-----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, IkzuUyquOpf1xCxj/4qqjKRgxFILbGtN+jc8ya/5vYQm3R7jxzEGk5Nb0itDvKnk PdFXBQSG1ItOofswJ2n1lw== 0000914317-06-001087.txt : 20060417 0000914317-06-001087.hdr.sgml : 20060417 20060417132422 ACCESSION NUMBER: 0000914317-06-001087 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20060131 FILED AS OF DATE: 20060417 DATE AS OF CHANGE: 20060417 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: 1934 Act SEC FILE NUMBER: 000-15535 FILM NUMBER: 06761810 BUSINESS ADDRESS: STREET 1: 711-2 KOEHLER AVENUE CITY: RONKONKOMA STATE: NY ZIP: 11779 BUSINESS PHONE: 5169819700 MAIL ADDRESS: STREET 1: 711- 2 KOEHLER AVENUE CITY: RONKONKOMA STATE: NY ZIP: 11779 10-K 1 form10k-74934_lake.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2006 ---------------- 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) 701 Koehler Ave., Suite 7, Ronkonkoma, NY 11779 ----------------------------------------------- (Address of Principal Executive Offices) (631) 981-9700 -------------- (Registrant's telephone number, including area code) 711 Koehler Ave., Suite 2, Ronkonkoma, NY 11779 ----------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act Title of Class - Common Stock $0.01 Par Value Name of Exchange on which listed - NASDAQ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes |_| No |X| 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 (ss. 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of 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. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer an accelerated file or a non- accelerated filer (as defined in Rule 12-b-2 of the Exchange Act). Large accelerated filer |_| Accelerated Filer |X| Non-Accelerated Filer |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act). Yes|_| No |X| As of July 29, 2005, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $65,777,000 based on the closing price of the common stock as reported on the National Association of Securities Dealers Automated Quotation System National Market System. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 17, 2006 - -------------------------------------- ----------------------------- Common Stock, $0.01 par value per share 5,017,046 1 DOCUMENTS INCORPORATED BY REFERENCE Document Parts Into Which Incorporated -------- ----------------------------- Annual Report to Stockholders for the Fiscal Parts [I, II, and IV] Year Ended January 31, 2006 (Annual Report) Portions of the Registrant's Proxy Statement relating to its 2006 Annual Stockholders' Meeting to be filed subsequently - are incorporated by reference and Part III of this Form 10-K. Except with respect to the Information specifically incorporated by reference in this Form 10-K, the registrant's definitive proxy statement is not deemed to be filed as part of this Form 10-K. 2
LAKELAND INDUSTRIES, INC. INDEX TO ANNUAL REPORT ON FORM 10-K PART 1: - ------- Cautionary Statement regarding Forward-Looking Information Page - ---------------------------------------------------------- ---- Item 1 Business - ------ -------- Overview 4 --------- Industry Overview and Consolidation 5 ----------------------------------- Business Strategy 7 ----------------- Our Competitive Strengths 9 ------------------------- Products 10 ---------- Quality Control 13 --------------- Marketing and Sales 13 ------------------- Research and Development 14 ------------------------ Suppliers and Materials 14 ----------------------- Competition 14 ----------- Seasonality 14 ----------- Patents and Trademarks 15 ---------------------- Employees 15 --------- Environmental Matters 15 --------------------- Available Information 15 --------------------- Item 1A Risk Factors 15 - ------- ------------ Item 1B Unresolved Staff Comments 22 - ------- ------------------------- Item 2 Properties 25 - ------ ---------- Item 3 Legal Proceedings 25 - ------ ----------------- Item 4 Submission of Matters to a Vote of Security Holders 25 - ------ --------------------------------------------------- PART II: - -------- Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters 25 - ------ ------------------------------------------------------------------------ Item 6 Selected Financial Data 26 - ------ ----------------------- Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 28 - ------ ------------------------------------------------------------------------------------- Item 7A Quantitative and Qualitative Disclosure about Market Risk 36 - ------- --------------------------------------------------------- Item 8 Financial Statements and Supplementary Data 36 - ------ ------------------------------------------- Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 64 - ------ ------------------------------------------------------------------------------------ Item 9A Controls and Procedures 64 - ------- ----------------------- Item 9B Other Information 65 - ------- ----------------- PART III: - --------- Item 10 Directors and Executive Officers of the Registrant 65 - ------- -------------------------------------------------- Item 11 Executive Compensation 68 - ------- ---------------------- Item 12 Security Ownership of Certain Beneficial Owners and Management 68 - ------- -------------------------------------------------------------- Item 13 Certain Relationships and Related Transactions 68 - ------- ---------------------------------------------- Item 14 Principal Accounting Fees and Services 69 - ------- -------------------------------------- PART IV: - -------- Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K 70 - ------- --------------------------------------------------------------- Signatures - ---------- Certification under Exchange Act Rules 13a - 14(b) and 15d- 14(b) 73
3 This Annual Report on Form 10-K contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements, annual reports and other periodic reports and filings of the Company filed with the Securities and Exchange Commission. All statements, other than statements of historical facts, which address the Company's expectations of sources of capital or which express the Company's expectation for the future with respect to financial performance or operating strategies, can be identified as forward-looking statements. As a result, there can be no assurance that the Company's future results will not be materially different from those described herein as "believed,""anticipated,""estimated" or "expected," which reflect the current views of the Company with respect to future events. We caution readers that these forward-looking statements speak only as of the date hereof. The Company hereby expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which such statement is based. PART I Lakeland Industries, Inc. (the "Company" or "Lakeland," "we," "our," or "us") was incorporated in the State of Delaware in 1986. Our executive offices are located at 701 Koehler Avenue, Suite 7, Ronkonkoma, New York 11779, and our telephone number is (631) 981-9700. Our web site is located at www.lakeland.com. Information contained on our web site is not part of this report. ITEM 1. BUSINESS - ----------------- Overview We manufacture and sell a comprehensive line of safety garments and accessories for the industrial protective clothing market. Our products are sold by our in-house customer service group our regional sales managers and independent sales representatives to a network of over 800 safety and mill supply distributors. These distributors in turn supply end user industrial customers such as chemical/petrochemical, automobile, steel, glass, construction, smelting, munition plants, janitorial, pharmaceutical and high technology electronics manufacturers, as well as hospitals and laboratories. In addition, we supply federal, state and local governmental agencies and departments such as fire and police departments, airport crash rescue units, the Department of Defense, Central Intelligence Agency, Federal Bureau of Investigation, and the Centers for Disease Control. In fiscal 2006, we had net sales of $98.7 million and earnings per share of $1.26, which represent a growth rate of 3.6% and 11.6%, respectively, over our previous fiscal year. Our net sales attributable to customers outside the United States were $8.0 million, $9.0 million and $10.5 million, in fiscal 2004, fiscal 2005 and fiscal 2006, respectively. Our major product categories and their applications are described below: Limited Use/Disposable Protective Clothing. We manufacture a complete line of limited use/disposable protective garments offered in coveralls, lab coats, shirts, pants, hoods, aprons, sleeves and smocks. These garments are made from several non-woven fabrics, primarily Tyvek(R) and Tychem (both DuPont manufactured fabrics) and also our proprietary fabrics Micromax and Micromax NS manufactured pursuant to customer order. These garments provide protection from low-risk 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-carbons (or PCBs) that pose health risks after exposure for long periods of time. Additional applications include protection from viruses and bacteria, such as AIDS, streptococcus, SARS and hepatitis, at hospitals, clinics and emergency rescue sites and use in clean room environments to prevent human contamination in the manufacturing processes. This is our largest product line. High-End Chemical Protective Suits. We manufacture heavy duty chemical suits made from TyChem(R) SL, TK and BR, and F, which are DuPont manufactured fabrics and Pyrolon CRFR. These suits are worn by individuals on 4 hazardous material teams to provide protection from powerful, highly concentrated and hazardous or potentially lethal chemical and biological toxins, such as toxic wastes at Super Fund sites, toxic chemical spills or biological discharges, chemical or biological warfare weapons (such as saran gas, anthrax or ricin), and chemicals and petro-chemicals present during the cleaning of refineries and nuclear facilities. These suits can be used in conjunction with a fire protective shell that we manufacture to protect the user from both chemical and flash fire hazards. Homeland Security measures and government funding of personal protective equipment for first responders to terrorist threats or attack have recently resulted in increased demand for our high-end chemical suits and we believe demand for these suits will continue to increase in the future as state and local Bioterrorism grants begin to be spent. Fire Fighting and Heat Protective Apparel. We manufacture an extensive line of fire fighting and heat protective apparel for use by fire fighters and other individuals that work in extreme heat environments. Our branded fire fighting apparel Fyrepel(TM) is sold to local municipalities and industrial fire fighting teams. Our heat protective aluminized fire suits are manufactured from Nomex(R), a fire and heat resistant material, and Kevlar(R), a cut and heat resistant, high-strength, lightweight, flexible and durable material both produced by DuPont. This apparel is also used for maintenance of extreme high temperature equipment, such as coke ovens, kilns, glass furnaces, refinery installations and smelting plants, as well as for military and airport crash and rescue teams. Gloves and Arm Guards. We manufacture gloves and arm guards from Kevlar(R) and Spectra(R), cut resistant fibers made by DuPont and Honeywell respectively as well as engineered composite yarns with Microgard antimicrobial for food service markets. Our gloves are used primarily in the automotive, glass, metal fabrication and food service industries to protect the wearer's hand and arms from lacerations and heat without sacrificing manual dexterity or comfort. Reusable Woven Garments. We manufacture a line of reusable and washable woven garments that complement our fire fighting and heat protective apparel offerings and provide alternatives to our limited use/disposable protective clothing lines. Product lines include electrostatic dissipative apparel used in the automotive industry for control of static electricity in the manufacturing process, clean room apparel to prevent human contamination in the manufacturing processes, and flame resistant Nomex(R) coveralls and FR cotton coveralls used in chemical and petroleum plants and for wildland fire fighting and extrication suits. We believe we are one of the largest independent customers of DuPont's Tyvek(R) and TyChem(R) apparel grade material. We purchase Tyvek(R) and TyChem(R) under North American licensing agreements and other DuPont materials, such as Kevlar(R), under international licensing agreements. While we have operated under these trademark agreements since 1995, we have been a significant customer of these DuPont materials since 1982. The trademark agreements require certain quality standards and the identification of the DuPont trademark on the finished product manufactured by us. We believe this brand identification with DuPont and Tyvek(R) significantly benefits the marketing of our largest product line, as over the past 30 years Tyvek(R) has become known as the standard for limited use/disposable protective clothing. We believe our relationship with DuPont to be excellent. We maintain manufacturing facilities in Decatur, Alabama; Celaya, Mexico; AnQui City, China; Jiaozhou, China; New Delhi, India, Shillington, PA, and St. Joseph, Missouri, where our products are designed, manufactured and sold. We also have a relationship with a sewing subcontractor in Mexico, which we can utilize for unexpected production surges. Our China, Mexico, and India facilities allow us to take advantage of favorable labor and component costs, thereby increasing our profit margins on products manufactured in these facilities. Our China and Mexico facilities are designed for the manufacture of limited use/disposable protective clothing as well as our high-end chemical protective suits. We have significantly improved our profit margins in these product lines by shifting production to our international facilities and we are currently expanding our international manufacturing capabilities to include our gloves and reusable woven protective apparel product lines. Industry Overview According to Global Industry Analysts, Inc., the global market for industrial work clothing was projected to be approximately $6.3 billion in 2005, and is projected to grow at a compound annual growth rate of approximately 6.5%. Our primary market, North America, is the largest market, expected to make up over one-third, or approximately $2.0 billion, of the global market. The industrial work clothing market includes our limited use/disposable protective or safety clothing, our high-end chemical protective suits, our fire fighting and heat protective apparel and our reusable woven garments. The industrial protective safety clothing market has evolved over the past 35 years as a result of governmental regulations and requirements and commercial product development. In 1970, Congress enacted the Occupational 5 Safety and Health Act, or OSHA, which requires employers to supply protective clothing in certain work environments. Almost two million workers are subject to OSHA standards today. Certain states have also enacted worker safety laws that supplement OSHA standards and requirements. The advent of OSHA coincided with DuPont's development of Tyvek(R) which, for the first time, allowed for the economical production of lightweight, disposable protective clothing. The attraction of disposable garments grew in the late 1970s as a result of increases in labor and material costs of producing cloth garments and the promulgation of federal, state and local safety regulations. In 1990, additional standards proposed and developed by the National Fire Protection Association and the American Society for Testing and Materials were adopted by OSHA. These standards identify four levels of protection, A through D, and specify the equipment and clothing required to adequately protect the wearer at each level: o Level A requires total encapsulation in a vapor proof chemical suit with self contained breathing apparatus, or SCBA, and appropriate accessories. o Level B calls for SCBA or a positive pressure supplied respirator with escape SCBA, plus hooded chemical resistant clothing (coveralls), one or two piece chemical splash suit, or disposable chemical resistant coveralls. o Level C requires hooded chemical resistant clothing, such as coveralls, two piece chemical splash suit, or disposable chemical resistant coveralls. o Level D involves work and/or training situations that require minimal coverall protection. In response to the terrorist attacks that took place on September 11, 2001, the federal government has provided for additional protective equipment funding through programs that are part of the Homeland Security initiative. The Fire Act of 2002 created the federal Assistance to Firefighters Grant Program, or AFGP, to provide funds directly to local fire districts to help improve their readiness and capability to respond to terrorist attacks. Funds are allocated under AFGP to the following areas: fire operations/firefighter safety; fire prevention; emergency medical services; and firefighting vehicle acquisition. AFGP will provide more than $2.15 billion in funding through 2005, with approximately $750 million appropriated for 2003, $750 million in 2004, $650 million more in 2005 and $648 million in 2006. The Bio Terrorism Preparedness and Response Act of 2002, which we refer to as the Bio Terrorism Act, appropriated $3.643 billion for Bioterrorism Preparedness and $1.641 billion for Bioterrorism Hospital Preparedness between 2002 and 2005. Hospital Preparedness is where we expect to see most of our garment sales. The 2006 appropriations bill provides $550 million for Hospital Preparedness. The $514.6 million of bioterrorism hospital preparedness monies appropriated in 2005 are expected to be disbursed in 2006 and 2007, and the funding for 2006 should be disbursed in 2007 and 2008. Recently, federal and state purchasing of industrial protective clothing and federal grants to fire departments have increased demand for industrial protective clothing to protect first responders against actual or threatened terrorist incidents. Specific events such as the 2002 U.S. Winter Olympics, the SARS epidemic in 2003 the anthrax letters incidents in 2001 and the ricin letter incidents in 2004 have also resulted in increased demand for our products. Industry Consolidation The industrial protective clothing industry is highly fragmented and consists of a large number of small, closely-held family businesses. DuPont, Lakeland and Kimberly Clark are the dominant disposable industrial protective apparel manufacturers. Since 1997, the markets for manufacturing and distribution have consolidated. A number of large distributors with access to capital have acquired smaller distributors. The acquisitions include Vallen Corporation's acquisitions of Safety Centers, Inc., All Supplies, Inc., Shepco Manufacturing Co., and Century Safety (Canada) and Hagemeyer's acquisition of Vallen Corporation; W.W. Grainger's acquisitions of Allied Safety, Inc., Lab Safety Supply, Inc., Acklands Limited, Gempler's safety supply division and Ben Meadows, Inc.; Air Gas' acquisitions of Rutland Tool & Supply Co., Inc., IPCO Safety Supply, Inc., Lyon Safety, Inc., Safety Supply, Inc., Safety West, Inc. and Delta Safety Supply, Inc.; and Fischer Scientific's acquisitions of Safety Services of America, Cole-Parner, Retsch and Emergo. As these safety distributors consolidate and grow, we believe they are looking to reduce the number of safety manufacturing vendors they deal with and support, while at the same time shifting the burden of end user selling to 6 the manufacturer. This creates a significant capital availability issue for small safety manufacturers as end user selling is more expensive, per sales dollar, than selling to safety distributors. As a result, the manufacturing sector in this industry is seeing follow-on consolidation. DuPont has acquired Marmac Manufacturing, Inc., Kappler, Inc., Cellucup, Melco, Mfg., and Regal Manufacturing since 1998, while in the related safety product industries Norcross Safety Products L.L.C. has acquired Morning Pride, Ranger-Servus, Salisbury, North and Pro Warrington and Christian Dalloz has acquired Bacou, USA which itself acquired Uvex Safety, Inc., Survivair, Howard Leight, Perfect Fit, Biosystems, Fenzy, Titmus, Optrel, OxBridge and Delta Protection. We believe a larger industrial protective clothing manufacturer has competitive advantages over a smaller competitor including: o economies of scale when selling to end users, either through the use of a direct sales force or independent representation groups; o broader product offerings that facilitate cross-selling opportunities; o the ability to employ dedicated protective apparel training and selling teams; o the ability to offer volume and growth incentives to safety distributors; and o access to international sales. We believe we have a substantial opportunity to pursue acquisitions in the industrial protective clothing industry, particularly because many smaller manufacturers share customers with us. Business Strategy Key elements of our strategy include: o Dealing with Price Increases in Raw Materials. One major supplier, DuPont, increased the price of Tyvek fabrics by 3.7% in January, 2005, by 4 to 6% in June 2005 and by 4.9% in November 2005. However, in June of 2005 DuPont also published new garment price increases of 4% to 6%, depending on style, and again increased garment prices in November 2005 by 6%. These increases were mostly predicated upon increases in oil and natural gas which are prime components in the manufacturing of Tyvek. We react to such increases by increasing our inventories of Tyvek roll goods prior to such announced increases. Additionally, we have negotiated discounts on such roll goods based upon volume purchases. Nonetheless, Tyvek garment pricing to prime volume accounts was competitive in the fourth quarter of fiscal 2006. In order to offset any negative effect of these prices increases we are continuing the operating cost reduction program already in effect and have initiated new measures. For example: 1. We continue to press our raw material and component suppliers for price reductions and better payment terms. 2. We are sourcing more raw materials and components from our China based operations as opposed to sourcing in Europe and North America. 3. We are re-engineering many products so as to reduce the amount of raw materials used and reduce the direct labor in such products. o Increase Sales to the First Responder Market. Our high-end chemical protective suits meet all of the regulatory standards and requirements and are particularly well qualified to provide protection to first responders to chemical or biological attacks. For example, our products have been used for response to recent threats such as the 2001 anthrax letters and the 2004 ricin letters. A portion of appropriations for the Fire Act of 2002 and the 7 Bio Terrorism Act of 2002 are available for purchase of products for first responders that we manufacture, and we are aggressively targeting this Homeland Security market. o Improve Marketing in Existing Markets. We believe significant growth opportunities are available to us through the better positioning, marketing and enhanced cross-selling of our reusable woven protective clothing, glove and arm guards and high-end chemical suit product lines, along with our limited use/disposable lines as a bundled offering. This allows our customers one stop shopping using combined freight shipments. o Decrease Manufacturing Expenses by Moving Production to International Facilities. We have additional opportunities to take advantage of our low cost production capabilities in Mexico and China. Beginning in 1995, we successfully moved the labor intensive sewing operation for our limited use/disposable protective clothing lines to these facilities. Beginning January 1, 2005, pursuant to the United States World Trade Organization Treaty with China, the reduction in quota requirements and tariffs imposed by the U.S. and Canada on textiles goods such as our reusable woven garments have made it more cost effective to move production for these product lines to our assembly facilities in China. We are half way through this process and expect to complete this process by the fourth quarter of fiscal 2007. As a result, we expect to see profit margin improvements for these product lines, which will allow us to compete more effectively as quota restrictions are removed and tariffs lowered. There are currently no items we produce in China subject to quotas. There are only a few minor items in our Mifflin Valley line which would presently fall into quota restraints. At this time, no such items are produced in China. o Increase International Sales Opportunities. We also intend to increase our penetration of the International markets for our product lines. We have recently opened new sales offices in Beijing, China; Tokyo, Japan; and Santiago, Chile: Our sales in our existing Canadian and United Kingdom operations grew by 21.5% and 35.9% respectively in fiscal 2006. o Emphasize Customer Service. We continue to offer a high level of customer service to distinguish our products and to create customer loyalty. We offer well-trained and experienced sales and support personnel, on-time delivery and accommodation of custom and rush orders. We also seek to advertise our brand names. o Acquisitions. We believe that the protective clothing market is fragmented and presents the opportunity to acquire businesses that offer comparable products or specialty products that we do not offer. We intend to consider acquisitions that afford us economies of scale, enhanced opportunity for cross-selling, expanded product offerings and an increased market presence. We currently have an option to purchase for $2.75 million the plant and machinery of the Indian glove operation, that we are presently leasing and at which we are producing gloves. We also acquired Mifflin Valley, Inc., a manufacturer of high visibility protective clothing in August 2005. o Introduction of New Products. We continue our history of product development and innovation by introducing new proprietary products across all our product lines. Our innovations have included Micromax(R) disposable protective clothing line, our Despro(TM) patented glove design, Microgard antimicrobial products for food service and our engineered composite glove products for high cut and abrasion, our Thermbar glove and sleeve products for heat protection, Grapolator(TM) sleeve lines for hand and arm cut protection and our Thermbar(TM) Mock Twist glove for hand and arm heat protection. We own 14 patents on fabrics and production machinery and have 9 additional patents in application. We will continue to dedicate resources to research and development. o Increase Penetration of the North American Tyvek(R) Market. We intend to increase our sales of Tyvek(R)-based garments by introducing Tyvek(R) in industries which have generally used woven reusable garments, such as food processing and food service industries including kitchens, grocery stores and chicken and fishery slaughter operations. We believe that limited use/disposable garments are more effective at preventing contamination than reusable garments that are exposed to possible contamination while in transit or while being laundered. We also plan to expand our sales of Tyvek(R)-based products and marketing efforts in Mexico and Canada. Industrial safety gear utilized in U.S. manufacturing often gains acceptance as standard equipment for new facilities and factories operated by U.S. companies in other countries. 8 Our Competitive Strengths Our competitive strengths include: o Industry Reputation. We devote significant resources to creating customer loyalty by accommodating custom and rush orders and focusing on on-time delivery. Additionally, our ISO 9001 certified facilities manufacture high-quality products. As a result of these factors, we believe that we have an excellent reputation in the industry. o Long-standing Relationship with DuPont. We believe we are the largest independent customer for DuPont's Tyvek(R) and TyChem(R) material for use in the industrial protective clothing market. Our trademark agreements with DuPont for Tyvek(R), TyChem(R) and Kevlar(R) require certain quality standards and the identification of the DuPont brand on the finished product. We believe this brand identification with DuPont significantly benefits the marketing of our product lines, as over the past 30 years Tyvek(R) has become known as the standard for limited use/disposable protective clothing. We believe our relationship with DuPont to be excellent. o International Manufacturing Capabilities. We have operated our own manufacturing facilities in Mexico since 1995 and in China since 1996. Our three facilities in China total over 160,000 sq. ft. of manufacturing, warehousing and administrative space while our facility in Mexico totals over 25,000 sq. ft. of manufacturing, warehousing and administrative space. Our facilities and capabilities in China and Mexico allow access to a less expensive labor pool than is available in the United States and permits us to purchase certain raw materials at a lower cost than they are available domestically. o India. We are currently leasing a 30,155 square foot facility in New Delhi, India where we are producing nitrile, latex and neoprene gloves which are being sold in Europe and South America presently. We intend to enter the North American market in autumn 2006 with a newly designed line of gloves. We have an option to purchase this facility after November 2006, if we are satisfied with its production and quality. o Sales Offices. We have sales offices around the world to service various major markets, Toronto, Canada for Canada, Newport, United Kingdom for the European Common Market, Beijing, China for China and Southeast Asia, Tokyo, Japan for Japan and Santiago, Chile for the South American market. o Comprehensive Inventory. We have a large product offering with numerous specifications, such as size, styles and pockets, and maintain a large inventory of each in order to satisfy customer orders in a timely manner. Many of our customers traditionally make purchases of industrial protective gear with expectations of immediate delivery. We believe our ability to provide timely service for these customers enhances our reputation in the industry and positions us strongly for repeat business, particularly in our limited use/disposable protective clothing lines. o Manufacturing Flexibility. By locating labor-intensive manufacturing processes such as sewing in Mexico and China, and by utilizing sewing sub-contractors, we have the ability to increase production without substantial additional capital expenditures. Our manufacturing systems allow us flexibility for unexpected production surges and alternative capacity in the event any of our independent contractors become unavailable. o Experienced Management Team. We have an experienced management team. Our executive officers other than the CFO average greater than 21 years of experience in the industrial protective clothing market. The knowledge, relationships and reputation of our management team helps us maintain and build our customer base. 9 Products The following table summarizes our principal product lines, the raw materials used to manufacture them, their applications and end markets:
- ---------------------------------------------------------------------------------------------------------------------------------- Product Line Raw Material Protection Against End Market - ---------------------------------------------------------------------------------------------------------------------------------- Limited use/disposable o Tyvek(R) and laminates o Contaminants, o Chemical/petrochemic protective clothing of Polyethylene, irritants, metals, al industries Spunlaced Polyester, chemicals, fertilizers, o Automotive and SMS, Polypropylene, pesticides, acids, pharmaceutical and Company asbestos, PCBs, lead, industries Micromax, Micromax dioxin and many other o Public utilities NS, Pyrolon(R), and hazardous chemicals o Government (terrorist other non-woven o Viruses and bacteria response) fabrics (AIDS, o Janitorial streptococcus,SARS o Medical Facilities and hepatitis) - ---------------------------------------------------------------------------------------------------------------------------------- High-end chemical protective o TyChem(R)QC o Chemical spills o Hazardous material suits o TyChem(R) SL o Toxic chemicals used teams o TyChem(R) TK in manufacturing o Chemical and nuclear o TyChem(R) F processes industries o TyChem(R) BR o Terrorist attacks, o Fire departments o Pyrolon CRFR biological warfare o Government (first o Other Lakeland (anthrax and ricin) responders) patented co-polymer laminates - ---------------------------------------------------------------------------------------------------------------------------------- Fire fighting and heat o PBI o Fire, burns and o Municipal, corporate protective apparel o Nomex(R) excessive heat and volunteer fire o Millenia(R) departments o Basofil(R) o Wildland fire fighting o Advance o Hot equipment o Indura(R) Ultrasoft maintenance personnel o Aluminized Nomex(R) and industrial fire o Aluminized Kevlar(R) departments o Oil well fires o Airport crash rescue - ---------------------------------------------------------------------------------------------------------------------------------- Gloves and arm guards ((1)) o Kevlar(R) yarns o Cuts, lacerations, heat o Automotive, glass and o Spectra(R) yarns and chemical irritants metal fabrication o Kevlar(R) wrapped industries steel core yarns o Chemical plants - ---------------------------------------------------------------------------------------------------------------------------------- Reusable woven garments o Staticsorb carbon o Protects manufactured o Hospital and industrial thread with polyester products from human facilities o Cotton polyester contamination or static o Clean room environments blends electrical charge o Emergency medical o Cotton o Bacteria, viruses and ambulance services o Polyester blood borne pathogens o Chemical and refining o Nomex(R)/FR Cottons o Protection from flash fires - ----------------------------------------------------------------------------------------------------------------------------------
-------- (1) Industrial grade Nitrile, Latex, Neoprene, Buytl and other combinations thereof will be added to our product line if we exercise our option to acquire the Indian glove facility we are working with now. These industrial gloves are used to protect workers from hazardous chemicals and will complement our line of cut resistant Kevlar and Spectra string knit gloves. 10 Limited Use/Disposable Protective Clothing We manufacture a complete line of limited use/disposable protective garments, including coveralls, laboratory coats, shirts, pants, hoods, aprons, sleeves, arm guards, caps, and smocks. 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(R) and TyChem QC (both DuPont fabrics) and our own trademarked fabrics such as Pyrolon(R) Plus 2, XT, CRFR, Micromax(R), Micromax NS, Safegard "76" (R), Zonegard(R), Body Gard(R), RyTex(R) and TomTex(R), which are made of spunlaced polyester, polypropylene and polyethylene materials, laminates, films and derivatives. We incorporate many seaming and taping techniques depending on the level of protection needed in the end use application. Typical users of these garments include chemical plants, petrochemical refineries and related installations, automotive manufacturers, pharmaceutical companies, construction companies, coal and oil power generation utilities and telephone utility companies. Numerous smaller industries use these garments for specific safety applications unique to their businesses. Additional applications include protection from viruses and bacteria, such as AIDS, streptococcus, SARS and hepatitis, at hospitals, clinics and emergency rescue sites and use in clean room environments to prevent human contamination in the manufacturing processes. Our limited use/disposable protective clothing products range in unit price from $.04 for shoe covers to approximately $14.00 for a TyChem(R) QC laminated hood and booted coverall. Our largest selling item, a standard white Tyvek(R) coverall, sells for approximately $2.50 to $3.75 per garment. By comparison, similar reusable cloth coveralls range in price from $30.00 to $60.00, exclusive of laundering, maintenance and shrinkage expenses. We cut, warehouse and sell our limited use/disposable garments primarily at our Decatur, Alabama and China facilities and warehouse in Las Vegas, NV and Shillington, PA. The fabric is cut into required patterns at our Decatur plant and shipped to our Mexico facility for assembly. Our assembly facilities in China or Mexico and independent contractors sew and package the finished garments and return them primarily to our Decatur, Alabama plant, normally within one to eight weeks, for immediate shipment to the customer. We presently utilize one independent domestic sewing contractor and one international contractor under agreements that are terminable at will by either party. In fiscal 2006, no independent sewing contractor accounted for more than 5% of our production of limited use/disposable garments. We believe that we can obtain adequate alternative production capacity should any of our independent contractors become unavailable. The capacity of our facilities, complemented by the availability of existing and other available independent sewing contractors, allow us to reduce by 5%, or alternately increase by 10%, our production capacity without incurring large on going costs typical of many manufacturing operations. This allows us to react quickly to changing unit demand for our products. High-End Chemical Protective Suits We manufacture heavy-duty chemical suits made from DuPont TyChem(R) QC, SL, TK, TyChem F and TyChem(R) BR fabrics. These suits are worn by individuals on hazardous material teams to provide protection from powerful, highly concentrated and hazardous or potentially lethal chemical and biological toxins, such as toxic wastes at Super Fund sites, toxic chemical spills or biological discharges, chemical or biological warfare weapons (such as anthrax, ricin, or saran gas), and chemicals and petro-chemicals present during the cleaning of refineries and nuclear facilities. Our line of chemical suits range in cost from $24 per coverall to $1192. The chemical suits can be used in conjunction with a fire protective shell that we manufacture to protect the user from both chemical and flash fire hazards. We have also introduced two garments approved by the National Fire Protection Agency (NFPA) for varying levels of protection that are manufactured from DuPont materials: o TyChem(R) TK - a co-polymer film laminated to a durable spun bonded substrate. This garment offers the broadest temperature range for limited use garments of -94(degree)F to 194(degree)F. TyChem(R) TK meets all OSHA Level A requirements. It is available in National Fire Protection Agency 1991-2000 certified versions when worn with an aluminized over cover. o TyChem(R) BR - meets all OSHA Level B and all National Fire Protection Agency 1994 fabric requirements and offers splash protection against a wide array of chemicals. We manufacture chemical protective clothing at our facilities in Decatur, Alabama, Mexico and China. Using fabrics such as TyChem(R) SL, TyChem(R) TK, TyChem F, and TyChem(R) BR, we design, cut, glue and/or sew the 11 materials to meet customer purchase orders. The federal government, through the Fire Act of 2002, appropriated approximately $750 million in 2003 to fire departments in the United States and its territories to fund the purchase of, among other things, personal protective equipment, including our fire fighting and heat protective apparel and high-end chemical protective suits. An additional $750 million was appropriated for 2004, $650 million for 2005 and $648 million for 2006. The Bio Terrorism Preparedness and Response Act of 2002 included appropriations of $3.643 billion for Bioterrorism Preparedness and $1.641 billion for Bioterrorism Hospital Preparedness between 2002 and 2005. Hospital Preparedness is where we expect to see most of our garment sales. The 2006 appropriations bill provides $550 million for Hospital Preparedness. Fire Fighting and Heat Protective Apparel We manufacture an extensive line of products to protect individuals who work in high heat environments. Our heat protective aluminized fire suit product lines include the following: o Kiln entry suit - to protect kiln maintenance workers from extreme heat. o Proximity suits - to give protection in high heat areas where exposure to hot liquids, steam or hot vapors is possible. o Approach suits - to protect personnel engaged in maintenance, repair and operational tasks where temperatures do not exceed 200(degree)F ambient, with a radiant heat exposure up to 2,000(degree)F. We manufacture fire fighter protective apparel for domestic and foreign fire departments. We developed the popular Sterling Heights(TM) style (short coat and bib pants) bunker gear. Crash rescue continues to be a major market for us, as we were one of the first manufacturers to supply military and civilian markets with airport fire fighting protection. Our fire suits range in price from $480 for standard fire department turn out gear to $2,000 for a fire entry suit. Approximately 70% of our heat protective clothing is currently manufactured at our facility in St. Joseph, Missouri with the remainder being made in our China facilities. Our Fyrepel(TM) brand of fire fighting apparel continues to benefit from ongoing research and development investment, as we seek to address the ergonomic needs of stressful occupations. Additionally, we have introduced a new line of turnout gear manufactured in China in order to compliment our US line. Gloves and Arm Guards We manufacture and sell specially designed gloves and arm guards made from Kevlar(R), a cut and heat resistant material produced by DuPont, Spectra(R), a cut resistant fiber made by Honeywell, and our proprietary patented yarns. We are one of only seven companies licensed in North America to sell 100% Kevlar(R) gloves, which are high strength, lightweight, flexible and durable. Kevlar(R) gloves offer a better overall level of protection and lower worker injury rates, and are more cost effective, than traditional leather, canvas or coated work gloves. Kevlar(R) gloves, which can withstand temperatures of up to 400(degree)F and are cut resistant enough to allow workers to safely handle sharp or jagged unfinished sheet metal, are used primarily in the automotive, glass and metal fabrication industries. Our higher end Kevlar(R) and Spectra(R) gloves range in price from $37 to $240 for a dozen pair. We manufacture gloves primarily at our Alabama and Mexican facilities, and we are shifting lower cost yarn production to our China facilities. We completed our shift of glove production to Mexico this year and will continue shifting more to our Chinese facilities and our Indian glove facility (if we exercise our option to acquire) in this fiscal year and next fiscal year. Foreign production will allow lower fabric and labor costs. We have received patents on manufacturing processes that provide hand protection to the areas of a glove where it wears out prematurely in various applications. For example, the areas of the thumb crotch, and index fingers are made heavier than the balance of the glove providing increased wear protection and longer glove life reducing overall glove costs. This proprietary manufacturing process allows us to produce our gloves more economically and provide a greater value to our end user. Reusable Woven Garments We manufacture and market a line of reusable and washable woven garments that complement our fire fighting 12 and heat protective apparel offerings and provide alternatives to our limited use/disposable protective clothing lines and give us access to the much larger woven industrial and health care-related markets. Cloth reusable garments are favored by customers for certain uses or applications because of familiarity with and acceptance of these fabrics and woven cloth's heavier weight, durability and longevity. These products allow us to supply and satisfy a wider range of safety and customer needs. Our product lines include the following: o Electrostatic dissipative apparel - used primarily in the automotive industry. o Clean room apparel - used in semiconductor manufacturing and pharmaceutical manufacturing to protect against human contamination. o Flame resistant Nomex(R)/FR Cotton coveralls/pants/jackets - used in chemical and petroleum plants and for wild land firefighting. o Cotton and Polycotton coveralls, lab coats, pants, and shirts. Our reusable woven garments range in price from $10 to $100 per garment. We manufacture and sell woven cloth garments at our facilities in China and St. Joseph, Missouri. We are continuing to relocate highly repetitive sewing processes for our high volume, standard product lines such as woven protective coveralls and high visibility vests and shirts to our facilities in China where lower fabric and labor costs allow increased profit margins. We expect the relocation process to be substantially complete by the fourth quarter of fiscal 2007. High Visibility Clothing In August 2005, we acquired the assets of Mifflin Valley, Inc. of Shillington, PA. Mifflin is a manufacturer of protective clothing specializing in safety and visibility, largely for the Emergency Services market, but also for the entire public safety and traffic control market. Mifflin's high visibility products include Flame Retardant garments for the Fire Industry, Nomex clothing for utilities, and high visibility Reflective Outerwear for Departments of Transportation. Mifflin products are our strategic fit for our Woven and Fire Line of garments and we expect higher than normal sales growth out of this subsidiary as our existing sales force starts promoting this new line. Quality Control Our Alabama, Missouri, Mexico and China manufacturing facilities are ISO 9001 certified. ISO standards are internationally recognized quality manufacturing standards established by the International Organization for Standardization based in Geneva, Switzerland. To obtain our ISO registration, our factories were independently audited to test our compliance with the applicable standards. In order to maintain registration, our factories receive regular announced inspections by an independent certification organization. We believe that the ISO 9001 certification makes us more competitive in the marketplace, as customers increasingly recognize the standard as an indication of product quality. Marketing and Sales We employ an in-house sales force of 17 people, 3 regional sales managers and utilize 42 independent sales representatives. These employees and representatives call on over 800 safety and mill supply distributors nationwide in order to promote and provide product information for and sell our products. Distributors buy our products for resale and typically maintain inventory at the local level in order to assure quick response times and the ability to service their customers properly. Our sales employees and independent representatives have consistent communication with end users and decision makers at the distribution level, thereby allowing us valuable feedback on market perception of our products, as well as information about new developments in our industry. During fiscal 2006, one single distributor accounted for 5% of our net sales. No other single distributor accounted for more than 5% of our net sales. We seek to maximize the efficiency of our established distribution network through direct promotion of our products at the end user level. We advertise primarily through trade publications and our promotional activities include sales catalogs, mailings to end users, a nationwide publicity program and our Internet web site. We exhibit at both regional and national trade shows such as the National Safety Congress and the American Industrial Hygienists Convention. 13 Research and Development We continue to evaluate and engineer new or innovative products. In the past three years we have introduced the Micromax(R) line of disposable protective clothing; a newly configured line of fire retardant work coveralls and fire turn-out gear; a SARS protective medical gown for Chinese hospital personnel; the Despro(TM), Grapolator(TM) and Microgard-anti microbial cut protective glove and sleeve lines for food service; and our patented Thermbar(TM) Mock Twist that provides heat protection for temperatures up to 600(degree)F. We own 14 patents on various fabrics, patterns and production machinery. We plan to continue investing in research and development to improve protective apparel fabrics and the manufacturing equipment used to make apparel. Specifically, we plan to continue to develop new specially knit and coated gloves, woven gowns for industrial and medical uses, fire retardant cotton fabrics and protective non-woven fabrics. During fiscal 2004, 2005 and 2006, we spent approximately $82,000, $89,000, and $90,000 respectively, on research and development. Suppliers and Materials Our largest supplier is DuPont, from whom we purchase Tyvek(R) under North American trademark licensing agreements and Kevlar(R) under international trademark licensing agreements. Commencing in 1995, anticipating the expiration of certain patents on its proprietary materials, DuPont offered certain customers of these materials the opportunity to enter into two year trademark licensing agreements. We entered into such agreements and have renewed them continually since. In fiscal 2006, we purchased approximately 74.1% of the dollar value of our materials from DuPont, and Tyvek(R) constituted approximately 64.4% of our cost of goods sold and 69.1% of the dollar value of our raw material purchases. We believe our relationship with DuPont to be excellent and our Tyvek/Tychem trade mark licenses with DuPont have been extended until January 31, 2008. We do not have long-term, formal agreements with any other suppliers of non-woven fabric raw materials used by us in the production of our limited use/disposable protective clothing product lines. Materials such as polypropylene, polyethylene, polyvinyl chloride, spun laced polyester and their derivatives are 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 our disposable garments, such as thread, boxes, snaps and elastics are obtained from unaffiliated suppliers. We have not experienced difficulty in obtaining our requirements for these commodity component items. We have not experienced difficulty in obtaining materials, including cotton, polyester and nylon, used in the production of reusable non-wovens and commodity gloves. We obtain Spectra(R) yarn used in our super cut-resistant Dextra Guard gloves from Honeywell, and we believe Honeywell will be able to meet our needs for this material in the future. We obtain Kevlar(R), used in the production of our specialty safety gloves, from independent mills that purchase the fiber from DuPont. Our use of Kevlar(R) is subject to an international trademark licensing agreement with DuPont. Materials used in our fire and heat protective suits include glass fabric, aluminized glass, Nomex(R), aluminized Nomex(R), Kevlar(R), aluminized Kevlar(R), polybenzimidazole and Gortex, as well as combinations utilizing neoprene coatings. Traditional chemical protective suits are made of Viton, butyl rubber and polyvinyl chloride, all of which are available from multiple sources. Advanced chemical protective suits are made from TyChem(R) SL, TK and BR fabrics, which we obtain from DuPont, and our patented fabrics. We have not experienced difficulty obtaining any of these materials. Competition Our business is highly competitive due to large competitors who have monopolistic positions in the fabrics that are standards in the industry. We believe that the barriers to entry in the reusable garments and glove markets are relatively low. We face competition in some of our other product markets from large established companies that have greater financial, research and development, sales and technical resources. Where larger competitors, such as DuPont and Kimberly Clark, offer products that are directly competitive with our products, particularly as part of an established line of products, there can be no assurance that we can successfully compete for sales and customers. Larger competitors also may be able to benefit from economies of scale and technological innovation and may introduce new products that compete with our products. Seasonality Our operations have historically been seasonal, with higher sales generally occurring in February, March, April and May when scheduled maintenance on nuclear, coal, oil and gas fired utilities, chemical, petrochemical and smelting facilities, and other heavy industrial manufacturing plants occurs, primarily due to moderate spring temperatures. Sales decline during the warmer summer and vacation months and generally increase from Labor Day 14 through February with slight declines during holidays. As a result of this seasonality in our sales, we have historically experienced a corresponding seasonality in our working capital, specifically inventories, with peak inventories occurring between September and March coinciding with lead times required to accommodate the spring maintenance schedules. We believe that by sustaining higher levels of inventory, we gain a competitive advantage in the marketplace. Certain of our large customers seek sole sourcing to avoid sourcing their requirements from multiple vendors whose prices, delivery times and quality standards differ. In recent years, due to increased demand by first responders for our chemical suits and fire gear, our historical seasonal pattern has shifted. Governmental disbursements are dependent upon budgetary processes and grant administration processes that do not follow our traditional seasonal sales patterns. Due to the size and timing of these governmental orders, our net sales, results of operations, working capital requirements and cash flows can vary between different reporting periods. As a result, we expect to experience increased variability in net sales, net income, working capital requirements and cash flows on a quarterly basis. Patents and Trademarks We own 14 patents and have 9 patents in the application and approval process with the U.S. Patent and Trademark Office. We own 11 Trademarks and have 9 Trademarks in the application and approval process. Additionally, a Patent Corporation Treaty application was filed for our Unilayer Glove Fabrics which involves technology using a robotic knitter that allows us to knit a glove using stronger or weaker yarns in different parts of the glove, as necessary, depending on the expected wear. Intellectual property rights that apply to our various products include patents, trade secrets, trademarks and to a lesser extent copyrights. We maintain an active program to protect our technology by ensuring respect for our intellectual property rights. We presently have no contracts with these unions Employees As of March 31, 2006, we had approximately 1,634 full time employees, 1,348, or 82.50%, of whom were employed in our international facilities and 286, or 17.50%, of whom were employed in our domestic facilities. An aggregate of 582 of our employees, representing a majority of our employees in our Mexico facility and in each of our China facilities, are members of unions. We are not currently a party to any collective bargaining agreements. We believe our employee relations to be excellent. We presently have no contracts with these unions. Environmental Matters We are subject to various foreign, federal, state and local environmental protection, chemical control, and health and safety laws and regulations, and we incur costs to comply with those laws. We own and lease real property, and certain environmental laws hold current or previous owners or operators of businesses and real property responsible for contamination on or originating from property, even if they did not know of or were not responsible for the contamination. The presence of hazardous substances on any of our properties or the failure to meet environmental regulatory requirements could affect our ability to use or to sell the property or to use the property as collateral for borrowing, and could result in substantial remediation or compliance costs. If hazardous substances are released from or located on any of our properties, we could incur substantial costs and damages. Although we have not in the past had any material costs or damages associated with environmental claims or compliance and we do not currently anticipate any such costs or damages, we cannot assure you that we will not incur material costs or damages in the future, as a result of the discovery of new facts or conditions, acquisition of new properties, the release of hazardous substances, a change in interpretation of existing environmental laws or the adoption of new environmental laws. Available Information We make available free of charge through our Internet website, www.lakeland.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. ITEM 1A. RISK FACTORS - ---------------------- RISK FACTORS You should carefully consider the following risks before investing in our common stock. These are not the only risks that we may face. If any of the events referred to below actually occurs, our business, financial condition, liquidity and results of operations could suffer. In that case, the trading price of our common stock could decline 15 and you may lose all or part of your investment. You should also refer to the other information in this Form 10-K and Annual Report and in the documents we incorporate by reference into this Form 10-K and Annual Report, including our consolidated financial statements and the related notes. Risk Related to Our Business We rely on a limited number of suppliers and manufacturers for specific fabrics, including Tyvek(R) and Tychem(R), and we may not be able to obtain substitute suppliers and manufacturers on terms that are as favorable, or at all, if our supplies are interrupted. Our business is dependent to a significant degree upon close relationships with vendors and our ability to purchase raw materials at competitive prices. The loss of key vendor support, particularly support by DuPont for its Tyvek(R) products, could have a material adverse effect on our business, financial condition, results of operations and cash flows. We do not have long-term supply contracts with DuPont or our other fabric suppliers. In addition, DuPont also uses Tyvek(R) and Tychem (R) in some of its own products which compete directly with our products. As a result, there can be no assurance that we will be able to acquire Tyvek(R), Tychem(R) and other raw materials and components at competitive prices or on competitive terms in the future. For example, certain materials that are high profile and in high demand may be allocated by vendors to their customers based upon the vendors' internal criteria, which are beyond our control. In fiscal 2006, we purchased approximately 74.01% of the dollar value of our raw materials from DuPont, and Tyvek(R) constituted approximately 69.1% of our cost of goods sold. For periods in 1985 and 1989, DuPont placed all purchasers of Tyvek(R) on "allocation." "Allocation" is a circumstance in which demand outstrips supply and fabrics are sold based upon the amount a buyer purchased the prior year. This allocation limited our ability to meet demand for our products. There can be no assurance that an adequate supply of Tyvek(R) or Tychem(R) will be available in the future. Any shortage could adversely affect our ability to manufacture our products, and thus reduce our net sales. Other than DuPont's Tyvek(R) and TyChem(R) fabrics, we generally use standard fabrics and components in our products. We rely on non-affiliated suppliers and manufacturers for the supply of these fabrics and components that are incorporated in our products. If such suppliers or manufacturers experience financial, operational, manufacturing capacity or quality assurance difficulties, or if there is a disruption in our relationships, we will be required to locate alternative sources of supply. We cannot assure you that we will be able to locate such alternative sources. In addition, we do not have any long-term contracts with any of our suppliers for any of these components. Our inability to obtain sufficient quantities of these components, if and as required in the future, may result in: o Interruptions and delays in manufacturing and resulting cancellations of orders for our products; o Increases in fabrics or component prices that we may not be able to pass on to our customers; and o Our holding more inventory that normal because we cannot finish assembling our products until we have all of the components We are subject to risk as a result of our international manufacturing operations. Because most of our products are manufactured at our facilities located in China and Mexico, our operations are subject to risk inherent in doing business internationally. Such risks include the adverse effects on operations from war, international terrorism, civil disturbances, political instability, governmental activities and deprivation of contract and property rights. In particular, since 1978, the Chinese government has been reforming its economic and political systems, and we expect this to continue. Although we believe that these reforms have had a positive effect on the economic development of China and have improved our ability to successfully operate our facilities in China, we cannot assure you that these reforms will continue or that the Chinese government will not take actions that 16 impair our operations or assets in China. In addition, periods of international unrest may impede our ability to manufacture goods in other countries and could have a material adverse effect on our business and results of operations. Our results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates. Most of our assembly arrangements with our foreign-based subsidiaries or third party suppliers require payment to be made in U.S. dollars. These payments aggregated $9.9 million in fiscal 2006. Any decrease in the value of the U.S. dollar in relation to foreign currencies could increase the cost of the services provided to us upon contract expirations or supply renegotiations. There can be no assurance that we will be able to increase product prices to offset any such cost increases and any failure to do so could have a material adverse effect on our business, financial condition and results of operations. We are also exposed to foreign currency exchange rate risks as a result of our sales in foreign countries. Our net sales to customers in Canada and China were $8.1 million, in fiscal 2006. Our sales in Canada are denominated in Canadian dollars. If the value of the U.S. dollar increases relative to the Canadian dollar and we are unable to raise our prices proportionally, then our profit margins could decrease because of the exchange rate change. Although our fabric and compenent costs in China are denominated in the Chinese Yuan, this currency has historically been largely pegged to the U.S. dollar, which has minimized our foreign currency exchange rate risk in China. Recently, however the Chinese Yuan has been allowed to float against to the U.S. dollar, and therefore, we will be exposed to additional foreign currency exchange rate risk. This risk will also increase as we continue to increase our sales in other foreign countries. See "Management's Discussion and Analysis of Financial condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Risk." Rapid technological change could negatively affect sales of our products and our performance. The rapid development of fabric technology continually affects our apparel applications and may directly impact the performance of our products. For example, microporous film-based products have eroded the market share of Tyvek(R) in certain applications. We cannot assure you that we will successfully maintain or improve the effectiveness of our existing products, nor can we assure you that we will successfully identify new opportunities or continue to have the needed financial resources to develop new fabric or apparel manufacturing techniques in a timely or cost-effective manner. In addition, products manufactured by others may render our products obsolete or non-competitive. If any of these events occur, our business, prospects, financial condition and operating results will be materially and adversely affected. Acquisitions or future expansion could be unsuccessful. Mifflin Valley, Inc., a Pennsylvania company, acquired on August 1, 2005, and a portion of the assets of RFB Latex, an Indian company, which we have the option to acquire in autumn 2006 currently market high visibility clothing and chemically resistant gloves. These two new lines may accelerate our growth in the personal protective equipment market. This past and potential upcoming acquisition involve various risks, including: difficulties in integrating these companies' operations, technologies, and products, the risk of diverting management's attention from normal daily operations of the business; potential difficulties in completing projects associated with in-process research and development; risks of entering markets in which we have limited experience and where competitors in such markets have stronger market positions; initial dependence on unfamiliar supply chains; and insufficient revenues to offset increased expenses associated with these acquisitions. In the future, we may seek to acquire additional selected safety products lines or safety-related businesses which 17 will complement our existing products. Our ability to acquire these businesses is dependent upon many factors, including our management's relationship with the owners of these businesses, many of which are small and closely held by individual stockholders. In addition, we will be competing for acquisition and expansion opportunities with other companies, many of which have greater name recognition, marketing support and financial resources than us, which may result in fewer acquisition opportunities for us as well as higher acquisition prices. There can be no assurance that we will be able to identify, pursue or acquire any targeted business and, if acquired, there can be no assurance that we will be able to profitably manage additional businesses or successfully integrate acquired business into our company without substantial costs, delays and other operational or financial problems. If we proceed with any significant acquisition for cash, we may use a substantial portion of our available cash in order to consummate any such acquisition. We may also seek to finance any such acquisition through debt or equity financings, and there can be no assurance that such financings will be available on acceptable terms or at all. If consideration for an acquisition consists of equity securities, our stockholders could be diluted. If we borrow funds in order to finance an acquisition, we may not be able to obtain such funds on terms that are favorable to us. In addition, such indebtedness may limit our ability to operate our business as we currently intend because of restrictions placed on us under the terms of the indebtedness and because we may be required to dedicate a substantial portion of our cash flow to payments on the debt instead of to our operations, which may place us at a competitive disadvantage. Acquisitions involve a number of special risks in addition to those mentioned above, including the diversion of management's attention to the assimilation of the operations and personnel of the acquired companies, the potential loss of key employees of acquired companies, potential exposure to unknown liabilities, adverse effects on our reported operating results, and the amortization or write down of acquired intangible assets. We cannot assure you that any acquisition by us will or will not occur, that if an acquisition does occur that it will not materially and adversely affect our results of operations or that any such acquisition will be successful in enhancing our business. If we are unable to manage our growth, our business could be adversely affected. Our operations and business have expanded substantially in recent years, with a large increase in employees and business areas in a short period of time. To manage our rapid growth properly, we have been and will be required to expend significant management and financial resources. There can be no assurance that our systems, procedures and controls will be adequate to support our operations as they expand. There can also be no assurance that our management will be able to manage our growth and operate a larger organization efficiently or profitably. To the extent that we are unable to mange growth efficiently and effectively or are unable to attract and retain additional qualified management personnel, our business, financial condition and results of operations could be materially and adversely affected. We must recruit and retain skilled employees, including our senior management, to succeed in our business. Our performance is substantially dependent on the continued services and performance of our senior management and certain other key personnel, including Christopher J. Ryan, our chief executive officer, president, general counsel and secretary, and Gary Pokrassa, our chief financial officer, who has 36 years of financial and accounting experience, and James McCormick our Controller and treasurer, Greg Willis, our Executive Vice President, and Harvey Pride, Jr., our vice president in charge of manufacturing, due to their long experience in our industry. Our executive officers, other than CFO, have an average tenure with us of 18 years and an average of 21 years of experience in our industry. The loss of services of any of our executive officers or other key employees could have a material adverse effect on our business, financial condition and results of operations. In addition, any future expansion of our business will depend on our ability to identify, attract, hire, train, retain and motivate other highly skilled managerial, marketing, customer service and manufacturing personnel and our inability to do so could have a material adverse effect on our business, financial condition and results of operations. 18 Because we do not have long-term commitments from many of our customers, we must estimate customer demand and errors in our estimates could negatively impact our inventory levels and net sales. Our sales are generally made on the basis of individual purchase orders, which may later be modified or canceled by the customer, rather than long-term commitments. We have historically been required to place firm orders for fabrics and components with our suppliers, prior to receiving an order for our products, based on our forecasts of customer demands. Our sales process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates, causing excess inventory to accrue or a lack of manufacturing capacity when needed. If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect or at all. As a result, we would have excess inventory, which would negatively impact our financial results. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would lose sales opportunities, lose market share and damage our customer relationships. On occasion, we have been unable to adequately respond to delivery dates required by our customers because of the lead time needed for us to obtain required materials or to send fabrics to our assembly facilities in China and Mexico. We face competition from other companies, two of which have substantially greater resources than we do. Two of our competitors, DuPont and Kimberly Clark, have substantially greater financial, marketing and sales resources than we do. In addition, we believe that the barriers to entry in the reusable garments and gloves markets are relatively low. We cannot assure you that our present competitors or competitors that choose to enter the marketplace in the future will not exert significant competitive pressures. Such competition could have a material adverse effect on our net sales and results of operations. For further discussion of the competition we face in our business, see "Business - Competition." Some of our sales are to foreign buyers, which exposes us to additional risks. We derived approximately 9.8% of our net sales from customers located in foreign countries in fiscal 2006. We intend to increase the amount of foreign sales we make in the future. The additional risks of foreign sales include: o Potential adverse fluctuations in foreign currency exchange rates; o Higher credit risks; o Restrictive trade policies of foreign governments; o Currency nullification and weak banking institutions; o Changing economic conditions in local markets; o Political and economic instability in foreign markets; and o Changes in leadership of foreign governments. Some or all of these risks may negatively impact our results of operations and financial condition. Covenants in our credit facilities may restrict our financial and operating flexibility. We currently have one credit facility; o A five year $25 million revolving credit facility, of which we had $7.3 million of borrowings outstanding as 19 of January 31, 2006; and Our current credit facility requires, and any future credit facilities may also require, that we comply with specified financial covenants relating to interest coverage, debt coverage, minimum consolidated net worth, and earnings before interest, taxes, depreciation and amortization. Our ability to satisfy these financial covenants can be affected by events beyond our control, and we cannot assure you that we will meet the requirements of these covenants. These restrictive covenants could affect our financial and operational flexibility or impede our ability to operate or expand our business. Default under our credit facilities would allow the lenders to declare all amounts outstanding to be immediately due and payable. Our lenders have a security interest in substantially all of our assets to secure the debt under our current credit facilities, and it is likely that our future lenders will have security interests in our assets. If our lenders declare amounts outstanding under any credit facility to be due, the lenders could proceed against our assets. Any event of default, therefore, could have a material adverse effect on our business. We may need additional funds, and if we are unable to obtain these funds, we may not be able to expand or operate our business as planned. Our operations require significant amounts of cash, and we may be required to seek additional capital, whether from sales of equity or by borrowing money, to fund acquisitions, for the future growth and development of our business or to fund our operations and inventory, particularly in the event of a market downturn. Although we have the ability until July 31, 2010 to borrow additional sums under our $25 million revolving credit facility, this facility contains a borrowing base provision and financial covenants that may limit the amount we can borrow thereunder or from other sources. We may not be able to replace or renew this credit facility upon its expiration on terms that are as favorable to us or at all. In addition, a number of factors could affect our ability to access debt or equity financing, including; o Our financial condition, strength and credit rating; o The financial markets' confidence in our management team and financial reporting; o General economic conditions and the conditions in the homeland security sector; and o Capital markets conditions. Even if available, additional financing could be costly or have adverse consequences. If additional funds are raised through the incurrence of debt, we will incur increased debt servicing costs and may become subject to additional restrictive financial and other covenants. We can give no assurance as to the terms or availability of additional capital. If we are not successful in obtaining sufficient capital, it could reduce our net sales and net income and adversely impact our financial position, and we may not be able to expand or operate our business as planned. A reduction in government funding for preparations for terrorist incidents that could adversely affect our net sales. As a general matter, a significant portion of our sales growth to our distributors is dependent upon resale by those distributors to customers that are funded in large part by federal, state and local government funding. Specifically, approximately 60% of our high-end chemical suit sales is dependent on government funding. Congress passed the 2001 Assistance to Firefighters Grant Program and the Bioterrorism Preparedness and Response Act of 2002. Both of these Acts provide for funding to fire and police departments and medical and emergency personnel to respond to terrorist incidents. Appropriations for these Acts by the federal government could be reduced or eliminated altogether. Any such reduction or elimination of federal funding, or any reductions in state or local funding, could cause sales of our products purchased by fire and police departments and medical and emergency personnel to decline. We may be subject to product liability claims, and insurance coverage could be inadequate or unavailable to 20 cover these claims. We manufacture products used for protection from hazardous or potentially lethal substances, such as chemical and biological toxins, fire, viruses and bacteria. The products that we manufacture are typically used in applications and situations that involve high levels of risk of personal injury. Failure to use our products for their intended purposes, failure to use our products properly or the malfunction of our products could result in serious bodily injury to or death of the user. In such cases, we may be subject to product liability claims arising from the design, manufacture or sale of our products. If these claims are decided against us and we are found to be liable, we may be required to pay substantial damages and our insurance costs may increase significantly as a result. We cannot assure you that our insurance coverage would be sufficient to cover the payment of any potential claim. In addition, we cannot assure you that this or any other insurance coverage will continue to be available or, if available, that we will be able to obtain it at a reasonable cost. Any material uninsured loss could have a material adverse effect on our financial condition, results of operations and cash flows. Environmental laws and regulations may subject us to significant liabilities. Our U.S. operations, including our manufacturing facilities, are subject to federal, state and local environmental laws and regulations relating to the discharge, storage, treatment, handling, disposal and remediation of certain materials, substances and wastes. Any violation of any of those laws and regulations could cause us to incur substantial liability to the Environmental Protection Agency, the state environmental agencies in any affected state or to any individuals affect by any such violation. Any such liability could have a material adverse effect on our financial condition and results of operations. The market price of our common stock may fluctuate widely. The market price of our common stock could be subject to significant fluctuations in response to quarter-to-quarter variation in our operating results, announcements of new products or services by us or our competitors, and other events or factors. For example, a shortfall in net sales or net income, or an increase in losses, from levels expected by securities analysts, could have an immediate and significant adverse effect on the market price and volume fluctuations that have particularly affected the market prices of many micro and small capitalization companies and that have often been unrelated or disproportionate to the operating performance of these companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price for our common stock. Our results of operations may vary widely from quarter to quarter. Our quarterly results of operations have varied and are expected to continue to vary in the future. These fluctuations may be caused by many factors, including: o Competitive pricing pressures; o Seasonal buying patterns resulting from the cyclical nature of the business of some of our customers; o The size and timing of individual sales; o Changes in the mix of products and services sold; o The timing of introductions and enhancements of products by us or our competitors; o Market acceptance of new products; o Technological changes in fabrics or production equipment used to make our products; o Changes in the mix of domestic and international sales; 21 o Personnel changes; o Our expansion of international operations; and o General industry and economic conditions. These variations could negatively impact our stock price. Compliance with the Sarbanes-Oxley Act of 2002 and rules and regulations relating to corporate governance and public disclosure may result in additional expenses and negatively impact our results of operations. The Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by the Securities and Exchange Commission and the Nasdaq Stock Market have greatly increased the scope, complexity and cost of corporate governance, reporting and disclosure practices for public companies, including our company. Keeping abreast of, and in compliance with, these laws, rules and regulations have required an increased amount of resources and management attention. In the future, this may result in increased general and administrative expenses and a diversion of management time and attention from sales-generating and other operating activities to compliance activities, which would negatively impact our results of operations. In addition, the corporate governance, reporting and disclosure laws, rules and regulations could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors. In particular, the Nasdaq Stock Market rules require a majority of our directors to be "independent" as determined by our board of directors in compliance with the Nasdaq rules. It therefore has become more difficult and significantly more expensive to attract such independent directors to our Board. Our directors and executive officers have the ability to exert significant influence on our company and on matters subject to a vote of our stockholders. As of April 12, 2006, our directors and executive officers beneficially owned approximately 19.2% of the outstanding shares of our common stock. As a result of their ownership of common stock and their positions in our company, our directors and executive officers are able to exert significant influence on our company and on matters submitted to a vote by our stockholders. In particular, as of April 12, 2006, Raymond J. Smith, our chairman of the board, and Christopher J. Ryan, our chief executive officer, president, general counsel and secretary and a director, beneficially owned approximately 9.56% and 6.52% of our common stock, respectively. The ownership interests of our directors and executive officers, including Messrs. Smith and Ryan, could have the effect of delaying or preventing a change of control of our company that may be favored by our stockholders generally. Provisions in our restated certificate of incorporation and by-laws and Delaware law could make a merger, tender offer or proxy contest difficult. Our restated certificate of incorporation contains "super majority" voting and classified board provisions, authorized preferred stock that could be utilized to implement various "poison pill" defenses and a stockholder authorized, but as yet unused, Employee stock Ownership Plan, all of which may have the effect of discouraging a takeover of Lakeland which is not approved by our board of directors. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibit us from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in the prescribed manner. For a description of these provisions, see "Description of Capital Stock - Anti-Takeover Provisions." ITEM 1B: UNRESOLVED STAFF COMMENTS - ---------------------------------- None. 22 ITEM 2. PROPERTIES We believe that our owned and leased facilities are suitable for the operations we conduct in each of them. Each manufacturing facility is well maintained and capable of supporting higher levels of production. The table below sets forth certain information about our principal facilities.
Estimated Square Address Feet Annual Rent Lease Expiration Principal Activity - -------- --------- ----------- ---------------- ------------------ Weifang Lakeland Safety Products 65,000 Owned(1) N/A Manufacturing Co., Ltd. Administration Xiao Shi Village Engineering AnQui City, Shandong Province PRC 262100 Qing Dao MayTung 90,415 Owned(1) N/A Manufacturing Healthcare Co., Ltd Administration Yinghai Industrial Park Warehousing Jiaozhou, Shandong Province PRC 266318 Meiyang Protective Products Co., Ltd. 9,360 $3,727 12/31/06 Manufacturing Xiao Shi Village AnQui City, Shandong Province PRC 262100 Woven Products Division 44,000 $96,000 7/31/07 Manufacturing 2401 SW Parkway Administration St. Joseph, MO 64503 Warehousing Lakeland de Mexico S.A. de C.V. 14,057 $59,400 7/31/07 Manufacturing (Luis Gomez Guzman - former Administration employee) and and Warehousing Poniente, Mza 8, Lote 11 12,853 $46,220 Ciudad Industrial, S/No. Celaya, Guanajuato 38010 Mexico Lakeland Protective Wear Canada 12,000 Approximately 11/30/07 Sales 5109-B7 Harvestor Road $86,000 (varies with Administration Burlington, ON L7L5Y9 exchange rates) Warehousing Canada Lakeland Industries, Inc. 6,250 Owned N/A Administration Headquarters Studio 701-7 Koehler Avenue Sales Ronkonkoma, NY 11779 Lakeland Industries, Inc. 91,788 Owned N/A Manufacturing 202 Pride Lane Administration Decatur, AL 35603 Engineering Warehousing
23
Estimated Square Address Feet Annual Rent Lease Expiration Principal Activity - -------- --------- ----------- ---------------- ------------------ Lakeland Industries, Inc. 49,500 Owned N/A Warehousing 3428 Valley Ave. (201 1/2 Pride Lane) Administration Decatur, AL 35603 Lakeland Industries, Inc. 2,400 $18,000 3/31/09 Sales (Harvey Pride, Jr. - officer- related Administration party) 201 Pride Lane, SW Decatur, AL 35603 Lakeland Industries Europe Ltd. 4,940 Approximately $48,600 1/31/08 Warehouse Wallingfen Park (varies with Sales 236 Main Road exchange rates) Newport, East Yorkshire HU15 2RH U United Kingdom Lakeland Industries 12,000 $40,200 (Leased from Month to Month Warehouse Route 227 & 73 D. Gallen an employee) Blandon, PA 19510 Mifflin Valley, Inc. 18,520 $55,560 (Leased from 7/31/10 Manufacturing 31 South Sterley Street M. Gallen an employee) Warehouse, Sales Shillington, PA 19607 Administration RFB Lakeland Industries Pvt. Ltd 30,155 $12,000 11/30/06 Manufacturing Plots 81, 50 and 24 Warehouse Noida Special Economic Zone New Delhi, India Lakeland Industries Inc., Agencia En 904 $12,000 03/01/2008 Warehouse Chile Los Algarrobos n(0) 2228 Sales Comuna de Santiago Codigo Postal 8361401 Santiago, Chile
- ---------------- (1) We own the buildings in which we conduct our manufacturing operations and lease the land underlying the buildings from the Chinese government. We have 42 years and 47 years remaining under the leases with respect to the AnQui City and Jiaozhou facilities, respectively. Our facilities in Decatur, Alabama; Celaya, Mexico; AnQui, China; Jiaozhou, China; St. Joseph, Missouri, and Shillington, Pennsylvania contain equipment used for the design, development and manufacture and sale of our products. Our operations in Burlington, Canada; Newport, United Kingdom; and Santiago, Chile are primarily sales and warehousing operations receiving goods for resale from our manufacturing facilities around the world. We had $1.9 million, $2.2 million and $0 million of long-lived assets, net located in China and $0.17 million, $0.13 million and $0 million of long-lived assets located in Mexico as of January 31, 2004, 2005 and 2006. ITEM 3. LEGAL PROCEEDINGS - ------------------------- From time to time, we are a party to litigation arising in the ordinary course of our business. We are not currently a party to any litigation that we believe could reasonably be expected to have a material adverse effect on our results of operations, financial condition or cash flows. 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- None. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS - ------------------------------------------------------------------------- MATTERS - ------- Our common stock is currently traded on the Nasdaq National Market under the symbol "LAKE". The following table sets forth for the periods indicated the high and low sales prices for our common stock as reported by the Nasdaq National Market. The stock prices in the table below have been adjusted for periods prior to July 31, 2003 to reflect our 10% stock dividends to stockholders of record on July 31, 2002, July 31, 2003 and April 30, 2005. Price Range of Common Stock ------------------- High Low -------- -------- Fiscal 2007 First Quarter (through April 12, 2006) $ 20.75 $ 18.23 Fiscal 2006 First Quarter ................................. $ 19.50 $ 12.27 Second Quarter ................................ 16.15 12.80 Third Quarter ................................. 18.89 15.13 Fourth Quarter ................................ 20.65 17.54 Fiscal 2005 First Quarter ................................. $ 25.05 $ 13.13 Second Quarter ................................ 23.63 14.42 Third Quarter ................................. 21.40 14.10 Fourth Quarter ................................ 19.09 14.73 Holders - ------- Holders of our Common Stock are entitled to one (1) vote for each share held on all matters submitted to a vote of the stockholders. No cumulative voting with respect to the election of directors is permitted by our Articles of Incorporation. The Common Stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon our liquidation, dissolution or winding -up, the assets legally available for distribution to stockholders are distributable ratably among the holders of the Common Stock after payment of liquidation preferences, if any, on any outstanding stock that may be issued in the future having prior rights on such distributions and payment of other claims of creditors. Each share of Common Stock outstanding as of the date of this Annual Report is validly issued, fully paid and non-assessable. On April 12, 2006 the last reported sale price of our common stock on the Nasdaq National Market was $18.88 per share. As of April 12, 2006, there were approximately 78 record holders of shares of our common stock. Dividend Policy - --------------- In the past, we have declared dividends in stock to our stockholders. We paid a 10% dividend in additional shares of our common stock to holders of record on July 31, 2002, on July 31, 2003 and on April 30, 2005. We may pay stock dividends in future years at the discretion of our board of directors. We have never paid any cash dividends on our common stock and we currently intend to retain any future earnings for use in our business. The payment and rate of future dividends, if any, are subject to the discretion of our board of directors and will depend upon our earnings, financial condition, capital requirements, contractual restrictions under our credit facilities and other factors. 25 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA - ---------------------------------------------- The following selected consolidated financial data as of and for our fiscal years 2002, 2003, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements, which have been audited by Grant Thornton LLP as of and for the fiscal years ended January 31, 2002 and by PricewaterhouseCoopers LLP as of and for the fiscal years ended January 31, 2003 and 2004 and by Holtz Rubenstein Reminick LLP for 2005 and 2006. You should read the information set forth below in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included in this Form 10-K.
Year Ended January 31, ----------------------------------------------------------------------- 2002 2003 2004 2005 2006 (in thousands, except share and per share data) Income Statement Data: Net sales .................................... $ 76,431 $ 77,826 $ 89,717 $ 95,320 $ 98,740 Costs of goods sold .......................... 63,294 62,867 71,741 74,924 74,818 ----------- ----------- ----------- ----------- ----------- Gross profit ........................ 13,137 14,959 17,976 20,396 23,922 ----------- ----------- ----------- ----------- ----------- Operating expenses: Selling and shipping ................ 5,414 6,338 7,342 7,871 8,301 General and administrative .......... 4,134 4,262 4,596 4,871 6,119 Impairment of goodwill .............. -- -- 249 -- -- ----------- ----------- ----------- ----------- ----------- Total operating expenses ............ 9,548 10,600 12,187 12,742 14,420 ----------- ----------- ----------- ----------- ----------- Operating profit .................... 3,589 4,359 5,789 7,654 9,502 ----------- ----------- ----------- ----------- ----------- Other income (expense): Interest expense .................... (882) (643) (535) (207) (167) Interest income ..................... 18 20 19 18 49 Other income ........................ 91 40 24 98 384 ----------- ----------- ----------- ----------- ----------- Total other expense ................. (773) (583) (492) (91) 266 ----------- ----------- ----------- ----------- ----------- Income before minority interest .............. 2,816 3,776 5,297 7,563 9,768 Minority interest in net income of variable interest entities ............................ -- -- -- 494 -- ----------- ----------- ----------- ----------- ----------- Income before income taxes .......... 2,816 3,776 5,297 7,069 9,768 Income tax expenses .......................... 846 1,172 1,659 2,053 3,439 ----------- ----------- ----------- ----------- ----------- Net Income ................................... $ 1,970 $ 2,604 $ 3,638 $ 5,016 $ 6,329 =========== =========== =========== =========== =========== Net income per common share (Basic)(1) ....... $ 0.56 $ 0.73 $ 1.01 $ 1.12 $ 1.26 =========== =========== =========== =========== =========== Net income per common share (Diluted)(1) ..... $ 0.55 $ 0.72 $ 1.01 $ 1.12 $ 1.26 =========== =========== =========== =========== =========== Weighted average common shares outstanding(1): Basic ............................... 3,545,252 3,587,228 3,595,406 4,471,687 5,017,046 =========== =========== =========== =========== =========== Diluted ............................. 3,572,019 3,595,943 3,603,051 4,476,944 5,021,887 =========== =========== =========== =========== =========== Balance Sheet Data (at period end): Current assets ............................... $ 39,545 $ 38,859 $ 43,285 $ 55,128 $ 63,719 Total assets ................................. 42,417 42,823 47,304 60,313 72,464 Current liabilities .......................... 22,778 20,934 21,509 4,152 3,839 Long-term liabilities ........................ 912 529 768 1,695 7,829 Stockholders' equity ......................... 18,727 21,359 25,027 54,467 60,796
26 - ----------- (1) Adjusted for periods prior to April 30, 2005 to reflect our 10% stock dividends to stockholders of record as of July 31, 2002, July 31, 2003, and April 30, 2005. Earnings per share have been restated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Repurchase of Securities We did not repurchase any of our Common Stock or other securities during our fiscal year ending January 31, 2006. 27 ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF - -------------------------------------------------------------------------------- OPERATIONS - ---------- Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following summary together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this Form 10-K and Annual Report and in the documents that we incorporate by reference into this Form 10-K. This document may contain certain "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Overview We manufacture and sell a comprehensive line of safety garments and accessories for the industrial protective clothing market. Our products are sold by our in-house sales force and independent sales representatives to a network of over 800 safety and mill supply distributors. These distributors in turn supply end user industrial customers such as chemical/petrochemical, automobile, steel, glass, construction, smelting, janitorial, pharmaceutical and high technology electronics manufacturers, as well as hospitals and laboratories. In addition, we supply federal, state and local governmental agencies and departments such as fire and police departments, airport crash rescue units, the Department of Defense, Central Intelligence Agency, Federal Bureau of Investigation, and the Centers for Disease Control. Our net sales attributable to customers outside the United States were $8.0 million, $9.0 million and $9.6 million, in fiscal 2004, fiscal 2005 and fiscal 2006, respectively. Our sales of limited use/disposable protective clothing grew approximately 2.4% in the year ended January 31, 2006 compared to the year ended January 31, 2005, and our expectation is to see continued growth. We expect that distributors will continue to stock more inventory as economic conditions in the United States continue to improve. We also expect our net sales to increase as we introduce our Tyvek(R)-based products into new industries in which the use of Tyvek(R) is not widespread. In addition, our net sales are driven in part by government funding and health-related events. Our net sales attributable to chemical suits decreased 27.0% in the year ended January 31, 2006 compared to the year ended January 31, 2005. These sales decreases were due primarily to a lull in government spending utilizing Fire Act monies and delays by state and local governmental purchasers in spending their Bio-Terrorism monies. These governmental sales are driven primarily by grants from the federal government under the Fire Act of 2002 and the Bio Terrorism Preparedness and Response Act of 2002 as part of the Homeland Security initiatives. During fiscal 2004, as a result of the SARS virus outbreak in various cities in 2003, we sold approximately $1.1 million of SARS-related garments in China, Toronto, Hong Kong and Taiwan. The Centers for Disease Control has recommended protective garments be used to protect healthcare workers in the fight against the spread of the SARS virus and the Avian Flu. In the event of future outbreaks of SARS or other similar contagious viruses, such as Avian Flu in 2005, we have positioned ourselves with increased production capacity. We have operated manufacturing facilities in Mexico since 1995 and in China since 1996. Beginning in 1995, we moved the labor intensive sewing operation for our limited use/disposable protective clothing lines to these facilities. Our facilities and capabilities in China and Mexico allow access to a less expensive labor pool than is available in the United States and permit us to purchase certain raw materials at a lower cost than they are available domestically. As we have increasingly moved production of our products to our facilities in Mexico and China, we have seen improvements in the profit margins for these products. We are in the middle of the process of moving production of our reusable woven garments and gloves to these facilities and expect to complete this process by the fourth quarter of fiscal 2007. As a result, we expect to see profit margin improvements for these product lines as well. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses, and disclosure of contingent assets and liabilities. We base estimates on our past experience and on various other assumptions that we believe to be reasonable under the circumstances and we periodically evaluate these estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in 28 the preparation of our consolidated financial statements. Revenue Recognition. We derive our sales primarily from our limited use/disposable protective clothing and secondarily from our sales of high-end chemical protective suits, fire fighting and heat protective apparel, gloves and arm guards, and reusable woven garments. Sales are recognized when goods are shipped to our distributors at which time title and the risk of loss passes. Sales are reduced for sales returns and allowances. Payment terms are generally net 30 days for United States sales and net 90 days for international sales. Inventories. Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in, first-out basis) or market. Provision is made for slow-moving, obsolete or unusable inventory. Allowance for Doubtful Accounts. We establish an allowance for doubtful accounts to provide for accounts receivable that may not be collectible. In establishing the allowance for doubtful accounts, we analyze the collectibility of individual large or past due accounts customer-by-customer. We establish reserves for accounts that we determine to be doubtful of collection. Income Taxes and Valuation Reserves. We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of preparing our consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carry forwards and tax credits, are recorded as deferred tax assets or liabilities on our balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be realized from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event we determine that we may not be able to realize all or part of our deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to net income in the period of such determination. Valuation of Goodwill and Other Intangible Assets. On February 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which provides that goodwill and other intangible assets are no longer amortized, but are assessed for impairment annually and upon occurrence of an event that indicates impairment may have occurred. Goodwill impairment is evaluated utilizing a two-step process as required by SFAS No. 142. Factors that we consider important that could identify a potential impairment include: significant underperformance relative to expected historical or projected future operating results; significant changes in the overall business strategy; and significant negative industry or economic trends. When we determine that the carrying value of intangibles and goodwill may not be recoverable based upon one or more of these indicators of impairment, we measure any potential impairment based on a projected discounted cash flow method. Estimating future cash flows requires our management to make projections that can differ materially from actual results. In fiscal 2004, as a result of our decision to move a portion of our reusable woven garment assembly from the United States to China, we reviewed this portion of our business for impairment. An impairment was calculated based on estimating the fair value, utilizing a discounted cash flow analysis, resulting in an impairment charge of $0.2 million. We had no remaining goodwill recorded as of January 31, 2004. In August 2005 we purchased Mifflin Valley, a manufacturing facility in Pennsylvania. This purchase resulted in the recording of $871,297 in Goodwill as of January 31, 2006. Self-Insured Liabilities. We have a self-insurance program for certain employee health benefits. The cost of such benefits is recognized as expense based on claims filed in each reporting period and an estimate of claims incurred but not reported during such period. Our estimate of claims incurred but not reported is based upon historical trends. If more claims are made than were estimated or if the costs of actual claims increases beyond what was anticipated, reserves recorded may not be sufficient and additional accruals may be required in future periods. We maintain separate insurance to cover the excess liability over set single claim amounts and aggregate annual claim amounts. 29 Results of Operations The following table set forth our historical results of operations for the years ended January 31, 2004, 2005 and 2006 as a percentage of our net sales.
Year Ended January 31, -------------------------- 2004 2005 2006 ------ ------ ------ Net sales ................................................... 100.0% 100.0% 100.0% Cost of goods sold .......................................... 80.0% 78.6% 75.8% ------ ------ ------ Gross profit ............................................ 20.0% 21.4% 24.2% Operating expenses .......................................... 13.6% 13.4% 14.6% Operating profit ........................................ 6.4% 8.0% 9.6% Interest expense, net ....................................... 0.5% 0.2% 0.2% Minority interest in net income of variable interest entities -0- (0.5) % -0- Income tax expense .......................................... 1.8% 2.2% 3.5% ------ ------ ------ Net income .............................................. 4.1% 5.3% 6.4%
Significant Balance Sheet Fluctuation January 31, 2006 as compared to January 31, 2005 Balance Sheet Accounts. The decrease in cash, cash equivalents and marketable securities and the increase in borrowings under the revolving credit agreement is principally due to the increase in inventories as we build our finished goods inventory for our seasonally strong fourth and first quarters for fiscal 2006 and 2007. We also built raw material reserves due to an anticipated increase in the cost of these raw materials. Accounts receivable increased due to increased January sales. Plant property and equipment increased as a result of purchasing $3.0 million of facilities in Alabama in April and May 2005 that had been subject to FIN 46R, in which we recorded $1.1 million of buildings in our consolidation of variable interest entities in the previous fiscal year. A corporate headquarters was also purchased in New York for $649,000 in May 2005. Year Ended January 31, 2006 Compared to the Year Ended January 31, 2005 Net Sales. Net sales increased $3.4 million, or 3.6%, to $98.7 million for the January 31, 2006 year ended from $95.3 million for the year ending January 31, 2005. The increase was due primarily to an increase in the sales in our core non-woven disposable products line and secondarily by our fire and glove lines respectively. Increased sales were also driven by an improving U.S. and Canadian economy which increased demand for our products, particularly in the industrial non-woven disposable markets we serve, the acquisition of Mifflin Valley, Inc. in July 2005, offset by decreased demand for our chemical protective suits for Homeland Security purposes which decreased month over month from February 2005 to October 2006 but then started increasing from November 2005 to our fiscal year ended January 31, 2006. Gross Profit. Gross Profit increased $3.5 million, or 17.3%, to $23.9 million for the year ended January 31, 2006 from $20.4 million for the year ended January 31, 2005. Gross profit as a percent of net sales increased to 24.3% for the year ended January 31, 2006 from 21.4% for the year ended January 31, 2005, primarily because of cost reductions achieved by shifting production of additional Tyvek(R)-based products and chemical suits to China and Mexico and changes in product mix. We have increasingly shifted and will continue to shift production to these lower-cost facilities in order to increase our margins. Operating Expenses. Operating expenses increased $1.7 million, or 13.2% to $14.4 million for the year ended January 31, 2006 from $12.7 million for the year ended January 31, 2005. As a percent of net sales, operating expenses increased to 14.6% for the year ended January 31, 2006 from 13.4% for the year ended January 31, 2005. The $1.7 million increase in operating expenses in the year ended January 31, 2006 compared to the year ended January 31, 2005 was principally due to an increase in: o Salaries of $0.64 million 30 o Freight of $0.06 million o Sales Commissions of $(.42) million o Pension Expense $(.12) million o Sales related expenses of $.28 million o Payroll Taxes of $0.09 million o Currency Fluctuations of $0.12 million o Professional Fees of $0.20 million o Consulting fees of $0.12 million (pertaining to Sarbanes-Oxley compliance) o Other $0.23 million o the absence in the current year of a minority interest reclassification in the prior year of $0.5 million, leaving a net increase of $1.7 million. Operating Profit. Operating profit increased by $1.9 million, or 24.1%, to 9.5 million for the year ended 1/31/06, from $7.7 million for the prior year. Operating income as a percent of net sales increased to 9.6% for the year ended January 31, 2006 from 8.0% for the year ending January 31, 2005 primarily due to the higher margins as discussed above. Interest Expense. Interest expense decreased by $.04 million for the year ended January 31, 2006 compared to the year ended January 31, 2005 because of decreased borrowings and interest rates. Minority Interest. Minority interest in net income of variable interest entities decreased by $.5 million for the year ended January 31, 2006 as a result of our adoption on Financial Interpretation No. 46R (FIN 46R), "Consolidation of Variable Interest Entities," effective February 1, 2004 and then our purchasing such properties in fiscal year 2006. Subsequent to our adoption of FIN 46R, we determined that certain entities from which we lease real property and which are partially owned by related parties are variable interest entities governed by FIN 46R. As a result, these entities were consolidated in our statement of income for the year ended January 31, 2005. These facilities were purchased in April and May 2005 thereby negating the recording of variable interest entities in fiscal 2006. Other Income - Net. Other income- net increased $0.29 million principally as a result of the settlement by the Company as plaintiff for $0.26 million of an outstanding litigation involving two former employees of the company. Income Tax Expense. Income tax expenses consist of federal, state and foreign income taxes. Income tax expense increased $1.4 million, or 67.5%, to $3.4 million for the year ended January 31, 2006 from $2.1 million for the year ended January 31, 2005. Our effective tax rate was 35.20% and 29.0% for the years ended January 31, 2006 and 2005, respectively. Our effective tax rate increased from the federal statutory rate of 34% due primarily to the repatriation of $3.2 million in profits from our Chinese subsidiaries and a reserve of $65,000 covering the portion of the claims of the IRS which can be determined due to a recent audit. The resolution of the remainder of their claims cannot be determined at this time. Net Income. Net income increased $1.31 million or 26.2%, to $6.33 million for the year ended January 31, 2006 from $5.02 million for the year ended January 31, 2005. The increase in net income was the result of an increase in net sales and productivity as a result of shifts in production to our China facilities, partially offset by an increase in costs and expenses due to higher sales and increases in our tax rates as mentioned above. Year ended January 31, 2005 Compared to the Year Ended January 31, 2004 Net Sales. Net sales increased $5.6 million, or 6.2%, to $95.3 million for the January 31, 2005 year ended from $89.7 million for the year ending January 31, 2004. The increase was due primarily to an increase in the sales of our chemical suits and also an increase in our core non-woven disposable products line. Increased sales were also driven 31 by an improving U.S. economy which increased demand for our products, particularly in the industrial non-woven disposable markets we serve, and increased demand for our chemical protective suits and fire turnout gear for Homeland Security purposes. Gross Profit. Gross Profit increased $2.4 million, or 13.5%, to $20.4 million for the year ended January 31, 2005 from $18 million for the year ended January 31, 2004. Gross profit as a percent of net sales increased to 21.4% for the year ended January 31, 2005 from 20% for the year ended January 31, 2004, primarily because of cost reductions achieved by shifting production of additional Tyvek(R)-based products and chemical suits to China and Mexico and changes in the mix resulting from more sales of the higher margin chemical suits. We have increasingly shifted and will continue to shift production to these lower-cost facilities. Operating Expenses. Operating expenses increased $0.55 million, or 4.5% to $12.7 million for the year ended January 31, 2005 from $12.2 million for the year ended January 31, 2004. As a percent of net sales, operating expenses decreased to 13.4% for the year ended January, 2005 from 13.6% for the year ended January 31, 2004. The $0.55 million increase in operating expenses in the year ended January 31, 2005 compared to the year ended January 31, 2004 was principally due to an increase in: o Salaries of $0.35 million o Freight of $0.3 million o Sales Commissions of $0.16 million o Sales related expenses of $0.1 million o Insurance expense of $(.14) million o Currency Fluctuations of $0.06 million o Licenses and Fees of $0.08 million o Advertising Expenses $(0.1) million o Consulting fees of $0.19 million (pertaining to Sarbanes-Oxley compliance) o Other $.05 million which above increases of $1.05 million were offset by: o a minority interest reclassification of $0.5 million, leaving a net increase of $0.55 million. Operating Profit. Operating profit increased by $1.9 million, or 32.2% to $7.7 million, from $5.8 million for the prior year. Operating income as a percent of net sales increased to 8.0% for the year ended January 31, 2005 from 6.5% for the year ending January 31, 2004 primarily due to increased margins as discussed above. Interest Expense. Interest expense decreased by $.3 million for the year ended January 31, 2005 compared to the year ended January 31, 2004 because we paid off our credit facility in full on June 18, 2004, from the proceeds of our Secondary Stock Offering. Minority Interest. Minority interest in net income of variable interest entities increased to $.5 million for the year ended January 31, 2005 as a result of our adoption on Financial Interpretation No. 46R (FIN 46R), "Consolidation of Variable Interest Entities," effective February 1, 2004. Subsequent to our adoption of FIN 46R, we determined that certain entities from which we lease real property and which are partially owned by related parties are variable interest entities governed by FIN 46R. As a result, these entities have been consolidated in our statement of income for the year ended January 31, 2005. Income Tax Expense. Income tax expenses consist of federal, state and foreign income taxes. Income tax expense increased $.4 million, or 23.7%, to $2.1 million for the year ended January 31, 2005 from $1.7 million for the year 32 ended January 31, 2004. Our effective tax rate was 29.0% and 31.3% for the year ended January 31, 2005 and 2004, respectively. Our effective tax rate varied from the federal statutory rate of 34% due primarily to lower foreign tax rates, inclusion of minority interest in net income of variable interest entities and utilization of a tax carry forward. Net Income. Net income increased $1.4 million or 37.9%, to $5.0 million for the year ended January 31, 2005 from $3.6 million for the year ended January 31, 2004. The increase in net income was the result of an increase in net sales primarily in the chemical suits and increased productivity as a result of shifts in production to our China facilities, partially offset by an increase in costs and expenses due to higher sales. Liquidity and Capital Resources Management measures our liquidity on the basis of our ability to meet short-term and long-term operational funding needs and fund additional investments, including acquisitions. Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, access to bank lines of credit and our ability to attract long-term capital under satisfactory terms. Internal cash generation, together with currently available cash and investment and an ability to access credit lines if needed, are expected to be sufficient to fund operations, capital expenditures, and any increase in working capital that we would need to accommodate a higher level of business activity. We are actively seeking to expand by acquisitions as well as through organic growth of our business. While a significant acquisition may require additional borrowings, equity financing or both, we believe that we would be able to obtain financing on acceptable terms based, among other things, on our earnings performance and current financial position. Cash Flows As of January 31, 2006 we had cash and cash equivalents of $1.5 million and working capital of $59.9 million, a decrease and increase of $(7.7) million and $8.9 million, respectively, from January 31, 2005. Our primary sources of funds for conducting our business activities have been from cash flow provided by operations and borrowings under our credit facilities described below. We require liquidity and working capital primarily to fund increases in inventories and accounts receivable associated with our net sales and, to a lesser extent, for capital expenditures. Net cash used in operating activities of $8.4 million for the year ended January 31, 2006 was due primarily to net income from operations of $6.3 million, offset by an increase in inventories of $13.7 million, and an increase in accounts receivable of $.7 million. Net cash provided by operating activities of $0.5 million for the year ended January 31, 2005 was due primarily to net income from operations of $5.0 million offset in part by a decrease in accounts payable of $0.4 million, an increase in inventories of $4.7 million and an increase in accounts receivable of $0.5 million and an increase in minority interest liability of $0.5 million. Net cash used in investing activities of $6.5 million and $0.8 million in the years ended January 31, 2006 and 2005, respectively, was due to purchases of property and equipment and the acquisition of Mifflin Valley. Net cash provided by financing activities in the years ended January 31, 2006 and 2005 was primarily attributable to borrowings under our credit facilities and to the secondary offering in fiscal 2005. Credit Facilities We currently have one credit facility: o a Five year, $25 million revolving credit facility, of which we had borrowings outstanding as of January 31, 2006 amounting to $7.3 million Our $25 million revolving credit facility permits us to borrow up to the lower of $25 million and a borrowing base determined by reference to a percentage of our eligible accounts receivable and inventory. Our $25 million revolving credit facility expires on July 31, 2010. Borrowings under this revolving credit facility bear interest at the London Interbank Offering Rate (LIBOR) plus 60 basis points and were 5.17% at January 31, 2006. As of January 31, 2006, we had $18 million of borrowing availability under this revolving credit facility. Our credit facility requires that we comply with specified financial covenants relating to interest coverage, debt coverage, minimum consolidated net worth, and earnings before interest, taxes, depreciation and amortization. These restrictive covenants could affect our financial and operational flexibility or impede our ability to operate or expand our business. Default under our credit facilities would allow the lenders to declare all amounts outstanding to be 33 immediately due and payable. Our lenders have a security interest in substantially all of our assets to secure the debt under our credit facilities. As of January 31, 2006, we were in compliance with all covenants contained in our credit facilities. We believe that our current cash position of $1.5 million, our cash flow from operations along with borrowing availability under our $25 million revolving credit facility will be sufficient to meet our currently anticipated operating, capital expenditures and debt service requirements for at least the next 12 months. Capital Expenditures Our capital expenditures principally relate to purchases of manufacturing equipment, computer equipment, leasehold improvement and automobiles, as well as payments related to the construction of our facilities in China. Our facilities in China are not encumbered by commercial bank mortgages and thus Chinese commercial mortgage loans may be available with respect to these real estate assets if we need additional liquidity. We expect our capital expenditures to be approximately $1.4 million to purchase our capital equipment primarily computer equipment and apparel manufacturing equipment in fiscal 2007. 34 Contractual Obligations We had no off-balance sheet arrangements at January 31, 2006. As shown below, at January 31, 2006, our contractual cash obligations totaled approximately $7.7 million, including lease renewals entered into subsequent to January 31, 2006.
Payments Due by Period ---------------------------------------------------------------- Less than --------- Total 1 Year 1-3 Years 4-5 Years After 5 Years ---------- ---------- ---------- ---------- ------------- (in thousands) Operating leases ........ $ 476,000 $ 373,000 $ 592,000 $ 3,000 $ -- Revolving credit facility 7,272,000 -- -- 7,272,000 -- ========== ========== ========== ========== ========== Total ................... $7,748,000 $ 373,000 $ 592,000 $7,275,000 $ --
Seasonality Our operations have historically been seasonal, with higher sales generally occurring in February, March, April and May when scheduled maintenance occurs on nuclear, coal, oil and gas fired utilities, chemical, petrochemical and smelting facilities, and other heavy industrial manufacturing plants, primarily due to cooler temperatures. Sales decline during the warmer summer and vacation months, and generally increase from Labor Day through February with slight declines during holidays. As a result of this seasonality in our sales, we have historically experienced a corresponding seasonality in our working capital, specifically inventories, with peak inventories occurring between September and March coinciding with lead times required to accommodate the spring maintenance schedules. We believe that by sustaining higher levels of inventory, we gain a competitive advantage in the marketplace. Certain of our large customers seek sole sourcing to avoid sourcing their requirements from multiple vendors whose prices, delivery times and quality standards differ. In recent years, due to increased demand by first responders for our chemical suits and fire gear, our historical seasonal pattern has shifted. Governmental disbursements are dependent upon budgetary processes and grant administration processes that do not follow our traditional seasonal sales patterns. Due to the size and timing of these governmental orders, our net sales, results of operations, working capital requirements and cash flows can vary between different reporting periods. As a result, we expect to experience increased variability in net sales, net income, working capital requirements and cash flows on a quarterly basis. Effects of Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this statement are effective for our first annual reporting period that begins after June 15, 2005. If the Company had included the cost of employee stock option compensation in our financial statements it would not have had a material effect on our net income for the years ended January 31, 2006, 2005, and 2004. 35 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- We are exposed to market risk, including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, we seek to limit, to the extent possible, our non-U.S. dollar denominated purchases. Foreign Currency Risk We are exposed to changes in foreign currency exchange rates as a result of our purchases and sales in other countries. To manage the volatility relating to foreign currency exchange rates, we seek to limit, to the extent possible, our non-U.S. dollar denominated purchases and sales. In connection with our operations in China, we purchase a significant amount of products from outside of the United States. However, our purchases in China are primarily made in Chinese Yuan, the value of which has been largely pegged to the U.S. dollar for the last decade. However, the Chinese Yuan has recently been decoupled from the US Dollar and allowed to float by the Chinese government, and therefore, we will be exposed to additional foreign exchange rate risk on our Chinese purchases. Our primary risk from foreign currency exchange rate changes is presently related to non-U.S. dollar denominated sales in Canada and, to a smaller extent, in Europe. Our sales to customers in Canada are denominated in Canadian dollars. If the value of the U.S. dollar increases relative to the Canadian dollar, then our net sales could decrease as our products would be more expensive to our Canadian customers because of the exchange rate change. Our sales in China are denominated in the Chinese Yuan, however, our sales there are presently not material. At this time, we do not manage the foreign currency risk through the use of derivative instruments. A 10% decrease in the value of the U.S. dollar relative to foreign currencies would increase the landed costs into the U.S. but would make our selling price for international sales more attractive with respect to foreign currencies. As non-U.S. dollar denominated international purchases and sales grow, exposure to volatility in exchange rates could have a material adverse impact on our financial results. Interest Rate Risk We are exposed to interest rate risk with respect to our credit facilities, which have variable interest rates based upon the London Interbank Offered Rate. At January 31, 2006, we had $7 million in borrowings outstanding under this credit facility. If the interest rate applicable to this variable rate debt rose 1% in the year ended January 31, 2006, our interest expense would have increased and our income before income taxes would have decreased by less than $70,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Index to Consolidated Financial Statements ------------------------------------------ Consolidated Financial Statements: Page No. -------- Report of Independent Registered Public Accounting Firm A-37 Report of Independent Registered Public Accounting Firm A-38 Consolidated Balance Sheets - January 31, 2006 and 2005 A-39 Consolidated Statements of Income for the years ended A-40 January 31, 2006, 2005 and 2004 Consolidated Statement of Stockholders' Equity for the years ended A-41 January 31, 2006, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended A-42 January 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements A-43 to A-63 Schedule II - Valuation and Qualifying Accounts A-64 All other schedules are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes thereto. 36 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Lakeland Industries, Inc. and Subsidiaries Ronkonkoma, New York We have audited the accompanying consolidated balance sheets of Lakeland Industries, Inc. and Subsidiaries ("Lakeland") as of January 31, 2006 and 2005 and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. We have also audited the schedule listed in Item 15(a)(2) of this Form 10-K for the years ended January 31, 2006 and 2005. We have also audited management's assessment, included in the accompanying "Management's Report on Internal Control Over Financial Reporting", that Lakeland Industries, Inc. and Subsidiaries maintained effective internal control over financial reporting as of January 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Lakeland's management is responsible for these consolidated financial statements and schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and the schedule, an opinion on management's assessment, and an opinion on the effectiveness of the company's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lakeland Industries, Inc. and Subsidiaries as of January 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Also in our opinion, management's assessment that Lakeland maintained effective internal control over financial reporting as of January 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, Lakeland maintained, in all material respects, effective internal control over financial reporting as of January 31, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). /s/ Holtz Rubenstein Reminick LLP Melville, New York April 14, 2006 37 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders Of Lakeland Industries, Inc. and Subsidiaries: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the results of operations and the cash flows of Lakeland Industries, Inc. and its subsidiaries for the year ended January 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended January 31, 2004 listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with related consolidated financial information. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP Melville, New York April 2, 2004 38
Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS --------------------------- January 31, 2006 2005 ---- ---- Assets Current assets Cash and cash equivalents (which includes $3,711,320 of marketable securities at January 31, 2005) $ 1,532,453 $ 9,185,382 Accounts receivable, net of allowance for doubtful accounts of $323,000 at January 31, 2006 and 2005, respectively 14,221,281 13,117,374 Inventories, net of reserves of $365,000 and $396,000 at January 31, 2006 and 2005, respectively 45,243,490 30,906,023 Deferred income taxes 917,684 960,734 Other current assets 1,804,552 958,491 ----------- ----------- Total current assets 63,719,460 55,128,004 Property and equipment, net 7,754,765 5,014,240 Other assets, net 118,330 171,010 Goodwill 871,297 -- ----------- ----------- Total assets $72,463,852 $60,313,254 =========== =========== Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 2,536,756 $ 2,710,251 Accrued compensation and benefits 866,765 842,319 Other accrued expenses 435,779 599,593 ----------- ----------- Total current liabilities 3,839,300 4,152,163 Borrowings under revolving credit facility 7,272,000 -- Pension liability 469,534 495,330 Deferred income taxes 86,982 86,229 Minority interest in variable interest entity 1,112,861 ----------- ----------- Total liabilities 11,667,816 5,846,583 ----------- ----------- 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; 5,017,046 and 4,560,885 shares issued and outstanding at January 31, 2006 and 2005, respectively 50,170 45,609 Additional paid-in capital 42,431,221 36,273,046 Retained earnings 18,314,645 18,148,016 ----------- ----------- Total stockholders' equity 60,796,036 54,466,671 ----------- ----------- Total liabilities and stockholders' equity $72,463,852 $60,313,254 =========== =========== The accompanying notes are an integral part of these financial statements.
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Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Fiscal years ended January 31, 2006 2005 2004 ---- ---- ---- Net sales $ 98,740,066 $ 95,320,163 $ 89,717,162 Cost of goods sold 74,817,715 74,924,375 71,740,876 ------------ ------------ ------------ Gross profit 23,922,351 20,395,788 17,976,286 ------------ ------------ ------------ Operating expenses Selling and shipping 8,301,216 7,871,423 7,342,017 General and administrative 6,118,722 4,870,302 4,596,437 Impairment of goodwill -- -- 248,834 ------------ ------------ ------------ Total operating expenses 14,419,938 12,741,725 12,187,288 ------------ ------------ ------------ Operating profit 9,502,413 7,654,063 5,788,998 ------------ ------------ ------------ Other income (expense) Interest expense (166,805) (207,912) (534,540) Interest income 48,545 18,378 18,976 Other income - net 383,909 98,370 24,064 ------------ ------------ ------------ Total other income (expense) 265,649 (91,164) (491,500) ------------ ------------ ------------ Income before minority interest 9,768,062 7,562,899 5,297,498 Minority interest in net income of variable interest entities -- 493,558 -- ------------ ------------ ------------ Income before income taxes 9,768,062 7,069,341 5,297,498 Income tax expense 3,438,698 2,053,095 1,659,064 ------------ ------------ ------------ Net income $ 6,329,364 $ 5,016,246 $ 3,638,434 ============ ============ ============ Net income per common share Basic $ 1.26 $ 1.12 $ 1.01 ============ ============ ============ Diluted $ 1.26 $ 1.12 $ 1.01 ============ ============ ============ Weighted average common shares outstanding Basic 5,017,046 4,471,687 3,595,406 ============ ============ ============ Diluted 5,021,887 4,476,944 3,603,051 ============ ============ ============
The accompanying notes are an integral part of these financial statements. 40
Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ---------------------------------------------- Fiscal years ended January 31, 2006, 2005 and 2004 Common stock Additional --------------------------- paid-in Retained Shares Amount Capital Earnings Total ------ ------ ------- -------- ----- Balance, January 31, 2003 2,969,107 $ 29,691 $ 8,762,673 $ 12,567,060 $ 21,359,424 Net income 3,638,434 3,638,434 Exercise of stock options 10,400 104 29,008 29,112 10% stock dividend 294,418 2,944 3,070,780 (3,073,724) -- ------------ ------------ ------------ ------------ ------------ Balance, January 31, 2004 3,273,925 32,739 11,862,461 13,131,770 25,026,970 Exercise of stock options 6,210 62 54,370 -- 54,432 Net income 5,016,246 5,016,246 Proceeds from secondary stock offering, net of expenses 1,280,750 12,808 24,356,215 -- 24,369,023 ------------ ------------ ------------ ------------ ------------ Balance, January 31, 2005 4,560,885 $ 45,609 $ 36,273,046 $ 18,148,016 $ 54,466,671 Net Income 6,329,364 6,329,364 10% stock dividend 456,161 4,561 6,158,175 (6,162,735) ------------ ------------ ------------ ------------ ------------ Balance, January 31, 2006 5,017,046 $ 50,170 $ 42,431,221 $ 18,314,645 $ 60,796,036 ------------ ------------ ------------ ------------ ------------ The accompanying notes are an integral part of these financial statements.
41
Lakeland Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Fiscal year ended January 31, 2006 2005 2004 ---- ---- ---- Cash flows from operating activities Net income $ 6,329,364 $ 5,016,246 $ 3,638,434 Adjustments to reconcile net income to net cash (used in) provided by operating activities Reserve for inventory obsolescence (31,000) (20,831) 63,000 Deferred income taxes 43,803 (334,795) 446,750 Depreciation and amortization 993,686 884,140 803,234 Minority interest in variable interest entity -- 493,558 -- Impairment of goodwill -- -- 248,834 (Increase) decrease in operating assets: Accounts receivable (726,169) (547,054) (2,206,132) Inventories (13,693,881) (4,619,385) (858,763) Prepaid income taxes and other current assets (1,046,265) 254,613 (663,540) Other assets 323,427 (73,267) 260,256 Increase (decrease) in operating liabilities -- Accounts payable (391,737) (751,102) 447,315 Accrued expenses and other liabilities (225,580) 157,083 3,444 ------------ ------------ ------------ Net cash (used in) provided by operating activities (8,424,352) 459,206 2,182,832 ------------ ------------ ------------ Cash flows from investing activities Purchase of Mifflin Valley (1,907,680) -- -- Purchases of property and equipment (4,592,897) (836,194) (1,367,707) ------------ ------------ ------------ Net cash used in investing activities (6,500,577) (836,194) (1,367,707) ------------ ------------ ------------ Cash flows from financing activities Net borrowings (payments) under credit agreements 7,272,000 (16,784,781) 126,899 Distributions to minority interest in variable interest entity (521,575) -- Proceeds from exercise of stock options 54,432 29,112 Proceeds from secondary stock offering 24,369,023 -- ------------ ------------ ------------ Net cash provided by financing activities 7,272,000 7,117,099 156,011 ------------ ------------ ------------ Net (Decrease) increase in cash and cash equivalents (7,652,929) 6,740,111 971,136 Cash and cash equivalents at beginning of year 9,185,382 2,445,271 1,474,135 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 1,532,453 $ 9,185,382 $ 2,445,271 ============ ============ ============
See notes for Supplemental Cash Flow information. The accompanying notes are an integral part of these financial statements 42 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 1. - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------- Business - -------- Lakeland Industries, Inc. and Subsidiaries (the "Company"), a Delaware corporation, organized in April 1982, manufactures and sells a comprehensive line of safety garments and accessories for the industrial protective clothing market. 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, 2006, 2005 and 2004. Principles of Consolidation - --------------------------- The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Laidlaw, Adams & Peck, Inc. and Subsidiary (MeiYang Protective Products Co. Ltd., a Chinese corporation), Lakeland Protective Wear, Inc. (a Canadian corporation), Weifang Lakeland Safety Products Co., Ltd. (a Chinese corporation), Qing Dao Maytung Healthcare Co., Ltd. (a Chinese corporation), Lakeland Industries Europe Ltd. (a British corporation), Mifflin Valley, Inc. (a Delaware Corporation), RFB Lakeland Industries Private, Ltd (an Indian Corporation) and Lakeland de Mexico S.A. de C.V. (a Mexican corporation). All significant intercompany accounts and transactions have been eliminated. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation provides guidance with respect to the consolidation of certain entities, referred to as variable interest entities ("VIE"), in which an investor is subject to a majority of the risk of loss from the VIE's activities, or is entitled to receive a majority of the VIE's residual returns. This interpretation also provides guidance with respect to the disclosure of VIEs in which an investor maintains an interest but is not required to consolidate. The provisions of the interpretation were effective immediately for all VIEs created after January 31, 2003, or in which we obtain an interest after that date. In October 2003, the FASB issued a revision to this pronouncement, FIN 46R, which clarified certain provisions and modified the effective date from October 1, 2003 to March 15, 2004 for variable interest entities created before February 1, 2003. The Company adopted this pronouncement as of February 1, 2004. The two entities which leased property to the Company and are owned by related parties, which were consolidated in our financial statements, are River Group Holding Co., L.L.P. and POMS Holding Co. Ownership of these entities is held by directors and officers of Lakeland. Under FIN 46, it is likely that leases between an entity and its related parties would be considered a variable interest even if there is no residual value guarantee or purchase option. The FASB staff's view is that these elements are implied in a related-party lease even though they may not be explicitly stated in the lease agreement. There are no variable interest entities in which we hold a variable interest but we are not primary beneficiary. There are no collateralized assets related to the variable interest entity recorded at January 31, 2005 and the creditors of the VIE had no recourse to the general credit of the Company. In Fiscal 2006 the Company purchased the property owned by River Group Holding Co., L.L.P. and POMS Holding Co. Revenue Recognition - ------------------- The Company derives its sales primarily from its limited use/disposable protective clothing and secondarily from its sales of high-end chemical protective suits, fire fighting and heat protective apparel, gloves and arm guards, and reusable woven garments. Sales are recognized when goods are shipped at which time title and the risk of loss passes to the customer. Sales are reduced for sales returns and allowances. Payment terms are generally net 30 days for United States sales and net 90 days for international sales. Domestic and international sales are as follows: 43 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 1. (continued) - -------------- Fiscal Years Ended January 31, 2006 2005 2004 ---- ---- ---- Domestic $89,107,000 90.2% $86,320,000 90.6% $81,763,000 91.1% International 9,633,000 9.8% 9,000,000 9.4% 7,954,000 8.9% ----------- ----- ----------- ----- ----------- ----- Total $98,740,000 100.0% $95,320,000 100.0% $89,717,000 100.0% =========== ===== =========== ===== =========== ===== Inventories - ----------- Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost (on a first-in first-out basis) or market. Provision is made for slow-moving, obsolete or unusable inventory. 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. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the account and the gain or loss on disposition is reflected in operating income. Goodwill - -------- On February 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which provides that goodwill and other intangible assets will no longer be amortized, but are assessed for impairment annually and upon occurrence of an event that indicates impairment may have occurred. Goodwill impairment is evaluated, utilizing a two-step process as required by SFAS No. 142. Factors that the Company considers important that could identify a potential impairment include: significant under performance relative to expected historical or projected future operating results; significant changes in the overall business strategy; and significant negative industry or economic trends. When the Company determines that the carrying value of intangibles and goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company measures any potential impairment based on a projected discounted cash flow method. Estimating future cash flows requires the Company's management to make projections that can differ materially from actual results. In fiscal 2004, as a result of the Company's decision to move a portion of our reusable woven garment assembly from the United States to China, the Company reviewed this portion of its business for impairment. The impairment was calculated based on estimating the fair value utilizing a discounted cash flow analysis, resulting in an impairment of $0.2 million in fiscal 2004. The Company had no remaining goodwill recorded at January 31, 2004. In June 2005 the Company purchased Mifflin Valley, Inc, a Pennsylvania Manufacturer. This acquisition resulted in the recording of $871,297 in Goodwill as of January 31, 2006. Self-Insured Liabilities. - ------------------------- The Company has a self-insurance program for certain employee health benefits. The cost of such benefits is recognized as expense based on claims filed in each reporting period and an estimate of claims incurred but not reported during such period. This estimate is based upon historical trends and amounted to $120,000 and $90,000 at January 31, 2006 and 2005, respectively. The Company maintains separate insurance to cover the excess liability over set single claim amounts and aggregate annual claim amounts. 44 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 1. (continued) - -------------- Stock-Based Compensation - ------------------------ The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"). In compliance with SFAS 123, the company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and does not recognize compensation expense for its employee stock-based compensation plans. The Company has also adopted the disclosure provisions of SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure." This pronouncement requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. If 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 as reported would be reduced for the years ended January 31, 2005, 2004 and 2003 to the pro forma amounts indicated below:
2006 2005 2004 ---- ---- ---- Net income As reported $ 6,329,364 $ 5,016,246 $ 3,638,434 Less: Stock -based employee compensation expense determined under fair value based method, net of related tax benefit 9,627 91,331 28,344 ----------- ----------- ----------- Net income, Pro forma $ 6,319,737 $ 4,924,915 $ 3,610,090 =========== =========== =========== Basic earnings per common share As reported $ 1.26 $ 1.12 $ 1.01 Pro forma $ 1.26 $ 1.10 $ 1.00 Diluted earnings per common share As reported $ 1.26 $ 1.12 $ 1.01 Pro forma $ 1.26 $ 1.10 $ 1.00
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, 2006, 2005 and 2004: expected volatility of 87%, 58% and 57%, respectively; risk-free interest rate of 3.6%, 3.6% and 3.25%, respectively; expected dividend yield of 0.0%; and expected life of six years. All stock-based awards were fully vested at January 31, 2005, 2004 and 2003 and 7,000 new option grants were made during the year ended January 31, 2004. No options were granted in 2006. During fiscal 2005 1,000 Option Shares granted to a Director upon re-election in June 2004 were cancelled upon his resignation in November 2004. In November 2004 two new directors were appointed and granted 5,000 option shares each, which were not exercisable at January 31, 2005. Earnings per share have been adjusted to reflect the 10% stock dividends to stockholders of record as of April 30, 2005 and July 31, 2003. Allowance for Doubtful Accounts - ------------------------------- The Company establishes an allowance for doubtful accounts to provide for accounts receivable that may not be collectible. In establishing the allowance for doubtful accounts, the Company analyzes the collectibility of individual large or past due accounts customer-by-customer. The Company establishes reserves for accounts that it determines to be doubtful of collection. 45 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 1. (continued) - -------------- Shipping and Handling Costs - --------------------------- For larger orders except in its Fyrepel product line, the Company absorbs the cost of shipping and handling. For those customers who are billed the cost of shipping and handling fees, such amounts are included in net sales. Shipping and handling costs associated with outbound freight are included in selling and shipping expenses and aggregated approximately $2,411,000, $2,355,000, and $2,394,000 in the fiscal years ended January 31, 2006, 2005 and 2004, respectively. Research and Development Costs - ------------------------------ Research and development costs are expensed as incurred and included in general and administrative expenses. Research and development expenses aggregated approximately $90,000, $89,000, and $82,000 in the fiscal years ended January 31, 2006, 2005 and 2004, respectively, and were paid to contractors for development of new raw materials. Income Taxes - ------------ The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of preparing the consolidated financial statements. This involves estimating the actual current tax in addition to assessing temporary differences resulting from differing treatments for tax and financial accounting purposes. These differences, together with net operating loss carry forwards and tax credits, are recorded as deferred tax assets or liabilities on the Company's balance sheet. A judgment must then be made of the likelihood that any deferred tax assets will be recovered from future taxable income. A valuation allowance may be required to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company determines that it may not be able to realize all or part of our deferred tax asset in the future, or that new estimates indicate that a previously recorded valuation allowance is no longer required, an adjustment to the deferred tax asset is charged or credited to income in the period of such determination. Earnings Per Share - ------------------ Basic earnings per share are based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share are based on the weighted average number of common and common stock equivalents. The common stock equivalents for the years ended January 31, 2006, 2005 and 2004 were 4,841, 5,257, and 7,645 respectively, representing the dilutive effect of stock options. The diluted earnings per share calculation takes into account the shares that may be issued upon exercise of stock options, reduced by shares that may be repurchased with the funds received from the exercise, based on the average price during the fiscal year (as adjusted for the 10% stock dividend to holders of record April 30, 2005 and July 31, 2003). Advertising Costs - ----------------- Advertising costs are expensed as incurred. Advertising costs (income) amounted to $(43, 104), $(15,326), and $86,603 in the fiscal years ended January 31, 2006, 2005 and 2004, respectively, net of co-op advertising allowance received from DuPont. These reimbursements include some costs which are classified in categories other than advertising such as payroll. 46 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 1. (continued) - -------------- 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. Foreign denominated cash and cash equivalents were approximately $1,194,000, $2,707, 000, and $2,012,000 at January 31, 2006, 2005 and 2004, respectively. Supplemental cash flow information for the years ended January 31 is as follows: 2006 2005 2004 ---- ---- ---- Interest paid $ 166,805 $ 207,912 $ 534,540 Income taxes paid $3,402,723 $2,103,682 $1,303,513 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 principally 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. The Company does not require customers to post collateral. The largest foreign cash balances are deposited in HSBC in China and the UK and in the TD Canada Trust Bank in Canada. The utilization of these larger banking facilities minimizes risk of deposits held in foreign countries. Foreign Operations and Foreign Currency Translation - --------------------------------------------------- The Company maintains manufacturing operations and uses independent contractors in Mexico, India and the People's Republic of China. It also maintains a sales and distribution entity located in Canada and the U.K. The Company is vulnerable to currency risks in these countries. The functional currency of foreign subsidiaries is the U.S. dollar. The monetary assets and liabilities of the Company's foreign operations are translated into U.S. dollars at current exchange rates, while non-monetary 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 and aggregated approximately $66,000, $58,000, and $29,000 for the fiscal years ended January 31, 2006, 2005 and 2004, respectively. Use of Estimates - ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 most 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. 47 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 1. (continued) - -------------- Fair value of Financial Instruments - ----------------------------------- The Company's principal financial instrument consists of its outstanding revolving credit facility and term loan. The Company believes that the carrying amount of such debt approximates the fair value as the variable interest rates approximate the current prevailing interest rate. Effects of Recent Accounting Pronouncements - ------------------------------------------- In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this statement are effective for the first annual reporting period that begins after June 15, 2005. On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"), which provides the Staff's views regarding interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. If the Company had included the cost of employee stock option compensation in its financial statements it would not have had a material effect on our net income for the years ended January 31, 2006, 2005, and 2004. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS No. 154"). SFAS No. 154 requires the retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or cumulative effect of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Comprehensive income (loss) - --------------------------- Comprehensive income (loss) refers to revenue, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity. At January 31, 2006, 2005 and 2004, there were no such adjustments required or such amounts were de minimus. 48 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 2 -INVENTORIES - -------------- Inventories consist of the following at January 31: 2006 2005 ---- ---- Raw materials $18,656,894 $12,231,264 Work-in-process 1,996,027 2,614,710 Finished goods 24,590,569 16,060,049 ----------- ----------- $45,243,490 $30,906,023 ----------- ----------- 3 -PROPERTY, PLANT AND EQUIPMENT - -------------------------------- Property and equipment consist of the following at January 31:
Useful life in years 2006 2005 -------- ---- ---- Machinery and equipment 3 - 10 $ 6,919,530 $ 6,236,736 Furniture and fixtures 3 - 10 294,087 249,971 Leasehold improvements Lease term 964,587 867,358 Land and Building (in China) 20 2,153,592 1,823,027 Land and Buildings (minority interest in 2005) 39 3,623,471 1,140,878 ----------- ----------- 13,955,267 10,317,970 Less accumulated depreciation and amortization (6,200,502) (5,303,730) ----------- ----------- $ 7,754,765 $ 5,014,240 =========== ===========
Depreciation expense incurred in fiscal 2006, 2005 and 2004 amounted to $993,686, $884,140, and $803,234 respectively. Net fixed assets in China were approximately $2.2 million, $2.2 million, $1.9 million as of January 31, 2006, 2005 and 2004, respectively. Net fixed assets in Mexico were approximately $154,000, $133,000,and $168,000 at January 31, 2006, 2005 and 2004, respectively. 49 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 4-BUSINESS COMBINATIONS - ----------------------- On August 1, 2005, the Company acquired the assets and operations and assumed certain liabilities of Mifflin Valley, Inc., ("Mifflin") of Shillington, PA for an initial purchase price of $1.6 million, subject to certain adjustments. Final payment was made in November 2005 following the audit of a closing date balance sheet. The final price amounted to $1.9 million and included adjustments for the payoff of a revolving loan of $.2 million and adjustments for inventory, fixed asset values and allowances for doubtful accounts. Mifflin did approximately $2.6 million of sales in 2004, and $1.5 million for the six months ended June 30, 2005. Mifflin is a manufacturer of protective clothing specializing in safety and visibility, largely for the Emergency Services market, and also for the entire public safety and traffic control market. Mifflin specializes in customized garments to suit customers' needs, coupled with quality, service, price and delivery. Mifflin's products include flame retardant garments for the Fire Industry, Nomex clothing for utilities, and high visibility reflective outerwear for Departments of Transportation. The purchase was effective as of July 1, 2005 and the results of Mifflin's operations have been included since July 1, 2005 in the Company's reported results , adding approximately $1.8 million in revenue for the seven months ended January 31, 2006 and $.02 to earnings per share to the actual reported results. Had the transaction taken place on February 1, 2005, on a proforma basis, there would have been an increase in the reported amounts as follows: Twelve months ended January 31, 2006
Pro Forma Results Combined with Mifflin Valley Additional resulting from Mifflin Valley ---------------------------------------------- ---------------------------------------- Sales $100,043,000 $1,303,000 Net Income $ 6,411,000 $ 82,000 Earnings per share $ 1.28 $ 0.02
Had the transactions taken place on February 1, 2004, on a Pro Forma basis, the effect on the reported amounts for the twelve months ended January 31, 2005 is considered by management to be insignificant. Condensed Balance Sheet Information: Accounts receivable $ 363,000 Inventory 667,000 Equipment 216,000 Other assets 35,000 ---------- Total assets 1,281,000 ---------- Accounts payable 261,000 Other liabilities 185,000 ---------- Total liabilities 446,000 ---------- Net assets acquired 835,000 Purchase price 1,767,000 ---------- Excess purchase price $ 932,000 ========== Allocated to: Goodwill $ 871,000 Other intangibles 61,000 ---------- $ 932,000 ========== The above goodwill is deductible for tax purposes to be amortized over a 15 year life. 5 -LONG-TERM DEBT - ----------------- Revolving Credit Facility In July 2005 the Company entered into a new $25 million five year revolving credit facility with Wachovia Bank, N.A. At January 31, 2006, the balance outstanding under this revolving credit facility amounted to $7.3 million. The credit facility is collateralized by substantially all of the assets of the Company. The credit facility contains financial covenants, including, but not limited to, fixed charge ratio, funded debt to EBIDTA ratio, inventory and accounts receivable collateral coverage ratio, with respect to which the Company was in compliance at January 31, 2006 and for the year then ended. The weighted average interest rate for the year ended January 31, 2006 was 4.85%. 50 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 5. (continued) - -------------- The Company's previous agreement with its lending institution, as amended, provided the Company with a revolving credit facility of $18 million. The balance was paid in full on June 18, 2004 using the proceeds from the Company's June 18, 2004 Secondary Stock Offering. This credit facility, which was subject to a borrowing base calculated on a percentage of eligible accounts receivable and inventory as defined, bore interest at LIBOR plus 2% (4.69% at January 31, 2005) and pursuant to an amendment in May 2004 expired on July 31, 2005. The agreement was amended on March 9, 2001 to (i) extend the maturity date to October 31, 2001, (ii) modify the interest rate, and (iii) modify certain financial covenants. The agreement was amended on July 12, 2001 to (i) extend the maturity date to July 31, 2002, (ii) increase the amount available under the revolving line of credit from $14 million to a percentage of eligible accounts receivable and inventory as defined, up to a maximum of $18 million, (iii) modify the interest rate, and (iv) modify a certain financial covenant. The maximum amounts borrowed under the credit facility during the fiscal years ended January 31, 2005 and 2004 were $17,000,000, and $18,000,000 respectively, and the average interest rates during the periods were 3.67% and 3.20%, respectively. The credit facility is collateralized by substantially all of the assets of the Company. The credit facility and term loan contain financial covenants, including, but not limited to, minimum levels of earnings and maintenance of minimum tangible net worth and other certain ratios at all times. The fees incurred by the Company related to the credit facility amounted to $25,000, $15,000 and $63,000 during fiscal 2006, 2005 and 2004, respectively. 6. - STOCKHOLDERS' EQUITY AND STOCK OPTIONS - ------------------------------------------- On June 18, 2004 the company completed its secondary public offering by issuing an additional 1,100,000 shares of its common stock. On July 1, 2004 an additional 180,750 shares of its common stock was issued pursuant to the over-allotment section of the prospectus dated June 14, 2004. The Company received $24.4 million, net of related expenses of $.4 million. The Company used $16.8 million to pay off the balance of its revolving credit facility. The Non-employee Directors' Option Plan (the "Directors' Plan") provides for an automatic one-time grant of options to purchase 5,000 shares of common stock to each non-employee 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 are granted at not less than fair market value, become exercisable commencing six months from the date of grant and expire six years from the date of grant. In addition, all non-employee directors re-elected to the Company's Board of Directors at any annual meeting of the stockholders will automatically be granted additional options to purchase 1,000 shares of common stock on each of such dates. The Company's 1986 Incentive and Non-statutory Stock Option Plan (the "Plan") provides for the granting of incentive stock options and non-statutory options. The Plan provides for the grant of options to key employees 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). This plan expired in May 2004. 51 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 6. (continued) - -------------- Additional information with respect to the Company's plans for the fiscal years ended January 31, 2006, 2005 and 2004 is summarized as follows:
2006 ----------------------------------------------------- Directors' Plan Plan (Expired May 1, 2004) ----------------------------------------------------- Weighted- Weighted- Number average Number average of exercise of exercise shares * price shares price -------- ----- ------ ----- Shares under option Outstanding at beginning of year 16,330 $13.87 10% stock dividend 1,633 ------ Outstanding and exercisable at end of year 17,963 $12.61 ====== Weighted-average remaining contractual 3.7 years life of options outstanding
* Adjusted for the 10% stock dividend to stockholders of record as of April 30, 2005
2005 -------------------------------------------------- Directors' Plan Plan (expired May 1, 2004) -------------------------------------------------- Weighted- Weighted- Number average Number average of exercise of exercise shares price shares price -------- ---------- --------- ---------- Shares under option Outstanding at beginning of year 12,540 $ 7.70 Granted 11,000 18.43 Cancelled (1,000) 21.99 Exercised (6,210) 8.77 ------ Outstanding and exercisable at end of year 16,330 13.87 ====== Weighted-average remaining contractual life of options 4.7 years outstanding Weighted-average fair value per shares of options granted during 2005 $13.87
52 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 6. (continued)
2004 ----------------------------------------------- Directors' Plan Plan ----------------------------------------------- Weighted- Weighted- Number average Number average of exercise of exercise shares price shares price --------- --------- --------- --------- Shares under option Outstanding at beginning of year 9,900 $ 4.71 4,455 $ 1.86 10% stock dividend 1,140 445 Granted 7,000 8.74 Exercised (5,500) 3.81 (4,900) 1.86 --------- --------- Outstanding and exercisable at end of year 12,540 7.70 0 ========= ========= Weighted-average remaining contractual life of options outstanding 4.25 years Weighted-average fair value per shares of options granted during 2004 $ 7.70
Summarized information about stock options outstanding under the two plans at January 31, 2006 is as follows (as adjusted for the 10% stock dividends): Options outstanding and exercisable ----------------------------------------------------- Weighted- Number Average Outstanding Remaining Weighted- Range of At Contractual Average Exercise prices January 31, 2006 Life in years Exercise price --------------- ---------------- ------------- -------------- $4.46-$5.03 3,993 0.83 $4.65 $7.94 2,970 3.50 7.94 $16.76 11,000 4.80 16.76 Reserved Shares: 1986 Stock Option Plan 329,422 Directors Option Plan 32,604 ------- 362,026 ======= 53 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 7. - INCOME TAXES - ----------------- The provision for income taxes is based on the following pre-tax income: Year Ended January 31, 2006 2005 2004 ---- ---- ---- Domestic $ 7,896,736 $ 5,398,768 $ 3,292,770 Foreign 1,871,326 1,670,573 2,004,728 ----------- ----------- ----------- Total $ 9,768,062 $ 7,069,341 $ 5,297,498 ----------- ----------- ----------- The provision for income taxes is summarized as follows: Year Ended January 31, 2006 2005 2004 ---- ---- ---- Current Federal $ 2,563,836 $ 1,661,606 $ 699,069 State 448,656 330,337 99,324 Foreign 382,403 395,917 413,921 ----------- ----------- ----------- 3,394,895 2,387,860 1,212,314 Domestic Deferred 43,803 (334,765) 446,750 ----------- ----------- ----------- $ 3,438,698 $ 2,053,095 $ 1,659,064 =========== =========== =========== 54 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 7. (continued) The following is a reconciliation of the effective income tax rate to the Federal statutory rate:
Year ended January 31, 2006 2005 2004 ---- ---- ---- Statutory rate 34.0% 34.0% 34.0% State income taxes, net of Federal tax benefit 2.0% 2.5% 1.7% Nondeductible expenses (.2)% (.2)% .6% Repatriation of foreign earnings 1.7% -- -- Foreign tax rate differential (2.7)% (2.0)% (3.2)% Contribution carry forward realized -- (4.0)% -- Other .4% (1.3)% (1.8)% ---------- ---------- ---------- Effective rate 35.2% 29.0% 31.3% ========== ---------- ---------- The tax effects of temporary differences which give rise to deferred tax assets at January 31, 2006, 2005 and 2004 are summarized as follows: January 31, 2006 2005 2004 ---- ---- ---- Deferred tax assets Inventories $ 688,800 $ 606,652 $ 639,156 Accounts receivable 120,703 122,740 122,740 Accrued compensation and other 108,181 231,342 28,376 ---------- ---------- ---------- Gross deferred tax assets 917,684 960,734 790,272 ---------- ---------- ---------- Deferred tax liabilities Depreciation and other 86,982 86,229 250,532 ---------- ---------- ---------- Gross deferred tax liabilities 86,982 86,229 250,532 ---------- ---------- ---------- Net deferred tax asset $ 830,702 $ 874,505 $ 539,740 ========== ========== ==========
In January 2006, the company repatriated through dividends to the parent, approximately $3.2 million of cumulative earnings from its Chinese subsidiaries, thereby incurring approximately $164,000 of additional US taxes. 55 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 8. - BENEFIT PLANS - ------------------ Defined Benefit Plan The Company has a frozen defined benefit pension plan that covers former employees of an acquired entity. The Company's funding policy is to contribute annually the recommended amount based on computations made by its consulting actuary as of January 31, 2006, 2005 and 2004. The following table sets forth the plan's funded status for the fiscal year ended January 31: 2006 2005 ---- ---- Change in benefit obligation - ---------------------------- Projected benefit obligation at beginning of year $ 1,227,215 $ 1,194,855 Interest cost 81,214 79,046 Actuarial loss 7,361 1,141 Benefits paid (48,104) (47,827) ----------- ----------- Benefit obligation at end of year $ 1,267,686 $ 1,227,215 =========== =========== Change in plan assets - --------------------- Fair value at beginning of year $ 1,190,964 $ 988,994 Actual investment return 270,287 225,797 Employer contribution -- 24,000 Benefits paid (48,104) (47,827) ----------- ----------- Fair value at end of year $ 1,413,147 $ 1,190,964 =========== =========== Funded status Funded Status $ (145,461) $ 36,251 Unrecognized gain 614,998 459,452 Unrecognized benefit transition liability -- (373) ----------- ----------- Accrued pension cost $ 469,534 $ 495,330 =========== =========== The components of net periodic pension cost for the fiscal years ended January 31 are summarized as follows: 2006 2005 2004 ---- ---- ---- Interest cost $ 81,214 $ 79,046 $ 76,727 Expected Return on Plan Assets 93,353 78,300 (366,369) Net amortization and deferral (13,657) 1,437 326,217 --------- --------- --------- Net periodic benefit cost $ (25,796) $ 2,183 $ 36,575 ========= ========= ========= An assumed discount rate of 6.75%, 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, 2006, 2005 and 2004, approximately 19.1%, 25.1% and 33.9% of the plan's assets were held in mutual funds invested primarily in equity securities, 56 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 8. (continued) 68.8%, 66.7% and 64.5% were invested in equity securities and debt instruments and 5.1%, 8.2% and 1.6% were invested in money market and other instruments, respectively. Expected Annual Benefit Payments Year Ending 1/31 Benefit Payments ---------------- ---------------- 2007 $55,181 2008 $54,566 2009 $53,856 2010 $52,864 2011 $62,281 2012-2016 $367,383 2005 2006 ---- ---- Benefit Obligations: Accumulated benefit obligation $1,227,215 $1,267,686 Vested accumulated benefit obligation $1,227,215 $1,267,686 The Company's policy is to hold no more than 50% of its pension assets in broadly held mutual funds, which invest, in a wide range of securities as well as money market funds, with the remainder of the plan assets invested in equity securities and debt instruments. The Company has utilized an expected long-term rate of return of 8% which it deems appropriate as a result of the fact that the actual rate of return on investments has not been less that 8% in the past 4 years. The Company does not expect its contributions for 2007 to exceed $50,000. Defined Contribution Plan Pursuant to the terms of the Company's 401(k) plan, substantially all U.S. 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 15% of the employee's compensation. The Company made discretionary contributions of $126,547, $118,696 and $100,033 in the fiscal years ended January 31, 2006, 2005, and 2004, respectively. 9. - MAJOR SUPPLIER - ------------------- The Company purchased approximately 74.0%, 74.7% and 77.4% of its raw materials from one supplier under licensing agreements for the fiscal years ended January 31, 2006, 2005 and 2004, respectively. The Company expects this relationship to continue for the foreseeable future. If required similar raw materials could be purchased from other sources; although, the Company's competitive position in the marketplace could be affected. 10. - COMMITMENTS AND CONTINGENCIES - ----------------------------------- Employment Contracts The Company has employment contracts with six principal officers and the Chairman of the Board of Directors, expiring through April 30, 2008. Such contracts are automatically renewable for two, one-year terms unless 30 to 120 days notice is given by either party. Pursuant to such contracts, the Company is committed to aggregate annual base remuneration of $1.5 million and $1.2 million for the fiscal years ended January 31, 2007 and 2008, respectively. 57 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 Leases POMS Holding Co. ("POMS"), a partnership consisting of three directors and one officer of Lakeland, who own 55% of the entity, and six non-affiliates, was formed to lease both land and building to the Company because bank financing was unavailable. POMS leased to the Company a 91,788 square foot disposable garment manufacturing facility in Decatur, Alabama. 20% of this space is highly improved office space. Under a lease effective April 1, 2004 and expiring on March 31, 2009, the Company paid an annual rent of $364,900 and was the sole occupant of the facility. The Company purchased this facility from POMS on April 25, 2005. On April 1, 2004, the Company entered into a five-year lease agreement (expiring March 31, 2009) with River Group Holding Co., L.L.C. for a 49,500 sq. ft. warehouse facility located next to the existing facility in Decatur, Alabama. River Group Holding Co., L.L.C. is a limited liability company consisting of five directors and one officer of the Company. The annual rent for this facility is $199,100 and the Company was the sole occupant of the facility. The Company purchased this facility from River Group on May 25, 2005. On March 1, 1999, the Company entered into a one-year (renewable for four additional one year terms) lease agreement with Harvey Pride, Jr., an officer of the Company, for a 2,400 sq. ft. customer service office for $18,000 annually located next to the existing Decatur, Alabama facility mentioned above. This lease was renewed on March 1, 2004 through March 31, 2009 at the same rental rate and terms. The Company believes that all rents paid to POMS, River Group Holding Co., L.L.C. and Harvey Pride, Jr. by the Company are comparable to what would be charged by an unrelated party, as three different rent fairness appraisals were performed in 1999, 2002 and 2004. The net rent paid to POMS and River Group Holding Co., L.L.C. by the Company for the year entered January 31, 2006 amounted to $116,000 and the total rent paid to Harvey Pride, Jr. by the Company for use of the customer service office for the year ended January 31, 2006 amounted to $18,000. The Company paid $74,808 to Luis Gomez Guzman, an employee in Mexico (until December 2005), for rent on a building pursuant to a lease expiring July 7, 2007 and in fiscal 2006 an 12,853 square foot addition was built for additional annual rent of $46, 416. Total rental under all operating leases is summarized as follows: Rentals Gross paid to rental related expense parties ------- ------- Year ended January 31, 2006 $540,162 $328,420 2005 893,862 641,400 2004 944,375 641,400 Minimum annual rental commitments for the remaining term of the Company's non-cancelable operating leases relating to manufacturing facilities, office space and equipment rentals at January 31, 2006 including lease renewals subsequent to year-end are summarized as follows: Year ending January 31, 2007 $372,790 2008 198,867 2009 20,000 2010 3,000 $594,657 ======== 58 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 Real Estate Purchases In April 2005, the Company entered into two separate real estate purchase contracts, one with POMS and one with River Group, both related parties. The Company has purchased the land and buildings in Decatur, Alabama that it had leased from these related parties since their inception, POMS (1984) and River Group (1999). The purchase price was $2,056,000 for the POMS property and $925,000 for the River Group property determined by averaging three separate and independent real estate appraisals. The partnerships were accounted for in accordance with FIN46R and were reflected in the financial statements for the fiscal year ended January 31, 2005. In contemplation of the real estate purchases, the Company entered into an agreement, dated March 4, 2005, with an officer of Lakeland (who is a partner in POMS & River Group) to acquire his interest for $565,367 ($411,200 for POMS and $154,167 for River Group), at the same proportional valuation as the overall property. On April 25, 2005 the Company closed on the real estate purchase contract with POMS for a purchase price of $2,067,587. The Company paid rent from February 1, 2005 until April 25, 2005 of $86,157, which was charged to rent expense. On May 25, 2005 the Company closed on the real estate purchase contract with River Group for a purchase price of $928,686. The Company paid River Group rent from February 1, 2005 until May 25, 2005 amounting to $63,157, which was charged to rent expense. At April 30, 2005, the Company recorded the asset land value of $230,000, the asset building value of $2,751,000, closing costs of $11,584 and a payable to River Group in the amount of $770,833. The Company recorded the purchase of the land and building from River Group as of April 30, 2005, since the contract of sale was finalized and the closing was deferred only until the release of an easement on the property. Total rent expense for the two properties from February 1, 2005 until the dates of the sale amounted to $146,577. The Company recorded depreciation on each of the two properties from the closing date forward. Upon conclusion of these two real estate purchase contracts, the Company no longer has related party transactions requiring the recording of variable interest entities under FIN46R. Other than the above entries, the Company has not recorded the effects of FIN46R in the current fiscal year. The Company deems any such impact to be immaterial. Building purchase in New York: On May 10, 2005 the Company purchased a 6,250 square foot office condominium to serve as its Corporate Headquarters. The purchase price was $640,000 plus $9,161 in closing costs. The lease on its previous location amounted to $51,202 annually and expired on June 30, 2005. Certain leases require additional payments based upon increases in property taxes and other expenses. 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 effect on the Company's financial position, results of operations, or cash flows. 59 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 11. OTHER RELATED PARTY TRANSACTIONS - ------------------------------------ In 1997, An Qui Holding Co., L.L.C., or An Qui, a limited liability company whose members include the Company, five directors and one officer of the Company, provided financing for the construction of a 46,000 square foot building in An Qui City, China and the lease of the real property underlying the building for 50 years from the Chinese government to Weifang Lakeland Safety Product Co., Ltd., or Weifang, one of the Company's subsidiaries. In connection with the financing, Weifang agreed to make annual payments to An Qui and to allocate a portion of the proceeds from any sale of the property to An Qui. In 2002, An Qui relinquished its rights to the annual payments and to its rights to proceeds from the sale of the property in exchange for the amount of $406,185 (net of expenses). Weifang paid $222,645, $89,000 and $94,400 of this amount to An Qui in December 2002, January 2003 and June 2003, respectively. The Company now owns the building. In 2001, An Qui also helped to finance the construction of the Company's facility in Jiaozhou, China through a loan to one of the Company's Chinese subsidiaries. The loan's interest rate was 9% per annum until May 30, 2003, when the rate increased to 10% per annum. On June 19, 2003, the Company repaid this construction loan by paying $168,100 (plus accrued interest) to An Qui and a foreign investor who contributed to the loan. Gallen Rent & Insurance Mifflin Valley, Inc. - -------------------- In July 2005 as part of the acquisition of Mifflin Valley Inc., the Company entered into a five year lease with Michael Gallen (an employee) to lease an 18,520 sq. ft. manufacturing facility in Shillington, PA for $55,560 annually or a per square foot rental of $3.00. This amount was obtained prior to the acquisition from an independent appraisal of the fair market rental value per square foot. In addition the Company, commencing January 1, 2006 is renting 12,000 sq ft of warehouse space in a second location is Pennsylvania from this employee, on a month by month basis, for the monthly amount of $3.35 per square foot. In addition, in January 2006 the Company entered into a month to month lease with Donna Gallen (an employee and wife of Michael Gallen) for a 12,000 sq. ft. warehouse space in Blandon, PA for $40,200 annually. Mifflin Valley utilizes the services of Gallen Insurance (an affiliate of Michael & Donna Gallen) to provide certain insurance in Pennsylvania. Such payments for insurance aggregated $4,728 in fiscal 2006. Related Party-outside contractor The Company leases its facility in Mexico from Louis Gomez Guzman, an employee in Mexico until December 2005, pursuant to a lease expiring July 31, 2007 at an annual rental of $121,224. Mr. Guzman is also acting as a contractor for our Mexican facility. His company, Intermack, enables our Mexican facility to increase or decrease production as required without the Company needing to expand its facility. During fiscal 2006, Lakeland de Mexico paid Intermack $938,755 for services relating to contract production. 12. MANUFACTURING SEGMENT DATA - ------------------------------ The Company manages its operations by evaluating its geographic locations. The Company's North American operations include its facilities in Decatur, Alabama (primarily disposables, chemical suit and glove production), Celaya, Mexico (primarily disposables, chemical suit and glove production) and St. Joseph, Missouri (primarily woven products). The Company also maintains contract manufacturing facilities in China (primarily disposable and chemical suit production). The Company's China facilities and Celaya, Mexico facility produce the majority of the Company's products. The accounting policies of these operating entities are the same as those described in Note 1. The Company evaluates the performance of these entities based on operating profit, which is defined as income 60 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 before income taxes and other income and expenses. The Company has a small sales force in Canada and Europe who distribute products shipped from the United States and China, the table below represents information about reported manufacturing segments for the years noted therein: 2006 2005 2004 ---- ---- ---- Net Sales: North America $ 104,101,669 $ 100,361,909 $ 88,346,362 China 9,205,660 7,411,651 4,753,853 Less inter-segment sales (14,567,263) (12,453,397) (3,383,053) ------------- ------------- ------------- Consolidated sales $ 98,740,066 $ 95,320,163 $ 89,717,162 ============= ============= ============= Operating Profit: North America $ 8,339,441 $ 7,067,855 $ 4,721,880 China 1,151,340 921,208 1,255,118 Less intersegment profit 11,632 (335,000) (188,000) ------------- ------------- ------------- Consolidated profit $ 9,502,413 $ 7,654,063 $ 5,788,998 ============= ============= ============= Identifiable Assets: North America $ 66,746,660 $ 51,654,104 $ 40,211,021 China 5,717,192 8,659,150 7,092,806 ------------- ------------- ------------- Consolidated assets $ 72,463,852 $ 60,313,254 $ 47,303,827 ============= ============= ============= Depreciation: North America $ 548,868 $ 542,463 $ 535,572 China 444,818 341,677 267,662 ------------- ------------- ------------- Consolidated depreciation $ 993,686 $ 884,140 $ 803,234 ============= ============= ============= 61 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 13. UNAUDITED QUARTERLY RESULTS of OPERATIONS (In thousands, except for per - --------------------------------------------------------------------------- share amounts): - ---------------
Fiscal Year Ended January 31, 2006: 1/31/06 10/31/05 7/31/05 4/30/05 Net Sales $ 25,226 $ 22,717 $ 25,089 $ 25,709 Cost of Sales 18,949 17,034 19,293 19,542 --------- --------- --------- --------- Gross Profit $ 6,277 $ 5,683 $ 5,796 $ 6,167 ========= ========= ========= ========= Net Income $ 1,655 $ 1,313 $ 1,648 $ 1,713 ========= ========= ========= ========= Basic and Diluted income per common share*: Basic (a) $ 0.33 $ 0.26 $ 0.33 $ 0.34 ========= ========= ========= ========= Diluted (a) $ 0.33 $ 0.26 $ 0.33 $ 0.34 ========= ========= ========= ========= Certain reclassifications between cost of goods sold and operating expenses were made to the first quarter of fiscal year 2006, in order to be consistent with the second quarter and year to date of fiscal 2006 classifications for the Mexico and China subsidiaries. Fiscal Year Ended January 31, 2005: 1/31/05 10/31/04 7/31/04 4/30/04 Net Sales $ 23,221 $ 22,416 $ 22,845 $ 26,838 Cost of Sales 18,592 17,491 17,983 20,858 --------- --------- --------- --------- Gross Profit $ 4,629 $ 4,925 $ 4,862 $ 5,980 ========= ========= ========= ========= Net Income $ 1,258 $ 1,190 $ 1,143 $ 1,425 ========= ========= ========= ========= Basic and Diluted income per common share*: Basic (a) $ 0.25 $ 0.24 $ 0.27 $ 0.36 ========= ========= ========= ========= Diluted (a) $ 0.25 $ 0.24 $ 0.27 $ 0.36 ========= ========= ========= =========
(a) The sum of earnings per share for the four quarters may not equal earnings per share for the full year due to changes in the average number of common shares outstanding. *Adjusted, retroactively, for the 10% stock dividends to shareholders of records on April 30, 2005, July 31, 2003 and 2002. 62 Lakeland Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ January 31, 2006, 2005 and 2004 14. FORMATION OF NEW SUBSIDIARIES - --------------------------------- During the fiscal year ending January 31, 2006, a new subsidiary RFB Lakeland Private LTD. (an Indian Corporation) was formed to execute the supply agreement with RFB Latex LTD. dated October 25, 2005, and to exercise the option to buy its industrial glove business for $2.7 million after one year, if certain conditions are met and approved by the Company's Board of Directors. The Company's minimum commitment is approximately $250,000. As of January 31, 2006, the Company has a receivable from RFB Latex of approximately $439,000. 15. CONTINGENCIES - TAX AUDIT - ----------------------------- The Company's Federal Income Tax returns for the fiscal years ended January 31, 2003 and 2004 are currently under audit by the Internal Revenue Service. The final results of these audits cannot be estimated by management at this time, but management does not believe that the results of the audit will to have a material effect on the financial condition of the Company. 63 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - -----------------------------------------------
Column A Column B Column C Column D Column E -------------------- -------- --------------------- ---------- --------- Additions Balance at Charge to Charged to Balance at Beginning costs and other end of of period expenses accounts Deductions period --------- -------- -------- ---------- ------ Year ended January 31, 2006 Allowance for doubtful account (a) $323,000 $323,000 ======== ======== Allowance for slow moving inventory $396,000 $ 31,000 $365,000 ======== ======== ======== Year ended January 31, 2005 Allowance for doubtful account (a) $323,000 $323,000 ======== ======== Allowance for slow moving inventory $417,000 $ 21,000 $396,000 ======== ======== ======== Year ended January 31, 2004 Allowance for doubtful account (a) $343,000 $ 20,000 $323,000 ======== ======== ======== Allowance for slow moving inventory $354,000 $ 63,000 $417,000 ======== ======== ========
- -------------------------- (a) Deducted from accounts receivable. (b) Uncollectible accounts receivable charged against allowance. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None ITEM 9A. CONTROLS AND PROCEDURES - -------------------------------- Evaluation of Disclosure Controls and Procedures We carried out an evaluation required by the 1934 Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of January 31, 2006. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of January 31, 2006, our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC reports. Management's Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Management has assessed the effectiveness of our internal control over financial reporting as of January 31, 2006 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of January 31, 2006, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Holtz Rubenstein Reminick LLP, the Company's independent registered public accounting firm, has audited management's assessment of the effectiveness of the Company's internal control over financial reporting as of April 14, 2006, as stated in their report included herein. 64 Limitations on Controls Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Through the year ended January 31, 2006 additional expense has been incurred relating to documenting and testing the systems of internal controls. The company hired an internal auditor in July 2004 and has contracted with an independent consultant for services related to Sarbanes-Oxley Act compliance with Section 404, in February 2004. The total cumulative amount expensed so far is approximately $708,000 and is expected to increase in the first quarter of 2007 due to the hiring of additional accounting personnel and increased professional fees. ITEM 9B. OTHER INFORMATION - -------------------------- None PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- The following is a list of the names and ages of all of our directors and executive officers, indicating all positions and offices they hold with us as of April 15, 2006. Our directors hold office for a three-year term and until their successors have been elected and qualified. Our executive officers hold offices for one year or until their successors are elected by our board of directors.
Name Age Position - ---- --- -------- Raymond J. Smith.................................. 67 Chairman of the Board of Directors Christopher J. Ryan............................... 54 Chief Executive Officer, President, Secretary, General Counsel and Director Gary Pokrassa..................................... 58 Chief Financial Officer Gregory D. Willis................................. 49 Executive Vice President Harvey Pride, Jr. ................................ 59 Vice President - Manufacturing James M. McCormick................................ 58 Controller and Treasurer Paul C. Smith..................................... 39 Vice President John J. Collins................................... 63 Director Eric O. Hallman................................... 62 Director Michael E. Cirenza................................ 50 Director John Kreft........................................ 55 Director Stephen M. Bachelder ............................. 55 Director
Raymond J. Smith, one of our co-founders, has been Chairman of our board of directors since our incorporation in 1982 and was President from 1982 to January 31, 2004. Mr. Smith's term as a director will expire at our annual meeting of stockholders in June 2007. Christopher J. Ryan has served as our Chief Executive Officer since April 2004 and President since February 1, 2004, Secretary since April 1991, General Counsel since February 2000 and a director since May 1986. Mr. Ryan was our Executive Vice President - Finance from May 1986 until becoming our President on February 1, 2004. From October 1989 until February 1991, Mr. Ryan was employed by Rodman & Renshaw, Inc., an investment banking firm. 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, Mr. Ryan was employed as the Managing Director of Corporate Finance for Brean Murray, Foster Securities, Inc. He was employed from June 1985 to January 1987 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 served as one of our directors since 1986 and his term as a director will expire at our annual meeting of stockholders in June 2005. 65 Gary Pokrassa is a CPA with 36 years experience in both public and private accounting. Mr. Pokrassa was the CFO for Gristedes Foods, Inc. (AMEX-GRI) from 2000-2003 and Syndata Technologies from 1997-2000. Mr. Pokrassa received a BS in Accounting from New York University and is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. Gregory D. Willis has served as our Executive Vice President since May 1, 2005 and has held the position of National Sales Manager for us since November 1991. Prior to joining Lakeland he held the positions of National Sales Manager and Global Marketing Manager for Kappler Inc. from 1983 to 1991. Mr. Willis received his BBA degree in Business from Faulkner University and is currently a member of ISEA and NFPA. Harvey Pride, Jr. has been our Vice President of manufacturing since May 1986. He was Vice President of Ryland (our former subsidiary) from May 1982 to June 1986 and President of Ryland until its merger into Lakeland on January 31, 1990. James M. McCormick was our Vice President and Treasurer from May 1986 to August 2003 and is presently Controller and Treasurer. Mr. McCormick acted as Chief Financial Officer between April 2004 and November 2004. Between January 1986 and May 1986 Mr. McCormick was our Controller. Paul C. Smith, son of Raymond J. Smith, has served as Vice President since February 1, 2004. Prior to that, Mr. Smith was our Northeast Regional Sales Manager since September 1998. From April 1994 until September 1998, Mr. Smith was a sales representative for the Metropolitan Merchandising and Sales Co. John J. Collins, Jr. was Executive Vice President of Chapdelaine GSI, a government securities firm, from 1977 to January 1987. He was Senior Vice President of Liberty Brokerage, a government securities firm, between January 1987 and November 1998. Presently, Mr. Collins is self employed, managing a direct investment portfolio of small business enterprises for his own accounts. Mr. Collins has served as one of our directors since 1986 and his term as a director will expire at our annual meeting of stockholders in June 2006. Eric O. Hallman was President of Naess Hallman Inc., a ship brokering firm, from 1974 to 1991. Mr. Hallman was also affiliated between 1991 and 1992 with Finanshuset (U.S.A.), Inc., a ship brokering and international financial services and consulting concern, and was an officer of Sylvan Lawrence, a real estate development company, between 1992 and 1998. Between 1998 and 2000, Mr. Hallman was President of PREMCO, a real estate management company, and currently is Comptroller of the law firm Murphy, Bartol & O'Brien, LLP. Mr. Hallman has served as one of our directors since our incorporation in 1982 and his term as a director will expire at our annual meeting of stockholders in June 2006. Michael E. Cirenza has been the Executive Vice President and Chief Financial Officer of Country-Life LLC, a manufacturer and distributor of vitamins and nutritional supplements, since September 2002. Mr. Cirenza was the Chief Financial Officer and Chief Operating Officer of Resilien, Inc., an independent distributor of computers, components and peripherals from January 2000 to September 2002. He was an Audit Partner with the international accounting firm of Grant Thornton LLP from August 1993 to January 2000 and an Audit Manager with Grant Thornton LLP from May 1989 to August 1993. Mr. Cirenza was employed by the international accounting firm of Price Waterhouse from July 1980 to May 1989. Mr. Cirenza is a Certified Public Accountant in the State of New York and a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. Mr. Cirenza has served as one of our directors since June 18, 2003 and his term as a director will expire at our annual meeting of stockholders in 2005. John Kreft has been President of Kreft Interests, a Houston based private investment firm, since 2001. Between 1998 and 2001, he was CEO of Baker Kreft Securities, LLC, a NASD broker-dealer. From 1996 to 1998, he was a co-founder and manager of TriCap Partners, a Houston based venture capital firm. From 1994 to 1996 he was employed as a director at Alex Brown and Sons. He also held senior positions at CS First Boston including employment as a managing director from 1989 to 1994. Mr. Kreft graduated from the Wharton School of Business in 1975. Stephen M. Bachelder has been with Swiftview, Inc. a Portland based software company since 1999 and President since 2002. From 1991-1999 Mr. Bachelder ran a consulting firm advising software and hardware based companies in the Pacific Northwest. Mr. Bachelder was the president and owner of an Apparel Company, Bachelder Imports from 1982-1991 and worked in executive positions for Giant Foods, Inc. and Pepsico, Inc. between 1976-1982. Mr. Bachelder is a 1976 Graduate of the Harvard Business School. 66 Committees of the Board Our board of directors has a designated Audit Committee that reviews the scope and results of the audit and other services performed by our independent accountants. The Audit Committee is comprised solely of independent directors and consists of Messrs. Cirenza, Kreft, Bachelder, Hallman and Collins. The board of directors has also designated a Compensation Committee that establishes objectives for our senior executive officers, sets the compensation of directors, executive officers and our other employees and is charged with the administration of our employee benefit plans. The Compensation Committee is comprised solely of independent directors and consists of Messrs. Cirenza, Kreft, Bachelder, Collins and Hallman. Compensation of Directors Each non-employee director receives a fee of $5,000 per quarter for attending meetings of our board of directors or committees of our board of directors. Non-employee directors are reimbursed for their reasonable expenses incurred in connection with attendance at or participation in such meetings. In addition, under our 1995 Director Plan, each non-employee director who becomes a director is granted an option to purchase 5,000 shares of our common stock. Messrs. Hallman and Collins were each granted an option to purchase 5,000 shares of our common stock under our previous 1986 Plan at the time of their respective appointments or reelections to the board of directors. Such grants and the terms thereof were renewed on April 18, 1997, May 5, 1996 and May 5, 1996, respectively, in accordance with stockholder approval of the 1995 Director Plan at our 1995 annual meeting of stockholders. Mr. Cirenza received an option to purchase 5,000 shares of our common stock upon his election to our board of directors in June 2003. Messrs. Kreft and Bachelder each received an option to purchase 5,000 shares of our Common Stock upon appointment to our Board of Directors. Directors who are employees of Lakeland receive no additional compensation for their service as directors. However, such directors are reimbursed for their reasonable expenses incurred in connection with travel to or attendance at or participation in meetings of our board of directors or committees of the board of directors. 67 ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- See information under the caption "Compensation of Executive Officers" in the Company's Proxy Statement, which information is incorporated herein by reference. 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 incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- Related Party Leases In the past, because our access to third party financing was insufficient, we entered into arrangements with our directors and executive officers in order to fund the construction or acquisition of our assembly facilities. In such cases, we commissioned independent appraisals in 1999, 2002 and 2004 to ensure that these arrangements approximated arrangements made on an arms length basis. We believe that we currently have sufficient access to financing to fund our current and anticipated facility needs, we do not anticipate entering into additional arrangements with our directors or executive officers in the future. A description of our current arrangements with our directors and executive officers follows. POMS Holding Co., or POMS, was formed in 1984 to lease both land and a building to us because bank financing was unavailable. POMS is a partnership whose partners include three of our directors, one of our officers and six other individuals who were stockholders of Lakeland at the time of the formation of POMS. Raymond J. Smith, the chairman of our board of directors, Harvey Pride, Jr., our Vice President - Manufacturing, and John J. Collins and Eric O. Hallman, both of whom are directors, have a 20%, 20%, 8.75% and 5% interest in POMS, respectively. POMS leased to us a 91,788 square foot disposable garment manufacturing facility in Decatur, Alabama. Under a lease effective September 1, 1999, we paid an annual rent of $364,900. This lease was renewed on April 1, 2004 through March 31, 2009 at the same rental rate. We purchased this facility from POMS on April 25, 2005. On March 1, 1999, we entered into a one year (renewable for four additional one year terms) lease agreement with Harvey Pride, Jr., our Vice President - Manufacturing, for a 2,400 sq. ft. customer service office located next to our existing Decatur, Alabama facility. We paid an annual rent of $18,000 for this facility under the lease agreement in fiscal 2004 and 2005. This lease was renewed on March 1, 2004 through March 31, 2009 at the same rental rate. On June 1, 1999, we entered into a five year lease agreement (expiring May 31, 2004) with River Group Holding Co., L.L.C. for a 49,500 sq. ft. warehouse facility located next to our existing facility in Decatur, Alabama. River Group Holding Co., L.L.C. is a limited liability company, the members of which are Raymond Smith, John Collins, Eric Hallman, Walter Raleigh (a former Director), Christopher Ryan and Harvey Pride, who all have an equal ownership interest. Mr. Ryan is our Chief Executive Officer, President, Secretary, General Counsel and a director of our company, Messrs. Smith, Collins and Hallman are all directors of our company, and Mr. Pride is our Vice President - Manufacturing. We paid an annual rent of $199,100 for this facility. We were the sole occupant of the facility. This lease was renewed on April 1, 2004 through March 31, 2009 at the same rental rate. We purchased this facility from River Group on May 25, 2005. Related Party-outside contractor The Company leases its facility in Mexico from Louis Gomez Guzman, an employee in Mexico until December 2005, pursuant to a lease expiring July 31, 2007 at an annual rental of $121,224. Mr. Guzman is also acting as a contractor for our Mexican facility. His company, Intermack, enables our Mexican facility to increase or decrease production as required without the Company needing to expand its facility. During fiscal 2006, Lakeland de Mexico paid Intermack $938,755 for services relating to contract production. Past Related Party Transactions In 1997, An Qui Holding Co., L.L.C., or An Qui, a limited liability company whose members include Lakeland, and Messrs. Smith, Collins, Hallman, Raleigh, Ryan and Pride, provided financing for the construction of a 65,000 68 square foot building in An Qui City, China and the lease of the real property underlying the building for 50 years from the Chinese government to Weifang Lakeland Safety Product Co., Ltd., or Weifang, one of our subsidiaries. In connection with the financing, Weifang agreed to make annual payments to An Qui and to allocate a portion of the proceeds from any sale of the property to An Qui. In 2002, An Qui relinquished its rights to the annual payments and to its rights to proceeds from the sale of the property in exchange for the amount of $406,185 (net of expenses). Weifang paid $222,645, $89,000 and $94,400 of this amount to An Qui in December 2002, January 2003 and June 2003, respectively. Of the $406,185 paid to An Qui, Messrs Smith, Collins, Hallman, Ryan and Pride each received $44,421 and Mr. Raleigh received $39,792. In 2001, An Qui also helped to finance the construction of our facility in Jiaozhou, China through a loan to one of our Chinese subsidiaries. The loan bore interest at the rate of 9% per annum until May 30, 2003, when the rate increased to 10% per annum. On June 19, 2003, we repaid this construction loan by paying $168,100 (plus accrued interest) to An Qui and a foreign investor who contributed to the loan. Messrs. Smith, Collins, Hallman, Ryan and Pride, the members of An Qui who participated in this transaction, were each repaid their $26,000 investments plus interest of approximately $3,038. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES - ------------------------------------------------ See the information under the caption "Report of the Audit Committee" in the Company's Proxy Statement, which information is incorporated herein by reference. 69 PART IV ------- ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K - --------------------------------------------------------------------------- (a)The following documents are filed as part of this report: 1 Consolidated Financial Statements (See Page 27 of this report which includes an index to the consolidated financial statements) 2 Financial Statement Schedules: Schedule II- Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto. 3. Exhibits: Exhibit Description 3.1 Restated Certificate of Incorporation of Lakeland Industries, Inc. (Incorporated by reference to Exhibit 3(a) of Lakeland Industries, Inc.'s Registration Statement on Form S-18 (File No. 33-7512 NY)) 3.2 Bylaws of Lakeland Industries Inc., as amended (Incorporated by reference to Exhibit 3(b) of Lakeland Industries, Inc.'s Registration Statement on Form S-18 (File No. 33-7512 NY)) 10.2 Lease Agreement, dated August 1, 2001, between Southwest Parkway, Inc., as lessor, and Lakeland Industries, Inc., as lessee (Incorporated by reference to Exhibit 10(b) of Lakeland Industries, Inc.'s Annual Report on Form 10-K for the year ended January 31, 2002) 10.3 Lakeland Industries, Inc. Stock Option Plan (Incorporated by reference to Exhibit 10(n) of Lakeland's Registration Statement on Form S-18 (File No. 33-7512 NY)) 10.4 Employment Agreement, dated September 22, 2003, between Lakeland Industries, Inc. and Raymond J. Smith (Incorporated by reference to Exhibit 10(g) of Lakeland Industries, Inc.'s Quarterly Report on Form 10-Q filed December 12, 2003) 10.5* Employment, dated February 1, 2006, agreement between Lakeland Industries, Inc. and Harvey Pride, Jr. 10.7* Employment Agreement, dated February 1, 2006, between Lakeland Industries, Inc. and Christopher J. Ryan 10.10 Lease Agreement, dated March 1, 2004, between Harvey Pride, Jr., as lessor, and Lakeland Industries, Inc., as lessee 70 10.11 Term Loan and Security Agreement, dated July 7, 2005, between Lakeland Industries, Inc. and Wachovia Bank, N.A. (Incorporated by reference to Exhibit 10.11 of Lakeland Industries, Inc.'s Quarterly Report on Form 10-Q filed September 7, 2005) 10.12 Employment Agreement, dated May 23, 2005, between Lakeland Industries, Inc. and James M. McCormick (Incorporated by reference to Exhibit 10(r) of Lakeland Industries, Inc.'s Quarterly Report on Form 10-Q filed June 9, 2005) 10.13 Employment Agreement, dated September 22, 2003, between Lakeland Industries, Inc. and Paul C. Smith (Incorporated by reference to Exhibit 10(s) of Lakeland Industries, Inc.'s Quarterly Report on Form 10-Q filed December 12, 2003) 10.14 Employment Agreement, dated November 29, 2005, between Lakeland Industries, Inc. and Gary Pokrassa, CPA. (Incorporated by reference to exhibit 10.14 of Lakeland Industries, Inc. Quarterly Report on Form 10-Q filed December 12, 2005) 10.15 Employment Agreement, dated May 23, 2005, between Lakeland Industries Inc., and Gregory D. Willis (Incorporated by reference to exhibit 10.15 of Lakeland Industries, Inc. Quarterly Report on Form 10-Q filed June 9, 2005) 10.16 Asset Purchase Agreement, dated July, 2005 between Lakeland Industries, Inc. and Mifflin Valley, Inc. and Lease Agreement and Employment Contract between Lakeland Industries, Inc., and Michael Gallen (Incorporated by reference to exhibit 10.15, 10.16, and 10.17 of Lakeland Industries, Inc.'s Quarterly Report on form 10-Q filed September 7, 2005) 10.17 Supply Agreement and Option to Purchase, between Lakeland Industries, Inc.'s subsidiary RFB Lakeland Industries Private Ltd. and RFB Latex Private, Ltd. (Incorporated by reference to exhibits 10.18 and 10.19 of Lakeland Industries Inc.'s Quarterly Report on form 10-Q filed December 12, 2005) 10.18 Asset Purchase Agreement upon exercising of option, between Lakeland Industries, Inc. and RFB Lakeland Industries Private Ltd. (Incorporated by reference to exhibits 10.20 of Lakeland Industries Inc.'s Quarterly Report on form 10-Q filed December 12, 2005) 10.19 Employment Agreements, between RFB Lakeland Industries Private Ltd. and P.S. Ratra and Kamal Ratra (Incorporated by reference to exhibits 10.21 and 10.22 of Lakeland Industries, Inc.'s Quarterly Report on Form 10-Q filed December 12, 2005) 10.20 Shareholder Agreement, between Lakeland Industries, Inc. and P.S. Ratra (Incorporated by reference to exhibit 10.23 of Lakeland Industries, Inc.'s Quarterly Report on form 10-Q filed December 12, 2005) 71 10.21* Lease Agreement, dated March 1, 2006, between Carlos Tornquist Bertrand, as lessor, and Lakeland Industries, Inc., as lessee 10.22* Lease Agreement, dated 2006, between Michael Robert Kendall, June Jarvis, and Barnett Waddingham Trustees Limited, as lessor, and Lakeland Industries, Inc., as lessee 14.1 Lakeland Industries, Inc. Code of Ethics 21.1 Subsidiaries of Lakeland Industries, Inc. (wholly-owned): Lakeland Protective Wear, Inc. Lakeland de Mexico S.A. de C.V. Laidlaw, Adams & Peck, Inc. and Subsidiary (Meiyang Protective Products Co., Ltd.) Weifang Lakeland Safety Products Co. Ltd. Qing Dao MayTung Healthcare Co., Ltd. Lakeland Industries Europe Ltd. Mifflin Valley, Inc. RFB Lakeland Industries Private, Ltd. (b)Reports on Form 8 - K. The documents which we incorporate by reference consist of the documents listed below that we have previously filed with the SEC: A - On November 9, 2005 the Company filed a Form 8-K notifying of a new Employment Contract. B - On December 6, 2005 the Company filed a Form 8-K reporting notice of a teleconference call on December 12, 2005 to discuss the results of the Company's third quarter ended October 31, 2005. C - On December 12, 2005 the Company filed a Form 8-K regarding the results for operations of the Company's third quarter ended October 31, 2005. - -------------------- * Enclosed herein 72 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 17, 2006 LAKELAND INDUSTRIES, INC. By: /s/ Christopher J. Ryan -------------------------------------------- Christopher J. Ryan, Chief Executive Officer 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 17, 2006 - ---------------------------- Raymond J. Smith /s/ Christopher J. Ryan Chief Executive Officer, President, April 17, 2006 - ---------------------------- General Counsel, Secretary and Director Christopher J. Ryan /s/ Gary Pokrassa Chief Financial Officer April 17, 2006 - ---------------------------- Gary Pokrassa /s/ James M. McCormick Controller and Treasurer April 17, 2006 - ---------------------------- James M. McCormick /s/ Eric O. Hallman Director April 17, 2006 - ---------------------------- Eric O. Hallman /s/ John J. Collins, Jr. Director April 17, 2006 - ---------------------------- John J. Collins, Jr. /s/ Michael E. Cirenza Director April 17, 2006 - ---------------------------- Michael E. Cirenza /s/ John Kreft Director April 17, 2006 - ---------------------------- John Kreft /s/ Stephen M. Bachelder Director April 17, 2006 - ---------------------------- Stephen M. Bachelder
73 EX-10.5 2 ex10-5.txt EXHIBIT 10.5 February 1, 2006 Mr. Harvey Pride, Jr. 202 Pride Lane Decatur, AL 35603 Dear Mr. Pride: The purpose of this letter is to confirm your employment with Lakeland Industries, Inc. on the following terms and conditions: 1. THE PARTIES ----------- This is an agreement between Harvey Pride, Jr. (hereinafter referred to as "you") and Lakeland Industries, Inc., a Delaware corporation with principal place of business located at 701-7 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, 2006 through and including February 1, 2008. 3. CAPACITY -------- You shall be employed in the capacity of Vice President of Manufacturing of Lakeland Industries, Inc. and such other title or titles as may from time to time be determined by 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. 4. COMPENSATION ------------ As full compensation for your services you shall receive the following from the Company: a. A base annual salary of $220,000.00 per year payable bi-weekly; and b. Participation when eligible in any of the Company's Pension, Profit Sharing, Disability and 401 (K) plans when any such plans have or 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 more than 20 business days; and d. An adjustment in the way car allowances or leases are paid which will require a gross up in W-2 wages of $9,000 covering all vehicle expenses except fuel. e. An annual bonus payable May 25, 2007 as set forth in this agreement: 1. Within year one of this contract you shall decrease identifiable expenses of Lakeland de Mexico by $150,000 as verified by us internal and outside accountants. For this you shall receive a bonus of $20,000. For anything under $150,000 you shall receive 10% of the savings and for anything over $150,000 you shall receive 15% of the savings up to a maximum of $50,000. This shall apply to reducing the cost of fabrics or components purchased, Mexican services purchased, reducing Mexican labor inefficiencies or redundancies, rents, supplies, transportation costs or other fixed and identifiable costs. The committee would expect that you would visit Mexico personally at least 4 times a year to insure that Mexico reduces its costs and achieves profitability. The Compensation Committee shall have full discretion and the final say on the determination of the bonus amount based upon the cost savings analysis submitted. a. The same formula for Mexico shall apply to year 2 of the contract. b. Such actions as increasing Parent payments on Mexican Products or moving labor from Mexico to China would not be considered as cost reductions. 2. Improving customer ship dates will be measured and weighed on a discretionary basis at year end and approximately $5,000 of the year end bonus will be allocated at the Board's discretion based upon the percent improvement of product shipped on time as compared to fiscal 2006 from the Decatur facility. 3. The remainder of up to $25,000 will be based upon your achievements as determined by the Board in reducing costs and other activities that directly increase profits on out bound and in bound freight, lowering labor costs at the Decatur facility and increasing Uniland productivity and profits. 4. No later than May 25, 2007 #1-3 will be evaluated and bonus awarded and similar goals will be implemented for you for the fiscal year 2/1/07 - 1/31/08. 5. NON-COMPETITION --------------- During the term of this agreement and for two years 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. You shall also abide by the Code of Ethics Agreement and other Corporate Governance Rules as displayed on the Company's Web Page. You shall disclose prior to the execution of this agreement (or later on as the case may be) all outside business relationships, interests, investments, enterprises, that you presently have or contemplate entering into or enter into in the future that might affect your time spent on the business interests and your employment responsibilities to Lakeland, and/or loyalties to Lakeland. 6. CONFIDENTIALITY --------------- Except as required in your duties to the Company you shall not at any time during your employment and for a period of 5 years thereafter directly or indirectly use or disclose any confidential information relating to the Company or its business which is disclosed to you or known by you as a consequence of or through your employment by the Company and which is not otherwise generally obtainable by the public at large. 7. TERMINATION ----------- You or the Company may terminate your employment prior to the end of the Term for any reason upon written notice to the other party in accordance with the following provisions: (a) Death. Your employment shall terminate on the date of your death. Your Base Salary (as in effect on the date of death) shall continue through the last day of the month in which your death occurs. Payment of your Base Salary shall be made to your estate or your beneficiary as designated in writing to the Company. Your estate or designated beneficiaries as applicable shall also receive a pro-rata portion of the Annual Bonus, if any, determined for the fiscal year up to and including the date of death which shall be determined in good faith by the Compensation Committee of the Board of Directors. Your beneficiaries shall also be entitled to all other benefits generally paid by the Company on an employee's death. (b) Disability. Your employment shall terminate if you become totally disabled. You shall be deemed to be totally disabled if you are unable, for any reason, to perform any of your duties to the Company for a period of ninety consecutive days, or for periods aggregating 120 days in any period of 180 consecutive days. (c) Other Termination. Should you decide to leave the Company, you will provide the Company with 45 days written notice. Should the Company decide to terminate you for any reason it shall have the right to buy out your contract rights herein for 6 months base pay and any commissions and bonus due you on the date of termination and shall determine same by what you would have been paid in salary for 6 months after the date of termination calculated from the prior six months of salary, all concomitant with your execution of the Company's standard severance agreement. 8. NOTICES ------- Any notices required to be given under this Agreement shall, unless otherwise agreed to by you and the Company, be in writing and by certified mail, return receipt requested and mailed to the Company at its headquarters at 701-7 Koehler Avenue, Ronkonkoma, NY 11779-07410 or to you at your business address at 202 Pride Lane, Decatur, AL 35603. 9. 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. 10. SEPARABILITY ------------ Any provision of this agreement or non-competition or confidentiality sections (the "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. 11. HEADINGS -------- The headings contained in this agreement are for convenience only and shall not affect, restrict or modify the interpretation of this Agreement. 12. 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 the federal or state courts located in the State of New York on any legal issues arising out of this contract and you agree that such judgments as rendered by New York courts shall be transferable and binding in all other American courts of competent jurisdiction. LAKELAND INDUSTRIES, INC. COMPENSATION COMMITTEE By: /s/ Eric O. Hallman, Chairman ------------------------------ Eric O. Hallman, Chairman By: /s/ John J. Collins ------------------------------ John J. Collins AGREED AND ACCEPTED: By: /s/ Michael Cirenza ------------------------------ Michael Cirenza /s/ Harvey Pride, Jr. - ---------------------------- Harvey Pride, Jr. Vice President By: /s/ A. John Kreft ------------------------------ A. John Kreft By: /s/ Stephen M. Bachelder ------------------------------ Stephen M. Bachelder Board of Directors Compensation Committee EX-10.7 3 ex10-7.txt Lakeland Industries, Inc. EXHIBIT 10.7 Employment Agreement This agreement ("Agreement") has been entered into this ___ day _____________, 2006, by and between Lakeland Industries, Inc., a Delaware corporation ("Company"), and Christopher J. Ryan, an individual ("Executive"). IT IS AGREED AS FOLLOWS SECTION 1: DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. For purposes of this Agreement, the following words and phrases, whether or not capitalized, shall have the meanings specified below, unless the context plainly requires a different meaning. 1.1 (a) "CHANGE IN CONTROL" means: (i) The acquisition by any individual, entity or group, or a Person (within the meaning of Section 13 (d) (3) or 14 (d) (2) of the Exchange Act) of ownership of more than 50% of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); or (ii) Individuals who, as the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, as a member of the Incumbent Board, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (a) more than 50% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their 1 ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation, entitled to vote generally in the election of directors and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the stockholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (1) more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sales or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 1.1 (b) "EMPLOYMENT PERIOD" means the period beginning on February 1, 2006 and ending on April 30, 2008. 1.1 (c) "PERSON" has the meaning set forth in Sections 13 (d) and 14 (d) of the Exchange Act. 1.1 (d) "TERM" means the period that begins on February 1, 2006 and ends on the earlier of: (i) the Date of Termination as defined in Section 3.6 of this Agreement, or (ii) the close of business on April 30, 2008. 1.1 (e) "TRIGGERING TRANSACTION" means a Change of Control of the Company. 1.1 (f) "TRIGGERING TRANSACTION DATE" shall mean the date of the Triggering Transaction. 2 1.2 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to its conflict of law principles. SECTION 2: TERMS AND CONDITIONS OF EMPLOYMENT. 2.1 PERIOD OF EMPLOYMENT. The Executive shall remain in the employ of the Company throughout the Term of this Agreement in accordance with the terms and provisions of this Agreement. 2.2 POSITIONS AND DUTIES. 2.2(a) Throughout the Term of this Agreement, the Executive shall serve as a Director of the Board and President, General Counsel and Secretary of the Company, subject to reasonable directions and nominations of the Board. The Executive shall have such authority and shall perform such duties as are specified by the By-laws of the Company for the office to which he has been appointed hereunder and shall so serve, subject to the control exercised by the Board from time to time. Additionally, each year throughout the Term of the Executive's service as a Director, the Executive shall be nominated to serve as member of the Board. 2.2(b) Throughout the Term of this Agreement (but excluding any periods of vacation and sick leave to which the Executive is entitled), the Executive shall devote his full business time and attention to the business and affairs of the Company and shall use his best efforts to perform faithfully and efficiently such responsibilities as are assigned to him under or in accordance with this Agreement; provided that, it shall not be a violation of this paragraph for the Executive to serve on corporate, civic or charitable boards or committees, so long as such activities do not interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement or violate the Company's conflict of interest policy. 2.3 SITUS OF EMPLOYMENT. Throughout the Term of this Agreement, the Executive's services shall be performed at the location where the Executive was employed immediately prior to the Effective Date, or any office of the Company which is locatedon Long Island or the New York City metropolitan area. It is understood and agreed by the Executive that the Executive will be required at the discretion of the Board of Directors, to engage in substantial business travel. 2.4 COMPENSATION. 2.4(a) ANNUAL BASE SALARY. The Executive shall receive an annual salary ("Annual Base Salary") of $400,000 between February 1, 2006 and April 30, 2008, which shall be paid in equal or substantially equal semi-monthly installments (i.e. $16,666.67 semi-monthly). During the Term of this Agreement, the Annual Base Salary payable to the Executive shall be reviewed at least annually and may be increased at the sole discretion of the Compensation Committee of the Board but shall not be reduced. 3 2.4(b) INCENTIVE BONUSES. In addition to Annual Base Salary, the Executive shall be awarded the opportunity to earn an incentive bonus on an annual basis ("Incentive Bonus") under an incentive compensation planto be determined by the Compensation Committee of the Board. During the Term of this Agreement, the annual Incentive Bonus which the Executive will have the opportunity to earn shall be reviewed at least annually and be increased at the discretion of the Compensation Committee of the Board. 2.4(c) INCENTIVE, SAVINGS AND RETIREMENT PLANS. Throughout the Term of this Agreement, the Executive shall be entitled to participate in all incentive, savings and retirement plans generally available to other peer executives of the Company. 2.4(d) WELFARE BENEFIT PLANS. Throughout the Term of this Agreement (and thereafter, subject to Section 4.1 (c) hereof), the Executive and /or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent generally available to other peer executives of the Company. As it affects Sections 2.4(c) and 2.4(d) above, the Company shall always have the right to alter its benefit plan providers. 2.4(e) EXPENSES. Throughout the Term of this Agreement, the Executive shall be entitled to receive reimbursement for all reasonable and necessary business-related expenses incurred by the Executive in accordance with the policies, practices and procedures generally applicable to other peer executives of the Company. The Executive agrees to submit receipts and/or vouchers in support of all requests for reimbursement. 2.4(f) FRINGE BENEFITS. Throughout the Term of this Agreement, the Executive shall be entitled to use a non-luxury automobile, with title to remain in the Company, and life insurance in the face amount of $500,000, paid by the Company. Executive agrees to be solely responsible for any and all federal, state and local taxes owing as a result of such automobile or life insurance being provided. 2.4(g) VACATION. Throughout the Term of this Agreement, the Executive shall be entitled to paid vacation for 20 business days. It is understood that no more than two (2) consecutive weeks of vacation shall be taken by Executive at any one time. SECTION 3: TERMINATION OF EMPLOYMENT 3.1 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, the payment of which 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 Incentive 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. 4 Your beneficiaries shall also be entitled to all other benefits generally paid by the Company on an employee's death. 3.2. DISABILITY. Your employment shall terminate if you become totally disabled. You shall be deemed to be totally disabled if you are unable, for any reason, to perform any of your duties to the Company for a period of ninety consecutive days, or for periods aggregating 120 days in any period of 180 consecutive days. 3.3 TERMINATION FOR CAUSE. The Company may terminate the Executive's employment during the Employment Period for "Cause", which shall mean termination based upon: (i) the Executive's failure to substantially perform his duties with the Company (other than as a result ofa disability, which shall be governed by Section 3.2), after a written demand for substantial performance is delivered to the Executive by the Company, which specifically identifies the manner in which the Executive has not substantially performed his duties, (ii) the Executive's commission of an act of fraud, theft, misappropriation, dishonesty or embezzlement, (iii) the Executive's conviction for a felony or pleading nolo contendere to a felony, (iv) the Executive's failure to follow a lawful directive of the Board of Directors, or (v) the Executive's material breach of any provision of this Agreement. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until (i) he receives a Notice of Termination from the Company, (ii) he is given the opportunity, with counsel, to be heard before the Board, and (iii) the Board finds, in its good faith opinion, the Executive was guilty of the conduct set forth in the Notice of Termination. 3.4 GOOD REASON. The Executive may terminate his employment with the Company for "Good Reason", which shall mean: 3.4(a) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 2.2 (a) or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose any action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; 3.4(b) (i) in the event of and after the occurrence of a Triggering Transaction, the failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, life insurance plan, health and accident plan or disability plan to which the Executive is entitled as specified in Section 2.4, (ii) the taking of any action by the Company which would adversely affect the Executive's participation in, or materially reduce the Executive's benefits under, any plans to which the Executive is entitled as specified in Section 2.4, or deprive the Executive of any material fringe benefit enjoyed by the Executive as described in Section 2.4 (f), or (iii) the failure by the Company to provide the Executive with paid vacation to which the Executive is entitled as described in Section 2.4 (g). 5 3.4(c) in the event of and after the occurrence of a Triggering Transaction, the Company's requiring the Executive to be based at any office or location other than that described in Section 2.3; 3.4(d) a material breach by the Company of any provision of this Agreement; such breach by the Company shall require Executive to provide the Company a written notice describing with specificity the nature of the contractual breach and the Company shall have 30 days to cure such breach. 3.4(e) within a period ending at the close of business on the date one (1) year after the Triggering Transaction Date of any Change in Control, if the Company has failed to comply with and satisfy Section 6.2 on or after such Triggering Transaction Date. 3.5 NOTICE OF TERMINATION. Any termination by the Company for Cause or Disability, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party, given in accordance with Section 7.2. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the Date of Termination (as defined in Section 3.6 hereof) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty (30) days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. 3.6 DATE OF TERMINATION. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the Date of Termination shall be the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by reason of death, the Date of Termination shall be the date of death of the Executive, or (iii) if the Executive's employment is terminated for any other reason, the Date of Termination shall be the date of receipt of the Notice of Termination. SECTION 4: CERTAIN BENEFITS UPON TERMINATION. 4.1 TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If, (i) the Company shall terminate the Executive's employment without Cause, or (ii) the Executive shall terminate employment with the Company for Good Reason, the Executive shall be entitled to the payment of the benefits provided below as of the Date of Termination: 4.1(a) Accrued Obligations. Within thirty (30) days after the Date of Termination, the 6 Company shall pay to the Executive the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not previously paid, (2) the accrued benefit payable to the Executive under any deferred compensation plan, program or arrangement in which the Executive is a participant subject to the computation of benefits provisions of such plan, program or arrangement, and (3) any accrued vacation pay; in each case to the extent not previously paid (the "Accrued Obligation"). In addition, on the date that Incentive Bonuses are paid to other peer executives for the year in which the Executive's employment is terminated, the Executive will be paid an amount equal to the product of the Current Target Bonus multiplied by a fraction, the numerator of which is the number of days during the fiscal year for which the Incentive Bonus is paid prior to the Date of Termination and denominator of which is 365. For purposes of this Agreement, the term "Current Target Bonus" means the Incentive Bonus that would have been paid to the Executive for the fiscal year in which the termination of employment occurred, if the Executive's employment had not been so terminated and the Executive had earned 100% of the Incentive Bonus that he could have earned for that year. 4.1(b) Annual Base Salary and Target Bonus Continuation. For the remainder of the Employment Period, the Company shall pay to the Executive, the Executive's then-current Annual Base Salary and Current Target Bonus as would have been paid to the Executive had the Executive remained in the Company's employ throughout the Employment Period; provided that in all cases the Executive shall receive, at minimum, the then-current Annual Base Salary and Current Target Bonus for the remainder of the Employment Period, or for a period beginning on the Date of Termination and ending one year thereafter, whichever is longer. The Company at any time may elect to pay the balance of such payments then remaining in a lump sum, in which case the total of such payments shall be discounted to present value on the basis of the applicable Federal short-term monthly rate as determined according to Code Section 1274 (s) for the month in which the Executive's Date of Termination occurred. 4.1(c) Medical and Health Benefit Continuation. For a period of two years beginning on the Date of Termination, the Company shall continue medical and health benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them if the Executive's employment had not been terminated, in accordance with the plans, practices, programs or policies of the Company as those provided generally to other peer executives and their families; provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical or health benefits under another employer-provided plan, the medical and health benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. In the event Executive is able to obtain medical and health care coverage from a third party for the duration of such coverage period that is at least as good in all material respects as that described in the immediately preceding sentence, Executive agrees to accept, in lieu of such Company provided medical and health benefits, a lump sum cash payment in an amount equal in value to the entire cost to Executive on an after-tax basis of such alternate medical and health care coverage. 7 4.1(d) Other Benefits. To the extent not previously paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided for which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company as those provided generally to other peer executives and their families ("Other Benefits"). 4.2 DEATH. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of Accrued Obligations (as defined in Section 4.1 (a)) (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within thirty (30) days of the Date of Termination) and (ii) the timely payment or provision ofany other benefit(s) generally provided by the Company upon the death of an employee of the Company, including death benefits pursuant to the terms of any plan, policy, or arrangement of the Company. 4.3 DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, , this Agreement shall terminate without further obligations to the Executive, other than for (i) payment of Accrued Obligations (as defined in Section 4.1 (a)) (which shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination) and (ii) the timely payment or provision of any other benefit(s) generally provided by the Company upon the Disability of an employee, including Disability benefits pursuant to the terms of any plan, policy or arrangement of the Company. 4.4 TERMINATION FOR CAUSE; OTHER THAN GOOD REASON. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligations to pay to the Executive his Accrued Compensation (as defined in this Section). If the Executive terminates employment with the Company during the Employment Period, (excluding a termination for Good Reason), this Agreement shall terminate without further obligations to the Executive, other than for the payment of Accrued Compensation (as defined in this Section). In such case, all Accrued compensation shall be paid to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination. For the purpose of this Section, the term "Accrued Compensation" means the sum of (i) the Executive's Annual Base Salary through the Date of Termination to the extent not previously paid, (ii) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon), and (iii) any accrued vacation pay; in each case, to the extent not previously paid. 4.5 NON-EXCLUSIVITY OF RIGHTS; SUPERSESSION OF CERTAIN BENEFITS. Except as provided in Section 4.1 (c) and in this Section 4.6, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, 8 program, policy or practice provided by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Amounts which are vested benefits of which the Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company at or subsequent to the Date of Termination, shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. SECTION 5: NON-COMPETITION. 5.1 NON-COMPETE AGREEMENT 5.1(a) It is agreed that during the Term of this Agreement and for a period of two (2) years thereafter, the Executive shall not, without prior written approval of the Board, become an officer, employee, agent, partner, consultant, beneficial/owner, agent, investor, or director of any business enterprise in substantial direct competition (as defined in Section 5.1(b)) with the Company; provided that, if the Executive is terminated by the Company without Cause or if the Executive terminates his employment for Good Reason, then he will not be subject to the restrictions of this Section. 5.1(b) For purposes of Section 5.1, a business enterprise with which the Executive becomes associated as an officer, employee, agent, partner, consultant, beneficial/owner, agent, investor or director shall be considered in substantial direct competition, if such entity competes with the Company in any business in which the Company is engaged and is within the Company's market area as of the date that the Term of this Agreement expires. 5.1(c) The above constraint shall not prevent the Executive from making passive investments, not to exceed five percent (5%), in any enterprise. 5.1(d) It is agreed that during the Term of this Agreement and for a period of two (2) years thereafter, the Executive shall not, directly or indirectly, hire, offer to hire, or otherwise solicit the employment of any employee of the Company on behalf of himself or any business enterprise in substantial direct competition (as defined in Section 5.1(b)) with the Company. 5.1(e) CONFIDENTIAL INFORMATION. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during or as a result of the Executive's employment by the Company and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company 9 and those designated by it. In no event shall an asserted violation of the provisions of this Section constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 5.1(f) The Executive agrees that the foregoing restrictions are reasonable and shall not prevent the Executive from earning a livelihood, and furthermore, if any court of competent jurisdiction deems any of the provisions of the foregoing invalid, this Agreement shall be enforced to the full extent that such provisions are valid and such court may modify such restrictions to afford the Company the maximum applicable protection permitted under the law. 5.1(g) Should Executive be adjudicated by a court of competent jurisdiction to be in violation of this Section 5.1, all amounts owed Executive pursuant to this Agreement shall be forfeited, and the Company shall be entitled to injunctive or such other equitable relief as is necessary to restrain Executive's breaching conduct. 5.2 DEVELOPMENTS. It is agreed that all developments, including ------------ inventions, whether patentable or otherwise, trade secrets, formulations, discoveries, concepts, processes, improvements, ideas or writings, or know-how related thereto, which directly or indirectly relate to or may be useful in the design, manufacture, packaging or marketing of the Company's products or otherwise in the business of the Company or which directly or indirectly result from or are related to any services the Executive has rendered, is or will be engaged in rendering for the Company which the Executive, either by himself or in conjunction with any other person or persons, shall conceive, make, develop, acquire or acquire knowledge of during the employment relationship or because of the employment relationship (the "developments"), shall become and remain the sole and exclusive property of the Company. The Executive hereby assigns, transfers and conveys all of his right, title and interest in and to any and all such developments and to promptly disclose all such developments to the Company. Upon the request of the Company, the Executive will execute and deliver any and all instruments, documents and papers, give evidence and do any and all other acts which are or may be necessary or desirable to document such transfer or to enable the Company to file and prosecute applications for and to acquire, maintain and enforce any and all patents, trademark registrations or copyrights under United States or foreign law with respect to any such developments or to obtain any extension, validation, reissue, continuance or renewal of any such patent, trademark or copyright. The Company will be responsible for the preparation of any such proceedings and will reimburse the Executive for reasonable expenses incurred complying with the provisions of this paragraph. SECTIONS 6: SUCCESSORS. 6.1 SUCCESSORS OF EXECUTIVE. This Agreement is personal to the Executive and, without the prior written consent of the Company, the rights (but not the obligations) shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. 10 6.2 SUCCESSORS OF COMPANY. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to terminate the Agreement at his option on or after the Triggering Transaction Date for Good Reason. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. SECTION 7: MISCELLANEOUS. 7.1 OTHER AGREEMENTS. The Board may, from time to time, in the future, provide other incentive programs and bonus arrangements to the Executive with respect to the occurrence of a Triggering Event that will be in addition to the benefits required to be paid in the designated circumstances in connection with the occurrence of a Triggering Transaction. Such additional incentive programs and/or bonus arrangements will affect or abrogate the benefits to be paid under this Agreement only in the manner and to the extent explicitly agreed to by the Executive in any such subsequent program or arrangement. 7.2 NOTICE. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses as set forth below; provided that all notices to the Company shall be directed to the attention of the Chairman of the Board, or to such other address as one party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. Notice to Executive: ------------------------ Christopher J. Ryan 136 West Bayberry Road Islip, NY 11751 Notice to Company: ----------------------- Lakeland Industries, Inc. 701-7 Koehler Ave. Ronkonkoma, NY 11779 7.3 VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 7.4 WAIVER. The Executive's or the Company's failure to insist upon strict compliance 11 with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 3.4 shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. IN WITNESS WHEREOF, the Executive and, the Company, pursuant to the authorization from its Board, have caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. By: /s/ Christopher J. Ryan ---------------------------- Christopher J. Ryan Members BOD Compensation Committee By: /s/ Eric O. Hallman ---------------------------- Eric O. Hallman By: /s/ John J. Collins ---------------------------- John J. Collins By: /s/ A. John Kreft ---------------------------- A. John Kreft By: /s/ Michael Cirenza ---------------------------- Michael Cirenza By: /s/ Stephan Bachelder ---------------------------- Stephan Bachelder EX-10.21 4 ex10-21.txt Exhibit 10.21 LEASE AGREEMENT Santiago de Chile, March 1, 2006, Mr. Carlos Tornquist Bertrand, Chilean, an individual, Los Algarrobos N2228, on behalf of Tor Chile S.A. (herinafter the "Landloard")Herin after and Mrs. Agustina Byer, Argentinean, married, 115 Crooked Hill Rd. Huntington New York. U.S.A, Passport N(0)24.069.380, on behalf of Lakeland Industries, 701 Koheler Avenue, Ronkonkoma New York, 11779, U.S.A. (hereinafter the "Tenant") agree to this lease agreement upon the following conditions and covenants stated here in. 1.- PROPERTY The Landlord is the exclusive owner of the property located in Los Algarrobos N(0)2228, Santiago de Chile, Chile. The landlord agrees to lease to the Tenant 2 offices totaling 42 square meters, including usage of a bathroom and kitchen and a warehouse in the property mentioned above; and the Tenant agrees to use the property as agree herein, otherwise it will be cause for termination of this lease agreement and Tenant shall evacuate the property, even when the end of the term of this agreement is still pending. 2.- PURPOSE The Tenant agrees to use the property as office space and warehousing of merchandise exclusively owned by the tenant. This obligation of the Tenant is essential for the execution of this agreement. 3. OTHER SERVICES INCLUDED IN THIS AGREEMENT. The Landlord agrees to provide services of electricity, water, alarm system, and warehouseman, which are included in the monthly rent. This obligation of the Landlord is essential for the execution of this agreement. 4.- TERM The term of this lease agreement is from March 1, 2006 to March, 1 2008. This agreement will expire in the stated term unless both parties shall agree in writing to extend the term of this agreement or execute another agreement. In the event there is no written letter extending the term of this agreement, or a new agreement, and the Tenant shall not vacate the premises, the Tenant shall pay the Landlord, the sum equal to a monthly rent plus a 20% for any additional months the Tenant remains and the Landlord shall have all continuing rights legal actions against the Tenant. 5.- RENT The parties agree monthly rent shall be US$1,000 for the property and other services Landlord shall provide. The rent shall be paid in advance, within the first 5 days of each month at the Landlords domicile, through a deposit at the Bank Boston or any other financial entity stated by the Landlord. The Tenant agrees and consents that any late payment will result in a 1% interest penalty per day over the monthly rent. Landlord grants to Tenant an option to renew this lease agreement after expiration of the term of this agreement, at which time the parties shall agrees the amount of new rent and the new covenants of this agreement. 6.- OTHER PAYMENTS. The tenant is obligated to pay for gas, telephone, freight, and communal expenses. 7.- TERMINATION In the event of default in payment on the rent over 10 days of the 5th day of any month, the Landlord shall immediately terminate this agreement, according to the law. The Landlord has the right to claim for damages and unpaid rents for breach of this agreement. 8.- PROHIBITIONS FOR THE TENANT It is expressly prohibited for the Tenant to assign, sublease or license in whole or in part the premises; to alter the structure of the property; to disturb the neighbors; to have animals; to have explosive, flammable or intoxicating materials in the premises. It is expressly prohibited to use the premises for any other purposes as stated in section 2 of this agreement. In the event, the Tenant assigns or subleases the Leased Premises to a third party, the tenant shall be liable for any damages on the premises and this lease shall be terminable. 9.- MAINTENANCE The Tenant shall agree to maintain in perfect conditions, the keys, artifacts, valves, toilets, plugs, bells, electricity vents; and o repair them and change them. The Tenant shall take care of the landscaping; clean and maintain the heating system, and the Tenant shall repair and maintain the premises in good condition. The tenant agrees to repair at it's owns expense caused by its ordinary use the ceiling, walls, glasses, paintings and features of the premise. Any damage that is the tenants is not obliged to repair structural damages, liking pipes, etc, which shall be repaired by the Landlord, immediately after notification by the Tenant. If within 10 days the Landlord does not repair the damages, the Tenant is entitled to repair the damage and to deduct the cost of the repair from the monthly rent. 10.-IMPROVEMENTS. The Tenant is authorized to improve and remodel the property necessary for its usage. At the termination of this agreement all fixtures installed in, and improvements made in the Leased Premises, can be removed if the removal does not damage the structure of the property. All other improvements shall remain as part of the premises. It is expressly agreed that if the agreement is terminated before the expiration of the Term of this agreement because the Landlord is in breach, the Landlords shall pay the Tenant for the cost, expenses or value of the fixtures that could not be removed without damaging the property. 11.-RESTITUTION OF THE PREMISES. At the end of this agreement the Tenant agrees to return the Leased Premises in the same condition as when entered and to return the keys to the property. Furthermore, the Tenant shall provide the Landlord with the rent receipts and expenses incurred during this agreement. 12.-WARRANTY To guaranty the maintenance of the premises in the same condition as when entered; repairs of the damages on any fixtures, or the services and premises; and in general, to perform all the obligations stated in this agreement; the Tenant shall make a deposit one month's rent as a security. If at the end of the Term there is a credit balance in favor of the Tenant, the Landlord agrees to return such amount to the Tenant, unless the Landlord has a legal right to exercise in his favor and to deduct damages caused by the Tenant; as well as the amount of unpaid invoices for electricity, gas, telephone and other expenses incurred by the Tenant. 13.- DAMAGES The Landlord shall not be liable for robberies incurred to the property or damages caused by fires, floods, leacks, broken pipes, damages caused by heat or humidity and other natural damages. 15.- PROHIBITIONS The Tenant shall not use the security to pay the monthly rent of any month nor the last month of the term. 16.-DOMICILE For all matters pertaining to this agreement the parties agree that the domicile is Santiago the Chile, and whatever action may be brought, shall be governed by, construed and enforced in accordance with the Jurisdiction of the Santiago de Chile. 17. OTHER CONDITIONS. The rent includes the fixtures that shall be stated in an attachment and signed by the parties heretp This agreement is executed March 1, 2006. Carlos Tornquist Agustina Byer Tor Chile S.A. Lakeland Industries, Inc. Landlord Tenant EX-10.22 5 ex10-22.txt Exhibit 10.22 DATED_______________________2006 THE TRUSTEES OF THE WALLINGFEN PARK LIMITED PENSION TRUST -to- LAKELAND INDUSTRIES EUROPE LIMITED *************** LEASE Relating to: Units 9 and 10 and office block at Wallingfen Park, 236 Main Road Newport East Riding of Yorkshire Ivesons Solicitors HULL A LEASE DATED - ------------- 1.1 The Landlord MICHAEL ROBERT KENDALL AND JUNE JARVIS of Wallingfen Lodge, 236 Main Road, Newport, East Yorkshire HU15 2RH and BARNETT WADDINGHAM TRUSTEES LIMITED whose registered office is at Chalfont Court, Hill Avenue, Amersham, Buckinghamshire HP6 5BB 1.2.1 The Tenant LAKELAND INDUSTRIES EUROPE LIMITED (Company Number 04500660) whose registered office is at Unit 11 Wallingfen Park 236 Main Road Newport East Yorkshire HU15 2RH 1.3 The Guarantor None 1.4 The Premises All that the light industrial units known as Unit 9 and 10 TOGETHER WITH the office block to the south of Unit 11 all of which form part of Warehouse Unit 3 at Wallingfen Park, 236 Main Road, Newport, East Riding of Yorkshire and are shown for the purposes of identification only edged red on the Plan 1.5 The Estate The land and warehouse buildings situate at Wallingfen Park, 236 Main Road, Newport (of which the Premises forms part) together with such additional land and buildings owned or acquired by the Landlord from time to time as shall be brought into use in the Estate 1 1.6 Contractual Term Five (5) years from and including the First day of January 2006 1.7 Rent Commencement Date the First day of January 2006 1.8 Initial Rent Twenty-two Thousand Nine Hundred Pounds ((pound)22,900.00) exclusive of VAT 1.9 Review Dates the First day of January 2007 and the First day of January in each year thereafter and Review Date means any one of the review dates 1.10 Interest Rate 4% per year above the base lending rate of Barclays Bank Plc or such other Bank (being a member of the Committee of London and Scottish Bankers) as the Landlord may from time to time nominate in writing 1.11 Permitted User General workshop storage and office use/light industrial use or such other use that falls within classes B1 and/or B8 of the Schedule to the Town and Country Planning (Use Classes) Order 1987 (as amended by the Town and County Planning (Use Classes) (Amendment) (England) Order 2005 as the Landlord shall from time to time approve (such approval not to be unreasonably withheld or delayed) 2. DEFINITIONS - ------------------ 2.1 For all purposes of this Lease the terms defined in clauses 1 and 2 have the meanings specified 2 2.2 "Access Roads" means the roadways, yards and pavements shown hatched blue on the Plan 2.3 "Authorised Guarantee Agreement" shall have the same meaning as in the Landlord and Tenant (Covenants) Act 1995 2.4 "Buildings" means the warehouse building or buildings now or at any time during the Term erected on the whole or part of the Estate 2.5 "the Industrial Covenants" means the covenants set out in the Third Schedule 2.6 "the Insurance Rent" means the sums which the Landlord shall from time to time pay or be required to pay by way of premium 2.6.1 for insuring the Premises (including insuring for loss of Rent) in accordance with its obligations contained in this Lease and 2.6.2 for insuring in such amount and on such terms (as the Landlord shall consider appropriate or shall be reasonable) against all liability of the Landlord to third parties arising out of or in connection with any matter including or relating to the Premises Provided that where any policy for such insurance includes other property as well as the Premises the Insurance Rent shall be equal to a fair and reasonable proportion attributable to the Premises (to be assessed by the Surveyor whose decision shall be final and binding on all the parties hereto) of such sums referred to in sub-clause 2.6.1 and 2.6.2. 2.7 "Insured Risks" means, subject to reasonable and continuing availability of insurance cover and without limitation, fire lightning explosion riot civil commotion malicious persons and vandals earthquakes storm tempest flood bursting and over flowing water pipes tanks and other apparatus impact by road vehicles and non-hostile aircraft (including articles dropped from aircraft) and such other risks or contingencies as the Landlord from time to time in its reasonable discretion may think fit to insure against subject to any exclusions limitations and conditions contained in the Policy of Insurance 2.8 "Interest" means interest during the period from the date on which the payment is due to the date of payment both before and after any judgement at the Interest Rate then prevailing or should the base rate referred to in clause 1.10 cease to exist or not be published at any time 3 such other rate of interest as is most closely comparable with the Interest Rate to be agreed between the parties or in default of agreement to be determined by the Surveyor acting as an expert and not as an arbitrator 2.9 "the 1954 Act" means the Landlord and Tenant Act 1954 (and all statutes regulations and orders included by virtue of clause 3.14) 2.10 "Pipes" means all pipes sewers drains mains ducts conduits gutters water courses wires cables channels flues and all other conducting media and includes any fixings louvres cowls and any other ancillary apparatus which are in on or under or which serve the Premises 2.11 "the Plan" means the plan annexed to this Lease 2.12 "the Planning Acts" means the Town and Country Planning Act 1990 the Planning (Listed Buildings and Conservation Areas) Act 1990, the Planning (Hazardous Substances) Act 1990 and the Planning (Consequential Provisions) Act 1990 (and all statutes regulations and orders included by virtue of clause 3.14) 2.13 Rent" means the Initial Rent and rent ascertained in accordance with the Second Schedule and such term does not include the Insurance Rent or Service Charge but the terms Rents includes both the Rent and the Insurance Rent and the Service Charge 2.14 "Service Charge" means such proportion as the gross metric area of the Premises bears to the gross metric area of the Buildings on the Estate from time to time of which it forms part (to be assessed by the Surveyor whose decision reasonably based and reached shall be final and binding on all the parties hereto) of the annual expenditure referred to in Part A of the Fourth Schedule 2.15 "Surveyor" means any suitability qualified person or firm appointed by the Landlord to perform any of the functions of the Surveyor under this Lease (including an employee of the Landlord or a company that is a member of the same group as the Landlord within the meaning of Section 42 of the 1954 Act and including also the person or the firm appointed by the Landlord to collect the rents) 3. INTERPRETATION - ----------------------- 3.1 The expressions "the Landlord" and "the Tenant" wherever the context so admits include 4 the person for the time being entitled to the reversion immediately expectant on the determination of the Term and the Tenants successors in title respectively and any reference to a superior landlord includes the Landlord's immediate reversioner (and any superior landlords) at any time 3.2 Where the Landlord the Tenant or the Guarantor for the time being are two or more persons obligations expressed or implied to be made by or with such party are deemed to be made by or with such persons jointly and severally 3.3 Words importing one gender include all other genders and words importing the singular include the plural and vice versa 3.4 The expression "Guarantor" includes not only the person registered to in clause 1.3 (if any) but also any person who enters into covenants with the Landlord pursuant to clauses 5.9.5 or 5.25 3.5 The expression "the Premises" includes but without limitation 3.5.1 the interior faces (including plaster surfaces) of all walls and ceiling contiguous with the Premises 3.5.2 the interior faces (including plaster surfaces) of all columns within the Premises 3.5.3 the floor boards of the Premises including beams or joists supporting the same 3.5.4 the suspended ceilings (if any) and lighting of the Premises 3.5.5 Doors and all doors contiguous with the Premises including the fasteners catches locks and glass herein 3.5.6 all windows but excluding the lintels as are contiguous with the Premises including the fasteners catches locks frames and glass therein 3.5.7 all additions alterations and improvements to the Premises 3.5.8 all the Landlord's fixtures and fittings and fixtures of every kind which shall from time to time be in or upon the Premises (whether originally affixed or fastened to or upon the Premises or otherwise) except any such fixtures installed by the Tenant 3.5.9 all Pipes in on under or over and exclusively serving the Premises 5 and excludes:- 3.5.10 the exterior of the Premises 3.5.11 the structure of the Premises (save as may be included by virtue of clause 3.5.3) 3.5.12 the foundation of the Premises but such expression includes no air space above the height of the top of the Premises and references to the Premises in the absence of any provision to the contrary include any part of the Premises 3.6 The expression "the Term" includes the Contractual Term and any period of holding over or extension or continuance of the Contractual Term whether by statute or common law 3.7 References to "the last year of the Term" include the last year of the Term if the Term shall determine otherwise than by effluxion of time and references to "the expiration of the Term" include such other determination of the Term 3.8 References to any right of the Landlord to have access to the Premises shall be construed as extending to any superior landlord and any mortgagee of the Premises and to all persons authorised by the Landlord and any superior landlord or mortgagee (including agents professional advisers contractors or workmen and others) (where such superior Lease or mortgage grants such right of access to the superior Landlord or mortgagee) 3.9 Any covenant by the Tenant not to do an act or thing shall be deemed to include an obligation not to permit or suffer such act or thing to be done by another person where the Tenant is aware that such act or thing is being done 3.10 Any provision in this Lease referring to the consent or approval of the Landlord shall be construed as also requiring the consent or approval of any mortgagee of the Premises and any superior landlord where such consent shall be required but nothing in this Lease shall be construed as implying that any obligation is imposed upon any mortgagee or any superior landlord not unreasonably to refuse any such consent or approval 3.11 References to "consent of the Landlord" or words to similar effect mean a consent in writing signed by or on behalf of the Landlord and to "approved" and "authorised" or words to similar effect mean (as the case may be) approved or authorised in writing by or 6 on behalf of the Landlord 3.12 The terms "the parties" or "party" mean the Landlord and/or the Tenant but except where there is an express indication to the contrary exclude the Guarantor 3.13 "Development" has the meaning given by the Town and Country Planning Act 1990 Section 55 3.14 Any references to a specific statute include any statutory extension or modification amendment or re-enactment of such statute and any regulations or orders made under such statute and any general reference to "statute" or "statutes" includes any regulations or orders made under such statute or statutes 3.15 References in this Lease to any clause sub clause or schedule without further designation shall be construed as a reference to the clause sub clause or schedule to this Lease so numbered 3.16 The clause paragraph and schedule headings do not form part of this Lease and shall not be taken into account in its construction or interpretation 4. DEMISE - --------------- The Landlord demises to the Tenant the Premises EXCEPTING AND RESERVING to the Landlord the rights specified in Part I of the First Schedule BUT TOGETHER WITH the rights specified in Part II of the First Schedule TO HOLD the Premises to the Tenant for the Contractual Term SUBJECT to all rights easements privileges restrictions covenants and stipulations of whatever nature affecting the Premises YIELDING AND PAYING to the Landlord 4.1 The Rent payable without deduction by equal quarterly payments in advance on the usual quarter days in every year and proportionately for any period of less than a year the first such payment being a proportionate sum in respect of the period from and including the Rent Commencement Date to and including the day before the quarter days next after the Rent Commencement Date to be paid on the date of this Lease and 4.2 By way of further rent the Insurance Rent payable on demand in accordance with clause 7 and the Service Charge payable in accordance with the Third Schedule 7 5. THE TENANT'S COVENANTS - ------------------------------- The Tenant covenants with the Landlord 5.1 Rent 5.1.1 to pay the rents on the days and in the manner set out in this Lease and not to exercise or seek to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off 5.1.2 if so required in writing by the Landlord to make such payments by banker's order or credit transfer to any bank account in the United Kingdom that the Landlord may from time to time nominate 5.2 Outgoings and VAT To pay and to indemnify the Landlord against 5.2.1 all rates taxes assessments duties charges impositions and outgoings which are now or during the Term shall be charged assessed or imposed upon the Premises or upon the owner or occupier of them (excluding any payable by the Landlord occasioned by a receipt of rents or by any disposition or dealing with or ownership of any interest reversionary to the interest created by this Lease) and if the Landlord shall suffer any loss of rating relief which may be applicable to empty premises after the end of the Term by reason of such relief being allowed to the Tenant in respect of any period before the end of the Term to make good such loss to the Landlord and 5.2.2 VAT (or any tax of a similar nature that may be substituted for it or levied in addition to it) chargeable in respect of any payment made by the Tenant under any of the terms of or in connection with this Lease or in respect of any payment made by the Landlord where the Tenant agrees in this Lease to reimburse the Landlord for such payment 5.3 Electricity Gas and Other Services Consumed To pay to the suppliers and to indemnify the Landlord against all charges for water electricity gas and other services consumed or used at or in relation to the Premises (including meter rents) 5.4 Repair Cleaning Decoration etc 5.4.1 to keep the Premises in as good repair as the same are now in, as evidenced by the 8 Schedule of Condition attached hereto excepting damage caused by an Insured Risk save to the extent that the insurance money is irrecoverable in consequence of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenant's authority and under the Tenant's control 5.4.2 to replace from time to time the Landlord's fixtures and fittings in the Premises which may be or become beyond repair at any time during or at the expiration of the Term 5.4.3 to clean the Premises and keep them in a clean condition 5.4.4 the Tenant must redecorate the Premises in a good and workmanlike manner and with appropriate materials of good quality as often as is in the reasonable opinion of the Landlord or his Surveyor necessary in order to maintain a high standard of decorative finish and preserve the Premises and in the last year of the Term and when in the last year of the Term any change to the tints, colours and patterns of the decoration are to be first approved by the Landlord in writing, provided that the covenants relating to the last year of the Term are not to apply where the Tenant has redecorated the Premises less than 18 months before the end of the Term. 5.4.5 not to deposit or permit to be deposited any waste rubbish or refuse on the Access Roads 5.4.6 not to keep or store on the Access Roads any vehicle caravan or movable dwelling 5.4.7 not to cause the Access Roads to be untidy or in a dirty condition and in particular (but without prejudice to the generality of the above) not to deposit on them refuse or other materials 5.4.8 where the use of Pipes boundary structures or other things is common to the Premises and other property to be responsible for and to indemnify the Landlord against all sums due from and to undertake all work that is the responsibility of the owner lessee or occupier of the Premises in relation to those Pipes or other things 5.5 Waste and Alterations 5.5.1 Not to 5.5.1.1 commit any waste 5.5.1.2 make any addition to the Premises 9 5.5.1.3 unite the Premises with any adjoining premises 5.5.1.4 make any alteration to the Premises save as permitted by the following provisions of this clause 5.5.2 not to make any alterations to the Premises without 5.5.2.1 obtaining and complying with all necessary consents of any competent authority and paying all charges of any such authority in respect of such consents 5.5.2.2 making an application supported by drawings and where appropriate a specification in duplicate prepared by an Architect or member of some other appropriate profession 5.5.2.3 paying the fees of the Landlord any superior landlord any mortgagee and their respective professional advisers and 5.5.2.4 entering into such covenants as the Landlord may require as to the execution and reinstatement of the alterations and in the case of any works of a substantial nature the Landlord may require prior to the commencement of such works the provision by the Tenant of adequate security in the form of a deposit of money or the provision of a bond as assurance to the Landlord that any works which may from time to time be permitted by the Landlord shall be fully completed 5.5.3 subject to the provisions of clause 5.5.2 not to make any internal non-structural alterations to the Premises without the consent of the Landlord (such consent not to be unreasonably withheld or delayed) 5.5.4 to remove any additional buildings additions alterations or improvements made to the Premises at the expiration of the Term if so requested by the Landlord and to make good any part or parts of the Premises which may be damaged by such removal 5.5.5 not to make connection with the Pipes that serve the Premises otherwise than in accordance with plans and specifications approved by the Landlord (such approval not to be unreasonably withheld or delayed) subject to consent to make such connections having previously been obtained from the competent statutory authority or undertaker 10 5.6 Aerials Signs and Advertisements 5.6.1 Not to erect any pole mast or wire (whether in connection with telegraphic telephonic radio or television communication or otherwise) upon the Premises 5.6.2 Not to affix to or exhibit on the outside of the Premises or to or through any window of the Premises nor display anywhere on the Premises any placard sign notice fascia board or advertisement except any sign permitted by virtue of any consent given by the Landlord pursuant to a covenant contained in this Lease 5.7 Statutory Obligations 5.7.1 At the Tenant's own expense to execute all works and provide and maintain all arrangements upon or in respect of the Premises or the use to which the Premises are being put that are required in order to comply with the requirements of any statute (already or in the future to be passed) or any government department local authority other public or competent authority or Court of competent jurisdiction regardless of whether such requirements are imposed on the lessor the lessee or the occupier PROVIDED THAT the Tenant shall not be responsible for the remediation of any contamination in on or under the Premises or the Estate at the date of this Lease 5.7.2 Not to do in or near the Premises any act or thing by reason of which the Landlord may under any statute incur have imposed upon it or become liable to pay any penalty damages compensation costs charges or expenses 5.7.3 Without prejudice to the generality of the above to comply in all respects with the provisions of any statutes and any other obligations imposed by law or by any byelaws applicable to the Premises or in regard to carrying on the trade or business for the time being carried on the Premises 5.8 Access of Landlord and Notice to Repair 5.8.1 To permit the Landlord: 5.8.1.1 to enter upon the Premises on giving reasonable notice to the Tenant and causing as little inconvenience and disturbance to the Tenant and its business as possible for the purpose of ascertaining that the covenants and conditions of this Lease 11 have been observed and performed 5.8.1.2 to view (and to open up floors under the parts of the Premises where such opening up is required in order to view) the state of repair and condition of the Premises and 5.8.1.3 to give to the Tenant (or leave upon the Premises) a notice specifying any repairs cleaning maintenance or painting that the Tenant has failed to execute in breach of the terms of this Lease and to request the Tenant to execute the same within such reasonable time as the notice may specify having regard to the nature and extent of the work required to remedy the breach including the making good of such opening up (if any) providing that any such opening-up shall be made good by and at the cost of the Landlord where such opening-up reveals no breaches of the terms of this Lease 5.8.2 As soon as possible to repair cleanse maintain and paint the Premises as required by such notice 5.8.3 If within one month of the service of such a notice the Tenant shall not have commenced and be proceeding diligently with the execution of the work referred to in the notice or shall fail to complete the work within two months or if in the Landlord's Surveyors reasonable opinion the Tenant is unlikely to have completed the work within such period to permit the Landlord to enter the Premises to execute such work as may be necessary to comply with the notice and to pay to the Landlord the cost of so doing and all expenses incurred by the Landlord (including legal costs and surveyors fees) within 14 days of a written demand 5.9 Alienation 5.9.1 Not to hold on trust for another or (save pursuant to a transaction permitted by and effected in accordance with the provisions of this Lease) part with the possession of the whole or any part of the Premises or permit another to occupy the whole or any part of the Premises 5.9.2 Not to assign or charge part only of the Premises and not to underlet the whole or any part 12 of the Premises 5.9.3 Not to assign or charge the whole of the Premises without prior consent to the Landlord such consent not to be unreasonably withheld or delayed provided that the Landlord shall be entitled (for the purposes of Section 19(1A) of the Landlord and Tenant Act 1925) in relation to an assignment 5.9.3.1 to withhold its consent in any of the circumstances set out in clause 5.9.4 5.9.3.2 to impose all or any of the matters set out in clause 5.9.5 as a condition of its consent The provisos to this subclause shall operate without prejudice to the right of the Landlord to withhold such consent on any other ground or grounds where such withholding of consent would be reasonable or to impose any further condition or conditions upon the grant of consent where the imposition of such condition or conditions would be reasonable 5.9.4 The circumstances referred to in clause 5.9.3.1 above are as follows:- 5.9.4.1 where the assignee is an associated company of the Tenant 5.9.4.2. where in the reasonable opinion of the Landlord the proposed assignee is not responsible or respectable or of sufficient financial standing to enable it to comply with the tenant's covenants in the Lease 5.9.4.3 where prior to completion of the intended assignment the Tenant has not paid all of the rents or other monetary payments due hereunder or had not substantially observed or performed the covenants on the part of the Tenant herein contains 5.9.5 The matters referred to in clause 5.9.3.2 as conditions are as follows:- 5.9.5.1 that the Tenant enters into an Authorised Guarantee Agreement on or before completion of the assignment whereby the Tenant covenants by deed with the Landlord to guarantee the performance by the proposed Assignee of all covenants on the part of the Tenant and conditions contained in this Lease in a form reasonably required by the Landlord to incorporate all or any of the terms set out in the Fifth Schedule (as if reference therein to "the Guarantor" were reference to the Tenant) with such amendments or additions as the Landlord may require 13 within the provisions of S.16 of the Landlord and Tenant (Covenants) Act 1995 save that such guarantee shall not extend to any liability restriction or other requirement arising after the Assignee is released from its covenants by virtue of the Landlord and Tenant (Covenants) 1995 5.9.5.2 that the Tenant provides two references confirming that the proposed assignee responsible and will be able to pay the rent and meet the other outgoings and liabilities arising under the Lease from any of the following namely a former landlord bank trade creditor solicitor or accountant (except where the financial status of the proposes assignee is such that it would be unreasonable for the Landlord to require such references) 5.9.5.3 that any assignee of the whole of the Premises covenants by deed with the Landlord to pay the rents reserved by this Lease and to observe and perform all covenants on the part of the Tenant and conditions contained in this Lease during the Term until released by virtue of the Landlord and Tenant (Covenants) Act 1995 5.9.5.4 that (where it is reasonable so to require) in addition to the guarantee provided by the Tenant pursuant to sub clause 5.9.5.1 at least two sureties acceptable to the Landlord (acting reasonably) act as sureties for the assignee in order to covenant jointly and severally with the Landlord that the assignee will pay the rents reserved by this Lease and perform and observe the covenants on the part of the Tenant and the conditions contained in this Lease and otherwise in the terms set out in the Fifth Schedule hereto (as if reference therein to "the Guarantor" were reference to the sureties) or such other terms as the Landlord may reasonably require 5.9.5.5 that the Tenant has with the application for consent to assign produced to the Landlord either an undertaking from its solicitors to pay or such other security satisfactory to the Landlord (acting reasonably) to cover payment of, whether the licence is granted or not, all costs and disbursements (including irrecoverable 14 VAT) which may be properly incurred by the Landlord in connection with the application for consent (including without prejudice to the generality of the foregoing) its solicitors' costs, it surveyors' costs and the costs of any accountants employed to advise in whether the intended assignee satisfies any financial criteria specified in this Lease or is a person of such financial standing that it is reasonable for the Landlord to grant licence for the assignment of this Lease to it 5.9.6 Within 28 days of any assignment charge underlease or sub-underlease or any transmission or other devolution relating to the Premises to produce for registration with the Landlord's solicitors such deed to document or a certified copy of it an to pay to the Landlord's solicitors reasonable charges for the registration of every such document 5.9.7 Notwithstanding clause 5.9.1 the Tenant may share the occupation of the whole or any part of the Premises with a company which is a member of the same group as the Tenant (within the meaning of Section 42 of the 1954 Act) for so long as both companies shall remain members of that group and otherwise than in a manner that transfers or creates a legal estate 5.10 Nuisance etc and Residential Restrictions 5.10.1 Not to do nor allow to remain upon the Premises anything which may be or become or cause a nuisance annoyance disturbance inconvenience injury or damage to the Landlord or its tenants or the owners or occupiers of adjacent or neighbouring premises 5.10.2 Not to use the Premises for a sale by auction or for any dangerous noxious noisy or offensive trade business manufacture or occupation nor for any illegal or immoral act or purpose 5.10.3 Not to use the Premises as sleeping accommodation or for residential purposes nor keep any animal fish reptile or bird anywhere on the Premises 5.11 Landlords Costs To pay to the Landlord on an indemnity basis all costs fees charges disbursements and expenses (including without prejudice to the generality of the above those payable to counsel solicitors 15 surveyors and bailiffs) properly and reasonably incurred by the Landlord in relation to or incidental to 5.11.1 every application made by the Tenant for a consent or licence required by the provisions of this Lease whether such consent or licence is granted or refused or proffered subject to any qualification or condition or whether the application is withdrawn 5.11.2 the preparation and service of a notice under the Landlord and Tenant [Covenants] Act 1995 Section 17 or under the Law of Property Act 1925 Section 146 or incurred by or in contemplation of proceedings under section 146 or 147 of that Act notwithstanding that forfeiture is avoided otherwise than by relief granted by the court 5.11.3 the recovery or attempted recovery of arrears of rent or other sums due from the Tenant and 5.11.4 any steps taken in contemplation of or in connection with the preparation and service of a schedule of dilapidations during or within 2 months after the expiration of the Term (but relating in all cases to dilapidations which occurred prior to such expiration of the Term) 5.12 The Planning Acts 5.12.1 Not to commit any breach of planning control (such term to be construed as it is used in the Planning Acts) and to comply with the provisions and requirements of the Planning Acts that affect the Premises whether as to the Permitted User or otherwise and to indemnify (both during or following the expiration of the Term) and keep the Landlord indemnified against all liability whatsoever including cost and expenses in respect of any contravention 5.12.2 At the expense of the Tenant to obtain all planning permissions and to serve all such notices as may be required for the carrying out of any operations or user on the Premises which may constitute Development provided that no application for planning permission shall be made without the previous consent of the Landlord (such consent not to be unreasonably withheld or delayed) in any case where the application for and implementation of such planning permission will not create or give rise to any tax or 16 other fiscal liability for the Landlord 5.12.3 Subject only to any statutory direction to the contrary to pay and satisfy any charge or levy that may subsequently be imposed under the Planning Acts in respect of the carrying out or maintenance of any such operations or the commencement or continuance of any such user 5.12.4 Notwithstanding any consent which may be granted by the Landlord under this Lease not to carry out or make any alteration or addition to the Premises or any change of use until 5.12.4.1 all necessary notices under the Planning Acts have been served and copies produced to the Landlord 5.12.4.2 all necessary permissions under the Planning Acts have been obtained and produced to the Landlord and 5.12.4.3 the Landlord has acknowledged that every necessary planning permission is acceptable to it (such acknowledgement not to be unreasonably withheld) the Landlord being entitled to refuse to acknowledge its acceptance of a planning permission on the grounds that any condition contained in it or anything omitted from it or the period referred to in it would be (or be likely to be) prejudicial to the Landlord's interest in the Premises whether during or following the expiration of the Term 5.12.5 Unless the Landlord shall otherwise direct to carry out and complete before the expiration of the Term 5.12.5.1 any works stipulated to be carried out to the Premises by a date subsequent to such expiration as a condition of any planning permission granted for any Development begun before the expiration of the Term and 5.12.5.2 any Development begun upon the Premises in respect of which the Landlord shall or may be or become liable for any change or levy under the Planning Acts 5.13 Plans Documents and Information 17 5.13.1 If called upon to do so to produce to the Landlord or the Surveyor all plans documents and other evidence as the Landlord may require in order to satisfy itself that the provisions of this Lease have been complied with 5.13.2 If called upon to do so to furnish to the Landlord the Surveyor or any person acting as the third party determining the Rent in default of agreement between the parties under any provisions for rent review contained in this Lease such information as may reasonably be requested in writing in relation to any pending or intended step under the 1954 Act or the implementation of any provision for rent review 5.14 Indemnities To be responsible for and to keep the Landlord fully indemnified against all damage damages losses costs expenses actions demands proceedings claims and liabilities made against or suffered or incurred by the Landlord arising directly or indirectly out of 5.14.1 any act omission or negligence of the Tenant or any persons at the Premises expressly or impliedly with the Tenant's authority and under the Tenant's control 5.14.2 any breach or non-observance by the Tenant of the covenants conditions or other provisions of this Lease or any of the matters to which this demise is subject 5.15 Encroachments 5.15.1 Not to stop up darken or obstruct any windows or light belonging to the Building 5.15.2 To take all reasonable steps to prevent any window light opening doorway path passage pipe or other encroachment or easement being made or acquired in against out of or upon the Premises and to notify the Landlord immediately if any such encroachment or easement shall be made or acquired (or attempted to be made or acquired) and at the request of the Landlord to adopt such means as shall reasonably be required to prevent such encroachment or the acquisition of any such easement 5.15.3 Not in any event to place or store or leave any articles or materials of any description on the retained parts (as defined in clause 5 of Part A of the Fourth Schedule) 5.15.4 Not to allow at any time any vehicular or other obstruction by any employee or invitees of the Tenant of the highways or the access and service roads or the service areas or 18 forecourts serving the Premises or any other parts of the Estate 5.16 Yield Up At the expiration of the Term: 5.16.1 To yield up the Premises in repair and in accordance with the terms of this Lease 5.16.2 To give up all keys of the Premises to the Landlord and 5.16.3 To remove all signs erected by the Tenant in upon or near the Premises and immediately to make good any damage caused by such removal 5.17 Interest on Arrears 5.17.1 If the Tenant shall fail to pay the rents or any other sum due under this Lease within 14 days of the date due whether formally demanded or not the Tenant shall pay to the Landlord Interest on the rents or other sum from the date when they were due to the date on which they are paid (both dates being inclusive) and such interest shall be deemed to be rents due to the Landlord 5.17.2 Nothing in the preceding clause shall entitle the Tenant to withhold or delay any payment of the rents or any other sum due under this Lease after the date upon which they fall due or in any way prejudice affect or derogate from the rights of the Landlord in relation to such non-payment including (but without prejudice to the generality of the above) under the proviso for re-entry contained in this Lease 5.18 Statutory Notices Etc To give full particulars to the Landlord of any notice direction order or proposal for the Premises made given or issued to the Tenant by any local or public authority within 7 days of receipt and if so required by the Landlord to produce it to the Landlord and without delay to take all necessary steps to comply with the notice direction or order and at the request of the Landlord but at the cost of the Tenant to make or join with the Landlord in making such objection or representation against or in respect of any notice direction order or proposal as the Landlord shall deem expedient 5.19 Sale of Reversion etc 19 To permit 5.19.1 the Landlord at any time upon reasonable notice to enter upon the Premises and affix and retain anywhere upon the Premises (but not so as to obstruct access to or egress from the Premises) a notice for the sale of the Landlord's reversionary interest 5.19.2 upon reasonable notice at any time during the Term prospective purchasers of or agents instructed in connection with the sale of the Landlord's reversion or of any other interest superior to the Term to view the Premises without interruption provided they are authorised in writing by the Landlord or its agents and provided in exercising such access as little disturbance or interference as possible in caused to the Tenant and its Permitted User:- 5.20 Reletting Board To permit the Landlord at any time during the last 6 months of the Contractual Term and at any time thereafter unless the Tenant shall have made a valid court application under Section 24 of the 1954 or otherwise be entitled in law to remain in occupation or to a new tenancy of the Premises (or sooner if the Rent reserved by clause 4.1 or any part of it shall be in arrear and unpaid for longer than 28 days) to enter upon the Premises and affix and retain anywhere upon the Premises (but not so as to obstruct access to or egress from the Premises) a notice for reletting the Premises and during such period to permit persons with the written authority of the Landlord or its agent at reasonable times of the day to view the Premises 5.21 Defective Premises To give notice to the Landlord of any defect in the Premises coming to the notice of the Tenant which might give rise to an obligation on the Landlord to do or refrain from doing any act or thing in order to comply with the provisions of this Lease or the duty of care imposed on the Landlord pursuant to the Defective Premises Act 1972 or otherwise and at all times to display and maintain all notices which the Landlord may from time to time reasonably require to be displayed at the Premises 5.22 Landlords Rights 20 To permit the Landlord at all times during the Term to exercise without interruption or interference any of the rights granted to it by virtue of the provisions of this Lease 5.23 The Industrial Covenants To observe and perform the Industrial covenants 5.24 Keyholders To ensure that at all times the Landlord has written notice of the name address and home telephone number of at least 2 keyholders of the Premises 5.25 New Guarantor Within 14 days of the death during the Term of any Guarantor or of such person becoming bankrupt or having a receiving order made against him or having a receiver appointed under the Mental Health Act 1983 or being a company passing a resolution to wind up or enter into liquidation or having a receiver to give notice of this to the Landlord and if so required by the Landlord at the expense of the Tenant within 28 days to produce some other person acceptable to the Landlord to execute a guarantee in respect of the Tenant's obligations contained in this Lease in the form of the Guarantor's covenants contained in this Lease 5.26 Landlords Costs on Grant etc To pay all proper fees and disbursements of the Landlords Solicitors agents and surveyors and all other costs and expenses incurred by the Landlord in relation to the negotiation preparation execution and grant of this Lease save that the first (pound)500.00 plus VAT of such fees costs and expenses as aforesaid shall be paid by the Landlord 6. THE LANDLORD'S COVENANTS - --------------------------------- The Landlord covenants with the Tenant: 6.1 Quiet Enjoyment To permit the Tenant peaceably and quietly to hold and enjoy the Premises without any interruption or disturbance from or by the Landlord or any person claiming under or in trust for the Landlord 6.2 To observe and perform its obligations contained in the Third Schedule 21 7. INSURANCE 7.1 Warranty re convictions The Tenant warrants that prior to the execution of this Lease it has disclosed to the Landlord in writing any conviction judgment or finding of any court or tribunal relating to the Tenant (or any director other officer or major shareholder of the Tenant) of such a nature as to be likely to affect the decision of any insurer or underwriter to grant or continue insurance of any of the Insured Risks 7.2 Landlord to insure The Landlord covenants with the Tenant to insure the Premises unless such insurance shall be vitiated by any act of the Tenant or by anyone at the Premises expressly or by implication with the Tenant's authority and under the Tenant's control 7.3 Details of the Insurance Insurance shall be effected: 7.3.1 In such substantial and reputable insurance office or with such other underwriters and through such agency as the Landlord may from time to time decide 7.3.2 For the following sums: 7.3.2.1 such sum as the Landlord shall from time to time be advised as being the full cost of rebuilding and reinstatement including architects' surveyors' and other professional fees, fees payable upon any applications for planning permission or other permits or consents that may be required in relation to the rebuilding or reinstatement of the Premises the cost of debris removal demolition site clearance any works that may be required by statute and incidental expenses and 7.3.2.2 the loss of Rent payable under this Lease from time to time (having regard to any review of rent which may become due under this Lease) for 2 years 7.3.3 Against damage or destruction by the Insured Risks to the extent that such insurance may ordinarily be arranged for properties such as the Premises with an insurer of repute and subject to such excesses exclusions or limitations as the insurer may require 22 7.4 Payment of Insurance Rent The Tenant shall pay the Insurance Rent on the date of this Lease for the period from and including the Rent Commencement Date to the day before the next policy renewal date and subsequently the Tenant shall pay the Insurance Rent on demand 7.5 Suspension of Rent 7.5.1 If and whenever during the Term: 7.5.1.1 the Premises or any part of them are damaged or destroyed by any of the Insured Risks except one against which insurance may not ordinarily be arranged with an insurer of repute for properties such as the Premises unless the Landlord has in fact insured against that risk so that the Premises or any part of them are unfit for occupation or use and 7.5.1.2 save where payment of the insurance money is refused in whole or in part by reason of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenants authority and under the Tenant's control the provisions of clause 7.5.2 shall have effect 7.5.2 When the circumstances contemplated in clause 7.5.1 arise the Rent or a fair proportion of the Rent according to the nature and the extent of the damage sustained shall cease to be payable until the Premises or the affected part shall have been rebuilt or reinstated so that the Premises or the affected part are made fit for occupation or use or until the expiration of 2 years from the destruction or damage whichever period is the shorter (the amount of such proportion and the period during which the Rent shall cease to be payable to be determined by the Surveyor acting as an expert and not as arbitrator) 7.6 Reinstatement and Termination if prevented: 7.6.1 If and whenever during the Term: 7.6.1.1 the Premises or any part of them are damaged or destroyed by any of the Insured Risks except one against which insurance may not ordinarily be arranged with an insurer of repute for properties such as the Premises unless 23 the Landlord has in fact insured against that risk and 7.6.1.2 save where the payment of the insurance money is refused in whole or in part by reason of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenants authority (and under the Tenant's control) the Landlord shall use its best endeavours to obtain all planning permissions or other permits and consents that may be required under the Planning Acts or other statutes (if any) to enable the Landlord to rebuild and reinstate ("Permissions") 7.6.2 Subject to the provisions of clause 7.6.3 and 7.6.4 the Landlord shall as soon as the Permissions have been obtained or immediately where no Permissions are required apply all monies received in respect of such insurance to which the Landlord is entitled (except such sums in respect of loss of Rent) in rebuilding or reinstating the Premises so destroyed or damaged 7.6.3 For the purposes of this clause the expression "Supervening Events" means 7.6.3.1 the Landlord has failed despite using its best endeavours to obtain the Permissions 7.6.3.2 any of the Permissions have been granted subject to a lawful condition with which in all the circumstances it would be unreasonable to expect the Landlord to comply 7.6.3.3 some defect or deficiency in the site upon which the rebuilding or reinstatement is to take place would mean that the same could only be undertaken at a cost that would be unreasonable in all the circumstances 7.6.3.4 the Landlord is unable to obtain access to the site for the purposes of rebuilding or reinstating 7.6.3.5 the rebuilding or reinstating is prevented by war act of God Government action strike lock out or 7.6.3.6 any other circumstances beyond the control of the Landlord 24 7.6.4 The Landlord shall not be liable to rebuild or reinstate the Premises if and for so long as such rebuilding or reinstating is prevented by Supervening Events 7.6.5 If upon the expiry of 2 years commencing on the date of the damage or destruction the Premises have not been rebuilt or reinstated so as to be fit for the Tenant's occupation and use either party by notice served at any time within 6 months of the expiry of such period invoke the provisions of clause 7.6.6 7.6.6 Upon service of a notice in accordance with clause 7.6.5 7.6.6.1 the Term will absolutely cease but without prejudice to any rights or remedies that may have accrued to either party against the other including (without prejudice to the generality of the above) any right that the Tenant may have against the Landlord for a breach of the Landlords covenants set out in clauses 7.6.1 and 7.6.2 7.6.6.2 all money received in respect of the insurance effected by the Landlord pursuant to this clause shall belong to the Landlord 7.7 Tenant's Insurance Covenants The Tenant covenants with the Landlord 7.7.1 To comply with all the requirements and recommendations of the insurers 7.7.2 Not to do or omit anything that could cause any policy of insurance on or in relation to the Premises to become void or voidable wholly or in part nor (unless the Tenant shall have previously notified the Landlord and have agreed to pay the increased premium) anything by which additional or increased insurance premiums may become payable 7.7.3 To keep the Premises supplied with such fire fighting equipment as the insurers and the fire authority may require and to maintain such equipment to their satisfaction and in efficient working order and that at least once in every six months to cause any sprinkler system and other fire fighting equipment to be inspected by a competent person 7.7.4 Not to store or bring on to the Premises any articles substance or liquid of a specially combustible inflammable or explosive nature and to comply with the requirements and 25 recommendations of the fire authority as to fire precautions relating to the Premises 7.7.5 Not to obstruct the access to any fire fighting equipment or means of escape from the Premises nor to lock any fire door while the Premises are occupied 7.7.6 To give notice to the Landlord immediately upon the happening of any event which might affect any insurance policy on or relating to the Premises or upon the happening of any event against which the Landlord may have insured under this Lease 7.7.7 Immediately to inform the Landlord in writing of any conviction judgement or finding of any court or tribunal relating to the Tenant (or any director or other officer or major shareholder of the Tenant) of such a nature as to be likely to affect the decision of any insurer or underwriter to grant or to continue any such insurance 7.7.8 If at any time the Tenant shall be entitled to the benefit of any insurance on the Premises (which is not effected or maintained in pursuance of any obligation contained in this Lease) to apply all money received by virtue of such insurance in making good the loss or damage in respect of which such money shall have been received 7.7.9 If however during the Term the Premises or any part of them are damaged or destroyed by an Insured Risk and the insurance money under the policy of insurance effected by the Landlord pursuant to its obligation contained in this Lease is by reason of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenant's authority and under the Tenant's control wholly or partially irrecoverable immediately in every such case (at the option of the Landlord) either 7.7.9.1 to rebuild and reinstate at its own expense the Premises or the part destroyed or damaged to the reasonable satisfaction and under the supervision of the Surveyor the Tenant being allowed towards the expenses of so doing upon such rebuilding and reinstatement being completed the amount (if any) actually received in respect of such destruction or damage under any such insurance policy or 7.7.9.2 to pay to the Landlord on demand with Interest the amount of such insurance 26 money so irrecoverable in which event the provisions of clause 7.5 and 7.6 shall apply 7.8 Landlords Insurance Covenants The Landlord covenants with the Tenant in relation to the policy of insurance effected by the Landlord pursuant to its obligations contained in this Lease 7.8.1 To produce to the Tenant on demand a copy of the policy and the last premium renewal receipt or reasonable evidence of the terms of the policy and the fact that the last premium has been paid 7.8.2 To procure that the interest of the Tenant is noted or endorsed on the policy 7.8.3 To notify the Tenant of any material change and the risks covered by the policy from time to time 8. PROVISOS - ----------------- 8.1 Re-entry If and whenever during the Term 8.1.1 the rents (or any of them or any part of them) under this Lease are outstanding for 14 days after becoming due whether formally demanded or not or 8.1.2 there is a breach by the Tenant of any covenant or other term of this Lease or any document supplemental to this Lease or 8.1.3 an individual Tenant becomes bankrupt or 8.1.4 a company Tenant or the Guarantor 8.1.4.1 enters into liquidation whether compulsory or voluntary (but not if the liquidation is for amalgamation or reconstruction of a solvent company) or 8.1.4.2 has a receiver appointed or 8.1.5 the Tenant enters into an arrangement for the benefit of its creditors or 8.1.6 the Tenant has any distress or execution levied on its goods the Landlord may re-enter the Premises (or any part of them in the name of the whole) at any time (and even if any previous right of re-entry has been waived) then the Term will absolutely cease but without prejudice to any rights or remedies which may have accrued to the Landlord against 27 the Tenant or the Guarantor or to the Tenant against the Landlord in respect of any breach of covenant or other term of this Lease (including the breach in respect of which the re-entry is made) 8.2 Exclusion of Use Warranty Nothing in this Lease or any consent granted by the Landlord under this Lease shall imply or warrant that the Premises may lawfully be used under the Planning Acts for the purposes authorised in this Lease (or any purpose subsequently authorised) 8.3 Entire Understanding This Lease embodies the entire understanding of the parties relating to the Premises and to all matters dealt with by any of the provisions of this Lease 8.4 Representations The Tenant acknowledges that this Lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord except any such statement or representation that is expressly set out in this Lease or in written replies to enquiries given by the Landlord's Solicitors 8.5 Licences etc under hand Whilst the Landlord is a limited company or other corporation all licences consents approvals and notices required to be given by the Landlord shall be sufficiently given if given under the hand of a director the secretary or other duly authorised officer of the Landlord or the Surveyor on behalf of the Landlord 8.6 Tenant's Property If after the Tenant has vacated the Premises on the expiry of the Term any property of the Tenant remains in or on the Premises and the Tenant fails to remove it within 7 days after being requested in writing by Landlord to do so or if after using its best endeavours the Landlord is unable to make such a request to the Tenant within 14 days from the first attempt so made by the Landlord 8.6.1 the Landlord may as the agent of the Tenant sell such property and the Tenant will indemnify the Landlord against any liability incurred by it to any third party whose property shall have been sold by the Landlord in the mistaken belief held in good faith 28 (which shall be presumed unless the contrary be proved) that such property belonged to the Tenant 8.6.2 if the Landlord having made reasonable efforts is unable to locate the Tenant the Landlord shall be entitled to retain such proceeds of sale absolutely unless the Tenant shall claim them within 6 months of the date upon which the Tenant vacated the Premises and 8.6.3 the Tenant shall indemnify the Landlord against any damage occasioned to the Premises and any actions claims proceedings costs expenses and demands made against the Landlord caused by or related to the presence of the property in or on the Premises 8.7 Compensation on Vacating Any statutory right of the Tenant to claim compensation from the Landlord on vacating the Premises shall be excluded to the extent that the law allows 8.8 Service of Notices The provisions of the Law of Property Act 1925 Section 196 as amended by the Recorded Delivery Service Act 1962 shall apply to the giving and service of all notices and documents under or in connection with this Lease except that Section 196 shall be deemed to be amended as follows:- 8.8.1 the final words of Section 196(4) "and that service...be delivered" shall be deleted and there shall be substituted "and that service shall be deemed to be made on the third Working Day after the registered letter has been posted "Working Day" meaning any day from Monday to Friday inclusive other than Christmas Day Good Friday and any statutory bank or public holiday" 8.8.2 any notice or document shall also be sufficiently served on a party if served on solicitors who have acted for that party in relation to this Lease or the Premises at anytime within the year preceding the service of the notice or document 8.8.3 any notice or document shall also be sufficiently served if sent by telex telephonic facsimile transmission or any other means of electronic transmission to the party to be 29 served (or its solicitors where clause 8.8.2 applies) and that service shall be deemed to be made on the day of transmission if transmitted before 4 p.m. on a Working Day but otherwise on the next following Working Day (as defined above) And in the clause "Party" includes the Guarantor 8.9 Power to Determine 8.9.1 The Tenant may terminate this Lease on the First day of January 2009 ("the Break Date") if the Tenant shall up to the time of such termination have paid Rent and performed and observed the covenants contained in this Lease by giving notice in writing ("the Break Notice") to the Landlord not more than 18 months nor less than 12 months and one day before the Break Date 8.9.2 The Tenant may withdraw the Break Notice by giving notice in writing to that effect to the Landlord not less than six months before the Break Date 8.9.3 If a Break Notice is given in accordance with clause 8.9.1 and not withdrawn in accordance with clause 8.9.2 this Lease will terminate on the Break Date but without prejudice to the respective right of either part in respect of any antecedent claim or breach of covenant 8.10 Jurisdiction This Lease shall be construed and governed by the Laws of England and Wales to the exclusive jurisdiction of whose Courts the parties hereto unconditionally submit 8.11 Rights of Third Parties This Lease does not create any right enforceable by any person not a party to it who is not the Landlord for the time being or the Tenant for the time being or (where relevant) the Guarantor for the time being 9. The Guarantor's Covenants The Guarantor covenants with the person named in clause 1.1 and without the need for any express assignment with all its successors in title in the terms set out in the Fifth Schedule IN WITNESS WHEREOF the parties hereto have executed this Lease as a deed the day and year first 30 before written FIRST SCHEDULE -------------- Part I (Rights Reserved) 1. The free and uninterrupted passage of water and soil through the pipes drains and watercourse and of electricity, gas and other services through the Pipes which are now or may at any time during the Term be in on or under or passing through the Premises for the benefit of the remainder of the Estate and any adjoining or neighbouring property and every part thereof with the right to construct and maintain new services for the benefit of the remainder of the Estate and any adjoining or neighbouring property and every part thereof the right to repair and maintain and renew such existing and new services and the right at any time but (except in emergency) after giving reasonable notice to enter upon the Premises in the exercise of such rights 2. Full right and liberty at any time hereafter or from time to time to execute works services and erections and buildings upon or to alter, demolish or rebuild any of the erections services or buildings erected on the remainder of the Estate and any adjoining or neighbouring property or any part thereof providing the Landlord is acting reasonably and to use the remainder of the Estate and any adjoining neighbouring property or buildings erected or to be erected thereon in such manner as the Landlord acting reasonably shall think fit notwithstanding that the access of light or air to the Premises may be interfered with or that access to the Premises may be unavoidably obstructed provided that the Landlord or the person exercising such rights shall make good all damage occasioned thereby and shall abate an appropriate amount of rent for any part of the Premises inaccessible by reason of such works 3. The right (upon reasonable prior notice except in emergency) to enter upon the Premises so far as may be necessary for the purpose of executing repairs or alteration to and maintaining the Retained Parts or to the remainder of the Estate and any adjoining or neighbouring property owned by the Landlord or any part thereof making good any damage caused as soon as reasonably practicable 4. The right of support and protection from the Premises for the remainder of the Estate and any 31 adjoining or neighbouring property and every part thereof 5. The right at any time during the Term at reasonable times and upon reasonable notice except in cases of emergency to enter (or in cases of emergency to break and enter) the Premises 5.1 to exercise any of the rights granted to the Landlord elsewhere in this Lease 5.2 to inspect the condition and state of repair of the Premises 5.3 to take schedules or inventories of fixtures and fittings and other items to be yielded up on the expiry of the Term 6. The right with the Surveyor at any time or convenient hours and on reasonable prior notice to enter and inspect and measure the Premises for all purposes connected with any pending or intended step or action under the 1954 Act or the implementation of the provisions for rent review 7. The right to vary alter or change the route leading to and from the Premises or close or build upon the Access Roads forming part of the Estate provided that the Landlord shall provide or maintain suitable alternate access to and from the Premises 8. The right in case of emergency for itself or others the occupier or Tenants of the remainder of the Estate and their visitors or licensees to gain egress through such parts of the Premises (if any) as are classified and maintained as fire exits or emergency escape routes Part II (Rights Granted) 1. The free and uninterrupted passage of water and soil through the pipes drains and watercourse and of electricity, gas and other services through the Pipes which are now or may at any time during the Term be in or under or passing through or over the other parts of the Estate or any adjoining or neighbouring property of the Landlord 2. All necessary rights of subjacent and lateral support and protection for the Premises 3. A right (upon reasonable prior notice except in emergencies) to enter onto the remainder of the Estate so far as may be necessary for the purpose of executing repairs to and maintaining the Premises and a right to enter into such part of the Building in which meters are housed in relation to mains service supplies provided that the Tenant or the person exercising such rights shall make 32 good all damage occasioned thereby to the remainder of the Estate 4. A right of way without or without vehicles over the Access Roads for the Tenant or any persons expressly or impliedly authorised by him at all times and for all purposes connected with such Tenant's use and enjoyment of the Premises and so far only as is necessary and to load and unload in the Access Roads without causing congestion or any permanent or unnecessary obstruction 5. The right at all usual times of business to park up to 3 motor cars in the parking spaces coloured red on the Plan or in other such places as the Landlord acting reasonably may from time to time designate together with the right to casual parking in such other parking spaces which the Landlord may provide and designate from time to time and which may be available 6. All necessary rights in the event of fire or other similar emergency to use the fire and emergency exits with the necessary egress to a place of safety THE SECOND SCHEDULE ------------------- Rent Review 1. DEFINITIONS - ------------------ For all purposes of this schedule the terms defined in this paragraph shall have the meanings specified 1.1 "The Base Figure" means being the amount of the latest index figure of the index last published before the date of this Lease 1.2 "the Index" means the Index of Retail Prices published by H M Stationary Office or any official publication substituted for it 1.3 "The New Rent" means that rent to apply after the relevant Review Date until the next Review Date 1.4 "The Revised Rent" means the rent determined in accordance with this schedule 1.5 "The Review Date Figure" means the amount of the latest index figure of the Index last published before the relevant Review Date 2. THE NEW RENT - ------------------ 33 2.1 The New Rent shall be whichever is the higher of: 2.1.1 An increase of 3% of the Rent then payable and 2.1.2 The Revised Rent 2.2 If the relevant Review Date is not a quarter day the Tenants shall on that Review Date pay to the Landlord the amount by which one quarters rent at the rate payable on the immediately preceding quarter day in less then one Quarters Rent at the rate of the New Rent apportioned on a daily basis for then part of the Quarter during which the New Rent is payable 3. REVISED RENT - ------------------ The Revised Rent shall be the amount to be determined at the Review Date by multiplying the Initial Rent by the Review Date Figure and dividing the result by the Base Figure 4. PROVISOS - -------------- 4.1 In the event of any change after the date of this Lease in the reference base used to complete the Index the figure taken to be shown in the Index after the change shall be the figure which would have been shown in the Index if the reference base current at the date of this Lease had been retained 4.2 In the event of it becoming impossible by reason of any change after the date of this Lease in the methods used to compile the Index or for any other reason whatsoever to calculate the Revised Rent by reference to the Index or if any dispute or question whatsoever arises between the parties to this Lease with respect to the amount of the Revised Rent or with respect to the construction or effect of this clause the dispute or question shall be determined by a valuer acting as an expert who shall have full power to determine on such dates as he shall deem apposite what would have been the Review Date Figure had the Index continued on the basis and giving the information assumed to be available for the operation of this Schedule 5. NOTIFICATION OF THE REVISED RENT - -------------------------------------- 5.1 The Landlord shall obtain copies of the Index and shall supply the Tenant with a copy of the latest publication of the Index before the Review Date together with a calculation of the amount of the Revised Rent 5.2 Within one month of receipt of the Tenant shall in writing acknowledge receipt of the copy and 34 statement and state whether or not he agrees with the calculation 6. DEFAULT PROVISION - ----------------------- 6.1 If the Tenant fails to acknowledge the Landlords calculation of the amount of the Revised Rent within one month or the procedure laid down in this Schedule is not complied with the Revised Rent shall be the amount stated in the Landlords calculation 6.2 If it is impossible to determine the Revised Rent in accordance with paragraph 2 of this Schedule then the Revised Rent shall be determined in accordance with paragraph 4.2 of this Schedule 7. PAYMENT OF THE NEW RENT - ----------------------------- 7.1 The Tenant shall continue to pay the previous Rent payable in accordance with the terms of this Lease until ascertainment of the Revised Rent 7.2 Upon ascertainment of the Revised Rent the New Rent shall be payable from the Review Date and the Tenant shall pay the New Rent until the next relevant Review Date 7.3 Upon ascertainment of the Revised Rent the Tenant shall forthwith pay to the Landlord the amount of any difference between the rent immediately payable before that Review Date and the New Rent for the period between the Review Date and the ascertainment of the New Rent with interest at the Interest Rate calculated on a daily basis from the date of ascertainment of the New Rent to the date of payment 8. MEMORANDUM OF NEW RENT - ---------------------------- When the New Rent have been ascertained in accordance with this Schedule memoranda of the amounts shall be endorsed on this Lease and the counterpart of it and shall be signed by or on behalf of the Landlord and the Tenant THE THIRD SCHEDULE ------------------ The Industrial Covenants 1. User. 1.1 To use the Premises for the Permitted User only 1.2 Not to leave the Premises continuously unoccupied for more than 1 month without 35 1.2.1 notifying the Landlord and 1.2.2 providing such caretaking or other security arrangements as the Landlord shall reasonably require and the insurers shall require in order to protect the Premises from vandalism theft damage or unlawful occupation 2. Smoke Abatements 2.1 To ensure that every furnace boiler or heater at the Premises (whether using solid liquid or gaseous fuel) is constructed and used so as substantially to consume or burn the smoke arising from it 2.2 Not to cause or permit any grit or noxious or offensive effluvia to be emitted from any engine furnace chimney or other apparatus on the Premises without using the best possible means for preventing or counteracting such emission 2.3 To comply with the provisions of the Clean Air Acts 1956 and 1968 the Control of Pollution Act 1974 and the Environmental Protection Act 1996 and with the requirements of any notice of the local authority served under them 3. Pollution Not to permit to be discharged into any Pipes serving the Premises or to be spilled or deposited on the Premises or any neighbouring or adjoining land 3.1 Any oil or grease or any deleterious objectionable dangerous poisonous noxious or explosive matter or substance and to take all reasonable measures to ensure that any effluent discharged into the Pipes will not be corrosive or otherwise harmful to the Pipes or cause obstruction or deposit in them or 3.2 Any fluid of a poisonous or noxious nature or other kind likely to or that does in fact destroy sicken or injure the fish or contaminate or pollute the water of any stream or river 3.3 Any controlled or special waste or any other substance that may produce concentrations or accumulations of noxious gases or noxious liquids that may cause pollution of the environment or harm to human health 4. Roof and Floor Weighting 4.1 Not to bring or permit to remain upon the Premises any safes machinery goods or other articles 36 which shall or may strain or damage the Premises or any part of it 4.2 Not without the consent of the Landlord to suspend any weight from the portal frames stanchions or roof purlins of the Premises or use the same for the storage of goods or place any weight on them 4.3 On the application by the Tenant for the Landlord's consent under paragraph 4.2 the Landlord shall be entitled to consult and obtain the advice of an engineer or other person in relation to the roof or floor loading proposed by the Tenant and the Tenant shall repay to the Landlord on demand the fee of such engineer or other person 5. Machinery 5.1 To keep all plant apparatus and machinery (including any boilers and furnaces) upon the Premises properly maintained and in good working order and for that purpose to employ reputable contractors for the regular periodic inspection and maintenance of them 5.2 To renew all working and other parts as and when necessary or when recommended by such contractors 5.3 To ensure by directions to the Tenants staff and otherwise that such plant apparatus and machinery are properly operated and 5.4 To avoid damage to the Premises by vibration or otherwise 6. Signs At all times to display and maintain a suitable sign showing the Tenant's trading name and business of the size and kind specified by the Landlord at points designated within the Estate by the Landlord 7. To comply with all regulations made by the Landlord from time to time for the management of the Estate THE FOURTH SCHEDULE ------------------- Service Charge PART A Definitions 1. "Services" means the services facilities and amenities specified in Part C of this Schedule 37 2. "Annual Expenditure" means 2.1 all costs expenses and outgoings whatever properly incurred by the Landlord during a Financial Year in or incidental to providing all or any of the Services and 2.2 all sums reasonably and properly incurred by the Landlord during a Financial Year in relation to the matters specified in Part D of this Schedule ("the Additional Items") and any VAT payable on such items (save where such VAT is recoverable by the Landlord) but 2.3 excluding any expenditure in respect of any part of the Estate for which the Tenant or any other Tenant shall be wholly responsible and excluding any expenditure that the Landlord shall recover or which shall be met under any policy of insurance maintained by the Landlord pursuant to its obligations in this Lease 3. "Computing Date" means 31st August in every year of the Term or such other date as the Landlord may from time to time nominate and "Computing Dates" shall be construed accordingly 4. "Financial Years" means the period 4.1 from the commencement of the Term to and including the first Computing Date and subsequently 4.2 between 2 consecutive Computing Dates (excluding the first Computing Date from but including the second Computing Date in the period) 5. "Retained Parts" mean all parts of the Estate not let or constructed or adapted for letting including (but without prejudice to the generality of the above): 5.1 any rooms and storage premises used in connection with the provision of services for the Estate 5.2 all Pipes equipment and apparatus used in the Building (except such as are within and solely serve an individual unit which is let or constructed or adapted for letting) 5.3 Such parts of the structure walls foundations and roofs of the Building that are not included in the Premises and that would not be included in the Premises demised by leases of all the other units in the Building if let on the same terms as this Lease 38 PART B Performance of the Services and Payment of the Service Charge 6. Performance of the Services Subject to the Tenant paying to the Landlord the Service Charge the Landlord shall perform the Services throughout the Term provided that the Landlord shall not be liable to the Tenant in respect of : 6.1 any failure or interruption in any of the Services by reason of repair replacement maintenance of any installations or apparatus or their damage or destruction or by reason of mechanical or other defect or breakdown or frost other inclement conditions or shortage of fuel materials water or labour or any other cause beyond the Landlord's control save as to the extent that any such failure or interruption could have been prevented or shortened by the exercise of proper care attention and diligence and skill by the Landlord or those undertaking the Services on behalf of the Landlord and provided that the Landlord uses and continues to use its reasonable endeavours to restore the Services in question as quickly as possible 6.2 any act omission or negligence of any person undertaking the Services or any of them on behalf of the Landlord provided that this paragraph shall not be construed as relieving the Landlord from liability for breach by the Landlord of any covenants on the part of the Landlord contained in this Lease 7. Payment of the Service Charge 7.1 For each Financial Year, the Tenant must pay to the Landlord on account of the Service Charge the sum of (pound)750.00 or such other sum as the Landlord's Surveyor certifies to be fair and reasonable having regard to the likely amount of the Service Charge. That sum shall be paid in advance, without deduction or set off by equal instalments on the usual quarter days, the first instalment or proportionate part thereof for the period from the rent commencement date to the next quarter being paid on the execution thereof. During any Financial Year the Surveyor may 39 revise the contribution on account of the service charge for that Financial Year so as to take into account any actual or expected increase in expenditure, and as soon as reasonably practicable after such revisions the Surveyor must certify the amount of the revised contribution 7.2 The Landlord shall as soon as convenient after each Computing Date prepare and serve on the Tenant an account showing the Annual Expenditure for the Financial Year ending on that Computing Date and containing a fair summary of the expenditure referred to in it and upon such account being certified by the Surveyor it shall be conclusive evidence for the purposes of this lease of all matters of fact referred to in the account except in the case of manifest error 7.3 The Tenant shall be entitled at any time to inspect the vouchers and receipts relating to the Annual Expenditure 7.4 With the account prepared and served under the provisions of paragraph 7.2 of this Schedule the Landlord will furnish the Tenant with an account of the service charge payable by him for that Financial Year, credit being given for payments made on account. Within 14 days of the furnishing of such an account, the Tenant must pay the service charge or the balance of any balance of it payable, to the Landlord. The Landlord must allow to the Tenant any amount overpaid by him against future payment of the Service Charge, whether on account or not. At the end of the Financial Year current at the end of the Term the Landlord must repay to the Tenant any outstanding overpayment of the service charge 7.5 The Tenant shall pay the Service Charge each Financial Year within 14 days after service upon it of the account certified by the Surveyor as provided by paragraph 7.1 of this Schedule 8. Variations The Landlord may withhold add to extend vary or make any alteration in the rendering of the Services or any of them from time to time provided that the same complies with the principles of good estate management and is reasonable in all the circumstances PART C The Services 9. Maintaining etc Retained Parts Maintaining repairing renewing where beyond economic repair and reinstating and where 40 appropriate treating washing down painting and decorating the Retained Parts 10. Maintaining etc apparatus plant machinery etc Inspecting servicing maintaining repairing amending overhauling replacing where beyond economic repair and insuring (save in so far as insured under other provisions of this lease) all apparatus plant machinery and equipment within the Retained Parts from time to time including (without prejudice to the generality of the above) all (if any) lifts and lift shafts stand-by generators and boilers and closed-circuit television 11. Maintaining etc Pipes Maintaining repairing cleansing emptying draining and renewing where necessary for the purpose of repair only all Pipes within the Retained Parts 12. Maintaining etc Fire Alarms etc Maintaining and renewing where necessary for the purposes of repair only any fire alarms and ancillary apparatus and fire prevention and fire fighting equipment and apparatus in the Retained Parts 13. Cleaning etc Retained Parts Cleaning treating heating and lighting the Retained Parts to such standard as the Landlord may from time to time consider adequate 14. Fixtures Fittings, etc Supplying providing purchasing hiring maintaining renewing where beyond economic repair replacing where necessary for the purposes of repair only repairing servicing overhauling and keeping in good and serviceable order and condition all fixtures and fittings bins receptacles tools appliances materials equipment and other things which the Landlord may deem desirable or necessary for the maintenance appearance upkeep or cleanliness of the Estate or any part of the Estate 15. Other Services Any other services relating to the Estate or any part of the Estate provided by the Landlord from time to time and not expressly mentioned which shall at any time during the Term be in keeping with the principles of good estate management 41 PART D The Additional Items 16. Fees 16.1 The reasonable and proper fees and disbursements (and any VAT payable on them save where recoverable by the Landlord) of : 16.1.1 the Surveyor and other individual firm or company employed or retained by the Landlord for (or in connection with) such surveying or accounting functions or the management of the Estate 16.1.2 the managing agents (whether or not the Surveyor) for or in connection with: 16.1.2.1 the management of the Estate 16.1.2.2 the collection of the rents and all other sums due to the Landlord from the tenants of the Estate 16.1.2.3 the performance of the Services and any other duties in and about the Estate or any part of it relating to (without prejudice to the generality of the above) the general management administration security maintenance protection and cleanliness of the Estate 16.1.3 any individual firm or company valuing the Estate for the purposes of assessing the full cost of rebuilding and reinstatement 16.1.4 any individual firm or company providing caretaking or security arrangements and services to the Estate as a whole 16.1.5 any other individual firm or company employed or retained by the Landlord to perform (or in connection with) any of the Services or any of the functions or duties referred to in this paragraph PROVIDED that such fees and expenses shall not relate to collecting arrears of rent negotiating new lettings or negotiations or other matters relating to rent reviews or dilapidations 16.2 The reasonable and proper fees of the Landlord for any of the Services or the other functions and duties referred to in paragraph 16.1 above that shall be undertaken by the Landlord and not by a third party 42 17. Contracts for Services The cost of entering into any contracts for the carrying out of all or any of the Services and other functions and duties that the Landlord may in its absolute discretion deem desirable or necessary 18. Outgoings All taxes assessments duties charges impositions and outgoings which are now or during the Term shall be charged assessed or imposed on: 18.1 the whole of the Estate where there is no separate charge assessment or imposition on or in respect of an individual unit 18.2 the whole of the Retained Parts or any part of them 19. Electricity Gas etc The cost of supply of electricity gas oil or other fuel for the provision of the Services and for all purposes in connection with the Retained Parts 20. Road Charges etc The expense of repairing maintaining and rebuilding and cleaning the access roads and any ways roads pavements or structures Pipes or anything which may belong to or be used for the Estate or any part of it exclusively or in common with other neighbouring or adjoining premises 21. Regulations The costs charges and expenses of preparing and supplying to the tenants copies of any regulation made by the Landlord to the Estate or the use of it 22. Statutory etc Requirements The cost of taking all steps deemed desirable or expedient by the Landlord for complying with making representations against or otherwise contesting the incidence of the provisions of any statute byelaw or notice concerning town planning public health highways streets drainage or other matters relating to or alleged to relate to the Estate or any part of it for which any tenant is not directly and exclusively liable 23. Nuisance The cost of the Landlord of abating a nuisance in respect of the Estate or any part of it in so far as the same is not the liability of any individual tenant 43 24. Interest Any reasonable and proper interest and fees in respect of money borrowed to finance the provisions of the Services of the Additional Items 25. Anticipated Expenditure Such Provision (if any) for the anticipated expenditure in respect of any of the Services or the Additional Items as the Landlord shall in its reasonable discretion consider appropriate. THE FIFTH SCHEDULE ------------------ Guarantors Covenants 1. That as between the Guarantor and the Landlord the liability of the Guarantor will be as principal debtor and covenantor 2. That the Tenant will at all times during the Term (and as well after as before any disclaimer of this Lease) duly and punctually pay the rents as herein provided and will observe and perform all the tenant's covenants and the conditions contained in this Lease 3. That if at any time during the Term the Tenant defaults in paying any of the rents or in observing or performing any of the covenants and conditions contained in this Lease the Guarantor will pay such rents and observe and perform the covenants and conditions in respect of which the Tenant is in default and pay and make good to the Landlord on demand all losses damages and costs and expenses sustained by the Landlord through the default of the Tenant notwithstanding:- 3.1 any time or indulgence granted by the Landlord to the Tenant or any neglect or forbearance of the Landlord in enforcing the payment of rents or the observance or performance of the Tenant's covenants or other terms of this Lease or any refusal by the Landlord to accept rents tendered by or on behalf of the Tenant at a time when the Landlord was entitled (or would after the service of a notice under Section 146 of the Law of Property Act 1925 have been entitled) to re-enter the Premises 3.2 that the terms of this Lease may have been varied by agreement between the parties 3.3 that the Tenant may have surrendered part of the Premises in which event the liability of 44 the Guarantor hereunder shall continue in respect of the parts of the Premises not so surrendered after making any necessary apportionments under the Law of Property Act 1925 s.140 3.4 that the Tenant may have ceased to exist 3.5 any other act or thing whereby but for this provision the Guarantor would have been released 4. If at any time during the Term the Tenant (being an individual) becomes bankrupt or (being a company) goes into liquidation and the trustee in bankruptcy or liquidator disclaims this Lease or if this Lease is forfeited then this Schedule will remain in full force and effect notwithstanding such event and the Guarantor will if the Landlord shall by notice in writing within 60 days after such disclaimer or forfeiture so require take from the Landlord a lease of the Premises for a term commensurate with the residue of the Contractual Term which would have remained had there been a disclaimer or forfeiture at the same Rent then being payable and subject to the same covenants and conditions as are reserved by and contained in this Lease to take effect from the date of the said disclaimer or forfeiture and in such case the Guarantor shall pay the costs of such new Lease and execute and deliver to the Landlord a counterpart thereof 5. The parties agree that this guarantee shall only subsist for such period and extend to such liabilities restrictions and other requirements as may be permitted by the Landlord and Tenant (Covenants) Act 1995 SIGNED AS A DEED AND DELIVERED ) by MICHAEL ROBERT KENDALL ) in the presence of:- ) 45 SIGNED AS A DEED AND DELIVERED ) by JUNE JARVIS in the presence of:- ) SIGNED AS A DEED AND DELIVERED by ) by BARNETT WADDINGHAM TRUSTEES ) LIMITED acting by a Director and its Secretary) Director: Secretary: SIGNED AS A DEED AND DELIVERED by ) LAKELAND INDUSTRIES EUROPE LIMITED ) acting by a Director and its Secretary ) Director: Secretary: 46 EX-31.1 6 ex31-1.txt Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Christopher J. Ryan, certify that: 1. I have reviewed this report on Form 10-K of Lakeland Industries, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: April 17, 2006 /s/ Christopher J. Ryan ------------------------------ By: Christopher J. Ryan Chief Executive Officer, President, Secretary and General Counsel EX-31.2 7 ex31-2.txt Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Gary Pokrassa, certify that: 1. I have reviewed this report on Form 10-K of Lakeland Industries, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: April 17, 2006 /s/ Gary Pokrassa ---------------------------- By: Gary Pokrassa Chief Financial Officer EX-32.1 8 ex32-1.txt Exhibit 32.1 ------------ CERTIFICATION PRESIDENT, SECRETARY AND GENERAL COUNSEL Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 In connection with the filing with the Securities and Exchange Commission of the Annual Report of Lakeland Industries, Inc. (the "Company") on Form 10-K for the period ending January 31, 2006 (the "Report"), I Christopher J. Ryan , Chief Executive Officer, President, Secretary and General Counsel of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents in all material respects, the financial condition and results of operations of the Company. /s/ Christopher J. Ryan - ----------------------------- Christopher J. Ryan Chief Executive Officer, President, Secretary and General Counsel April 17, 2006 EX-32.2 9 ex32-2.txt Exhibit 32.2 ------------ CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 In connection with the filing with the Securities and Exchange Commission of the Annual Report of Lakeland Industries, Inc. (the "Company") on Form 10-K for the year ending January 31, 2006 (the "Report"), I Gary Pokrassa, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents in all material respects, the financial condition and results of operations of the Company. /s/ Gary Pokrassa - ----------------------- Gary Pokrassa Chief Financial Officer April 17 , 2006 -----END PRIVACY-ENHANCED MESSAGE-----