-----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, Cnp9B+A5sjg+mOIhfN5Q+2qAt7Y+/OXW6aWyh6ZutbKeIhIatXHRnEtj+a3Nw4Kf A6pzb5ldGIXyYcoCm5+4Kw== 0000914317-98-000281.txt : 19980504 0000914317-98-000281.hdr.sgml : 19980504 ACCESSION NUMBER: 0000914317-98-000281 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980430 SROS: NONE 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-K SEC ACT: SEC FILE NUMBER: 000-15535 FILM NUMBER: 98606236 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 STREET 2: 711- 2 KOEHLER AVENUE CITY: RONKONKOMA STATE: NY ZIP: 11779 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - K (Mark one) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended, January 31, 1998 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) (I.R.S. Employer Identification Number) 711-2 Koehler Ave., Ronkonkoma, NY 11779 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices, Including Zip Code) (516) 981-9700 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.01 Par Value - -------------------------------------------------------------------------------- (Title of class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S - K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10 - K or any amendment to this Form 10 - K ____. The aggregate market value of the Common Stock outstanding and held by nonaffiliates (as defined in Rule 405 under the Securities Exchange Act of 1934) of the Registrant, based upon the average high and low bid price of the Common Stock on NASDAQ on April 17, 1998 was approximately $14,163,091 (based on 1,531,145 shares held by nonaffiliates). The number of shares outstanding of the Registrant's common stock, $.01 par value, on April 29, 1998 was 2,610,472. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended January 31, 1998 are incorporated by reference in Items 5 - 7 of Part II and certain portions of the Registrant's Definitive Proxy Statement, for the Annual Meeting of Stockholders to be held June 17, 1998, are incorporated by reference in Items 10 - 13 of Part III of this Annual Report on Form 10-K. CAUTIONARY STATEMENTS This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical fact included in this report, including, without limitation, the statements under the headings "Business," and "Properties," "Market for Registrant's Common Stock and Related Stockholder Matters," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position and liquidity, the Company's strategic alternatives, future capital needs, development and capital expenditures (including the amount and nature thereof), future net revenues, business strategies, and other plans and objectives of management of the Company for future operations and activities. Forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate under the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, and factors in the Company's other filings with the Securities and Exchange Commission (the "Commission"), general economic and business conditions, the business opportunities that may be presented to and pursued by the Company, changes in law or regulations and other factors, many of which are beyond the control of the Company. Readers are cautioned that these statements are not guarantees of future performance, and the actual results or developments may differ materially from those projected in the forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. PART I ITEM 1. BUSINESS Lakeland Industries, Inc. (the"Company") believes that it is one of the leading manufacturers of a comprehensive line of safety garments and accessories for the industrial safety and protective clothing industries in the United States. The Company's major product areas include disposable / limited use protective industrial garments, specialty safety and industrial work gloves, reusable woven industrial and medical apparel, fire and heat protective clothing along with protective systems for personnel, and suits for use by toxic waste clean up teams. Products are manufactured both domestically and internationally by the Company and by contract manufacturers. Products are sold by Company personnel and 42 independent sales representatives, primarily to a network of 500 safety and mill supply distributors. The Company's protective garments are used primarily for: (i) safety and hazard protection, to protect the wearer from contaminants or irritants, such as, chemicals, pesticides, fertilizers, paint, grease, and dust and from limited exposure to hazardous waste and toxic chemicals including acids, asbestos, lead, and hydro-carbon's (PCB's) (ii) clean room environments, for the prevention of human contamination of manufacturing processes in clean room environments, (iii) hand and arm protection, to protect the wearer's hand and arms from lacerations, heat and chemical irritants without sacrificing manual dexterity or comfort, (iv) heat and fire protection, to protect municipal fire fighters, military, airport and industrial fire fighting teams and for maintenance of "hot" equipment, such as, coke ovens, kilns, glass furnaces, refinery installations, and smelting plants, (v) protection from viral and bacterial microbiologicals, to protect the wearer from contagious diseases, such as AIDS and hepatitis, at hospitals, clinics and emergency rescue sites, and (vi) protection from highly concentrated and powerful chemical and biological toxins, to protect the wearer from toxic wastes at Super Fund sites, accidental toxic chemical spills or biological discharges, the handling of chemical or biological warfare weapons and the cleaning and maintenance of chemical, petro-chemical and nuclear facilities. These products are manufactured, distributed and sold through six divisions and three wholly owned subsidiaries. The Company was incorporated in New York in 1982 and later reincorporated in Delaware in 1986. A new subsidiary, Fireland Industries, Inc. was formed during fiscal 1994 to hold the land and building then owned in Ohio and to act as Trustee and Sponsor of the Fireland Industries, Inc. Pension Plan. During fiscal 1998, the name of this subsidiary was changed to Laidlaw, Adams & Peck, Inc. In December 1997, the Company replaced its $8 million dollar bank line of credit with a two year $10 million credit facility. Background and Market The market for disposable industrial garments has increased substantially in the past 20 years. In 1970, Congress enacted the Occupational Safety and Health Act ("OSHA"), which requires employers to supply protective clothing in certain work environments. At about the same time, DuPont developed Tyvek TM which, for the first time, allowed for the economical production of lightweight, disposable protective clothing. The attraction of disposable garments grew in the late 1970's with the increases in both labor and material costs of producing cloth garments and the promulgation of federal, state and local regulations requiring that employees wear protective clothing to protect against exposure to certain contaminants, such as asbestos and P.C.B.s. The use of disposable garments avoids the continuing costs of laundering and decontaminating woven cloth work garments and reduces the overhead costs associated with handling, transporting and replacing such garments. As manufacturers have become aware of the advantages of disposable clothing, the demand for such garments has increased. This has allowed for greater production volume and, in turn, has reduced the cost of manufacturing disposable industrial garments. With the acquisition of the assets and certain liabilities of Fyrepel Products, Inc., the Company entered, via Fireland, into the field of manufacturing and selling fire and heat protective garments. Fyrepel Products, Inc. conducted business in this field for 40 years, and the Company acquired its assets as well as the right to use its trade name. During fiscal 1992, the Company re-evaluated the product lines manufactured at this facility in order to reduce the operating losses that occurred in prior fiscal years. Orders that would not assure an acceptable return were not booked, causing a decrease in overall sales, but an improved bottom line. The Company continued to market Fyrepel's product line and furnishes these products but utilized domestic or international independent manufacturing contractors while internal manufacturing was phased out. Chemland was formed in December 1986 to purchase the assets and certain liabilities of Siena Industries, Inc. Chemland manufactures protective garments for use in hazardous chemical environments. All of its products are sold through the Company's distributor network. The Company believes that this market will grow due to the extensive government legislation which mandates the clean up of toxic waste sites and the elimination of hazardous materials from the environment as promulgated under prior Congressional Super Fund Acts and the Super Fund Reform Act of 1998 presently awaiting passage. The Environmental Protection Agency ("EPA") designated OSHA to be responsible for the health and safety of workers in and around areas of hazardous materials and contaminated waste. OSHA responded by formulating an all encompassing compendium of safety regulations that prescribe operating standards for all aspects of OSHA projects. Almost 2 million people are affected by OSHA Standards today. Various states have also enacted worker safety laws which are equal to or go beyond OSHA standards and requirements, as it affects the Company's products. In 1990, additional standards proposed and developed by the National Fire Protection Association ("NFPA") and the American Society for Testing and Materials ("ASTM") were accepted by OSHA. NFPA Standard 1991 set performance requirements for total-encapsulating vapor-proof chemical suits and includes rigid chemical and flame resistance tests and a permeability test against 17 challenge chemicals. The basic OSHA Standards call for 4 levels of protection, A through D, and specify in detail the equipment and clothing required to adequately protect the wearer at corresponding danger levels. A summary of these four levels follows: NFPA 1991/Level A calls for total encapsulation in a vapor-proof chemical suit with self-contained breathing apparatus ("SCBA") and appropriate accessories. Level B calls for SCBA or positive pressure supplied respirator with escape SCBA, plus hooded chemical resistant clothing (overalls, and long sleeved jacket; coveralls; one or two piece chemical-splash suit; or disposable chemical-resistant overalls). Level C requires hooded chemical-resistant clothing (overalls; two-piece chemical-splash suit; disposable chemical-resistant overalls). Level D is basically a work and/or training situation requiring minimal coverall protection. Products General Prior to acquiring Fyrepel Products, Inc. and Siena Industries, Inc. in December 1986, the Company's product line consisted principally of two product groups: disposable / limited use or woven protective industrial garments and specialty safety and industrial work gloves. With the formation of Fireland and Chemland, the Company entered the field of fire, heat and chemical protective garments. The Company also manufactures and sells gloves made from Kevlar TM and Spectra TM, both high-strength fibers. These gloves provide the wearer with a high degree of protection against cuts and lacerations in a glove that is both lightweight and flexible. The Company anticipates strong demand for these gloves in the manufacturing and food service industries. Disposable / Limited Use Garments The Company manufactures a complete line of limited use protective garments. These garments are offered in coveralls, lab-coats, shirts, pants, hoods, aprons, sleeves and smocks. The Company offers these garments in a number of sizes and styles to fit the end users' needs. Limited-use garments can also be coated or laminated to increase splash protection against many inorganic acids, bases, and other liquid chemicals. Limited use garments are made from several non-woven fabrics including Tyvek (TM), Tyvek(R)QC, Tyvek/Saranex 23-P, Barricade, Tychem 9400, Tychem 10,000, Pyrolon FR, proprietary patented fabrics and Polypropylene materials and derivatives. The Company incorporates many seaming techniques depending on the level of hold-out needed in the end use application. Seam types utilized include standard serge seam, bound seam, and heat sealed seam. During fiscal 1995, the Company continued to market the Pyrolon(TM) disposable flame retardant garments. Pyrolon garments meet the stringent requirements of NFPA 701. This material offers multiple benefits; replacing traditional bulky layers of clothing, reducing overall weight and reducing both inventory and storage and replacement costs. The Company's limited use garments range in price from $.06 for limited use shoe covers to approximately $12.00 for Tyvek/Saranex 23-P laminated hood and booted coverall. The Company's largest selling item, a standard white limited-use Tyvek coverall, costs the end user approximately $2.75 to $3.25 per garment. By comparison, similar re-usable cloth coveralls range in price from $10.00 to $35.00, exclusive of significant laundering, maintenance and slippage expenses. Industrial and Medical Cloth Garments The Company also manufactures and markets a line of reusable and launderable woven cloth protective apparel which supplement the disposable / limited use garments, giving the Company access to the broader industrial and health care related markets. Cloth re-usable garments are more appropriate in certain situations because of their heavier weight and greater durability which gives the Company the flexibility to supply and satisfy a wider range of safety and customer needs. The Company also designs and manufactures: o special apparel for the auto industry's paint systems, o hospital garments for protection against blood borne pathogens, o clean room apparel as used in the most sophisticated semiconductor manufacturing facilities, and o jackets and bib overalls for use by emergency medical teams around the country. Safety and Industrial Gloves The Company manufactures and sells specialty safety gloves and sleeves made from Kevlar TM. The Company is one of four companies licensed to sell 100% Kevlar TM gloves. Kevlar TM is a cut and heat resistant, high-strength, lightweight, flexible and durable material produced by DuPont. Kevlar TM, on an equivalent weight basis, is five times stronger than steel and has increasingly been used in manufacturing such diverse products as airplane fuselage components and bullet-resistant vests. Gloves made of Kevlar TM offer a better overall level of protection, lower the injury rate and are more cost effective than work gloves made from such traditional material as leather, canvas and coated gloves. Kevlar TM gloves can withstand temperatures of up to 400 degrees F and are sufficiently cut-resistant to allow workers to safely handle sharp or jagged unfinished sheet metal. Kevlar TM gloves are used primarily in the automotive and metal fabrication industries. The Company also markets approximately 30 different types of commodity industrial work gloves to a small extent made from such materials as cotton, polyester, terry cloth and nylon. Sales of these commodity gloves are used to augment the Company's product line. Kevlar TM gloves and sleeves represent a large portion of the Company's glove production and therefore a majority of the Company's dollar volume of glove and sleeve sales. The Company has been manufacturing and selling knit gloves and sleeves made of Spectra TM since 1989. The Company expects the continued demand for these enhanced gloves to increase as users become familiar with the cut resistance and versatility of these gloves. New markets are continuously being explored for these gloves whose sales account for less than 10% of the Company' dollar volume of glove and sleeve sales. The Company phased out its importation of gloves for distribution into retail sales channels during 1989 to concentrate on the more profitable manufactured gloves. The Company is devoting an increasing portion of its manufacturing capacity to the production of Kevlar TM and Spectra TM gloves, which carry a higher profit margin than commodity gloves. In order to maintain a full line of gloves, however, the Company intends to continue to produce commodity gloves and to import such additional commodity gloves as are necessary to meet demand for its glove products. The Company believes that there are adequate and reliable foreign manufacturers available to meet the Company's import requirements of commodity gloves, if needed. Fire and Heat Protective Apparel and Protective Systems for Personnel The Company's products protect individuals that must work in hostile environments and the Company has been the creator, innovator and inventor of protective systems for hazardous occupations for the last 12 years. The brand name FYREPEL TM is recognized nationally and internationally. The Company has completed an intensive redesign and engineering study to address the ergonomic needs of stressful occupations. The Company's products include: Fire entry suit - for total flame entry for industries dealing with volatile and highly flammable products. Kiln Entry suit - to protect kiln maintenance workers from extreme heat. Proximity suits - designed for performance in high heat areas to give protection where exposure to hot liquids, steam or hot vapors is possible. Approach suits - for personnel engaged in maintenance, repair and operational tasks where temperatures do not exceed 200F degrees ambient, with a radiant heat exposure up to 2,000F degrees. The Company also manufactures Fire Fighters Protective Clothing for domestic and foreign fire departments and developed the popular Sterling Heights style (short coat and bib pants) bunker gear. Crash Rescue has been a major market for the Company, which was the first to produce and supply military and civilian markets with protection worn at airports, petrochemical plants and in the marine industry. Each of the fire suits range in cost to the end user from $450 for a standard fire department turn-out gear to $2,000 for the fire entry suit. The Company anticipates continuing growth and emphasis in the industrial fire market and the international markets. With greater emphasis being placed on the globalization of the industrial manufacturing capacity, it is expected that the Company's products will receive more attention and will be in grater demand worldwide. Chemical Protective Garments The Company manufactures heavy duty fully encapsulated chemical suits which are made of Viton TM, butyl rubber, polyvinylchloride ("PVC") TyChem TM and Teflon TM. These suits are worn to protect the user from exposure to hazardous chemicals. Hazardous material teams or individuals use chemical suits for toxic cleanups, chemical spills, or in industrial and electronic plants. The Company also makes a line of lighter weight chemical suits using such materials as Saranex-coated Tyvek TM and Barricade TM, both DuPont products. The Company's line of chemical suits range in cost from $12 for the Saranex-coated Tyvek suits to $3,400 for the Teflon suits. The chemical suits can be used in conjunction with a fire protective shell manufactured by the Company which will protect the user from both chemical and fire hazards. The Company has also introduced two NFPA approved garments: Forcefield TM - A lightweight hazmat suit, totally encapsulized providing greater mobility, visibility, dependability and versatility in dealing safely and effectively with most types of chemical hazards. This product meets NFPA 1991 standards for a fully certified chemical protective suit. When combined with an Aluminized PBI/Kevlar over cover, it provides NFPA 1991 / Level A protection; Interceptor TM - Model A meets all OSHA Level A requirements as a vapor-proof suit. Model 1 meets and exceeds NFPA 1991 requirements of certification for vapor-proof suit when used with an Aluminized PBI / Kevlar over cover. The Company also manufactures and sells a Level B worksuit called Checkmate TM. This suit is lightweight, tough, versatile, durable and cost effective and can be used for: splash protection, basic clean up, toxic waste dumps and post fire monitoring of toxic residue. Manufacturing Disposable / Limited Use Garments The Company manufactures its disposable / limited use garments primarily at its Decatur, Alabama facility. The fabric is first cut into required patterns at the Company's own plant. The cut fabric and any necessary accessories, such as zippers or elastic, are then obtained from the Company's plant by the Company's wholly owned contract assembly facilities or independent sewing contractors. The assembly facilities and independent contractors sew and package the finished garments at their own facilities and return them to the Company's plant, normally within one to nine weeks for immediate shipment to the customer. The Company presently utilizes over 30 independent sewing contractors under agreements that are terminable at will by either party. These contractors employ approximately 500 people full-time (both domestically and internationally) and operate and maintain their own industrial sewing machines. The Company believes that it is the only customer of the majority of its independent sewing contractors and considers its relations with such contractors to be excellent. In the year ended January 31, 1998, no independent sewing contractors accounted for more than 10% of the Company's production of disposable/limited use garments. The Company believes that it can obtain adequate alternative production capacity should any of its independent contractors become unavailable. The Company believes that its manufacturing system permits it considerable flexibility. Furthermore, by employing additional sewing contractors, the Company can increase production without substantial additional capital expenditures. While the Company has not experienced reduced demand for its disposable / limited use garments, management believes that by its use of its Company owned facilities complemented by the use of independent sewing contractors, the Company is capable of reducing or alternately increasing its production capacity without incurring large on-going costs typical of many manufacturing operations. This allows the Company to react quickly to changing unit demand for its products. Industrial and Medical Woven Garments The Company manufactures and sells woven cloth garments at its facility in Missouri. After the Company receives fabrics from suppliers, principally blends of polyester and cotton, the Company cuts and sews the fabrics at its own facilities to meet customer purchase orders. Some of the items manufactured at this facility are static-free clean room garments, coveralls, lab coats, shirts, pants, jackets, protective covers for industrial robots and garments for emergency response paramedic teams. Fire and Heat Protective Apparel Prior to 1992, the Company solely manufactured fire and heat protective garments at its Newark, Ohio facility, which facility was subsequently sold. Independent manufacturing contractors have been utilized subsequently. The Company receives fabric from its suppliers and sends it to the contractor who cuts the fabric, assembles the suits, boxes the finished product and delivers it pursuant to customer purchase orders or to a Company warehouse. The fire and heat protective suits are manufactured to the purchaser's specifications and delivered upon completion. Chemical Protective Garments The Company manufactures chemical protective clothing at its facility in Somerville, Alabama. After the Company obtains such materials as Saranex-coated Tyvek TM, Barricade TM, TyChem TM, Viton TM, butyl rubber and PVC, it designs, cuts, glues and/or sews the materials to meet customer purchase orders. Forcefield TM suits (a Teflon level A sophisticated chemical suit) the Interceptor TM line of suits, and Checkmate TM suits used by hazardous materials response teams have been developed internally to provide chemical protection at the highest level of barrier available today and are patented products. Safety and Industrial Work Gloves The Company also manufactures gloves at its Somerville, Alabama facility. Computerized robotic knitters are used to weave gloves from both natural and synthetic materials, including Kevlar TM and Spectra TM, on an automatic basis. These robotic knitters are generally in operation 20 hours a day, 5-1/2 days a week. The Company's robotic knitters allow flexibility in production as they can be easily reprogrammed in minutes to produce gloves and sleeves in different sizes, styles, weights, weaves or combinations of materials. Additionally, these robotic knitters can produce gloves and sleeves separately or as a one-piece garment. Gloves and sleeves can also be knitted in different weights and combinations of yarns, such as Kevlar TM mixed with cotton or polyester. Additional processing is sometimes provided by independent sewing contractors. Glove dotting for grip enhancement is also done internally. Quality Control To assure quality, Company employees monitor the sewing of disposable / limited use garments at the facilities of the independent sewing contractors and also inspect the garments upon delivery to the Company's facilities. Finished product that is below standard is returned to the contractor for reworking. The Company has rarely been required to return product to its independent sewing contractors. The Company also actively participates in the Industrial Safety Equipment Association's (ISEA) frequent independent quality inspection programs. The Company conducts quality control inspections of its industrial gloves, cloth, fire and chemical garments throughout the manufacturing process. The Company's Decatur, Alabama plant was ISO 9002 certified during fiscal year 1998. Marketing The Company markets and sells its products through a minimum of 42 independent manufacturers' representatives. The Company believes that these representatives constitute one of the largest and most sophisticated independent sales force in its industry. These independent representatives call on over 500 safety and industrial distributors nationwide and promote and sell the Company's products to safety and industrial distributors and provide product information. The distributors buy the Company's products and maintain inventory at the local level in order to assure quick response time and the ability to serve accounts properly. During the year ended January 31, 1998, no one distributor accounted for more than 5% of sales. Fire, heat and chemical suits were sold through the sales force which was previously used by Fyrepel Products, Inc. and Siena Industries, Inc. Starting in fiscal 1989, the Company increased sales of these products by having them sold through the Company's entire sales network. Due to increasingly technical nature of the sale, in 1992 the Fyrepel division ceased using independent sales representatives, utilizing in house personnel only. Products are sold through the Company's network of distributors to the steel, aluminum, nuclear, chemical and petro chemical, fiberglass, agricultural, pharmaceutical, aerospace, electronics, semi conductor, food processing, glass, power generation and automotive industries, ammunition plants, and fire departments, the U.S. Defense Department and numerous other governmental and quasi-governmental agencies. Highland, the glove division, uses independent sales representatives, exclusively. The Company's marketing plan is to maximize the efficiency of its established distribution network by direct promotion at the end-user level. Advertising is primarily through trade publications. Promotional activities include sales catalogs, mailings to end users and a nationwide publicity program. The Company exhibits at both regional and national trade shows and was represented at the National Safety Congress in Chicago, IL (Fall of 1997) and will be represented at the American Industrial Hygienists Convention (Spring of 1998). The Company also markets its products through its web-site on the Internet at /http://www.lakeland.com. Suppliers and Materials The Company does not have long-term, formal agreements with unaffiliated suppliers of non-woven fabric raw materials used by the Company in the production of its disposable garments. Tyvek TM, Tychem TM and Kevlar TM, however, are purchased from DuPont under licensing agreements; Polypropylene is available from thirty or more major mills; flame retardant fabrics are also available from a number of both domestic and international mills. The accessories used in the production of the Company's disposable garments such as zippers, snaps and elastics are obtained from unaffiliated suppliers. The Company has not experienced difficulty in obtaining its requirements for these commodity component items. The Company has not experienced difficulty in obtaining materials, including cotton, polyester and nylon, used in Highland's production of commodity gloves. Kevlar TM, used in the production of the Company's specialty safety gloves, is obtained from independent mills that purchase the fiber from DuPont. The Company has not experienced difficulty in obtaining its requirements for its raw materials, fabrics or components on any of the above described products. The Company obtains the Spectra yarn used in its Dextra Guard gloves from mills that purchase the fiber from Allied Signal Company, Inc. ("Allied"). The Company believes that Allied will be able to meet the Company's needs for Spectra. In manufacturing its fire and heat protective suits, the Company uses glass fabric, aluminized glass, Nomex TM, aluminized Nomex TM, Kevlar TM, aluminized Kevlar TM, polybenzimidazole (PBI) as well as combinations utilizing neoprene coatings. The chemical protective suits are made of Viton TM, butyl rubber, PVC (available from multiple sources), proprietary and Company patented laminates and Teflon TM, Saranex TM Tyvek QC TM, TyChem TM and Barricade TM from DuPont. The Company also has not experienced difficulty obtaining any of the aforementioned materials. Competition Competition in the market for all of the Company's products is intense. The Company competes with a large number of domestic and foreign companies, public and private, some of which are larger and have substantially greater financial resources. Competition within the industry is on the basis of price, quality, timely delivery, consistency of product, and support services to distributors and end users. Beginning in the third quarter of fiscal 1990, intense competition in the disposable garment business drove margins on non- Tyvek TM garments down. This competition and the concomitant sales price erosion continued through fiscal 1993. However, small price increases on the core Tyvek disposable line in February of 1993, 1994, 1996 and 1998 have and should continue to result in gross margin increases. Management continued to take steps to reduce the Company's manufacturing costs and overhead in order to improve operating results in fiscal 1998. The Company continues to focus its efforts on increasing the sales and profitability of all products, and to redeploy its capital toward higher margin proprietary products. Seasonality Historically, more disposable garments are sold in spring and summer due to moderate weather and construction starts. The highest level of activity is in the spring months. This does not materially affect the total sales of the Company. The fourth quarters of fiscal years 1990 and 1991 yielded the lowest sales volume of each fiscal year. However, during fiscal 1992 and 1993 the third quarter and second quarter, respectively, yielded the lowest sales volume. Since fiscal 1994, the third quarter has been the only seasonally weak quarter. Patents and Trademarks At this time, there are no patents or trademarks which are significant to the Company's operations; however, the Company has one exclusive licensing arrangement covering seven patents in the Company's name, two Company developed patents, five additional patents in the application and approval process with the U.S. Patent and Trademark office, and has one non-exclusive agreement with DuPont regarding patented materials used in the manufacture of chemical suits. Employees As of April 15, 1998, the Company had approximately 766 full-time employees (both domestically and internationally) and meets its manpower requirements at one division through an employee leasing agreement with Madison Manpower and Mobile Storage, Inc., the president and principal stockholder of which is also an officer of the Company. The Company has experienced a low turnover rate among its employees. The Company believes its employee relations to be excellent. ITEM 2. PROPERTIES The Company leases three domestic manufacturing facilities, three foreign manufacturing facilities, one foreign sales office, one Canadian warehouse facility and a corporate office headquarters. The Company's 90,308 square foot facility in Decatur, Alabama, is used in the production of disposable / limited use garments. The Alabama facility is leased entirely by the Company from a partnership consisting primarily of certain stockholders of the Company, pursuant to two lease agreements expiring on August 31, 1999. Chemland and Highland lease 12,000 sq. ft. of manufacturing space, each, on a month to month basis in Somerville, Alabama. This Somerville facility is owned by an officer of the Company. The Company leases 44,000 square feet of manufacturing space in St. Joseph, Missouri used in the manufacturing of woven cloth garments and other cloth products. This lease expires on October 31, 1999. The Company's Mexican subsidiary leases two manufacturing facilities totaling 33,816 square feet under one lease expiring on December 31, 2000 and the second smaller facility is leased on a month to month basis. The Company also leases a 39,816 square foot manufacturing facility in China. This lease agreement is with a partnership of American and Chinese individuals (which include certain officers, employees and directors of the Company) who own the buildings and leases the property for 50 years. The partnership in turn leases the buildings to the Chinese division of the Company as a sales, distribution and manufacturing facility. Currently, the lease is on a month to month basis at an annual rental of $36,288. A formal lease is expected upon completion of the building. A small 2,000 sq. ft. sales office is also leased (from a third party) at an annual rental of $8,000. The Company leases a 5,600 square foot warehouse in Canada under a lease expiring on November 30, 2001. The Company leases 4,362 square feet of office space in Ronkonkoma, New York, in which its corporate, executive and sales offices are located. This lease expires on June 30, 1999. For the year ended January 31, 1998, the Company paid total rent on property and all leased equipment of approximately $669,514 on a net basis. The Company believes that these facilities are adequate for its present operations. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved as plaintiffs in certain receivable collection actions and claims arising in the ordinary course of business, none of which are of a material nature. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders of the Company. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Reference is made to Page 4 ("Market for the Registrant's Common Stock and Related Stockholder Matters") of the Registrant's 1998 Annual Report to Shareholders filed as Exhibit 13 hereto and incorporated herein by reference. (See Part IV, Item 14(c) Exhibits.) ITEM 6. SELECTED FINANCIAL DATA Reference is made to Page 2 ("Selected Financial Data") of the Registrant's 1998 Annual Report to Shareholders filed as an exhibit hereto filed as an Exhibit 13 hereto and incorporated herein by reference. (See Part IV, Item 14(c) Exhibits.) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Reference is made to Page 3 ("Management's Discussion and Analysis of Financial Condition and Results of Operations") of the Registrant's 1998 Annual Report to Shareholders filed as Exhibit 13 hereto and incorporated herein by reference. (See Part IV, Item 14(c) Exhibits.) ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements are incorporated herein by reference to Pages 5 to 23 of the Registrant's Annual Report to Shareholders for the year ended January 31, 1998: Report of Independent Certified Public Accountants Consolidated Balance Sheets - January 31, 1998 and 1997 Consolidated Statements of Income for the years ended January 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended January 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended January 31, 1998, 1997 and 1996 Notes to consolidated financial statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the information under the caption "Election of Directors" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders ("Proxy Statement"), which information is included in Exhibit 20 hereto and incorporated herein by reference. (See Part IV, Item 14(c) Exhibits.) The following table sets forth the names and ages of all executive officers of the Company, and all positions and offices within the Company presently held by such executive officers. None of the directors, executive officers or nominees for director has any family relationship with any other director, executive officer or nominee for director of the Company.
Name Age Position Held ---- --- ------------- Raymond J. Smith 59 Chairman of the Board, President and Director Christopher J. Ryan 46 Executive Vice President - Finance & Secretary and Director Harvey Pride, Jr. 51 Vice President - Manufacturing James M. McCormick 50 Vice President and Treasurer
Mr. Smith, a co-founder of the Company, has been Chairman of the Board and President since its incorporation. Prior to 1982, he was employed for 16 years by Disposables, Inc., a manufacturer of disposable garments, first as sales manager, then as Executive Vice President and subsequently as President and Director. Mr. Christopher J. Ryan has served as Executive Vice President- Finance and director since May, 1986 and Secretary since April 1991. From October 1989 until February 1991 Mr. Ryan was employed by Sands Brothers & Co. Ltd. and Rodman & Renshaw, Inc., both investment banking firms. Prior to that, he was an independent consultant with Laidlaw Holding Co., Inc., an investment banking firm, from January 1989 until September 1989. From February, 1987 to January, 1989 he was employed as the Managing Director of Corporate Finance for Brean Murray, Foster Securities, Inc. Mr. Pride has been Vice President of the Company since May 1986. He was Vice President of Ryland (the Company's former subsidiary) from May 1982 to June 1986, and President of Ryland until its merger into Lakeland on January 31, 1990. Mr. McCormick has been Vice President and Treasurer since May 1986. Between January 1986 and May 1986 he was the Company's Controller. ITEM 11. EXECUTIVE COMPENSATION See information under the caption "Compensation of Executive Officers" in the Company's Proxy Statement, which information is included in Exhibit 20 hereto and incorporated herein by reference. (See Part IV, Item 14(c) Exhibits.) ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the information under the caption "Voting Securities and Stock Ownership of Officers, Directors and Principal Stockholders" in the Company's Proxy Statement, which information is included in Exhibit 20 hereto and incorporated herein by reference. (See Part IV, Item 14(c) Exhibits.) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the information under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement, which information is incorporated herein by reference. (See Part IV, Item 14(c) Exhibits.) PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K a) Index to Consolidated Financial Statements and Schedules: 1. Financial Statements: The following Consolidated Financial Statements of the Registrant are incorporated herein by reference to the Registrant's Annual Report to Shareholders for the year ended January 31, 1998, as noted in Item 8 hereof: Report of Independent Certified Public Accounts Consolidated Balance Sheets - January 31, 1998 and 1997 Consolidated Statements of Income for the years ended January 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended January 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended January 31, 1998, 1997 and 1996 Notes to consolidated financial statements 2. Financial Statement Schedules The following consolidated financial statement schedule is included in Part IV of this report: Schedule II - Valuation and qualifying accounts All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. (b) Reports on Form 8 - K. No report on Form 8 - K has been filed for the Quarter ended January 31, 1998. (c) Exhibits: 3 (a) Restated Certificate of Incorporation* 3 (b) By-Laws, as amended* 10 (a) Lease agreements between POMS Holding Co., as lessor, and the Company, as lessee, dated January 1, 1995 10 (b) Lease agreement between Central Life Assurance Company, as lessor, and the Company, as lessee, dated September 10, 1987. (Incorporated by reference to the Company's Form 10 - K for the year ended January 31, 1988). 10 (c) The Company's Stock Option Plan* 10 (d) Asset Purchase Agreement, dated as of December 26, 1986, by and among the Company, Fireland, Fyrepel Products, Inc. and John H. Weaver, James R. Gauerke and Vernon W. Lenz** 10 (e) Asset Purchase Agreement, dated as of December 26, 1986, by and among the Company, Chemland, Siena Industries, Inc. and John H. Weaver, James R. Gauerke, Eugene R. Weir, John E. Oberfield and Frank Randles** 10 (f) Asset Purchase Agreement, dated September 30, 1987 by and among the Company and Walter H. Mayer & Co. (Incorporated by reference to the report on Form 8 - K filed by the Company on October 14, 1987.) 10 (g) Employment agreement between the Company and Raymond J. Smith, dated January 23, 1998 10 (h) Employment agreement between the Company and Harvey Pride, Jr., dated January 31, 1998 10 (i) Lease between Lakeland Industries, Inc. and JBJ Realty, dated April 11, 1994 10 (j) Asset Purchase Agreement, dated November 19, 1990 by and among the Company, Mayer and WHM Acquisition Corp. (Incorporated by reference to the report on Form 10 - Q for the quarter ended October 31, 1990, filed by the Company on December 14, 1990). 10 (k) Employment agreement between the Company and Christopher J. Ryan, dated February 14, 1997. 10 (l) Loan agreement dated December 12, 1997 between the Company and Merrill Lynch. 10 (m) Consulting and License Agreements between the Company and W. Novis Smith dated December 10, 1991. 10 (n) Agreement dated June 17, 1993 between the Company and Madison Manpower and Mobile Storage, Inc. 11 Consent of Grant Thornton LLP dated April 29, 1998*** 13 Annual Report to Shareholders for the year ended January 31, 1998 20 Proxy Statement of the Registrant for Annual Meeting of Stockholders - June 17, 1998 22 Subsidiaries of the Company (wholly-owned): Lakeland Protective Wear, Inc. Lakeland de Mexico S.A. de C.V. Laidlaw, Adams & Peck, Inc. 27 Financial Data Schedules All other exhibits are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. - ------------ * Incorporated by reference to Registration Statement on Form S - 18 on file with the Securities and Exchange Commission No.33-7512-NY. ** Incorporated by reference to report on Form 8 - K filed by the Company on January 9, 1987. *** Incorporated by reference to Registration Statement on Form S-8 on file with the Securities & Exchange Commission No. 33-92564 - NY. The Exhibits listed above (with the exception of the Annual Report to Shareholders) have been filed separately with the Securities and Exchange Commission in conjunction with this Annual Report on Form 10-K. On request, Lakeland Industries, Inc. will furnish to each of its shareholders a copy of any such Exhibit for a fee equal to Lakeland's cost in furnishing such Exhibit. Requests should be addressed to the Office of the Secretary, Lakeland Industries, Inc., 711-2 Koehler Avenue, Ronkonkoma, New York 11779. _________________ 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. Dated: April 30, 1998 LAKELAND INDUSTRIES, INC. By: /s/Raymond J. Smith ------------------- Raymond J. Smith, Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Name Title Date - ---- ----- ---- /s/Raymond J. Smith Chairman of the Board, April 30, 1998 - ------------------- President and Director Raymond J. Smith (Principal Executive Officer) /s/Christopher J. Ryan Executive V. P.- Finance April 30, 1998 - ---------------------- & Secretary and Director Christopher J. Ryan /s/James M. McCormick Vice President and Treasurer April 30, 1998 - --------------------- (Principal Financial and James M. McCormick Accounting Officer) /s/Eric O. Hallman Director April 30, 1998 - ------------------ Eric O. Hallman /s/John J. Collins, Jr. Director April 30, 1998 - ----------------------- John J. Collins, Jr. /s/Walter J. Raleigh Director April 30, 1998 - -------------------- Walter J. Raleigh
Lakeland Industries, Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions --------------------------- Balance at Charged to Charged to Balance at beginning costs and other end of of period expenses accounts Deductions period --------- -------- -------- ---------- ------ Year ended January 31, 1998 Allowance for doubtful accounts (a) $150,000 $69,421 $ 16,421 (b) $203,000 Year ended January 31, 1997 Allowance for doubtful accounts (a) $262,765 $ 7,439 $120,204 (b) $150,000 Year ended January 31, 1996 Allowance for doubtful accounts (a) $375,597 $32,069 $144,901 (b) $262,765
(a) Deducted from accounts receivable. (b) Uncollectible accounts receivable charged against allowance. EX-10 2 EXHIBIT 10(g) January 23, 1998 Mr. Raymond J. Smith 34 Riverview Terrace Smithtown, NY 11787 Dear Mr. Smith: The purpose of this letter is to confirm your continuing employment with Lakeland Industries Inc. on the following terms and conditions: 1. THE PARTIES This is an agreement between Raymond J. Smith, residing at 34 Riverview Terrace, Smithtown 11787 (hereinafter referred to as "you") and Lakeland Industries, Inc., a Delaware corporation, with principal place of business located at 711-2 Koehler Avenue, Ronkonkoma, NY 11779-7410 (hereinafter the " "Company"). 2. TERM; RENEWAL The term of the agreement shall be for a three year period from February 1, 1998 through and including January 31, 2002 which term shall be automatically renewed for a maximum of 2 successive annual periods unless either party notifies the other 120 days prior to the expiration of the original term or renewal thereof, that the agreement will not be renewed. 3. CAPACITY You shall be employed in the capacity of President of Lakeland Industries, Inc. and such other senior executive title or titles as may from time to time be determined by the Board of Directors of the Company. You shall be nominated for election to serve as a member of the Board of Directors of the Company, so long as this agreement shall remain in effect. You shall be directly responsible to the Board of Directors of the Company. You agree to devote your full 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. You shall be the Chief Operating and Administrative Officer of the Company. All employees of the Company shall report or be ultimately responsible to you. 4. COMPENSATION As full compensation for your services you shall receive following from the Company: (a) A base annual salary of $262,500 per year payable bi-weekly (the "Base Salary"); and (b) Payments, compensation, and reimbursements equal to such payments, compensation and reimbursements as are paid to the members of the Board of Directors from time to time; and (c) Participation when eligible in any of the Company's Pension, Profit Sharing Plans, medical and disability plans, stock appreciation rights plan or stock option plans and ESOP. 401(K) plans when any such plans become effective; and (d) A group term life policy insuring your life, the beneficiary of whom shall be designated by you, with a face amount of no less than $1,000,000.00, provided you meet the insurance company's reasonable medical qualifications; and (e) Such other benefits as are provided from time to time by the Company to its officers and employees; provided, however, that your vacation shall be for a period of no less than 5 weeks; and (f) The use of an appropriate new luxury automobile furnished by the Company on a bi-annual basis, or an automobile allowance to be paid to you in an amount sufficient to pay for the lease of such an automobile; and (g) Reimbursement for the dues and expenses incurred by you that are necessary and proper to conduct the Company's business; and (h) An annual bonus as set forth in Section 5 of this Agreement (the "Annual Bonus"). 5. ANNUAL BONUS In May of each year commencing in 1999 you shall be awarded an annual bonus based on the achievement of specific goals in the previous fiscal year. The annual bonus to be awarded in May shall be based upon the following performance goals: If the Company achieves .50 per share in the fiscal years covered by this contract the bonus is computed as follows: Base .50* bonus amounts to $25,000 and for each .01 earning per share an additional $2500 to be added to the base of the $25,000 mentioned above. * Subject to recalculation of earnings per share as the result of the implementation of SFAS 128 (earning per share). The earnings per share shall be the earnings per share of common stock of the Company as determined by the Company's independent auditors as set forth in the annual audited financial statements and reported to the Company's shareholders. If during the fiscal year commencing February 1, 1998 the Company acquires all of the stock and/or assets of a separate business entity or divests itself of one or more subsidiaries or is involved in a recapitalization or other public offering of the Company's securities, then in that event the amount of the annual bonus will be appropriately adjusted to reflect such change or changes. The adjustment to the annual bonus and any additional discretionary bonus will be made by the Compensation Committee of the Board of Directors of the Company. The decision of the Compensation Committee of the Board of Directors as to any matter relating to the annual bonus shall be final, binding and conclusive and shall not be subject to any further review. 6. NON-COMPETITION During the term of this Agreement and for one year thereafter, 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. 7. CONFIDENTIALITY Except as required in your duties to the Company, you shall not at any time during your employment and for a period of twelve months 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. As used in this Agreement, "confidential information" means any information relating to the business of the Company which is not publicly known or readily ascertainable by proper means. 8. CHANGE IN CONTROL Upon the occurrence of a change in control (as hereinafter defined) you shall have the right to terminate at your option this agreement within 30 days after the occurrence of such change in control (provided such thirty day period shall not begin to run until you have actual knowledge of the change in control). Upon the effective date of such termination, you shall be entitled to receive a lump sum severance payment in an amount equal to the greater of the present value (determined by applying a discount factor of 6% effective annual interest rate) of (i) the balance of your Base Salary of the Term of the Agreement, plus your estimated Annual Bonus for the fiscal year in which such termination occurs, or (ii) two times your Base Salary, plus your estimated Annual Bonus for the fiscal year in which such termination occurs. The estimated amount of your Annual Bonus in this Agreement for the fiscal year during which the termination occurs shall be determined in good faith by the Compensation Committee of the Board of Directors of the Company based upon the Company's results of operations for the partial fiscal year through the effective date of the termination and the Company's historical results of operations. A "change of control" shall have occurred (i) upon any person or group becoming directly or indirectly, the beneficial owner of 50% or more of the Company's then outstanding securities or (ii) upon the disposition by the Company (whether direct or indirect by sale of assets or stock, merger, consolidation or otherwise) of all or substantially all of the Company's business and/or assets. For purposes of this paragraph, "person" means such term as used in Section 13(d) (1) of the Securities Exchange Act of 1934 (the "1934 Act"); "beneficial owner" means such term as defined in Rule 13d-3 of the SEC under the 1934 Act; and "group" means such term as defined in Section 13(d) (3) of the 1934 Act. In the event of a disposition by the Company (whether direct or indirect by sale of assets or stock, merger, consolidation or otherwise) of all or substantially all of its business and/or assets the Company will require any successor to expressly assume and agree to perform this agreement in the same manner and to the same extent that the Company would be required to perform, if no such disposition had taken place. 9. 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) Termination of Employment for Cause or Without Good Reason. If, before the end of the Term, the Company terminates your employment for Cause (as defined below) or you quit without Good Reason (as defined below), the Company shall pay you, within thirty days of such termination, (i) that portion of your Base Salary which is accrued but unpaid as of the date of such termination, and (ii) any other benefits accrued prior to the date of termination under this Agreement, but you will not be entitled to receive any portion of your Annual Bonus for the year in which said termination occurs or any other compensation or benefits under this Agreement. If the Company terminates your employment for Cause, the written notice of such termination shall set forth the effective date of your termination (which shall not be prior to the date such notice is delivered) and a reasonable detailed description of the facts and circumstances giving rise to the Cause for termination.' "Cause" means a written finding by the Board or the Company, acting through an authorized officer, that you were convicted of, or entered a plea of nolo contendere to a charge of, committing a felony involving moral turpitude, or you were grossly negligent in performing your duties and responsibilities (other than on account of "total disability" as referred to in sub-Paragraph (c) below), or that you committed an act of fraud, embezzlement, or gross neglect of duty. Cause shall not mean (i) the exercise of bad judgment alone, (ii) negligence not amounting to gross negligence, (iii) any act or omission believed by you in good faith to have been in or not opposed to the interest of the Company (without intent of you to gain therefrom, directly or indirectly, a profit to which you were not legally entitled), or (iv) any act or omission with respect to which notice of the termination of your employment is given to you more than 12 months after the earliest date on which any member of the Board who is not a party to the act or omission, knew of such act or omission. "Good Reason" means any of the following events: (i) the assignment to you of any duties materially and adversely inconsistent with your position, responsibilities, duties, or officerships, as required under Section 3 hereof, (ii) the liquidation or dissolution of the Company, (iii) any material breach by the Company of the provisions of this Agreement, or (iv) the Company's requiring, without your written consent, that you be based in an office or location other than the Company's principal business location at Ronkonkoma, New York. b) 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. c) Total 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 substantially perform your duties to the Company for a period of (ninety consecutive days). In the event of your Total Disability, you shall receive 100% of your Base Salary for the greater of (i) the remainder of the Term of this Agreement or (ii) one year. Such amount shall be reduced by the amount of any disability insurance payments received by you under any disability insurance policy maintained by the Company. For the six months thereafter, you shall receive 50% of your Base Salary reduced by the amount of any such disability insurance payments. d) Termination Without Cause or for Good Reason. If, before the end of the Term, the Company terminates your employment without Cause or you quit with Good Reason, the Company shall: (i) Pay you within 10 days of the termination of your employment, a lump sum amount equal to the then present value of your Base Salary (as in effect on the date of your termination) though the remainder of the Term, determined by applying a discount factor of 6% effective annual interest rate. (ii) Pay you within 10 days of the termination of your employment, a lump sum amount equal to a pro-rata portion of the Annual Bonus, if any, that you would have received for the fiscal year in which such termination occurs determined in good faith by the Compensation Committee of the Board of Directors. (iii)Pay you within 10 days of the termination of your employment, a lump sum amount equal to the present value of (three) times your Base Salary (as in effect of the date of your termination), determined by applying a discount factor of 6% effective annual interest rate. (iv) Continue to provide to you for a period equal to the greater of (i) the remainder of the Term of this Agreement or (ii) one year, benefits under any of the following welfare benefit programs of the Company as in effect from time to time during the Term of this Agreement: long term disability insurance, life insurance, accidental death and dismemberment insurance, and health and major medical benefits, pursuant to COBRA. 10. TAX GROSS-UP If it is determined that as a result of any payments provided to you under this Agreement, you will incur an excise tax under Section 4999 of the Internal Revenue Code on "excess parachute payments" or any similar tax payable under any federal, state, local or other law, as a result of payments made to you under this Agreement, then the Company shall pay to you an amount necessary to reimburse you for such excise taxes and the tax due on such reimbursement payments. All determinations and payments hereunder shall be made in adequate time to permit you to prepare and file your individual tax returns in a timely fashion. 11. MITIGATION In no event shall you, subsequent to the termination of your employment, be obligated to seek other employment arrangements or take any other action by way of mitigation of the amounts payable to you under and provision of this Agreement, nor shall the amount of any payment, hereunder be reduced by any compensation earned by you as a result of a subsequent contract with or employment by another employer. 12. ASSIGNMENT AND SUCCESSORS The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors of the Company. This Agreement may not be assigned by the Company unless the assignee or successor (as the case may be) expressly assumes the Company's obligations hereunder in writing or unless, in the opinion of counsel for the Company addressed to you, the obligations of the Company under this Agreement become the obligations of the successor to the Company by operation of law. In the event of a successor to the Company or the assignment of the Agreement, the term "Company" as used herein shall include any such successor or assignee. 13. CONSTRUCTION This Agreement shall be interpreted and construed in accordance with the laws of the State of New York without regard to its choice of law principles. In case of any dispute or disagreement arising out of or connected with this Agreement, the parties hereto hereby agree to resolve such dispute or disagreement in a court of competent jurisdiction within the State of New York. The Company shall reimburse you for all reasonable legal fees and expenses incurred by you in an effort to establish entitlement to fees and benefits under this Agreement. If you do not prevail (after exhaustion of all available judicial remedies), and a court of competent jurisdiction decides that you had no reasonable basis for bringing you action or there was an absence of good faith for bringing your action, no further reimbursement for legal fees and expenses shall be due to you, and you shall repay the Company for any amounts previously paid by the Company. It is understood that in all events, the Company shall be responsible for its own legal fees and expenses incurred for any action brought hereunder. 14. 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 711-2 Koehler Avenue Ronkonkoma, NY 11779-7410 or to you at your home address at 34 Riverview Terrace, Smithtown, NY 11787. 15. 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. 16. SEPARABILITY Any provision of this agreement 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. 17. HEADINGS The headings contained in this agreement are for convenience only and shall not effect, restrict, or modify the interpretation of this agreement. LAKELAND INDUSTRIES, INC. /S/Raymond J. Smith - ------------------- --------------------------- Raymond J. Smith By: John J. Collins President --------------------------- By: Eric O. Hallman /S/W. James Raleigh --------------------------- By: W. James Raleigh Board of Directors Compensation Committee EXHIBIT 10(h) [LAKELAND INDUSTRIES, INC LETTERHEAD] January 31, 1998 Mr. Harvey Pride, Jr. 810-E Island Way NW Decatur, AL 35602 Dear Mr. Pride: The purpose of this letter is to confirm your continuing employment with Lakeland Industries Inc. on the following terms and conditions: 1. THE PARTIES This is an agreement between Harvey Pride, Jr. residing at 810-E Island Way NW, Decatur, Alabama 35602 (hereinafter referred to as "you") and Lakeland Industries, Inc., a Delaware corporation, with principal place of business located at 711-2 Koehler Avenue, Ronkonkoma, NY 11779-7410 (hereinafter the Company). 2. TERM; RENEWAL The term of the agreement shall be for a 2 year period from February 1, 1998 through and including January 31, 2000 which term shall be automatically renewed for a maximum of 2 successive annual periods unless either party notifies the other 30 days prior to the expiration of the original term or renewal thereof, that the agreement will not be renewed. 3. CAPACITY You shall be employed in the capacity of Vice President of Lakeland Industries, Inc. and such other senior executive title or titles as may from time to time be determined by the Board of Directors of the Company. You shall be directly responsible to the Board of Directors of the Company and to the President of Lakeland. 4. COMPENSATION As full compensation for your services you shall receive following from the Company: (a) A base annual salary of $135,000 per year payable bi-weekly; and (b) Participation when eligible in any of the Company's Pension, Profit Sharing Plans and ESOP - 401(K) when any such plans become effective: (c) Such other benefits as are consistent with the personnel benefits provided by the Company to its officers and employees; provided however that your vacation shall be for a period of no less than 5 weeks; and (d) You shall be entitled to an automobile allowance consistent with the allowance you have been receiving; and (e) Reimbursement for any dues and expenses incurred by you that are necessary and proper in the conduct of the Company's business; and (f) An annual bonus as set forth in this agreement. 5. ANNUAL BONUS In June of each year commencing in 1999 you shall be awarded an annual bonus based on the performance of the Company in the previous fiscal year. The bonus to be awarded in June of 1999 and 2000 shall be based upon the following formula by pro rata increments for each cents per share earnings measured upwardly from fiscal 1998 earnings per share. For each .01(cent) earnings per share increase over fiscal year and 1998 earnings per share, you shall receive $800.00 in bonus. Thus, if EPS 1998 are .50(cent) then if EPS for fiscal 1999 are .60(cent) you shall receive a bonus of 10 x 800 or $8,000.00. Further, if EPS for fiscal 1999 are .80(cent), the fiscal 1999 bonus will be .80(cent) - .60(cent) = 20 x $800 = $16,000 and so on. The earnings per share shall be the earnings per share of common stock of the Company as determined by the Company's auditors in the preparation of the annual audit and reported to the Company's shareholders. If during the fiscal year commencing February 1, 1996 the Company acquires all of the stock and/or assets of a separate business entity or divests itself of one or more subsidiaries or is involved in a recapitalization or other public offering of the Company's securities, then in that event the amount of the aforesaid annual bonus will be adjusted to reflect such change or changes. The adjustment to the annual bonus will be made by the Compensation Committee of the Board of Directors of the Company. The decision of the Compensation Committee of the Board of Directors as to any matter relating to the annual bonus or discretionary bonus shall be final, binding and conclusive and shall not be subject to any further review. 6. DISABILITY In the event that you shall incur a total disability which renders you unable to substantially perform your duties to the Company as determined by the Board of Directors you shall receive 100% of your base annual salary for the first year of such total disability reduced by the amount of any disability insurance payments received under a disability insurance policy maintained by the Company or you (Disability Insurance). Thereafter, and for the following six months you shall receive 50% of your base annual salary during the period of such total disability reduced by the amount of any such Disability Insurance. If such disability continues after such 18 month period your employment hereunder shall terminate. 7. CONFIDENTIALITY AND NO-COMPETE A. Restrictive Covenants. The Company and you acknowledge and agree that: (i) the business contracts, joint ventures, Asian and all the Company's other U.S. and international suppliers, independent, contractors, customers, international and domestic vendors, joint venture or non-joint venture contractors and customers, patterns, know-how, trade secrets, marketing techniques and other aspects of the business of the Company are of value to the Company and will provide the Company with substantial competitive advantage in the operation of its business; (ii) the business of the Company is national and international in scope, and (iii) the Company is entitled to protect its goodwill during and after the term of this Agreement. (b) For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by you, you hereby agree that you nor any of your companies, corporations or subsidiaries thereof joint ventures, proprietorships or affiliates of same hereinafter referred to as ("the affiliates") shall in any manner, directly or indirectly: (i) at any time, divulge, transmit or otherwise disclose, or cause to be divulged, transmitted or otherwise disclosed, to any person or entity whatsoever, any confidential or proprietary information of the Company, including business contacts, customer lists, supplier lists, domestic and international vendors, suppliers, joint ventures and assembly contractors, technology know-how, trade secrets, marketing techniques, marketing plans and strategies, manufacturing methods, patterns, product development techniques or plans, patents, laminates, fabrics, contracts or other confidential or proprietary information of the Company (including such matters related to the business heretofore conducted by the Company); (ii) at any time during the period from the date hereof through and including the second (2nd) anniversary of any termination date this Agreement hereof (the "Restrictive Period"), anywhere in or out of the United States of America, render any services to or engage, participate, or have any interest or be involved in any capacity, whether as an owner, agent, stockholder (excluding ownership of not more than 5% of the outstanding shares of a publicly held corporation if such ownership does not involve, and neither Employee nor any of his affiliates, otherwise has, any managerial or operational responsibility in respect thereof), officer, director, manager, partner, joint venturer, employee, consultant or otherwise, in any business enterprise which is, or shall at any time during the Restrictive Period be, engaged in any manner in the business of designing, developing, manufacturing, marketing, selling and/or distributing any Products (as defined below); (iii) directly or indirectly solicit, request, cause or induce any person who is at the time or eighteen months prior thereto had been an employee of or consultant to the Company, to leave the employ of or terminate his relationship with the Company, or to employ, hire, engage or be associated with, or endeavor to entice away from the Company, any such person; and (iv) induce any customers, vendors, joint venturers or contract manufacturers of the Company, either domestically or internationally to discontinue doing business with the Company. (c) As used herein, the term "Products" means any and all goods and/or products of the type heretofore sold by the Company or any of its affiliates, including but not limited to the "Products" as listed in the company's product catalogs, pricing lists, or other literature and any functionally similar goods and/or products, already developed by the Company and shown in its catalogs, pricing lists or other literature or to be developed by the Company during the term of this Agreement. (d) For purposes hereof, information shall not be deemed "confidential" or "proprietary" to the extent that it (i) is a matter of common knowledge or of public record, or within the public domain (other than as a result of any breach hereof by Supplier); (ii) is generally known throughout the industry or was otherwise acquired from other legitimate sources; or (iii) is required to be disclosed by law or by order of any court or governmental authority. B. Specific Performance You hereby acknowledges and agrees that any default by you or any of your affiliates, singly or collectively, in any of the foregoing restrictive covenants will cause the Company irreparable injury for which there is no adequate remedy at law. Accordingly, you expressly agree that, in the event of any breach or threatened breach of any such covenant or agreement by you or any of your affiliates the Company shall be entitled, in addition to any and all other remedies available, to seek and obtain injunctive and/or other equitable relief to require specific performance of or prevent a default under the provisions of this Agreement; and you hereby consent to each such application. 8. CHANGE IN CONTROL Upon the occurrence of a change in control (as hereinafter defined) you shall have the right to terminate at your option this agreement within 10 days after the occurrence of such change in control. Upon the effective date of such termination you shall be entitled to receive a lump sum severance amount equal to the sum of (i) the greater of the present value of your base salary in effect at the time of the change of control for 1 year or the present value of your base salary in effect at the time of the change of control for the remainder of the term and (ii) the estimated amount which would have been payable to you pursuant to the bonus as set forth in this agreement for the fiscal year during which the change of control occurred as determined in good faith by the Compensation Committee of the Board of Directors of the Company based upon the Company's results of operations for the fiscal year through the effective date of the termination and its historical results of operations and pro-rated to the effective date of termination. You shall not be required to mitigate the amount of termination payment provided pursuant to this section nor will such payment be reduced by reason of your securing other employment. A change of control shall have occurred (i) upon the acquisition of any person (as such term is defined in sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 as amended), directly or indirectly of securities of the Company representing 66 2/3% or more of the combined voting power of the Company's then outstanding securities or (ii) upon the future disposition by the Company (whether direct or indirect by sale of assets or stock merger consolidation or otherwise) of all or substantially all of the Company's business and/or assets in the transaction. In the event of a future disposition by the Company (whether direct or indirect by sale of assets or stock, merger, consolidation or otherwise) of all or substantially all of its business and/or assets the Company will require any successor to expressly assume and agree to perform this agreement in the same manner and to the same extent that the Company would be required to perform, if no such disposition had taken place. 9. NOTICES Any notices required to be give 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 711-2 Koehler Avenue Ronkonkoma, NY 11779-7410 or to you at your home address at 810-E Island NW, Decatur, Alabama 35602. 10. 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. 11. SEPARABILITY Any provision of this agreement 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. 12. HEADINGS The headings contained in this agreement are for convenience only and shall not affect restrict or modify the interpretation this agreement. 13. CONTROLLING LAW This agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed therein, and you agree to the exclusive jurisdiction and venue of all State and Federal Courts sitting in the State of New York in connection with any claim, dispute, or controversy arising under or in connection with this Agreement. LAKELAND INDUSTRIES, INC. /S/Harvey Pride, Jr. - -------------------- ______________________ Harvey Pride, Jr. By: John J. Collins Vice President Manufacturing ______________________ By: Eric O. Hallman /S/W. James Raleigh ---------------------- By: W. James Raleigh Board of Directors Compensation Committee Exhibit 10 (l) UNCONDITIONAL GUARANTY FOR VALUE RECEIVED, and in order to induce MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") to advance moneys or extend or continue to extend credit to or for the benefit of, or modify its credit relationship with LAKELAND INDUSTRIES, INC., (with any successor-in interest, including, without limitation, any successor by merger or by operation of law, herein collectively referred to as "Customer"), under: (a) that certain WCMA NOTE, LOAN AND SECURITY NO. 849-07230 between MLBFS and Customer (the "Loan Agreement"), (b) any "Additional Agreements", as that term is defined in the Loan Agreement (including, without limitation, the NOTE incorporated by reference into the Loan Agreement), and (c) all present and future amendments and other evidences of any extensions, increases, renewals and other changes of or to the Loan Agreement or Additional Agreements (collectively, the "Guaranteed Documents"), and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned, LAKELAND PROTECTIVE WEAR INC. (CANADA) a corporation organized and existing under the laws of the Province of Ontario, Canada ("Guarantor"), hereby unconditionally guarantees to MLBFS (i) the prompt and full payment when due, by acceleration or otherwise, of all sums now or any time hereafter due from Customer to MLBFS under the Guaranteed Documents; (ii) the prompt, full and faithful performance and discharge by Customer of each and every other covenant and warranty of Customer set forth in the Guaranteed Documents, and (iii) the prompt and full payment and performance of all other indebtedness, liabilities and obligations of Customer to MLBFS, howsoever created or evidenced, and whether now existing or hereafter arising (collectively, the "Obligations"). Guarantor further agrees to pay all reasonable costs and expenses (including, but not limited to, court costs and reasonable attorneys' fees) paid or incurred by MLBFS in endeavoring to collect or enforce performance of any of the Obligations, or in enforcing this Guaranty. This Guaranty is absolute, unconditional and continuing and shall remain in effect until all of the Obligations shall have been fully paid, performed and discharged. Upon the occurrence and during the continuance of any default or Event of Default under the Guaranteed Documents, any or all of the indebtedness hereby guaranteed then existing shall, at the option of MLBFS, become immediately due and payable from Guarantor. Notwithstanding the occurrence of any such event, this Guaranty shall continue and remain in full force and effect. Guarantor will pay the Obligations without regard to any equities or any defense or right of set-off or counter-claim between Guarantor and Customer or any defense or right of set-off or counter-claim which Customer or Guarantor may have against MLBFS. The liability of Guarantor hereunder shall in no event be affected or impaired by any of the following, any of which may be done or omitted by MLBFS from time to time, without notice to or the consent of Guarantor: (a) any renewals, amendments, modifications or supplements of or to any of the Guaranteed Documents, or any extensions, forbearances, compromises or releases of any of the Obligations or any of MLBFS' rights under any of the Guaranteed Documents; (b) any acceptance by MLBFS of any collateral or security for, or other guarantors of, any of the Obligations; (c) any failure, neglect or omission on the part of MLBFS to realize upon or protect any of the Obligations, or any collateral or security therefor, or to exercise any lien upon or right of appropriation of any moneys, credits or property of Customer or any other guarantor, possessed by or under the control of MLBFS or any of its affiliates, toward the liquidation or reduction of the Obligations; (d) any application of payments or credits by MLBFS; (e) the granting of credit from time to time by MLBFS to Customer in excess of the amount set forth in the Guaranteed Documents; or (f) any other act of commission or omission of any kind or at any time upon the part of MLBFS or any of its affiliates or any of their respective employees or agents with respect to any matter whatsoever. MLBFS shall not be required at any time, as a condition of Guarantor's obligations hereunder, to resort to payment from Customer or other persons or entities whatsoever, or any of their properties or estates, or resort to any collateral or pursue or exhaust any other rights or remedies whatsoever. Guarantor renounces all benefits of discussion and division. No release or discharge in whole or in part of any other guarantor of the Obligations shall release or discharge Guarantor unless and until all of the Obligations shall have been fully paid and discharged. Guarantor expressly waives presentment, protest, demand, notice of dishonor or default, notice of acceptance of this Guaranty, notice of advancement of funds under the Guaranteed Documents and all other notices and formalities to which Customer or Guarantor might be entitled, by statute or otherwise, and, so long as there are any Obligations or MLBFS is committed to extend credit to Customer, waives any right to revoke or terminate this Guaranty without the express written consent of MLBFS. This Guaranty shall not be affected by any change in the name of Customer, or by any change whatsoever in the objects, capital structure or constitution of Customer, or by Customer being amalgamated with one or more corporations, but shall notwithstanding the happening of any such event continue to apply to all the Obligations whether theretofore or thereafter incurred or arising and in this instrument the word "Customer" shall include every such firm and corporation. This Guaranty shall not be affected by the bankruptcy, dissolution or winding-up of Customer or by any reorganization, moratorium, arrangement with creditors or other proceedings affecting Customer. So long as there are any Obligations, Guarantor shall not have any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim, right, or remedy of MLBFS against Customer or any security which MLBFS now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law, or otherwise. This Guaranty shall not be considered as wholly or partially satisfied by the payment or liquidation at any time or times of any sum or sums of money for the time being due or remaining unpaid to MLBFS, and all dividends, compositions, proceeds of security valued and payments received by MLBFS from Customer or from others or from estates shall be regarded for all purposes as payments in gross without any right on the part of Guarantor to claim in reduction of its liability under this Guaranty the benefit of any such dividends, compositions, proceeds or payments or any securities held by MLBFS or proceeds thereof Guarantor until MLBFS shall have received payment in full of the Obligations. Upon any voluntary or involuntary liquidation, dissolution or winding-up of Customer or any other surety or guarantor of the Obligations, any sale or other disposition of all or substantially all of the assets of Customer, or any insolvency bankruptcy, reorganization, moratorium, arrangement with creditors, judicial or extra-judicial receivership, or other similar proceedings affecting Customer or any surety for or guarantor of Obligations, the rights of MLBFS shall not be limited, lessened or released by its omission to prove its claim or to prove its full claim and it may prove such claim as it sees fit and may refrain from proving any claim and in its discretion it may value as it sees fit or refrain from valuing any security or securities held by it, without in any way lessening, limiting or releasing the liability to MLBFS of Guarantor. All monies, advances, renewals, credits and credit facilities in fact borrowed or obtained from MLBFS shall be deemed to form part of the Obligations, notwithstanding any lack or limitation of status or of power, incapacity or disability of Customer or of the directors, partners or agents of Customer, or that Customer may not be a legal or suable entity, or any irregularity, defect or informality in the borrowing or obtaining of such monies, advances, renewals, credits or credit facilities, or any other reason, similar or not, the whole whether known to MLBFS or not. Any sum of which may not be recoverable from Guarantor on the footing of a Guaranty, whether for the reasons set out in the previous sentence or for any other reason, similar or not, shall be recoverable from Guarantor as sole or principal debtor in respect of that sum, and shall be paid to MLBFS on demand with interest. This Guaranty is in addition to and not in substitution for any other guaranty, by whomsoever given, at any time held by MLBFS, and any present or future obligation to MLBFS incurred or arising otherwise than under a guaranty, of Guarantor or of any other obligant, whether bound with or apart from Customer. Guarantor shall be bound by any account settled between MLBFS and Customer, and if no such account has been so settled immediately before demand for payment under this Guaranty any account stated by MLBFS shall be accepted by Guarantor as prima facie evidence of the amount which at the date of the account so stated is due by Customer to MLBFS or remains unpaid by Customer to MLBFS. This Guaranty was not delivered in escrow or pursuant to any agreement that it should not be effective until any conditions precedent or subsequent had been complied with. MLBFS is hereby irrevocably authorized by Guarantor at any time during the continuance of an Event of Default under the Loan Agreement or any other of the Guaranteed Documents or in respect of any of the Obligations, in its sole discretion and without demand or notice of any kind, to appropriate, hold, set off and apply toward the payment of any amount due hereunder, in such order of application as MLBFS may elect, all cash, credits, deposits, accounts, securities and any other property of Guarantor which is in transit to or in the possession, custody or control of MLBFS or Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), or any of their respective agents, bailees or affiliates, including, without limitation, all securities accounts with MLPF&S and all cash and securities therein or controlled thereby, and all proceeds thereof. Guarantor hereby collaterally assigns, charges and grants to MLBFS a fixed and floating charge and a security interest in all such property as additional security for the Obligations. Upon the occurrence and during the continuance of an Event of Default, MLBFS shall have all rights in such property available to collateral assignees and secured parties under all applicable laws, including, without limitation, the Personal Property Security Act (Ontario). Guarantor agrees to furnish to MLBFS such financial information concerning Guarantor as may be required by any of the Guaranteed Documents or as MLBFS may otherwise from time to time reasonably request. Guarantor further hereby irrevocably authorizes MLBFS and each of its affiliates, including without limitation MLPF&S, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Guarantor. Each payment to be made by Guarantor under this Guaranty in respect of any of the Obligations are denominated in United States currency (the "Agreed Currency"). If MLBFS receives any payment from or for the account of Guarantor in any currency other than the Agreed Currency (the "Other Currency"), that payment shall constitute satisfaction of the obligations of Guarantor under this Guaranty only to the extent of the amount of the Agreed Currency that MLBFS, in accordance with its normal procedures, could purchase with the amount of the Other Currency received by it on the first business day after the day of receipt. If, to obtain judgment in any court, it is necessary to convert any amount owing or payable under this Guaranty in the Agreed Currency into a particular currency (the "Judgment Currency"), the rate of exchange is to be applied in the conversion shall be the rate at which MLBFS, in accordance with its normal procedures, could purchase the Agreed Currency with the Judgment Currency on the day that judgment is given. The obligation of the Guarantor in respect of any amount owing or payable under this Guaranty in the Agreed Currency shall, notwithstanding any judgment and payment in the Judgment Currency, be satisfied only to the extent that MLBFS, in accordance with its normal procedures, could purchase the Agreed Currency with the amount of the Judgment Currency paid on the first business day after the day of payment. If the amount of Agreed Currency that MLBFS could purchase is less that the amount originally due in the Agreed Currency, Guarantor shall, as a separate obligation and notwithstanding any judgment or payment, indemnify MLBFS against its loss. No delay on the part of MLBFS in the exercise of any right or remedy under any agreement (including, but not limited to, this Guaranty) shall operate as a waiver thereof, and, without limiting the foregoing, no delay in the enforcement of any security interest, and no single or partial exercise by MLBFS of any right or remedy shall preclude any other or further exercise thereof or the exercise of any other right or remedy. This Guaranty may be executed in any number of counterparts, each of which counterparts, once they are executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Guaranty. This Guaranty shall be binding upon Guarantor and its successors and assigns, and shall inure to the benefit of MLBFS and its successors and assigns. If there are more than one guarantor of the Obligations, all of the obligations and agreements of Guarantor are joint and several with such other guarantors. This Guaranty shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. Guarantor and MLBFS irrevocably submit to the non-exclusive jurisdiction of the courts of the Province of Ontario and of Canada sitting in Ontario in any action or proceeding arising out of or relating to this Guaranty, and irrevocably agree that all such actions and proceeding may be heard and determined in such courts, and irrevocably waive, to the fullest extent possible, the defense of an inconvenient forum. Guarantor agrees that a judgment or order in any such action or proceeding may be enforced in any jurisdiction in any manner provided by law. For greater certainty, MLBFS may serve legal process in any manner permitted by law and may bring an action or proceeding against Guarantor or the property or assets of Guarantor in the courts of any jurisdiction. Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. No modification or waiver of any of the provisions of this Guaranty shall be effective unless in writing and signed by both Guarantor and an officer of MLBFS. Each signatory on behalf of Guarantor warrants that he or she has authority to sign on behalf of Guarantor, and by so signing, to bind Guarantor hereunder. Guarantor hereby acknowledges receipt of a copy of this warranty. Dated as of December 2, 1998. LAKELAND PROTECTIVE WEAR INC. (CANADA) By: s/s Christopher Ryan /s/ -------------------- ------------------------ Signature (1) Signature (2) Christopher Ryan Printed Name Printed Name Title: Vice President Title: Address of Guarantor: [GRAPHIC-LOGO Merrill Lynch] No. 849-07230 SECURITY AGREEMENT SECURITY AGREEMENT ("Agreement") dated as of December 2, 1997, between LAIDLAW ADAMS & PECK INC. F/K/A FIRELAND INDUSTRIES, INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 815 Superior Avenue, Cleveland, OH 44114 ("Grantor"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 33 West Monroe Street, Chicago, IL 60603 ("MLBFS"). In order to induce MLBFS to extend or continue to extend credit to LAKELAND INDUSTRIES, INC. ("Customer"), under the Loan Agreement (as defined below) or otherwise, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Grantor hereby agrees with MLBFS as follows: 1. DEFINITIONS (a) Specific Terms. In addition to terms defined elsewhere in this Agreement, when used herein the following terms shall have the following meanings: (i) "Account Debtor" shall mean any party who is or may become obligated with respect to an Account or Chattel Paper. (ii) "Bankruptcy Event" shall mean any of the following: (A) a proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or receivership law or statute shall be filed or consented to by Grantor or Customer; or (B) any such proceeding shall be filed against Grantor or Customer and shall not be dismissed or withdrawn within sixty (60) days after filing; or (C) Grantor or Customer shall make a general assignment for the benefit of creditors; or (D) Grantor or Customer shall become insolvent or generally fail to pay or admit in writing its inability to pay its debts as they become due; or (E) Grantor or Customer shall be adjudicated a bankrupt or insolvent. (iii) "Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or other day on which the New York Stock Exchange is regularly closed. (iv) "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts, Documents and Instruments of Grantor, howsoever arising, whether now owned or existing or hereafter acquired or arising, and wherever located; together with all parts thereof (including spare parts), all accessories and accessions thereto, all books and records (including computer records) directly related thereto, all proceeds thereof (including, without limitation, proceeds in the form of Accounts and insurance proceeds), and the additional collateral described in Section 7 (b) hereof. (v) "Default" shall mean an "Event of Default", as defined in Section 6 hereof, or any event which with the giving of notice, passage of time, or both, would constitute such an Event of Default. (vi) "Loan Agreement" shall mean that certain WCMA NOTE, LOAN AND SECURITY AGREEMENT No. 849-07230 between Customer and MLBFS, as the same may from time to time be or have been amended, restated, extended or supplemented. (vii) "Location of Tangible Collateral" shall mean the address of Grantor set forth at the beginning of this Agreement, together with any other address or addresses set forth on any exhibit hereto as being a Location of Tangible Collateral. (viii) "Obligations" shall mean all liabilities, indebtedness and other obligations of Customer or Grantor to MLBFS, howsoever created, arising or evidenced, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due, primary or secondary or joint or several, and, without limiting the foregoing, shall include interest accruing after the filing of any petition in bankruptcy, and all present and future liabilities, indebtedness and obligations of Customer under the Loan Agreement and the agreements, instruments and documents executed pursuant thereto, and of Grantor under this Agreement. (ix) "Permitted Liens" shall mean with respect to the Collateral: (A) liens for current taxes not delinquent, other non-consensual liens arising in the ordinary course of business for sums not due, and, if MLBFS' rights to and interest in the Collateral are not materially and adversely affected thereby, any such liens for taxes or other non-consensual liens arising in the ordinary course of business being contested in good faith by appropriate proceedings; (B) liens in favor of MLBFS; and (C) any other liens expressly permitted in writing by MLBFS. (b) Other Terms. Except as otherwise defined herein, all terms used in this Agreement which are defined in the Uniform Commercial Code of Illinois ("UCC") shall have the meanings set forth in the UCC. 2. COLLATERAL (a) Pledge of Collateral. To secure payment and performance of the Obligations, Grantor hereby pledges, assigns, transfers and sets over to MLBFS, and grants to MLBFS a first lien and security interest in and upon all of the Collateral, subject only to Permitted Liens. (b) Liens. Except upon the prior written consent of MLBFS, Grantor shall not create or permit to exist any lien, encumbrance or security interest upon or with respect to any Collateral now owned or hereafter acquired other than Permitted Liens. (c) Performance of Obligations. Grantor shall perform all of its obligations owing on account of or with respect to the Collateral; it being understood that nothing herein, and no action or inaction by MLBFS, under this Agreement or otherwise, shall be deemed an assumption by MLBFS of any of Grantor's said obligations. (d) Notice of Certain Events. Grantor shall give MLBFS immediate notice of any attachment, lien, judicial process, encumbrance or claim affecting or involving $25,000.00 or more of the Collateral. (e) Indemnification. Grantor shall indemnify, defend and save MLBFS harmless from and against any and all claims, losses, costs, expenses (including, without limitation, reasonable attorneys' fees and expenses), demands, liabilities, penalties, fines and forfeitures of any nature whatsoever which may be asserted against or incurred by MLBFS arising out of or in any manner occasioned by (i) the ownership, use, operation, condition or maintenance of any Collateral, or (ii) any failure by Grantor to perform any of its obligations hereunder; excluding, however, from said indemnity any such claims, losses, etc. arising out of the willful wrongful act or active gross negligence of MLBFS. This indemnity shall survive the expiration or termination of this Agreement as to all matters arising or accruing prior to such expiration or termination. (f) Insurance. Grantor shall insure all of the tangible Collateral with an insurer or insurers reasonably acceptable to MLBFS, under a policy or policies of physical damage insurance reasonably acceptable to MLBFS providing that (i) losses will be payable to MLBFS as its interests may appear pursuant to a Lender's Loss Payable endorsement, and (ii) MLBFS will receive not less than 10 days prior written notice of any cancellation; and containing such other provisions as may be reasonably required by MLBFS. Grantor shall maintain such other insurance as may be required by law or otherwise reasonably required by MLBFS. Grantor shall furnish MLBFS with a copy or certificate of each such policy or policies and, prior to any expiration or cancellation, each renewal or replacement thereof. (g) Event of Loss. Grantor shall at its expense promptly repair all repairable damage to any tangible Collateral. In the event that any tangible Collateral is damaged beyond repair, lost, totally destroyed or confiscated (an "Event of Loss") and such Collateral had a value prior to such Event of Loss of $25,000.00 or more, then, on or before the first to occur of (i) 90 days after the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on which either Grantor or MLBFS shall receive any proceeds of insurance on account of such Event of Loss, or any underwriter of insurance on such tangible Collateral shall advise either Grantor or MLBFS that it disclaims liability in respect of such Event of Loss, Grantor shall, at Grantor's option, either replace the Collateral subject to such Event of Loss with comparable Collateral free of all liens other than Permitted Liens (in which event Grantor shall be entitled to utilize the proceeds of insurance on account of such Event of Loss for such purpose, and may retain any excess proceeds of such insurance), or pay to MLBFS on account of the Obligations an amount equal to the actual cash value of such Collateral as determined by either the applicable insurance company's payment (plus any applicable deductible) or, in absence of insurance company payment, as reasonably determined by MLBFS. Notwithstanding the foregoing, if at the time of occurrence of such Event of Loss or any time thereafter prior to replacement or payment, as aforesaid, an Event of Default shall have occurred and be continuing hereunder, then MLBFS may at its sole option, exercisable at any time while such Event of Default shall be continuing, require Grantor to either replace such Collateral or make a payment on account of the Obligations, as aforesaid. (h) Sales and Collections. So long as no Event of Default shall have occurred and be continuing, Grantor may in the ordinary course of its business: (i) sell any Inventory normally held by Grantor for sale, (ii) use or consume any materials and supplies normally held by Grantor for use or consumption, and (iii) collect all of its Accounts. Grantor shall take such action with respect to protection of its Inventory and the other Collateral and the collection of its Accounts as MLBFS may from time to time reasonably request. (i) Account Schedules. Upon the request of MLBFS, made now or at any time or times hereafter, Grantor shall deliver to MLBFS, in addition to the other information required hereunder, a schedule identifying, for each Account and all Chattel Paper subject to MLBFS' security interests hereunder, each Account Debtor by name and address and amount, invoice number and date of each invoice. Grantor shall furnish to MLBFS such additional information with respect to the Collateral, and amounts received by Grantor as proceeds of any of the Collateral, as MLBFS may from time to time reasonably request. (j) Location. Except for movements in the ordinary course of its business, Grantor shall give MLBFS 30 days' prior written notice of the placing at or movement of any tangible Collateral to any location other than a Location of Tangible Collateral. In no event shall Grantor cause or permit any tangible Collateral to be removed from the United States without the express prior written consent of MLBFS. (k) Alterations and Maintenance. Except upon the prior written consent of MLBFS, Grantor shall not make or permit any material alterations to any tangible Collateral which might materially reduce or impair its market value or utility. Grantor shall at all times keep the tangible Collateral in good condition and repair and shall pay or cause to be paid all obligations arising from the repair and maintenance of such Collateral, as well as all obligations with respect to each Location of Tangible Collateral, except for any such obligations being contested by Grantor in good faith by appropriate proceedings. 3. REPRESENTATIONS AND WARRANTIES Grantor represents and warrants to MLBFS that: (a) Grantor. Grantor is a corporation, duly organized and validly existing in good standing under the laws of the State of Delaware and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary. (b) Execution, Delivery and Performance. The execution, delivery and performance by Grantor of this Agreement have been duly authorized by all requisite action, do not and will not violate or conflict with any law or other governmental requirement, or any of the agreements, instruments or documents which formed or governed Grantor, and do not and will not breach or violate any of the provisions of, and will not result in a default by Grantor under, any other agreement, instrument or document to which it is a party or by which it or its properties are bound. (c) Notice or Consent. Except as may have been given or obtained, no notice to or consent or approval of any governmental body or authority or other third party whatsoever (including, without limitation, any other creditor) is required in connection with the execution, delivery or performance by Grantor of this Agreement. (d) Valid and Binding. This Agreement is the legal, valid and binding obligation of Grantor, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally or by general principles of equity. (e) Financial Statements. Except as expressly set forth in Grantor's financial statements, all financial statements of Grantor furnished to MLBFS have been prepared in conformity with generally accepted accounting principles, consistently applied, are true and correct, and fairly present the financial condition of it as at such dates and the results of its operations for the periods then ended; and since the most recent date covered by such financial statements, there has been no material adverse change in any such financial condition or operation. (f) Litigation, etc. No litigation, arbitration, administrative or governmental proceedings are pending or threatened against Grantor, which would, if adversely determined, materially and adversely affect the financial condition or continued operations of Grantor, or the liens and security interests of MLBFS hereunder. (g) Taxes. All federal, state and local tax returns, reports and statements required to be filed by Grantor have been filed with the appropriate governmental agencies and all taxes due and payable by Grantor have been timely paid (except to the extent that any such failure to file or pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or the financial condition or continued operations of Grantor). (h) Collateral. Grantor has good and marketable title to the Collateral, and, except for any Permitted Liens: (i) none of the Collateral is subject to any lien, encumbrance or security interest, and (ii) upon the filing of all Uniform Commercial Code financing statements executed by Grantor with respect to the Collateral or a copy of this Agreement in the appropriate jurisdiction(s) and/or the completion of any other action required by applicable law to perfect is lien and security interests, MLBFS will have valid and perfected first liens and security interests upon all of the Collateral. Each of the foregoing representations and warranties has been and will be relied upon as an inducement to MLBFS to advance funds or extend or continue to extend credit to Customer, and is continuing and shall be deemed remade by Grantor concurrently with each such advance or extension of credit by MLBFS to Customer. 4. FINANCIAL AND OTHER INFORMATION Grantor covenants and agrees that Grantor will furnish or cause to be furnished to MLBFS during the term of this Agreement such financial and other information as may be required by the Loan Agreement or any other document evidencing the Obligations or as MLBFS may from time to time reasonably request relating to Grantor or the Collateral. 5. OTHER COVENANTS Grantor further agrees during the term of this Agreement that: (a) Financial Records; Inspection. Grantor will: (i) maintain complete and accurate books and records at its principal place of business, and maintain all of its financial records in a manner consistent with the financial statements heretofore furnished to MLBFS, or prepared on such other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized representatives, upon reasonable notice and at reasonable times, to inspect its properties (both real and personal), operations, books and records. (b) Taxes. Grantor will pay when due all taxes, assessments and other governmental charges, howsoever designated, and all other liabilities and obligations, except to the extent that any such failure to pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder, or the financial condition or continued operations of Grantor. (c) Compliance With Laws and Agreements. Grantor will not violate any law, regulation or other governmental requirement, any judgment or order of any court or governmental agency or authority, or any agreement, instrument or document to which it is a party or by which it is bound, if any such violation will materially and adversely affect either the liens and security interests of MLBFS hereunder, or the financial condition or continued operations of Grantor. (d) Notification By Grantor. Grantor shall provide MLBFS with prompt written notification of: (i) any Default; (ii) any materially adverse change in the business, financial condition or operations of Grantor; and (iii) any information which indicates that any financial statements of Grantor fail in any material respect to present fairly the financial condition and results of operations purported to be presented in such statements. Each notification by Grantor pursuant hereto shall specify the event or information causing such notification, and, to the extent applicable, shall specify the steps being taken to rectify or remedy such event or information. (e) Notice of Change. Grantor shall give MLBFS not less than 30 days prior written notice of any change in the name (including any fictitious name) or principal place of business of Grantor. (f) Continuity. Except upon the prior written consent of MLBFS, which consent will not be unreasonably withheld: (i) Grantor shall not be a party to any merger or consolidation with, or purchase or otherwise acquire all or substantially all of the assets of, or any material stock, partnership, joint venture or other equity interest in, any person or entity, or sell, transfer or lease all or any substantial part of its assets, if any such action would result in either: (A) a material change in the principal business, ownership or control of Grantor, or (B) a material adverse change in the financial condition or operations of Grantor; (ii) Grantor shall preserve its existence and good standing in the jurisdictions of establishment and operation, and shall not operate in any material business substantially different from its business in effect as of the date of application by Customer for credit from MLBFS; and (iii) Grantor shall not cause or permit any material change in its controlling ownership. 6. EVENTS OF DEFAULT The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement: (a) Default Under Loan Agreement. An Event of Default shall occur under the terms of the Loan Agreement. (b) Failure to Perform. Grantor shall default in the performance or observance of any covenant or agreement on its part to be performed or observed under this Agreement (not constituting an Event of Default under any other clause of this Section), and such default shall continue unremedied for 10 Business Days after written notice thereof shall have been given by MLBFS to Grantor. (c) Breach of Warranty. Any representation or warranty made by Grantor contained in this Agreement shall at any time prove to have been incorrect in any material respect when made. (d) Default Under Other Agreement. A default or Event of Default by Grantor shall occur under the terms of any other agreement, instrument or document with or intended for the benefit of MLBFS, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") or any of their affiliates, and any required notice shall have been given and required passage of time shall have elapsed. (e) Seizure or Abuse of Collateral. The Collateral, or any material part thereof, shall be or become subject to any levy, attachment, seizure or confiscation which is not released within 10 Business Days. (f) Bankruptcy Event. Any Bankruptcy Event shall occur. (g) Material Impairment. Any event shall occur which shall reasonably cause MLBFS to in good faith believe that the prospect of payment or performance by Grantor has been materially impaired. (h) Acceleration of Debt to Other Creditors. Any event shall occur which results in the acceleration of the maturity of any indebtedness of $100,000.00 or more of Grantor to another creditor under any indenture, agreement, undertaking, or otherwise. 7. REMEDIES (a) Remedies Upon Default Upon the occurrence and during the continuance of any Event of Default, MLBFS may at its sole option do any one or more or all of the following, at such time and in such order as MLBFS may in its sole discretion choose: (i) Acceleration. MLBFS may declare all Obligations to be forthwith due and payable, whereupon all such amounts shall be immediately due and payable, without presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate or other notice or formality of any kind, all of which are hereby expressly waived; provided, however, that upon the occurrence of any Bankruptcy Event all Obligations shall automatically become due and payable without any action on the part of MLBFS. (ii) Exercise Rights of Secured Party. MLBFS may exercise any or all of the remedies of a secured party under applicable law, including, but not limited to, the UCC, and any or all of its other rights and remedies under this Agreement. (iii) Possession. MLBFS may require Grantor to make the Collateral and the records pertaining to the Collateral available to MLBFS at a place designated by MLBFS which is reasonably convenient to Grantor, or may take possession of the Collateral and the records pertaining to the Collateral without the use of any judicial process and without any prior notice to Grantor. (iv) Sale. MLBFS may sell any or all of the Collateral at public or private sale upon such terms and conditions as MLBFS may reasonably deem proper, and MLBFS may purchase any Collateral at any such public sale; and the net proceeds of any such public or private sale and all other amounts actually collected or received by MLBFS pursuant hereto, after deducting all costs and expenses incurred at any time in the collection of the Obligations and in the protection, collection and sale of the Collateral, will be applied to the payment of the Obligations, with any remaining proceeds paid to Grantor or whoever else may be entitled thereto, and with Customer and each guarantor of Customer's obligations remaining jointly and severally liable for any amount remaining unpaid after such application. (v) Delivery of Cash, Checks, Etc. MLBFS may require Grantor to forthwith upon receipt, transmit and deliver to MLBFS in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, so that such items may be collected by MLBFS) which may be received by Grantor at any time in full or partial payment of any Collateral, and require that Grantor not commingle any such items which may be so received by Grantor with any other of its funds or property but instead hold them separate and apart and in trust for MLBFS until delivery is made to MLBFS. (vi) Notification of Account Debtors. MLBFS may notify any Account Debtor that its Account or Chattel Paper has been assigned to MLBFS and direct such Account Debtor to make payment directly to MLBFS of all amounts due or becoming due with respect to such Account or Chattel Paper; and MLBFS may enforce payment and collect, by legal proceedings or otherwise, such Account or Chattel Paper. (vii) Control of Collateral. MLBFS may otherwise take control in any lawful manner of any cash or non-cash items of payment or proceeds of Collateral and of any rejected, returned, stopped in transit or repossessed goods included in the Collateral and endorse Grantor name on any item of payment on or proceeds of the Collateral, and, in connection therewith, MLBFS may notify the postal authorities to change the address for delivery of mail addressed to Grantor to such address as MLBFS may designate. (b) Set-Off. MLBFS shall have the further right upon the occurrence and during the continuance of an Event of Default to set-off, appropriate and apply toward payment of any of the Obligations, in such order of application as MLBFS may from time to time and at any time elect, any cash, credits, deposits, accounts, securities and any other property of Grantor which is in transit to or in the possession, custody or control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S, including, without limitation, all securities accounts with MLPF&S and all cash and securities and other financial assets therein or controlled thereby, and all proceeds thereof. Grantor hereby collaterally assigns and grants to MLBFS a security interest in all such property as additional Collateral. (c) Power of Attorney. Effective upon the occurrence and during the continuance of an Event of Default, Grantor hereby irrevocably appoints MLBFS as its attorney-in-fact, with full power of substitution, in its place and stead and in its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion take any action and to execute any instrument which MLBFS may deem necessary or advisable to accomplish the purposes of this Agreement, including, but not limited to, to receive, endorse and collect all checks, drafts and other instruments for the payment of money made payable to Grantor included in the Collateral. (d) Remedies are Severable and Cumulative. All rights and remedies of MLBFS herein are severable and cumulative and in addition to all other rights and remedies available at law or in equity, and any one or more of such rights and remedies may be exercised simultaneously or successively. Any notice required under this Agreement or under applicable law shall be deemed reasonably and properly given to Grantor if given at the address and by any of the methods of giving notice set forth in this Agreement at least 5 Business Days before taking any action specified in such notice. (e) Notices. To the fullest extent permitted by applicable law, Grantor hereby irrevocably waives and releases MLBFS of and from any and all liabilities and penalties for failure of MLBFS to comply with any statutory or other requirement imposed upon MLBFS relating to notices of sale, holding of sale or reporting of any sale, and Grantor waives all rights of redemption or reinstatement from any such sale. MLBFS shall have the right to postpone or adjourn any sale or other disposition of Collateral at any time without giving notice of any such postponed or adjourned date. In the event MLBFS seeks to take possession of any or all of the Collateral by court process, Grantor further irrevocably waives to the fullest extent permitted by law any bonds and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession, and any demand for possession prior to the commencement of any suit or action. 8. MISCELLANEOUS (a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any right, power or remedy pursuant to this Agreement shall operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Neither any waiver of any provision of this Agreement, nor any consent to any departure by Grantor therefrom, shall be effective unless the same shall be in writing and signed by MLBFS. Any waiver of any provision of this Agreement and any consent to any departure by Grantor from the terms of this Agreement shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, no notice to or demand on Grantor shall in any case entitle Grantor to any other or further notice or demand in similar or other circumstances. (b) Communications. All notices and other communications required or permitted hereunder shall be in writing, and shall be either delivered personally, mailed by postage prepaid certified mail or sent by express overnight courier or by facsimile. Such notices and communications shall be deemed to be given on the date of personal delivery, facsimile transmission or actual delivery of certified mail, or one Business Day after delivery to an express overnight courier. Unless otherwise specified in a notice sent or delivered in accordance with the terms hereof, notices and other communications in writing shall be given to the parties hereto at their respective addresses set forth at the beginning of this Agreement, and, in the case of facsimile transmission, to the parties at their respective regular facsimile telephone number. (c) Costs, Expenses and Taxes. Grantor shall pay or reimburse MLBFS upon demand for: (i) all Uniform Commercial Code filing and search fees and expenses incurred by MLBFS in connection with the verification, perfection or preservation of MLBFS' rights hereunder or in the Collateral; (ii) any and all stamp, transfer and other taxes and fees payable or determined to be payable in connection with the execution, delivery and/or recording of this Agreement; and (iii) all reasonable fees and out-of-pocket expenses (including, but not limited to, reasonable fees and expenses of outside counsel) incurred by MLBFS in connection with the enforcement of this Agreement or the protection of MLBFS' rights hereunder, excluding, however, salaries and expenses of MLBFS' employees. The obligations of Grantor under this paragraph shall survive the expiration or termination of this Agreement and the discharge of the other Obligations. (d) Right to Perform Obligations. If Grantor shall fail to do any act or thing which it has covenanted to do under this Agreement or any representation or warranty on the part of Grantor contained in this Agreement shall be breached, MLBFS may, in its sole discretion, after 5 Business Days written notice is sent to Grantor (or such lesser notice, including no notice, as is reasonable under the circumstances), do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Grantor upon demand, with interest at the "Interest Rate" (as that term is defined in the Loan Agreement or any document incorporated into the Loan Agreement) during the period from and including the date funds are so expended by MLBFS to the date of repayment, and any such amounts due and owing MLBFS shall be additional Obligations. The payment or performance by MLBFS of any of Grantor's obligations hereunder shall not relieve Grantor of said obligations or of the consequences of having failed to pay or perform the same, and shall not waive or be deemed a cure of any Default. (e) Further Assurances. Grantor agrees to do such further acts and things and to execute and deliver to MLBFS such additional agreements, instruments and documents as MLBFS may reasonably require or deem advisable to effectuate the purposes of this Agreement , or to establish, perfect and maintain MLBFS' security interests and liens upon the Collateral, including, but not limited to: (i) executing financing statements or amendments thereto when and as reasonably requested by MLBFS; and (ii) if in the reasonable judgment of MLBFS it is required by local law, causing the owners and/or mortgagees of the real property on which any Collateral may be located to execute and deliver to MLBFS waivers or subordinations reasonably satisfactory to MLBFS with respect to any rights in such Collateral. (f) Binding Effect. This Agreement shall be binding upon Grantor and its successors and assigns, and shall inure to the benefit of MLBFS and its successors and assigns. (g) Headings. Captions and section and paragraph headings in this Agreement are inserted only as a matter of convenience, and shall not affect the interpretation hereof. (h) Governing Law. This Agreement shall be governed in all respects by the laws of the State of Illinois. (i) Severability of Provisions. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (j) Term. This Agreement shall become effective upon acceptance by MLBFS, and, subject to the terms hereof, shall continue in effect so long thereafter as either MLBFS shall be committed to advance funds or extend credit to Customer or there shall be any Obligations outstanding. (k) Counterparts. This Agreement may be executed in one or more counterparts which, when taken together, constitute one and the same agreement. (l) Jurisdiction; Waiver. GRANTOR ACKNOWLEDGES THAT THIS AGREEMENT IS BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN ITS SOLE DISCRETION, TO ENFORCE THIS AGREEMENT IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE GRANTOR OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. GRANTOR CONSENTS TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND GRANTOR WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE. GRANTOR FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND GRANTOR HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE LOAN AGREEMENT, THIS AGREEMENT AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THE LOAN AGREEMENT OR THIS AGREEMENT. (m) Integration. THIS WRITTEN AGREEMENT CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. NO AMENDMENT OR MODIFICATION OF THIS AGREEMENT SHALL BE EFFECTIVE UNLESS IN A WRITING SIGNED BY BOTH MLBFS AND GRANTOR. IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. LAIDLAW ADAMS & PECK INC. F/K/A FIRELAND INDUSTRIES, INC. By: s/s Raymond J. Smith s/s Christopher Ryan ---------------- ---------------- Signature (1) Signature (2) Raymond J. Smith Christopher Ryan Printed Name Printed Name Title: President Title: Executive V.P. Secretary Accepted at Chicago, Illinois: MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. By: __________________________________________________________ EXHIBIT A ATTACHED TO AND HEREBY MADE A PART OF SECURITY AGREEMENT NO. 849-07230 BETWEEN MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. AND LAIDLAW ADAMS & PECK INC. F/K/A FIRELAND INDUSTRIES, INC. Locations of Tangible Collateral: WCMA(R) NOTE, LOAN AND SECURITY AGREEMENT WCMA NOTE, LOAN AND SECURITY AGREEMENT NO. 849-07230 ("Loan Agreement") dated as of December 2, 1997, between LAKELAND INDUSTRIES, INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 711-2 Koehler Avenue, Ronkonkoma, NY 11779-7410 ("Customer"), and MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC., a corporation organized and existing under the laws of the State of Delaware having its principal office at 33 West Monroe Street, Chicago, IL 60603 ("MLBFS"). In accordance with that certain WORKING CAPITAL MANAGEMENT(R) ACCOUNT AGREEMENT NO. 849-07230 ("WCMA Agreement") between Customer and MLBFS' affiliate, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S"), Customer has subscribed to the WCMA Program described in the WCMA Agreement. The WCMA Agreement is by this reference incorporated as a part hereof. In conjunction therewith and as part of the WCMA Program, Customer has requested that MLBFS provide, and subject to the terms and conditions herein set forth MLBFS has agreed to provide, a commercial line of credit for Customer (the "WCMA Line of Credit"). Accordingly, and in consideration of the premises and of the mutual covenants of the parties hereto, Customer and MLBFS hereby agree as follows: 1. DEFINITIONS (a) Specific Terms. In addition to terms defined elsewhere in this Loan Agreement, when used herein the following terms shall have the following meanings: (i) "Account Debtor" shall mean any party who is or may become obligated with respect to an Account or Chattel Paper. (ii) "Activation Date" shall mean the date upon which MLBFS shall cause the WCMA Line of Credit to be fully activated under MLPF&S' computer system as part of the WCMA Program. (iii) "Additional Agreements" shall mean all agreements, instruments, documents and opinions other than this Loan Agreement, whether with or from Customer or any other party, which are contemplated hereby or otherwise reasonably required by MLBFS in connection herewith, or which evidence the creation, guaranty or collateralization of any of the Obligations or the granting or perfection of liens or security interests upon the Collateral or any other collateral for the Obligations. (iv) "Bankruptcy Event" shall mean any of the following: (A) a proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or receivership law or statute shall be filed or consented to by Customer or any Guarantor; or (B) any such proceeding shall be filed against Customer or any Guarantor and shall not be dismissed or withdrawn within sixty (60) days after filing; or (C) Customer or any Guarantor shall make a general assignment for the benefit of creditors; or (D) Customer or any Guarantor shall become insolvent or generally fail to pay or admit in writing its inability to pay its debts as they become due; or (E) Customer or any Guarantor shall be adjudicated a bankrupt or insolvent. (v) "Business Day" shall mean any day other than a Saturday, Sunday, federal holiday or other day on which the New York Stock Exchange is regularly closed. (vi) "Collateral" shall mean all Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts, Documents and Instruments of Customer, howsoever arising, whether now owned or existing or hereafter acquired or arising, and wherever located; together with all parts thereof (including spare parts), all accessories and accessions thereto, all books and records (including computer records) directly related thereto, all proceeds thereof (including, without limitation, proceeds in the form of Accounts and insurance proceeds), and the additional collateral described in Section 9 (b) hereof. (vii) "Commitment Expiration Date" shall mean January 2, 1998. (viii) "Default" shall mean an "Event of Default" as defined in Section 8 hereof, or an event which with the giving of notice, passage of time, or both, would constitute such an Event of Default. (ix) "General Funding Conditions" shall mean each of the following conditions to any WCMA Loan by MLBFS hereunder: (A) no Default shall have occurred and be continuing or would result from the making of any WCMA Loan hereunder by MLBFS; (B) there shall not have occurred and be continuing any material adverse change in the business or financial condition of Customer or any Guarantor; (C) all representations and warranties of Customer or any Guarantor herein or in any Additional Agreements shall then be true and correct in all material respects; (D) MLBFS shall have received this Loan Agreement and all of the Additional Agreements, duly executed and filed or recorded where applicable, all of which shall be in form and substance reasonably satisfactory to MLBFS; (E) MLBFS shall have received evidence reasonably satisfactory to it as to the ownership of the Collateral and the perfection and priority of MLBFS' liens and security interests thereon, as well as the ownership of and the perfection and priority of MLBFS' liens and security interests on any other collateral for the Obligations furnished pursuant to any of the Additional Agreements; (F) MLBFS shall have received evidence reasonably satisfactory to it of the insurance required hereby or by any of the Additional Agreements; and (G) any additional conditions specified in the "WCMA Line of Credit Approval" letter executed by MLBFS with respect to the transactions contemplated hereby shall have been met to the reasonable satisfaction of MLBFS. (x) "Guarantor" shall mean a person or entity who has either guaranteed or provided collateral for any or all of the Obligations; and "Business Guarantor" shall mean any such Guarantor that is a corporation, partnership, proprietorship, limited liability company or other entity regularly engaged in a business activity. (xi) "Initial Maturity Date" shall mean the first date upon which the WCMA Line of Credit will expire unless it has been renewed in accordance with the terms hereof; to wit: November 30, 1999. (xii) "Interest Rate" shall mean a variable per annum rate of interest equal to the sum of 1.75% and the 30-Day Commercial Paper Rate. The "30-Day Commercial Paper Rate" shall mean, as of the date of any determination, the interest rate from time to time published in the "Money Rates" section of The Wall Street Journal for 30-day high-grade unsecured notes sold through dealers by major corporations. If no Default shall then have occurred and be continuing, Customer shall have the option, exercisable not more than once in any calendar quarter upon not less than 15 days prior written notice to MLBFS, to: (a) substitute for the 30-Day Commercial Paper Rate the interest rate published in the "Money Rates" section of The Wall Street Journal as the one-month London Interbank Offered Rate (the "One-Month LIBOR.), or (b) substitute the 30-Day Commercial Paper Rate for the One-Month Libor, as applicable. The Interest Rate will change as of the date of publication in The Wall Street Journal of a 30-Day Commercial Paper Rate or One-Month Libor that is different from that published on the preceding Business Day. In the event that The Wall Street Journal shall, for any reason, fail or cease to publish the 30-Day Commercial Paper Rate or One-Month Libor, MLBFS will choose a reasonably comparable index or source to use as the basis for the Interest Rate. (xiii) "Line Fee" shall mean the fee of $37,500.00 payable periodically by Customer to MLBFS in connection with the WCMA Line of Credit, as provided herein. (xiv) "Location of Tangible Collateral" shall mean the address of Customer set forth at the beginning of this Loan Agreement, together with any other address or addresses set forth on an exhibit hereto as being a Location of Tangible Collateral. (xv) "Maturity Date" shall mean the date of expiration or earlier termination of the WCMA Line of Credit pursuant to the terms hereof. (xvi) "Maximum WCMA Line of Credit" shall mean $10,000,000.00. (xvii) "Obligations" shall mean all liabilities, indebtedness and other obligations of Customer to MLBFS, howsoever created, arising or evidenced, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, due or to become due, primary or secondary or joint or several, and, without limiting the foregoing, shall include interest accruing after the filing of any petition in bankruptcy, and all present and future liabilities, indebtedness and obligations of Customer under this Loan Agreement. (xviii) "Permitted Liens" shall mean shall mean with respect to the Collateral: (A) liens for current taxes not delinquent, other non-consensual liens arising in the ordinary course of business for sums not due, and, if MLBFS' rights to and interest in the Collateral are not materially and adversely affected thereby, any such liens for taxes or other non-consensual liens arising in the ordinary course of business being contested in good faith by appropriate proceedings; (B) liens in favor of MLBFS; (C) liens which will be discharged with the proceeds of the initial WCMA Loan; and (D) any other liens expressly permitted in writing by MLBFS. (xix) "Renewal Year" shall mean and refer to the 12-month period immediately following the Initial Maturity Date and each 12-month period thereafter. (xx) "WCMA Account" shall mean and refer to the Working Capital Management Account of Customer with MLPF&S identified as Account No. 849-07230. (xxi) "WCMA Loan" shall mean each advance made by MLBFS pursuant to this Loan Agreement. (b) Other Terms. Except as otherwise defined herein: (i) all terms used in this Loan Agreement which are defined in the Uniform Commercial Code of Illinois ("UCC") shall have the meanings set forth in the UCC, and (ii) capitalized terms used herein which are defined in the WCMA Agreement shall have the meanings set forth in the WCMA Agreement. 2. WCMA PROMISSORY NOTE FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, at the times and in the manner set forth in this Loan Agreement, or in such other manner and at such place as MLBFS may hereafter designate in writing, the following: (a) on the Maturity Date, the aggregate unpaid principal amount of all WCMA Loans (the "WCMA Loan Balance"); (b) interest at the Interest Rate on the outstanding WCMA Loan Balance, from and including the date on which the initial WCMA Loan is made until the date of payment of all WCMA Loans in full; and (c) on demand, all other sums payable pursuant to this Loan Agreement, including, but not limited to, the periodic Line Fee and any late charges. Except as otherwise expressly set forth herein, Customer hereby waives presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate and all other notices and formalities in connection with this WCMA Promissory Note and this Loan Agreement. 3. WCMA LOANS (a) Activation Date. Provided that: (i) the Commitment Expiration Date shall not then have occurred, and (ii) Customer shall have subscribed to the WCMA Program and its subscription to the WCMA Program shall then be in effect, the Activation Date shall occur on or promptly after the date, following the acceptance of this Loan Agreement by MLBFS at its office in Chicago, Illinois, upon which each of the General Funding Conditions shall have been met or satisfied to the reasonable satisfaction of MLBFS. No activation by MLBFS of the WCMA Line of Credit for a nominal amount shall be deemed evidence of the satisfaction of any of the conditions herein set forth, or a waiver of any of the terms or conditions hereof. Customer hereby authorizes MLBFS to pay out of and charge to Customer's WCMA Account on the Activation Date any and all amounts necessary to fully pay off any bank or other financial institution having a lien upon any of the Collateral other than a Permitted Lien. (b) WCMA Loans. Subject to the terms and conditions hereof, during the period from and after the Activation Date to the Maturity Date: (i) MLBFS will make WCMA Loans to Customer in such amounts as Customer may from time to time request in accordance with the terms hereof, up to an aggregate outstanding amount not to exceed the Maximum WCMA Line of Credit, and (ii) Customer may repay any WCMA Loans in whole or in part at any time without premium or penalty, and request a re-borrowing of amounts repaid on a revolving basis. Customer may request WCMA Loans by use of WCMA Checks, FTS, Visa(R) charges, wire transfers, or such other means of access to the WCMA Line of Credit as may be permitted by MLBFS from time to time; it being understood that so long as the WCMA Line of Credit shall be in effect, any charge or debit to the WCMA Account which but for the WCMA Line of Credit would under the terms of the WCMA Agreement result in an overdraft, shall be deemed a request by Customer for a WCMA Loan. (c) Conditions of WCMA Loans. Notwithstanding the foregoing, MLBFS shall not be obligated to make any WCMA Loan, and may without notice refuse to honor any such request by Customer, if at the time of receipt by MLBFS of Customer's request: (i) the making of such WCMA Loan would cause the Maximum WCMA Line of Credit to be exceeded; or (ii) the Maturity Date shall have occurred, or the WCMA Line of Credit shall have otherwise been terminated in accordance with the terms hereof; or (iii) Customer's subscription to the WCMA Program shall have been terminated; or (iv) an event shall have occurred and be continuing which shall have caused any of the General Funding Conditions to not then be met or satisfied to the reasonable satisfaction of MLBFS. The making by MLBFS of any WCMA Loan at a time when any one or more of said conditions shall not have been met shall not in any event be construed as a waiver of said condition or conditions or of any Default, and shall not prevent MLBFS at any time thereafter while any condition shall not have been met from refusing to honor any request by Customer for a WCMA Loan. (d) Force Majeure. MLBFS shall not be responsible, and shall have no liability to Customer or any other party, for any delay or failure of MLBFS to honor any request of Customer for a WCMA Loan or any other act or omission of MLBFS, MLPF&S or any of their affiliates due to or resulting from any system failure, error or delay in posting or other clerical error, loss of power, fire, Act of God or other cause beyond the reasonable control of MLBFS, MLPF&S or any of their affiliates unless directly arising out of the willful wrongful act or active gross negligence of MLBFS. In no event shall MLBFS be liable to Customer or any other party for any incidental or consequential damages arising from any act or omission by MLBFS, MLPF&S or any of their affiliates in connection with the WCMA Line of Credit or this Loan Agreement. (e) Interest. The WCMA Loan Balance shall bear interest at the Interest Rate. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days. Notwithstanding any provision to the contrary in this Agreement or any of the Additional Agreements, no provision of this Agreement or any of the Additional Agreements shall require the payment or permit the collection of any amount in excess of the maximum amount of interest permitted to be charged by law ("Excess Interest"). If any Excess Interest is provided for, or is adjudicated as being provided for, in this Agreement or any of the Additional Agreements, then: (a) Customer shall not be obligated to pay any Excess Interest; and (b) any Excess Interest that MLBFS may have received hereunder or under any of the Additional Agreements shall, at the option of MLBFS, be: (i) applied as a credit against the then unpaid balance of the WCMA Line of Credit, (ii) refunded to the payer thereof, or (iii) any combination of the foregoing. Except as otherwise provided herein, accrued and unpaid interest on the WCMA Loan Balance shall be payable monthly on the last Business Day of each calendar month, commencing with the last Business Day of the calendar month in which the Activation Date shall occur. Customer hereby irrevocably authorizes and directs MLPF&S to pay MLBFS such accrued interest from any available free credit balances in the WCMA Account, and if such available free credit balances are insufficient to satisfy any interest payment due, to liquidate any investments in the Money Accounts (other than any investments constituting any Minimum Money Accounts Balance under the WCMA Directed Reserve program) in an amount up to the balance of such accrued interest, and pay to MLBFS the available proceeds on account thereof. If available free credit balances in the WCMA Account and available proceeds of the Money Accounts are insufficient to pay the entire balance of accrued interest, and Customer otherwise fails to make such payment when due, MLBFS may, in its sole discretion, make a WCMA Loan in an amount equal to the balance of such accrued interest and pay the proceeds of such WCMA Loan to itself on account of such interest. The amount of any such WCMA Loan will be added to the WCMA Loan Balance. If MLBFS declines to extend a WCMA Loan to Customer under these circumstances, Customer hereby authorizes and directs MLPF&S to make all such interest payments to MLBFS from any Minimum Money Accounts Balance. If there is no Minimum Money Accounts Balance, or it is insufficient to pay all such interest, MLBFS will invoice Customer for payment of the balance of the accrued interest, and Customer shall pay such interest as directed by MLBFS within 5 Business Days of receipt of such invoice. (f) Payments. All payments required or permitted to be made pursuant to this Loan Agreement shall be made in lawful money of the United States. Unless otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may be made by the delivery of checks (other than WCMA Checks), or by means of FTS or wire transfer of funds (other than funds from the WCMA Line of Credit) to MLPF&S for credit to Customer's WCMA Account. Notwithstanding anything in the WCMA Agreement to the contrary, Customer hereby irrevocably authorizes and directs MLPF&S to apply available free credit balances in the WCMA Account to the repayment of the WCMA Loan Balance prior to application for any other purpose. Payments to MLBFS from funds in the WCMA Account shall be deemed to be made by Customer upon the same basis and schedule as funds are made available for investment in the Money Accounts in accordance with the terms of the WCMA Agreement. All funds received by MLBFS from MLPF&S pursuant to the aforesaid authorization shall be applied by MLBFS to repayment of the WCMA Loan Balance. The acceptance by or on behalf of MLBFS of a check or other payment for a lesser amount than shall be due from Customer, regardless of any endorsement or statement thereon or transmitted therewith, shall not be deemed an accord and satisfaction or anything other than a payment on account, and MLBFS or anyone acting on behalf of MLBFS may accept such check or other payment without prejudice to the rights of MLBFS to recover the balance actually due or to pursue any other remedy under this Loan Agreement or applicable law for such balance. All checks accepted by or on behalf of MLBFS in connection with the WCMA Line of Credit are subject to final collection. (g) Exceeding the Maximum WCMA Line of Credit. In the event that the WCMA Loan Balance shall at any time exceed the Maximum WCMA Line of Credit, Customer shall within 1 Business Day of the first to occur of (i) any request or demand of MLBFS, or (ii) receipt by Customer of a statement from MLPF&S showing a WCMA Loan Balance in excess of the Maximum WCMA Line of Credit, deposit sufficient funds into the WCMA Account to reduce the WCMA Loan Balance below the Maximum WCMA Line of Credit. (h) Statements. MLPF&S will include in each monthly statement it issues under the WCMA Program information with respect to WCMA Loans and the WCMA Loan Balance. Any questions that Customer may have with respect to such information should be directed to MLBFS; and any questions with respect to any other matter in such statements or about or affecting the WCMA Program should be directed to MLPF&S. (i) Use of Loan Proceeds; Securities Transactions. On the Activation Date, a WCMA Loan will be made to pay any indebtedness of Customer to a third party secured by all or any part of the Collateral. The proceeds of each subsequent WCMA Loan shall be used by Customer solely for working capital in the ordinary course of its business, or, with the prior written consent of MLBFS, for other lawful business purposes of Customer not prohibited hereby. Customer agrees that under no circumstances will funds borrowed from MLBFS through the WCMA Line of Credit be used: (i) for personal, family or household purposes of any person whatsoever, or (ii) to purchase, carry or trade in securities, or repay debt incurred to purchase, carry or trade in securities, whether in or in connection with the WCMA Account, another account of Customer with MLPF&S or an account of Customer at any other broker or dealer in securities. (j) Renewal at Option of MLBFS; Right of Customer to Terminate. MLBFS may at any time, in its sole discretion and at its sole option, renew the WCMA Line of Credit for one or more Renewal Years; it being understood, however, that no such renewal shall be effective unless set forth in a writing executed by a duly authorized representative of MLBFS and delivered to Customer. Unless any such renewal is accompanied by a proposed change in the terms of the WCMA Line of Credit (other than the extension of the Maturity Date), no such renewal shall require Customer's approval. Customer shall, however, have the right to terminate the WCMA Line of Credit at any time upon written notice to MLBFS. If the WCMA Line of Credit shall be terminated for any reason prior to payment by Customer of the Line Fee of $37,500.00 due for the 12-month period immediately following November 30, 1998, then said fee shall be deemed fully earned by MLBFS and immediately payable by Customer on the date of such termination. (k) Line Fees. (i) In consideration of the extension of the WCMA Line of Credit by MLBFS to Customer during the period from the Activation Date to November 30, 1998 (the "Initial Line Period"), Customer has paid or shall pay the initial Line Fee to MLBFS. If the initial Line Fee has not heretofore been paid by Customer, Customer hereby authorizes MLBFS, at its option, to either cause the Line Fee to be paid on the Activation Date with a WCMA Loan, or invoice Customer for such initial Line Fee (in which event Customer shall pay said fee within 5 Business Days after receipt of such invoice). No delay in the Activation Date, howsoever caused, shall entitle Customer to any rebate or reduction in the Line Fee or to any extension of the Initial Maturity Date. (ii) Customer shall pay an additional Line Fee for each 12-month period following the Initial Line Period to the Initial Maturity Date, and for each Renewal Year. In connection therewith, Customer hereby authorizes MLBFS, at its option, to either cause each such additional Line Fee to be paid with a WCMA Loan on or at any time after the first Business Day of such 12-month period or Renewal Year, as applicable, or invoiced to Customer at such time (in which event Customer shall pay such Line Fee within 5 Business Days after receipt of such invoice). Each Line Fee shall be deemed fully earned by MLBFS on the date payable by Customer, and no termination of the WCMA Line of Credit, howsoever caused, shall entitle Customer to any rebate or refund of any portion of such Line Fee. 4. REPRESENTATIONS AND WARRANTIES Customer represents and warrants to MLBFS that: (a) Organization and Existence. Customer is a corporation, duly organized and validly existing in good standing under the laws of the State of Delaware and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary; and, where applicable, each Business Guarantor is duly organized, validly existing and in good standing under the laws of the state of its formation and is qualified to do business and in good standing in each other state where the nature of its business or the property owned by it make such qualification necessary. (b) Execution, Delivery and Performance. The execution, delivery and performance by Customer of this Loan Agreement and by Customer and each Guarantor of such of the Additional Agreements to which it is a party: (i) have been duly authorized by all requisite action, (ii) do not and will not violate or conflict with any law or other governmental requirement, or any of the agreements, instruments or documents which formed or govern Customer or any such Guarantor, and (iii) do not and will not breach or violate any of the provisions of, and will not result in a default by Customer or any such Guarantor under, any other agreement, instrument or document to which it is a party or by which it or its properties are bound. (c) Notices and Approvals. Except as may have been given or obtained, no notice to or consent or approval of any governmental body or authority or other third party whatsoever (including, without limitation, any other creditor) is required in connection with the execution, delivery or performance by Customer or any Guarantor of such of this Loan Agreement and the Additional Agreements to which it is a party. (d) Enforceability. This Loan Agreement and such of the Additional Agreements to which Customer or any Guarantor is a party are the respective legal, valid and binding obligations of Customer and such Guarantor, enforceable against it or them, as the case may be, in accordance with their respective terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally or by general principles of equity. (e) Collateral. Except for any Permitted Liens: (i) Customer has good and marketable title to the Collateral, (ii) none of the Collateral is subject to any lien, encumbrance or security interest, and (iii) upon the filing of all Uniform Commercial Code financing statements executed by Customer with respect to the Collateral in the appropriate jurisdiction(s) and/or the completion of any other action required by applicable law to perfect its liens and security interests, MLBFS will have valid and perfected first liens and security interests upon all of the Collateral. (f) Financial Statements. Except as expressly set forth in Customer's or any Business Guarantor's financial statements, all financial statements of Customer and each Business Guarantor furnished to MLBFS have been prepared in conformity with generally accepted accounting principles, consistently applied, are true and correct, and fairly present the financial condition of it as at such dates and the results of its operations for the periods then ended; and since the most recent date covered by such financial statements, there has been no material adverse change in any such financial condition or operation. All financial statements furnished to MLBFS of any Guarantor other than a Business Guarantor are true and correct and fairly represent such Guarantor's financial condition as of the date of such financial statements, and since the most recent date of such financial statements, there has been no material adverse change in such financial condition. (g) Litigation. No litigation, arbitration, administrative or governmental proceedings are pending or, to the knowledge of Customer, threatened against Customer or any Guarantor, which would, if adversely determined, materially and adversely affect the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any such Guarantor or the continued operations of Customer or any Business Guarantor. (h) Tax Returns. All federal, state and local tax returns, reports and statements required to be filed by Customer and each Guarantor have been filed with the appropriate governmental agencies and all taxes due and payable by Customer and each Guarantor have been timely paid (except to the extent that any such failure to file or pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer or any Business Guarantor). (i) Collateral Location. All of the tangible Collateral is located at a Location of Tangible Collateral. Each of the foregoing representations and warranties: (i) has been and will be relied upon as an inducement to MLBFS to provide the WCMA Line of Credit, and (ii) is continuing and shall be deemed remade by Customer concurrently with each request for a WCMA Loan. 5. FINANCIAL AND OTHER INFORMATION Customer shall furnish or cause to be furnished to MLBFS during the term of this Loan Agreement all of the following: (a) Annual Financial Statements. Within 120 days after the close of each fiscal year of Customer, Customer shall furnish or cause to be furnished to MLBFS a copy of the annual audited financial statements of Customer, consisting of at least a balance sheet as at the close of such fiscal year and related statements of income, retained earnings and cash flows, certified by its current independent certified public accountants or other independent certified public accountants reasonably acceptable to MLBFS. (b) Interim Financial Statements. Within 45 days after the close of each fiscal quarter of Customer, Customer shall furnish or cause to be furnished to MLBFS: (i) its statement of profit and loss for the fiscal quarter then ended, and (ii) a balance sheet as at the close of such fiscal quarter; all in reasonable detail and certified by its chief financial officer. (c)Agings of Accounts. Within 15 days after the close of each fiscal month of Customer, Customer shall furnish or cause to be furnished to MLBFS an aging of Accounts and Chattel Paper for Customer as of the end of such fiscal month, in reasonable detail and certified by its chief financial officer. (d) Other Information. Customer shall furnish or cause to be furnished to MLBFS such other information as MLBFS may from time to time reasonably request relating to Customer, any Guarantor or the Collateral. 6. OTHER COVENANTS Customer further covenants and agrees during the term of this Loan Agreement that: (a) Financial Records; Inspection. Customer and each Business Guarantor will: (i) maintain at its principal place of business complete and accurate books and records, and maintain all of its financial records in a manner consistent with the financial statements heretofore furnished to MLBFS, or prepared on such other basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its duly authorized representatives, upon reasonable notice and at reasonable times, to inspect its properties (both real and personal), operations, books and records. (b) Taxes. Customer and each Guarantor will pay when due all taxes, assessments and other governmental charges, howsoever designated, and all other liabilities and obligations, except to the extent that any such failure to pay will not materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor or the continued operations of Customer or any Business Guarantor. (c) Compliance With Laws and Agreements. Neither Customer nor any Guarantor will violate any law, regulation or other governmental requirement, any judgment or order of any court or governmental agency or authority, or any agreement, instrument or document to which it is a party or by which it is bound, if any such violation will materially and adversely affect either the liens and security interests of MLBFS hereunder or under any of the Additional Agreements, the financial condition of Customer or any Guarantor, or the continued operations of Customer or any Business Guarantor. (d) Notification By Customer. Customer shall provide MLBFS with prompt written notification of: (i) any Default; (ii) any materially adverse change in the business, financial condition or operations of Customer or any Business Guarantor; and (iii) any information which indicates that any financial statements of Customer or any Guarantor fail in any material respect to present fairly the financial condition and results of operations purported to be presented in such statements. Each notification by Customer pursuant hereto shall specify the event or information causing such notification, and, to the extent applicable, shall specify the steps being taken to rectify or remedy such event or information. (e) Notice of Change. Customer shall give MLBFS not less than 30 days prior written notice of any change in the name (including any fictitious name) or principal place of business or residence of Customer or any Guarantor. (f) Continuity. Except upon the prior written consent of MLBFS, which consent will not be unreasonably withheld: (i) neither Customer nor any Business Guarantor shall be a party to any merger or consolidation with, or purchase or otherwise acquire all or substantially all of the assets of, or any material stock, partnership, joint venture or other equity interest in, any person or entity, or sell, transfer or lease all or any substantial part of its assets, if any such action would result in either: (A) a material change in the principal business, ownership or control of Customer or such Business Guarantor, or (B) a material adverse change in the financial condition or operations of Customer or such Business Guarantor; (ii) Customer and each Business Guarantor shall preserve their respective existence and good standing in the jurisdictions of establishment and operation, and shall not operate in any material business substantially different from their respective business in effect as of the date of application by Customer for credit from MLBFS; and (iii) neither Customer nor any Business Guarantor shall cause or permit any material change in its controlling ownership. (g) Minimum Tangible Net Worth. Customer's "tangible net worth" shall at all times exceed $9,000,000.00. For the purposes hereof, the term "tangible net worth" shall mean Customer's net worth as shown on Customer's regular financial statements prepared in a manner consistent with the terms hereof, but excluding an amount equal to: (i) any assets which are ordinarily classified as \"intangible\" in accordance with generally accepted accounting principles, and (ii) any amounts now or hereafter directly or indirectly owing to Customer by officers, shareholders or affiliates of Customer. 7. COLLATERAL (a) Pledge of Collateral. To secure payment and performance of the Obligations, Customer hereby pledges, assigns, transfers and sets over to MLBFS, and grants to MLBFS first liens and security interests in and upon all of the Collateral, subject only to Permitted Liens. (b) Liens. Except upon the prior written consent of MLBFS, Customer shall not create or permit to exist any lien, encumbrance or security interest upon or with respect to any Collateral now owned or hereafter acquired other than Permitted Liens. (c) Performance of Obligations. Customer shall perform all of its obligations owing on account of or with respect to the Collateral; it being understood that nothing herein, and no action or inaction by MLBFS, under this Loan Agreement or otherwise, shall be deemed an assumption by MLBFS of any of Customer's said obligations. (d) Sales and Collections. So long as no Event of Default shall have occurred and be continuing, Customer may in the ordinary course of its business: (i) sell any Inventory normally held by Customer for sale, (ii) use or consume any materials and supplies normally held by Customer for use or consumption, and (iii) collect all of its Accounts. Customer shall take such action with respect to protection of its Inventory and the other Collateral and the collection of its Accounts as MLBFS may from time to time reasonably request. (e) Account Schedules. Upon the request of MLBFS, made now or at any reasonable time or times hereafter, Customer shall deliver to MLBFS, in addition to the other information required hereunder, a schedule identifying, for each Account and all Chattel Paper subject to MLBFS' security interests hereunder, each Account Debtor by name and address and amount, invoice or contract number and date of each invoice or contract. Customer shall furnish to MLBFS such additional information with respect to the Collateral, and amounts received by Customer as proceeds of any of the Collateral, as MLBFS may from time to time reasonably request. (f) Alterations and Maintenance. Except upon the prior written consent of MLBFS, Customer shall not make or permit any material alterations to any tangible Collateral which might materially reduce or impair its market value or utility. Customer shall at all times keep the tangible Collateral in good condition and repair and shall pay or cause to be paid all obligations arising from the repair and maintenance of such Collateral, as well as all obligations with respect to each Location of Tangible Collateral, except for any such obligations being contested by Customer in good faith by appropriate proceedings. (g) Location. Except for movements required in the ordinary course of Customer's business, Customer shall give MLBFS 30 days' prior written notice of the placing at or movement of any tangible Collateral to any location other than a Location of Tangible Collateral. In no event shall Customer cause or permit any material tangible Collateral to be removed from the United States without the express prior written consent of MLBFS. (h) Insurance. Customer shall insure all of the tangible Collateral under a policy or policies of physical damage insurance providing that losses will be payable to MLBFS as its interests may appear pursuant to a Lender's Loss Payable Endorsement and containing such other provisions as may be reasonably required by MLBFS. Customer shall further provide and maintain a policy or policies of comprehensive public liability insurance naming MLBFS as an additional party insured. Customer and each Business Guarantor shall maintain such other insurance as may be required by law or is customarily maintained by companies in a similar business or otherwise reasonably required by MLBFS. All such insurance shall provide that MLBFS will receive not less than 10 days prior written notice of any cancellation, and shall otherwise be in form and amount and with an insurer or insurers reasonably acceptable to MLBFS. Customer shall furnish MLBFS with a copy or certificate of each such policy or policies and, prior to any expiration or cancellation, each renewal or replacement thereof. (i) Event of Loss. Customer shall at its expense promptly repair all repairable damage to any tangible Collateral. In the event that any tangible Collateral is damaged beyond repair, lost, totally destroyed or confiscated (an "Event of Loss") and such Collateral had a value prior to such Event of Loss of $25,000.00 or more, then, on or before the first to occur of (i) 90 days after the occurrence of such Event of Loss, or (ii) 10 Business Days after the date on which either Customer or MLBFS shall receive any proceeds of insurance on account of such Event of Loss, or any underwriter of insurance on such Collateral shall advise either Customer or MLBFS that it disclaims liability in respect of such Event of Loss, Customer shall, at Customer's option, either replace the Collateral subject to such Event of Loss with comparable Collateral free of all liens other than Permitted Liens (in which event Customer shall be entitled to utilize the proceeds of insurance on account of such Event of Loss for such purpose, and may retain any excess proceeds of such insurance), or consent to a reduction in the Maximum WCMA Line of Credit in an amount equal to the actual cash value of such Collateral as determined by either the applicable insurance company's payment (plus any applicable deductible) or, in absence of insurance company payment, as reasonably determined by MLBFS. Notwithstanding the foregoing, if at the time of occurrence of such Event of Loss or any time thereafter prior to replacement or line reduction, as aforesaid, an Event of Default shall have occurred and be continuing hereunder, then MLBFS may at its sole option, exercisable at any time while such Event of Default shall be continuing, require Customer to either replace such Collateral or, on its own volition and without the consent of Customer, reduce the Maximum WCMA Line of Credit, as aforesaid. (j) Notice of Certain Events. Customer shall give MLBFS immediate notice of any attachment, lien, judicial process, encumbrance or claim affecting or involving $25,000.00 or more of the Collateral. (k) Indemnification. Customer shall indemnify, defend and save MLBFS harmless from and against any and all claims, liabilities, losses, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) of any nature whatsoever which may be asserted against or incurred by MLBFS arising out of or in any manner occasioned by (i) the ownership, collection, possession, use or operation of any Collateral, or (ii) any failure by Customer to perform any of its obligations hereunder; excluding, however, from said indemnity any such claims, liabilities, etc. arising directly out of the willful wrongful act or active gross negligence of MLBFS. This indemnity shall survive the expiration or termination of this Loan Agreement as to all matters arising or accruing prior to such expiration or termination. 8. EVENTS OF DEFAULT The occurrence of any of the following events shall constitute an "Event of Default" under this Loan Agreement: (a) Failure to Pay. Customer shall fail to pay to MLBFS or deposit into the WCMA Account when due any amount owing or required to be paid or deposited by Customer under this Loan Agreement, or shall fail to pay when due any other Obligations, and any such failure shall continue for more than five (5) Business Days after written notice thereof shall have been given by MLBFS to Customer. (b) Failure to Perform. Customer or any Guarantor shall default in the performance or observance of any covenant or agreement on its part to be performed or observed under this Loan Agreement or any of the Additional Agreements (not constituting an Event of Default under any other clause of this Section), and such default shall continue unremedied for ten (10) Business Days after written notice thereof shall have been given by MLBFS to Customer. (c) Breach of Warranty. Any representation or warranty made by Customer or any Guarantor contained in this Loan Agreement or any of the Additional Agreements shall at any time prove to have been incorrect in any material respect when made. (d) Default Under Other Agreement. A default or Event of Default by Customer or any Guarantor shall occur under the terms of any other agreement, instrument or document with or intended for the benefit of MLBFS, MLPF&S or any of their affiliates, and any required notice shall have been given and required passage of time shall have elapsed. (e) Bankruptcy Event. Any Bankruptcy Event shall occur. (f) Material Impairment. Any event shall occur which shall reasonably cause MLBFS to in good faith believe that the prospect of full payment or performance by Customer or any Guarantor of any of their respective liabilities or obligations under this Loan Agreement or any of the Additional Agreements to which Customer or such Guarantor is a party has been materially impaired. (g) Acceleration of Debt to Other Creditors. Any event shall occur which results in the acceleration of the maturity of any indebtedness of $100,000.00 or more of Customer or any Guarantor to another creditor under any indenture, agreement, undertaking, or otherwise. (h) Seizure or Abuse of Collateral. The Collateral, or any material part thereof, shall be or become subject to any material abuse or misuse, or any levy, attachment, seizure or confiscation which is not released within ten (10) Business Days. 9. REMEDIES (a) Remedies Upon Default. Upon the occurrence and during the continuance of any Event of Default, MLBFS may at its sole option do any one or more or all of the following, at such time and in such order as MLBFS may in its sole discretion choose: (i) Termination. MLBFS may without notice terminate the WCMA Line of Credit and all obligations to provide the WCMA Line of Credit or otherwise extend any credit to or for the benefit of Customer (it being understood, however, that upon the occurrence of any Bankruptcy Event the WCMA Line of Credit and all such obligations shall automatically terminate without any action on the part of MLBFS); and upon any such termination MLBFS shall be relieved of all such obligations. (ii) Acceleration. MLBFS may declare the principal of and interest on the WCMA Loan Balance, and all other Obligations to be forthwith due and payable, whereupon all such amounts shall be immediately due and payable, without presentment, demand for payment, protest and notice of protest, notice of dishonor, notice of acceleration, notice of intent to accelerate or other notice or formality of any kind, all of which are hereby expressly waived; provided, however, that upon the occurrence of any Bankruptcy Event all such principal, interest and other Obligations shall automatically become due and payable without any action on the part of MLBFS. (iii) Exercise Rights of Secured Party. MLBFS may exercise any or all of the remedies of a secured party under applicable law, including, but not limited to, the UCC, and any or all of its other rights and remedies under this Loan Agreement and the Additional Agreements. (iv) Possession. MLBFS may require Customer to make the Collateral and the records pertaining to the Collateral available to MLBFS at a place designated by MLBFS which is reasonably convenient to Customer, or may take possession of the Collateral and the records pertaining to the Collateral without the use of any judicial process and without any prior notice to Customer. (v) Sale. MLBFS may sell any or all of the Collateral at public or private sale upon such terms and conditions as MLBFS may reasonably deem proper. MLBFS may purchase any Collateral at any such public sale. The net proceeds of any such public or private sale and all other amounts actually collected or received by MLBFS pursuant hereto, after deducting all costs and expenses incurred at any time in the collection of the Obligations and in the protection, collection and sale of the Collateral, will be applied to the payment of the Obligations, with any remaining proceeds paid to Customer or whoever else may be entitled thereto, and with Customer and each Guarantor remaining jointly and severally liable for any amount remaining unpaid after such application. (vi) Delivery of Cash, Checks, Etc. MLBFS may require Customer to forthwith upon receipt, transmit and deliver to MLBFS in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, so that such items may be collected by MLBFS) which may be received by Customer at any time in full or partial payment of any Collateral, and require that Customer not commingle any such items which may be so received by Customer with any other of its funds or property but instead hold them separate and apart and in trust for MLBFS until delivery is made to MLBFS. (vii) Notification of Account Debtors. MLBFS may notify any Account Debtor that its Account or Chattel Paper has been assigned to MLBFS and direct such Account Debtor to make payment directly to MLBFS of all amounts due or becoming due with respect to such Account or Chattel Paper; and MLBFS may enforce payment and collect, by legal proceedings or otherwise, such Account or Chattel Paper. (viii) Control of Collateral. MLBFS may otherwise take control in any lawful manner of any cash or non-cash items of payment or proceeds of Collateral and of any rejected, returned, stopped in transit or repossessed goods included in the Collateral and endorse Customer's name on any item of payment on or proceeds of the Collateral. (b) Set-Off. MLBFS shall have the further right upon the occurrence and during the continuance of an Event of Default to set-off, appropriate and apply toward payment of any of the Obligations, in such order of application as MLBFS may from time to time and at any time elect, any cash, credit, deposits, accounts, securities and any other property of Customer which is in transit to or in the possession, custody or control of MLBFS, MLPF&S or any agent, bailee, or affiliate of MLBFS or MLPF&S, including, without limitation, the WCMA Account and any Money Accounts, and all cash, securities and other financial assets therein or controlled thereby, and all proceeds thereof. Customer hereby collaterally assigns and grants to MLBFS a continuing security interest in all such property as additional Collateral. (c) Power of Attorney. Effective upon the occurrence and during the continuance of an Event of Default, Customer hereby irrevocably appoints MLBFS as its attorney-in-fact, with full power of substitution, in its place and stead and in its name or in the name of MLBFS, to from time to time in MLBFS' sole discretion take any action and to execute any instrument which MLBFS may deem necessary or advisable to accomplish the purposes of this Loan Agreement, including, but not limited to, to receive, endorse and collect all checks, drafts and other instruments for the payment of money made payable to Customer included in the Collateral. (d) Remedies are Severable and Cumulative. All rights and remedies of MLBFS herein are severable and cumulative and in addition to all other rights and remedies available in the Additional Agreements, at law or in equity, and any one or more of such rights and remedies may be exercised simultaneously or successively. (e) Notices. To the fullest extent permitted by applicable law, Customer hereby irrevocably waives and releases MLBFS of and from any and all liabilities and penalties for failure of MLBFS to comply with any statutory or other requirement imposed upon MLBFS relating to notices of sale, holding of sale or reporting of any sale, and Customer waives all rights of redemption or reinstatement from any such sale. Any notices required under applicable law shall be reasonably and properly given to Customer if given by any of the methods provided herein at least 5 Business Days prior to taking action. MLBFS shall have the right to postpone or adjourn any sale or other disposition of Collateral at any time without giving notice of any such postponed or adjourned date. In the event MLBFS seeks to take possession of any or all of the Collateral by court process, Customer further irrevocably waives to the fullest extent permitted by law any bonds and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession, and any demand for possession prior to the commencement of any suit or action. 10. MISCELLANEOUS (a) Non-Waiver. No failure or delay on the part of MLBFS in exercising any right, power or remedy pursuant to this Loan Agreement or any of the Additional Agreements shall operate as a waiver thereof, and no single or partial exercise of any such right, power or remedy shall preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Neither any waiver of any provision of this Loan Agreement or any of the Additional Agreements, nor any consent to any departure by Customer therefrom, shall be effective unless the same shall be in writing and signed by MLBFS. Any waiver of any provision of this Loan Agreement or any of the Additional Agreements and any consent to any departure by Customer from the terms of this Loan Agreement or any of the Additional Agreements shall be effective only in the specific instance and for the specific purpose for which given. Except as otherwise expressly provided herein, no notice to or demand on Customer shall in any case entitle Customer to any other or further notice or demand in similar or other circumstances. (b) Disclosure. Customer hereby irrevocably authorizes MLBFS and each of its affiliates, including without limitation MLPF&S, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Customer. In connection with said authorization, the parties recognize that in order to provide a WCMA Line of Credit certain information about Customer is required to be made available on a computer network accessible by certain affiliates of MLBFS, including MLPF&S. (c) Communications. All notices and other communications required or permitted hereunder shall be in writing, and shall be either delivered personally, mailed by postage prepaid certified mail or sent by express overnight courier or by facsimile. Such notices and communications shall be deemed to be given on the date of personal delivery, facsimile transmission or actual delivery of certified mail, or one Business Day after delivery to an express overnight courier. Unless otherwise specified in a notice sent or delivered in accordance with the terms hereof, notices and other communications in writing shall be given to the parties hereto at their respective addresses set forth at the beginning of this Loan Agreement, or, in the case of facsimile transmission, to the parties at their respective regular facsimile telephone number. (d) Costs, Expenses and Taxes. Customer shall upon demand pay or reimburse MLBFS for: (i) all Uniform Commercial Code filing and search fees and expenses incurred by MLBFS in connection with the verification, perfection or preservation of MLBFS' rights hereunder or in the Collateral or any other collateral for the Obligations; (ii) any and all stamp, transfer and other taxes and fees payable or determined to be payable in connection with the execution, delivery and/or recording of this Loan Agreement or any of the Additional Agreements; (iii) all reasonable fees and out-of-pocket expenses of outside counsel up to $5,000.00 incurred by MLBFS in connection with the preparation of this Loan Agreement and the additional agreements and (iv) all reasonable fees and out-of-pocket expenses (including, but not limited to, reasonable fees and expenses of outside counsel) incurred by MLBFS in connection with the collection of any sum payable hereunder or under any of the Additional Agreements not paid when due, the enforcement of this Loan Agreement or any of the Additional Agreements and the protection of MLBFS' rights hereunder or thereunder, excluding, however, salaries and normal overhead attributable to MLBFS' employees. The obligations of Customer under this paragraph shall survive the expiration or termination of this Loan Agreement and the discharge of the other Obligations. (e) Right to Perform Obligations. If Customer shall fail to do any act or thing which it has covenanted to do under this Loan Agreement or any representation or warranty on the part of Customer contained in this Loan Agreement shall be breached, MLBFS may, in its sole discretion, after 5 days written notice is sent to Customer (or such lesser notice, including no notice, as is reasonable under the circumstances), do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose. Any and all reasonable amounts so expended by MLBFS shall be repayable to MLBFS by Customer upon demand, with interest at the Interest Rate during the period from and including the date funds are so expended by MLBFS to the date of repayment, and all such amounts shall be additional Obligations. The payment or performance by MLBFS of any of Customer's obligations hereunder shall not relieve Customer of said obligations or of the consequences of having failed to pay or perform the same, and shall not waive or be deemed a cure of any Default. (f) Late Charge. Any payment required to be made by Customer pursuant to this Loan Agreement not paid within ten (10) days of the applicable due date shall be subject to a late charge in an amount equal to the lesser of: (i) 5% of the overdue amount, or (ii) the maximum amount permitted by applicable law. Such late charge shall be payable on demand, or, without demand, may in the sole discretion of MLBFS be paid by a WCMA Loan and added to the WCMA Loan Balance in the same manner as provided herein for accrued interest. (g) Further Assurances. Customer agrees to do such further acts and things and to execute and deliver to MLBFS such additional agreements, instruments and documents as MLBFS may reasonably require or deem advisable to effectuate the purposes of this Loan Agreement or any of the Additional Agreements, or to establish, perfect and maintain MLBFS' security interests and liens upon the Collateral, including, but not limited to: (i) executing financing statements or amendments thereto when and as reasonably requested by MLBFS; and (ii) if in the reasonable judgment of MLBFS it is required by local law, causing the owners and/or mortgagees of the real property on which any Collateral may be located to execute and deliver to MLBFS waivers or subordinations reasonably satisfactory to MLBFS with respect to any rights in such Collateral. (h) Binding Effect. This Loan Agreement and the Additional Agreements shall be binding upon, and shall inure to the benefit of MLBFS, Customer and their respective successors and assigns. Customer shall not assign any of its rights or delegate any of its obligations under this Loan Agreement or any of the Additional Agreements without the prior written consent of MLBFS. Unless otherwise expressly agreed to in a writing signed by MLBFS, no such consent shall in any event relieve Customer of any of its obligations under this Loan Agreement or the Additional Agreements. (i) Headings. Captions and section and paragraph headings in this Loan Agreement are inserted only as a matter of convenience, and shall not affect the interpretation hereof. (j) Governing Law. This Loan Agreement, and, unless otherwise expressly provided therein, each of the Additional Agreements, shall be governed in all respects by the laws of the State of Illinois. (k) Severability of Provisions. Whenever possible, each provision of this Loan Agreement and the Additional Agreements shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Loan Agreement or any of the Additional Agreements which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Loan Agreement and the Additional Agreements or affecting the validity or enforceability of such provision in any other jurisdiction. (l) Term. This Loan Agreement shall become effective on the date accepted by MLBFS at its office in Chicago, Illinois, and, subject to the terms hereof, shall continue in effect so long thereafter as the WCMA Line of Credit shall be in effect or there shall be any Obligations outstanding. (m) Counterparts. This Loan Agreement may be executed in one or more counterparts which, when taken together, constitute one and the same agreement. (n) Jurisdiction; Waiver. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION, IN ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT AND THE ADDITIONAL AGREEMENTS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. CUSTOMER CONSENTS TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE. CUSTOMER FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND CUSTOMER HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THE WCMA LINE OF CREDIT, THIS LOAN AGREEMENT, ANY ADDITIONAL AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF THIS LOAN AGREEMENT. (o) Integration. THIS LOAN AGREEMENT, TOGETHER WITH THE ADDITIONAL AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. WITHOUT LIMITING THE FOREGOING, CUSTOMER ACKNOWLEDGES THAT EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN: (I) NO PROMISE OR COMMITMENT HAS BEEN MADE TO IT BY MLBFS, MLPF&S OR ANY OF THEIR RESPECTIVE EMPLOYEES, AGENTS OR REPRESENTATIVES TO EXTEND THE AVAILABILITY OF THE WCMA LINE OF CREDIT OR THE MATURITY DATE, OR TO INCREASE THE MAXIMUM WCMA LINE OF CREDIT, OR OTHERWISE EXTEND ANY OTHER CREDIT TO CUSTOMER OR ANY OTHER PARTY; (II) NO PURPORTED EXTENSION OF THE MATURITY DATE, INCREASE IN THE MAXIMUM WCMA LINE OF CREDIT OR OTHER EXTENSION OR AGREEMENT TO EXTEND CREDIT SHALL BE VALID OR BINDING UNLESS EXPRESSLY SET FORTH IN A WRITTEN INSTRUMENT SIGNED BY MLBFS; AND (III) THIS LOAN AGREEMENT SUPERSEDES AND REPLACES ANY AND ALL PROPOSALS, LETTERS OF INTENT AND APPROVAL AND COMMITMENT LETTERS FROM MLBFS TO CUSTOMER, NONE OF WHICH SHALL BE CONSIDERED AN ADDITIONAL AGREEMENT. NO AMENDMENT OR MODIFICATION OF THIS AGREEMENT OR ANY OF THE ADDITIONAL AGREEMENTS TO WHICH CUSTOMER IS A PARTY SHALL BE EFFECTIVE UNLESS IN A WRITING SIGNED BY BOTH MLBFS AND CUSTOMER. IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and year first above written. LAKELAND INDUSTRIES, INC. By: s/s Raymond J. Smith /s/Christopher Ryan -------------------- ------------------- Signature (1) Signature (2) Raymond J. Smith Christopher Ryan Printed Name Printed Name Title: President Title: Executive V.P. & Secretary Accepted at Chicago, Illinois: MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. By: _________________________________ CERTIFICATE OF SECRETARY The undersigned hereby certifies to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. that the undersigned is the duly appointed and acting Secretary (or Assistant Secretary) of LAKELAND INDUSTRIES, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; and that the following is a true, accurate and compared transcript of resolutions duly, validly and lawfully adopted on the 10th day of December , 1997 by the Board of Directors of said Corporation acting in accordance with the laws of the state of incorporation and the charter and by-laws of said Corporation: "RESOLVED, that this Corporation is authorized and empowered, now and from time to time hereafter, to borrow and/or obtain credit from, and/or enter into other financial arrangements with, MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS"), and in connection therewith to grant to MLBFS liens and security interests on any or all property belonging to this Corporation; all such transactions to be on such terms and conditions as may be mutually agreed from time to time between this Corporation and MLBFS; and "FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary or other officer of this Corporation, or any one or more of them, be and each of them hereby is authorized and empowered to: (a) execute and deliver to MLBFS on behalf of this Corporation any and all loan agreements, promissory notes, security agreements, pledge agreements, financing statements, mortgages, deeds of trust, leases and/or all other agreements, instruments and documents required by MLBFS in connection therewith, and any present or future extensions, amendments, supplements, modifications and restatements thereof; all in such form as any such officer shall approve, as conclusively evidenced by his or her signature thereon, and (b) do and perform all such acts and things deemed by any such officer to be necessary or advisable to carry out and perform the undertakings and agreements of this Corporation in connection therewith; and any and all prior acts of each of said officers in these premises are hereby ratified and confirmed in all respects; and "FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing resolutions until it receives written notice of any change or revocation from an authorized officer of this Corporation, which change or revocation shall not in any event affect the obligations of this Corporation with respect to any transaction conditionally agreed or committed to by MLBFS or having its inception prior to the receipt of such notice by MLBFS." The undersigned further certifies that: (a) the foregoing resolutions have not been rescinded, modified or repealed in any manner, are not in conflict with any agreement of said Corporation and are in full force and effect as of the date of this Certificate, and (b) the following individuals are now the duly elected and acting officers of said Corporation and the signatures set forth below are the true signatures of said officers: President: s/s --------------------- Vice President: s/s --------------------- Treasurer: s/s --------------------- Secretary: s/s --------------------- V.P. Manufacturing: s/s Additional Title --------------------- IN WITNESS WHEREOF, the undersigned has executed this Certificate and has affixed the seal of said Corporation hereto, pursuant to due authorization, all as of this 10th day of December , 1997. (Corporate Seal) s/s Christopher Ryan ---------------- Printed Name: Christopher Ryan Secretary UNCONDITIONAL GUARANTY FOR VALUE RECEIVED, and in order to induce MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS") to advance moneys or extend or continue to extend credit or lease property to or for the benefit of, or modify its credit relationship with, or enter into any other financial accommodations with LAKELAND INDUSTRIES, INC. (with any successor-in interest, including, without limitation, any successor by merger or by operation of law, herein collectively referred to as "Customer"), under: (a) that certain WCMA NOTE, LOAN AND SECURITY AGREEMENT NO. 849-07230 between MLBFS and Customer (the "Loan Agreement"), (b) any "Additional Agreements", as that term is defined in the Loan Agreement, and (c) all present and future amendments, restatements, supplements and other evidences of any extensions, increases, renewals, modifications and other changes of or to the Loan Agreement or any Additional Agreements (collectively, the "Guaranteed Documents"), and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned, LAIDLAW ADAMS & PECK INC. F/K/A FIRELAND INDUSTRIES, INC., a corporation organized and existing under the laws of the State of Delaware ("Guarantor"), hereby unconditionally guarantees to MLBFS: (i) the prompt and full payment when due, by acceleration or otherwise, of all sums now or any time hereafter due from Customer to MLBFS under the Guaranteed Documents, (ii) the prompt, full and faithful performance and discharge by Customer of each and every other covenant and warranty of Customer set forth in the Guaranteed Documents, and (iii) the prompt and full payment and performance of all other indebtedness, liabilities and obligations of Customer to MLBFS, howsoever created or evidenced, and whether now existing or hereafter arising (collectively, the "Obligations"). Guarantor further agrees to pay all reasonable costs and expenses (including, but not limited to, court costs and reasonable attorneys' fees) paid or incurred by MLBFS in endeavoring to collect or enforce performance of any of the Obligations, or in enforcing this Guaranty. Guarantor acknowledges that MLBFS is relying on the execution and delivery of this Guaranty in advancing moneys to or extending or continuing to extend credit to or for the benefit of Customer. This Guaranty is absolute, unconditional and continuing and shall remain in effect until all of the Obligations shall have been fully and indefeasibly paid, performed and discharged. Upon the occurrence and during the continuance of any default or Event of Default under the Guaranteed Documents, any or all of the indebtedness hereby guaranteed then existing shall, at the option of MLBFS, become immediately due and payable from Guarantor (it being understood, however, that upon the occurrence of any "Bankruptcy Event", as defined in the Guaranteed Documents, all such indebtedness shall automatically become due and payable without action on the part of MLBFS). Notwithstanding the occurrence of any such event, this Guaranty shall continue and remain in full force and effect. To the extent MLBFS receives payment with respect to the Obligations, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside, required to be repaid by MLBFS or is repaid by MLBFS pursuant to a settlement agreement, to a trustee, receiver or any other person or entity, whether under any Bankruptcy law or otherwise (a "Returned Payment"), this Guaranty shall continue to be effective or shall be reinstated, as the case may be, to the extent of such payment or repayment by MLBFS, and the indebtedness or part thereof intended to be satisfied by such Returned Payment shall be revived and continued in full force and effect as if said Returned Payment had not been made. The liability of Guarantor hereunder shall in no event be affected or impaired by any of the following, any of which may be done or omitted by MLBFS from time to time, without notice to or the consent of Guarantor: (a) any renewals, amendments, restatements, modifications or supplements of or to any of the Guaranteed Documents, or any extensions, forbearances, compromises or releases of any of the Obligations or any of MLBFS' rights under any of the Guaranteed Documents; (b) any acceptance by MLBFS of any collateral or security for, or other guarantees of, any of the Obligations; (c) any failure, neglect or omission on the part of MLBFS to realize upon or protect any of the Obligations, or any collateral or security therefor, or to exercise any lien upon or right of appropriation of any moneys, credits or property of Customer or any other guarantor, possessed by or under the control of MLBFS or any of its affiliates, toward the liquidation or reduction of the Obligations; (d) any invalidity, irregularity or unenforceability of all or any part of the Obligations, of any collateral security for the Obligations, or the Guaranteed Documents; (e) any application of payments or credits by MLBFS; (f) the granting of credit from time to time by MLBFS to Customer in excess of the amount set forth in the Guaranteed Documents; or (g) any other act of commission or omission of any kind or at any time upon the part of MLBFS or any of its affiliates or any of their respective employees or agents with respect to any matter whatsoever. MLBFS shall not be required at any time, as a condition of Guarantor's obligations hereunder, to resort to payment from Customer or other persons or entities whatsoever, or any of their properties or estates, or resort to any collateral or pursue or exhaust any other rights or remedies whatsoever. No release or discharge in whole or in part of any other guarantor of the Obligations shall release or discharge Guarantor unless and until all of the Obligations shall have been indefeasibly fully paid and discharged. Guarantor expressly waives presentment, protest, demand, notice of dishonor or default, notice of acceptance of this Guaranty, notice of advancement of funds under the Guaranteed Documents and all other notices and formalities to which Customer or Guarantor might be entitled, by statute or otherwise, and, so long as there are any Obligations or MLBFS is committed to extend credit to Customer, waives any right to revoke or terminate this Guaranty without the express written consent of MLBFS. So long as there are any Obligations, Guarantor shall not have any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim, right, or remedy of MLBFS against Customer or any security which MLBFS now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law, or otherwise. MLBFS is hereby irrevocably authorized by Guarantor at any time during the continuance of an Event of Default under the Loan Agreement or any other of the Guaranteed Documents or in respect of any of the Obligations, in its sole discretion and without demand or notice of any kind, to appropriate, hold, set off and apply toward the payment of any amount due hereunder, in such order of application as MLBFS may elect, all cash, credits, deposits, accounts, securities and any other property of Guarantor which is in transit to or in the possession, custody or control of MLBFS or Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), or any of their respective agents, bailees or affiliates, including, without limitation, all securities accounts with MLPF&S and all cash, securities and other financial assets therein or controlled thereby, and all proceeds thereof. Guarantor hereby collaterally assigns and grants to MLBFS a continuing security interest in all such property as additional security for the Obligations. Upon the occurrence and during the continuance of an Event of Default, MLBFS shall have all rights in such property available to collateral assignees and secured parties under all applicable laws, including, without limitation, the UCC. Guarantor agrees to furnish to MLBFS such financial information concerning Guarantor as may be required by any of the Guaranteed Documents or as MLBFS may otherwise from time to time reasonably request. Guarantor further hereby irrevocably authorizes MLBFS and each of its affiliates, including without limitation MLPF&S, to at any time (whether or not an Event of Default shall have occurred) obtain from and disclose to each other any and all financial and other information about Guarantor. No delay on the part of MLBFS in the exercise of any right or remedy under the Guaranteed Documents, this Guaranty or any other agreement shall operate as a waiver thereof, and, without limiting the foregoing, no delay in the enforcement of any security interest, and no single or partial exercise by MLBFS of any right or remedy shall preclude any other or further exercise thereof or the exercise of any other right or remedy. This Guaranty may be executed in any number of counterparts, each of which counterparts, once they are executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Guaranty. This Guaranty shall be binding upon Guarantor and its successors and assigns, and shall inure to the benefit of MLBFS and its successors and assigns. If there are more than one guarantor of the Obligations, all of the obligations and agreements of Guarantor are joint and several with such other guarantors. This Guaranty shall be governed by the laws of the State of Illinois. WITHOUT LIMITING THE RIGHT OF MLBFS TO ENFORCE THIS GUARANTY IN ANY JURISDICTION AND VENUE PERMITTED BY APPLICABLE LAW, GUARANTOR AGREES THAT THIS GUARANTY MAY AT THE OPTION OF MLBFS BE ENFORCED BY MLBFS IN ANY JURISDICTION AND VENUE IN WHICH ANY OF THE GUARANTEED DOCUMENTS MAY BE ENFORCED. GUARANTOR AND MLBFS HEREBY EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER PARTY IN ANY WAY RELATED TO OR ARISING OUT OF THIS GUARANTY OR THE OBLIGATIONS. Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. No modification or waiver of any of the provisions of this Guaranty shall be effective unless in writing and signed by both Guarantor and an officer of MLBFS. Each signatory on behalf of Guarantor warrants that he or she has authority to sign on behalf of Guarantor, and by so signing, to bind Guarantor hereunder. Dated as of December 2, 1997. LAIDLAW ADAMS & PECK INC. F/K/A FIRELAND INDUSTRIES, INC. By: s/s Raymond J. Smith s/s Christopher Ryan -------------------- -------------------- Signature (2) Signature (2) Raymond J. Smith Christopher Ryan Printed Name Printed Name Title: President Title: Executive V.P. Secretary Address of Guarantor: 815 SUPERIOR AVENUE CLEVELAND, OH 44114 CERTIFICATE OF SECRETARY (Guaranty) The undersigned hereby certifies to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. that the undersigned is the duly appointed and acting Secretary (or Assistant Secretary) of LAIDLAW ADAMS & PECK INC. F/K/A FIRELAND INDUSTRIES, INC., a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; and that the following is a true, accurate and compared transcript of resolutions duly, validly and lawfully adopted on the 10th day of December , 1997 by the Board of Directors of said Corporation acting in accordance with the laws of the state of incorporation and the charter and by-laws of said Corporation: "RESOLVED, that it is advisable and in the best interests and to the benefit of this Corporation to guaranty the obligations of LAKELAND INDUSTRIES, INC. ("Customer") to MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS"); and "FURTHER RESOLVED, that the President, any Vice President, Treasurer, Secretary or other officer of this Corporation, or any one or more of them, be and each of them hereby is authorized and empowered for and on behalf of this Corporation to: (a) execute and deliver to MLBFS: (i) an Unconditional Guaranty of the obligations of Customer, (ii) any other agreements, instruments and documents required by MLBFS in connection therewith, including, without limitation, any agreements, instruments and documents evidencing liens or security interests on any of the property of this Corporation as collateral for said Unconditional Guaranty and/or the obligations of Customer to MLBFS, and (iii) any present or future amendments to any of the foregoing; all in such form as such officer shall approve, as evidenced by his signature thereon; and (b) to do and perform all such acts and things deemed by any such officer to be necessary or advisable to carry out and perform the undertakings and agreements of this Corporation set forth therein; and all prior acts of each of said officers in these premises are hereby ratified and confirmed; and "FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing resolutions until it receives written notice of any change or revocation from an authorized officer of this Corporation, which change or revocation shall not in any event affect the obligations of this Corporation with respect to any transaction conditionally agreed or committed to by MLBFS or having its inception prior to the receipt of such notice by MLBFS." The undersigned further certifies that: (a) the foregoing resolutions have not been rescinded, modified or repealed in any manner, are not in conflict with any agreement of said Corporation and are in full force and effect as of the date of this Certificate, and (b) the following individuals are now the duly elected and acting officers of said Corporation and the signatures set forth below are the true signatures of said officers: President: s/s ------------------- Vice President: s/s ------------------- Treasurer: s/s ------------------- Secretary: s/s ------------------- Additional Title IN WITNESS WHEREOF, the undersigned has executed this Certificate and has affixed the seal of said corporation hereto, pursuant to due authorization, all as of this 10th day of December, 1997. (Corporate Seal) s/s Christopher Ryan ---------------------- Printed Name: Christoper Ryan Secretary EX-11 3 EXHIBIT 11 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated April 15, 1998, accompanying the consolidated financial statements and schedule included in the Annual Report of Lakeland Industries, Inc. and Subsidiaries on Form 10-K for the fiscal year ended January 31, 1998. We hereby consent to the incorporation by reference of said report in the Registration Statement of Lakeland Industries, Inc. and Subsidiaries on Form S-8 (File No. 33-92564, effective May 15, 1995). /s/GRANT THORNTON LLP - --------------------- GRANT THORNTON LLP Melville, New York April 29, 1998 EX-13 4 Dear Fellow Shareholders: It is my pleasure to tell you that the fiscal year ended January 31, 1998, set new records for your company. Sales climbed to an all-time high of $47.3 million compared with $41.8 million in fiscal 1997. Net income increased to a record $1,600,000 from the prior year's net profit of $1,063,000. Stated on a diluted per share basis, earnings reached $0.61, which represented a gain of 49% over the $0.41 per share profit in fiscal 1997. Fiscal 1998 saw major progress regarding our ongoing plans to reduce production costs while simultaneously improving the quality of our products. Our new factory in Mexico, mentioned in last year's letter, is running at peak efficiency. Augmenting the Mexican production is a new manufacturing facility in China. The establishment of this factory further reduces the costs of several of our major sales items. Also, it enables us to compete more efficiently with foreign manufacturers both in the United States and Pacific Rim markets. "Very proud" would be the phrase of choice to best describe my feelings regarding the ISO 9002 certification of our Decatur, Alabama facility during fiscal 1998. The entire staff worked diligently as a team, and because of their cooperation and resolve, came through the exacting international certification process with flying colors. Another of this past year's significant accomplishments was the installation and implementation of a new computer software package to serve the entire corporation. It enables the company to maintain even better control over its financial and inventory areas, and has already confronted and complied with - -- two years ahead of time -- those potential computer problems generally associated with the arrival of the year 2000. Lakeland's relationships with its prime vendors continue to be firm and cordial. The licensing program with DuPont involving our most popular products, Tyvek(R) and Tychem(R), has proven to be very successful. We have been advised by DuPont and other vendors that their preparation for the year 2000 is going well. They do not expect major changes. On the financial side, we concluded an agreement with a major financial institution allowing us to fund safely the growth we have enjoyed during fiscal 1998 and that which lies in your company's promising future. Importantly, we have enlarged our Internet web site to provide both potential customers and shareholders the ability to see what Lakeland has to offer by way of a full product line. The markets we are selling to currently are expanding as more manufacturers become aware of the savings they can realize by providing employees with appropriate safety clothing. Additionally, we are seeing a much larger interest in chemical- and biological-resistant clothing. This is due to the unfortunate threat of increased terrorist activities using chemical and biological agents throughout the world. I would like to extend my personal thanks to the Board of Directors for their valued advice and support of our efforts to steer Lakeland on a successful course. I would like to thank as well the members of our management staff, all of our employees worldwide, our vendors and our shareholders for their unflagging support. We expect next year to be another record breaker for your company. Respectfully submitted, /s/Raymond J. Smith - ------------------- Raymond J. Smith President and Chief Executive Officer -1-
SELECTED FINANCIAL DATA (In thousands, except per share amounts) For the Years Ended January 31, 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA: Net sales ............................. $ 47,263 $ 41,792 $ 40,189 $ 35,185 $ 30,143 Gross profit .......................... 9,195 7,237 6,288 6,346 4,763 Operating expenses (1) ................ 6,157 5,212 4,882 4,704 4,739 Operating profit ...................... 3,038 2,024 1,406 1,642 24 Income (loss) before income taxes and cumulative effect of change in accounting principle (2) .......... 2,590 1,576 956 2,000 (137) Income (loss) before cumulative effect of change in accounting principle .............. 1,600 1,063 587 1,421 (278) Cumulative effect of change in accounting principle (3) ............. 241 Net income (loss) ..................... 1,600 1,063 587 1,421 (37) Earnings (loss) per share - Basic (4) Income (loss) before cumulative effect of change in accounting ....... $ .63 $ .42 $ .23 $ .56 $ (.11) Cumulative effect of change in accounting principle ................. -- -- -- -- .10 ----------- ----------- ----------- ----------- ----------- Net income (loss) ..................... $ .63 $ .42 $ .23 $ .56 ($ .01) Earnings (loss) per share - Diluted (4) Income (loss) before cumulative effect of change in accounting ....... .61 .41 .22 .54 (0.11) Cumulative effect of change in accounting principle ................. -- -- -- -- 0.10 ----------- ----------- ----------- ----------- ----------- Net Income (loss) ..................... $ .61 $ .41 $ .22 $ .54 ($ .01) =========== =========== =========== =========== =========== Weighted average common shares outstanding: Basic ......................... 2,558,541 2,550,000 2,550,000 2,550,000 2,550,000 Diluted ....................... 2,627,425 2,609,700 2,635,506 2,641,000 2,550,000 BALANCE SHEET DATA (at end of year): Working capital ....................... $ 18,903 $ 14,018 $ 13,618 $ 7,190 $ 8,871 Total assets .......................... 25,812 18,573 19,263 15,562 13,103 Current liabilities ................... 5,007 2,920 3,894 6,813 2,464 L/T liabilities ....................... 9,217 5,746 6,492 441 3,680 Stockholders' equity .................. $ 11,518 $ 9,825 $ 8,762 $ 8,175 $ 6,754
(1) Includes a write-off of $583,669 in Notes receivable due from one customer in 1994. (2) Includes $625,000 gain recorded in 1995 relating to the favorable settlement of an outstanding litigation. (3) Effective February 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), which requires an asset and liability approach to accounting for income taxes. The cumulative effect as of February 1, 1993, of the adoption of SFAS No. 109, resulted in a fiscal 1994 benefit of $241,000. (4) Earnings per share has been restated in accordance with SFAS No. 128, "Earnings Per Share". -2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fiscal Year Ended January 31, 1998 Compared to Fiscal Year Ended January 31, 1997 Net sales for the year ended January 31, 1998 increased $5,471,000 or 13.1% to $47,263,000 from $41,792,000 reported for the year ended January 31, 1997. Increased prices and unit shipments of various protective garment products are the principal reason for this upward movement in sales. This industry, however, continues to be highly competitive. Net sales increased 10.2% during the quarter ended January 31, 1998 as compared to the immediate preceding quarter, principally as the result of the Company's ability to maintain inventory levels to meet sales demand. Gross profit as a percentage of net sales increased to 19.5% for the year ended January 31, 1998 from 17.3% reported for the prior year, principally due to price increases instituted at the beginning of the fiscal year and market price stabilization during the course of the year. The prior year was negatively affected as a result of the competitive and economic climate of the protective clothing industry. Margins decreased to 16.5% during the quarter ended January 31, 1998 as compared to the immediate preceding quarter due to meeting competitive pricing situations and additionally some products imported for sale during the fourth quarter were sold at lower margins. Operating expenses as a percentage of net sales increased to 13% for year ended January 31, 1998 from 12.5% for the prior year, as sales continued to increase at a rate of 13% without a corresponding increase in selling and general and administrative expenses. Interest expense decreased slightly consistent with outstanding borrowings. As a result of the foregoing, operating results increased to net income of $1,600,000 (up 50.5%) for the year ended January 31, 1998 from net income of $1,063,000 for the year ended January 31, 1997. Fiscal Year Ended January 31, 1997 Compared to Fiscal Year Ended January 31, 1996 Net sales for the year ended January 31, 1997 increased $1,603,000 or 3.99% to $41,792,000 from $40,189,000 reported for the year ended January 31, 1996. Increased prices and unit shipments of various protective garment products are the principal reason for this upward movement in sales. This industry, however, continues to be highly competitive. Net sales increased 13.7% during the quarter ended January 31, 1997 as compared to the immediate preceding quarter, principally as the result of the Company's ability to maintain inventory levels to meet sales demand. Gross profit as a percentage of net sales increased to 17.3% for the year ended January 31, 1997 from 15.6% reported for the prior year, principally due to the price increase instituted at the beginning of the fiscal year and price stabilization. The prior year was negatively affected as a result of the competitive and economic climate of the protective clothing industry. Margins decreased to 14.8% during the quarter ended January 31, 1997 as compared to the immediate preceding quarter as some products imported for sale during the fourth quarter were sold at lower margins. Operating expenses as a percentage of net sales increased to 12.5% for year ended January 31, 1997 from 12.1% for the prior year, as sales continue to increase without a corresponding increase in selling and general and administrative expenses as well as the prior year having benefited from a reduction in pension expense. Interest expense remained the same consistent with outstanding borrowings. As a result of the foregoing, operating results increased to net income of $1,063,000 for the year ended January 31, 1997 from net income of $587,000 for the year ended January 31, 1996. -3- LIQUIDITY AND CAPITAL RESOURCES Lakeland has historically met its cash requirements through funds generated from operations and borrowings under a revolving credit facility. On December 12, 1997, the Company entered into a new $10 million facility with a financial institution. This facility matures on November 30, 1999. Interest charges under this credit facility are calculated on various optional formulas using LIBOR or the 30 day commercial paper rates, as defined. The Company's January 31, 1998 balance sheet shows a strong current ratio and working capital position and management believes that its positive financial position, together with its new 2 year credit facility and proposed amendment to increase the facility by $3 million, will provide sufficient funds for operating purposes for the next twelve months. The Company has substantially completed its program to prepare computer systems and applications for the Year 2000. The Company expects to incur additional internal staff costs as well as consulting and other expenses related to enhancements necessary to complete the systems for the Year 2000. The Company is also communicating with customers and suppliers with whom it conducts business to help identify and resolve any potential Year 2000 issues. Management has not quantified the remaining Year 2000 compliance and related expenses to be incurred, however, management believes the remaining costs will not have a material affect on its financial position. IMPACT OF INFLATION Management believes inflation has not had a material effect on the Company's operations or its financial condition. There can be no assurance, however, that the Company's business will not be affected by inflation in the future. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Prior to September 9, 1986, there was no public market for the Company's Common Stock. On September 9, 1986, the effective date of the Company's initial public offering, the Company's Common Stock began trading in the over-the-counter market. On June 2, 1987, the Company's Common Stock began trading in the over-the-counter market as a National Market Issue. The Company's Common Stock trades on The Nasdaq Stock Market under the symbol "LAKE". It is listed in major publications under "Lakeland". The following table sets forth the high and low trade prices, as reported by NASDAQ for the last two fiscal years:
Fiscal 1998 Fiscal 1997 -------------------------- ------------------------- High Low High Low ---- --- ---- --- First Quarter 3 7/8 2 13/16 4 1/4 3 1/8 Second Quarter 5 9/16 3 15/32 4 5/8 2 3/4 Third Quarter 9 4 3/4 4 1/16 3 Fourth Quarter 10 6 3/4 3 1/2 2 3/4 First Quarter fiscal 1998 10 1/2 7 3/4 3 3/4 2 13/16 (through April 17, 1998)
The Company has never declared or paid a cash dividend on its Common Stock, and the Company has no present intention of declaring or paying any cash dividends on its Common Stock in the foreseeable future. As of April 10, 1998, there were 135 holders of record of the Common Stock of the Company. There are believed to be in excess of 500 beneficial shareholders in addition to those of record, since over 1 million shares are held in street name by Cede & Co. a large financial clearing house. -4- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Lakeland Industries, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Lakeland Industries, Inc. and Subsidiaries (the "Company") as of January 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of January 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. We have also audited Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended January 31, 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/GRANT THORNTON LLP - --------------------- GRANT THORNTON LLP Melville, New York April 15, 1998 -5-
Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS January 31, ASSETS 1998 1997 ----------- ----------- CURRENT ASSETS Cash and cash equivalents ............................. $ 222,700 $ 504,940 Accounts receivable, net of allowance for doubtful accounts of $203,000 and $150,000 at January 31, 1998 and 1997, respectively ....................... 6,953,538 5,893,594 Inventories ........................................... 15,858,052 9,894,156 Deferred income taxes ................................. 511,000 469,000 Other current assets .................................. 364,697 176,901 ----------- ----------- Total current assets .............................. 23,909,987 16,938,591 PROPERTY AND EQUIPMENT, net ............................... 1,392,346 989,667 EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net of accumulated amortization of $218,000 and $198,000 at January 31, 1998 and 1997, respectively 327,120 347,116 OTHER ASSETS .............................................. 182,412 297,742 ----------- ----------- $25,811,865 $18,573,116 =========== ===========
The accompanying notes are an integral part of these statements. -6-
Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (continued) January 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ----------- ----------- CURRENT LIABILITIES Accounts payable ................................ $ 4,294,241 $ 2,534,999 Accrued compensation and benefits ............... 283,187 223,090 Other accrued expenses .......................... 379,143 112,224 Current portion of long-term liabilities ........ 50,000 50,000 ----------- ----------- Total current liabilities ................. 5,006,571 2,920,313 LONG-TERM LIABILITIES ............................... 9,216,669 5,745,789 DEFERRED INCOME TAXES ............................... 71,000 82,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par; 1,500,000 shares authorized; none issued Common stock, $.01 par; 10,000,000 shares authorized; 2,610,472 and 2,550,000 shares issued and outstanding at January 31, 1998 and 1997, respectively ................................ 26,105 25,500 Additional paid-in capital ...................... 6,073,358 5,981,226 Retained earnings ............................... 5,418,162 3,818,288 ----------- ----------- 11,517,625 9,825,014 ----------- ----------- $25,811,865 $18,573,116 =========== ===========
The accompanying notes are an integral part of these statements. -7-
Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Fiscal year ended January 31, 1998 1997 1996 ------------ ------------ ------------ Net sales ................................ $ 47,262,519 $ 41,792,469 $ 40,188,916 Cost of goods sold ....................... 38,067,351 34,555,786 33,901,232 ------------ ------------ ------------ Gross profit ................... 9,195,168 7,236,683 6,287,684 ------------ ------------ ------------ Operating expenses Selling and shipping ................. 3,001,500 2,569,702 2,691,193 General and administrative ........... 3,155,605 2,625,866 2,163,621 Research and development ............. -- 16,718 27,298 ------------ ------------ ------------ Total operating expenses ....... 6,157,105 5,212,286 4,882,112 ------------ ------------ ------------ Operating profit ............... 3,038,063 2,024,397 1,405,572 ------------ ------------ ------------ Other (expense) income Interest expense ..................... (497,739) (510,757) (511,180) Interest income ...................... 35,371 27,293 19,938 Other income ......................... 14,179 35,363 41,292 ------------ ------------ ------------ (448,189) (448,101) (449,950) ------------ ------------ ------------ Income before income taxes ..... 2,589,874 1,576,296 955,622 Income tax expense ....................... (990,000) (513,000) (369,000) ------------ ------------ ------------ NET INCOME ..................... 1,599,874 1,063,296 586,622 Net income per common share Basic ................................ $ .63 $ .42 $ .23 ============ ============ ============ Diluted .............................. $ .61 $ .41 $ .22 ============ ============ ============ Weighted average common shares outstanding Basic ................................ 2,558,541 2,550,000 2,550,000 ============ ============ ============ Diluted .............................. 2,627,425 2,609,700 2,635,506 ============ ============ ============
The accompanying notes are an integral part of these statements. -8-
Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Fiscal years ended January 31, 1998, 1997 and 1996 Additional Common stock paid-in Retained Shares Amount capital earnings Total --------- ----------- ----------- ----------- ----------- Balance, January 31, 1995 2,550,000 $ 25,500 $ 5,981,226 $ 2,168,370 $ 8,175,096 Net income .............. 586,622 586,622 --------- ----------- ----------- ----------- ----------- Balance, January 31, 1996 2,550,000 25,500 5,981,226 2,754,992 8,761,718 Net income .............. 1,063,296 1,063,296 --------- ----------- ----------- ----------- ----------- Balance, January 31, 1997 2,550,000 25,500 5,981,226 3,818,288 9,825,014 Net income .............. 1,599,874 1,599,874 Exercise of stock options 60,472 605 92,132 92,737 --------- ----------- ----------- ----------- ----------- Balance, January 31, 1998 2,610,472 $ 26,105 $ 6,073,358 $ 5,418,162 $11,517,625 ========= =========== =========== =========== ===========
The accompanying notes are an integral part of this statement. -9-
Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal year ended January 31, 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities Net income ................................................ $ 1,599,874 $ 1,063,296 $ 586,622 Adjustments to reconcile net income to net cash (used in) provided by operating activities Deferred income taxes ..................................... (53,000) (70,000) 5,000 Depreciation and amortization ............................. 435,849 342,963 272,135 Gain on sale of property .................................. -- (4,530) -- (Increase) decrease in operating assets Accounts receivable ....................................... (1,059,944) (913,620) (571,104) Inventories ............................................... (5,963,896) 1,350,085 (2,385,943) Other current assets ...................................... (54,602) 314,415 Other assets .............................................. 23,688 (46,653) 130,550 Increase (decrease) in operating liabilities Accounts payable .......................................... 1,759,242 (930,553) 641,004 Accrued expenses and other liabilities .................... 355,463 759 6,108 ----------- ----------- ----------- Net cash (used in) provided by operating activities ....... (2,957,326) 1,106,162 (1,645,353) ----------- ----------- ----------- Cash flows from investing activities Purchases of property and equipment - net ................. (803,487) (283,358) (577,756) Principal payments on note receivable ..................... 7,104 7,082 6,015 Proceeds from sale of property ............................ -- 10,414 -- ----------- ----------- ----------- Net cash used in investing activities ..................... (796,383) (265,862) (571,741) ----------- ----------- ----------- Cash flows from financing activities Net borrowings (reductions) under line of credit agreements 3,416,232 (700,000) 2,485,150 Proceeds from exercise of stock options ................... 92,737 -- -- Deferred financing costs .................................. (37,500) -- (23,335) ----------- ----------- ----------- Net cash provided by (used in) financing activities ....... 3,471,469 (700,000) 2,461,815 ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .......................................... (282,240) 140,300 244,721 Cash and cash equivalents at beginning of year ............ 504,940 364,640 119,919 ----------- ----------- ----------- Cash and cash equivalents at end of year .................. $ 222,700 $ 504,940 $ 364,640 =========== =========== ===========
The accompanying notes are an integral part of these statements. -10- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 1998, 1997 and 1996 NOTE A - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES 1. Business Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware corporation, organized in April 1982, is engaged primarily in the manufacture of disposable and reusable protective work clothing. The principal market for the Company's products is in the United States. No customer accounted for more than 10% of net sales during the fiscal years ended January 31, 1998, 1997 and 1996. 2. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Laidlaw, Adams & Peck, Inc., (formerly Fireland Industries, Inc.), Lakeland Protective Wear, Inc. (a Canadian corporation) and Lakeland de Mexico S.A. de C.V. (a Mexican corporation). All significant intercompany accounts and transactions have been eliminated. 3. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. 4. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, on a straight-line basis. Leasehold improvements and leasehold costs are amortized over the term of the lease or service lives of the improvements, whichever is shorter. The costs of additions and improvements which substantially extend the useful life of a particular asset are capitalized. Repair and maintenance costs are charged to expense. 5. Excess of Cost Over the Fair Value of Net Assets Acquired The excess of cost over the fair value of net assets acquired (goodwill) is amortized on a straight-line basis over a 30-year period. On an ongoing basis, management reviews the valuation and amortization of goodwill to determine possible impairment by considering current operating results and comparing the carrying value to the anticipated undiscounted future cash flows of the related assets. 6. Income Taxes Deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities and loss carryforwards and tax credit carryforwards for which income tax benefits are expected to be realized in future years. A valuation allowance would be established to reduce deferred tax assets if it is more likely than not that all, or some portion of, such deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. -11- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE A (continued) 7. Earnings Per Share In fiscal 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which requires public companies to present basic earnings per share and, if applicable, diluted earnings per share. In accordance with SFAS No. 128, all comparative periods have been restated as of January 31, 1998. Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of potential common stock. Diluted earnings per share are based on the weighted average number of common and potential common shares outstanding. The calculation takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be repurchased with the funds received from the exercise, based on the average price during the fiscal year. 8. Statement of Cash Flows The Company considers highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of money market funds. The market value of the cash equivalents approximates cost. Supplemental cash flow information for the fiscal years ended January 31 is as follows: 1998 1997 1996 ---- ---- ---- Interest paid $446,550 $494,102 $431,555 Income taxes paid 825,648 325,242 618,853 9. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of trade receivables. Concentration of credit risk with respect to these receivables is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across geographic areas within the United States. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. 10. Foreign Operations and Foreign Currency Translation The Company maintains manufacturing operations and uses independent contractors in Mexico and the People's Republic of China. It also maintains a sales and distribution entity located in Canada. The Company is vulnerable to currency risks in these countries. The monetary assets and liabilities of the Company's foreign operations are translated into U.S. dollars at current exchange rates, while nonmonetary items are translated at historical rates. Revenues and expenses are generally translated at average exchange rates for the year. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. -12- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE A (continued) 11. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates include the allowance for doubtful accounts and inventory reserves. It is reasonably possible that events could occur during the upcoming year that could change such estimates. 12. New Pronouncement Not Yet Adopted In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which is effective for the Company's fiscal year ending January 31, 1999. This statement standardizes the disclosure requirements for pensions and other postretirement benefits, requires additional information on changes in the benefit obligation and fair values of plan assets and eliminates certain disclosures that are no longer useful. Adoption of SFAS No. 132 is not expected to have a material effect on the Company's financial statements. NOTE B - NOTE RECEIVABLE In October 1994, the Company sold its Ohio facility to an unrelated third party for $187,500 ($25,000 cash and a $162,500 mortgage note). The selling price of the property approximated the net book value at the time of sale. The mortgage note is payable in 47 consecutive monthly payments of $1,523, including principal and interest at an annual rate of 8%, until October 1998 when the entire unpaid balance of the indebtedness shall be due and payable. This note is secured by a mortgage on real estate located in the City of Newark, Licking County, Ohio. The unpaid balance was $140,251 and $147,355 at January 31, 1998 and 1997, respectively. NOTE C - INVENTORIES Inventories consist of the following at January 31: 1998 1997 ------------ ---------- Raw materials $ 2,672,719 $2,669,254 Work-in-process 4,168,376 3,124,141 Finished goods 9,016,957 4,100,761 ------------ ---------- $ 15,858,052 $9,894,156 ============ ========== -13- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE D - PROPERTY AND EQUIPMENT Property and equipment consist of the following at January 31:
Useful life in years 1998 1997 ----------- ---------- ---------- Machinery and equipment 3 - 10 $3,076,002 $2,409,648 ---------- ---------- Furniture and fixtures 3 - 10 223,190 157,722 Leasehold improvements Lease term 257,252 185,587 ---------- ---------- 3,556,444 2,752,957 Less accumulated depreciation and amortization 2,164,098 1,763,290 ---------- ---------- $1,392,346 $ 989,667 ========== ==========
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's principal financial instrument consists of its outstanding revolving credit facility. The Company believes that the carrying amount of such debt approximates the fair value as the variable interest rate approximates the current prevailing interest rate. NOTE F - LONG-TERM LIABILITIES Long-term liabilities consist of the following at January 31:
1998 1997 ---------- ---------- Revolving credit facility $8,816,232 $5,400,000 Pension liability (Note K) 450,437 395,789 ---------- ---------- 9,266,669 5,795,789 Less current portion of pension liability 50,000 50,000 ---------- ---------- Long-term liabilities $9,216,669 $5,745,789 ========== ==========
During December 1997, the Company entered into a new $10,000,000 secured revolving credit facility (the "facility") with a financial institution with an initial expiration date of November 30, 1999. Borrowings under the facility bear interest at a rate per annum equal to the one-month LIBOR or the 30-day commercial paper rate, as defined, plus 1.75%, with interest payable monthly. At January 31, 1998, interest on outstanding borrowings was based on the commercial paper rate option (7.2%). The facility is collateralized by substantially all the assets of the Company and guaranteed by certain of the Company's subsidiaries. The facility requires the Company to maintain a minimum tangible net worth, at all times. -14- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE F (continued) During August 1995, the Company entered into an $8,000,000, three-year secured revolving credit facility with a bank. Under this secured revolving credit facility, which was replaced with the new facility in December 1997, the Company's maximum available borrowings were based upon eligible accounts receivable and inventories, as defined. Borrowings under the revolving credit facility incurred interest at a rate per annum equal to the prime commercial lending rate or LIBOR plus 200 points. A fee of 1/2% per annum was charged to the Company on the unused portion of such facility. The loan was collateralized by substantially all the assets of the Company. The maximum amounts borrowed under the revolving lines of credit during the fiscal years ended January 31, 1998 and 1997 were $10,000,000 and $7,000,000, respectively, and the average interest rate during each period was 7.5%. NOTE G - COMMITMENTS AND CONTINGENCIES 1. Employment Contracts The Company has employment contracts with three principal officers expiring through January 2001. Such contracts are automatically renewable for one- or two-year terms, unless 30 to 120 days' notice is given by either party. Pursuant to such contracts, the Company is committed to aggregate base remuneration of $572,500, $572,500 and $397,500 for the fiscal years ended January 31, 1999, 2000 and 2001, respectively. 2. Leases The Company leases the majority of its premises under various operating leases expiring through fiscal 2003. The lease for the manufacturing facility (located in Decatur, Alabama) is with a partnership whose partners are principal officers and stockholders of the Company. This lease expires on August 31, 1999 and requires annual payments of approximately $365,000 plus certain operating expenses. The Company also leases two manufacturing facilities pursuant to month-to-month leases from an officer of the Company. Monthly payments are $3,100. In addition, the Company has several operating leases for machinery and equipment. In January 1998, the Company entered into a month-to-month lease for a manufacturing facility in the People's Republic of China. The lessor is a partnership of which the Company's directors, one officer and four employees hold partnership interests. This leasing arrangement requires monthly payments of $3,024. Total rental expense under all operating leases is summarized as follows:
Total Rentals Gross sublease paid to rental rental related expense income parties ------- ------ ------- Year ended January 31, 1998 $621,162 $ 9,704 $405,120 1997 581,161 3,024 392,160 1996 483,690 20,011 369,150
-15- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE G (continued) Minimum annual rental commitments for the remaining term of the Company's noncancellable operating leases relating to manufacturing facilities, office space and equipment rentals at January 31, 1998 are summarized as follows: Year ending January 31, 1999 $ 626,695 2000 411,815 2001 108,652 2002 35,902 2003 23,200 ---------- $1,206,264 ========== Certain leases require additional payments based upon increases in property taxes and other expenses. 3. Services Agreement Pursuant to the terms of a services agreement with an affiliated entity, principally owned by a principal officer and stockholder of the Company, the affiliate provides professional and/or skilled labor to a division of the Company, as needed, at contractual rates of compensation. Such agreement is cancelable by either the Company or the affiliate upon thirty days' written notice. Costs incurred by the Company in connection with such agreement aggregated $552,000, $426,000 and $520,000 for the fiscal years ended January 31, 1998, 1997 and 1996, respectively. 4. Litigation The Company is involved in various litigation arising during the normal course of business which, in the opinion of the management of the Company, will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 5. Self-insurance The Company maintains a self-insurance program for that portion of health care costs not covered by insurance. The Company is liable for claims up to defined limits. Self-insurance costs are based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. NOTE H - STOCKHOLDERS' EQUITY AND STOCK OPTIONS The Nonemployee Directors' Option Plan (the "Directors' Plan") provides for an automatic one-time grant on options to purchase 5,000 shares of common stock to each nonemployee director elected or appointed to the Board of Directors. Under the Directors' Plan, 60,000 shares of common stock have been authorized for issuance. Options become exercisable commencing six months from the date of grant and expire six years from the date of grant. In addition, all nonemployee directors re-elected to the Company's Board of Directors at any annual meeting of the stockholders will be automatically granted additional options to -16- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE H (continued) purchase 1,000 shares of common stock on each of such dates. In April 1997, the Company extended the term on 5,000 expiring options for an additional six years. The Company's 1986 Incentive and Nonstatutory Stock Option Plan (the "Incentive Plan") provides for the granting of incentive stock options and nonstatutory options. The Incentive Plan provides for the grant of options to key employees and independent sales representatives to purchase up to 400,000 shares of the Company's common stock, upon terms and conditions determined by a committee of the Board of Directors which administers the plan. Options are granted at not less than fair market value (110 percent of fair market value as to incentive stock options granted to ten percent stockholders) and are exercisable over a period not to exceed ten years (five years as to incentive stock options granted to ten percent stockholders). The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans. If the Company had elected to recognize compensation expense based upon the fair value at the date of grant for awards under these plans consistent with the methodology prescribed by SFAS 123, the effect on the Company's net income and earnings per share for the year ended January 31, 1996 would not be material in relation to the consolidated financial statements and the Company's net income and earnings per share for the years ended January 31, 1998 and 1997 would be reduced to the pro forma amounts indicated below:
1998 1997 ---------- ---------- Net income per common share As reported $1,599,874 $1,063,296 Pro forma 1,584,144 974,555 Basic earnings per common share As reported $.63 $.42 Pro forma .62 .38 Diluted earnings per common share As reported $.61 $.41 Pro forma .60 .37
The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions for the years ended January 31, 1998, 1997 and 1996, respectively: expected volatility of 52%, 57% and 43%; risk-free interest rates of 6.5%, 7% and 6%; and expected life of six years for all periods. Additional information with respect to the Company's plans for the fiscal years ended January 31, 1998, 1997 and 1996 is summarized as follows: -17- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE H (continued)
1998 ------------------------------------------------------------- Directors' Plan Incentive Plan --------------------------- ------------------------- Weighted- Weighted- Number average Number average of exercise of exercise shares price shares price ------ ----- ------ ----- Shares under option Outstanding at beginning of year 18,000 $1.90 150,000 $2.36 Granted 7,000 3.78 - - Exercised (10,000) 1.44 (50,472) 1.54 Expired (5,000) 1.56 - - ------- ------- Outstanding at end of year 10,000 3.85 99,528 2.77 ======= ======= Options exercisable at year-end 10,000 3.85 99,528 2.77 Weighted-average remaining contractual life of options outstanding 4.5 years 3.5 years Weighted-average fair value per share of options granted during 1998 2.25 -
1997 ------------------------------------------------------------- Directors' Plan Incentive Plan --------------------------- ------------------------- Weighted- Weighted- Number average Number average of exercise of exercise shares price shares price ------ ----- ------ ----- Shares under option Outstanding at beginning of year 18,000 $1.90 150,000 $2.13 Granted - - 34,000 3.50 Expired - - (34,000) 2.50 Outstanding at end of year 18,000 1.90 150,000 2.36 ------- ------- Options exercisable at year-end 18,000 1.90 150,000 2.36 ======= ======= Weighted-average remaining contractual life of options outstanding 1 year 4 years Weighted-average fair value per share of options granted during 1997 - 2.61
-18- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE H (continued)
1996 ------------------------------------------------------------- Directors' Plan Incentive Plan --------------------------- ------------------------- Weighted- Weighted- Number average Number average of exercise of exercise shares price shares price ------ ----- ------ ----- Shares under option Outstanding at beginning of year 17,000 $1.76 150,000 $2.13 Granted 1,000 4.25 - ------ ----- ------- ----- Outstanding at end of year 18,000 1.90 150,000 2.13 ====== ==== ======= ===== Options exercisable at year-end 18,000 1.90 150,000 2.13 Weighted-average fair value per share of options granted during 1996 2.15 -
Summarized information about stock options outstanding under the two plans at January 31, 1998 is as follows:
Options outstanding and exercisable ----------------------------------------------- Weighted- Number average outstanding remaining Weighted- at contractual average Range of January life in exercise exercise prices 31, 1998 years price --------------- -------- ----- ----- $2.25 - $3.38 70,528 1.00 $2.45 3.39 - 5.12 39,000 7.50 3.62 ------- ---- ----- $2.25 - $5.12 109,528 3.58 $2.88
-19- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE I - EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share at January 31:
1998 1997 1996 ---------- ---------- ----------- Numerator Net income $1,599,874 $1,063,296 $ 586,622 ========== ========== =========== Denominator Denominator for basic earnings per share (weighted-average shares) 2,558,541 2,550,000 2,550,000 Effect of dilutive securities: Stock options 68,884 59,700 85,506 ---------- ---------- ---------- Denominator for diluted earnings per share (adjusted weighted-average shares) and assumed conversions 2,627,425 2,609,700 2,635,506 ========== ========== =========== Basic earnings per share $ .63 $ .42 $ .23 ========== ========== =========== Diluted earnings per share $ .61 $ .41 $ .22 ========== ========== ===========
NOTE J - INCOME TAXES The provision for income taxes is summarized as follows:
Year ended January 31, ------------------------------------------------- 1998 1997 1996 ----------- -------- -------- Current Federal $ 938,000 $603,000 $382,000 State 105,000 (20,000) (18,000) ----------- -------- -------- 1,043,000 583,000 364,000 Deferred (53,000) (70,000) 5,000 ----------- -------- -------- $ 990,000 $513,000 $369,000 =========== ======== ========
-20- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 The following is a reconciliation of the effective income tax rate to the Federal statutory rate:
Year ended January 31, --------------------------------------------- 1998 1997 1996 ---- ---- ---- Statutory rate 34.0% 34.0% 34.0% State income taxes, net of Federal tax benefit 2.7 (.4) (.4) Nondeductible expenses .5 .8 1.7 Operating losses generating no current tax benefit 2.5 1.8 2.5 Change in deferred assets (2.0) (4.4) .5 Other .5 .7 .3 ---- ---- ---- Effective rate 38.2% 32.5% 38.6% ==== ==== ====
The tax effects of temporary differences which give rise to deferred tax assets at January 31, 1998 and 1997 are summarized as follows: January 31,
1998 1997 -------- -------- Deferred tax assets Inventories ......................................... $284,000 $302,500 Net operating loss carryforward - Canadian subsidiary 100,500 53,000 Accounts receivable ................................. 75,000 57,000 Accrued compensation and other ...................... 51,500 56,500 -------- -------- Gross deferred tax assets ......................... 511,000 469,000 -------- -------- Deferred tax liabilities Depreciation ........................................ 71,000 82,000 -------- -------- Gross deferred tax liabilities .................... 71,000 82,000 -------- -------- Net deferred tax asset .............................. $440,000 $387,000 ======== ========
Net operating loss carryforwards of $287,000 applicable to the Canadian subsidiary expire in fiscal 2003 through 2005. -21- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE K - BENEFIT PLANS Defined Benefit Plan A former subsidiary of the Company has a defined benefit pension plan which the Company assumed in connection with an acquisition made in fiscal 1987. This plan covers substantially all of the former subsidiary's employees. Benefits pursuant to this plan were frozen as of January 1, 1986. The benefits earned were based on years of service and the employee's final average annual salary which was based on the highest five consecutive of the last ten years of employment prior to January 1, 1986. The Company's funding policy is to contribute annually the recommended amount based on computations made by its consulting actuary. The components of the net periodic pension cost for the fiscal years ended January 31 are summarized as follows:
1998 1997 1996 --------- --------- --------- Normal cost $ 1,613 $ 1,613 $ 1,613 Interest cost on projected benefit obligation 63,772 62,259 60,611 Actual return on assets (16,168) (92,226) (40,653) Net amortization and deferral (10,771) 71,026 25,159 --------- --------- --------- Net periodic pension cost $ 38,446 $ 42,672 $ 46,730 ======== ======== ========
The following is a summary of the plan's funded status and amounts recognized in the Company's consolidated balance sheets at January 31:
1998 1997 --------- --------- Actuarial present value of benefit obligations Vested benefits $ 917,791 $ 863,621 --------- --------- Projected benefit obligation 917,791 863,621 Plan assets at fair market value 467,354 467,832 --------- --------- Projected benefit obligation in excess of plan assets 450,437 395,789 Unrecognized (loss) gain (19,112) 16,945 Unrecognized net obligation at transition amortized over a 15-year period (69,358) (79,213) Required minimum liability (also included as a component of other assets) 88,470 62,268 --------- --------- Pension cost liability (included in long-term liabilities) $ 450,437 $ 395,789 ========= =========
-22- Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) January 31, 1998, 1997 and 1996 NOTE K (continued) An assumed discount rate of 7.5% was used in determining the actuarial present value of benefit obligations for all periods presented. The expected long-term rate of return on plan assets was 8% for all periods presented. At January 31, 1998, approximately 73% of the plan's assets were held in mutual funds invested primarily in equity securities, approximately 15% was invested in money market instruments and the remaining 12% was invested in equity securities and debt instruments. Defined Contribution Plan Pursuant to the terms of the Company's 401(k) plan, substantially all employees over 21 years of age with a minimum period of service are eligible to participate. The 401(k) plan is administered by the Company and provides for voluntary employee contributions ranging from 1% to 18% of the employee's compensation. The Company made discretionary contributions of $18,950 in fiscal 1998. NOTE L - MAJOR SUPPLIER The Company purchased approximately 74% of its raw materials from one supplier under licensing agreements. The Company expects this relationship to continue for the foreseeable future. If required, similar raw materials could be purchased from other sources. -23- CORPORATE INFORMATION - -------------------------------------------------------------------------------- Directors: Raymond J. Smith, Chairman Christopher J. Ryan John J. Collins, Jr. Senior Vice President of Liberty Brokerage, Inc. Eric O. Hallman Officer of Sylvan -Lawrence Walter J. Raleigh Senior Advisor to CMI Industries, Inc. Market Makers: Troster Singer Corp. Legg Mason Wood Walker Inc. Mayer & Schweitzer Inc. Nash Weiss/Div of Shatkin Inv. Herzog, Heine, Geduld, Inc. Officers: Raymond J. Smith, President Christopher J. Ryan Executive Vice President of Finance and Secretary James M. McCormick Vice President and Treasurer Harvey Pride, Jr. Vice President, Manufacturing Auditors: Grant Thornton LLP Suite 3S01 One Huntington Quadrangle Melville, NY 11747-4464 Counsel: Law Offices of Thomas J. Smith 14 Briarwood Lane Suffern, NY 10901-3602 Transfer Agent: Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 NASDAQ symbol: LAKE Executive Offices: 711-2 Koehler Ave. Ronkonkoma, NY 11779 (516) 981-9700 Subsidiaries: Lakeland Protective Wear, Inc. (Canada) Lakeland de Mexico S.A. de C.V. Laidlaw, Adams & Peck, Inc. Exhibits to Lakeland Industries, Inc.'s 1998 Form 10 - K are available to shareholders for a fee equal to Lakeland's cost in furnishing such exhibits, on written request to the Secretary, Lakeland Industries, Inc., 711-2 Koehler Avenue, Ronkonkoma, New York 11779. DextraGard TM, Forcefield TM, Interceptor TM, Checkmate TM, Heatex TM, Pyrolon TM, Sterling Heights TM, Fyrepel TM, Highland TM, Chemland TM and Uniland TM are trademarks of Lakeland Industries, Inc. Tyvek TM, Viton TM, Barricade TM, Nomex TM, Kevlar TM, Delrin TM, TyChem TM and Teflon TM are registered trademarks of E.I.DuPont de Nemours and Company. Saranex TM is a registered trademark of Dow Chemical. Spectra TM is a registered trademark of Allied Signal, Inc. -24- EX-20 5 [GRAPHIC-LOGO FOR LAKELAND INUDSTRIES, INC.] (LETTERHEAD LAKELAND INUDSTRIES, INC.) Corporate Headquarters 711-2 Koehler Avenue Ronkonkoma, NY USA 11779-7410 Tel: 516-981-9700 Fax:516-981-9751 E-Mail:74313.1743@compuserve.com Internet:http://www.lakeland.com Lakeland Limited-Use Clothing Customer Service 800-645-9291 Tel: 205-350-3873 Fax:205-350-0773 Chemical Protective Clothing Division Customer Service 800-645-9291 Tel:205-350-3873 Fax:205-350-3011 Hand/Arm Protection Division Customer Service 800-886-8010 Tel:205-351-9126 Fax:205-353-9463 Woven Clothing Division Customer Service 800-933-0115 Tel: 219-929-5536 Fax: 219-929-5562 Fire Protective Clothing Division Customer Service 800-345-7845 Tel:205-350-3107 Fax:205-350-3011 May 13, 1998 Dear Stockholder, I am pleased to extend to you my personal invitation to attend the 1998 Annual Meeting of Stockholders of Lakeland Industries, Inc. (the "Company") on Wednesday, June 17, 1998 at 10:00 a.m. at the Holiday Inn, 3845 Veterans Memorial Highway, Ronkonkoma, NY 11779. The accompanying Notice of Annual Meeting and Proxy Statement contain a description of the formal business to be acted upon by the stockholders. At the meeting, I intend to discuss the Company's performance for its fiscal year ended January 31, 1998 and its plans for the current fiscal year. Certain members of the Company's Board of Directors and officers of the Company, as well as a representative of Grant Thornton LLP, the Company's independent auditors, will be available to answer any questions you may have, or to make a statement if they wish to. While I am looking forward to seeing you at the meeting, it is very important that those of you who cannot personally attend assure your shares are represented. I urge you therefore to sign and date the enclosed form of proxy and return it promptly in the accompanying envelope. If you attend the meeting, you may, if you wish, withdraw any proxy previously given and vote your shares in person. Sincerely, /s/Raymond J. Smith ------------------- President and Chairman of the Board LAKELAND INDUSTRIES, INC. NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS June 17, 1998 TO THE STOCKHOLDERS OF LAKELAND INDUSTRIES, INC.: Notice is hereby given that the Annual Meeting of Stockholders of Lakeland Industries, Inc., a Delaware corporation (the "Company"), will be held on Wednesday, June 17, 1998 at 10:00 a.m. at the Holiday Inn, 3845 Veterans Memorial Highway, Ronkonkoma, NY 11779 for the following purposes: 1. To elect two Class III members of the Board of Directors, and 2. To transact such other business as properly may come before the meeting or any adjournment thereof. Each share of the Company's Common Stock will be entitled to one vote upon all matters described above. Stockholders of record at the close of business on April 29, 1998 will be entitled to notice and to vote at the meeting. May 13, 1998 BY ORDER OF THE BOARD OF DIRECTORS Christopher J. Ryan, Secretary PLEASE DATE, VOTE AND SIGN THE ENCLOSED PROXY AND RETURN PROMPTLY. AN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, IS ENCLOSED FOR THIS PURPOSE. LAKELAND INDUSTRIES, INC. 711-2 Koehler Ave. Ronkonkoma, New York 11779 PROXY STATEMENT 1998 Annual Meeting of Stockholders June 17, 1998 GENERAL INFORMATION - -------------------------------------------------------------------------------- This proxy statement is furnished in connection with the solicitation by the Board of Directors of Lakeland Industries, Inc. (the "Company") of proxies from the holders of the Company's $.01 par value Common Stock (the "Common Stock") for use at the 1998 Annual Meeting of Stockholders to be held on June 17, 1998, and at any adjournment thereof (the "Annual Meeting"). This proxy statement, the accompanying form of proxy and the Company's 1998 Form 10-K (which includes the Company's Annual Report to Stockholders) are first being sent to the Company's stockholders on or about May 13, 1998. The accompanying proxy may be revoked by the person giving it at any time prior to its being voted; such revocation may be accomplished by a letter, or by a properly signed proxy bearing a later date, filed with the Secretary of the Company prior to the Annual Meeting. If the person giving the proxy is present at the meeting and wishes to vote in person, he or she may withdraw his or her proxy at that time. The Company has borne all costs of solicitation of proxies. In addition to solicitation by mail, there may be incidental personal solicitations made by directors, officers and regular employees of the Company and its subsidiaries. The cost of solicitation, including the payments to nominees who at the request of the Company mail such material to their customers, will be borne by the Company. VOTING SECURITIES AND STOCK OWNERSHIP OF OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS All holders of record of the Common Stock at the close of business on April 29, 1998, are entitled to notice of and to vote at the Annual Meeting. At the close of business on April 29, 1998, there were 2,610,472 shares of outstanding Common Stock, each entitled to one vote per share on all matters to be voted upon at the Annual Meeting. The Company's stockholders do not have cumulative voting rights. The following table sets forth information as of April 24, 1998, with respect to beneficial ownership of the Company's Common Stock by all persons known by the Company to own beneficially more than 5% of the Common Stock, each director and nominee for director of the Company and all directors and officers of the Company as a group. All persons listed have sole voting and investment power with respect to their shares of Common Stock.
Name and Address Number of Common Percent of Beneficial Owner Shares Beneficially Owned of Class ---------------- ------------------------- -------- Raymond J. Smith 579,500 (1) 22.2% 711-2 Koehler Ave. Ronkonkoma, NY 11779 Christopher J. Ryan 250,977 (2) (6) 9.61% 711-2 Koehler Ave. Ronkonkoma, NY 11779 Joseph P. Gordon 134,500 5.15% 177-23 Union Tpke. Flushing, NY 11366 John J. Collins, Jr. 123,400 (3) 4.73% Eric O. Hallman 47,500 (3) 1.82% Walter J. Raleigh 6,000 (4) .23% All officers and directors as a group (7 persons) 1,051,827 (5) 40.3%
- ---------- Included in the above are fully exercisable options to purchase the Company's common stock, as follows: (1) 9,000 shares granted on June 5, 1996; and 44,500 shares granted January 1 and 2, 1994; (2) 4,050 shares granted on January 1, 1994; (3) 1,000 shares granted on June 15, 1994 and 1,000 shares granted on June 18, 1997 to each of Mr. Hallman and Mr. Collins; (4) 5,000 shares granted on April 18, 1997 and 1,000 shares granted June 15, 1995; (5) 107,000 shares granted between May 28, 1991 and June 18, 1997 (6) Mr. Ryan disclaims beneficial ownership of 15,000 shares owned by his wife. Proposal 1 - ELECTION OF DIRECTORS The Company's Certificate of Incorporation provides for three classes of directors with staggered terms of office and provides that upon the expiration of the terms of office for a class of directors, nominees for each class shall be elected for a term of three years to serve until the election and qualification of their successors or until their earlier resignation, death or removal from office. The Company currently has one Class I director, two Class II directors and two Class III directors. At the 1998 Annual Meeting there are two nominees for director in Class III. The incumbent Class I and Class II directors have one year and two years, respectively, remaining on their terms of office. The Company has no reason to believe that either of the nominees will be disqualified or unable to serve, or will refuse to serve if elected. However, if a nominee is unable or unwilling to accept election, the proxies will be voted for such substitute as the Board of Directors may select. It is intended that the shares represented by proxies will be voted, in the absence of contrary instructions, for the election as director of the nominees for Class III named in the following table. The Board of Directors has nominated and Management recommends the election of the persons listed in the following table as Class III directors. The table also sets forth the names of the one director in Class I and the two directors in Class II whose terms of office have not expired, their ages, their positions with the Company and the period each has served as a director of the Company. There are no family relationships among the Board members.
Position With the Director Name Age Company Since - -------------------------------------------------------------------------------- NOMINEES FOR DIRECTOR CLASS III (Nominees for 3 Year Term Expiring in June, 2001) - -------------------------------------------------------------------------------- Raymond J. Smith 59 Chairman of the Board, 1982 President and Director Walter J. Raleigh 70 Director 1991 INCUMBENT DIRECTOR - CLASS I (One Year Remaining on Term Expiring in June, 1999) Christopher J. Ryan 46 Executive Vice President - 1986 Finance, Secretary and Director INCUMBENT DIRECTORS - CLASS II (Two Years remaining on Term Expiring in June, 2000) - -------------------------------------------------------------------------------- John J. Collins, Jr. 55 Director 1986 Eric O. Hallman 54 Director 1982 The principal occupations and employment of the nominees for director and for the directors continuing in office are set forth below: Raymond J. Smith, a co-founder of the Company, has been Chairman of the Board of Directors and President since its incorporation in 1982. Walter J. Raleigh is a director of CMI Industries, Inc., the successor company to Clinton Mills, Inc. and was president of Clinton Mills Sales, Co. Division, N.Y. from 1974 to 1995. Clinton Mills was a textile manufacturer of woven fabrics. Mr. Raleigh retired from Clinton Mills in 1995 and now is a Senior Adviser to CMI Industries, Inc. Mr. Raleigh is a former director of Kerry Petroleum Company, an oil and gas development company. Christopher J. Ryan has served as Executive Vice President-Finance and director since May, 1986 and Secretary since April 1991. From October 1989 until February 1991 Mr. Ryan was employed by Sands Brothers Co. Ltd. and Rodman & Renshaw, Inc., both investment banking firms. Prior to that, he was an independent consultant with Laidlaw Holding Co., Inc., an investment banking firm, from January 1989 until September 1989. From February, 1987 to January, 1989 he was employed as the Managing Director of Corporate Finance for Brean Murray, Foster Securities, Inc. He was employed from June, 1985 to March, 1986 as a Senior Vice President with the investment banking firm of Laidlaw Adams Peck, Inc., a predecessor firm to Laidlaw Holdings, Inc. Mr. Ryan has been a director of Auerback, Pollack & Richardson and Lessing, Inc. since 1996. John J. Collins, Jr. has been Senior Vice President of Liberty Brokerage, a government securities firm, since January 1987. From 1977 to January, 1987, he was Executive Vice President of Chapdelaine GSI, a government securities firm. Eric O. Hallman has been a director of the Company since its incorporation. He was President of Naess Hallman Inc., a shipbrokering firm, between 1984 and 1991. Mr. Hallman was also affiliated between 1991 and 1992 with Finanshuset (U.S.A.), Inc., a shipbrokering and international financial services and consulting concern, and is currently an officer of Sylvan Lawrence, a real estate development company. During the year ended January 31, 1998, the Board of Directors of the Company met two times, and four of the five members of the Board of Directors attended at least 75% of the aggregate of (1) the total number of meetings of the Board of Directors held during the period when he was a director, and (2) the total number of meetings held by all committees of the Board of Directors on which he served (during the periods when he served). Committees of the Board of Directors are as follows: 1- The Stock Option and Compensation Committee is responsible for evaluating the performance of the Company's management, fixing or determining the method of fixing compensation of the Company's salaried employees, administering the Company's Stock Option and 401K/ESOP Plans, and reviewing significant amendments to a subsidiary's employee pension benefit plan. The Committee also, in conjunction with the Chief Executive Officer, considers the qualifications of prospective Directors of the Company and, as vacancies occur, recommends nominees to the Board of Directors. The Stock Option and Compensation Committee (which also functions as a nominating committee for nominations to the Board) will consider nominees to the Board recommended by stockholders. Such recommendations must be in writing and sent to the Secretary of the Company no later than January 31st of the year in which the Annual Meeting is to be held, accompanied by a brief description of the proposed nominee's principal occupation and his or her other qualifications which, in the stockholder's opinion, make such person a suitable candidate for nomination to the Board. This Committee met once during the year ended January 31, 1998. The committee members are: John J. Collins, Jr., Eric O. Hallman, and Walter J. Raleigh Compensation Committee Interlocks and Insider Participation Members of the Stock Option and Compensation Committee are outside directors who do not serve in any other capacity with respect to the Company or any of its subsidiaries. Messrs. Collins and Hallman are partners of POMS Holding Co. See "Certain Relationships and Related Transactions". 2- The Audit Committee was formed in September, 1987 and is responsible for recommending to the Board of Directors the appointment of independent auditors for the fiscal year, reviewing with the independent auditors the scope of their proposed and completed audits, and reviewing with the Company's financial management and its independent auditors other matters relating to audits and to the adequacy of the Company's internal control structure. This Committee met once during the year ended January 31, 1998. The committee members are: John J. Collins, Jr., Eric O. Hallman, and Christopher J. Ryan COMPENSATION OF EXECUTIVE OFFICERS ---------------------------------- The table below sets forth all salary, bonus and all other compensation paid to the Company's chief executive officer and each of the Company's other executive officers (who earned more than $100,000 per year in salary and bonus) for the years ended January 31, 1998, 1997 and 1996: Name and All Other Principal Position Year Salary Bonus Compensation ------------------ ---- ------ ----- ------------ Raymond J. Smith, 1998 $225,000 $ ------ $ 3,089 Chairman, President and CEO 1997 225,000 ------ ------ 1996 225,000 28,653 ------ Christopher J. Ryan, 1998 $169,003 $ 7,750 $ 1,262 Executive V.P.-Finance 1997 115,000 23,250 ------ and Secretary 1996 115,000 55,956 ------ Harvey Pride, Jr. 1998 $115,000 $ 23,000 $ 910 Vice President- 1997 115,000 19,136 ------ Manufacturing 1996 115,000 9,044 ------ James McCormick 1998 $115,000 $ 8,450 $ 2,138 VP - Treasurer 1997 89,000 16,350 ------ 1996 89,000 10,968 ------
There are four executive officers with salary and bonus individually exceeding $100,000. There were no pension or retirement plans or other benefits, payable or accrued, for such persons during fiscal year 1998. The Company has entered into employment contracts with certain executive officers providing for annual compensation of $262,500 for Mr. Smith and $175,000 for Mr. Ryan and $135,000 for Mr. Pride. Messrs. Smith and Pride each have a three year contract which expires on January 31, 2001, Mr. Ryan has a three year contract which expires on February 13, 2000. All contracts are automatically renewable for one or two year terms, unless in various instances 30 to 120 days notice is given by either party. The above named executives participate in the Company's 401-K Plan which commenced on January 1, 1995. The Company has made a contribution to this plan totaling $18,950, during the plan year ended December 31, 1997. These employment contracts are similar in nature and include disability benefits, vacation time, non-compete and confidentiality clauses. There are no provisions for retirement. Messrs. Smith, Ryan and Pride's contracts have an additional provision for annual bonus based on the Company's performance and based upon earnings per share formulas determined by the Stock Option and Compensation Committee of the Board of Directors of the Company. All contracts provide for lump sum payments of contracted salaries pursuant to various formulas should there be a change in control of the Company. STOCK OPTION AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION Policies: The compensation policy of the Company is to provide its executive officers and management with a level of pay and benefits that will assure the Company's competitiveness and continued growth, and allow the Company to retain key executives critical to this long-term success and attract and retain qualified personnel. The Company competes for talented executives in a market segment where successful entrepreneurial executives are highly compensated. It also competes for executives with a background in manufacturing and selling protective safety garments. As a result, to obtain and retain highly qualified and motivated executives, the Compensation Committee has deemed it desirable to structure employment arrangements which compensate highly for high profitability and performance and to enter into written employment agreements with its senior executive officers. The Compensation Committee's responsibilities include overseeing the Company's compensation policies, supervising compensation for management and employee benefits and administering the Company's stock option and other employee benefit plans. The Compensation Committee also develops and negotiates employment agreements with key executive officers. These employment agreements include base salaries and incentive compensation arrangements designed to reward management for achieving certain production or performance levels. The Compensation Committee is also responsible for developing or reviewing incentive compensation arrangements which the Company enters into with executive officers and key individuals, other than those senior executives who have written employment agreements. See "Compensation of Executive Officers". In order to determine appropriate levels of executive compensation, the Compensation Committee reviews various factors, including individual performance, and evaluates the progress of the Company towards attaining its long-term profit and return on equity goals. Compensation packages for senior executive officers have been structured to attempt to compensate them to a substantial extent based on both the profitability of the Company as a whole and the productivity of their individual departments. Particulars: Messrs. Eric O. Hallman, John J. Collins, Jr. and Walter J. Raleigh were members of the Company's Stock Option and Compensation Committee when it ratified Mr. Smith's and Mr. Pride's employment contracts in January 1998, and Mr. Ryan's which was ratified on February 14, 1997. Mr. Walter J. Raleigh joined the Board of Directors on April 18, 1991, as a third outside director and with Messrs. Hallman and Collins, these three outside directors presently make up the Stock Option and Compensation Committee. Messrs. Smith, Pride and Ryan were awarded base compensations of $262,500, $175,000 and $135,000, for fiscal 1999, respectively. In addition, the Committee reviewed what was normally paid the President and Chairman in Mr. Smith's case and Executive Vice President Finance and In-House Counsel in Mr. Ryan's case and the Chief Manufacturing Executive in Mr. Pride's case, in public companies of Lakeland's size and concluded that the compensation package represented close to the median of what other officers were being compensated in like public companies of comparable size after reviewing Growth Resources Officer Compensation Report Eleventh Edition - Panel Publications. These contracts also provide for bonuses in addition to salary based upon the Company's increase in earnings. (See Directors and Principal Stockholders.) The Stock Option and Compensation Committee believes that the contracts covering Messrs. Smith, Pride and Ryan are appropriately tied to their respective levels of expertise, were constructed at or below industry norms, and any increases in compensation were and will be tied to increases in the Company's earnings. The Stock Option and Compensation Committee also took into consideration that since the inception of the Company 15 years ago there have been no executive pension plans, deferred compensation plans, or other compensation or benefit plans for executives of the Company other than the Company's Stock Option Plan and the 401-K/ESOP Plan, the latter of which went into effect January 1, 1995. The Board Compensation Committee Report on Executive Compensation shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts. Performance Graph The Corporate Performance Graph, appearing on the following page, obtained from Media General Financial Services of Virginia, compares the five year cumulative total return of the Company's common stock with that of a broad equity market index, including dividend reinvestment and with that of a peer group. Option/SAR Grants in Last Fiscal Year - No stock options were granted to any employee not listed below in fiscal 1998 and no SAR grants have been made since inception of the Stock Option Plan. See "Directors' Compensation". Stock Option Plan Messrs. Smith, Ryan, Pride and McCormick participate in the Company's Incentive Stock Option Plan (common stock) as follows:
No. of Date(s) Grant Name of Shares Option of Expiration Date Executive Granted Price Grant Date(s) Value --------- ------- ----- ----- ------- ----- Mr. Smith 53,500 $2.25 - 3.50 6/5/96 & 1/2/94 & 1/1/94 6/4/06 & 1/2/99 & 1/1/99 $140,894 Mr. Ryan 4,050 $2.25 1/1/94 1/1/04 $ 9,113 Mr. Pride 29,600 $2.25 - 3.50 6/5/96 & 1/1/94 6/4/06 & 1/1/04 $ 91,600 Mr. McCormick 9,850 $2.25 - 3.50 6/5/96 & 1/1/94 6/4/06 & 1/1/04 $ 28,413
There are currently 250,000 option shares available for future grant under this plan. During the year ended January 31, 1998, no stock options were granted and the following options were exercised:
No. of Name of Shares Exercise Date of Per Share Exercise Executive Exercised Price Exercise Date Value --------- --------- ----- -------- ---------- Mr. Ryan 40,000 $1.37 9/11/97 $6 15/16 4,700 $2.25 9/11/97 $6 15/16 Mr. McCormick 5,000 $2.25 10/10/97 $7 7/8
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN AMONG LAKELAND INDUSTRIES, INC. S&P INDUSTRIES INDEX AND PEER GROUP INDEX [GRAPHIC-GRAPH PLOTTED TO POINTS LISTED BELOW]
FISCAL YEAR ENDING -------------------------------------------------------- COMPANY 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- LAKELAND INDUSTRIES INC. 100 140.00 253.33 228.34 168.34 433.33 PEER GROUP 100 111.22 104.28 69.25 67.09 74.31 BROAD MARKET 100 112.45 114.41 157.04 198.04 250.28
THE PEER GROUP CHOSEN WAS: Customer Selected Stock List THE BROAD MARKET INDEX CHOSEN WAS: AN INDEX OF THE COMPANIES ON THE S&P INDUSTRIALS INDEX THE PEER GROUP IS MADE UP OF THE FOLLOWING SECURITIES; ANGELICA CORP CYRK INC EASTCO INDUSTRIAL SAFETY SALANT CORP ASSUMES $100 INVESTED ON FEB. 1, 1993 ASSUMES DIVIDEND REINVESTED FISCAL YEAR ENDING JAN. 31, 1998 DIRECTORS' COMPENSATION ----------------------- Members of the Board of Directors, in their capacity as directors, are reimbursed for all travel expenses to and from meetings of the Board. Outside Directors received $750 for each meeting as compensation for serving on the Board. There are no charitable award or director legacy programs. Messrs. Collins, Hallman and Raleigh participate in the Company's Non-employee Directors' Option Plan as follows: # of Option Date of Expiration Director Shares Price Grant Date -------- ------ ----- ----- ---------- Mr. Collins 1,000 5.125 6/18/97 6/18/2003 Mr. Collins 1,000 3.88 6/15/94 6/15/2000 Mr. Hallman 1,000 5.125 6/18/97 6/18/2003 Mr. Hallman 1,000 3.88 6/15/94 6/15/2000 Mr. Raleigh 1,000 4.25 6/15/95 6/15/2001 Mr. Raleigh 5,000 3.25 4/18/97 4/18/2003 There are currently 40,000 option shares available for future grant under this plan. During the year ended January 31, 1998, no options were granted and the following options were exercised: # of Exercise Date Per Share Exercise Director Shares Price of Exercise Date Value -------- ------ ----- ----------- ------------------ Mr. Collins 5,000 $1.43 5/13/97 $3.50 Mr. Hallman 5,000 $1.43 5/13/97 $3.50 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- POMS Holding Co. ("POMS", a partnership consisting of Raymond J. Smith, Eric O. Hallman, John J. Collins, Jr., Joseph P. Gordon, Harvey Pride, Jr. and certain other stockholders of the Company) leases to the Company a 90,308 square foot disposable garment manufacturing facility in Decatur, Alabama. Under leases effective January 1 and March 1, 1995 and expiring on August 31, 1999, the Company pays an annual rent of $364,900 and is the sole occupant of the facility. During September 1992 Highland, a former wholly-owned subsidiary of the Company, relocated to Somerville, Alabama from the above mentioned Decatur facility. Highland entered into a $1,500 month to month lease agreement for 12,000 sq. ft. of manufacturing space, sharing this same Somerville location with Chemland, another former wholly-owned subsidiary of the Company. Chemland currently has a $1,600 month to month lease agreement for 12,000 sq. ft. This Somerville facility is owned by Harvey Pride, Jr., an officer of the Company. The Company believes that all rents paid to POMS and Harvey Pride, Jr. by the Company, Highland and Chemland Divisions are comparable to what would be charged by an unrelated third party. The net rent paid to POMS by the Company for the year ended January 31, 1998, amounted to $368,011 and the total rent paid to Harvey Pride, Jr. by the Company for use by its Highland and Chemland divisions, for the year ended January 31, 1998, amounted to $37,200. An Qiu Holding Co., ("An Qiu" a partnership consisting of all the Directors of the Company, one officer and four employees) leases to the Chinese division of the Company 39,660 square feet of manufacturing space in Shangdong Province, PR, China. The partnership owns the buildings located on property which it leases in China for a 50 year period. This month to month lease to the Company's division was effective 1/1/98, at $3,024 per month, $36,288 annually. A formal lease will not be effective until August 1998 when full construction is completed. The Company's division is the sole occupant of the facility. During the year ended January 31, 1998 the Company made payments totaling $778 to Madison Mobile Storage, Inc. for trailer rentals, and $557,855 for expenses incurred by Madison Mobile Storage, Inc. in running the Company's Missouri facility. Such expenses included employee payroll, insurance, auto and other miscellaneous expenses. The principal shareholder of Madison Mobile Storage, Inc. is Mr. Harvey Pride, Jr. who is also an officer of the Company. The Company paid or accrued legal fees of $3,369 for the fiscal year ended January 31, 1998 to the law firm of Wildman, Harrold, Allen, Dixon & Smith, the Company's General Counsel, of which a partner, Mr. Thomas Smith, is the brother of Raymond J. Smith. OTHER MATTERS ------------- The Board of Directors knows of no matters other than those described above that may come before the Annual Meeting. As to other matters, if any, that properly may come before the Annual Meeting, the Board of Directors intends that proxies in the accompanying form will be voted in respect thereof in accordance with the judgment of the person or persons voting the proxies. STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING --------------------------------------------- Stockholder proposals for inclusion in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders must be received by the Company not later than January 31, 1999. The person submitting the proposal must have been a record or beneficial owner of the Company's Common Stock for at least one year and must continue to own such securities through the date on which the meeting is held, and the securities so held must have a market value of at least $1,000. Any such proposal will be included in the Proxy Statement for such Annual Meeting if the rules of the Securities and Exchange Commission are complied with as to the timing and form of such proposal, and the content of such stockholder's proposal is determined by the Company to be appropriate under rules promulgated by the Commission. By the Order of the Board of Directors Christopher J. Ryan, Secretary May 13, 1998 EX-27.1 6
5 YEAR JAN-31-1998 JAN-31-1998 222,700 6,953,538 0 0 15,858,052 23,909,987 1,392,346 0 25,811,865 5,006,571 0 0 0 26,105 6,073,358 11,517,625 47,262,519 47,262,519 38,067,351 6,157,105 0 0 497,739 2,589,874 990,000 1,599,874 0 0 0 1,599,874 .63 .61
EX-27.2 7
5 YEAR YEAR DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996 504,940 364,640 0 0 5,893,594 4,979,975 0 0 9,894,156 11,244,241 16,938,591 17,511,632 989,667 1,026,203 0 0 18,573,116 19,262,732 2,920,313 3,894,076 0 0 0 0 0 0 25,500 25,500 5,981,226 5,981,226 18,573,116 19,262,732 41,792,469 40,188,916 41,792,469 40,188,916 34,555,786 33,901,232 5,212,286 4,882,112 0 0 0 0 510,757 511,180 1,576,296 955,622 513,000 369,000 1,063,296 586,622 0 0 0 0 0 0 1,063,296 586,622 .42 .23 .41 .22
-----END PRIVACY-ENHANCED MESSAGE-----