in the State of Pennsylvania. (ii) Buyer and Parent each has full corporate power and authority to enter into each of the Agreements to the extent it is a party thereto and to consummate the transactions contemplated hereby and thereby; the execution, delivery and performance by each of Buyer and Parent of the Agreements to which it is a party have been duly authorized by all requisite corporate action on the part of Buyer and Parent; each of the Agreements to which it is a party has been duly executed and delivered by Buyer and Parent, as the case may be, and (assuming due execution and delivery by Seller of those Agreements to which it is a party) constitutes a valid and binding obligation of Buyer and Parent, enforceable in accordance with its terms, subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting creditors' rights generally from time to time in effect and general principles of equity; (iii) the Undertaking executed and delivered to Seller by Buyer at the Closing is valid in accordance with its terms and is effective to provide, as between Buyer and Seller, for the assumption by Buyer of all of the obligations and liabilities of Seller specified therein which are valid and binding obligations and liabilities of Seller; and (iv) Except as may be specified by said counsel, they do not know of any action, suit or governmental, administrative, arbitration or regulatory proceeding or investigation pending or threatened against or relating to Buyer or Parent which could have a materially adverse impact on the transactions contemplated by this Agreement. In rendering such opinion, counsel to Buyer and Parent may rely upon certificates of one or more officers of Buyer or of public officials as to factual matters. (d) No action, suit, or proceeding before any court or governmental or regulatory authority shall be pending, no investigation by any governmental or regulatory authority shall have been commenced, and no action, suit or proceeding by any governmental or regulatory authority shall have been threatened, against Buyer or Parent or any of its officers or directors seeking to restrain, prevent, or change the transactions contemplated hereby or questioning the legality or validity of any such transactions or seeking material damages in connection with any such transactions. 12 (e) All consents of third parties including, without limitation, governmental authorities and self-regulatory agencies, and all filings with and notifications of governmental authorities, regulatory agencies (including non-governmental self-regulatory agencies) or other entities which regulate the business of Buyer or Parent, necessary on the part of Buyer or Parent, or their respective subsidiaries or affiliates, to the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, other than routine post-closing notifications or filings, shall have been obtained or effected. 8. Indemnification by Seller and the Shareholder. Seller and the -------------------------------------------------- Shareholder hereby agree jointly and not severally to defend, indemnify and hold harmless Buyer and Parent and each of their respective successors, assigns and affiliates from and against any and all costs, liabilities and damages to the extent they result from: (a) any and all: (i) material misrepresentations or material breaches of warranty, agreement or undertaking hereunder on the part of Seller; and (ii) material failures by Seller to perform or otherwise fulfill any undertaking or other agreement or obligation hereunder; (b) all liabilities of Seller not specifically assumed by Buyer pursuant to its Undertaking, including, without limitation, (i) all liabilities and expenses (including attorneys' fees and disbursements) incurred by Buyer and/or Parent resulting from the parties' failure to comply with the Bulk Transfer Statutes of Pennsylvania, as amended, at 43 P.S. ss.788.3, 72 P.S. ss.1403(a), and 72 P.S. ss.7240, and (ii) all expenses incurred by Buyer and/or Parent in respect of taxes to the extent owed by Seller covering any period prior to the Effective Date; unless such costs, liabilities, damages or expenses arise by reason of Buyer's failure to fully observe and perform its duties and obligations under the Undertaking; (c) any and all actions, suits, proceedings, claims, liabilities, demands, assessments, judgments, costs and expenses, including reasonable attorneys' fees, incident to any of the foregoing which are subject to such indemnification; provided, however, that in no event shall Seller or the Shareholder have any duty to defend, indemnify or hold harmless on account of any cost, liability, loss, damage or expense to the extent that such cost, liability, loss, damage or expense arises out of or is caused by any act or omission of Parent or Buyer or any of their respective shareholder, directors, officers, agents, employees or representatives; and provided further, however, that if any claim, liability, demand, assessments action, suit or proceeding shall be asserted against Buyer and/or Parent or any of their respective successors or assigns in respect of which Buyer and/or Parent proposes to demand indemnification, Buyer and/or Parent shall immediately notify Seller thereof in writing. Subject to rights of or duties to any insurer or other third person having liability therefor, Seller or the Shareholder (or the insurer of either) shall have the right promptly upon receipt of such notice to assume the control of the defense, compromise or settlement of any such claim, demand, liability, assessment, action, suit or proceeding, including, at its own expense, employment of counsel reasonably satisfactory to Buyer and Parent; provided, however, that if Seller shall have exercised its right to assume such control, Buyer and/or Parent may, in its sole discretion, employ counsel to represent it (in addition to counsel employed by Seller, and in the latter case, at the sole expense of Buyer and Parent) in any such matter, and in such event counsel selected by Seller shall be required to cooperate with such counsel of Buyer and/or Parent in such defense, compromise or settlement; and provided further, however, that Seller's and Shareholder's obligation to defend, indemnify, or hold harmless under this Section 8 shall accrue only if and to the extent the aggregate of all such losses, damages, deficiencies, debts, liabilities, costs and expenses arising under this Agreement exceeds $5,000 and, except as otherwise provided in Section 12, occurs within two (2) years after the Closing. 13 The rights of Buyer and Parent pursuant to this Section 8 shall constitute the sole and exclusive right and remedy of Buyer and Parent with respect to any breach, violation or default by Seller or the Shareholder arising out of any of the Agreements or the transactions contemplated thereby. 9. Indemnification by Buyer and Parent. Buyer and Parent agree to defend, ----------------------------------- indemnify and hold harmless Seller and the Shareholder and each of their respective successors, assigns and affiliates from and against any and all costs, liabilities and damages resulting from: (a) any and all losses, damages or deficiencies resulting from any and all: (i) material misrepresentations or material breaches of warranty, agreement or undertaking hereunder on the part of Buyer and/or Parent; and (ii) material failures by Buyer and/or Parent to perform or otherwise fulfill any undertaking or agreement or obligation hereunder; (b) all liabilities of Seller specifically assumed by Buyer pursuant to the Undertaking; (c) all liabilities, losses or damages directly or indirectly resulting from the sale of any product of or by, or the providing of any services by, Seller (including, without limitation, with respect to product recalls, warranty claims and product liability claims, whether claims for damages; injuries to persons or damage to property); and (d) any and all actions, suits, proceedings, claims, liabilities, demands, assessments, judgments, costs and expenses, including reasonable attorneys' fees, incident to any of the foregoing or such indemnification; provided, however, that if any claim, liability, demand, assessment, action, suit or proceeding shall be asserted against Seller or any of its successors or assigns in respect of which it proposes to demand indemnification, Seller shall immediately notify Buyer (with a copy to Parent) thereof in writing. Subject to rights of or duties to any insurer or other third person having liability therefor, Buyer shall have the right promptly upon receipt of such notice to assume the control of the defense, compromise or settlement of any such claim, demand, liability, assessment, action, suit or proceeding, including, at its own expense, employment or counsel reasonably satisfactory to Seller; provided, however, that if Buyer shall have exercised its right to assume such control, Seller may, in its sole discretion, employ counsel to represent it (in addition to counsel employed by Buyer, and in the latter case, at Seller's sole expense) in any such matter, and in such event counsel selected by Buyer shall be required to cooperate with such counsel of Seller in such defense, compromise or settlement; and provided further, however, that except as provided in the final sentence of this Section 9, Buyer's and Parent's obligation to indemnify under this Section 9 shall accrue only if and to the extent that the aggregate of all such losses, damages, deficiencies, debts, liabilities, costs and expenses arising under this Agreement exceeds $5,000 and, except as otherwise provided in Section 12, occurs within two (2) years after the Closing. Notwithstanding anything to the contrary, the duty of Parent and Buyer to pay the Initial Purchase Price, the Final Purchase Price, the liabilities set forth in the Undertaking, and all other amounts set forth or referred to in any of the Agreements shall be absolute and shall not be subject to the $5,000.00 limitation set forth in the preceding sentence. 10. Product Liability Matters ------------------------- (a) For purposes of this Section, the following terms shall have the following definitions: (i) "Coverage Period" means the period of time beginning as of June 30, 2005, and ending as of August 1, 2010. 14 (ii) "Product Liability Matters" shall mean any matters arising in whole or in part out of the manufacture, production or sale at any time of any product by Seller, including without limitation, product recalls, returns, warranty claims, claims of product defect, claims of negligence and product liability claims, whether or not the sale of such products shall have occurred prior to, on or after the Effective Date. (iii) "Product Liability Policies" shall mean insurance policies pertaining to Product Liability Matters. (b) Seller shall maintain in full force and effect all Product Liability Policies which Seller maintained as of June 30, 2005, through the respective policy expiration dates. Buyer shall reimburse Seller for the pro rata portion of all insurance premiums applicable to such Product Liability Policies for the period of time from June 30, 2005, through the respective policy expiration dates. (c) Seller shall indemnify Buyer and Parent solely to the extent that Seller has coverage under any Product Liability Policies for all loss, damage, cost and expense, including without limitation reasonable attorneys' fees, suffered or incurred by Buyer or Parent with respect to Product Liability Matters. Notwithstanding anything to the contrary, the liability of Seller and Shareholder arising out of the duty of indemnification set forth in this Subsection (c). shall not extend to any of the assets of Seller or Shareholder. (d) At their sole cost and expense, throughout the Coverage Period, Buyer and Parent shall maintain Product Liability Policies on an occurrence basis naming Seller and Shareholder as insureds, such Product Liability Policies to be in amount, form and substance and with insurance companies reasonably satisfactory to Seller and Shareholder. Upon request from time to time but at least no less than annually, Buyer and Parent shall provide Seller and Shareholder with evidence of such coverage as Seller and Shareholder shall reasonably require. (e) Buyer and Parent shall defend, indemnify and hold harmless Seller and Shareholder from any and all loss, damage, cost and expense, including without limitation deductibles, self-insured retention amounts, and reasonable attorneys' fees, suffered or incurred by Seller or Shareholder by reason of any Product Liability Matters, to the extent that Seller and Shareholder are not subject to a defense and indemnification under the Product Liability Policy referred to in Subsection b. of this Section. 11. Expenses and Finder's Fees. Seller will bear the expenses incurred by -------------------------- Seller in connection with this Agreement and its performance and Buyer and Parent will bear the expenses incurred by them. Seller, on the one hand, and Buyer and Parent, on the other hand, each represent and warrant to the other that the negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by Seller directly with Buyer and Parent and in such a manner as not to give rise to any valid claims against Seller or Buyer or Parent for a brokerage commission, finder's fee or other like payment. Seller represents and warrants to Buyer and Parent that neither Seller nor any officer or director of Seller knows of any broker or finder having any connection with this Agreement or the transactions contemplated hereby; Buyer and Parent represent and warrant to Seller that neither Buyer nor Parent nor any officer or director of Buyer or Parent knows of any broker or finder having any connection with this Agreement or the transactions contemplated hereby. 12. Survival of Representations and Warranties. Except as otherwise ---------------------------------------------- provided in this Agreement, the respective representations, warranties, covenants and agreements of Seller and the Shareholder and of Buyer and Parent contained or deemed to be contained herein shall survive the Closing Date for two (2) years, except for: 15 (a) Any item as to which, within such two (2) year period, Buyer and/or Parent, under Section 8, or Seller and the Shareholder, under Section 9, shall have in good faith asserted a bona fide claim in writing against the other party or parties, which claim shall identify with reasonable specificity the basis of the claim; (b) Buyer's obligation, and Parent's obligation to cause Buyer to pay or perform assumed liabilities or obligations pursuant to the Undertaking, which terminates when such liabilities or obligations have been paid or performed, as the case may be; (c) Any representation, warranty, covenant or agreement on the part of Seller relating to taxes owing by Seller, including liens attaching to any of the Purchased Assets as a result of the failure to pay taxes, which shall extend for a period equal to the applicable statute of limitations; (d) Any representation, warranty, covenant, agreement, duty or obligation on the part of Buyer and Parent referred to in Section 9(c) of this Agreement or referred to in Section 10 of this Agreement, which shall extend forever; (e) The agreements relating to transfer taxes under Section 17(1). 13. Covenant Against Competition. (a) As a further inducement to Buyer to ---------------------------- purchase the assets of Seller hereunder, Seller and the Shareholder agree jointly and not severally that (except to the extent otherwise provided in subsection (b) hereof) for the period from the Closing Date through the two (2) year anniversary of the Closing Date: (i) Seller and the Shareholder will not in any way, directly or indirectly, own, manage, operate or control any enterprise which engages in, or otherwise carries on, any business activity in competition with the business of Seller transferred to Buyer as of the Closing Date in any geographic area (including, without limitation, North, Central and South America) in which products of Seller are sold or are offered for sale by Buyer; Seller and the Shareholder recognize that the offer and sale of the products of Seller will be worldwide in scope in that Buyer will directly advertise and solicit business from customers wherever they may be found; (ii) Neither Seller nor the Shareholder will at any time disclose to other than Buyer or any of Buyer's affiliates, or use, any proprietary information relating to Seller, whether or not such information is embodied in writing or other physical form, except for any such proprietary information which is or becomes publicly available through no fault of Seller or the Shareholder, in which case Seller or the Principal Shareholder may disclose to the extent required by applicable law. For purposes of this Agreement, the phrase "proprietary information" means all information which is known only to an employee, former employee or consultant of or other person in a confidential relationship with Seller or any of its affiliates and which relates to specific technical matters concerning Seller, such as, without limiting the generality of the foregoing, devices, formulae, components, patterns or materials or machines for manufacturing, testing, building or product development, sales or financing procedures or methods of Seller or any of its affiliates or which relates to specific business matters concerning Seller such as, without limiting the generality of the foregoing, the identity of suppliers, customers or contractors of Seller or its affiliates; (iii) Seller and the Shareholder recognize that all documents and objects containing or reflecting any proprietary information relating to Seller, whether developed by Seller or by someone else for Seller or any of its affiliates, will be after the Closing Date the respective exclusive property of Buyer or of such of its affiliates, as the case may be; and 16 (iv) Neither Seller nor the Shareholder will recruit any employees who accept employment with Buyer who were formerly employed by Seller, except with the consent of Buyer, which shall not be unreasonably withheld. (b) In the event that a court of competent jurisdiction holds that Parent or Buyer breached the provisions of any of the Agreements, including the Employment Agreement, the restrictions contained in this covenant as described in Section 13 herein shall automatically terminate. (c) Notwithstanding anything to the contrary, in the event of any material breach, violation or default by: Buyer or Parent of the provisions of this Asset Purchase Agreement, or by Parent of the provisions of the Employment Letter Agreement between Parent and Shareholder, or by Parent of the provisions of the Lease Agreement between Shareholder and Parent, Seller and Shareholder shall be released and relieved of any and all duties and obligations arising under Section 13 of this Agreement. 14. Guaranty of Receivables. On the Closing Date, Seller and Buyer shall ----------------------- jointly send a letter to each of the obligors on the Accounts Receivable purchased hereunder, informing each such obligor of the transfer hereunder and instructing them to remit all payments and other items in respect of such Accounts Receivable and all future Accounts Receivable of the Buyer to the lockbox of the Buyer as specified in such letter. Buyer shall, after the Closing Date, use efforts consistent with the efforts used by Buyer in the collection of its own Accounts Receivable, exclusive, however, of suit or other third-party collection methods, to collect the Accounts Receivable of Seller purchased hereunder. For each such Account Receivable, any amounts received from, the account customer shall be applied first to reduce such Account Receivable and then to other amounts owed by such customer, except for amounts which are the subject of a bona fide dispute and not paid by reason of such disputed amounts which are identifiable to a particular Account Receivable and amounts as to which the account customer has directed that there be- application to a particular Account Receivable. Without regard to any assertion that Seller may make with respect to prior collection efforts, ninety (90) days after the Closing Date, to the extent the aggregate amount of such uncollected Accounts Receivable exceeds the amount contained in the Reserve, Seller shall upon ten (10) days notice from Buyer, reimburse Buyer an amount equal to the amount then outstanding in respect of each such Account Receivable transferred to Buyer hereunder, and upon such reimbursement, Buyer shall promptly transfer to Seller or its assignee all right, title and interest in and to such Account Receivable. With respect to any Account Receivable for which Seller has reimbursed Buyer, Buyer shall apply any funds collected by it with respect to such Account Receivable in the same manner as they would be applied hereunder had they been collected prior to reimbursement by Seller and shall promptly remit any such collections thereon to Seller. Seller shall be entitled to pursue the collection of any outstanding Account Receivable for which it has reimbursed Buyer or which Buyer has not purchased hereunder, except that Seller shall confer with Buyer prior to taking any such action and Seller agrees to use its reasonable best efforts not to injure any customer relationships of Buyer. Seller hereby agrees to authorize such banks as Buyer shall designate to deposit without Seller's endorsement into Buyer's account payments on Accounts Receivable which are addressed to Seller, and any payments received by Seller on an Account Receivable of Buyer attributable to the Seller will be held in trust for Buyer and promptly delivered to Buyer. 15. Inventory Amount. For purposes of determining the Purchase Price, the ---------------- Inventory Amount shall be determined in accordance with Exhibit D hereto which shall be finalized and attached to this Agreement at Closing. 16. Press Releases. Any public announcements regarding the transactions -------------- contemplated hereby shall be made only with the mutual consent of Seller and Parent. 17 17. Miscellaneous. ------------- (a) Cooperation. Each of the parties hereto shall use its best efforts ----------- to take or cause to be taken, and to cooperate with the other party hereto, to the extent necessary with respect to all actions, and to do, or cause to be done, consistent with applicable law, all things' necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement. From time to time prior to the Closing Date, Seller will promptly supplement or amend any list previously delivered to Buyer pursuant to Section 4(g) with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such list. No supplement or amendment to any list shall have any effect for the purpose of determining satisfaction of the condition set forth in Section 6(b). (b) Regulatory Filings; Access. Each of the parties hereto will ------------------- furnish to the other party hereto such necessary information and reasonable assistance as such other party may reasonably request in connection with its preparation of necessary filings or submissions to any governmental agency; provided, however, that any regulatory filings required of Buyer shall be at Buyer's expense. Seller agrees to give Buyer and advisors, counsel and representatives of Buyer reasonable access to its records and facilities for the purpose of evaluating the basis for the transactions contemplated hereby. Such access shall include, without limitation, the review of the books, records and business affairs of Seller. (c) Waiver. Any failure of either of the parties hereto to comply with ------ any of its obligations or agreements or to fulfill conditions herein contained may be waived in writing by the other party. (d) Notices. All notices and other communications hereunder shall be ------- in writing and shall be deemed. to have been duly given if delivered or mailed, first class postage prepaid: (i) If to Seller or to the Shareholder, to: Mifflin Valley, Inc. Attention: Michael Gallen 833 Wyomissing Road Mohnton, PA 19540 (with a copy to): Jestyn G. Payne, Esquire Kozloff Stoudt P.O. Box 6286 2640 Westview Drive Wyomissing, PA 19610 (ii) If to Buyer or Parent, to: Lakeland Industries, Inc., 701 Koehler Ave, Suite 7, Ronkonkoma NY 11779 Attention: Gary Pokrassa (with a copy to) Christopher J. Ryan Such names and addresses may be changed by written notice to each person listed above. (e) Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the internal substantive laws and not the choice of laws of the Commonwealth of Pennsylvania. All disputes brought with respect to the Agreement shall be brought before the courts of Pennsylvania or other court of competent jurisdiction. 18 (f) Counterparts. This Agreement may be executed simultaneously in two ------------ or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (g) Headings. The section headings contained in this Agreement are for -------- reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (h) Entire Agreement. This Agreement, including the Exhibits hereto ----------------- and the documents referred to herein embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (i) Amendment and Modification. This Agreement may be amended or ---------------------------- modified only by written agreement of the parties hereto. (j) Binding Effect; Benefits. This Agreement shall inure to the -------------------------- benefit of and be binding upon the parties hereto and their respective successors and assigns; nothing in this Agreement, express or implied, is intended to confer on any person other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. (k) Assignability. This Agreement shall not be assignable by any party ------------- hereto other than, in the case of an assignment by Buyer, to a direct or indirect subsidiary of Parent, without the prior written consent of the other party hereto. (1) Transfer Taxes. All transfer taxes, stamp taxes, realty ---------------- documentary stamp taxes and sales and use taxes, if any, imposed by the laws of the Commonwealth of Pennsylvania and payable by reason of this transaction or the sale, transfer or delivery of any of the Purchased Assets shall be paid and borne as follows: (i) All such taxes with respect to any realty included in the Purchased Assets shall be paid and borne by Seller. (ii) The parties believe that the tangible personal property included in the Purchased Assets (including, without limitation, inventories of raw materials, work in process and finished goods) is exempt from sales and other transfer taxes in the State of Pennsylvania. However, in the event that any such taxes are ultimately determined to be due with respect to any of such Purchased Assets, they shall be paid and borne by Buyer. (m) Prorations. At the Closing, ad valorem property taxes on the ---------- Purchased Assets and utility services with respect thereto shall be prorated as of the Closing Date between Seller and Buyer. (n) General Manager's Salary. Following the Closing, the General -------------------------- Manager of Seller shall have his annual salary adjusted upward by the amount of the annual withholding for medical and dental health insurance. (o) Reimbursement for COBRA Payments. The parties to this Agreement -------------------------------- acknowledge that as of the Closing Date, Seller shall terminate the health coverage benefits of Shareholder and the General Manager of Shareholder. The parties to this Agreement further acknowledge that although Buyer shall enroll Shareholder and General Manager of Seller in its health care coverage program, that program has a ninety (90) day eligibility waiting period and thus Shareholder and General Manager of Shareholder shall need to obtain COBRA coverage 19 during that ninety (90) day eligibility waiting period. Buyer covenants that upon demand, Buyer shall reimburse Shareholder and the General Manager of Seller in an amount equal to the COBRA payments which they pay during such ninety (90) day eligibility waiting period. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. LAKELAND INDUSTRIES, INC. By: /s/Christopher J. Ryan ---------------------------------- Name: Christopher J. Ryan Title: President & General Counsel By: ---------------------------------- Name: Title: MIFFLIN VALLEY, INC. By: ---------------------------------- Name: Title: By: ---------------------------------- Name: Title: MIFFLIN VALLEY, INC. By: /s/Michael Gallen ---------------------------------- Name: Michael Gallen Title: President ---------------------------------- Michael Gallen 20 EXHIBIT A BILL OF SALE Mifflin Valley Inc., a Pennsylvania corporation ("Assignor"), pursuant to the Asset Purchase Agreement, dated as of July 18, 2005, (the "Agreement"), between Assignor and the Principal Shareholder of Assignor and Mifflin Valley, Inc., ("Buyer"), a Delaware corporation, and wholly-owned subsidiary of Lakeland Industries, Inc., and for good and valuable consideration to it in hand paid, receipt of which is hereby acknowledged, does sell, assign, transfer and convey unto Assignee, its successors and assigns, as at the opening of business on the date hereof, all of Assignor's business, properties and assets constituting a going concern, and all of Assignor's rights, whether at common law or otherwise (except rights of Assignor and Excluded Assets under the Agreement), claims, including the proceeds of any claims which may not be assignable, and causes of action arising out of any transaction occurring on or prior to the date hereof, with respect to Assignor's business, properties and assets transferred hereunder, irrespective of the time or date on which any such right, claim or cause of action may arise or accrue. Without limiting the generality of the foregoing, and subject to the exceptions set forth above, the rights, claims, causes of action and property and assets being sold, assigned, transferred and conveyed hereunder by Assignor include all of its right, title and interest in, to and under the following: a) Existing assets, properties and business; b) Leases (other than for the existing real estate lease agreement pertaining to the property located at 31 South Sterley Street, Shillington, Pennsylvania), security deposits and options under leases, licenses, franchises, sales and other contracts; c) Inventories, merchandise, machinery, equipment, furniture, tools, dies, jigs, vehicles, instruments and fixtures; d) Petty cash as of the date hereof; e) Patents, copyrights, trademarks, formulae, trade secrets, trade names and other intangibles; f) Accounts receivable; g) Sundry assets and supplies; and h) Designs, drawings; research. engineering; marketing, and other data, and all books and records, including those maintained on tapes, discs or other magnetic or electronic storage media, except for corporate minute books, stock ledgers and stock books, relating to its assets, business, and operations; and Notwithstanding the foregoing; there shall be excluded from the rights, claims, causes of action and property and assets being sold, assigned, transferred and conveyed hereunder all Excluded Assets (as defined in Exhibit "B"). Assignor hereby authorizes Assignee to take any appropriate action in connection with any of said rights, claims, causes of action and property and assets being sold, assigned, transferred and conveyed hereunder, in the name of Assignor or in its own or any other name but at its own expense. TO HAVE AND TO HOLD said rights, claims, causes of action and property, including without limitation the assets and business of Assignor, as a going concern, unto Assignee and its successors and assigns., to and for its or their use forever. And Assignor does hereby warrant, covenant and agree that it: (a) will warrant and defend the sale of said property, assets and business against each and every person or persons whomsoever claiming: or who may claim against any or all of the same; 21 and (b) will take all steps necessary to put Assignee, its successors or assigns in actual possession and operating control of said property, assets and business. Notwithstanding anything to the contrary, except for such representations and warranties as are specifically set forth in the Agreement or in this Bill of Sale, Seller makes no representations or warranties of any kind or nature with respect to the business, properties and assets which are the subject matter of this Bill of Sale. IN WITNESS WHEREOF, Assignor has caused the same to be signed by its President as at the opening of business on this first day of August, 2005. MIFFLIN VALLEY INC. By: /s/Michael Gallen ---------------------------------- Name: Michael Gallen Title: President 22 Exhibit B EXCLUDED ASSETS Minute Book Stock Transfer Ledger Tax Returns Financial Reports Property of a Personal Nature of Either Michael Gallen or Donna Gallen Table and eight (8) chairs Insurance policies Antique display cases Fifth floor stove and refrigerator Fifth floor banquet chairs and stools (approximately eighty [80]) Front awning and roof Building fire extinguishers Basement sump pump All property affixed to building located at 31 South Sterley Street, Shillington, Pennsylvania including all equipment and mechanical systems All claims arising out of the Smarty Pants bankruptcy/insolvency account The cause of action against the Borough of Shillington and Shillington Municipal Authority and all proceeds thereof. 23 Exhibit C Undertaking as of August 1, 2005. Undertaking by Mifflin Valley, Inc. ("Buyer"), a Delaware corporation and wholly-owned subsidiary of Lakeland Industries, Inc. ("Parent"), in favor of Mifflin Valley, Inc, a Pennsylvania corporation ("Seller"). WITNESSETH: WHEREAS, pursuant to an Asset Purchase Agreement dated as of July ____, 2005,(the "Agreement") by and among Seller, Michael J. Gallen ("Shareholder"), the shareholder of Seller, Parent and Buyer, Seller has concurrently herewith assigned, transferred, conveyed and delivered to Buyer certain of Seller's existing property, assets and business, as a going concern; and WHEREAS, in partial consideration therefor the Agreement requires that Buyer undertake to assume and to agree to perform, pay or discharge certain liabilities and obligations of Seller as specified herein; and WHEREAS, all terms used but not otherwise defined herein shall have the meaning set forth in the Agreement; NOW, THEREFORE, in consideration of the mutual promises set forth in the Agreement and other good and valuable consideration, the receipt of which is hereby acknowledged, Buyer hereby undertakes. assumes and agrees to timely perform, pay and discharge each and every duty, obligation and liability of Seller set forth below to the extent not performed, paid or discharged by Seller as of the Effective Date as that term is defined in the Agreement: 1. All bids, orders, commitments, proposals, agreements and contracts made or incurred in the ordinary course of business of the Seller including those set forth on any of the lists attached to the Agreement; and 2. All commissions, loans, credit card balances and other debts, obligations and liabilities of Seller shown or set forth on the books and records of Seller as of the Closing Date. provided, however, that (except as otherwise provided above) Buyer does not undertake, assume, agree to perform, pay or discharge any obligation of Seller for or arising out of any contract or other agreement which requires the consent of a third party, which consent has not been obtained at the date hereof, or within ten (10) days following receipt by Seller of notice from Buyer thereof. Upon request from time to time by Seller or Shareholder, Buyer shall provide Seller and Shareholder with reasonable evidence of Buyer's full and timely compliance with the provisions of this Undertaking, such evidence to be in form and substance reasonably satisfactory to Seller and Shareholder. Nothing contained herein shall require Buyer to pay or discharge any liability or obligation assumed hereby prior to the entry of a final judgment so long as Buyer in good faith shall contest or cause to be contested the amount or validity thereof by the institution of appropriate proceedings, provided that Buyer shall promptly pay or discharge any such liability or obligation to the extent determined to be due in any such final judgment. No title warranty, representation or covenant made to Buyer by Seller pursuant to the Agreement is hereby assumed by Buyer. Other than as specifically stated above, Buyer 24 assumes no liability or obligation of Seller by this Undertaking. This Undertaking shall inure to the benefit of Seller and Shareholder and their respective heirs, representatives, successors and assigns and shall be binding upon Buyer and its successors and assigns. Buyer will execute any additional documents reasonably requested by Seller to evidence Buyer's undertaking hereunder. Notwithstanding any term or provision of the Agreement or this Undertaking, this document does not create any right of subrogation on the part of and shall not inure to the benefit of any person other than Seller. MIFFLIN VALLEY, INC. By: /s/Christopher J. Ryan --------------------------------- Name: Christopher J. Ryan Title: President & Secretary 25 Exhibit D INVENTORY AMOUNT [TO BE COMPLETED AT CLOSING] 26 EX-10.16 4 ex10-16.txt EXHIBIT 10.16 LEASE AGREEMENT BETWEEN MICHAEL GALLEN AND LAKELAND INDUSTRIES, INC. DATED AS OF JULY 18, 2005 -------------------------------------- 31 SOUTH STERLEY STREET BOROUGH OF SHILLINGTON COUNTY OF BERKS COMMONWEALTH OF PENNSYLVANIA TABLE OF CONTENTS ----------------- ARTICLE 1. DEMISE, DESCRIPTION, USE AND TERM 2 ARTICLE 2. RENT 3 ARTICLE 3. INSURANCE/INDEMNIFICATION 4 ARTICLE 4. WASTE AND NUISANCE 5 ARTICLE 5. REPAIRS AND MAINTENANCE 5 ARTICLE 6. LESSEE'S COMPLIANCE 6 ARTICLE 7. UTILITIES 6 ARTICLE 8. RULES AND REGULATIONS 6 ARTICLE 9. ALTERATIONS, IMPROVEMENTS AND FIXTURES 6 ARTICLE 10. QUIET POSSESSION 7 ARTICLE 11. DELIVERY OF POSSESSION 7 ARTICLE 12. SURRENDER OF PREMISES 8 ARTICLE 13. DEFAULT 8 ARTICLE 14. INSPECTION BY LESSOR 10 ARTICLE 15. ASSIGNMENT AND SUBLEASE 11 ARTICLE 16. SECURITY DEPOSIT 11 ARTICLE 17. ESTOPPEL CERTIFICATE 12 ARTICLE 18. ENVIRONMENTAL MATTERS 12 ARTICLE 19 LIMITATION OF LIABILITY OF LESSOR 13 ARTICLE 20. MISCELLANEOUS 13 EXHIBIT "A" RULES AND REGULATIONS 1 LEASE AGREEMENT --------------- THIS LEASE AGREEMENT ("Lease") is made as of the 18th day of July, 2005, by MICHAEL GALLEN ("Lessor"), an adult individual and citizen of the Commonwealth of Pennsylvania, and A N D LAKELAND INDUSTRIES, INC., ("Lessee"), a Delaware corporation. Background ---------- The Lessor is the owner of certain real property ("Property") situate at 31 South Sterley Street, Shillington, Berks County, Pennsylvania. A five (5) story industrial building ("Building") is located on the Property. The Property and all improvements thereon owned by the Lessor, including the Building, are hereinafter referred to as the "Leased Premises". Concurrently with the execution of this Lease, the Lessor, Mifflin Valley, Inc., a Pennsylvania corporation, the Lessee, and Mifflin Valley, Inc., a Delaware corporation, have executed an Asset Purchase Agreement ("Asset Purchase Agreement"). The Lessor and Lessee now seek to perpetuate in writing their present understanding and agreement. NOW, THEREFORE, INTENDING TO BE LEGALLY BOUND HEREBY, the Lessor and Lessee hereby agree as follows: ARTICLE 1. DEMISE, DESCRIPTION, USE AND TERM -------------------------------------------- 1.1 The duties and obligations of both the Lessor and the Lessee pursuant to this Lease are subject to and contingent upon closing occurring under the Asset Purchase Agreement; provided, however, that any default by the Lessor or Mifflin Valley, Inc., a Delaware corporation, under the Asset Purchase Agreement shall constitute a default by the Lessor under this Lease and any default by the Lessee or Mifflin Valley, Inc., a Delaware corporation, under the Asset Purchase Agreement shall constitute a Default (as hereinafter defined) by the Lessee under this Lease. 1.2 The Lessor hereby leases to the Lessee in accordance with the provisions of this Lease, and the Lessee hereby leases from the Lessor in accordance with the provisions of this Lease, the Leased Premises. 1.3 The Leased Premises shall be used for the manufacturing of protective clothing. 1.4 The initial term ("Initial Term") of this Lease shall be five (5) years and shall begin on August 1, 2005, ("Commencement Date") and shall terminate on July 31, 2010 ("Termination Date"). 1.5 Provided that no Default shall have occurred during the Initial Term, the Lessee shall have the option ("Renewal Option") to extend this Lease for a period of five (5) years ("Renewal Term"), which Renewal Term shall commence on August 1, 2010, and terminate on July 31, 2015. 2 1.6 The exclusive method of exercising the Renewal Option shall be by the giving by the Lessee of notice of such exercise to the Lessor as provided in Section 20.6 of this Lease, at least two hundred seventy (270) days prior to the end of the Initial Term. 1.7 In the event that the Lessee shall exercise its Renewal Option: (a) The Lessee shall pay to the Lessor Rent (as hereinafter defined) in accordance with the provisions of Section 2.1 of this Lease; and (b) All other terms and conditions contained in this Lease shall be applicable throughout the Renewal Term and binding upon the Lessee to the same extent that such terms and conditions were applicable and binding during the Initial Term. 1.8 Each twelve (12) month period of the Initial Term commencing on the anniversary of the Commencement Date and each twelve (12) month period of the Renewal Term, if applicable, commencing on the anniversary of the Commencement Date is hereinafter referred to as "Lease Year". As hereinafter used, "Term" shall mean the Initial Term and, if applicable, the Renewal Term. ARTICLE 2. RENT --------------- 2.1 The Lessee shall pay to the Lessor at its offices set forth in Section 20.6 of this Lease or at such other place as the Lessor shall designate to the Lessee from time to time in writing, as rent ("Rent"), payable without prior notice or demand and without setoff or deduction of any nature, as follows: (a) During the first Lease Year of the Term hereof, twelve (12) equal, consecutive monthly installments in the amount of Four Thousand Six Hundred Thirty and 00/100 Dollars ($4,630.00) each, in advance, the first such payment becoming due and payable on the Commencement Date and each successive monthly payment becoming due and payable on the same day of each of the next eleven (11) months thereafter. (b) For each Lease Year of the Initial Term hereof following the first Lease Year, and for each Lease Year of the Renewal Term, if applicable, there shall be an increase in Rent ("Rent Increase"), which Rent Increase shall be three and one half percent (3.5%) of the Rent applicable to the immediately preceding Lease Year. 2.2 As used herein, "Expenses" shall mean any and all assessments, costs, premiums, taxes, utility charges and all other expenses of any and every nature pertaining or related to the Leased Premises or the maintenance, occupation, repair or operation of the Leased Premises other than (a) principal, interest and other amounts owing with respect to loans to Lessor secured in whole or in part by the Leased Premises, and (b) all Capital Expenditures (as hereinafter defined) except those Capital Expenditures which are caused, in whole or in part, (i) by any act or omission of the Lessee or any of its shareholders, directors, officers, employees, agents, contractors or representatives or (ii) by any Default by Lessee. As used herein, "Capital Expenditures" means any expenditures which, under generally accepted accounting principals and practices, would be characterized as Capital Expenditures. 2.3 The Lease shall be considered a "triple net lease". Upon demand therefore, the Lessee shall pay all Expenses billed directly to the Lessee and reimburse the Lessor for all Expenses paid by the Lessor during the Term, except, however, that Lessor shall make every effort to have such invoices billed directly to Lessee and paid directly by Lessee where appropriate. 3 2.4 Any amounts owing by the Lessee under this Lease other than Rent are hereinafter referred to as "Additional Rent". 2.5 In the absence of manifest error, all determinations made by the Lessor under or pursuant to this Article shall be final and conclusive. 4 ARTICLE 3. INSURANCE/INDEMNIFICATION ------------------------------------ 3.1 Throughout the Term hereof, the Lessee shall maintain with a good and responsible company or companies doing insurance business in the Commonwealth of Pennsylvania and reasonably acceptable to the Lessor public liability insurance in the minimum amount per occurrence of One Million Dollars ($1,000,000.00) combined single limit coverage for loss from an accident resulting in bodily injury to or death of persons and Five Hundred Thousand Dollars ($500,000.00) for loss from an accident resulting in damage to or destruction of property, naming the Lessor as an additional named insured. 3.2 At the beginning of each Lease Year the Lessee shall provide the Lessor with a certificate or certificates of insurance evidencing the maintenance of the insurance coverages referred to in Section 3.1 hereof. 3.3 With respect to the insurance referred to in Section 3.1 hereof, all policies pertaining thereto shall expressly provide that the same may not be cancelled or altered without thirty (30) days' prior written notice to the Lessor. 3.4 If the Lessee shall fail to secure or maintain the insurance referred to in Section 3.1 hereof, the Lessor shall be permitted, but shall have no duty, to obtain such insurance in the Lessee's name or as the agent for the Lessee and shall be compensated by the Lessee as Additional Rent for the cost of the insurance premiums therefore immediately upon demand made by the Lessor without setoff or deduction, and all such amounts so paid by the Lessor shall become Additional Rent until paid to the Lessor by the Lessee. 3.5 If the Leased Premises or the Building in which the same is located should be totally destroyed by fire, flood or other casualty, or if either should be so damaged that rebuilding or repair cannot reasonably be completed so as to allow the Lessee to reasonably occupy the Leased Premises for the purposes provided in Section 1.2 hereof within ninety (90) working days from the date of the occurrence of said damage, and such destruction or damage has not been caused by or resulted from any act or omission of the Lessee, this Lease shall terminate and the Rent and Additional Rent shall be abated for the unexpired portion of this Lease, effective as of the date of such destruction or damage. Other than for the termination and abatement of Rent and Additional Rent as hereinabove set forth, the Lessee shall have no other rights or remedies against the Lessor on account of the Lessee's inability to use and occupy the Leased Premises. 3.6 If the Leased Premises or the Building in which the same is situate should be damaged by fire, flood or other casualty but such damage has not been caused by or resulted from any act or omission of the Lessee, and such damage is not to such an extent that rebuilding or repair cannot reasonably be completed within ninety (90) working days from the date of such damage, this Lease shall not terminate, but the Lessor at its sole cost and expense, shall proceed forthwith to rebuild or repair the Leased Premises or the Building in which the same is situate to substantially the condition in which the same existed prior to such damage. In the event of such damage to the Leased Premises or the Building as aforesaid, Rent and Additional Rent shall be abated for that period of time during which the Lessee shall not be able to reasonably occupy the Leased Premises for the purposes provided in Section 1.2 hereof. In the event that Lessor should fail to complete such rebuilding or repair within ninety (90) working days from the date of the occurrence of said damage, the Lessee may, at its option, by giving written notice thereof to the Lessor, terminate this Lease, in which case the Rent and Additional Rent shall be abated for the unexpired portion of this Lease, effective as of the date of such damage. Other than for the termination and abatement of Rent and Additional Rent as hereinabove set forth, the Lessee shall have no other rights or remedies against the Lessor for 5 the failure by the Lessor to complete such rebuilding or repair as aforesaid within ninety (90) working days of the date of the occurrence of said damage or on account of the Lessee's inability to use and occupy the Leased Premises. 3.7 The Lessee shall indemnify and save the Lessor harmless of and from any and all loss, damage, cost and expense, including reasonable attorneys' fees, suffered or incurred by the Lessor arising out of or pertaining to any act or omission of any nature of the Lessee or any of its shareholders, directors, officers, agents, employees, invitees, contractors or representatives resulting in damage to or destruction of the Leased Premises or the Property. 3.8 Notwithstanding anything to the contrary contained in this Lease or otherwise, the Lessee shall not be entitled to any abatement of Rent or Additional Rent or termination of this Lease in the event that any destruction or damage to the Leased Premises or the Building shall be caused by or result from any act or omission of the Lessee or any of its shareholders, directors, officers, agents, employees, invitees, contractors or representatives. 3.9 Notwithstanding anything to the contrary contained in this Lease, nothing contained in this Lease shall be deemed to limit, negate or otherwise diminish any rights or remedies which the Lessor shall have against the Lessee on account of any or omission by the Lessee which results in damage or destruction to the Leased Premises or the Building in which the same is situate. ARTICLE 4. WASTE AND NUISANCE ----------------------------- 4.1 The Lessee shall not commit, or suffer to be committed, any waste on the Leased Premises, nor shall the Lessee maintain, commit or permit the maintenance or commission of any nuisance on the Leased Premises or the use of the Leased Premises for any unlawful purpose. ARTICLE 5. REPAIRS AND MAINTENANCE ---------------------------------- 5.1 Lessee acknowledges that the Lessee has carefully inspected the Leased Premises and accepts the Leased Premises AS IS. ----- 5.2 The Lessee shall keep the Leased Premises in good order and repair, reasonable wear and tear excepted. The Lessee shall repair or replace all broken or damaged doors, windows, fixtures and other portions of the Leased Premises. Notwithstanding the foregoing, the Lessee shall have no duty to make structural repairs to the Leased Premises unless the damage thereto has been caused by the act or omission of the Lessee or any failure by the Lessee to observe or perform any of its duties or obligations under this Lease. 5.3 The Lessee shall not overload the floors nor install any heavy machinery or other heavy equipment of any kind without first obtaining the prior written consent of the Lessor, which, if granted, may be conditioned upon the moving of such machinery and equipment by skilled, licensed handlers and installation and maintenance, at Lessee's sole cost and expense, of special reinforcing and settings adequate to absorb and prevent noise and vibration. 5.4 The Lessor shall repair and maintain the Leased Premises at Lessor's expense, except for any damage thereto caused by any act or omission of the Lessee or any failure by the Lessee to observe or perform any of its duties and obligations under this Lease, in which event such damage shall be promptly repaired to the Lessor's satisfaction at the sole cost and expense of the Lessee, so that the Leased Premises shall have: 6 (a) effective waterproofing and weather protection of roof and exterior walls; (b) plumbing facilities that substantially conform to applicable law in effect at the time of installation; (c) heating facilities which substantially conform with applicable law at the time of installation; (d) electrical lighting, with wiring and electrical equipment, which substantially conform with applicable law at the time of installation; and (e) floors, stairways and railings maintained in good repair; provided, however, that notwithstanding the foregoing the Lessor shall have no duty to make any repairs otherwise required by this Section unless and until the Lessor shall have received notice of the need therefore from the Lessee. ARTICLE 6. LESSEE'S COMPLIANCE ------------------------------ 6.1 The Lessee shall not at any time use or occupy the Leased Premises nor permit nor suffer the same to be used or occupied in violation of any statute, ordinance or other requirement of any local, state or federal government or any authority, agency or department thereof, and in the event that any local, state or federal government or any authority, agency or department thereof shall hereafter at any time contend or declare by notice, citation, order or in any other manner whatsoever that the Leased Premises is used for a purpose which is in violation of any statute, ordinance or other requirement, the Lessee shall discontinue immediately such use of the Leased Premises. ARTICLE 7. UTILITIES -------------------- 7.1 As of the date of this Lease, the Leased Premises is served by the following utilities ("Utilities"): electric, natural gas, public water, public sewer and telephone. 7.2 Notwithstanding anything to the contrary, the Lessor does not make any representations or warranties of any nature to the Lessee with respect to the existence, continued existence, quantity or quality of any Utilities and shall have no liability or responsibility for any diminution in, suspension of or termination of any Utilities. 7.3 The Lessee shall pay when due, directly to the suppliers thereof, the cost of all Utilities now or hereafter serving the Leased Premises which are metered and billed directly to the Lessee. 7.4 Immediately upon demand, the Lessee shall reimburse the Lessor for the cost of all Utilities now or hereafter serving the Leased Premises which are not separately metered and for which the Lessee is not separately billed by a supplier of such Utilities. In the absence of manifest error, the reasonable determination by the Lessor as to the cost of Utilities subject to reimbursement by the Lessee shall be final and conclusive. ARTICLE 8. RULES AND REGULATIONS -------------------------------- 7 8.1 The rules and regulations set forth on Exhibit "A" which is attached hereto and made a part hereof are part of this Lease with the same effect as though contained herein in their entirety, and the Lessee covenants that said rules and regulations shall be fully observed by the Lessee throughout the Term hereof and fully observed by each and every employee of the Lessee and each and every person on the Leased Premises by permission or consent of the Lessee. ARTICLE 9. ALTERATIONS, IMPROVEMENTS AND FIXTURES ------------------------------------------------- 9.1 The Lessee shall make no alterations, additions or improvements in or to the Leased Premises without obtaining the prior written consent of the Lessor, which shall not be unreasonably withheld. In no event shall the Lessee be permitted to make any alterations, additions or improvements in or to the Leased Premises which would diminish the value of the Leased Premises. 9.2 All alterations, additions and improvements to the Leased Premises shall be of first quality, shall be free of all liens and encumbrances except for a lien on all assets of Lessee held by Lessee's bank (except, however, that in no event shall Lessee's bank have any lien, right, title or interest in any alteration, addition or improvement to the Leased Premises which constitutes a fixture or otherwise is affixed to the Leased Premises or any part thereof), shall be completed in a good and workmanlike manner, shall be made in accordance with all applicable laws and governmental rules and regulations and shall be in form satisfactory to the Lessor. In no event shall the Lessee cause or permit any mechanic's lien or claim ("Mechanic's Lien") to attach to the Leased Premises or any part thereof by reason of the construction of any alterations, additions or improvements to the Leased Premises or any work related thereto. 9.3 At the Lessor's option, upon incorporation into the Leased Premises, all alterations, additions and improvements shall become the property of the Lessor and shall remain upon and be surrendered by the Lessee with the Leased Premises. The Lessee shall indemnify and hold the Lessor harmless of and from any and all loss, damage, cost and expense, including all fines, penalties, reasonable attorneys' fees and court costs, incurred by the Lessor arising out of or resulting from the construction of the alterations, additions and improvements or any repairs to the Leased Premises occasioned thereby. 9.4 In the event that the Lessee shall make any alterations, additions or improvements to the Leased Premises, the Lessee shall promptly pay when due all contractors and materialmen who shall have supplied labor, work or materials to the Lessee with respect to the Leased Premises. In addition, the Lessee shall take all other steps, including the timely filing of a waiver against liens, as permitted by applicable law, in form and substance satisfactory to the Lessor ("Waiver Against Liens"), in order to avoid the imposition of any Mechanic's Lien upon or against the Leased Premises. At least ten (10) business days prior to the initiation of any labor or work with respect to the alterations, additions or improvements or the delivery of any materials to the Leased Premises with respect thereto, the Lessee shall deliver to the Lessor a Waiver Against Liens, executed by the Lessee and by each of its contractors. In the event that any Mechanic's Lien shall be filed with respect to the Leased Premises for labor or work performed or materials supplied by or on behalf of the Lessee with respect to the Leased Premises, the Lessee shall cause the same to be discharged within thirty (30) days after the Mechanic's Lien has been filed or formal notice of said lien has been issued, whichever shall first occur, regardless of the validity or invalidity of such Mechanic's Lien. Nothing contained in this Lease or otherwise is intended to authorize the Lessee to do or cause any work or labor to be done or any materials to be supplied for the account of the Lessor, all of the same being solely for the Lessee's account and at the Lessee's sole risk, cost and expense. 8 ARTICLE 10. QUIET POSSESSION ---------------------------- 10.1 This Lease and the tenancy of the Lessee hereunder shall be subordinate to the mortgage liens of record as of the date of this Lease and to all amendments, consolidations, extensions, modifications and renewals thereof or pertaining thereto and to the mortgage liens of record arising out of or pertaining to any refinancing with respect to any of the foregoing, and all amendments, consolidations, extensions, modifications and renewals thereof or pertaining thereto, and to all advances hereafter made from time to time upon the security thereof. Upon demand by the Lessor, the Lessee shall execute and deliver to the Lessor such instruments and assurances as the Lessor shall reasonably require in order to evidence such subordination. 10.2 Provided that no Default (as hereinafter defined) shall have occurred, and subject to the other provisions of this Lease, the Lessee shall peaceably and quietly hold and enjoy the Leased Premises for the Term hereof without hindrance or interruption, and such quiet enjoyment shall be defended by the Lessor. ARTICLE 11. DELIVERY OF POSSESSION ---------------------------------- 11.1 If the Lessor shall be unable for any reason whatsoever to deliver possession of the Leased Premises on the Commencement Date, the Lessor shall not be liable to the Lessee for any damage caused thereby, nor shall this Lease thereby become void or voidable, nor shall the Term hereof in any way be extended. In any such event as aforesaid, the Lessee shall not be liable for any Rent or Additional Rent as herein provided until such time as the Lessor delivers possession of the Leased Premises. ARTICLE 12. SURRENDER OF PREMISES --------------------------------- 12.1 Without demand therefore and at the Lessee's own cost and expense, the Lessee shall remove all personal property belonging to the Lessee and all alterations, additions and improvements (other than permanent partitions and installations and those alterations, additions and improvements with respect to which the Lessor has exercised its option under Section 9.3 hereof) to the Leased Premises which the Lessee has installed or caused to be installed as of the date of the termination of this Lease or the sooner termination of the Lessee's tenancy hereunder. In addition, the Lessee shall repair all damage to the Leased Premises caused by such removal as aforesaid and restore the Leased Premises to the condition in which the same existed prior to the installation of such alterations, additions and improvements so removed. Without limiting any other rights or remedies of which the Lessor may be possessed, any alterations, additions and improvements which are not removed as required by this Section shall be deemed to have been abandoned by the Lessee and may be retained or disposed of by the Lessor without accounting therefore to the Lessee of any nature. In the event that the Lessor shall dispose of any property deemed to have been abandoned by the Lessee, immediately upon demand therefore the Lessee shall reimburse the Lessor for all costs and expenses incurred by the Lessor with respect to such disposition. 12.2 The Lessee shall, on expiration of the Term hereof or the sooner termination of the Lessee's tenancy hereunder, promptly surrender and deliver the Leased Premises to the Lessor without demand therefore in good condition, ordinary wear and tear excepted. 9 12.3 If during the Term of this Lease the Leased Premises, or any part thereof, should be taken for any public or quasi-public use under any law, ordinance or regulation, or by right of eminent domain, or should be sold to any condemning authority under threat of condemnation, the Lessor shall have the right to terminate this Lease, and in such event the Rent and Additional Rent shall be abated for the unexpired portion of this Lease, effective as of the date of the taking by or conveyance to the condemning authority. No such condemnation or conveyance shall entitle the Lessee to any part of any damage award or purchase price paid on account of such condemnation or conveyance, all of which rights are hereby expressly waived by the Lessee. Notwithstanding the foregoing, in the event that the condemning authority shall award moving or business interruption damages which do not in any way diminish the recovery available to the Lessor, the Lessee shall not be deemed to have waived any right to the same by reason of the provisions of this Section and shall have the right to seek a recovery of such moving damages from the condemning authority. ARTICLE 13. DEFAULT ------------------- 13.1 Any of the following events shall constitute an event of default by the Lessee ("Default") under the provisions of this Lease: (a) the failure or refusal by the Lessee to pay when due and without notice or demand and without setoff or deduction to the Lessor any Rent, Additional Rent or any other amount owing under this Lease, and the continuance of such failure or refusal by the Lessee for a period of ten (10) days following the due date; provided, however, that the Lessee shall not be entitled to such grace period more than two (2) times during any consecutive twelve (12) month period; (b) the failure or refusal by the Lessee to carry the insurances required by Article 3 hereof or to provide the Lessor with evidence of such coverage as therein required; (c) the failure or refusal by the Lessee to make full and timely performance and observance of the provisions of this Lease (excluding the provisions to which Subsections (a) and (b) of this Section pertain) which the Lessee is required to perform or observe, and the continuance of such failure or refusal by the Lessee for a period of thirty (30) days following the giving of notice by the Lessor with respect thereto; provided, however, that the Lessor shall not be required to give such notice nor shall the Lessee be entitled to such grace period more than two (2) times during any consecutive twelve (12) month period; (d) [INTENTIONALLY DELETED]; (e) if the Lessee shall suffer or incur any lien, charge, encumbrance or security interest to be imposed upon the Leased Premises, the Lessee's interest in this Lease or the tenancy of the Lessee arising therefrom, and such lien, charge, encumbrance or security interest shall not be satisfied, discharged or terminated, as applicable, within thirty (30) days of the imposition thereof; (f) the attachment, garnishment, levy or seizure of any of the assets of the Lessee or the taking of possession thereof by a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official, and such attachment, garnishment, seizure or levy is not released within thirty (30) days of the imposition thereof, or possession relinquished within thirty (30) days of the taking thereof; 10 (g) the making by the Lessee or the attempt by the Lessee to make any common law composition of debts with the creditors of Lessee or the making by the Lessee to make an assignment for the benefit of the creditors of the Lessee or any attempt by the Lessee to otherwise take advantage of any insolvency law; (h) the entry of a decree or order for relief by a court having jurisdiction in respect of the Lessee in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law, or for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official with respect to the Lessee or any of its assets, and such appointment is not terminated within thirty (30) days of the date of the making thereof; (i) the commencement by the Lessee of a voluntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, or the consent of the Lessee to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for the Lessee or any of the assets of Lessee. 13.2 In the event of a Default, the Lessor shall have any and all of the following rights and remedies: (a) to declare the Rent, Additional Rent and all other amounts owing by the Lessee to the Lessor pursuant to this Lease for the balance of the Term to be immediately due and payable by the Lessee; (b) to terminate this Lease and be entitled to unpaid accrued Rent, Additional Rent and other amounts owing pursuant to this Lease and damages, including damages equal to the difference between the balance of the Rent, Additional Rent and other amounts owing pursuant to this Lease for the Term and the then fair rental value of the Leased Premises for the remainder of the Term; (c) without terminating this Lease, to re-enter and re-let to another tenant, the Lessee remaining liable for the loss of Rent for the balance of the Term, the Lessor being released from any and all liability for such re-entry; (d) to apply the Security Deposit against all losses, damages, costs and expenses suffered or incurred by the Lessor by reason of such Default; (e) To be indemnified of and from any and all losses, damages, costs and expenses, including reasonable attorneys' fees, suffered or incurred by the Lessor by reason of such Default; (f) to exercise any and all other rights and remedies set forth or referred to in this Lease and all other rights and remedies at law, in equity or by statute permitted. 13.3 [INTENTIONALLY DELETED]. 13.4 All rights and remedies of the Lessor hereunder or at law in, equity or by statute permitted or provided are cumulative, and may, to the extent permitted by law, be exercised concurrently or separately. The exercise of any one right or remedy shall not be deemed to be an exclusive election of such right 11 or remedy or to preclude the exercise of any other right or remedy. No failure on the part of Lessor to exercise, and no delay in exercising, any right or remedy hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise by Lessor of any right or remedy hereunder preclude any other or future exercise thereof or the exercise of any other right or remedy. 13.5 In the event of a Default hereunder, Lessee shall pay, in addition to any and all other amounts owing hereunder, and without setoff or deduction, upon demand therefore all costs and expenses, including reasonable attorneys' fees, incurred by the Lessor in enforcing any of its rights or remedies hereunder or by law, equity or statute permitted or provided. 13.6 (a) In the event that the Lessor shall fail to perform or observe any provision of this Lease to be performed or observed by the Lessor, the Lessee shall provide the Lessor with written notice thereof specifying the nature of such failure ("Default Notice"). In the event that the Lessor shall failure to cure such failure within the cure period ("Cure Period") provided in Subsection (b) hereof, the Lessor shall be in default hereunder and the Lessee shall have any and all rights and remedies at law, in equity or by statute permitted. (b) The Cure Period referred to in Subsection (a) hereof shall: (1) Consist of thirty (30)days beginning as of the date of receipt by the Lessor of the Default Notice; or (2) In the event that the Lessor's failure to perform or observe any provision of this Lease to be performed or observed by the Lessor is of such nature that it cannot reasonably be cured within thirty (30) days, the Cure Period shall consist of a reasonably greater period of time under the circumstances not to exceed ninety (90) days, beginning as of the date of receipt by the Lessor of the Default Notice. ARTICLE 14. INSPECTION BY LESSOR -------------------------------- 14.1 The Lessee shall permit the Lessor and its agents and representatives to enter into and upon the Leased Premises at all reasonable times and upon reasonable notice for the purposes of inspecting the same and for the purpose of maintaining or making repairs or alterations to the Leased Premises. Notwithstanding the foregoing, in the event that an emergency shall occur with respect to the Leased Premises or any part thereof, the Lessor shall not be required to give any notice whatsoever to the Lessee. 14.2 The Lessor shall have the right at any and all times during the Term to erect one (1) or more "For Sale" signs on the Leased Premises and within the one hundred eighty (180) day period prior to the end of the Term to erect one (1) or more "For Lease" signs on the Leased Premises. 14.3 The Lessor shall have the right at all reasonable times during the Term, and during the one hundred eighty (180) day period prior to the end of the Term to allow one (1) or more real estate agents and potential purchasers and lessees, as applicable, to inspect the Leased Premises. ARTICLE 15. ASSIGNMENT AND SUBLEASE ----------------------------------- 15.1 The Lessee shall not voluntarily, involuntarily or by operation of law, assign, transfer, mortgage, pledge or otherwise encumber this Lease or all or any part of the Lessee's interest in this Lease or in the Leased Premises, in 12 whole or in part, or sublet the whole or any part of the Leased Premises, or permit the use of the whole or any part of the Leased Premises by any other person or other entity of any nature ("Person") without the prior written consent of the Lessor; such consent, however, shall not be unreasonably withheld. No assignment or sublease, if consented to in the manner aforesaid, shall in any way relieve or release Lessee from liability upon any of the covenants under the terms of this Lease, and notwithstanding any such assignment or sublease, the responsibility and liability of Lessee hereunder shall continue in full force and effect until the expiration of the Term hereby created and any renewals thereof. No assignment or sublease shall be valid unless the assignee or subtenant shall assent to and agree in writing to be bound by all of the covenants and conditions herein contained, including the provisions of Section 13.3 hereof, such assent and agreement to be in form reasonably satisfactory to the Lessor. 15.2 The Lessor shall have the right to assign and transfer, in whole or in part, this Lease and any and all rights thereunder, the Leased Premises or any part of the foregoing without the consent of the Lessee. Such assignment and transfer shall relieve the Lessor of any and all liability under this Lease; provided, however, that the liability of the Lessor hereunder shall be fully enforceable against such assignee or transferee. The Lessee shall, within fifteen (15) days from receipt of a written demand by the Lessor, execute a consent in form reasonably satisfactory to the Lessor to such assignment or transfer as aforesaid. ARTICLE 16. SECURITY DEPOSIT ---------------------------- 16.1 Concurrently with the execution of this Lease, the Lessee shall deposit with Lessor the security deposit ("Security Deposit") in the amount of Four Thousand Six Hundred Thirty and 00/100 Dollars ($4,630.00) as security for the full, timely and faithful performance and observance by the Lessee of the provisions of this Lease on the part of the Lessee to be performed or observed and for the cost of any trash removal, house cleaning, repair or correction of damage to the Leased Premises in excess of normal wear and tear. 16.2 The Security Deposit referred to in Section 16.1 hereof shall be held by the Lessor, and the Lessee shall not be entitled to interest thereon. 16.3 If at any time during the Term hereof a Default shall occur by reason of the failure of the Lessee to make prompt payment when due of Rent or Additional Rent, or any portion thereof, or any other sum owing by the Lessee to the Lessor pursuant to the provisions of this Lease, the Lessor may appropriate and apply any portion of the Security Deposit as may be necessary to the payment of the overdue Rent, Additional Rent or any other sum owing by the Lessee to the Lessor pursuant to the provisions of this Lease. 16.4 If at any time during the Term hereof the Lessee shall fail to repair any damage to the Leased Premises or the Building in which the same is situate that the Lessee is required to repair pursuant to the provisions of this Lease, the Lessor may appropriate and apply any portion of the Security Deposit as may be reasonably necessary to make such repairs. 16.5 If on the termination of the tenancy of the Lessee for any reason, the Lessee does not leave the Leased Premises in reasonably clean condition, then the Lessor may appropriate and apply any portion of the Security Deposit as may be reasonably necessary to put the Leased Premises in such clean condition. 16.6 Should the Lessor transfer the Lessor's interest under this Lease or in the Leased Premises in any manner at the Lessor's option, the Lessor shall do 13 one of the following acts, either of which shall relieve the Lessor of further liability with respect to such Security Deposit: (a) transfer the portion of such Security Deposit remaining after all lawful deductions have been made to the Lessor's successor in interest and thereafter notify the Lessee of such transfer, and of the transferee's name and address. On receipt of such remaining Security Deposit, the successor in interest to the Lessor shall have all of the rights, remedies and obligations of the Lessor with respect to such Security Deposit and the Lessor shall be relieved and released of all further liability, duty and obligation to the Lessee with respect to the Security Deposit or its return; or (b) return to the Lessee the portion of the Security Deposit remaining after any lawful deductions have been made. 16.7 Except as otherwise provided herein, the Lessor shall return the Security Deposit, or the balance thereof after all lawful deductions have been made therefrom, to the Lessee as soon as possible following the vacation of the Leased Premises by the Lessee in accordance with the provisions of this Lease and the surrender to the Lessor of all keys to the Leased Premises; provided, however, that nothing herein contained shall be deemed to require the Lessor to return the Security Deposit or any portion thereof to the Lessee until all charges against the Security Deposit shall have been determined by the Lessor. In the event that the Lessor determines that any loss, damage or injury chargeable to the Lessee hereunder exceeds the Security Deposit, the Lessor, in addition to any and all other rights and remedies of which the Lessor may be possessed, may retain the Security Deposit as liquidated damages or may apply said sum against any actual loss, damage or injury and the balance thereof shall be the responsibility of the Lessee. 16.8 Except as provided in this Article, the parties hereto acknowledge that the Security Deposit is not to be considered as the last monthly payment of Rent under this Lease. 16.9 In the event that the Security Deposit or any portion thereof shall be used or applied by the Lessor pursuant to the provisions of this Lease, the Lessor shall give notice to the Lessee of such use or application and the reasons therefore within thirty (30) days of such use or application. 16.10 In the event that the Lessor shall use or apply the Security Deposit or any portion thereof but shall not elect to exercise the other rights and remedies granted to the Lessor under this Lease, then, immediately upon demand therefore by the Lessor, the Lessee shall pay over to the Lessor such sums of money as are necessary to reconstitute the Security Deposit in the amount set forth in Section 16.1. ARTICLE 17. ESTOPPEL CERTIFICATE -------------------------------- 17.1 The Lessee shall, at any time within ten (10) days of the Lessor's written request, execute, acknowledge and deliver to the Lessor a statement certifying that this Lease is unamended, unmodified and in full force and effect (or, if there have been amendments or modifications, that the same is in full force and effect as amended or modified and stating the amendments and modifications), the dates to which the Rent, Additional Rent and other amounts owing hereunder have been paid in advance, if any, and such other information as the Lessor shall reasonably require. It is intended that any such statement delivered pursuant hereto shall be relied upon by any prospective purchaser or mortgagee of the Leased Premises. 14 ARTICLE 18. ENVIRONMENTAL MATTERS --------------------------------- 18.1 (a) The term "Applicable Environmental Laws" shall mean without limitation all present and future laws, statutes, codes, ordinances, orders, judgments, decrees, injunctions, rules, regulations, restrictions and requirements ("Legal Requirements") of the United States of America, the Commonwealth of Pennsylvania, the Borough of Shillington and any agency, department, bureau, board, commission or instrumentality of either of the foregoing now existing or hereafter created ("Governmental Authority") pertaining to the preservation or enhancement of the quality of the environment or regulating or restricting the use, transfer, storage or remediation of Hazardous Materials (as hereinafter defined), including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Section 1801, et seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Section 6901, et seq.), the Pennsylvania Hazardous Sites Cleanup Act (35 P.S. 6020.101, et seq.) and all rules and regulations adopted and publications promulgated pursuant thereto at any time. (b) The term "Hazardous Materials" shall mean, without limitation, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances or related materials, asbestos or any material containing asbestos, or any other substance or material regulated under any Applicable Environmental Laws. 18.2 The Lessee shall not use the Leased Premises, nor allow it to be used, to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Materials. 18.3 The Lessee shall not cause or permit, as a result of any intentional or unintentional act or omission on the part of the Lessee or any other Person, a release of Hazardous Materials onto, from or affecting the Leased Premises or any other use, installation or disposition of Hazardous Materials in violation of Applicable Environmental Laws. 18.4 The Lessee shall comply, and enforce compliance by all of its agents, servants, employees, invitees, permitted assigns, sublessees, representatives and all other persons coming on the Leased Premises with the permission of the Lessee, with all Applicable Environmental Laws. ARTICLE 19 LIMITATION OF LIABILITY OF LESSOR -------------------------------------------- 19.1 Notwithstanding anything to the contrary, the liability of the Lessor (and any assignee thereof) under this Lease shall be limited to its interest in the Leased Premises and the Lessor (and any assignee thereof) shall have no liability to the Lessee beyond its interest in this Lease. ARTICLE 20. MISCELLANEOUS ------------------------- 20.1 In the event of any assignment, conveyance or other transfer by the Lessor of its interest in the Lease or the Leased Premises to any Person assuming the Lessor's obligations under this Lease, then in such event the Lessor shall be released and relieved of and from any and all further liability, duties and 15 obligations under this Lease and to the Lessee and the Lessee shall look solely to such successor in interest of the Lessor for the observance and performance of the Lessor's obligations under this Lease. 20.2 The Lessee shall comply with all Legal Requirements of all Governmental Authorities to the extent that the same affect the Leased Premises, and the Lessee shall save the Lessor harmless from any and all fines and penalties and costs assessed against the Lessor as a result of the failure by the Lessee to comply with such statutes, laws, ordinances, rules, regulations, orders, directives and requirements. 20.3 All property on the Leased Premises shall be and remain on the Leased Premises at the sole risk of the Lessee, and the Lessor shall not be liable for any damage to nor loss of such property arising from (a) any acts, omissions or negligence of others, (b) the leaking of the roof of the Building, (c) the bursting, leaking or overflowing of water, sewer or other pipes, (d) the bursting, leaking or overflowing of heating or plumbing fixtures, (e) electrical wires or fixtures, (f) damage by fire, casualty or any other disaster, (g) any other cause whatsoever; and the Lessee shall indemnify and hold Lessor harmless in all such cases. 20.4 It is expressly understood that the Lessor shall not be construed or held to be a partner or associate of the Lessee in the conduct of the Lessee's business, it being expressly understood that the relationship between the parties hereto is and shall remain at all times that of landlord and tenant. 20.5 Time shall be of the essence of this Lease. 20.6 All notices, requests, demands and other communications given or made pursuant to this Lease shall be in writing and delivered in person, or sent by certified mail, return receipt requested, postage prepaid, or sent by nationally recognized overnight courier to the address set forth in Paragraph 14 of the Addendum or to such other address as the receiving party shall have last designated by written notice to the other party hereto: If to Lessor: Michael Gallen 833 Wyomissing Road Mohnton, PA 19540 If to Lessee: Lakeland Industries, Inc. c/o Mifflin Valley, Inc. 31 South Sterley Street Shillington, PA 19607 With a copy to: Lakeland Industries, Inc. 701-7 Koehler Avenue Ronkonkoma, NY 11779 ATTN: Christopher Ryan and Gary Pokrassa 20.7 Whenever a period of time is to be computed from the date of receipt of a notice, request, demand or other communication and actual receipt thereof is refused by the party to whom it is directed, receipt shall be deemed to have been received for all purposes as follows: (a) if the refused item was delivered in person, such item shall be deemed to have been received on the date refused; (b) if the refused item was sent by certified mail, return receipt requested, such item shall be deemed to have been received on the third (3rd) day following mailing thereof; 16 (c) if the refused item was sent by nationally recognized courier, such item shall be deemed to have been received on the day following delivery to such nationally recognized courier. 20.8 When the sense so requires, words of any gender used in this Lease shall be held to include any other gender and words in the singular number shall be held to include the plural and vice versa. All pronouns and adjectives and any variations thereof used herein shall be deemed to refer to the masculine, feminine, neuter, single and plural as the identity of the person or persons may require. 20.9 Immediately upon demand therefore made by the Lessor, the Lessee shall execute and deliver to the Lessor such additional documentation as is reasonably necessary to effectuate the intent of this Lease. 20.10 The titles contained in this Lease do not constitute a part of this Lease, but are for informational purposes only. 20.11 The word "including" shall be a word of enlargement rather than a word of limitation and shall be deemed to mean "including but not limited to" rather than "including only". 20.12 If any provisions of this Lease or the application thereof be held invalid or unenforceable, the remainder of this Lease and the application thereof to other parties or circumstances shall not be affected thereby, unless such holding substantially and materially deprives Lessee of the use of the Leased Premises or Lessor of the Rent, Additional Rent or any other amount under this Lease, in which event this Lease shall forthwith terminate as if by expiration of the Term hereof. 20.13 Neither this Lease nor any memorandum thereof shall be recorded. 20.14 This Lease, together with the Exhibit attached hereto, contains the entire understanding between the parties hereto with respect to the subject matter hereof and such understanding may not be amended, modified or terminated except in writing and duly executed by the parties hereto. 20.15 This Lease shall not be more strictly construed against one party than the other. 20.16 This Lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and, where permitted by this Lease, assigns. 20.17 The Lessor and the Lessee each hereby consent to the jurisdiction of all state and federal courts having their situs in the Commonwealth of Pennsylvania. 20.18 This Lease and all interpretations hereof and controversies hereunder shall be construed in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, AND INTENDING TO BE LEGALLY BOUND HEREBY, the parties hereto have caused this Lease to be executed as of the day and year first above written. LESSOR: 17 /s/Michael Gallen - --------------------------------------- Michael Gallen LESSEE: LAKELAND INDUSTRIES,INC. By: /s/Christopher J. Ryan ------------------------------------ President: Attest: -------------------------------- Secretary: 18 EXHIBIT "A" RULES AND REGULATIONS --------------------- The following are the rules and regulations pertaining to the Leased Premises. These rules and regulations form an integral part of the Lease to which they are attached ("Lease") and shall be fully binding upon the Lessee therein named as if contained in the Lease in their entirety. Unless the context clearly requires otherwise, each term used herein shall have the meaning ascribed to it in the Lease. 1. No smoking shall be permitted at any time in the Building 2. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors and halls shall not be obstructed or encumbered by any Lessee or used for any purpose other than ingress and egress to and from the Leased Premises. 3. No awnings or other projections shall be attached to the outside walls of the Building without the prior written consent of the Lessor. No curtains, blinds, shades or screens shall be attached to or hung in or used in connection with any window or door of the Leased Premises without obtaining the prior written consent of the Lessor. In the event that such consent is given, such awnings, projections, curtains, blinds, shades, screens and other fixtures must be of a quality, type, design and color and attached in a manner approved by the Lessor and shall be removed by the Lessee at the Lessee's sole cost and expense immediately upon subsequent demand by the Lessor. 4. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by the Lessee on any part of the outside of the Leased Premises or the Building without obtaining the prior written consent of the Lessor. 5. Interior signs on doors and any directory tablet shall be inscribed and painted or affixed at the sole cost and expense of the Lessee and shall be of a size, color and style approved by the Lessor. 6. The sashes, sash doors, skylights, windows and doors that reflect or admit light and air into the vestibules, stairways, corridors, halls or other public places in the Building shall not be covered or obstructed by the Lessee, nor shall any bottles, parcels or other articles be placed on any window sills in the Building. 7. No utility sinks or other plumbing fixtures shall be used for any purpose other than those for which they were constructed, and no sweepings, rubbish, rags or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the Lessee. 8. The Lessee shall not in any way deface any part of the Leased Premises or the Building. No boring, cutting or stringing of wire shall be permitted, except with the prior written consent of the Lessor, and, in such event as the Lessor shall direct. 9. No bicycles, vehicles or animals of any kind shall be brought into or kept in the Building. 10. No cooking shall be done or permitted in the Building other than by means of a standard microwave oven. In no event shall any unusual or objectionable odors be produced upon or allowed to permeate the Leased Premises. 11. The Lessee shall not make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of the Building. 12. No additional locks or bolts of any kind shall be placed upon any doors or windows in the Building by the Lessee nor shall any change be made in existing locks or the mechanisms thereof. The Lessee must, upon the termination of his tenancy, restore to the Lessor all keys. In the event of the loss of any keys so furnished, the Lessee shall pay to the Lessor the cost of changing all applicable locks. 13. All removals or the carrying in or out of any safes, freight, furniture or bulky matter of any description must take place during the hours which the Lessor may determine from time to time. 14. Canvassing, soliciting and peddling in the Building are prohibited and the Lessee shall cooperate to prevent the same. 15. In the event that the Lessee shall use or occupy the Leased Premises or admit any person to the Building other than on normal business days during normal business hours, the Lessee shall be responsible for the locking of all exterior doors of the Building which the Lessee uses and shall otherwise cooperate fully with the Lessor to maintain security within the Building at all times. 16. The Lessee shall not at any time bring or allow to be brought into the building any flammable, combustible or explosive chemical, fluid, material or substance of any nature; provided, however, that the foregoing prohibition shall not be interpreted to preclude supplies customarily used for office purposes in customary amounts. 17. The Lessor reserves the right to make such other and further reasonable rules and regulations as in the Lessor's judgment may from time to time be needed for the safety, care and cleanliness of the Building and for the preservation of good order therein and any such other or further rules and regulations shall be binding upon the Lessee with the same force and effect as if they had been inserted herein at the time of the execution hereof. No such additional rules and regulations shall become effective as against the Lessee until the Lessor shall have given the Lessee written notice thereof, and unless such additional rules and regulations shall be of general applicability with respect to all other tenants in the Building. EX-10.17 5 ex10-17.txt EXHIBIT 10.17 July 18, 2005 Mr. Michael J. Gallen 31 South Sterley Street Shillington, PA 19607 Dear Mr. Gallen: The purpose of this letter agreement (hereinafter referred to as "Letter Agreement") is to confirm your employment with Lakeland Industries, Inc. (hereinafter referred to as the "Company") on the following terms and conditions: 1. THE PARTIES ----------- This is an agreement between Michael J. Gallen (hereinafter referred to as "you") and the Company, a Delaware corporation with principal place of business located at 701-7 Koehler Avenue, Ronkonkoma, NY 11779-7410. 2. CONTINGENCY ----------- Your duties and obligations under this Letter Agreement and the duties and obligations of the Company under this Letter Agreement are subject to and contingent upon closing occurring under the Asset Purchase Agreement dated July 18, 2005 (hereinafter referred to as "Asset Purchase Agreement"). 3. TERM; RENEWAL ------------- The term (hereinafter referred to as "Term") of this Letter Agreement shall be for the five (5) year period from August 1, 2005, through and including July 31, 2010, unless otherwise specified in the Asset Purchase Agreement or this Letter Agreement. Each term used in this Letter Agreement without definition which is defined in the Asset Purchase Agreement shall have the meaning ascribed to it in the Asset Purchase Agreement. 4. CAPACITY -------- You shall be employed as and have the title of President of Mifflin Valley, Inc., a Delaware corporation and wholly owned subsidiary of the Company, and such other title or titles as may from time to time be determined by the Board of Directors of the Company. In your capacity as President of Mifflin Valley, Inc., you shall have such authority and status as are customary to such position and shall not be required to accept or perform July 18, 2005 Page 2 of 8 any duties or obligations which are inconsistent with an executive position of this nature or which are contrary to applicable law. You shall devote reasonable time and attention and best efforts to the faithful and diligent performance of your duties to the Company and shall serve and further the best interests and enhance the reputation of the Company to the best of your ability; provided, however, that nothing contained in this Letter Agreement or otherwise shall be interpreted to preclude you from any activities, including but not limited to the sale of gifts and novelties, which do not interfere with the performance of your duties and obligations to the Company or otherwise violate the provisions of this Letter Agreement. 5. MONETARY COMPENSATION --------------------- As full monetary compensation for your services to the Company pursuant to this Letter Agreement, throughout the Term you shall receive the following from the Company: a. An annual bonus (hereinafter referred to as "Base Salary") as follows: i. August 1, 2005 through July 31, 2006 - $125,000.00; ii. August 1, 2006 through July 31, 2007 - $129,375.00; iii. August 1, 2007 through July 31, 2008 - $133,900.00; iv. August 1, 2008 through July 31, 2009 - $138,600.00; v. August 1, 2009 through July 31, 2010 - $143,400.00. b. An annual bonus (hereinafter referred to as "Annual Bonus") as follows: i. For the fiscal year of the Company ended January 31, 2006: (1) a $7,500.00 bonus if for the fiscal year ended January 31, 2006, pre-tax margins in the businesses under your control exceed 5% and reasonable sales forecasts are met; (2) a $12,500.00 bonus if for the fiscal year ended January 31, 2006, pre-tax margins in the businesses under your control exceed 7% and reasonable sales forecasts are met; (3) a $25,000.00 bonus if for the fiscal year ended January 31, 2006, pre-tax margins in the businesses under your control exceed 10% and reasonable sales forecasts are met. and an additional bonus equal to: July 18, 2005 Page 3 of 8 (a) a $7,500.00 bonus if for the fiscal year ended January 31, 2006, pre-tax profits in the businesses under your control exceed $150,000.00 and reasonable sales forecasts are met; (b) a $12,500.00 bonus if for the fiscal year ended January 31, 2006, pre-tax profits in the businesses under your control exceed $225,000.00 and reasonable sales forecasts are met; (c) a $25,000.00 bonus if for the fiscal year ended January 31, 2006, pre-tax profits in the businesses under your control exceed $300,000.00 and reasonable sales forecasts are met. ii. For each fiscal year of the Company subsequent to the fiscal year ended January 31, 2006: (1) a $7,500.00 bonus if for the applicable fiscal year, pre-tax margins in the businesses under your control exceed 7% and reasonable sales forecasts are met; (2) a $12,500.00 bonus if for the applicable fiscal year, pre-tax margins in the businesses under your control exceed 10% and reasonable sales forecast are met; (3) a $25,000.00 bonus if for the applicable fiscal year, pre-tax margins in the businesses under your control exceed 15% and reasonable sales forecasts are met. and a further bonus equal to: (a) a $7,500.00 bonus if for the applicable fiscal year, pre-tax profits in the businesses under your control exceed $200,000.00 and reasonable sales forecasts are met; (b) a $12,500.00 bonus if for the applicable fiscal year, pre-tax profits in the businesses under your control exceed $275,000.00 and reasonable sales forecasts are met; (c) a $25,000.00 bonus if for the applicable fiscal year, pre-tax profits in the businesses under your control exceed $450,000.00 and reasonable sales forecasts are met. c. Your Annual Bonus shall be paid as soon as practicable after the determination of the amount thereof in accordance with the provisions of Section 5.b. of this Letter Agreement. July 18, 2005 Page 4 of 8 d. Notwithstanding anything to the contrary, your Annual Bonus shall be equitably pro rated for any fiscal year in which you are not employed by the Company for the entire fiscal year. e. All calculations, computations and determinations made with respect to each Annual Bonus shall be made in good faith by the Company in a reasonable manner consistent with past practice. 6. NO RELOCATION OR UNREASONABLE TRAVEL ------------------------------------ In no event shall you be required by the Company: (a) to relocate your residence, (b) to commute more than twenty-five (25) miles daily, or (c) to unreasonably travel. 7. BENEFITS -------- Throughout the Term, you shall also be (a) entitled to participate in such retirement, profit sharing, insurance, medical, dental, health, fringe benefit and incentive plans as are available to and in a manner consistent with other executives of the Company, and (b) entitled to vacation and holidays in accordance with the Company's personnel policies for its executives. All of the foregoing are hereinafter collectively referred to as "Benefits". 8. NON-COMPETITION --------------- In consideration of the fact that the Company through a subsidiary corporation has purchased all the assets of Mifflin Valley, Inc., (hereinafter referred to as "MVI-PA") a Pennsylvania corporation, and assumed all of MVI-PA's debts, obligations and liabilities, and pursuant to a Lease Agreement ("Lease Agreement") dated July 18, 2005, leased the building located at 31 South Sterley Street, Shillington, Pennsylvania which is owned by you for a period of five (5) years, during the Term of this Letter Agreement you shall not, either directly or indirectly, as an agent, employee, partner, stockholder, director, investor, or otherwise engage in any activities in competition with the activities of the Company. You shall also abide by the Code of Ethics Agreement and other Corporate Governance Rules attached hereto and made a part hereof. You shall disclose to the Company all business relationships you presently have or contemplate entering into or enter into in the future that might affect your ability to work full time or perform any and all of your responsibilities or affect your loyalties to Lakeland. Notwithstanding anything to the contrary, in the event of any material breach, violation or default by the Company or Mifflin Valley, Inc., a Delaware corporation, of the provisions of the Asset Purchase Agreement, or the Company of the provisions of this Employment Letter Agreement, or the Company of the provisions of the Lease Agreement, you shall be released and relieved of any and all duties and obligations arising pursuant to this Section 8 and the duties and obligations arising pursuant to Section 11 of the Asset Purchase Agreement. July 18, 2005 Page 5 of 8 9. CONFIDENTIALITY --------------- Except as required in your duties to the Company you shall not at any time during your employment and for a period of five (5) years thereafter directly or indirectly use or disclose any confidential information relating to the Company or its business which is disclosed to you or known by you as a consequence of or through your employment by the Company and which is not otherwise generally obtainable by the public at large. 10. TERMINATION ----------- You or the Company may terminate your employment prior to the end of the Term for any reason upon written notice to the other party in accordance with the following provisions: (a) Death. Your employment shall terminate on the date of your death. Your Base Salary (as in effect on the date of death) shall continue through the last day of the month in which your death occurs. Payment of your Base Salary shall be made to your estate or your beneficiary as designated in writing to the Company. Your estate or designated beneficiaries as applicable shall also receive a pro-rata portion of the Annual Bonus, if any, determined for the fiscal year up to and including the date of death which shall be determined in good faith by the Compensation Committee of the Board of Directors. Your beneficiaries shall also be entitled to all other benefits generally paid by the Company on an employee's death. (b) Disability. Your employment shall terminate if you become totally disabled. You shall be deemed to be totally disabled if you are unable, for any reason, to perform any of your duties to the Company for a period of ninety consecutive days, or for periods aggregating one hundred twenty (120) days in any period of one hundred eighty (180) consecutive days. Your Base Salary (as in effect on the date you become totally disabled) shall be paid through the date you become totally disabled. You shall also receive a pro rata portion of the Annual Bonus, if any, determined for the fiscal year up to and including the date of your disability which shall be determined in good faith by the Compensation Committee of the Board of Directors. (c) Termination By You. You shall have the right to terminate the employment relationship established pursuant to this Letter Agreement at any time during the Term for any or no reason by giving the Company at least forty-five (45) days prior written notice ("Termination Notice") thereof, which Termination Notice shall set forth the date ("Employment Termination Date") of the employment relationship established pursuant to this Letter Agreement. In the event that you elect to terminate the employment relationship as set forth in this Section 10(c): July 18, 2005 Page 6 of 8 o The Company shall continue to pay your Base Salary and provide you with Benefits as provided in this Letter Agreement through the Employment Termination Date; o The Company shall have the right to terminate the tenancy established pursuant to the Lease Agreement by giving you written notice ("Tenancy Termination Notice") thereof during the said forty-five (45) day notice period, the termination of such tenancy to occur one hundred eighty (180) days following your receipt of such Tenancy Termination Notice; and o The non-competition provisions of Section 5 of this Letter Agreement shall continue in full force and effect for a period of time which shall end upon the earlier of July 31, 2010, or two (2) years following the Employment Termination Date. (d) Termination by the Company. The Company shall have the right to terminate the employment relationship established pursuant to this Letter Agreement at any time after the second Anniversary Date of the Term hereof (i.e., August 1, 2007) for any or no reason by giving you at least one hundred eight (180) days prior written notice notice ("Employer Termination Notice") thereof, which Employer Termination Notice shall set forth in the Employment Termination Date. In the event that the Company elects to terminate the employment relationship as set forth in this Section 10(d): o The Company shall continue to pay your Base Salary, Annual Bonuses as provided for in this Letter Agreement (including but not limited to a pro rata Annual Bonus for any fiscal year during which the Employment Termination Date occurs), and Benefits as provided in this Letter Agreement through the Employment Termination Date and for fifteen (15) months thereafter (hereinafter referred to as "Severance Period"); o The Company shall have no right to terminate the tenancy established pursuant to the Lease Agreement; o The non-competition provisions contained in Section 5 of this Letter Agreement and Section 11 of the Asset Purchase Agreement (if such provision remains in force) shall terminate upon the earlier of: (a) the end of the Severance Period, or (b) any breach, violation or default by the Company of the provisions of this Letter Agreement or the Asset Purchase Agreement. July 18, 2005 Page 7 of 8 11. NOTICES ------- Any notices required to be given under this Agreement shall, unless otherwise agreed to by you and the Company, be in writing and by certified mail, return receipt requested and mailed to the Company at its headquarters at 701-7 Koehler Avenue, Suite 7, Ronkonkoma, New York 11779-7410 or to you at your home address at 833 Wyomissing Road, Mohnton, Pennsylvania 19540. 12. WAIVER OR MODIFICATION ---------------------- No waiver or modification in whole or in part of this agreement or any term or condition hereof shall be effective against any party unless in writing and duly signed by the party sought to be bound. Any waiver of any breach of any provision hereof or right or power by any party on one occasion shall not be construed as a waiver of or a bar to the exercise of such right or power on any other occasion or as a waiver of any subsequent breach. 13. SEPARABILITY ------------ Any provision of this Letter Agreement including the non-competition or confidentiality sections which is unenforceable or invalid in any respect in any jurisdiction shall be ineffective in such jurisdiction to the extent that it is unenforceable or invalid without effecting the remaining provisions hereof which shall continue in full force and effect. The unenforceability or invalidity of any provision of the agreement in one jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. HEADINGS -------- The headings contained in this agreement are for convenience only and shall not affect, restrict or modify the interpretation of this Agreement. 15. CONTROLLING LAW --------------- This agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to contracts made and to be performed therein and you agree to the exclusive jurisdiction and venue of the federal or state courts located in the State of Pennsylvania or other court of competent jurisdiction on any legal issues arising out of this contract and you agree that such judgments as rendered by Pennsylvania or other courts shall be transferable and binding in all other American courts of competent jurisdiction. July 18, 2005 Page 8 of 8 16. UNPAID WAGES AND BENFITS ------------------------ The Company shall indemnify you for any liability which you may incur under the Pennsylvania Wage Payment and Collection Law, as amended ("Law") by reason of the failure of the Company or its wholly owned subsidiary, Mifflin Valley, Inc., to pay wages, benefits or other amounts referred to in the Law. LAKELAND INDUSTRIES, INC. By: /s/Christopher J. Ryan ---------------------------- Christopher J. Ryan CEO & President AGREED AND ACCEPTED: /s/Michael J. Gallen - ---------------------------- Michael J. Gallen EX-31.1 6 ex31-1.txt Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Christopher J. Ryan, certify that: 1. I have reviewed this report on Form 10-Q of Lakeland Industries, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 7, 2005 /s/Christopher J. Ryan ---------------------- By: Christopher J. Ryan Chief Executive Officer, President, Secretary and General Counsel EX-31.2 7 ex31-2.txt Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Gary Pokrassa, certify that: 1. I have reviewed this report on Form 10-Q of Lakeland Industries, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13A-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 7, 2005 /s/ Gary Pokrassa ----------------- By: Gary Pokrassa, Chief Financial Officer EX-32.1 8 ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO ss. 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of Lakeland Industries, Inc. (the "Company") on Form 10-Q for the period ending July 31, 2005 (the "Report"), I, Christopher J. Ryan, Chief Executive Officer, President, Secretary and General Counsel of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents in all material respects, the financial condition and results of operations of the Company. /s/Christopher J. Ryan - ---------------------- Christopher J. Ryan Chief Executive Officer, President, Secretary and General Counsel September 7, 2005 EX-32.2 9 ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO ss. 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of Lakeland Industries, Inc. (the "Company") on Form 10-Q for the period ending July 31, 2005 (the "Report"), I, Gary Pokrassa, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents in all material respects, the financial condition and results of operations of the Company. /s/Gary Pokrassa - ---------------- Gary Pokrassa, Chief Financial Officer September 7, 2005 -----END PRIVACY-ENHANCED MESSAGE-----