<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended February 1, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from To
Commission File No. 0-17870
LECHTERS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY No. 13-2821526
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(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1 Cape May Street, Harrison, NEW JERSEY 07029-9998
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (201) 481-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES x NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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. [ ]
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<PAGE> 2
As of April 18, 1997, 17,155,086 shares of Common Stock were
outstanding and the aggregate market value of the Common Stock held by
non-affiliates of the registrant (based upon the closing price on the NASDAQ
National Market on that date) was approximately $47,077,169.
For the purposes of such calculation, all outstanding shares of Common
Stock have been considered held by non-affiliates, other than the 4,388,396
Shares beneficially owned by directors and executive officers of the registrant.
In making such calculation, the registrant does not determine the affiliate or
non-affiliate status of any shares for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
Information called for by Part III (Items 10, 11, 12 and 13) is
incorporated by reference to the registrant's definitive proxy statement in
connection with its Annual Meeting of Shareholders to be held on June 17, 1997.
<PAGE> 3
PART I
ITEM 1. BUSINESS.
HISTORY
Lechters, Inc. (together with its subsidiaries, unless the context
otherwise requires, the "Company") was incorporated in New Jersey in July 1975
to operate leased houseware and giftware departments in discount department
stores. Subsequently, Donald Jonas, then Chairman and Albert Lechter, then
President of the Company, recognized an opportunity to operate specialty
houseware stores in malls. In 1977, the repositioning of the Company from a
leased department operator to a specialty store operator was commenced.
The Company opened its first store in Rockaway, New Jersey, and, has
expanded until at February 1, 1997, the Company operated a total of 649 stores
as more fully set forth in the table on page 7 herein. During the past five
years, the Company increased the number of stores operated by it from 438 on
January 1992, including the Famous Brands Housewares Outlets(R) concept added in
1990, and discontinued the use of the Kitchen Place trade name. Stores operated
under the name Lechters Housewares(R) are primarily located in malls, but can
also be found in strip centers as well as city locations. Stores operated under
the name Famous Brands Housewares Outlets(R) are located in outlet centers.
Stores formerly operated under the name Kitchen Place are primarily located in
strip centers.
The Company operated as a private concern during the period from its
inception to its initial public offering on July 25, 1989. The Company's common
stock is listed on NASDAQ under the symbol LECH.
In January 1994 the Company elected Steen Kanter as Chief Executive
Officer, replacing Donald Jonas who had held the position since the date the
Company was organized. Mr. Kanter left the employ of the Company during January
1996 when it became apparent that there was a difference of philosophy with
respect to the future priorities of the Company. Unable to resolve this
difference, Mr. Kanter determined that it was in his best interest to consider
various career options in all fields. During the period Mr. Kanter acted as
C.E.O., Mr. Jonas remained active as Chairman of the Board of Directors and a
member of the Board's Executive Committee. Upon the termination of Mr. Kanter's
employment during January 1996, Mr. Jonas resumed the position of Chief
Executive Officer of the Company.
Except as otherwise indicated or the context otherwise requires,
references to Fiscal 1995, 1996, 1997 and each subsequent fiscal year shall mean
the fiscal year ending on the Saturday closest to January 31st in the following
year in accordance with an amendment to the by-laws of the Company adopted in
1996. References to Fiscal 1994 shall mean the fiscal year ending on the last
Saturday in January of the following year.
<PAGE> 4
MERCHANDISING AND MARKETING
The Company's business is conducted through two retail store concepts,
namely, Lechters Housewares(R) and Famous Brands Housewares Outlets(R) .
The mission of the Lechters Housewares(R) concept is to become the
leading housewares retailer in the mall, city and strip environments in which it
competes. Lechters Housewares(R) concept is focused on the kitchen, and, also,
aggressively pursues the frame, storage and organization business. The
merchandise assortment offers moderately priced functional products which solve
our customer's problems and capitalize on current trends.
Lechters Housewares(R) stores are merchandised and marketed to a large
cross section of customers typically found in high-traffic, regional shopping
malls having at least two major department stores as "anchors" with at least
200,000 square feet of retail space for specialty stores. City stores and larger
stores referred to herein as Super Lechters are also operated under this trade
name. Merchandise is displayed utilizing fixtures designed to maximize
versatility in merchandise mix, minimize space requirements and enable customers
to serve themselves. The Company believes that its wide selection of products,
competitive prices and convenient store locations create competitive advantages
over traditional sources for home products, such as department stores, specialty
stores and general merchandise discount stores.
Product categories include cookware, bakeware, kitchen gadgets and
utensils, microwave accessories, small electrics, table top, textiles, household
storage and organization, frames and other decorative housewares. The product
line includes over 4,000 items. All products sold by the Company are either
private label or national brand names such as, Rubbermaid, Durand, Ecko,
Farberware, Henckels, Krups, OXO, Pyrex, Revere and T-Fal. The Company estimates
that approximately 20% of the product line accounted for approximately 75% of
Fiscal 1996 net sales. Private label merchandise (Cook's Club(R), Simple
Solutions(R), Regent Gallery(R)) which represents approximately 28% of the
products sold by the Company, accounted for approximately 31% of Fiscal 1996 net
sales. No product accounted for more than 1.0% of Fiscal 1996 net sales.
2
<PAGE> 5
The following table shows the approximate contribution to net sales of
the Company's two principal product categories for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
Category 1996 1995 1994
-------- ---- ------ -----
<S> <C> <C> <C>
Basic Housewares 62% 60% 57%
Decorative Housewares 38% 40% 43%
</TABLE>
The Company has adopted an every day low pricing strategy. Lechters
Housewares(R) merchandise is generally priced at a discount to department stores
and other specialty retailers offering similar goods. Its value position is
further enhanced by sales and promotional events which also heighten customer
awareness and sense of buying urgency. The Company's price advantage reflects
its purchasing power and the economies of its private label program.
Items generally range in price from $1.00 to $200.00, with most items
selling for less than $10.00. All sales are transacted in cash or through
third-party credit cards, which accounted for approximately 64% and 36%,
respectively, of Fiscal 1996 net sales.
During Fiscal 1996 the Company initiated an advertising test in support
of the Lechters Housewares(R) business. The test program was conducted in
specific markets utilizing circulars, weekly newspaper advertising, and
television. The Company also advertises by participating in mall circulars and
contributing to mall merchants associations and marketing funds. Advertising
expense which had historically averaged approximately 1.0% of net sales
increased to 1.2% as a result of new advertising initiatives. The Company
intends to expand its advertising test in Fiscal 1997 given the favorable
results of the current year initiative.
The Lechters Housewares(R) business is highly seasonal. As a
convenience concept, the chain benefits from the high concentration of traffic
about its stores during certain times of the year. Sales are highest during the
year end holiday season, followed by a strong back to school business which
commences in late July. In 1996, November/December and back to school sales
accounted for approximately 31% and 16%, respectively, of total year sales.
3
<PAGE> 6
The mission of the Famous Brands Housewares Outlets(R) concept is to
become the leading retailer of off-price housewares in outlet centers and the
preferred retailer for U.S. housewares manufacturers to liquidate their excess,
discontinued, and slow selling inventory.
The Company believes it can offer its outlet customers extraordinary
savings opportunities as compared to regular priced retailers through its
ability to purchase off-price housewares. This commitment to off price
merchandise is a new direction based on a strategic assessment of the market and
Famous Brands Housewares Outlets(R) position in the outlet malls. The outlet
customer is more price driven than the mall customer and requires a fresh
assortment to inspire a purchase decision.
The strategy is supported by a merchandising team dedicated to Famous
Brands Housewares Outlets(R). The Famous Brands stores offer an assortment of
basic Lechters Housewares(R) merchandise to supplement the constantly changing
assortment of off-price purchases. Famous Brands Housewares Outlets(R) stores
typically have lower occupancy expenses and leasehold improvement requirements
versus stores located in malls, city locations and strip centers. The lower cost
structure subsequently supports the lower price points of the outlet
environment.
Given the geographic dispersion of customers who frequent outlet
centers, the marketing strategy to drive the Famous Brands Housewares Outlets(R)
business will continue to rely primarily on in-store signing, handouts and
displays to explain the values to our customer.
The seasonality of the Famous Brands Housewares Outlets(R) business
differs slightly from that of the Company's Lechters Housewares(R) concept. The
summer season represents a greater portion of the annual sales in Famous Brands
Housewares Outlets given the increase in leisure travel and the proximity of
outlet centers to major routes and vacation destinations. The November and
December period represents a slightly lower portion of the year in Famous Brands
Housewares Outlets(R) versus Lechters Housewares(R), 26% and 33% respectively.
4
<PAGE> 7
PURCHASING, WAREHOUSING AND DISTRIBUTION
Service Office management is responsible for virtually all
merchandising decisions, including product selection, sourcing, pricing and
in-store display. Merchandise mix is determined by the Service Office at each
store's inception and is dictated by store size and configuration. All
categories of merchandise are reviewed and edited on a regular basis to
accommodate seasonal sales opportunities and evolving customer requirements.
The Company's buying staff is comprised of a Senior Vice President -
General Merchandise Manager, a Vice President - Merchandising, two Merchandise
Managers and three buyers. In 1996, a separate buying organization was
established to support the Famous Brands Housewares Outlets(R) business. The
dedicated staff was deemed necessary given the distinct differences in the two
concepts' evolving merchandise strategies and the nature of the transactions
involving off-price merchandise. Previously, merchants and buyers bought for
both concepts as essentially the same business.
The buying staff is supported by a Planning and Allocation staff that
includes a Vice President - Merchandise Replishment and Logistics and eight
reorder buyers each specializing in certain product categories. The Company
purchases its products from over 400 suppliers with no supplier accounting for
more than 7% of Fiscal 1996 sales. Approximately 71% of its products are
purchased in the United States which ensures sufficient flexibility in the
management and flow of merchandise. The remaining 29% is imported merchandise
and is sourced primarily in the Far East. The Company believes that there are
alternate sources for virtually all of its products.
Most of the Company's merchandise is shipped directly from
manufacturers to the Company's distribution centers in Harrison, New Jersey and
North Las Vegas, Nevada where it is held until reshipment to the Company's
stores. The Company believes that its ability to buy in bulk directly from
manufacturers enables the Company to obtain lower merchandise costs, favorable
trade terms and a broader selection of products. The Company believes that these
facilities are adequate to satisfy its foreseeable distribution requirements.
The Company generally maintains an average of 10 weeks supply of
merchandise at the distribution centers. The stores, themselves, have minimum
storage capacity which in instances is augmented by additional lease space in
proximity to each store.
The Company uses contract carriers to supply its stores with
merchandise from its distribution centers. The Company's stores are supplied
with merchandise within two to five days of placing an order, depending upon the
store's distance from the distribution centers. On average, stores are supplied
with merchandise on a bi-weekly basis. Shipments are accelerated during peak
sales periods and are more frequent in high volume and city locations. The
ordering process is facilitated by a Computer Assisted Replenishment (CAR)
system.
5
<PAGE> 8
STORE OPERATIONS
Store Operations' objective is to provide an easy to shop store
environment supported by knowledgeable, customer oriented and sales focused
associates.
The Company's stores are designed to attract traffic through prominent
in-store displays generally organized according to a store planogram provided by
the Service Office. The Company attempts to keep the signage and design of its
store fronts consistent among its stores to enhance the name recognition of its
stores. Merchandise is displayed utilizing fixtures designed to maximize
versatility in merchandise mix, minimize space requirements and enable customers
to purchase through self choice and/or be assisted by an associate. The Company
enhances consumer interest by using store front space for seasonal and
promotional presentations which are rotated regularly. In addition, it uses
selected stores as test sites for the introduction of new products, new product
categories and new store designs.
The stores organization is headed by a Senior Vice President and
supported by a Service Office staff. The latter is responsible for the
development of store operations policies and procedures, the design of in-store
programs, store associate training programs, coordination of activities with
other functions residing in the Service Office and general communications.
As of April 1, 1997, the field organization was comprised of four
Regional Vice Presidents and one Regional Manager, who each have profit and loss
responsibility for several districts and provide leadership to 45 District
Managers. The District Managers, in turn, are responsible for the day to day
operations of the stores. Their supervisory span of control ranges from 7 to 23
stores, averaging approximately 14 stores each. Those Districts Managers at the
high end of the range are supported by Area Managers who are Store Managers with
additional oversight responsibility for 1 to 3 stores. Stores are typically
staffed with a Manager, 2 Assistant Managers and 5 sales/cashier Associates. The
stores schedule their labor from a pool of hourly Associates, the majority of
which are part-time. The number of Associates on hand at any one time is a
function of customer traffic and scheduled store activities, such as training
events and the receipt of merchandise.
Recognizing the value of distinct concept identities, the Company
realigned its field organization in 1996 along concept lines. Previously, field
management had combined concept responsibility which did not afford the focused
attention required of each.
The Company is committed to the in-store development of its Associates.
A training and evaluation program is provided to new Managers. Additionally, the
Company has developed a program under which it transfers qualified Associates to
other stores throughout the country to gain the experience necessary for
promotion. All store Associates otherwise attend periodic training sessions
designed to develop their management, merchandising and customer service skills.
The Company believes its pay and benefits package is competitive with
retail industry standards. Complemented by the aforementioned training program
and promotional opportunities, it enables the Company to attract and retain a
quality workforce.
The Company believes that the security measures in its stores are
strict, reflecting the cash orientation of the Company's business. The Company
employs 6 field Loss Prevention Managers, who are responsible for the review of
cash register transactions and inventory management procedures, in a effort to
control inventory shrinkage. Their periodic reviews are complemented by audit
programs to include District Manager conducted reviews and Service Office
monitoring of store transaction reports. Particular emphasis is placed on stores
with a history of inventory shrinkages in excess of the norm.
6
<PAGE> 9
REAL ESTATE
The Company considers its ability to obtain and retain attractive,
high-traffic store locations to be a critical element of its business and a key
determinant of the Company's future growth and profitability. Lechters
Housewares(R) mall stores are located primarily in high-traffic regional
enclosed projects while strip centers and city stores are located in the premium
project or downtown area as defined by market analysis. Famous Brands Housewares
Outlets(R) stores are located in the dominant outlet projects nationally.
As shown in the following table, the Company operated 396 Lechters
Housewares(R) stores as of year end. These stores range in size from 1,800 to
5,700 square feet and average approximately 3,200 square feet. To take advantage
of higher volume locations and extended product line opportunities, the Company
has also developed a larger format store of which there are 89. Internally
referred to as Super Lechters, these stores range in size from 4,500 to 10,900
square feet, averaging 6,000 square feet. The Company's 164 Famous Brands
Housewares Outlets(R) stores range in size from 3,000 to 7,500 square feet and
average 3,900 square feet.
The Company converted its 15 Kitchen Place stores to either Lechters
Housewares(R) or Famous Brands Housewares Outlets(R) during 1996.
<TABLE>
<CAPTION>
Lechters Super Famous Kitchen
Housewares Lechters Brands Place Total
---------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
February 3, 1996
Units 389 88 150 15 642
Square Feet 1,216,000 533,400 597,000 58,700 2,405,100
1996 Additions:
Units 4 1 11 0 16
Square Feet 13,300 4,100 39,400 0 56,800
1996 Closings:
Units 6 1 2 0 9
Square Feet 17,500 8,000 8,500 0 34,000
Adjustments:(1)
Units 9 1 5 (15) 0
Square Feet 39,300 6,500 17,200 (58,700) 4,300
February 1, 1997
Units 396 89 164 0 649
Square Feet 1,251,100 536,000 645,100 0 2,432,200(2)
</TABLE>
(1) Includes square footage adjustments due to store categorization shifts
including the conversion of Kitchen Place stores.
(2) Approximately 90% of the total store space of the Company's stores
represents selling area. The balance is storage and office space.
7
<PAGE> 10
The Company's present expansion plan is limited and opportunistic given
its high level of penetration of the better performing malls and outlet centers,
and the need to fully implement new merchandising and promotional strategies. In
the near future it perceives the greater opportunity for new store development
to lie in strip centers of which the Company had 37 store locations at year end.
The Company's Fiscal 1997 development plan is to open approximately 10 new
stores.
In determining where and in what format new stores will be opened, the
Company's preference is to backfill existing markets to enhance its marketing
and operations leverage. Specific store development decisions give due
consideration to such factors as market area demographics, competition, center
quality and customer traffic, store location within the center, costs of
development and ongoing occupancy expense. Performance comparables are also
reviewed if available.
The costs of new store development differ by concept and further varies
with the size of the store and site conditions. The costs incurred by the
Company to open an average size store under typical site conditions are
approximately, as shown below:
<TABLE>
<CAPTION>
Leasehold Fixtures Inventory, Preopening
Improvement & Equipment net of A/P Expense
----------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Lechters Housewares(R) $210,000 $60,000 $ 80,000 $ 8,000
Super Lechters 255,000 71,000 150,000 15,000
Famous Brands Housewares Outlets(R) 42,000 60,000 80,000 13,000
</TABLE>
The Company actively manages its real estate portfolio to ensure
profitability at the store level. In case of an underperforming store, the
Company will seek reduction in its occupancy expense under its existing lease
agreement, or any agreement extending the term thereof. Where profitability is
unattainable, the Company will exercise its right to terminate its lease
agreement under any volume termination provision or upon expiration of the term.
The Company plans to close approximately 15 stores in Fiscal 1997.
A majority of the Company's leases expire or will be subject to
termination by the Company over the next three years. In the current real estate
environment, this gives the Company leverage in the management of its occupancy
expenses and flexibility in store location. The Company intends to maintain this
flexibility and therefor will seek shorter terms upon renewal in those instances
where it is an advantage to do so. This strategy was pursued during Fiscal 1996.
8
<PAGE> 11
INFORMATION TECHNOLOGY
The Company is heavily reliant upon systems technology in the conduct of its
business. Over the years it has migrated its technology and enhanced its
software applications to support the more efficient execution of its core
operations and the facilitation of its decision support requirements.
The Company's core operating systems reside on IBM AS400's, IBM RS6000's, and
IBM OS/2 Local Area Network (LAN) servers which are connected in an open
systems, client-server environment. The hardware is located in the Company's
operations center at the Service Office. To ensure continuous operations, the
Company also maintains backup systems capabilities at a third party contracted
disaster recovery site.
In-store systems consist of IBM 4684 and 4694 Point of Sale registers with
Symbol Technology laser scanners. This technology enables the efficient
processing of customer transactions, daily reporting of basic sales and
transaction information, ordering and receipt of inventories, payroll processing
and e-mail communication with the Service Office. Additionally, field managers
are equipped with laptop computers which facilitate their communications
capabilities and access to essential store, district and region level management
reports.
The Company has in place a Computer Assisted Replenishment (CAR) system which
controls the flow of merchandise to the stores from its distribution centers in
Harrison and Las Vegas. The system facilitates the maintenance of in-stock
service levels with a minimum required investment in inventory. Additionally,
the system's automated shelf marking capability has resulted in substantial
store labor savings as the pricing of individual SKU's has been eliminated for
most products. The operations of both distribution centers are, in turn, driven
by an automated warehouse management system which also incorporates radio
frequency laser scanning technology. This system enables the cost efficient
handling and control of inventory in a paperless environment.
Currently the Company is communicating through Electronic Data Interchange (EDI)
with 48 of its highest volume vendors. During 1997 the company plans to continue
to build these vendor partnerships and to integrate EDI technology into
additional areas of the business. The objective of this technology is to improve
the Company's supply chain management and enhance its inventory pipeline
flexibility.
The Company has been on the World Wide Web since the Fall of 1995 at
'www.lechters.com'. Its home page includes basic company information, a store
locator, a customer service feedback form, and promotional information. The
Company plans to expand its on-line presence in 1997.
The Company is committed to maintaining the integrity and functionality of its
information systems. Accordingly, it will continue to upgrade its current
technology and expand its applications to ensure their effective support of the
business, both internal operations and market focused programs.
9
<PAGE> 12
COMPETITION
The business in which the Company is engaged is highly competitive and
many items sold by the Company are sold by department stores, general
merchandise discount stores, hardware stores and others having greater financial
and other resources than the Company. To a lesser extent, the Company also
competes with mail order companies and other specialty retailers of home-related
products. However, the Company believes that it competes favorably with such
retailers because in the shopping and outlet centers where the Company's stores
are located, the Company's stores are typically the only specialty housewares
retailer. The Company offers a broader assortment of housewares merchandise than
most of its competitors, and the Company's prices are generally lower than those
charged by department stores and are generally competitive with those charged by
general merchandise discount stores. Nevertheless, there can be no assurance
that any or all of the factors listed above which enable the Company to compete
favorably will not be adopted by companies having greater financial and other
resources than the Company.
ASSOCIATES
On April 1, 1997, the Company employed 6,364 persons, 1,949 of whom
were full-time (30 or more hours per week) and 4,415 of whom were part-time
Associates. Of this total, 464 were located at the Company's Harrison, New
Jersey Service Office and two distribution centers, 49 as Regional and District
Managers, 6 as Loss Prevention Managers and the balance located at the Company's
stores.
On April 1, 1997, the 173 non-management office and distribution
Associates at the Harrison, New Jersey facility were represented by UNITE, Local
99, under contracts expiring on March 15, 1999 with respect to non-management
distribution center Associates and June 30, 1997 with respect to non-management
office Associates. The 5,845 Associates in the Company's 649 retail stores are
non-union. The 40 Associates at the Company's North Las Vegas, Nevada
distribution center are also non-union.
The Company has never experienced a strike or other labor disruption
and is unaware of any current efforts or plans to organize its non-union
Associates. The Company believes that its employee relations are satisfactory.
10
<PAGE> 13
TRADEMARKS
The Company has registered in the United States Patent and Trademark
Office its service marks "Lechters," "Lechters Home Store," "Lechters
Housewares," "The Kitchen Place" and "Famous Brands Housewares Outlet" for
retail services, and its trademarks "Lechters", "The Kitchen Place", "Regent
Gallery", "Cooks Club", "Perfect Bake", and "Simple Solutions" for certain
housewares items.
EXECUTIVE OFFICERS
The following table shows information regarding executive officers of
the Company as of April 19, 1997:
<TABLE>
<CAPTION>
Position or Office Term of Employ-
Name Age with the Company ment Commenced
- ---- --- ---------------- --------------
<S> <C> <C> <C>
Donald Jonas 67 Chairman of the Board January 1984
Chief Executive
Officer and President
Robert J. Harloe 52 Senior Vice President August 1994
- Human Resources
Dennis Hickey 49 Senior Vice President January 1991
- Stores
Frank J. O'Neill 48 Senior Vice President February 1992
- Director of Real Estate
Ira S. Rosenberg 62 Vice President, January 1984
Secretary and
Corporate Counsel
James Shea 51 Senior Vice President November 1994
and General
Merchandise Manager
John W. Smolak 48 Senior Vice President February 1995
and Chief Financial
Officer
</TABLE>
11
<PAGE> 14
Donald Jonas has been Chairman of the Board and a Director of the
Company or its former parent since 1979. From 1979 to January 1994 he was also
Chief Executive Officer. Mr. Jonas resumed the position of Chief Executive
Officer and became President in January 1996. He is also a Director of Dress
Barn, Inc.
Robert J. Harloe was elected Senior Vice President - Human Resources of
the Company in March 1996. Mr. Harloe became Vice President - Human Resources in
September 1994 after joining the Company in August 1994. Prior to that he was
Senior Vice President of Human Resources for Allied-Lyons Retailing.
Allied-Lyons acquired Dunkin Donuts in 1990, where he was employed for 18 years.
Dennis Hickey was elected Senior Vice President - Stores of the Company
in March 1996. Mr. Hickey became Vice President - Stores in April 1991 after
joining the Company in January 1991. Prior to that he was Vice President of Kay
Bee Toy Stores, a Division of Melville Corp. from August 1990 to January 1991.
From August 1985 to August 1990, Mr. Hickey was Vice President - Store
Operations for Circus World Toy Stores, a Division of Greenman Bros.
Frank J. O'Neill was elected Senior Vice President - Director of Real
Estate of the Company in March 1996. Mr. O'Neill became Vice President -
Director of Real Estate in April 1992 after joining the Company in February
1992. Prior to that he was employed for 14 years with the Melville Realty
Company, most recently as the Senior Vice President.
Ira S. Rosenberg has been Corporate Counsel of the Company or its
former parent since 1979 and Vice President and Secretary of the Company since
1984.
James Shea was elected Senior Vice President - General Merchandise
Manager of the Company in December 1994. Prior to joining the Company in
November 1994, Mr. Shea served as Senior Vice President, General Merchandise
Manager, Homestore with Kaufmann's, a division of May Company, from 1990 to
November 1995. From 1985 through 1990 he was employed by Lechmere, a hardgoods
chain, as Vice President and General Merchandise Manager. Mr. Shea was also Vice
President of Marketing and Merchandising for Eddie Bauer and spent 12 years with
Dayton Department Stores in various merchandising positions.
John W. Smolak was elected Senior Vice President and Chief Financial
Officer of the Company in March 1996. Mr. Smolak became Vice President and Chief
Financial Officer in April 1995 after joining the Company in February 1995.
Prior to that he was employed by Jungle Jim's Playlands, Inc., a chain of family
entertainment centers, as Senior Vice President, Finance and Administration. Mr.
Smolak previously held the positions of Vice President, Finance and Chief
Financial Officer for Precision Lenscrafters, Inc. and spent six years with the
Marriott Corporation, in both the Corporate Finance function and as Vice
President and Chief Financial Officer for their Roy Rogers Restaurants division.
12
<PAGE> 15
ITEM 2. PROPERTIES.
The general offices of the Company are located at 1 Cape May Street,
Harrison, New Jersey. The Company leases approximately 540,000 square feet of
floor space at this location. Approximately 490,000 square feet are being
utilized for the distribution center, and approximately 50,000 square feet for
the Company's service offices. This lease expires on January 31, 2007 and the
Company has three five-year renewal options.
The Company leases approximately 155,000 square foot distribution
center in North Las Vegas, Nevada. Approximately 151,000 square feet are being
utilized for the distribution center, and approximately 4,000 square feet for
administrative offices. Constructed and opened in 1993, the facility is designed
to enable expansion of an additional 100,000 square feet should the need arise.
This lease expires on March 31, 2008 and the Company has four five-year renewal
options.
The Company leases all of its stores. Lease terms for the Company's
stores are generally 10 to 12 years in duration without renewal options or five
years with one or more renewal options and provide for a fixed minimum rental
plus a percentage of sales once the minimum has been satisfied. However, certain
stores are operated under short term extensions of otherwise expired leases.
For additional information concerning the Company's leases, see the
section of Item 1 entitled Real Estate and Note 7 to the Consolidated Financial
Statements of the Company included elsewhere herein.
ITEM 3. LEGAL PROCEEDINGS.
There is no material litigation currently pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through solicitations of
proxies or otherwise.
13
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is traded on the over-the-counter market and is
included in the National Market System of the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") under the symbol "LECH". The
initial public offering of the Common Stock occurred in July 1989.
The following table sets forth (as reported by NASDAQ) for the periods
indicated the closing prices of the Common Stock.
<TABLE>
<CAPTION>
Price of Common Stock
---------------------
Fiscal 1996 High Low
----------- ---- ---
<S> <C> <C>
1st Quarter 8-1/8 4-1/4
2nd Quarter 7-1/4 4-3/8
3rd Quarter 5-3/4 4-1/4
4th Quarter 5-1/4 3-7/8
<CAPTION>
Fiscal 1995 High Low
----------- ---- ---
<S> <C> <C>
1st Quarter 19 14-3/4
2nd Quarter 16-3/4 12-1/4
3rd Quarter 14-1/4 9-1/4
4th Quarter 10-3/8 4-1/4
</TABLE>
These quotations reflect inter-dealer prices, without retail markups,
markdowns or commissions.
On April 18, 1997, there were approximately 1,051 holders of record of
the Common Stock. On April 18, 1997, the closing price of the Common Stock was
$3.6875.
The Company has never paid any cash dividends on its Common Stock and
does not presently intend to pay any dividends on the Common stock for the
foreseeable future. In addition, the Company's Credit Agreement contains certain
covenants which restrict the ability of the Company to pay dividends. See Notes
to the Consolidated Financial Statements.
14
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto set
forth elsewhere herein.
<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Fifty-Three
Weeks Ended Weeks Ended Fifty-Two Weeks Ended Weeks Ended
February 1, February 3, January 28, January 29, January 30,
1997 1996 1995 1994 1993
---- -------------- ------------------ --------------- -----------
(Dollars in thousands, except share, per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 441,243 $ 432,048 $ 399,264 $ 350,196 $ 306,043
Cost of goods sold
(including occupancy
and indirect costs) 322,110 310,163 282,875 242,833 207,862
----------- ------------ ----------- ----------- -----------
Gross profit 119,133 121,885 116,389 107,363 98,181
Selling, general and,
administrative expenses 111,218 109,414 93,853 83,669 71,252
Restructuring expense -- (217) 11,000 -- --
----------- ------------ ----------- ----------- -----------
Operating income 7,915 12,688 11,536 23,694 26,929
Other expenses (1) 3,372 5,039 5,838 4,991 2,497
----------- ------------ ----------- ----------- -----------
Income before income
tax provision 4,543 7,649 5,698 18,703 24,432
Income tax provision 1,200 3,146 2,336 7,623 9,044
----------- ------------ ----------- ----------- -----------
Net income 3,343 4,503 3,362 11,080 15,388
Preferred dividend
requirement 842 -- -- -- --
----------- ------------ ----------- ----------- -----------
Net income available to
common shareholders $ 2,501 $ 4,503 $ 3,362 $ 11,080 $ 15,388
=========== ============ =========== =========== ===========
Net income per share (2) (3) $ 0.15 $ 0.26 $ 0.20 $ 0.65 $ 0.90
Weighted average
shares outstanding 17,155,000 17,288,000 17,095,000 17,100,000 17,178,000
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Fifty-Three
Weeks Ended Weeks Ended Fifty-Two Weeks Ended Weeks Ended
February 1, February 3, January 28, January 29, January 30,
1997 1996 1995 1994 1993
---- -------------- ------------------ --------------- -----------
(Dollars in thousands, except share, per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Stores opened during year 16 48 49 61 81
Stores closed during year 9 11 11 7 6
Stores open at year end 649 642 605 567 513
Total square feet of store
space (at year end) (4) 2,432,200 2,405,100 2,228,195 2,048,916 1,730,516
Sales per average square
foot of total space (4) (5) $ 182 $ 186 $ 187 $ 185 $ 197
Percentage increase
(decrease) in comparable
store sales (6) (0.2%) (1.6%) 3.2% (1.2%) 2.8%
Balance Sheet Data
(At Year End):
Working capital $ 151,954 $ 136,113 $ 134,785 $ 134,695 $ 137,807
Total assets 272,333 272,312 270,710 256,812 239,019
Long-term debt 58,853 75,038 77,777 82,859 85,006
Shareholders' equity 170,408 148,642 143,541 136,632 125,131
Total debt to total
capitalization 25.7% 34.4% 36.0% 38.6% 40.5%
</TABLE>
(1) Other expenses includes interest expense net of interest income and
gains realized on the sale of government securities.
(2) Net income per share for fiscal 1996 was calculated on net income less
the preferred stock dividends requirement.
(3) All share and per share amounts included herewith have been adjusted to
give effect to the 2-for-1 stock split in April 1992. The Company has
never paid any cash dividends on its Common Stock.
(4) Approximately 90% of total store space represents selling area. The
balance is storage and office space.
(5) Average square feet of total store space represents the average of
square feet of total store space at the beginning and end of each
fiscal year. Sales per average square foot of total store space is the
result of dividing net sales for the year by average square feet of
total store space. These amounts are not adjusted to reflect the
seasonal nature of the Company's sales or the impact of opening stores
in different periods during the year.
(6) Comparable store sales data are calculated based on each store's time
in operation during the prior year (even if such store began operations
in the prior year) compared with its corresponding time in operation
during the current year. Comparable store sales for Fiscal 1996 and
1995 are reported on a 52 week basis.
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL 1996 IN COMPARISON WITH FISCAL 1995
Net sales for Fiscal 1996, the 52 week period ended February 1, 1997,
increased $9,195,000 to $441,243,000, a 2.1% increase over Fiscal 1995, the 53
week period ended February 3, 1996, primarily as a result of the addition of 7
stores and the impact of the introduction of the Company's advertising program.
For Fiscal 1995, the Company adopted the National Retail Federation's reporting
calendar which resulted in the additional week. On a comparable 52 week basis
for both fiscal years, sales increased 3.5% and comparable store sales decreased
0.2%. At the close of the fiscal year, the Company operated 649 stores compared
to 642 stores at close of the previous fiscal year, a net increase of 7 stores
or 1.1%. Total retail space increased approximately 27,000 square feet to
2,432,000 at February 1, 1997.
Gross profit for Fiscal 1996 was $119,133,000, a $2,752,000 decrease
from Fiscal 1995. The resulting gross profit rate of 27.0% was 1.2 percentage
points below that of Fiscal 1995. Gross profit was favorably impacted by an
increase of higher margin merchandise from both foreign and domestic sources.
However, promotional pricing associated with the Company's advertising programs
and a highly competitive retail market place produced price reductions in excess
of last year. Additionally, while inventory shrinkage was at the Company's
historical average, it deteriorated from the exceptional performance of the
prior year. Finally, rent and other occupancy costs were underabsorbed due to
the decline in comparable store sales.
Selling, general and administrative expenses increased $1,804,000 to
$111,218,000. The expense rate of 25.2% of net sales was 0.1% percentage point
below the rate of Fiscal 1995. While expenses increased due to the net addition
of 7 stores and the implementation of the Company's advertising programs,
savings were achieved in variable expenses such as benefits and Service Office
payroll, one less week of operations expense, and the absence of significant
contingent liability provisions as were required last year.
Other expenses decreased $1,667,000 to $3,372,000, 0.8% of net sales.
Interest expense decreased $1,917,000 as the early retirement of the outstanding
$20,250,000 of Senior Notes Payable reduced interest expense by $1,787,000 for
the year. Interest income of $1,650,000 was $205,000 lower than last year as the
balance of marketable securities was lower for most of the year compared with
Fiscal 1995.
Income taxes for Fiscal 1996 were provided at a rate of 26.4% compared
41.1% for Fiscal 1995. The 1996 tax provision rate was reduced due to the
reversal of residual estimated liabilities for prior years.
17
<PAGE> 20
FISCAL 1995 IN COMPARISON WITH FISCAL 1994
Net sales for Fiscal 1995 increased $32,784,000 to $432,048,000, an
8.2% increase. Adjusting for the additional week which resulted from the
Company's adoption of the retail calendar proposed by the National Retail
Federation, net sales on a 52 week basis increased 6.8% over the prior year.
Comparable store sales declined 1.6%. Sales growth was due to the opening of new
stores. At the end of Fiscal 1995, the Company had 642 stores open compared to
605 at the close of the previous fiscal year, a net increase of 37 stores or a
6.1% increase. Total square feet of store space increased approximately 177,000
square feet during the year to 2,405,081 square feet.
Gross profit for Fiscal 1995 was $121,885,000, a $5,496,000 increase
over Fiscal 1994. Gross profit was 28.2% of net sales compared with 29.2% of net
sales in Fiscal 1994. While the margins generated by merchandise sales were
comparable to prior year's, there was an under absorption of rent and other
occupancy expense caused by a decline in comparable store sales.
Selling, general and administrative expenses increased by $15,561,000
to $109,414,000, and increased 1.8% as a percentage of net sales to 25.3%. The
increase in selling, general and administrative expenses was due to planned
increases in store and Service Office payroll and benefits and Service Office
operating expenses. There was also a reduction in vendor support related to the
increase in direct sourced foreign products and a set-a-side for certain
contingent events.
The Company recorded a pre-tax restructuring charge of $11,000,000 in
the second quarter of Fiscal 1994. In the fourth quarter of Fiscal 1995, the
Company recorded a $217,000 restructuring credit representing the residual
reserve balance remaining after the final charges for inventory writedowns,
store closings and severance costs had been determined. The restructuring
reserve balance at the beginning of the fiscal year was approximately
$2,400,000. At the close of the fiscal year the reserve related to restructuring
was $951,000. This represents the final amount necessary to complete the
restructuring plan.
Other expenses incurred in Fiscal 1995 decreased $799,000 to
$5,039,000, 1.2% of net sales. Interest expense for the year decreased $246,000
due to reduced long term debt resulting from scheduled repayments. Interest
income improved by $406,000 due to improved cash management and higher interest
rates earned on invested funds. The Company also earned a slight profit on
government securities transactions compared to a slight loss for Fiscal 1994.
The effective income tax rate for the Company was 41.1% for Fiscal
1995, compared with a rate of 41.0% for Fiscal 1994. The effective state rate
declined in Fiscal 1995. The increase in the Other portion of the rate was due
to other factors such as the expiration of the Targeted Jobs Tax Credit which
expired for new hires on January 1, 1995.
18
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities at February 1, 1997 as
reflected on the Consolidated Balance Sheets increased $19,266,000 over the
balances at the close of the prior fiscal year. The increase in cash as depicted
in the Statements of Cash Flows was $2,788,000 as net cash provided by
operations exceeded cash used for investing activities, including the increase
in marketable securities, and cash used in financing activities.
Cash flows from operating activities consist primarily of net income
adjusted for certain noncash expense items such as depreciation and
amortization, deferred taxes and loss on disposal of property and equipment.
Operating activities also include changes in accounts receivable, inventory,
accounts payable and accrued expenses and other items. Net cash provided by
operating activities was $28,604,000 for Fiscal 1996 compared to $9,333,000 for
Fiscal 1995. For Fiscal 1996, in addition to net income of $3,343,000, the most
significant operating activities providing cash, were depreciation and
amortization of $17,113,000 and the reduction of $9,456,000 in merchandise
inventories which was the result of strong inventory control measures. The most
significant operating activity which reduced operating cash flow was the
decrease in accounts payable, accrued liabilities and taxes of $5,089,000
primarily due to reduced vendor accounts payable related to the previously
mentioned reduction of inventory.
With respect to investing activities, in addition to the increase in
marketable securities of $16,592,000, capital expenditures totaled $8,474,000
for Fiscal 1996 compared to $22,626,000 for Fiscal 1995. Capital expenditures
were principally for the construction of and fixtures for new stores. During
Fiscal 1996, 16 new stores were opened compared to 48 new stores during Fiscal
1995. Other capital expenditures were for renovation and remodeling of existing
stores, warehouse equipment and systems enhancements.
For Fiscal 1997, totaled planned capital expenditures are $12,000,000
primarily for new stores, renovations, remodels and system enhancements.
With respect to financing activities, the Company improved its
financial flexibility and liquidity through two significant transactions. On
April 5, 1996, the Company issued $20,000,000 in Convertible Preferred Stock
(See Note 3). This transaction has provided the Company with additional
flexibility to meet its future financing requirements. The proceeds from the
preferred stock issuance were utilized in the second transaction, the early
repayment of $17,625,000 of the Senior Notes Payable during the first quarter of
Fiscal 1996. The remaining Senior Notes Payable of $2,625,000 were retired
during the third quarter of Fiscal 1996.
During Fiscal 1996, the Company entered into an Amended and Restated
Credit Agreement ("Credit Agreement") which provided for borrowings up to
$40,000,000 (See Note 5). The unsecured Credit Agreement established a
suballocation of $30,000,000 for letters of credit. At the close of Fiscal 1996,
there were $9,219,000 in outstanding letters of credit. The term of the Credit
Agreement was extended from November 19, 1996 to May 22, 1998. As of the close
of Fiscal 1996, there were no borrowings outstanding under the Credit Agreement.
19
<PAGE> 22
INFLATION AND SEASONALITY
The Company does not believe that its operations have been materially
affected by inflation during the two most recent fiscal years. While the Company
does not expect that inflation would have a material impact upon operating
results, there is no assurance that its business will not be affected by
inflation in the future.
The Company's business is highly seasonal. The Company benefits from
the higher concentration of traffic in its stores during certain times of the
year, especially the July to September "Back to School" period and the holiday
selling seasons of November and December. In addition, the Company expects that
its quarterly results of operations will fluctuate depending on the timing and
amount of revenue contributed by new stores and the timing of costs associated
with the opening of new stores. The Company's current strategy is to open
substantially all of its new stores in the first three quarters of the fiscal
year in order to minimize business disruptions during the heavy selling season
in the last quarter of the fiscal year. See Note 10 of Notes to Consolidated
Financial Statements of the Company included elsewhere herein.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." The statement is effective for financial statements for periods ending
after December 15, 1997, and changes the method in which earnings or net income
per share will be determined. Adoption of this statement by the Company will not
have a material impact on earnings per share.
20
<PAGE> 23
PART III
The information called for by Part III (Items 10, 11, 12 and 13) is
incorporated by reference to the Company's definitive proxy statement in
connection with its Annual Meeting of Shareholders to be held June 17, 1997.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. See the Index immediately following the
signature page.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
3.1 Restated Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 File No. 33-29465
(the "Registration Statement")).
3.2 By-laws of the Company (Incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 File No. 33-40372).
4.1 Preferred Stock Purchase Agreement dated April 5, 1996.*
4.2 Indenture, dated as of September 27, 1991, between the Company
and Chemical Bank, as Trustee. (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the year ended January 25, 1992).
10.1 1989 Stock Option Plan and form of Agreement pursuant to 1989
Stock Option Plan. (Incorporated herein by reference to
Exhibit 10.3 to the Registration Statement).
10.2 Amended and Restated Revolving Credit Agreement as of May 24,
1996. (Incorporated herein by reference to the Company's Form
10-Q, for the period ended May 4, 1996).
21
<PAGE> 24
10.3 Form of Deferred Compensation Agreement (Incorporated herein
by reference to Exhibit 10.5 to the Registration Statement).
10.4 Amendment No. 1 to Deferred Compensation Agreement, dated June
16, 1989. (Incorporated herein by reference to Exhibit 10.5.2
to Amendment No. 1 to the Registration Statement).
10.5 Amendment No. 2 to Deferred Compensation Agreement, dated
August 15, 1989. (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
January 26, 1991).
10.6 Amendment No. 3 to Deferred Compensation Agreement, dated June
15, 1995. (Incorporated herein by reference to the Company's
Form 10-Q for the period ended July 29, 1995.)
10.7 Amendment No. 4 to Deferred Compensation Agreement between the
Company and Donald Jonas dated April 8, 1996. (Incorporated
herein by reference to the Company's Annual Report on Form
10-K for the year ended February 3, 1996.)
10.8 Form of Consulting Agreement (Incorporated herein by reference
to Exhibit 10.9.1 to the Registration Statement).
10.9 Forms of Amendment of Consulting Agreement (Incorporated
herein by reference to Exhibit 10.9.2 to Amendment No. 1 to
the Registration Statement).
10.10 Agreement between the Company and Local 99, UNITE to a
collective bargaining agreement covering warehouse employees
dated March 16, 1996.*
10.11 Lease for distribution Center space (Incorporated herein by
reference to Exhibit 1 to the Company's Current Report on Form
8-K, dated January 2, 1992).
10.12 Lease for Distribution Center space. (Incorporated herein by
reference to Exhibit 1 to the Company's Form 10-Q, for the
period ended July 25, 1992).
21 Subsidiaries of the Company. (Incorporated herein by reference
to the Company's Annual Report on Form 10-K for the year ended
February 3, 1996.)
23 Consent of Deloitte & Touche LLP.*
24 Powers of Attorney dated April 10, 1997.*
*Filed herewith.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements 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.
LECHTERS, INC.
(Registrant)
By: /s/ Donald Jonas
------------------------------
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on May 2, 1997 by the following persons in their
respective capacities set forth opposite their names, which include its
principal executive officer, its principal financial and accounting officer and
a majority of the board of directors.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ DONALD JONAS Chairman of the Board and
- --------------------------- Chief Executive Officer and Director
(DONALD JONAS) (Principal Executive Officer)
/s/ JOHN W. SMOLAK Senior Vice President (Principal Financial
- --------------------------- Officer and Principal Accounting Officer)
(JOHN W. SMOLAK)
/s/ MARTIN BEGUN Director
- ---------------------------
(MARTIN BEGUN*)
/s/ CHARLES A. DAVIS Director
- ---------------------------
(CHARLES A. DAVIS*)
/s/ BERNARD D. FISCHMAN Director
- ---------------------------
(BERNARD D. FISCHMAN*)
/s/ ROBERT KNOX Director
- ---------------------------
(ROBERT KNOX*)
/s/ ALBERT LECHTER Director
- ---------------------------
(ALBERT LECHTER*)
/s/ ANTHONY MALKIN Director
- ---------------------------
(ANTHONY MALKIN*)
/s/ ROBERTA MANEKER Director
- ---------------------------
(ROBERTA MANEKER*)
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ NORMAN MATTHEWS Director
- ------------------------------------------------
(NORMAN MATTHEWS*)
/s/ LEONARD PFEFFER Director
- ------------------------------------------------
(LEONARD PFEFFER*)
/s/ JOHN WOLFF Director
- ------------------------------------------------
(JOHN WOLFF*)
</TABLE>
*By: John W. Smolak
Attorney-in-fact
24
<PAGE> 27
LECHTERS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
MANAGEMENT'S REPORT F-1
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED
FEBRUARY 1, 1997:
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Shareholders' Equity F-6
Notes to Consolidated Financial Statements F-7 - F-19
</TABLE>
<PAGE> 28
MANAGEMENT'S REPORT
To the Shareholders of Lechters, Inc.:
We have prepared Lechters, Inc. consolidated financial statements, including the
notes and other financial information appearing in this Annual Report on Form
10-K, and are responsible for the integrity and objectivity of the accompanying
financial statements and related information. In order to fulfill this
responsibility, policies have been established that require each system of
internal accounting control provide reasonable assurance, giving due regard to
the cost of implementing and maintaining the system, that transactions are
executed in accordance with management's intention and authorization, that
accounting books and records are prepared and maintained so as to permit the
preparation of the financial statements in accordance with generally accepted
accounting principles, and that accountability for assets, liabilities and
equity is maintained.
Compliance with these policies is verified, and the continuing adequacy of
accounting policies and procedures is evaluated. In addition, Lechters, Inc.'s
independent auditors obtain and maintain an understanding of the accounting and
administrative controls in place and, based on tests of those controls and of
accounting records, render an opinion on the fairness of presentation of the
financial statements. The Audit Committee of the Board of Directors, composed of
non-management Board members, and management representatives, meet periodically
with the independent auditors to receive their reports and direct compliance
with their recommendations.
Further, we recognize our responsibility to conduct Lechters' business in
accordance with high moral and ethical standards. Policies have been established
and review programs are maintained to ensure that all business activities are in
compliance with these standards.
Donald Jonas
Chairman of the Board and
Chief Executive Officer
John W. Smolak
Senior Vice President and
Chief Financial Officer
F-1
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Lechters, Inc.
Harrison, New Jersey
We have audited the accompanying consolidated balance sheets of Lechters, Inc.
and subsidiaries (collectively the "Company") as of February 1, 1997 and
February 3, 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ending February 1, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of February 1, 1997
and February 3, 1996, and the results of their operations and their cash flows
for each of the three years in the period ended February 1, 1997 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 26, 1997
F-2
<PAGE> 30
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,022 $ 4,234
Marketable securities (Note 9) 54,084 37,606
Accounts receivable 5,561 5,573
Merchandise inventories 100,442 109,898
Prepaid expenses 5,734 5,519
--------- --------
Total current assets 172,843 162,830
--------- --------
PROPERTY AND EQUIPMENT:
Fixtures and equipment 66,828 64,688
Leasehold improvements 102,912 100,840
--------- --------
169,740 165,528
Less accumulated depreciation
and amortization 74,356 60,446
--------- --------
Net property and equipment 95,384 105,082
--------- --------
OTHER ASSETS 4,106 4,400
--------- --------
TOTAL ASSETS $ 272,333 $272,312
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,264 $ 7,827
Dividends payable-preferred stock 1,010 --
Salaries, wages and other accrued expenses 13,318 13,546
Taxes, other than income taxes 1,318 1,591
Income taxes payable (Note 6) 1,979 753
Current portion long-term debt (Note 4) -- 3,000
--------- --------
Total current liabilities 20,889 26,717
LONG-TERM DEBT, LESS CURRENT PORTION
(Note 4): 58,853 75,038
DEFERRED INCOME TAXES (Note 6) 16,454 17,348
OTHER LIABILITIES 5,729 4,567
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 7 and 8)
SHAREHOLDERS' EQUITY (Note 3):
Convertible preferred stock, $100 par value
authorized 1,000,000 shares,
Issued and outstanding Series A - 149,999 shares and
Series B - 50,001 shares 20,000 --
Common stock, no par value,
authorized 50,000,000 shares,
issued and outstanding 17,155,086 58 58
Unrealized holding gain (loss) on
available for sale securities (Note 9) (29) 38
Additional paid-in capital 62,273 62,773
Retained earnings 88,106 85,773
--------- --------
Total shareholders' equity 170,408 148,642
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 272,333 $272,312
========= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 31
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
NET SALES $ 441,243 $ 432,048 $ 399,264
COST OF GOODS SOLD (including occupancy and
indirect costs) 322,110 310,163 282,875
------------ ------------ ------------
GROSS PROFIT 119,133 121,885 116,389
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 7 and 8)
111,218 109,414 93,853
RESTRUCTURING EXPENSE (Note 2) -- (217) 11,000
------------ ------------ ------------
OPERATING INCOME 7,915 12,688 11,536
OTHER EXPENSES (INCOME):
Interest Expense 5,003 6,920 7,166
Interest Income (1,650) (1,855) (1,449)
Loss (Gain) on Sale of Government
Securities (Note 9) 19 (26) 121
------------ ------------ ------------
3,372 5,039 5,838
------------ ------------ ------------
INCOME BEFORE INCOME TAX PROVISION 4,543 7,649 5,698
INCOME TAX PROVISION (Note 6) 1,200 3,146 2,336
------------ ------------ ------------
NET INCOME 3,343 4,503 3,362
Preferred Stock Dividend Requirement 842 -- --
------------ ------------ ------------
Net Income Available to Common Shareholders $ 2,501 $ 4,503 $ 3,362
============ ============ ============
NET INCOME PER COMMON SHARE $ 0.15 $ 0.26 $ 0.20
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 17,155,000 17,288,000 17,095,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 32
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,343 $ 4,503 $ 3,362
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Restructuring charge -- (217) 11,000
Depreciation and amortization 17,113 16,056 14,269
Loss on disposal of property and equipment 1,067 954 550
Deferred income taxes (894) 3,227 1,397
Deferred rent 1,160 1,020 800
Other 1,297 1,442 579
Changes in operating assets and liabilities, net
of effects of restructuring:
Decrease (Increase) in accounts receivable 12 1,095 (753)
Decrease (Increase) in merchandise inventories 9,456 (12,575) (7,052)
Decrease (Increase) in prepaid expenses (215) (918) 761
Decrease (Increase) in other assets 128 (51) 17
Increase (Decrease) in accounts payable,
accrued salaries, wages and other accrued
expenses and taxes, other than income taxes (5,089) (5,201) 8,911
Increase (Decrease) in income taxes payable 1,226 (2) 425
-------- -------- --------
Net cash provided by operating activities 28,604 9,333 34,266
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,474) (22,626) (20,592)
(Increase) Decrease in marketable securities (16,592) 6,153 (4,546)
-------- -------- --------
Net cash used in investing activities (25,066) (16,473) (25,138)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible preferred stock 20,000 -- --
Expenses of Issuance of convertible preferred stock (500) -- --
Repayment of long-term debt (20,250) (3,750) (6,000)
Exercise of stock options -- 350 2,683
-------- -------- --------
Net cash used in financing activities (750) (3,400) (3,317)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,788 (10,540) 5,811
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 4,234 14,774 8,963
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,022 $ 4,234 $ 14,774
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Unrealized holding gain (loss) on available
for sale securities $ (50) $ 64 $ (356)
======== ======== ========
Cash paid (refunded) during the year for:
Interest $ 4,616 $ 6,031 $ 6,491
======== ======== ========
Income taxes $ 920 $ (820) $ 121
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 33
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Convertible Preferred Unrealized
Stock Issued Stock Issued Additional Holding
------------------ --------------------- Paid-In Retained Gain
Shares Amount Shares Amount Capital Earnings (Loss) Total
------ ------ ------ ------ ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 29, 1994 16,783,472 $58 -- $- $ 58,666 $ 77,908 $ -- $ 136,632
Unrealized holdings loss -- -- -- -- -- -- (210) (210)
Exercise of stock
options 335,174 -- -- -- 2,683 -- -- 2,683
Tax benefit from
exercise of stock options -- -- -- -- 1,074 -- -- 1,074
Net Income -- -- -- -- -- 3,362 -- 3,362
---------- --- ------- ------- -------- -------- ----- ---------
BALANCE, JANUARY 28, 1995 17,118,646 58 -- -- 62,423 81,270 (210) 143,541
Unrealized gain (loss)
Adjustment -- -- -- -- -- -- 248 248
Exercise of stock options 36,440 -- -- -- 350 -- -- 350
Net income -- -- -- -- -- 4,503 -- 4,503
---------- --- ------- ------- -------- -------- ----- ---------
BALANCE, FEBRUARY 3, 1996 17,155,086 58 -- -- 62,773 85,773 38 148,642
Unrealized gain (loss)
Adjustment -- -- -- -- -- -- (67) (67)
Issuance of Convertible
Preferred Stock
Net of Issuance Expenses -- -- 200,000 20,000 (500) -- -- 19,500
Net Income -- -- -- -- -- 3,343 -- 3,343
Declaration of Dividend on
Convertible Preferred Stock -- -- -- -- -- (1,010) -- (1,010)
---------- --- ------- ------- -------- -------- ----- ---------
BALANCE, FEBRUARY 1, 1997 17,155,086 $58 200,000 $20,000 $ 62,273 $ 88,106 ($ 29) $ 170,408
========== === ======= ======= ======== ======== ===== =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 34
LECHTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED FEBRUARY 1, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business - Lechters, Inc. and its subsidiaries (collectively,
the "Company") is a specialty retailer of primarily brand-name basic
housewares and decorative housewares. As of February 1, 1997, the
Company operated 649 stores in 44 states.
b. Basis of Presentation - The consolidated financial statements
include the accounts of Lechters, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
References to Fiscal 1996 and Fiscal 1995 mean the fiscal year
ending on the Saturday closest to the end of January. References to
Fiscal 1994 mean the fiscal year ending on the last Saturday in January
of the following year. Fiscal year 1996 was comprised of 52 weeks,
Fiscal 1995 was comprised of 53 weeks and fiscal year 1994 was
comprised of 52 weeks.
c. Cash Equivalents and Marketable Securities - The Company
considers cash on hand in stores, deposits in banks and all highly
liquid debt instruments, with original maturities of 90 days or less
when purchased, as cash and cash equivalents. Marketable securities are
cash investments, primarily U.S. Government securities, with original
maturities exceeding 90 days at time of purchase.
The Company classifies marketable securities as "Available for
Sale" which are carried at fair value, with any unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity, net-of-taxes. (See Note 9.)
F-7
<PAGE> 35
d. Merchandise Inventories - Merchandise inventories are stated
on the following methods:
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
Lower of cost (first-in,
first-out) or market as
determined by the retail
inventory method (stores) $ 73,993,000 $ 76,902,000
Lower of cost (first-in,
first-out) or market
(distribution centers) 26,449,000 32,996,000
------------ ------------
$100,442,000 $109,898,000
============ ============
</TABLE>
The Company includes as inventoriable costs, certain indirect
costs, principally purchasing, warehousing and distribution costs,
which are necessary to bring inventory to the point of sale. At
February 1, 1997 total indirect costs included as part of inventory
were approximately $8,750,000. At February 3, 1996, indirect costs
included as part of inventory were approximately $9,600,000.
e. Property and Equipment - Property and equipment are stated at
cost. Depreciation and amortization are computed principally by the
straight-line method by charges to earnings in amounts sufficient to
write-off the cost of depreciable assets over their estimated lives, or
where applicable, the terms of the respective leases, whichever is
shorter. During Fiscal 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The
adoption of SFAS 121 resulted in a $370,000 provision for Fiscal 1996.
f. Preopening Costs - Preopening costs are capitalized and
amortized over a period of 12 months from the date operations commence.
g. Income Taxes - The Company uses the asset and liability method
for financial accounting and reporting for income taxes. A valuation
allowance is established, when necessary, to reduce the deferred tax
assets to their estimated realizable amounts. (See Note 6.)
F-8
<PAGE> 36
h. Net Income Per Share - Net income per share data were computed
by dividing net income less dividend requirements on the Convertible
Preferred Stock by the weighted average number of common shares and
common share equivalents outstanding during each period. Common share
equivalents include outstanding stock options. The Company's 5%
Convertible Subordinated Debentures issued in September 1991 did not
qualify as a common stock equivalent at the time of issue and are not
included in the calculation of primary net income per share. The 5.05%
Convertible Preferred Stock issued in April 1996, also did not qualify
as a common stock equivalent at the time of issue and are not included
in the calculation of primary net income per share. For the purpose of
computing fully diluted net income per share, the assumed conversion of
the debentures and the preferred stock would have an anti-dilutive
effect on Fiscal 1996 and the assumed conversion of the debentures
would have an anti-dilutive effect on Fiscal 1995 and 1994 net income
per share.
The number of shares used in computing net income per share
was determined as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Weighted average common
shares outstanding 17,155,000 17,147,000 16,898,000
Common share equivalents -- 141,000 197,000
---------- ---------- ----------
17,155,000 17,288,000 17,095,000
========== ========== ==========
</TABLE>
i. Fair Value of Financial Instruments - SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," requires
disclosure of the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the consolidated balance
sheet of the Company, for which it is practicable to estimate fair
value. The estimated fair values of financial instruments which are
presented herein have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of amounts the Company could
realize in a current market exchange.
F-9
<PAGE> 37
The fair value of the Company's cash and cash equivalents,
accounts receivable and accounts payable approximate their carrying
values at February 1, 1997 and February 3, 1996, due to the short term
maturities of these investments. The fair value of the Company's
long-term debt at February 1, 1997 and February 3, 1996 was $41,762,500
and $61,380,000, respectively. The carrying value of long-term debt at
February 1, 1997 and February 3, 1996 was $58,853,000 and $78,038,000,
respectively. The fair value of the Company's long-term debt is based
on market prices or dealer quotes (for publicly traded debentures) and
on discounted future cash flows using current interest rates for
financial instruments with similar characteristics and maturity (for
senior notes).
j. Recent Accounting Pronouncements - In February 1997, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending
after December 15, 1997, and changes the method in which net income
per share will be determined. Adoption of this statement by the
Company will not have a material impact on net income per share.
k. Use of Estimates - The Company utilizes estimates and
assumptions in the preparation of financial statements in conformity
with generally accepted accounting principles. These estimates and
assumptions affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. The estimates and assumptions also affect the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
l. Reclassifications - Certain reclassifications have been made
to the financial statements of prior years to conform with the
classifications used for Fiscal 1996.
2. RESTRUCTURING CHARGE
During the second quarter of Fiscal 1994, the Company recorded a pretax
restructuring charge of $11,000,000 (approximately $6,500,000 after
tax, or $0.38 per share) related to its plan to close 10 unprofitable
stores and discontinue various unprofitable merchandise lines. The plan
called for the termination of the employment of approximately 19
associates from store operations, the service office and distribution
centers. This restructuring was completed in Fiscal 1995 and excess
reserves of $217,000 were credited to operating income in Fiscal 1995.
F-10
<PAGE> 38
3. SHAREHOLDERS' EQUITY
a. CONVERTIBLE PREFERRED STOCK - On April 5, 1996, the Company issued
149,999 shares of Series A Convertible Preferred Stock, $100 par value
("Series A Preferred Stock") and 50,001 shares of Series B Convertible
Preferred Stock, $100 par value ("Series B Preferred Stock") at par
value. Said shares of Convertible Preferred Stock were sold to
Prudential Private Equity Investors III, L.P. for $20,000,000. The
proceeds from the sale of the Series A and Series B Preferred Stock
were used to prepay $15,000,000 of the 9.53% Senior Notes due 2001 and
$2,625,000 of the 10.5% Senior Notes due 1998. The balance of the
proceeds were used for general corporate purposes. Expenses of the
private placement were charged to Additional Paid-in Capital. Series A
Preferred Stock and Series B Preferred Stock are convertible to Common
Stock at a conversion price of $6.25 per share. Series A Preferred
Stock is convertible to 2,399,984 shares of common stock and has voting
rights equivalent to that number of common shares. Series B Preferred
Stock is convertible to 800,016 of shares of common stock but has no
voting rights. Both Series A Preferred Stock and Series B Preferred
Stock receive a dividend of 5.05% payable annually. Series A Preferred
Stock and Series B Preferred Stock did not qualify as common stock
equivalents at the time of issue.
Robert Knox, a Director of the Company, is a limited partner in
Prudential Private Equity Investors III, L.P.
b. STOCK OPTIONS - In October 1995, SFAS No. 123, "Accounting for
Stock-Based Compensation," was issued and is effective for financial
statements for fiscal years beginning after December 1995. As permitted
by this statement, the Company will continue to measure compensation
cost for stock option plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting For Stock Issued to Employees."
Accordingly, no compensation cost has been recognized for the Company's
stock option plan.
If compensation cost for stock options had been determined based on
fair values at the grant dates, net income available to common
shareholders and net income per share would have been reduced to the
pro forma amounts below, for the fiscal years ended February 1, 1997
and February 3, 1996.
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
---------- ----------
<S> <C> <C>
Net income available to common
shareholders:
As reported $ 2,501,000 $ 4,503,000
Pro-forma $ 2,079,000 $ 4,478,000
Net income per share:
As reported $ 0.15 $ 0.26
Pro-forma $ 0.12 $ 0.26
</TABLE>
The pro forma effect of applying FAS 123 is not necessarily indicative
of the effect on reported net income for future years.
F-11
<PAGE> 39
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following assumptions
were used during the respective years to estimate the fair value of
options granted:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 68% 51%
Risk-free interest rate 6.3% 6.0%
Expected life of options 6 years 6 years
</TABLE>
Options granted under the Company's 1989 Incentive and Non-Qualified
Stock Option Plan are granted at market value on the date of grant and
are exercisable at a rate of 20% per year over a five-year period
commencing with the date of grant and expire in 10 years.
In June 1989, the Company granted to a consultant a non-qualified
option to purchase 120,302 shares of the Company's common stock at a
price of $6.65 per share, which reflected the fair market value on the
date of grant. The option is exercisable in annual installments over a
period of four years.
Changes in stock options were as follows:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
------------------------------- -------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Beginning balance 940,320 $ 5.80 908,620 $ 13.51
Granted 283,990 5.12 1,135,650 8.04
Exercised 0 0 (36,440) 9.62
Canceled (114,990) 8.34 (1,067,510) 14.62
--------- ----------- ---------- -----------
Ending balance 1,109,320 $ 5.36 940,320 $ 5.80
========= =========== ========== ===========
Reserved for future grant
at year end 405,590 574,590
Exercisable 213,730 $ 6.60 136,560 $ 9.48
Weighted average fair
value of options granted
during the year $ 3.41 $ 4.50
</TABLE>
F-12
<PAGE> 40
The following table summarizes information concerning stock options
outstanding at February 1, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Weighted Average Number
Outstanding at Remaining Weighted Exercisable at Weighted
Number Range of February 1, Contractual Average February 1, Average
Exercise Prices 1997 Life in Years Exercise Price 1997 Exercise Price
--------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.25 to $ 5.00 730,350 9.0 $ 4.99 99,630 $ 5.00
5.01 to 8.50 344,220 8.2 5.61 80,720 6.97
10.00 to 14.50 34,250 2.8 10.52 32,980 10.39
20.50 500 5.4 20.50 400 20.50
--------- -------
$ 4.25 to $ 20.50 1,109,320 213,730
========= =======
</TABLE>
4. LONG-TERM DEBT
Long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
Senior Notes, 10.5% due 1998 (a) $ -- $ 5,250,000
Senior Notes, 9.53% due 2001 (a) -- 15,000,000
Convertible Subordinated
Debentures, 5% due 2001 (b) 58,853,000 57,788,000
----------- -----------
Total 58,853,000 78,038,000
Less current portion (c) 0 3,000,000
----------- -----------
$58,853,000 $75,038,000
=========== ===========
</TABLE>
(a) During Fiscal Year 1996, the Company retired both series of Senior
Notes Payable. Senior Notes (the "1988 Notes") were due September 1,
1998. Interest on the 1988 Notes was payable semiannually on March 1
and September 1 of each year. Beginning September 1, 1994, and each
year thereafter until the 1988 Notes were paid in full, the Company was
required to repay $3,000,000 of the principal amount of the 1988 Notes.
The 9.53% Senior Notes (the "1991 Notes") were due May 1, 2001.
Interest on the 1991 Notes was payable semiannually on May 1 and
November 1 of each year. Beginning May 1, 1997, and each year
thereafter until the 1991 Notes were paid in full, the Company was
required to repay $3,000,000 of the principal amount of the 1991 Notes.
The Company was able to prepay the 1988 Notes and the 1991 Notes
(collectively, the "Notes") at any time, in whole or in part, at a
price equal to the greater of par or the present value of the future
debt service on the Notes, discounted at 1/2% above the then current
yield on U.S. Treasury securities of a maturity comparable to the
remaining weighted average life of the Notes. The provisions of the
note agreements included a requirement that the Company maintain a
current ratio of at least 1.5 to 1 and limitations on liens, sale and
leaseback transactions, funded debt, payment of dividends,
acquisitions, investments, sales of assets and incurrence of leases.
F-13
<PAGE> 41
(b) The 5% Convertible Subordinated Debentures (the "Debentures") were
issued in 1991 with a yield to maturity of approximately 7.47%. At
February 1, 1997 and February 3, 1996, the unamortized original issue
discount was $6,147,000 and $7,212,000, respectively. The Debentures
are convertible into Common Stock of the Company prior to maturity at a
conversion of 32.79 shares per $1,000 principal amount at maturity.
Amounts charged to income for the amortization of debenture discount
were $1,066,000 and $1,011,000 for Fiscal 1996 and Fiscal 1995,
respectively.
The Debentures have not been and will not be registered under the
United States Securities Act of 1933.
(c) The long term debt at February 1, 1997 of $58,853,000 is due in the
fiscal year 2001.
5. LINE OF CREDIT
At February 1, 1997, the Company had an unused $40,000,000 unsecured
Credit Agreement (the "Credit Agreement") with a group of banks. This
agreement was amended and restated on May 23, 1996. The Credit
Agreement includes a sub-allocation of $30,000,000 for letters of
credit. Borrowings under the Credit Agreement bear a base rate interest
of either (1) the higher of the prime rate and the sum of the Federal
Fund Rate plus 1/2%; or (2) an Adjusted Eurodollar Rate based on
LIBOR. The Credit Agreement requires maintenance of certain earnings
and fixed charge coverage ratios, and the interest rate payable is
adjusted by from 1.4% to 2.5% over the above base rate depending on the
ratio of consolidated indebtedness to pre-tax cash earnings. The Credit
Agreement expires May 22, 1998. At the end of Fiscal 1996 and Fiscal
1995, there were no borrowings outstanding under the Company's Credit
Agreement.
At February 1, 1997 and February 3, 1996, the Company was liable for
outstanding letters of credit in the amount of approximately $9,219,000
and $8,886,000, respectively.
F-14
<PAGE> 42
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Federal:
Current $ 1,448,000 $ 832,000 $ 677,000
Deferred (625,000) 1,505,000 936,000
----------- ---------- ----------
823,000 2,337,000 1,613,000
----------- ---------- ----------
State:
Current 625,000 630,000 262,000
Deferred (248,000) 179,000 461,000
----------- ---------- ----------
377,000 809,000 723,000
----------- ---------- ----------
$ 1,200,000 $3,146,000 $2,336,000
=========== ========== ==========
</TABLE>
A reconciliation of the statutory Federal income tax rate with the
effective rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Statutory Federal income
tax rate 34.0% 34.0% 34.0%
State income taxes, net of
Federal benefit 5.5 7.0 8.4
Reversal of prior year
residual estimated liabilities (12.4) -- --
Other (0.7) 0.1 (1.4)
---- ---- ----
Effective income tax rate 26.4% 41.1% 41.0%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and amounts used for income tax purposes.
F-15
<PAGE> 43
The components of the non-current deferred tax liability (asset) are as
follows:
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
------------ ------------
<S> <C> <C>
Accelerated tax depreciation $ 18,281,000 $ 18,085,000
Reserve not currently
deductible (539,000) (737,000)
AMT credit carryovers (1,288,000) --
------------ ------------
$ 16,454,000 $ 17,348,000
============ ============
</TABLE>
The Company files consolidated Federal and state income tax returns.
Deferred income tax expense during Fiscal 1996, 1995 and 1994
principally resulted from the use of accelerated methods of
depreciation for tax purposes over the straight-line method used for
financial reporting purposes.
7. LEASES
At February 1, 1997, the Company leased all of its stores and two
facilities for its corporate office, warehouse and distribution
operations. These operating leases expire on varying dates to 2008.
At February 1, 1997, aggregate minimum rentals in future periods are as
follows:
<TABLE>
<CAPTION>
Minimum
Fiscal Rental
Year Commitment
------ -----------
<S> <C>
1997 $49,919,000
1998 $46,645,000
1999 $41,319,000
2000 $36,735,000
2001 $32,537,000
Thereafter $97,033,000
</TABLE>
The preceding does not include contingent rentals which may be payable
under certain leases on the basis of percentage of sales in excess of
stipulated amounts. The amounts of such additional rentals incurred
were as follows:
<TABLE>
<CAPTION>
Fiscal
Year Amount
------ ------
<S> <C>
1996 $2,320,000
1995 $1,913,000
1994 $1,708,000
</TABLE>
F-16
<PAGE> 44
Total rent expense was as follows:
<TABLE>
<CAPTION>
Fiscal
Year Amount
------ ------
<S> <C>
1996 $52,729,000
1995 $50,712,000
1994 $45,014,000
</TABLE>
8. EMPLOYEE BENEFIT PLANS AND OTHER COMMITMENTS
Pursuant to collective bargaining agreements, the Company is obligated
to make contributions to union-administered health and welfare,
retirement and severance funds which provide benefits for the Company's
union-represented associates. Payments under these agreements amounted
to approximately $994,000, $1,070,000 and $1,037,000 in Fiscal 1996,
Fiscal 1995 and Fiscal 1994, respectively.
In January 1994, the Company adopted a voluntary 401(k) savings plan.
The Company matches 25% of each associate's contribution, up to a
maximum of 5% of salary. This match is paid in Company common stock
purchased by the Trustee on the open market. Approximately $154,000,
$181,000 and $176,000 were charged to expense in Fiscal 1996, Fiscal
1995 and Fiscal 1994, respectively.
The Company has a Deferred Compensation Plan covering certain key
executives which provides that, at retirement, these associates will
receive for a 10-year period an annual predetermined benefit, the
amount of which is dependent upon their retirement age. The maximum
amount that the associate may receive is being accrued for financial
reporting purposes over the employment period. Approximately $129,000,
$134,000 and $71,000 were charged to expense in Fiscal 1996, Fiscal
1995 and Fiscal 1994, respectively.
The Company has entered into consulting agreements with certain senior
executives whereby, at retirement, these associates will provide
consulting and advisory services for a 10-year period. The maximum
aggregate amount payable under these agreements is $400,000 per year.
F-17
<PAGE> 45
9. AVAILABLE FOR SALE SECURITIES
The following is a summary of the available for sale securities which
comprise the balance in "marketable securities" at February 1, 1997 and
February 3, 1996:
<TABLE>
<CAPTION>
Gross Gross
February 1, Unrealized Unrealized Estimated
1997 Cost Gains Losses Fair Value
------------------- ------ ----- ------ ----------
<S> <C> <C> <C> <C>
Government Bonds $50,300,000 $ -- $(58,000) $50,242,000
Municipal Bonds 3,834,000 8,000 -- 3,842,000
----------- ------- -------- -----------
Total available for
sale securities $54,134,000 $ 8,000 $(58,000) $54,084,000
=========== ======= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
February 3, Unrealized Unrealized Estimated
1996 Cost Gains Losses Fair Value
------------------- ------ ----- ------ ----------
<S> <C> <C> <C> <C>
Government Bonds $35,489,000 $60,000 $ (2,000) $35,547,000
Municipal Bonds 2,053,000 6,000 -- 2,059,000
----------- ------- -------- -----------
Total available for
sale securities $37,542,000 $66,000 $ (2,000) $37,606,000
=========== ======= ======== ===========
</TABLE>
The cost and estimated fair value of debt securities at February 1,
1997 by contractual maturity are as follows:
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
------ ----------
<S> <C> <C>
1997 $35,642,000 $35,625,000
1998 14,658,000 14,617,000
1999 3,834,000 3,842,000
----------- -----------
Total available for
sale securities $54,134,000 $54,084,000
=========== ===========
</TABLE>
Net gains from the sales of available for sale securities are reported
on the consolidated statement of income as "Loss (Gain) on Sale of
Government Securities". The components of "Loss (Gain) on Sales of
Government Securities" for Fiscal 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Gross Gross Loss (Gain)
Fiscal Realized Realized on Sale of
Year Gains Losses Government Securities
------ ----- ------ ---------------------
<S> <C> <C> <C>
1996 $ (9,000) $ 28,000 $ 19,000
1995 $(114,000) $ 88,000 $ (26,000)
1994 $ (16,000) $137,000 $ 121,000
</TABLE>
F-18
<PAGE> 46
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal Quarter Ended
-----------------------------------------------------------------------
May 4, August 3, November 2, February 1,
1996 1996 1996 1997
------ --------- ----------- -----------
(Amounts in thousands except share and per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 84,992 $ 92,727 $ 98,495 $ 165,029
Gross profit 20,614 21,878 25,317 51,324
Income (loss) before income
tax provision (5,977) (4,793) (2,653) 17,966
Net income (loss) (3,526) (2,828) (1,565) 11,262
Net income (loss) per share (a) (b) (d) $ (0.21) $ (0.18) $ (0.11) $ 0.64
Number of shares used in computing
net income (loss) per share 17,155,000 17,155,000 17,155,000 17,155,000
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarter Ended
-----------------------------------------------------------------------
April 29, July 29, October 28, February 3,
1995 1995 1995 1996
-------- --------- ----------- -----------
(Amounts in thousands except share and per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 80,316 $ 88,671 $ 95,148 $ 167,913
Gross profit 20,240 22,745 24,850 54,050
Restructuring expense -- -- -- (217)
Income (loss) before income
tax provision (3,973) (3,163) (1,559) 16,344
Net income (loss) (2,344) (1,866) (921) 9,634
Net income (loss) per share (a) (c) (d) $ (0.13) $ (0.11) $ (0.05) $ 0.56
Number of shares used in computing
net income (loss) per share 17,416,000 17,333,000 17,238,000 17,183,000
</TABLE>
(a) Net (loss) income per share is calculated based on net (loss)
income less the dividend requirement of the Convertible
Preferred Stock.
(b) Fully diluted net income per share, assuming conversion of the
Company's 5% Convertible Subordinated Debentures and
elimination of the related interest costs less applicable
income taxes and assuming conversion of the 5.05% Convertible
Preferred Stock and elimination of the related dividend was
$0.54 for the thirteen weeks ended February 1, 1997 on
weighted average shares outstanding of 22,487,000.
(c) Fully diluted net income per share, assuming conversion of the
Company's 5% Convertible Subordinate Debentures and
elimination of the related interest costs less applicable
income taxes was $0.53 per share for the fourteen weeks ended
February 3, 1996 on weighted average shares outstanding of
19,314,000.
(d) Difference of $0.01 between full year income per share and the
resulting income per share from the sum of each of the
quarters in Fiscal 1996 is due to rounding and Fiscal 1995 is
due to the weighted average share calculation and the
seasonality of the business.
F-19
<PAGE> 47
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 File No. 33-29465
(the "Registration Statement")).
3.2 By-laws of the Company (Incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1 File No. 33-40372).
4.1 Preferred Stock Purchase Agreement dated April 5, 1996.*
4.2 Indenture, dated as of September 27, 1991, between the Company
and Chemical Bank, as Trustee. (Incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the year ended January 25, 1992).
10.1 1989 Stock Option Plan and form of Agreement pursuant to 1989
Stock Option Plan. (Incorporated herein by reference to
Exhibit 10.3 to the Registration Statement).
10.2 Amended and Restated Revolving Credit Agreement as of May 24,
1996. (Incorporated herein by reference to the Company's Form
10-Q, for the period ended May 4, 1996).
10.3 Form of Deferred Compensation Agreement (Incorporated herein
by reference to Exhibit 10.5 to the Registration Statement).
10.4 Amendment No. 1 to Deferred Compensation Agreement, dated June
16, 1989. (Incorporated herein by reference to Exhibit 10.5.2
to Amendment No. 1 to the Registration Statement).
10.5 Amendment No. 2 to Deferred Compensation Agreement, dated
August 15, 1989. (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
January 26, 1991).
10.6 Amendment No. 3 to Deferred Compensation Agreement, dated June
15, 1995. (Incorporated herein by reference to the Company's
Form 10-Q for the period ended July 29, 1995.)
10.7 Amendment No. 4 to Deferred Compensation Agreement between the
Company and Donald Jonas dated April 8, 1996. (Incorporated
herein by reference to the Company's Annual Report on Form
10-K for the year ended February 3, 1996.)
10.8 Form of Consulting Agreement (Incorporated herein by reference
to Exhibit 10.9.1 to the Registration Statement).
10.9 Forms of Amendment of Consulting Agreement (Incorporated
herein by reference to Exhibit 10.9.2 to Amendment No. 1 to
the Registration Statement).
10.10 Agreement between the Company and Local 99, UNITE to a
collective bargaining agreement covering warehouse employees
dated March 16, 1996.*
10.11 Lease for distribution Center space (Incorporated herein by
reference to Exhibit 1 to the Company's Current Report on Form
8-K, dated January 2, 1992).
10.12 Lease for Distribution Center space. (Incorporated herein by
reference to Exhibit 1 to the Company's Form 10-Q, for the
period ended July 25, 1992).
21 Subsidiaries of the Company. (Incorporated herein by reference
to the Company's Annual Report on Form 10-K for the year ended
February 3, 1996.)
23 Consent of Deloitte & Touche LLP.*
24 Powers of Attorney dated April 10, 1997.*
*Filed herewith.
<PAGE> 1
LECHTERS, INC.
PREFERRED STOCK PURCHASE AGREEMENT
DATED AS OF APRIL 5, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I
DEFINITIONS...............................................................................................1
1.1 Definitions; Interpretation...............................................................................1
ARTICLE II
ISSUANCE AND SALE OF PREFERRED STOCK......................................................................5
2.1 Number of Shares and Price................................................................................5
ARTICLE III
CLOSING; CLOSING DELIVERIES...............................................................................5
3.1 Closing...................................................................................................5
3.2 Payment for and Delivery of Purchased Shares..............................................................6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................................................6
4.1 Existence; Qualification; Subsidiaries....................................................................6
4.2 Authorization and Enforceability; Issuance of Shares......................................................6
4.3 Capitalization............................................................................................7
4.4 Private Sale; Voting Agreements...........................................................................7
4.5 Financial Statements; Disclosure..........................................................................8
4.6 Absence of Certain Changes................................................................................9
4.7 Litigation...............................................................................................10
4.8 Licenses, Compliance with Law, Other Agreements, Etc.....................................................10
4.9 Third-Party Approvals....................................................................................10
4.10 No Undisclosed Liabilities...............................................................................11
4.11 Tangible Assets..........................................................................................11
4.12 Inventory................................................................................................11
4.13 Owned Real Property......................................................................................11
4.14 Real Property Leases.....................................................................................11
4.15 Agreements...............................................................................................11
4.16 Intellectual Property....................................................................................12
4.17 Employees................................................................................................12
4.18 ERISA; Employee Benefits.................................................................................12
4.19 Environment, Health and Safety...........................................................................13
4.20 Transactions With Affiliates.............................................................................13
4.21 Taxes....................................................................................................13
4.22 Other Investors..........................................................................................14
</TABLE>
(ii)
<PAGE> 3
<TABLE>
ARTICLE V
<S> <C>
REPRESENTATIONS AND WARRANTIES OF PPEI...................................................................14
5.1 Authorization and Enforceability.........................................................................14
5.2 Government Approvals.....................................................................................14
ARTICLE VI
COMPLIANCE WITH SECURITIES LAWS..........................................................................15
6.1 Investment Intent of Purchaser...........................................................................15
6.2 Status of Purchased Shares...............................................................................15
6.3 Sophistication and Financial Condition of Purchaser......................................................15
6.4 Opportunity for Review of Company Information............................................................15
6.5 Transfer of Preferred Shares and Conversion Shares.......................................................15
ARTICLE VII
CONDITIONS PRECEDENT.....................................................................................16
7.1 Closing Deliveries to Purchaser..........................................................................16
7.2 Closing Deliveries to the Company........................................................................17
ARTICLE VIII
COVENANTS OF THE COMPANY.................................................................................17
8.1 Restricted Actions.......................................................................................17
8.2 Required Actions.........................................................................................18
8.3 Reservation of Series A Preferred and Common Stock.......................................................19
ARTICLE IX
SURVIVAL.................................................................................................20
9.1 Survival.................................................................................................20
ARTICLE X
GENERAL PROVISIONS.......................................................................................20
10.1 Successors and Assigns...................................................................................20
10.2 Entire Agreement.........................................................................................20
10.3 Notices..................................................................................................20
10.4 Purchasers Fees and Expenses.............................................................................21
10.5 Amendment and Waiver.....................................................................................21
10.6 Counterparts.............................................................................................22
10.7 Headings.................................................................................................22
10.8 Specific Performance.....................................................................................22
10.9 Remedies Cumulative......................................................................................22
10.10 GOVERNING LAW.............................................................................................22
</TABLE>
(iii)
<PAGE> 4
TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C>
10.11 No Third Party Beneficiaries..............................................................................22
10.12 Severability..............................................................................................22
</TABLE>
Exhibit A Amendment to the Restated Certificate of Incorporation
Exhibit B Financial Statements (Incorporated herein by reference to the
Company's Form 10-Q, for the period ended May 4, 1996).
Exhibit C Registration Rights Agreement
Exhibit D Opinion of Counsel
(iv)
<PAGE> 5
PREFERRED STOCK PURCHASE AGREEMENT
PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT") dated as of April
5, 1996 between Lechters, Inc., a New Jersey corporation (the "COMPANY") and
Prudential Private Equity Investors III, L.P., a Delaware limited partnership
("PPEI" or the "PURCHASER").
The Purchaser desires to purchase from the Company, and the Company
desires to issue to the Purchaser, shares of Series A Convertible Preferred
Stock $100 par value of the Company (the "SERIES A PREFERRED") and Series B
Convertible Preferred Stock $100 par value of the Company (the "SERIES B
PREFERRED").
In consideration of the mutual promises, representations, warranties,
covenants and conditions set forth in this Agreement, the parties hereto agree
as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS; INTERPRETATION.
(a) For purposes of this Agreement, the following terms have
the indicated meanings:
"AFFILIATE" of a person means any other person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with such person.
"CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF
INCORPORATION" means the Certificate of Amendment to the Restated Certificate of
Incorporation designating the rights and preferences of the Series A Preferred
and Series B Preferred adopted by the Board of Directors of the Company and set
forth as EXHIBIT A hereto.
"CLOSING" has the meaning set forth in Section 3.1.
"CLOSING DATE" has the meaning set forth in Section 3.1.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON STOCK" means the common stock of the Company having no
par value.
"COMPANY" has the meaning set forth in the recitals hereof.
<PAGE> 6
"CONFIDENTIAL INFORMATION" means any information concerning
the Company's business other than information that (i) was already known to the
Person having a duty to keep confidential such information on a nonconfidential
basis prior to the time of disclosure, (ii) is or becomes generally available to
the public through no act or omission of such Person or (iii) becomes available
to such Person on a nonconfidential basis from a source other than any party
hereto (or any agent or representative thereof) if such source was not under a
prohibition against disclosing the information to such Person.
"CONVERSION SHARES" means shares of Common Stock issued or
issuable upon conversion of Preferred Shares.
"CURRENT BALANCE SHEET" means the unaudited balance sheet of
the Company dated October 28, 1995.
"ENVIRONMENTAL AND SAFETY REQUIREMENTS" means all federal,
state, local and foreign statutes, regulations, ordinances and other provisions
having the force or effect of law, all judicial and administrative orders and
determinations, all contractual obligations and all common law concerning public
health and safety, worker health and safety, and pollution or protection of the
environment, including without limitation all those relating to the presence,
use, production, generation, handling, transportation, treatment, storage,
disposal, distribution, labeling, testing, processing, discharge, release,
threatened release, control, or cleanup of any hazardous materials, substances
or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or by-products, asbestos,
polychlorinated biphenyls, noise or radiation.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FINANCIAL STATEMENTS" means the unaudited balance sheets of
the Company for the quarterly periods ended April 29, 1995, July 29, 1995,
October 28, 1995, each as included in a quarterly report of the Company on Form
10-Q as filed with the SEC pursuant to the Exchange Act and the audited balance
sheet of the Company dated January 28, 1995 as included in the Company's annual
report on Form 10-K as filed with the SEC pursuant to the Exchange Act and the
related unaudited and audited, as applicable, statements of income and
consolidated cash flow for the quarterly and fiscal year-to-date periods then
ended, each as included in the Company's applicable quarterly report or annual
report on Form 10-Q and Form 10-K, as applicable, as filed with the SEC pursuant
to the Exchange Act, all of which are attached as EXHIBIT B hereto.
"GAAP" means United States generally accepted accounting
principles as in effect from time to time, consistently applied.
2
<PAGE> 7
"GOVERNMENTAL AGENCY" means any federal, state, local, foreign
or other governmental agency, instrumentality, commission, authority, board or
body.
"INCLUDES" and "INCLUDING" mean includes and including,
without limitation.
"INTELLECTUAL PROPERTY" means all patents, patent applications
and inventions; all trademarks, service marks, trade dress, trade names and
corporate names and all goodwill associated therewith; all copyrights; all
registrations, applications and renewals for any of the foregoing; all trade
secrets, Confidential Information, know-how, technical and computer data,
documentation and software, financial, business and marketing plans, customer
and supplier lists and all other intellectual property rights; and all copies
and tangible embodiments of the foregoing.
"IRS" means the Internal Revenue Service.
"KNOWLEDGE" or "KNOW" when used with respect to the Company
means the knowledge of the senior management of the Company, or any other
management personnel that has had significant involvement in the business and
affairs of the Company.
"LIABILITY" means any liability or obligation (whether
absolute or contingent, liquidated or unliquidated or due or to become due).
"LIEN" means any lien, mortgage, pledge, security interest,
restriction, charge or other encumbrance.
"MATERIAL ADVERSE CHANGE" means any material adverse change in
the business, condition (financial or otherwise), prospects or results of
operations of the Company and its Subsidiaries taken as a whole.
"MATERIAL ADVERSE EFFECT" means any material adverse effect on
(i) the business, condition (financial or otherwise), prospects or results of
operations of the Company and its Subsidiaries taken as a whole, or (ii) the
transactions contemplated hereby or by the Related Documents.
"ORDINARY COURSE OF BUSINESS" means the ordinary course of
business consistent with past practice (including with respect to quantity,
quality and frequency).
"PERMITTED LIENS" means (i) liens for taxes not yet due and
taxes for which adequate provision is made in the Current Balance Sheet, (ii)
purchase money security interests in supplies and equipment, (iii) precautionary
liens filed by lessors with respect to leased equipment and (iv) encumbrances
which are not substantial in amount, do not materially detract from the value of
the
3
<PAGE> 8
property subject thereto and do not materially impair the use of the
property subject thereto or the operation of the Company's business.
"PERSON" means any individual, partnership, joint venture,
corporation, trust, unincorporated organization or other entity.
"PLAN" means any employee benefit plan (as defined in Section
3(3) of ERISA), subject to Title IV of ERISA or the minimum funding requirements
of Section 412 of the Code, maintained or contributed to by the Company at any
time during the 5-calendar years immediately preceding the date of this
Agreement.
"PPEI" has the meaning set forth in the recitals hereof.
"PREFERRED SHARES" means the Purchased Shares and shares of
Series A Preferred issuable upon conversion of the Purchased Shares that are
Series B Preferred.
"PURCHASED SHARES" has the meaning set forth in Section 2.1.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement between the Company and PPEI in the form of EXHIBIT C hereto.
"RELATED DOCUMENTS" means all documents and instruments to be
executed or adopted by the Company in connection herewith, including the
Certificate of Amendment to the Restated Certificate of Incorporation, the
Purchased Shares and the Registration Rights Agreement.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERIES A PREFERRED" has the meaning set forth in the recitals
hereof.
"SERIES B PREFERRED" has the meaning set forth in the recitals
hereof.
"SUBSIDIARY" means any corporation, partnership, association or
other business entity of which (i) if a corporation, a majority of the total
voting power of shares of stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by the
Company or (ii) if a partnership, association or other business entity, a
majority of the partnership or other similar ownership interest thereof is at
the time owned or controlled, directly or indirectly, by the Company. For
purposes hereof, the Company shall be deemed to have a majority ownership
interest in a partnership, association or other business entity if the Company,
directly or indirectly, is allocated
4
<PAGE> 9
a majority of partnership, association or other business entity gains or losses,
or is or controls the managing director or general partner of such partnership,
association or other business entity.
"TAX" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code
Section 59A), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
"TAX RETURNS" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"TAXES" means all taxes, charges, fees, levies or other
assessments, including all net income, gross income, gross receipts, sales, use,
ad valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, estimated, severance, stamp, occupation, property or other
taxes, customs duties, fees, assessments or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any Governmental Agency.
(b) The words "HEREIN", "HEREOF" and "HEREUNDER" refer to this
Agreement as a whole and not to any particular article, section or other
subdivision of this Agreement.
ARTICLE II
ISSUANCE AND SALE OF PREFERRED STOCK
2.1 NUMBER OF SHARES AND PRICE. On the terms and subject to the
conditions of this Agreement, at the Closing, the Company shall issue to PPEI,
149,999 shares of Series A Preferred and 50,001 shares of Series B Preferred for
a price per share of $100.00 (collectively, the "PURCHASED SHARES").
ARTICLE III
CLOSING; CLOSING DELIVERIES
3.1 CLOSING. The closing of the transactions contemplated hereby
(the "CLOSING") shall take place at 11:00 a.m. on April 5, 1996, at the offices
of Kirkland & Ellis, New York, New
5
<PAGE> 10
York or at such other time, place and/or date as shall be agreed upon by the
parties hereto. The date upon which the Closing occurs is referred to herein as
the "CLOSING DATE".
3.2 PAYMENT FOR AND DELIVERY OF PURCHASED SHARES. At the Closing,
the Company shall issue and deliver to PPEI, stock certificates for the
Purchased Shares duly registered in the name of PPEI, against payment by PPEI,
by wire transfer of immediately-available funds to the account designated by the
Company, of $20,000,000 as the aggregate purchase price therefor.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each Purchaser as
follows:
4.1 EXISTENCE; QUALIFICATION; SUBSIDIARIES. The Company and each
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation and has full corporate
power and authority to conduct its business and own and operate its properties
as now conducted, owned and operated. The copies of the Restated Certificate of
Incorporation and By-Laws of the Company and all amendments thereto previously
delivered to PPEI are true, correct and complete copies of such documents. The
Company and each Subsidiary is licensed or qualified as a foreign corporation
and is in good standing in all jurisdictions where such person is required to be
so licensed or qualified, except where the failure to be so licensed, qualified
or in good standing would not have a Material Adverse Effect. Except as set
forth on SCHEDULE 4.1, the Company has no Subsidiaries and owns no capital stock
or other securities of, and has not made any other investment in, any other
entity. All of the issued shares of capital stock of each Subsidiary have been
duly and validly authorized and issued, are fully paid and non-assessable and
are owned directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or adverse claims.
4.2 AUTHORIZATION AND ENFORCEABILITY; ISSUANCE OF SHARES.
(a) The Company has full power and authority and has taken all
required corporate and other action necessary to permit it to execute
and deliver this Agreement and the
Related Documents and to carry out the terms hereof and thereof and to
issue and deliver the Preferred Shares and the Conversion Shares
(including adoption of the Certificate of Amendment to the Restated
Certificate of Incorporation), and none of such actions will violate any
provision of the Restated Certificate of Incorporation of the Company,
the ByLaws of the Company or of any applicable law, regulation, order,
judgment or decree, or result in the breach of or constitute a default
(or an event which, with notice or lapse of time or both would
constitute a default) under any material agreement, instrument or
understanding to which the Company
6
<PAGE> 11
is a party or by which it is bound or by which it will become bound as
a result of the transaction contemplated by this Agreement. This
Agreement and each of the Related Documents constitutes a legal, valid
and binding obligation of the Company, enforceable against the Company
in accordance with its terms, except to the extent limited by (i)
applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws of general application related to the enforcement of
creditor's rights generally and (ii) general principles of equity.
(b) The Purchased Shares have been duly authorized and, when
issued and delivered in accordance with this Agreement, will be validly
issued and outstanding. The Purchased Shares and, when issued, the
Preferred Shares other than the Purchased Shares and the Conversion
Shares, will be fully paid and nonassessable. The Preferred Shares other
than the Purchased Shares, and the Conversion Shares have been duly
reserved for issuance upon conversion of the Purchased Shares and the
Preferred Shares other than the Purchased Shares and, when so issued,
will be duly authorized, validly issued and outstanding, fully paid and
nonassessable shares of Series A Preferred or Common Stock, as the case
may be. Neither the issuance and delivery of the Purchased Shares nor
the issuance and delivery of any Preferred Shares or Conversion Shares
upon conversion of any Preferred Shares is subject to any preemptive
right of any stockholder of the Company or to any right of first
refusal or other similar right in favor of any Person which has not
been waived.
4.3 CAPITALIZATION. As of the Closing, the authorized capital
stock of the Company shall consist of (i) 50,000,000 shares of Common Stock,
without par value, of which 17,155,086 shares are outstanding, 3,200,000 shares
are reserved for issuance upon conversion of Preferred Shares, 2,131,350 shares
are reserved for issuance upon conversion of the Company s 5% Convertible
Subordinated Debentures and 1,444,062 shares are reserved for issuance upon the
exercise of certain stock options, and (ii) 1,000,000 shares of Preferred Stock,
par value $100 per share, of which (a) 200,000 shares have been designated
Series A Preferred, of which 149,999 shares will be sold to the Purchaser
pursuant to this Agreement and 50,001 shares are reserved for issuance upon
conversion of Series B Preferred and (b) 50,001 shares have been designated
Series B Preferred, all of which will be sold to the Purchaser pursuant to this
Agreement. At the time of the Closing, all of the outstanding capital stock will
be validly issued, fully paid and nonassessable and will have been issued in
compliance with all applicable securities laws (including the provisions of the
Securities Act and the rules and regulations promulgated thereunder). Except as
set forth on SCHEDULE 4.3, as of the Closing, the Company has not granted or
issued any options, convertible securities, warrants, calls, pledges, transfer
restrictions (except restrictions imposed by federal and state securities laws),
liens, rights of first offer, rights of first refusal, antidilution provisions
or commitments of any character relating to any issued or unissued shares of
capital stock of the Company other than contemplated in the Related Documents.
Except as contemplated by this Agreement and the Related Documents or as set
forth in SCHEDULE 4.3, there are no preemptive or
7
<PAGE> 12
other preferential rights applicable to the issuance and sale of securities of
the Company, including the Purchased Shares.
4.4 PRIVATE SALE; VOTING AGREEMENTS. Assuming the accuracy of the
representations and warranties made by recipients of the Company's capital stock
made in connection with the acquisition of such capital stock, the Company has
not violated any applicable federal or state securities laws in connection with
the offer, sale and issuance of any of its capital stock. Subject to the
accuracy of the Purchaser's representations contained herein, neither the offer,
sale and issuance of the Purchased Shares hereunder nor the issuance and
delivery of any Preferred Shares or Conversion Shares upon conversion of any
Preferred Shares requires registration under the Securities Act or any state
securities laws.
4.5 FINANCIAL STATEMENTS; DISCLOSURE.
(a) The Financial Statements (together with the notes thereto, as
applicable), (i) are true, correct and complete in all material
respects, (ii) are in accordance with the books and records of the
Company and (iii) fairly present the financial condition and results of
operations of the Company as of the dates and for the periods indicated,
in accordance with GAAP except that the unaudited balance sheets and
related financial statements do not contain an auditors' opinion and do
not contain footnotes and are subject to normal year-end audit
adjustments.
(b) This Agreement together with the schedules, attachments,
exhibits, written statements and certificates supplied to the Purchaser
by or on behalf of the Company with respect to the transactions
contemplated hereby does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they
were made, not misleading. There is no fact which has not been disclosed
to the Purchaser and of which the Company has knowledge, and which has
had or would reasonably be anticipated to have a Material Adverse Effect
(it being understood that no representation or warranty is made with
respect to conditions affecting the Company s industry in general).
(c) As of its filing date, each document filed with the SEC by
the Company, as amended or supplemented prior to the Closing Date, if
applicable, pursuant to the Securities Act and/or the Exchange Act (i)
complied in all material respects with the applicable requirements of
the Securities Act and/or Exchange Act and (ii) did not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. Each final
registration statement filed with the SEC by the Company pursuant to the
Securities Act, as of the date such statement became effective (i)
complied in all material respects with the applicable requirements of
the Securities Act and (ii) did not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
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therein or necessary to make the statements therein not misleading (in
the case of any prospectus, in light of the circumstances under which
they were made).
4.6 ABSENCE OF CERTAIN CHANGES.
(a) Except as set forth on SCHEDULE 4.6 since the date of the
Current Balance Sheet, neither the Company nor any Subsidiary has:
(i) incurred any Liabilities other than current
Liabilities incurred, or obligations under contracts entered
into, in the Ordinary Course of Business and for individual
amounts not greater than $500,000;
(ii) paid, discharged or satisfied any claim, Lien or
Liability, other than any claim, Lien or Liability (A)
reflected or reserved against on the Current Balance Sheet and
paid, discharged or satisfied in the Ordinary Course of
Business since the date of the Current Balance Sheet or (B)
incurred and paid, discharged or satisfied since the date of
the Current Balance Sheet, in each case in the Ordinary Course
of Business;
(iii) sold, leased, assigned or otherwise transferred
any of its assets, tangible or intangible (other than sales of
inventory in the Ordinary Course of Business and use of
supplies in the Ordinary Course of Business);
(iv) permitted any of its assets, tangible or
intangible, to become subject to any Lien (other than any
Permitted Lien);
(v) written off as uncollectible any accounts
receivable other than in the Ordinary Course of Business and
for amounts not greater than $100,000;
(vi) terminated or amended or suffered the
termination or amendment of, other than in the Ordinary Course
of Business, failed to perform in all material respects all of
its obligations or suffered or permitted any material default
to exist under, any material agreement, license or permit;
(vii) suffered any damage, destruction or loss of
tangible property (whether or not covered by insurance) which
in the aggregate exceeds $250,000;
(viii) made any loan (other than intercompany
advances) to any other Person (other than advances to
employees in the Ordinary Course of Business which do not
exceed $10,000 individually or $50,000 in the aggregate);
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(ix) canceled, waived or released any debt, claim or
right in an amount or having a value exceeding $100,000;
(x) paid any amount to or entered into any agreement,
arrangement or transaction with any Affiliate (including its
officers, directors and employees) outside the Ordinary Course
of Business and which was not approved by a majority of the
Company's disinterested directors;
(xi) declared, set aside, or paid any dividend or
distribution with respect to its capital stock or redeemed,
purchased or otherwise acquired any of its capital stock;
(xii) other than in the Ordinary Course of Business,
granted any increase in the compensation of any officer or
employee or made any other change in employment terms of any
officer or employee;
(xiii) made any change in any method of accounting or
accounting practice;
(xiv) suffered or caused any other occurrence, event
or transaction outside the Ordinary Course of Business which
could have a Material Adverse Effect; or
(xv) agreed, in writing or otherwise, to any of the
foregoing.
(b) Since the date of the Current Balance Sheet there has been no
Material Adverse Change.
4.7 LITIGATION. As of the date hereof no claim, suit, proceeding
or investigation pending or, to the knowledge of the Company, threatened against
or affecting the Company or any Subsidiary or any officer or director thereof or
the Company's and the Subsidiaries' business which if decided adversely to any
such person could have a Material Adverse Effect.
4.8 LICENSES, COMPLIANCE WITH LAW, OTHER AGREEMENTS, ETC. The
Company has all material franchises, permits, licenses and other rights to allow
it to conduct its business and is not in violation, in any material respects of
any order or decree of any court, or of any law, order or regulation of any
governmental authority, or of the provisions of any material contract or
agreement to which it is a party or by which it is bound, and neither this
Agreement nor the Related Documents nor the transactions contemplated hereby or
thereby will result in any such violation except where the failure to have any
such franchise permit or license or any such violation could not be expected to
have a Material Adverse Effect. The Company's and the Subsidiaries' business has
been conducted in all material respects in compliance with all federal, state
and local laws, ordinances, rules and regulations, except where such violations,
defaults or noncompliance would not have a Material Adverse Effect.
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4.9 THIRD-PARTY APPROVALS. Assuming the accuracy of the
representations and warranties of the Purchasers contained in this Agreement,
the Company is not required to obtain any order, consent, approval or
authorization of, or to make any declaration or filing with, any Governmental
Agency or other third party (including under any state securities or "blue sky"
laws) in connection with the execution and delivery of this Agreement or the
Related Documents, or the consummation of the transactions contemplated hereby
or thereby to occur on the Closing Date, except for any consents, approvals or
authorizations the failure to obtain could not have a Material Adverse Effect.
4.10 NO UNDISCLOSED LIABILITIES. The Company has no Liabilities
except (i) as and to the extent of the amounts reflected or reserved against on
the Current Balance Sheet (excluding the footnotes thereto) and (ii) liabilities
and obligations incurred in the Ordinary Course of Business since the date
thereof and (iii) such other liabilities that in the aggregate will not result
in a Material Adverse Effect.
4.11 TANGIBLE ASSETS. The Company owns or leases all tangible
assets used or reasonably necessary in connection with the conduct of its
business. All material tangible assets are free from any Liens (other than
Permitted Liens), are free from any material defects, have been maintained in
accordance with normal industry practice and any regulatory standard or
procedure to which such assets are subject, are in good operating condition and
repair (subject to normal wear and tear) and are suitable for the purposes for
which such assets are used or proposed to be used, other than liens, defects and
wear and tear which in the aggregate could not be expected to have a Material
Adverse Effect.
4.12 INVENTORY. All inventory of the Company, whether reflected
on the Current Balance Sheet or otherwise, consists of a quality and quantity
usable or salable in the Ordinary Course of Business, subject to normal rates of
defect or obsolescence not inconsistent with the Company's historical
experience.
4.13 OWNED REAL PROPERTY. The Company and its Subsidiaries own
no real property.
4.14 REAL PROPERTY LEASES. There exists no event of default
(nor any event which with notice or lapse of time would constitute an event of
default) with respect to the Company, any Subsidiary and, to the Company's
knowledge, with respect to any other party thereto under any agreement pursuant
to which the Company is the lessee or lessor of any real property, except for
such defaults and defects in enforceability as could not in the aggregate be
expected to have a Material Adverse Effect, and all such agreements are in full
force and effect and enforceable against the lessor or lessee in accordance with
their terms except for such defaults and defects in enforceability as could not
in the aggregate be expected to have a Material Adverse Effect.
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4.15 AGREEMENTS. Neither the Company nor any Subsidiary is in
default, to the knowledge of the Company there is no basis for any valid claim
of default, and to the Company's knowledge no event has occurred which, with
notice or lapse of time, would constitute a default, under any agreement,
arrangement or understanding to which the Company or any Subsidiary is a party,
and to the knowledge of the Company no other Person is in default under any such
agreement, in each case other than defaults which in the aggregate could not be
expected to have a Material Adverse Effect. Additionally, neither the Company
nor any Subsidiary is party to any agreement the performance of which in
accordance with its terms (including any termination provision thereof) could be
expected to have a Material Adverse Effect. It is understood that this paragraph
4.15 does not relate to real property leases.
4.16 INTELLECTUAL PROPERTY. SCHEDULE 4.16 sets forth a complete
list of (i) all patented, registered or applied for Intellectual Property owned
or filed by the Company; and (ii) all trade names and material unregistered
trademarks used by the Company in connection with its business. The Company owns
and possesses all right, title and interest in and to, or has a valid and
enforceable license to use, the Intellectual Property necessary for the
operation of its business as currently conducted and as currently proposed to be
conducted, and no claim by any third party contesting the validity,
enforceability, use or ownership of such Intellectual Property has been made or,
to the knowledge of the Company, is threatened. The Company has not infringed or
misappropriated the Intellectual Property of any third party.
4.17 EMPLOYEES. Except as set forth on SCHEDULE 4.17, since the
date of the Current Balance Sheet, no key employees and no group of employees
has terminated, or to the knowledge of the Company plans to terminate,
employment with the Company or any Subsidiary, as applicable. Except as set
forth on SCHEDULE 4.17, the Company is not a party to or bound by any collective
bargaining agreement, nor has it experienced any strike, material grievance,
material claim of unfair labor practice or other collective bargaining dispute.
Except as set forth on Schedule 4.17, to the knowledge of the Company there is
no organizational effort being made or threatened by or on behalf of any labor
union with respect to its employees. The Company has not committed any unfair
labor practice or materially violated any federal, state or local law or
regulation regulating employers or the terms and conditions of its employees'
employment, including laws regulating employee wages and hours, employment
discrimination, employee civil rights, equal employment opportunity and
employment of foreign nationals, except for such violations as could not be
expected to have a Material Adverse Effect.
4.18 ERISA; EMPLOYEE BENEFITS. Each Plan (other than a Plan which
is a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA) that
is intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service or has timely
filed for a favorable determination letter from the Internal Revenue Service and
no event has occurred since the date of the last determination letter that could
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reasonably be expected to materially adversely affect the qualified status of
such Plan. Each Plan (other than a Plan which is a multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA) is in full force and effect and has been
administered in all material respects in accordance with its terms and is and
has been, and each plan administrator and fiduciary of a Plan is acting and has
been acting, in compliance in all material respects with all applicable
requirements of the Code and ERISA (including the funding, reporting and
disclosure and prohibited transaction provisions thereof) and other applicable
laws, regulations and rulings in connection with each such Plan. No Plan has
been terminated or partially terminated. With respect to each Plan which is a
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA, no
complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of
ERISA) has occurred, no such Plan is in reorganization or insolvency (within the
meaning of Title IV of ERISA) and no material withdrawal liability has been
assessed against the Company. The Company or one of its Subsidiaries has made,
accrued or provided for all contributions required under each Plan. To the
knowledge of the Company, no event has occurred or is reasonably expected to
occur with respect to any employee pension benefit plan of the Company or any
member of the Company s controlled group (within the meaning of Section 414 of
the Code), which could reasonably be expected to directly or indirectly result
in any material liability (other than liability arising in the ordinary course)
to the Company or any member of its controlled group pursuant to Title IV of
ERISA or Section 412 of the Code. No Plan (other than a Plan which is a
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA) has
incurred an accumulated funding deficiency within the meaning of Section 412 of
the Code or Section 302 of ERISA.
4.19 ENVIRONMENT, HEALTH AND SAFETY.
(a) The Company (as used in this Section 4.19, Company shall
include the Company's Subsidiaries) has complied and is in compliance in
all material respects with all Environmental and Safety Requirements
that are applicable to the Company's business.
(b) The Company has not received any written notice, report or
other information regarding any liabilities or potential liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise),
including any investigatory, remedial or corrective obligations,
relating to the Company or its facilities and arising under
Environmental and Safety Requirements.
(c) The Company has not, either expressly or by operation of law,
assumed or undertaken any liability, including without limitation any
obligation for corrective or remedial action, of any other person
relating to Environmental and Safety Requirements.
4.20 TRANSACTIONS WITH AFFILIATES. Except as disclosed in filings
made by the Company with the SEC pursuant to the Securities Act and the Exchange
Act, neither the Company
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nor any Subsidiary is party to any agreement, arrangement or transaction with
any Affiliate which is material to the Company's and its Subsidiaries business,
taken as a whole.
4.21 TAXES.
(a) Each of the Company and its Subsidiaries has filed all Tax
Returns that it was required to file, and has paid all Taxes shown
thereon as owing, except where the failure to file Tax Returns or to pay
Taxes would not have a material adverse effect on the financial
condition of the Company and its Subsidiaries taken as a whole.
(b) None of the Company and its Subsidiaries (A) has been a
member of an affiliated group filing a consolidated federal Tax Return
(other than a group the common parent of which was the Company) or (B)
has any liability for the Taxes of any Person (other than any of the
Company and its Subsidiaries) under Treas. Reg. Section 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.
(c) Each of the Company and its Subsidiaries has withheld and
paid all taxes required to have been withheld and paid in connection
with amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party.
(d) There is no dispute or claim concerning any Tax liability of
any of the Company and its Subsidiaries either (A) claimed or raised by
any authority in writing or (B) as to which any of the directors and
officers (and employees responsible for Tax matters) of the Company and
its Subsidiaries has knowledge based upon personal contact with any
agent of such authority and which is material to the Company and its
Subsidiaries taken as a whole.
4.22 OTHER INVESTORS. Set forth on SCHEDULE 4.22 is a list of all
shareholders of the Company who as of the date hereof, after giving effect to
the terms hereof, own more than 15% of the fully diluted common equity of the
Company and sets forth such percentage ownership.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PPEI
PPEI hereby represents and warrants to the Company as follows:
5.1 AUTHORIZATION AND ENFORCEABILITY. PPEI has taken all action
necessary to permit it to execute and deliver this Agreement and the other
documents and instruments to be executed by it pursuant hereto and to carry out
the terms hereof and thereof. This Agreement and each such other
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document and instrument, when duly executed and delivered by PPEI, will
constitute a valid and binding obligation of PPEI, enforceable against PPEI in
accordance with its terms.
5.2 GOVERNMENT APPROVALS. PPEI is not required to obtain any
order, consent, approval or authorization of, or to make any declaration or
filing with, any Governmental Agency in connection with the execution and
delivery of this Agreement and the other documents and instruments to be
executed by it pursuant hereto or the consummation of the transactions
contemplated hereby and thereby.
ARTICLE VI
COMPLIANCE WITH SECURITIES LAWS
6.1 INVESTMENT INTENT OF PURCHASER. PPEI represents and
warrants to the Company that it is acquiring the Purchased Shares for its own
account, with no present intention of selling or otherwise distributing the same
to the public.
6.2 STATUS OF PURCHASED SHARES. PPEI has been informed by the
Company that the Purchased Shares have not been and will not be registered under
the Securities Act or under any state securities laws and are being offered and
sold in reliance upon federal and state exemptions for transactions not
involving any public offering.
6.3 SOPHISTICATION AND FINANCIAL CONDITION OF PURCHASER. PPEI
represents and warrants to the Company that it is an "Accredited Investor" as
defined in Regulation D under the Securities Act and that it considers itself to
be an experienced and sophisticated investor and to have such knowledge and
experience in financial and business matters as are necessary to evaluate the
merits and risks of an investment in the Purchased Shares.
6.4 OPPORTUNITY FOR REVIEW OF COMPANY INFORMATION. PPEI
acknowledges that it has had the opportunity to ask questions of and receive
answers from officers of the Company regarding the Purchased Shares, the Company
and its business, prospects and financial condition.
6.5 TRANSFER OF PREFERRED SHARES AND CONVERSION SHARES.
(a) Preferred Shares and Conversion Shares may be transferred
pursuant to (i) public offerings registered under the Securities Act,
(ii) Rule 144 of the SEC (or any similar rule then in force) or (iii)
subject to the conditions set forth in Section 6.5(b), any other
legally-available means of transfer.
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(b) In connection with any transfer of any Preferred Shares or
Conversion Shares (other than a transfer described in Section 6.5(a)(i)
or (ii)), the holder of such shares shall deliver written notice to the
Company describing in reasonable detail the proposed transfer, together
with an opinion of counsel (Kirkland & Ellis or such other counsel
which, to the Company's reasonable satisfaction, is knowledgeable in
securities law matters) to the effect that such transfer may be
effected without registration of such shares under the Securities Act.
The holder of the shares being transferred shall not consummate the
transfer until (i) the prospective transferee has confirmed to the
Company in writing its agreement to be bound by the provisions of this
Section 6.5 or (ii) such holder shall have delivered to the Company an
opinion of such counsel that no subsequent transfer of such Preferred
Shares or Conversion Shares shall require registration under the
Securities Act. Promptly upon receipt of any opinion described in
clause (ii) of the preceding sentence, the Company shall prepare and
deliver in connection with the consummation of the proposed transfer,
new certificates for the Preferred Shares or Conversion Shares being
transferred that do not bear the legend set forth in Section 6.5(c).
(c) Except as provided in Section 6.5(b), each certificate for
Preferred Shares or Conversion Shares shall be imprinted with a legend
substantially in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY
ISSUED ON APRIL 5, 1996 AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED OR ANY APPLICABLE STATE
SECURITIES LAW. THE TRANSFER OF THE SECURITIES REPRESENTED BY
THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SET FORTH IN THE
PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF APRIL 5, 1996
BETWEEN THE ISSUER (THE "COMPANY") AND PRUDENTIAL PRIVATE EQUITY
INVESTORS III, L.P. THE COMPANY RESERVES THE RIGHT TO REFUSE ANY
TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN
FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH
CONDITIONS SHALL BE FURNISHED WITHOUT CHARGE TO THE HOLDER HEREOF
UPON WRITTEN REQUEST TO THE COMPANY.
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ARTICLE VII
CONDITIONS PRECEDENT
7.1 CLOSING DELIVERIES TO PURCHASER. The following documents
and items shall be delivered to Purchaser at or prior to the Closing:
(a) Evidence acceptable to Purchaser of adoption by the
Company of the Certificate of Amendment to the Restated Certificate of
Incorporation;
(b) A fully executed and delivered counterpart of the
Registration Rights Agreement;
(c) The written opinion of LeBoeuf, Lamb, Greene & MacRae,
L.L.P., counsel for the Company, in the form of EXHIBIT D hereto;
(d) certificates of a duly authorized officer of the Company
dated as of the Closing Date
(A) stating that the following conditions have been satisfied
as of the Closing Date,
(i) the representations and warranties of the Company
contained herein and in any writing delivered pursuant hereto
shall be true and correct when made and at and as of the time
of the Closing;
(ii) No action, suit, investigation or proceeding
shall be pending or threatened before any court or
Governmental Agency to restrain, prohibit, collect damages as
a result of or otherwise challenge this Agreement or any
Related Document or any transaction contemplated hereby or
thereby;
(iii) All acts or covenants required hereunder to be
performed by the Company prior to the Closing shall have been
fully performed by it;
(iv) No Material Adverse Change shall have occurred
between the date of the Current Balance Sheet and the Closing
Date; and
(B) setting forth the resolutions of the board of directors of
the Company authorizing the execution and delivery of this Agreement and
the Related Documents (including the Certificate of Amendment to the
Restated Certificate of Incorporation) and the consummation of the
transactions contemplated hereby and thereby and certifying that such
resolutions were duly adopted and have not been rescinded or amended;
and
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(e) such other documents relating to the transactions
contemplated hereby as Purchaser may reasonably request.
7.2 CLOSING DELIVERIES TO THE COMPANY. At Closing, PPEI will
deliver to the Company the aggregate purchase price for the Purchased Shares.
ARTICLE VIII
COVENANTS OF THE COMPANY
8.1 RESTRICTED ACTIONS. Without the prior written consent of
the holders of two-thirds of the then outstanding Preferred Shares the Company
shall not, and shall not permit any Subsidiary to:
(a) become subject to any agreement or instrument which by its
terms would (under any circumstances) restrict the Company's right to
comply with the terms of this Agreement or any of the Related
Documents;
(b) use the proceeds from the sale of the Purchased Shares
other than for expansion of the number of the Company's store
locations, repayment of indebtedness and for other working capital
purposes of the Company; or
(c) enter into any transaction or series of transactions with
any stockholder, director, officer, employee or Affiliate which would
require disclosure pursuant to Rule 404 of Regulation S-K under the
Securities Act unless such transaction is approved by the Company's
disinterested directors.
8.2 REQUIRED ACTIONS. For so long as any Preferred Shares
remain outstanding, the Company shall, and shall cause each Subsidiary
to:
(a) cause all properties owned by the Company or any of
its Subsidiaries or used or held for use in the conduct of its business
or the business of any of its Subsidiaries to be maintained and kept in
good condition, repair and working order (reasonable wear and tear
excepted) and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the judgment of the Board of Directors
may be necessary so that the business carried on in connection therewith
may be properly and advantageously conducted at all times; provided,
however, that the foregoing shall not prevent the Company from
discontinuing the maintenance of any of such properties if such
discontinuance is, in the judgment of the management of the Company,
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desirable in the conduct of its business or the business of any of its
Subsidiaries and is not disadvantageous in any material respect to the
holders of Preferred Shares;
(b) preserve and keep in full force and effect the
corporate existence, rights (charter and statutory), licenses and
franchises of the Company and each of its Subsidiaries; provided,
however, that the Company shall not be required to preserve any such
right, license or franchise if the Board of Directors shall determine
that the preservation thereof is no longer desirable in the conduct of
the business of the Company and its Subsidiaries as a whole and that the
loss thereof is not disadvantageous in any material respect to the
holders of Preferred Shares;
(c) maintain the books, accounts and records of the
Company and its Subsidiaries in accordance with past custom and practice
as used in the preparation of the Financial Statements except to the
extent permitted or required by GAAP;
(d) keep all of its and its Subsidiaries properties which
are of an insurable nature insured with insurers, believed by the
Company in good faith to be financially sound and responsible, against
loss or damage to the extent that property of similar character is
usually so insured by corporations similarly situated and owning like
properties (which may include self-insurance, if reasonable and in
comparable form to that maintained by companies similarly situated);
(e) comply with all material legal requirements and
material contractual obligations applicable to the operations and
business of the Company and its Subsidiaries and pay all applicable
Taxes as they become due and payable;
(f) permit representatives of PPEI and their agents
(including their counsel, accountants and consultants) to have
reasonable access during business hours to the Company s books, records,
facilities, key personnel, officers, directors, customers, independent
accountants and legal counsel;
(g) at all times file all reports (including annual
reports, quarterly reports and the information, documentation and other
reports) required to be filed by the Company under the Exchange Act and
Sections 13 and 15 of the rules and regulations adopted by the SEC
thereunder, and the Company shall use its best efforts to file each of
such reports on a timely basis, and take such further action as any
holder or holders of Securities may reasonably request, all to the
extent required to enable such holders to sell Securities pursuant to
Rule 144 adopted by the SEC under the Securities Act (as such rule may
be amended from time to time) or any similar rule or regulation
hereafter adopted by the SEC and to enable the Company to register
securities with the SEC on Form S-3 or any similar short-form
registration statement
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and upon the filing of each such report deliver a copy thereof to each
holder of the Preferred Shares;
(h) maintain all material Intellectual Property Rights
necessary to the conduct of its business and own or have a valid license
to use all right, title and interest in and to, such material
Intellectual Property Rights.
8.3 RESERVATION OF SERIES A PREFERRED AND COMMON STOCK. The
Company shall at all times reserve and keep available out of its authorized but
unissued (i) shares of Series A Preferred, solely for the purpose of issuance
upon the conversion of the Class B Preferred, such number of shares of Series A
Preferred as are issuable upon the conversion of all outstanding shares of
Series B Preferred and (ii) shares of Common Stock, solely for the purposes of
issuance upon conversion of the Class A Preferred and Class B Preferred, such
number of shares of Common Stock as are issuable upon the conversion of all
outstanding shares of Class A Preferred and Class B Preferred. All shares of
Series A Preferred and Common Stock which are so issuable shall, when issued, be
duly and validly issued, fully paid and nonassessable and free from all taxes,
liens and charges. The Company shall take all such actions as may be necessary
to assure that all such shares of Series A Preferred and Common Stock may be so
issued without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Common
Stock may be listed (except for official notice of issuance which shall be
immediately transmitted by the Company upon issuance).
ARTICLE IX
SURVIVAL
9.1 SURVIVAL. The representations and warranties of the parties
hereto contained herein, or in any writing delivered pursuant hereto, shall
survive the Closing and expire 30 days following the filing of the Company's
annual report on Form 10-K with the SEC for the Company's fiscal year that ends
in 1997.
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ARTICLE X
GENERAL PROVISIONS
10.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of the parties hereto and their respective successors and
assigns, including each subsequent holder of Preferred Shares or Conversion
Shares. Except as otherwise specifically provided herein, this Agreement shall
not be assignable by any party without the prior written consent of the other
parties hereto.
10.2 ENTIRE AGREEMENT. This Agreement and the other writings
referred to herein or delivered pursuant hereto constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior arrangements or understandings.
10.3 NOTICES. All notices, requests, consents and other
communications provided for herein shall be in writing and shall be (i)
delivered in person, (ii) transmitted by telecopy, (iii) sent by first-class,
registered or certified mail, postage prepaid, or (iv) sent by reputable
overnight courier service, fees prepaid, to the recipient at the address or
telecopy number set forth below, or such other address or telecopy number as may
hereafter be designated in writing by such recipient. Notices shall be deemed
given upon personal delivery, seven days following deposit in the mail as set
forth above, upon acknowledgment by the receiving telecopier or one day
following deposit with an overnight courier service.
(a) If to the Company:
Lechters, Inc.
1 Cape May Street
Harrison, New Jersey 07029
Telecopy: (201) 481-4479
Attention: Donald Jonas
with a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019
Telecopy: (212) 424-8500
Attention: Bernard D. Fischman, Esq.
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<PAGE> 26
(b) If to PPEI:
Prudential Private Equity Investors, III, L.P.
717 Fifth Avenue
Suite 1100
New York, New York 10022
Telecopy: (212) 826-6798
Attention: Robert Knox, Chairman
Robert Getz, Director
with a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022
Telecopy: (212) 446-4900
Attention: Frederick Tanne, Esq.
10.4 PURCHASERS FEES AND EXPENSES. The Company shall reimburse
PPEI for the reasonable fees and expenses of Kirkland & Ellis incurred in
connection with the documentation, negotiation and consummation of the
transactions contemplated by this Agreement and the Related Documents.
10.5 AMENDMENT AND WAIVER. No amendment of any provision of this
Agreement shall be effective, unless the same shall be in writing and signed by
the Company and the holders of two-thirds of the Preferred Shares and Conversion
Shares, taken together. Any failure of the Company to comply with any provision
hereof may only be waived in writing by the holders of two-thirds of the
Preferred Shares and Conversion Shares, taken together, and any failure of any
holder of Preferred Shares or Conversion Shares to comply with any provision
hereof may only be waived in writing by the Company. No such waiver shall
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. No failure by any party to take any action against any breach of this
Agreement or default by any other party shall constitute a waiver of such
party's right to enforce any provision hereof or to take any such action.
10.6 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one agreement.
10.7 HEADINGS. The headings of the various sections of this
Agreement have been inserted for reference only and shall not be deemed to be a
part of this Agreement.
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<PAGE> 27
10.8 SPECIFIC PERFORMANCE. The Company, on the one hand, and the
Purchaser, on the other hand, acknowledge that money damages would not be a
sufficient remedy for any breach of this Agreement. It is accordingly agreed
that the parties shall be entitled to specific performance and injunctive relief
as remedies for any such breach, these remedies being in addition to any of the
remedies to which they may be entitled at law or equity.
10.9 REMEDIES CUMULATIVE. Except as otherwise provided herein,
the remedies provided herein shall be cumulative and shall not preclude the
assertion by any party hereto of any other rights or the seeking of any other
remedies against any other party hereto.
10.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF NEW
YORK WITHOUT GIVING EFFECT TO THE LAWS OF CONFLICT OR CHOICE OF LAWS OF THE
STATE OF NEW YORK OR OF ANY OTHER JURISDICTION THAT WOULD RESULT IN THE
APPLICATION OF ANY LAWS OTHER THAN THOSE OF THE STATE OF NEW YORK.
10.11 NO THIRD PARTY BENEFICIARIES. Except as specifically set
forth or referred to herein, nothing herein is intended or shall be construed to
confer upon any person or entity other than the parties hereto and their
successors or assigns, any rights or remedies under or by reason of this
Agreement.
10.12 SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
* * * * *
23
<PAGE> 28
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Agreement as of the date first above written.
LECHTERS, INC.
By:
---------------------------------------
Name:
Title:
PRUDENTIAL PRIVATE EQUITY
INVESTORS III, L.P.
By: Prudential Equity Investors, Inc.,
General Partner
By:
---------------------------------------
Name:
Title:
<PAGE> 29
CERTIFICATE OF AMENDMENT TO THE
RESTATED CERTIFICATE OF INCORPORATION OF
LECHTERS, INC.
It is hereby certified that:
1. The name of the corporation is Lechters, Inc. (the
Company).
2. The following resolution has been adopted by the Board of
Directors of the Company as required by Subsection 14A:7-2(3) of the New Jersey
Business Corporation Act:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of this Company (hereinafter called
the Board of Directors ) in accordance with the provisions of
the Restated Certificate of Incorporation of the Company, as
amended to date, the Board of Directors hereby amends the
Restated Certificate of Incorporation by the addition of the
following provision stating the respective number,
designations, relative rights, preferences and limitations of
two series of Preferred Stock of the Company, designated
respectively as Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock:
Section 1. Designation and Amount.
1A. Series A Convertible Preferred Stock. The shares of the
Series A Convertible Preferred Stock shall be designated as the Series A
Convertible Preferred Stock (the Series A Preferred ) and the number of shares
constituting such series shall be 200,000, which number may be increased or
decreased by the Board of Directors without a vote of stockholders; provided,
however, that such number may not be decreased below the number of then
currently outstanding shares of Series A Preferred plus the number of shares of
Series A Preferred reserved for issuance upon the conversion of the Series B
Preferred (defined below).
1B. Series B Convertible Preferred Stock. The shares of the
Series B Convertible Preferred Stock shall be designated as the Series B
Convertible Preferred Stock (the Series B Preferred ) and the number of shares
constituting such series shall be 50,001, which number may be increased or
decreased by the Board of Directors without a vote of stockholders; provided,
however, that such number may not be decreased below the number of then
currently outstanding shares of Series B Preferred.
Section 2. Dividends.
<PAGE> 30
2A. General Obligation. When and as declared by the Company's
Board of Directors and to the extent permitted under the Corporations, General
Act of New Jersey, the Company shall pay preferential dividends in cash to the
holders of the Series A Preferred and the Series B Preferred as provided in this
Section Dividends on each share of the Series A Preferred (a "Series A
Share") and each Share of Series B Preferred (a "Series B Share" the Series A
Shares and Series B Shares are referred to generically herein as a "Share")
shall accrue on a daily basis at the rate of 5% per annum of the Liquidation
Value thereof or 66 2/3% of the average Aa corporate bond yield for the calendar
week preceding the issuance, whichever is greater at the time of issuance, from
and including the date of issuance of such Share to and including the first to
occur of (i) the date on which the Liquidation Value of such Share (plus all
accrued and unpaid dividends thereon) is paid to the holder thereof in
connection with the liquidation of the Company or the redemption of such Share
by the Company, (ii) the date on which such Share is converted into shares of
Conversion Stock hereunder or (iii) the date on which such Share is otherwise
acquired by the Company. Such dividends shall accrue whether or not they have
been declared and whether or not there are profits, surplus or other funds of
the Company legally available for the payment of dividends, and such dividends
shall be cumulative such that all accrued and unpaid dividends shall be fully
paid or declared with funds irrevocably set apart for payment before any
dividends, distributions, redemptions or other payments may be made with respect
to any Junior Securities. The date on which the Company initially issues any
Share shall be deemed to be its "date of issuance" regardless of the number of
times transfer of such Share is made on the stock records maintained by or for
the Company and regardless of the number of certificates which may be issued to
evidence such Share.
2B. Dividend Payment Date. All dividends which have accrued
on the Series A Preferred and the Series B Preferred shall be payable on April 5
of each year, beginning April 5, 1997 (the "Dividend Payment Date").
2C. Distribution of Partial Dividend Payments. Except as
otherwise provided herein, if at any time the Company pays less than the total
amount of dividends then accrued with respect to the Series A Preferred and the
Series B Preferred, such payment shall be distributed pro rata among the holders
of the Series A Preferred and the Series B Preferred based upon the number of
Shares held by each such holder.
2D. Participating Dividends. In the event that the Company
declares or pays any dividends upon the Common Stock (whether payable in cash,
securities or other property) other than dividends payable solely in shares of
Common Stock, the Company shall also declare and pay to the holders of the
Series A Preferred and the Series B Preferred at the same time that it declares
and pays such dividends to the holders of the Common Stock, the dividends which
would have been declared and paid with respect to the Common Stock issuable upon
conversion of the Series A Preferred and Series B Preferred had all of the
outstanding Series A Preferred and the Series B Preferred been converted
immediately prior to the record date for such dividend, or if no record date is
fixed, the date as of which the record holders of Common Stock entitled to such
dividends are to be determined; provided that if any dividend consists of voting
securities, the Company shall make available to each holder of Series A
Preferred and Series B Preferred, at such holder's request, dividends consisting
of securities which are non-voting (except as otherwise required by law), which
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<PAGE> 31
are otherwise identical to the dividends consisting of voting securities and
which are convertible into such voting securities.
Section 3. Liquidation.
Upon any liquidation, dissolution or winding up of the Company
(whether voluntary or involuntary), each holder of Series A Preferred and Series
B Preferred shall be entitled to be paid, before any distribution or payment is
made upon any Junior Securities, an amount in cash equal to the aggregate
Liquidation Value of all Shares held by such holder (plus all accrued and unpaid
dividends thereon), and the holders of Series A Preferred and Series B Preferred
shall not be entitled to any further payment. If upon any such liquidation,
dissolution or winding up of the Company, the Company's assets to be distributed
among the holders of the Series A Preferred and Series B Preferred are
insufficient to permit payment to such holders of the aggregate amount which
they are entitled to be paid under this Section 3, then the entire assets
available to be distributed to the Company's stockholders shall be distributed
pro rata among such holders based upon the aggregate Liquidation Value (plus all
accrued and unpaid dividends) of the Series A Preferred and Series B Preferred
held by each such holder. Not less than 60 days prior to the payment date stated
therein, the Company shall mail written notice of any such liquidation,
dissolution or winding up to each record holder of Series A Preferred and each
record holder of Series B Preferred, setting forth in reasonable detail the
amount of proceeds to be paid with respect to each Share and each share of
Common Stock in connection with such liquidation, dissolution or winding up.
Section 4. Priority of Series A Preferred and Series B
Preferred on Dividends and Redemptions.
4A. No Payments With Respect to Junior Securities.
So long as any Series A Preferred and Series B Preferred
remains outstanding, without the prior written consent of the holders of a
majority of the outstanding shares of Series A Preferred and Series B Preferred,
taken together as a single Series, the Company shall not, nor shall it permit
any Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly
any Junior Securities, nor shall the Company directly or indirectly pay or
declare any dividend or make any distribution upon any Junior Securities;
provided that the Company may repurchase shares of Common Stock for an aggregate
purchase price of no more than $500,000 in any twelve-month period and so long
as no Event of Noncompliance is in existence at the time of or immediately after
such repurchase or would be caused by such repurchase.
4B. No Issuance of Senior Securities.
For so long as any Series A Preferred or Series B Preferred
remains outstanding, the Company shall not amend its Restated Certificate of
Incorporation or take any other action to approve or issue any capital stock of
the Company that is senior in right to the payment of dividends, payment upon
liquidation, redemption or otherwise to the Series A Preferred and the Series B
Preferred. Additionally, so long as any Series A Preferred and Series B
Preferred remains outstanding, the Company shall not amend its Restated
Certificate of Incorporation or take any other
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<PAGE> 32
action that would cause the rights of the Series A Preferred and the rights of
the Series B Preferred to differ in any respect other than as specifically set
forth in this Certificate of Amendment to the Restated Certificate of
Incorporation as in effect on the date of the original issuance of the Series A
Preferred and the Series B Preferred.
Section 5. Redemptions.
5A. Redemptions or Acquisitions. The Company shall not, nor
shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of
Series A Preferred or Series B Preferred, except pursuant to a purchase offer
made pro rata to all holders of Series A Preferred and Series B Preferred on the
basis of the number of Shares owned by each such holder.
5B. Special Redemptions.
(i) If a Change in Ownership has occurred or the Company
obtains knowledge that a Change in Ownership is proposed to occur, the Company
shall give prompt written notice of such Change in Ownership describing in
reasonable detail the material terms and date of consummation thereof to each
holder of Series A Preferred and each holder of Series B Preferred, but in any
event such notice shall not be given later than five days after the occurrence
of such Change in Ownership, and the Company shall give each holder of Series A
Preferred and each holder of Series B Preferred prompt written notice of any
material change in the terms or timing of such transaction. Any holder of Series
A Preferred or Series B Preferred may require the Company to redeem all or any
portion of the Series A Preferred and/or Series B Preferred owned by such holder
at a price per Share equal to the Liquidation Value thereof (plus all accrued
and unpaid dividends thereon) by giving written notice to the Company of such
election prior to the later of (a) 21 days after receipt of the Company's notice
and (b) 5 days prior to the consummation of the Change in Ownership (the
"Expiration Date"). The Company shall give prompt written notice of any such
election to all other holders of Series A Preferred and holders of Series B
Preferred within 5 days after the receipt thereof, and each such holder shall
have until the later of (a) the Expiration Date or (b) 10 days after receipt of
such second notice to request redemption hereunder (by giving written notice to
the Company) of all or any portion of the Series A Preferred and/or Series B
Preferred owned by such holder.
Upon receipt of such election(s), the Company shall be
obligated to redeem the aggregate number of Shares specified therein on the
later of (a) the occurrence of the Change in Ownership or (b) five days after
the Company's receipt of such election(s). If any proposed Change in Ownership
does not occur, all requests for redemption in connection therewith shall be
automatically rescinded, or if there has been a material change in the terms or
the timing of the transaction, any holder of Series A Preferred and/or Series B
Preferred may rescind such holder's request for redemption by giving written
notice of such rescission to the Company.
The term "Change in Ownership" means any sale, transfer or
issuance or series of sales, transfers and/or issuances of shares of the
Company's capital stock by the Company or any holders thereof which results in
any Person or group of Persons (as the term "group" is used under the Securities
Exchange Act of 1934), other than Prudential Private Equity Investors III, L.P.
(or any
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<PAGE> 33
group of Persons controlled by it), owning 30% or more of the fully diluted
capital stock of the Company.
(ii) If a Fundamental Change is proposed to occur, the Company
shall give written notice of such Fundamental Change describing in reasonable
detail the material terms and date of consummation thereof to each holder of
Series A Preferred and each holder of Series B Preferred not more than 45 days
nor less than 20 days prior to the consummation of such Fundamental Change, and
the Company shall give each holder of Series A Preferred and each holder of
Series B Preferred prompt written notice of any material change in the terms or
timing of such transaction. Any holder of Series A Preferred and any holder of
Series B Preferred may require the Company to redeem all or any portion of the
Series A Preferred and/or Series B Preferred owned by such holder at a price per
Share equal to the Liquidation Value thereof (plus all accrued and unpaid
dividends thereon) by giving written notice to the Company of such election
prior to the later of (a) ten days prior to the consummation of the Fundamental
Change or (b) ten days after receipt of notice from the Company. The Company
shall give prompt written notice of such election to all other holders of Series
A Preferred and all other holders of Series B Preferred (but in any event within
five days prior to the consummation of the Fundamental Change), and each such
holder shall have until two days after the receipt of such notice to request
redemption (by written notice given to the Company) of all or any portion of the
Series A Preferred and/or Series B Preferred owned by such holder.
Upon receipt of such election(s), the Company shall be
obligated to redeem the aggregate number of Shares specified therein upon the
consummation of such Fundamental Change. If any proposed Fundamental Change does
not occur, all requests for redemption in connection therewith shall be
automatically rescinded, or if there has been a material change in the terms or
the timing of the transaction, any holder of Series A Preferred and any holder
of Series B Preferred may rescind such holder's request for redemption by
delivering written notice thereof to the Company prior to the consummation of
the transaction.
The term "Fundamental Change" means (a) any sale or transfer
of more than 30% of the assets of the Company and its Subsidiaries on a
consolidated basis (measured either by book value in accordance with generally
accepted accounting principles consistently applied or by fair market value
determined in the reasonable good faith judgment of the Company's Board of
Directors) in any transaction or series of transactions (other than sales in the
ordinary course of business) and (b) any merger or consolidation to which the
Company is a party, except for a merger in which the Company is the surviving
Company, the terms of the Series A Preferred and Series B Preferred are not
changed and the Series A Preferred and Series B Preferred are not exchanged for
cash, securities or other property, and after giving effect to such merger, the
holders of the Company's outstanding capital stock possessing a majority of the
voting power (under ordinary circumstances) to elect a majority of the Company's
Board of Directors immediately prior to the merger shall continue to own the
Company's outstanding capital stock possessing the voting power (under ordinary
circumstances) to elect a majority of the Company's Board of Directors.
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<PAGE> 34
Section 6. Voting Rights.
6A. Election of Directors. In the election of directors of the
Company, the holders of the Series A Preferred, voting separately as a single
Series to the exclusion of all other Series of the Company's capital stock and
with each Share of Series A Preferred entitled to one vote, shall be entitled to
elect one director to serve on the Company's Board of Directors until his
successor is duly elected by the holders of the Series A Preferred or he is
removed from office by the holders of the Series A Preferred. If the holders of
the Series A Preferred for any reason fail to elect anyone to fill any such
directorship, such position shall remain vacant until such time as the holders
of the Series A Preferred elect a director to fill such position and shall not
be filled by resolution or vote of the Company's Board of Directors or the
Company's other stockholders.
6B. Other Voting Rights. The holders of the Series A
Preferred shall be entitled to notice of all stockholders meetings in accordance
with the Company's bylaws, and the holders of the Series A Preferred shall be
entitled to vote on all matters submitted to the stockholders for a vote
together with the holders of the Common Stock voting together as a single Series
with each share of Common Stock entitled to one vote per share and each Share of
Series A Preferred entitled to one vote for each share of Common Stock issuable
upon conversion of the Series A Preferred as of the record date for such vote
or, if no record date is specified, as of the date of such vote. Unless
otherwise provided in this Certificate of Amendment to the Restated Certificate
of Incorporation or pursuant to applicable law, the holders of Series B
Preferred shall have no voting rights.
Section 7. Conversion.
7A. Conversion Procedure.
(i) (a) Subject to making any governmental filings or
obtaining any required governmental approval prior to or in connection with any
conversion of Shares hereunder, at any time and from time to time, any holder of
Series A Preferred or Series B Preferred may convert all or any portion of the
Series A Preferred or Series B Preferred held by such holder into a number of
shares of Conversion Stock computed by multiplying the number of Shares to be
converted by $100 and dividing the result by the Conversion Price then in
effect.
(b) Subject to making any governmental filings or
obtaining any required governmental approval prior to or in connection with any
conversion of Shares hereunder, at any time and from time to time, any holder of
Series B Preferred may convert all or any number of the Series B Preferred
shares held by such holder into an equal number of Series A Preferred shares.
(ii) Except as otherwise provided herein, each conversion of
Series A Preferred or Series B Preferred shall be deemed to have been effected
as of the close of business on the date on which the certificate or certificates
representing the Series A Preferred or Series B Preferred to be converted have
been surrendered for conversion at the principal office of the Company. At the
time any such conversion has been effected, the rights of the holder of the
Shares converted as a holder of Series A Preferred or Series B Preferred shall
cease and the Person or Persons in whose name or names any certificate or
certificates for shares of Conversion Stock are to be issued upon
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<PAGE> 35
such conversion shall be deemed to have become the holder or holders of record
of the shares of Conversion Stock represented thereby.
(iii) The conversion rights of any Share subject to redemption
hereunder shall terminate on the Redemption Date for such Share unless the
Company has failed to pay to the holder thereof the Liquidation Value of such
Share (plus all accrued and unpaid dividends thereon).
(iv) Notwithstanding any other provision hereof, if a
conversion of Series A Preferred or Series B Preferred is to be made in
connection with a public offering, a Change in Ownership, a Fundamental Change
or other transaction affecting the Company, the conversion of any Shares of
Series A Preferred or Series B Preferred may, at the election of the holder
thereof, be conditioned upon the consummation of such transaction, in which case
such conversion shall not be deemed to be effective until such transaction has
been consummated.
(v) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Company shall deliver to the converting holder:
(a) a certificate or certificates representing the
number of shares of Conversion Stock issuable by reason of such
conversion in such name or names and such denomination or denominations
as the converting holder has specified;
(b) payment in an amount equal to all accrued
dividends with respect to each Share converted which have not been paid
prior thereto, plus the amount payable under subparagraph (x) below
with respect to such conversion; and
(c) a certificate representing any Shares of Series A
Pre ferred or Series B Preferred which were represented by the
certificate or certificates delivered to the Company in connection with
such conversion but which were not converted.
(vi) The Company shall declare the payment of all dividends
payable under subparagraph (v)(b) above.
(vii) The issuance of certificates for shares of Conversion
Stock upon conversion of Series A Preferred or Series B Preferred shall be made
without charge to the holders of such Series A Preferred or Series B Preferred
for any issuance tax in respect thereof or other cost incurred by the Company in
connection with such conversion and the related issuance of shares of Conversion
Stock. Upon conversion of each Share of Series A Preferred or Series B
Preferred, the Company shall take all such actions as are necessary in order to
insure that the Conversion Stock issuable with respect to such conversion shall
be validly issued, fully paid and nonassessable, free and clear of all taxes,
liens, charges and encumbrances with respect to the issuance thereof.
(viii) The Company shall not close its books against the
transfer of Series A Preferred, Series B Preferred or of Conversion Stock issued
or issuable upon conversion of Series A Preferred or Series B Preferred in any
manner which interferes with the timely conversion of
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<PAGE> 36
Series A Preferred or the Series B Preferred. The Company shall assist and
cooperate with any holder of Shares required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Shares hereunder (including the conversion of Series B Preferred into Series
A Preferred) (including, without limitation, making any filings pursuant to the
provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the HSR Act ), and any other filings required to be made by the
Company).
(ix) The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Conversion Stock, solely for the
purpose of issuance upon the conversion of the Series A Preferred and Series B
Preferred, such number of shares of Conversion Stock issuable upon the
conversion of all outstanding Series A Preferred and Series B Preferred. All
shares of Conversion Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges. The Company shall take all such actions as may be necessary to assure
that all such shares of Conversion Stock may be so issued without violation of
any applicable law or governmental regulation or any requirements of any
domestic securities exchange upon which shares of Conversion Stock may be listed
(except for official notice of issuance which shall be immediately delivered by
the Company upon each such issuance). The Company shall not take any action
which would cause the number of authorized but unissued shares of Conversion
Stock to be less than the number of such shares required to be reserved
hereunder for issuance upon conversion of the Series A Preferred and Series B
Preferred.
(x) If any fractional interest in a share of Conversion Stock
would, except for the provisions of this subparagraph, be delivered upon any
conversion of the Series A Preferred or Series B Preferred, the Company, in lieu
of delivering the fractional share therefor, shall pay an amount to the holder
thereof equal to the Market Price of such fractional interest as of the date of
conversion.
(xi) If the shares of Conversion Stock issuable by reason of
conversion of Series A Preferred or Series B Preferred are convertible into or
exchangeable for any other stock or securities of the Company, the Company
shall, at the converting holder's option, upon surrender of the Shares to be
converted by such holder as provided herein together with any notice, statement
or payment required to effect such conversion or exchange of Conversion Stock,
deliver to such holder or as otherwise specified by such holder a certificate or
certificates representing the stock or securities into which the shares of
Conversion Stock issuable by reason of such conversion are so convertible or
exchangeable, registered in such name or names and in such denomination or
denominations as such holder has specified.
7B. Conversion Price.
(i) The initial Conversion Price shall be $6.25. In order to
prevent dilution of the conversion rights granted under this Section 7, the
Conversion Price shall be subject to adjustment from time to time pursuant to
this paragraph 7B.
(ii) If and whenever the Company issues or sells, or in
accordance with paragraph 7C is deemed to have issued or sold, any shares of its
Common Stock for a consideration per share less than the Conversion Price in
effect immediately prior to the time of such issue or sale,
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<PAGE> 37
then immediately upon such issue or sale or deemed issue or sale the Conversion
Price shall be reduced to the Conversion Price determined by dividing (a) the
sum of (1) the product derived by multiplying the Conversion Price in effect
immediately prior to such issue or sale by the number of shares of Common Stock
Deemed Outstanding immediately prior to such issue or sale, plus (2) the
consideration, if any, received by the Company upon such issue or sale, by (b)
the number of shares of Common Stock Deemed Outstanding immediately after such
issue or sale.
(iii) Notwithstanding the foregoing, there shall be no
adjustment in the Conversion Price as a result of any issue or sale (or deemed
issue or sale) of up to an aggregate of 2,000,000 shares of Common Stock
(including any shares subject to any plan of the Company or its Subsidiaries as
of the date hereof) to employees or directors of the Company and its
Subsidiaries pursuant to stock option plans and stock ownership plans approved
by the Company's Board of Directors (as such number of shares is proportionately
adjusted for subsequent stock splits, combinations and dividends affecting the
Common Stock and as such number includes all such stock options and purchase
rights outstanding at the time of the issuance of the Series A Preferred and
Series B Preferred).
7C. Effect on Conversion Price of Certain Events. For purposes
of determining the adjusted Conversion Price under paragraph 7B, the following
shall be applicable:
(i) Issuance of Rights or Options. If the Company in any
manner grants or sells any Options and the price per share for which Common
Stock is issuable upon the exercise of such Options, or upon conversion or
exchange of any Convertible Securities issuable upon exercise of such Options,
is less than the Conversion Price in effect immediately prior to the time of the
granting or sale of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Company at the time of the granting or sale of such
Options for such price per share. For purposes of this paragraph, the "price per
share for which Common Stock is issuable" shall be determined by dividing (A)
the total amount, if any, received or receivable by the Company as consideration
for the granting or sale of such Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon exercise of all such
Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Company upon the issuance or sale of such Convertible Securities
and the conversion or exchange thereof, by (B) the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options. No further adjustment of the Conversion Price shall be
made when Convertible Securities are actually issued upon the exercise of such
Options or when Common Stock is actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon conversion or exchange thereof is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale, then the maximum number of shares of Common Stock issuable upon
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conversion or exchange of such Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
issuance or sale of such Convertible Securities for such price per share. For
the purposes of this paragraph, the "price per share for which Common Stock is
issuable" shall be determined by dividing (A) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (B) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities. No further
adjustment of the Conversion Price shall be made when Common Stock is actually
issued upon the conversion or exchange of such Convertible Securities, and if
any such issue or sale of such Convertible Securities is made upon exercise of
any Options for which adjustments of the Conversion Price had been or are to be
made pursuant to other provisions of this Section 6, no further adjustment of
the Conversion Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock changes at any time, the Conversion Price in
effect at the time of such change shall be immediately adjusted to the
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold; provided that if such adjustment would
result in an increase of the Conversion Price then in effect, such adjustment
shall not be effective until 30 days after written notice thereof has been given
by the Company to all holders of the Series A Preferred and Series B Preferred.
For purposes of paragraph 7C, if the terms of any Option or Convertible Security
which was outstanding as of the date of issuance of the Series A Preferred and
Series B Preferred are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change; provided that no such
change shall at any time cause the Conversion Price hereunder to be increased.
(iv) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination of any right to
convert or exchange any Convertible Security without the exercise of any such
Option or right, the Conversion Price then in effect hereunder shall be adjusted
immediately to the Conversion Price which would have been in effect at the time
of such expiration or termination had such Option or Convertible Security, to
the extent outstanding immediately prior to such expiration or termination,
never been issued; provided that if such expiration or termination would result
in an increase in the Conversion Price then in effect, such increase shall not
be effective until 30 days after written notice thereof has been given to all
holders of the Series A Preferred and Series B Preferred. For purposes of
paragraph 7C, the expiration or termination of any Option or Convertible
Security which was outstanding as of the date of issuance of the Series A
Preferred and Series B Preferred shall not cause the conversion Price hereunder
to be adjusted unless, and only to the extent that, a change in the terms of
such Option or Convertible Security caused it to be deemed to have been issued
after the date of issuance of the Series A Preferred and Series B Preferred.
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(v) Calculation of Consideration Received. If any Common
Stock, Option or Convertible Security is issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Company therefor (net of discounts, commissions
and related expenses). If any Common Stock, Option or Convertible Security is
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company shall be the fair value of
such consideration, except where such consideration consists of securities, in
which case the amount of consideration received by the Company shall be the
Market Price thereof as of the date of receipt. If any Common Stock, Option or
Convertible Security is issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving Company, the
amount of consideration therefor shall be deemed to be the fair value of such
portion of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Option or Convertible Security, as the case
may be. The fair value of any consideration other than cash and securities shall
be determined jointly by the Company and the holders of a majority of the
outstanding Series A Preferred and Series B Preferred taken as a single Series.
If such parties are unable to reach agreement within a reasonable period of
time, the fair value of such consideration shall be determined by an independent
appraiser experienced in valuing such type of consideration jointly selected by
the Company and the holders of a majority of the outstanding Series A Preferred
and Series B Preferred taken as a single Series. The determination of such
appraiser shall be final and binding upon the parties, and the fees and expenses
of such appraiser shall be borne by the Company.
(vi) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Option by the parties thereto, the Option shall be deemed to
have been issued for a consideration of $.01.
(vii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Company or any Subsidiary, and the disposition of any shares
so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (a) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (b) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date shall be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or upon the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
7D. Subdivision or Combination of Common Stock. If the Company
at any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more Series of its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price in effect immediately prior to
such subdivision shall be proportionately reduced, and if the Company at any
time combines (by reverse stock split or otherwise) one or more Series of its
outstanding
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shares of Common Stock into a smaller number of shares, the Conversion Price in
effect immediately prior to such combination shall be proportionately increased.
7E. Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Company's assets or other
transaction, in each case which is effected in such a manner that the holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock, is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Company shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A Preferred and Series B Preferred taken together as a single Series
then outstanding) to insure that each of the holders of Series A Preferred and
Series B Preferred shall thereafter have the right to acquire and receive, in
lieu of or in addition to (as the case may be) the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Series A Preferred or Series B Preferred, such shares of stock,
securities or assets as such holder would have received in connection with such
Organic Change if such holder had converted its Series A Preferred and Series B
Preferred immediately prior to such Organic Change. In each such case, the
Company shall also make appropriate provisions (in form and substance
satisfactory to the holders of a majority of the Series A Preferred and Series B
Preferred taken together as a single Series then outstanding) to insure that the
provisions of this Section 7 and Sections 8 and 9 hereof shall thereafter be
applicable to the Series A Preferred and Series B Preferred (including, in the
case of any such consolidation, merger or sale in which the successor entity or
purchasing entity is other than the Company, an immediate adjustment of the
Conversion Price to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, and a corresponding immediate adjustment in
the number of shares of Conversion Stock acquirable and receivable upon
conversion of Series A Preferred and Series B Preferred, if the value so
reflected is less than the Conversion Price in effect immediately prior to such
consolidation, merger or sale). The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from consolidation or
merger or the entity purchasing such assets assumes by written instrument (in
form and substance satisfactory to the holders of a majority of the Series A
Preferred and Series B Preferred taken together as a single Series then
outstanding), the obligation to deliver to each such holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to acquire.
7F. Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 7 but not expressly provided for
by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company's Board of Directors shall make an appropriate adjustment in
the Conversion Price so as to protect the rights of the holders of Series A
Preferred and Series B Preferred; provided that no such adjustment shall
increase the Conversion Price as otherwise determined pursuant to this Section 7
or decrease the number of shares of Conversion Stock issuable upon conversion of
each Share of Series A Preferred and Series B Preferred.
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7G. Notices.
(i) Immediately upon any adjustment of the Conversion Price,
the Company shall give written notice thereof to all holders of Series A
Preferred and Series B Preferred, setting forth in reasonable detail and
certifying the calculation of such adjustment.
(ii) The Company shall give written notice to all holders of
Series A Preferred and Series B Preferred at least 20 days prior to the date on
which the Company closes its books or takes a record (a) with respect to any
dividend or distribution upon Common Stock, (b) with respect to any pro rata sub
scription offer to holders of Common Stock or (c) for determining rights to vote
with respect to any Organic Change, dissolution or liquidation.
(iii) The Company shall also give written notice to the
holders of Series A Preferred and Series B Preferred at least 20 days prior to
the date on which any Organic Change shall take place.
7H. Mandatory Conversion. The Company may at any time
require the conversion of all of the outstanding Series A Preferred and all of
the outstanding Series B Preferred into shares of Common Stock if the closing
price of the Common Stock based on trading in the NASDAQ National Market, or
such other stock market on which the Common Stock is then traded, as reported in
the Wall Street Journal averages not less than $15.625 over the 60 trading days
ending on the date immediately preceding the date of the Company's election to
cause such mandatory conversion; provided that the Company must elect to cause
the conversion of all of the outstanding shares of both the Series A Preferred
and Series B Preferred simultaneously. Any such mandatory conversion shall only
be effected upon written notice of such mandatory conversion delivered to all
holders of Series A Preferred and Series B Preferred within 10 days following
the date on which the Company elects to cause such conversion. Each holder of
Series A Preferred and Series B Preferred shall assist and cooperate with the
Company if it is required to make any governmental filings or obtain any
governmental approval prior to or in connection with any such mandatory
conversion of Shares hereunder (including, without limitation, making any
filings pursuant to the provisions of the HSR Act and any other filings required
to be made by such holder).
Section 8. Liquidating Dividends.
If the Company declares or pays a dividend upon the Common
Stock payable otherwise than in cash out of earnings or earned surplus
(determined in accordance with generally accepted accounting principles,
consistently applied) except for a stock dividend payable in shares of Common
Stock (a "Liquidating Dividend"), then the Company shall pay to the holders of
Series A Preferred and Series B Preferred at the time of payment thereof the
Liquidating Dividends which would have been paid on the shares of Conversion
Stock had such Series A Preferred and Series B Preferred been converted
immediately prior to the date on which a record is taken for such Liquidating
Dividend, or, if no record is taken, the date as of which the record holders of
Common Stock entitled to such dividends are to be determined; provided that if
the Liquidating Dividends consist of voting securities, the Company shall make
available to each holder of Series A Preferred and Series B Preferred, at such
holder's request, Liquidating Dividends consisting of securities which
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are non-voting (except as otherwise required by law), which are otherwise
identical to the Liquidating Dividends consisting of voting securities and which
are convertible into such voting securities.
Section 9. Purchase Rights.
If at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any Series of
Common Stock (the "Purchase Rights"), then each holder of Series A Preferred and
Series B Preferred shall be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Conversion Stock
acquirable upon conversion of such holder's Series A Preferred and/or Series B
Preferred immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or if no such record is taken, the
date as of which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights; provided that if the Purchase
Rights involve voting securities, the Company shall make available to each
holder of Series A Preferred and Series B Preferred, at such holder's request,
Purchase Rights involving securities which are non-voting (except as otherwise
required by law), which are otherwise identical to the Purchase Rights involving
voting securities and which are convertible into such voting securities.
Section 10. Events of Noncompliance.
10A. Definition. An Event of Noncompliance shall have occurred
if:
(i) the Company fails to pay on any Dividend Payment Date the
full amount of dividends then accrued on the Series A Preferred and Series B
Preferred, whether or not such payment is legally permissible or is prohibited
by any agreement to which the Company is subject;
(ii) the Company breaches or otherwise fails to perform or
observe any other covenant or agreement set forth in this Certificate of
Amendment to the Restated Certificate of Incorporation or in the Purchase
Agreement;
(iii) any representation or warranty contained in the Purchase
Agreement or required to be furnished to any holder of Series A Preferred or
Series B Preferred pursuant to the Purchase Agreement, or any information
contained in writing required to be furnished by the Company or any Subsidiary
to any holder of Series A Preferred or Series B Preferred, is false or
misleading in any material respect on the date made or furnished;
(iv) the Company or any Subsidiary makes an assignment for the
benefit of creditors or admits in writing its inability to pay its debts gen
erally as they become due; or an order, judgment or decree is entered
adjudicating the Company or any Subsidiary bankrupt or insolvent; or any order
for relief with respect to the Company or any Subsidiary is entered under the
Federal Bankruptcy Code; or the Company or any Subsidiary petitions or applies
to any tribunal for the appointment of a custodian, trustee, receiver or
liquidator of the Company or any Subsidiary or of
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any substantial part of the assets of the Company or any Subsidiary, or
commences any proceeding (other than a proceeding for the voluntary liquidation
and dissolution of a Subsidiary) relating to the Company or any Subsidiary under
any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction; or any such petition or
application is filed, or any such proceeding is commenced, against the Company
or any Subsidiary and either (a) the Company or any such Subsidiary by any act
indicates its approval thereof, consent thereto or acquiescence therein or (b)
such petition, application or proceeding is not dismissed within 60 days;
(v) a judgment in excess of $2,000,000 is rendered against the
Company or any Subsidiary and, within 30 days after entry thereof, such judgment
is not discharged or execution thereof stayed pending appeal, or within 30 days
after the expiration of any such stay, such judgment is not discharged; or
(vi) the Company or any Subsidiary defaults in the performance
of any obligation or agreement if the effect of such default is to cause an
amount exceeding $5,000,000 to become due prior to its stated maturity or to
permit the holder or holders of any obligation to cause an amount exceeding
$5,000,000 to become due prior to its stated maturity.
10B. Consequences of Events of Noncompliance.
(i) If an Event of Noncompliance of the type described in
subparagraph 10A(ii) has occurred and continues for a period of 30 days or any
other Event of Noncompliance has occurred and is continuing, the dividend rate
on the Series A Preferred and Series B Preferred shall increase immediately by
an increment of 3 percentage point(s). Thereafter, until such time as no Event
of Noncompliance exists, the dividend rate shall increase automatically at the
end of each succeeding 90-day period by an additional increment of 3 percentage
point(s) (but in no event shall the dividend rate exceed 12%). Any increase of
the dividend rate resulting from the operation of this subparagraph shall
terminate as of the close of business on the date on which no Event of
Noncompliance exists, subject to subsequent increases pursuant to this
paragraph.
(ii) If an (a) Event of Noncompliance of the type described in
subparagraph 10A(ii) has occurred and continued for a period of 30 days, (b) an
Event of NonCompliance has occurred pursuant to subparagraph 10A(i) and such
Event of NonCompliance has not been cured on or before the 60th day following
the date on which such payment was originally due or (c) any other Event of
Noncompliance (other than an Event of Noncompliance of the type described in
subparagraph 10A(i)) has occurred and is continuing, the holder or holders of a
majority of the Series A Preferred and Series B Preferred taken together as a
single Series then outstanding may demand (by written notice delivered to the
Company) immediate redemption of all or any portion of the Series A Preferred
and/or Series B Preferred owned by such holder or holders at a price per Share
equal to the Liquidation Value thereof (plus all accrued and unpaid dividends
thereon). The Company shall give prompt written notice of such election to the
other holders of Series A Preferred and Series B Preferred (but in any event
within five days after receipt of the initial demand for redemption), and each
such other holder may demand immediate redemption of all or any portion of such
holder's Series A Preferred and/or Series B Preferred by giving written notice
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thereof to the Company within seven days after receipt of the Company's notice.
The Company shall redeem all Series A Preferred and Series B Preferred as to
which rights under this paragraph have been exercised within 15 days after
receipt of the initial demand for redemption.
(iii) If at any time the Company is not permitted under
applicable law or is otherwise unable to pay any portion of the accrued and
unpaid dividends on the Series A Preferred or Series B Preferred which are then
due and payable (including upon conversion of any Shares pursuant to Section
6A(vi) above), at each holder's election the Company shall either (1) pay such
dividends to the holder as soon thereafter as funds of the Company are legally
available for such payment (at the request of any such holder, the Company shall
provide such holder with written evidence of such obligation to such holder) or
(2) allow such holder to convert such dividends into a number of shares of
Conversion Stock determined by dividing the amount of the unpaid dividends to be
applied for such purpose, by the lesser of (A) the Conversion Price then in
effect and (B) the then current Market Price.
(iv) If any Event of Noncompliance exists, each holder of
Series A Preferred and each holder of Series B Preferred shall also have any
other rights which such holder is entitled to under any contract or agreement at
any time and any other rights which such holder may have pursuant to applicable
law.
Section 11. Registration of Transfer.
The Company shall keep at its principal office a register for
the registration of Series A Preferred and Series B Preferred. Upon the
surrender of any certificate representing Series A Preferred or Series B
Preferred at such place, the Company shall, at the request of the record holder
of such certificate, execute and deliver (at the Company's expense) a new
certificate or certificates in exchange therefor representing in the aggregate
the number of Shares represented by the surrendered certificate. Each such new
certificate shall be registered in such name and shall represent such number of
Shares as is requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate, and dividends
shall accrue on the Series A Preferred or Series B Preferred represented by such
new certificate from the date to which dividends have been fully paid on such
Series A Preferred or Series B Preferred represented by the surrendered
certificate.
Section 12. Replacement.
Upon receipt of evidence reasonably satisfactory to the
Company (an affidavit of the registered holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of Series A Preferred or Series B Preferred, and in the case
of any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Company (provided that if the holder is a financial
institution or other institutional investor its own agreement shall be
satisfactory), or, in the case of any such mutilation upon surrender of such
certificate, the Company shall (at its expense) execute and deliver in lieu of
such certificate a new certificate of like kind representing the number of
Shares of such Series represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate, and
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dividends shall accrue on the Series A Preferred or Series B Preferred
represented by such new certificate from the date to which dividends have been
fully paid on such lost, stolen, destroyed or mutilated certificate.
Section 13. Definitions.
"Change in Ownership" has the meaning set forth in paragraph
5B hereof.
"Common Stock" means, the Company's Common Stock, without par
value, and any capital stock of any Series of the Company hereafter authorized
which is not limited to a fixed sum or percentage of par or stated value in
respect to the rights of the holders thereof to participate in dividends or in
the distribution of assets upon any liquidation, dissolution or winding up of
the Company.
"Common Stock Deemed Outstanding" means, at any given time,
the number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to
subparagraphs 7C(i) and 7C(ii) hereof whether or not the Options or Convertible
Securities are actually exercisable at such time.
"Conversion Stock" means shares of the Company's Common Stock;
provided that if there is a change such that the securities issuable upon
conversion of the Series A Preferred are issued by an entity other than the
Company or there is a change in the type or Series of securities so issuable,
then the term "Conversion Stock" shall mean one share of the security issuable
upon conversion of the Series A Preferred and Series B Preferred if such
security is issuable in shares, or shall mean the smallest unit in which such
security is issuable if such security is not issuable in shares.
"Convertible Securities" means any stock or securities
directly or indirectly convertible into or exchangeable for Common Stock.
"Fundamental Change" has the meaning set forth in paragraph 5B
hereof.
"Junior Securities" means any capital stock or other equity
securities of the Company, whether outstanding on the date of original issuance
of the Series A Preferred and Series B Preferred or issued thereafter, except
for the Series A Preferred and Series B Preferred.
"Liquidation Value" of any Share as of any particular date
shall be equal to $6.25 plus all accrued and unpaid dividends thereon.
"Market Price" of any security means the average of the
closing prices of such security's sales on all securities exchanges on which
such security may at the time be listed, or, if there has been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such
security is not quoted in the NASDAQ System,
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the average of the highest bid and lowest asked prices on such day in the
domestic over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which "Market Price" is
being determined and the 20 consecutive business days prior to such day. If at
any time such security is not listed on any securities exchange or quoted in the
NASDAQ System or the over-the-counter market, the "Market Price" shall be the
fair value thereof determined jointly by the Company and the holders of a
majority of the Series A Preferred and Series B Preferred taken together as a
single Series. If such parties are unable to reach agreement within a reasonable
period of time, such fair value shall be determined by an independent appraiser
experienced in valuing securities jointly selected by the Company and the
holders of a majority of the Series A Preferred and Series B Preferred taken
together as a single Series. The determination of such appraiser shall be final
and binding upon the parties, and the Company shall pay the fees and expenses of
such appraiser.
"Options" means any rights, warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.
"Person" means an individual, a partnership, a Company, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Purchase Agreement" means the Preferred Stock Purchase
Agreement, dated as of April __, 1996 by and between the Company and Prudential
Private Equity Investors III, L.P., as such agreement may from time to time be
amended in accordance with its terms.
"Registration Rights Agreement" means the Registration Rights
Agreement as defined in the Purchase Agreement.
"Redemption Date" as to any Share means the date specified in
the notice of any redemption at the Company's option or at the holder's option
or the applicable date specified herein in the case of any other redemption;
provided that no such date shall be a Redemption Date unless the Liquidation
Value of such Share (plus all accrued and unpaid dividends thereon and any
required premium with respect thereto) is actually paid in full on such date,
and if not so paid in full, the Redemption Date shall be the date on which such
amount is fully paid.
"Subsidiary" means, with respect to any Person, any Company,
limited liability company, partnership, association or other business entity of
which (i) if a Company, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other
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business entity gains or losses or shall be or control the managing general
partner of such limited liability company, partnership, association or other
business entity.
Section 14. Amendment and Waiver.
No amendment, modification or waiver shall be binding or
effective with respect to any provision of this Certificate of Amendment to the
Restated Certificate of Incorporation without the prior written consent of the
holders of a majority of the Series A Preferred and Series B Preferred taken
together as a single Series outstanding at the time such action is taken;
provided that no such action shall change (a) the rate at which or the manner in
which dividends on the Series A Preferred or Series B Preferred accrue or the
times at which such dividends become payable or the amount payable on redemption
of the Series A Preferred or Series B Preferred or the times at which redemption
of Series A Preferred or Series B Preferred is to occur, without the prior
written consent of the holders of at least 75% of the Series A Preferred and
Series B Preferred taken together as a single Series then outstanding, (b) the
Conversion Price of the Series A Preferred or the Series B Preferred or the
number of shares or Series of stock into which the Series A Preferred or the
Series B Preferred is convertible, without the prior written consent of the
holders of at least 75% of the Series A Preferred and Series B Preferred taken
together as a single Series then outstanding or (c) the percentage required to
approve any change described in clauses (a) and (b) above, without the prior
written consent of the holders of at least 75% of the Series A Preferred and
Series B Preferred taken together as a single Series then outstanding; and
provided further that no change in the terms hereof may be accomplished by
merger or consolidation of the Company with another Company or entity unless the
Company has obtained the prior written consent of the holders of the applicable
percentage of the Series A Preferred and Series B Preferred taken together as a
single Series then outstanding.
Section 15. Notices.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (i) to the Company, at its principal executive
offices and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Company (unless otherwise indicated by any such
holder).
3. The resolution set forth in the preceding paragraph was
duly adopted by the Board of Directors of the Company on April 1, 1996.
4. The Restated Certificate of Incorporation of the Company is
amended so that the number, designations, relative rights, preferences and
limitations of Series A Preferred and Series B Preferred, respectively, are as
stated in the resolution set forth in paragraph 2 of this Certificate of
Amendment to the Restated Certificate of Incorporation of the Company.
-19-
<PAGE> 48
IN WITNESS WHEREOF, the undersigned duly authorized officer of
the Company does swear to and has executed this Certificate of Amendment, as of
the __ day of April, 1996, and affirms that the statements made herein are true
under penalties of perjury.
LECHTERS, INC.
By: _______________________________
Title:
-20-
<PAGE> 49
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of
April 5, 1996, between Lechters, Inc., a New Jersey corporation (the "Company"),
and Prudential Private Equity Investors III, L.P., a Delaware limited
partnership ("PPEI").
RECITALS:
(a) PPEI and the Company have entered into a Preferred Stock
Purchase Agreement, dated as of the date hereof (the "Stock Purchase Agreement")
(capitalized terms used herein and not otherwise defined have the meanings
ascribed to such terms in the Stock Purchase Agreement), pursuant to which PPEI
is simultaneously with the execution hereof purchasing from the Company the
number of shares of Series A Preferred and Series B Preferred of the Company set
forth opposite its name on Schedule I hereto.
(b) As of the date hereof, the Series A Preferred and Series B
Preferred purchased by PPEI pursuant to the Stock Purchase Agreement entitles
the holder thereof to receive, upon the conversion thereof, the number of shares
of Common Stock as are set forth opposite its name on Schedule I, which number
of shares are subject to adjustment as set forth in the provisions of the
Certificate of Amendment to the Restated Certificate of Amendment to the
Restated Certificate of Incorporation.
(1) The Company desires to grant PPEI
certain registration rights with respect to the Common Stock.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the parties hereto agree as follows:
1. Demand Registrations.
(a) Requests for Registration. Subject to paragraph 1(b)
below, the holders of at least 66.67% of the Registrable Securities may request
at any time after December 31, 1996 registration under the Securities Act of
1933, as amended (the "Securities Act"), of all or part of their Registrable
Securities on Form S-1 or any similar long-form registration ("Long-Form
Registrations"), and the holders of at least 66.67% of the Registrable
Securities may request registration under the Securities Act of all or part of
their Registrable Securities on Form S-2 or S-3 or any similar short-form
registration ("Short-Form Registrations") if available. Each request for a
Demand Registration shall specify the approximate number of Registrable
Securities requested to be registered and the anticipated per share price range
for such offering. Within ten days after
<PAGE> 50
receipt of any such request, the Company will give written notice of such
requested registration to all other holders of Registrable Securities and will
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within 15 days
after the receipt of the Company's notice. All registrations requested pursuant
to this paragraph 1(a) are referred to herein as "Demand Registrations".
(b) Long-Form Registrations. Subject to paragraph 1(a), the
holders of Registrable Securities will be entitled at any time to request
Long-Form Registrations in which (subject to Section 5(b)) the Company will pay
all Registration Expenses ("Company-paid Long-Form Registrations"); provided
that the holders of Registrable Securities may not request more than three (3)
Long-Form Registrations (each a "Demand Long-Form Registration," and each of
which shall be a Company-paid Long-Form Registration), such number to be reduced
by the number of previously consummated Demand Long-Form Registrations and
Demand Short-Form Registrations. A registration will not count as one of the
permitted Demand Long-Form Registrations until it has become effective, and no
Company-paid Long-Form Registration will count as one of the permitted Demand
Long-Form Registrations unless the holders of Registrable Securities are able to
register and sell at least 85% of the Registrable Securities requested to be
included in such registration; provided that in any event the Company will pay
all Registration Expenses in connection with any registration initiated as a
Company-paid Long-Form Registration whether or not it has become effective.
(c) Short-Form Registrations. In addition to the Long-Form
Registrations provided pursuant to paragraph 1(b), the holders of Registrable
Securities will be entitled to request up to three (3) Short-Form Registrations
(which number shall be reduced by the number of previously consummated Demand
Long-Form Registrations and Demand Short-Form Registrations) in which the
Company will pay all Registration Expenses. Demand Registrations will be
Short-Form Registrations whenever the Company is permitted to use any applicable
short form. The Company will use its best efforts to make Short-Form
Registrations on Form S-3 available for the sale of Registrable Securities. The
holders of Registrable Securities agree that they will not request a Long-Form
Registration when the Company is eligible to use a Short-Form Registration;
provided that the Company agrees to include in the prospectus included in any
Short-Form Registration Statement, such material describing the Company and
intended to facilitate the sale of securities being so registered as is
reasonably requested for inclusion therein by any of the shareholders selling
securities pursuant to such registration statement, whether or not the form used
for such registration statement requires the inclusion of such information.
(d) Priority on Demand Registrations. The Company will not
include in any Demand Registration any securities which are not Registrable
Securities without the prior written consent of the holders of at least 50.1% of
the Registrable Securities included in such registration. If a Demand
Registration is an underwritten offering and the managing underwriters advise
the Company in writing that in their opinion the number of Registrable
Securities and, if permitted hereunder, other securities requested to be
included in such offering exceeds the number of Registrable Securities and other
securities, if any, which can be sold therein without adversely affecting the
marketability of the offering, the Company will include in such registration
prior to the
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<PAGE> 51
inclusion of any securities which are not Registrable Securities
the number of Registrable Securities requested to be included which in the
opinion of such underwriters can be sold without adversely affecting the
marketability of the offering, pro rata among the respective holders thereof on
the basis of the number of Registrable Securities owned by each holder
participating in such offering.
(e) Restrictions on Long-Form Registrations and Demand
Registrations. The Company will not be obligated to effect any Demand Long-Form
Registration during the period starting with the date thirty (30) days prior to
the Company's good faith estimate of the date of filing of, and ending on a date
one hundred and twenty (120) days after the effective date of, a
Company-initiated registration; provided that the Company is actively employing
in good faith all reasonable efforts to cause such registration statement to
become effective. The Company will not be obligated to effect any Demand
Long-Form Registration within six (6) months after the effective date of a
previous Long-Form Registration. The Company may postpone for up to six (6)
months the filing or the effectiveness of a registration statement for a Demand
Registration if the Company and the holders of at least 66.67% of the
Registrable Securities agree that such Demand Registration would reasonably be
expected to have an adverse effect on any proposal or plan by the Company or any
of its subsidiaries to engage in any acquisition of assets (other than in the
ordinary course of business) or any merger, consolidation, tender offer or
similar transaction; provided that in such event, the holders of Registrable
Securities initially requesting such Demand Registration will be entitled to
withdraw such request and such Demand Registration will not count as one of the
permitted Demand Registrations hereunder and the Company will pay all
Registration Expenses in connection with such registration.
2. Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to
register any of its securities under the Securities Act (other than pursuant to
(i) a Demand Registration, (ii) a registration in connection with shares issued
by the Company in connection with the acquisition of any company or companies or
(iii) a registration solely of shares that have been issued pursuant to the
Company's employee benefit plans) and the registration form to be used may be
used for the registration of Registrable Securities (a "Piggyback
Registration"), the Company will give prompt written notice to all holders of
Registrable Securities of its intention to effect such a registration and will
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within 15 days
after the receipt of the Company's notice.
(b) Piggyback Expenses. Subject to Section 5(b), the
Registration Expenses of the holders of Registrable Securities will be paid by
the Company in all Piggyback Registrations.
(c) Priority on Primary Registrations. If a Piggyback
Registration is an underwritten primary registration on behalf of the Company,
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without adversely
affecting the marketability of the offering, the Company will include in such
registration (i) first, the securities
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<PAGE> 52
the Company proposes to sell, (ii) second, the Registrable Securities requested
to be included in such registration, pro rata among the holders of such
Registrable Securities on the basis of the number of Registrable Securities
owned by each holder of Registrable Securities participating in such offering,
and (iii) third, other securities requested to be included in such registration;
provided that in any event the holders of Registrable Securities shall be
entitled to register at least 20% of the securities to be included in any such
registration.
(d) Priority on Secondary Registrations. If a Piggyback Regis
tration is an underwritten secondary registration on behalf of holders of the
Company's securities, and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such offering
without adversely affecting the marketability of the offering, the Company will
include in such registration (i) first, the Registrable Securities requested to
be included in such registration, pro rata among the holders of such Registrable
Securities on the basis of the number of Registrable Securities owned by each
holder of Registrable Securities participating in such offering, and (ii) second
other securities requested to be included in such registration.
(e) Selection of Underwriters. If any Piggyback Registration
is an underwritten offering, the selection of investment banker(s) and
manager(s) for the offering must be approved by the holders of a majority of the
Registrable Securities included in such Piggyback Registration. Such approval
will not be unreasonably withheld.
(f) Other Registrations. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to
Paragraph 1 or pursuant to this Paragraph 2, and if such previous registration
has not been withdrawn or abandoned, the Company will not file or cause to be
effected any other registration of any of its equity securities or securities
convertible or exchangeable into or exercisable for its equity securities under
the Securities Act (except on Form S-8 or any successor form), whether on its
own behalf or at the request of any holder or holders of such securities, until
a period of at least six months has elapsed from the effective date of such
previous registration.
3. Holdback Agreements.
(a) Each holder of Registrable Securities agrees not to effect
any public sale or distribution (including sales pursuant to Rule 144) of equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and the ninety
(90)-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration in which Registrable
Securities are included (except as part of such underwritten registration),
unless the underwriters managing the registered public offering otherwise agree.
(b) The Company agrees (i) not to effect any public sale or
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and during the ninety (90)-day period beginning on the effective date
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<PAGE> 53
of any underwritten Demand Registration or any underwritten Piggyback
Registration (except as part of such underwritten registration or pursuant to
registrations on Form S-8 or any successor form), unless the underwriters
managing the registered public offering otherwise agree, and (ii) to cause each
holder of at least 5% (on a fully-diluted basis) of its Common Stock, or any
securities convertible into or exchangeable or exercisable for Common Stock,
purchased from the Company at any time after the date of this Agreement (other
than in a registered public offering) to agree not to effect any public sale or
distribution (including sales pursuant to Rule 144) of any such securities
during such period (except as part of such underwritten registration, if
otherwise permitted), unless the underwriters managing the registered public
offering otherwise agree.
4. Registration Procedures. Whenever the holders of Regis
trable Securities have requested that any Registrable Securities be registered
pursuant to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof including the registration of common
stock that may be obtained upon conversion of Series A Preferred and/or Series B
Preferred held by a holder of Registrable Securities requesting registration as
to which the Company has received reasonable assurances that only Registrable
Securities will be distributed to the public, and pursuant thereto the Company
will as expeditiously as possible:
(a) prepare and file (in the case of a Demand Registration not
more than sixty (60) days after request therefor) with the Securities and
Exchange Commission a registration statement with respect to such Registra ble
Securities and use its best efforts to cause such registration statement to
become effective (provided that as far in advance as practicable before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company will furnish to the counsel selected by the holders of a majority of
the Registrable Securities covered by such registration statement copies of all
such documents proposed to be filed, which documents will be subject to the
review of such counsel);
(b) prepare and file with the Securities and Exchange Com
mission such amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than one hundred and
eighty (180) days and comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Securities such
number of copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any
5
<PAGE> 54
and all other acts and things which may be reasonably necessary or advisable to
enable such seller to consummate the disposition in such jurisdictions of the
Registrable Securities owned by such seller (provided that the Company will not
be required to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this subparagraph, (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to general
service of process in any such jurisdiction);
(e) notify each seller of such Registrable Securities, at any
time when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company will prepare
a supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Registrable Securities, such prospectus will not contain
an untrue statement of a material fact or omit to state any fact necessary to
make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the National Association of
Securities Dealers automated quotation system;
(g) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;
(h) enter into such customary agreements (including under
writing agreements in customary form) and take all such other actions as the
holders of a majority of the Registrable Securities being sold or the under
writers, if any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities (including, without limitation,
effecting a stock split or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(j) permit any holder of Registrable Securities which holder,
in its sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
registration or comparable statement and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included;
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<PAGE> 55
(k) in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company will promptly notify the holders of Registrable
Securities and will use its reasonable best efforts promptly to obtain the
withdrawal of such order; and
(l) obtain a cold comfort letter from the Company's
independent public accountants in customary form and covering such matters of
the type customarily covered by cold comfort letters as the holders of a
majority of the Registrable Securities being sold reasonably request.
5. Registration Expenses.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for the Company and all independent certified public
accountants, underwriters (excluding discounts and commissions) and other
Persons retained by the Company (all such expenses being herein called
"Registration Expenses"), will be borne as provided in this Agreement, except
that the Company will, in any event, pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit or
quarterly review, the expense of any liability insurance and the expenses and
fees for listing the securities to be registered on each securities exchange on
which similar securities issued by the Company are then listed or on the
National Association of Securities Dealers automated quotation system. The
Company shall not be required to pay an underwriting discount with respect to
any shares being sold by any party other than the Company in connection with an
underwritten public offering of any of the Company's securities pursuant to this
Agreement.
(b) In connection with each Company-paid Demand Registration,
the Company will reimburse the holders of Registrable Securities covered by such
registration for the reasonable fees and expenses (including the fees and
expenses of counsel chosen by the holders of a majority of the Registrable
Securities initially requesting such registration) incurred by such holders in
connection with such registration. To the extent that there are any unreimbursed
expenses incurred by the holders of Registrable Securities, each holder shall
bear his or her pro rata share of such expenses based upon the number of shares
of Registrable Securities held by such holder that are included in such
registration relative to the number of all Registrable Securities included in
such registration.
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<PAGE> 56
6. Indemnification.
(a) The Company agrees to indemnify, to the full extent
permitted by law, each holder of Registrable Securities, its officers and
directors and each Person who controls such holder (within the meaning of the
Securities Act) against all losses, claims, damages, liabilities and expenses
caused by any untrue or alleged untrue statement of material fact contained in
any registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the state ments
therein not misleading, except insofar as the same are caused by or contained in
any information furnished in writing to the Company by such holder expressly for
use therein or by such holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supplements thereto after the
Company has furnished such holder with a sufficient number of copies of the
same. In connection with an underwritten offering, the Company will indemnify
such underwriters, their officers and directors and each Person who controls
such underwriters (within the meaning of the Securities Act) to the same extent
as provided above with respect to the indemnification of the holders of
Registrable Securities.
(b) In connection with any registration statement in which a
holder of Registrable Securities is participating, each such holder will furnish
to the Company in writing such information and affidavits as the Company
reasonably requests for use in connection with any such registration statement
or prospectus and, to the extent permitted by law, will indemnify the Company,
its directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished in writing by such holder for use in such registration statement or
prospectus; provided that the obligation to indemnify will be individual to each
holder and will be limited to the net amount of proceeds received by such holder
from the sale of Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder will (i)
give prompt written notice to the indemnifying party of any claim with respect
to which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel rea sonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
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<PAGE> 57
(d) The indemnification provided for under this Agreement will
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any officer, director or controlling Person
of such indemnified party and will survive the transfer of securities. The
Company also agrees to make such provisions, as are reasonably requested by any
indemnified party, for contribution to such party in the event the Company's
indemnification is unavailable for any reason.
7. Participation in Underwritten Registrations. No Person may
participate in any registration hereunder which is underwritten unless such
Person (a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements
8. Definitions.
"Common Stock" means the Common Stock of the Company, no
par value.
"Registrable Securities" means (i) any Common Stock issued
upon the conversion of any Series A Preferred or Series B Preferred issued
pursuant to the Stock Purchase Agreement and any Common Stock issued upon
conversion of any Series A Preferred issued upon conversion of any Series B
Preferred issued pursuant to the Stock Purchase Agreement (whether held by PPEI
or any successor or assignee of PPEI), (ii) any Common Stock issued or issuable
with respect to the securities referred to in clause (i) by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization, and (iii) any
other shares of Common Stock held by Persons holding securities described in
clauses (i) and (ii) above. As to any particular Registrable Securities, such
securities will cease to be Registrable Securities when they have been
distributed to the public pursuant to a offering registered under the Securities
Act or sold to the public through a broker, dealer or market maker in compliance
with Rule 144 under the Securities Act (or any similar rule then in force). For
purposes of this Agreement, a Person will be deemed to be a holder of
Registrable Securities whenever such Person has the right to acquire directly or
indirectly such Registrable Securities (upon conversion or exercise in
connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected.
"Registration Expenses" has the meaning set forth in Section
5(a) hereof.
9. Miscellaneous.
(a) No Inconsistent Agreements. The Company has not entered
and will not hereafter enter into any agreement with respect to its securities
which is inconsistent with or violates the rights granted to the holders of
Registrable Securities in this Agreement.
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<PAGE> 58
(b) Adjustments Affecting Registrable Securities. The Company
will not take any action, or permit any change to occur, with respect to its
securities which would adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement or which would adversely affect the
marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
(c) Remedies. Any Person having rights under any provision of
this Agreement will be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(d) Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may be amended or waived only upon the
prior written consent of the Company and holders of at least 66.67% of the
Registrable Securities.
(e) Successors and Assigns. All covenants and agreements in
this Agreement by or on behalf of any of the parties hereto will bind and inure
to the benefit of the permitted respective successors and assigns of the parties
hereto whether so expressed or not. The parties expressly agree that PPEI shall
have the right to assign its rights and obligations hereunder to any transferee
who, immediately following such transfer, holds at least 10% of the Series A
Preferred or Series B Preferred acquired by PPEI pursuant to the Preferred Stock
Purchase Agreement.
(f) Notices. Except as otherwise expressly provided herein,
any and all notices, designations, consents, offers, acceptances or other
communications provided for herein shall be given in writing and shall be mailed
by first class registered or certified mail, postage prepaid, sent by a
nationally recognized overnight courier service or transmitted via telecopier as
follows:
If to the Company:
Lechters, Inc.
1 Cape May Street
Harrison, New Jersey 07029-9998
Telecopy: (201) 481-4479
Attention: President
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<PAGE> 59
With a copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019
Telecopy: (212) 424-8500
Attention: Bernard D. Fischman, Esq.
If to PPEI:
Prudential Private Equity Investors III, L.P.
717 Fifth Avenue
Suite 1100
New York, New York 10022
Facsimile: (212) 826-6798
Attention: Robert Knox, Chairman
Robert Getz, Director
With a copy to:
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022-4675
Facsimile: (212) 446-4900
Attention: Frederick Tanne, Esq.
Notice shall be deemed given, for all purposes, when deposited in the United
States mail as registered or certified mail, in which event the third day
following the date of postmark on the receipt of such registered or certified
mail shall conclusively be deemed the date of giving of such notice, on the
first Business Day following collection by the courier service or when
acknowledged by the receiving telecopier.
(g) Interpretation of Agreement; Severability. The provisions
of this Agreement shall be applied and interpreted in a manner consistent with
each other so as to carry out the purposes and intent of the parties hereto, but
if for any reason any provision hereof is determined to be unenforceable or
invalid, such provision or such part thereof as may be unenforceable or invalid
shall be deemed severed from the Agreement and the remaining provisions carried
out with the same force and effect as if the severed provision or part thereof
had not been a part of this Agreement.
(H) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS (AND NOT THE
CONFLICTS OF LAW) OF THE STATE OF NEW YORK.
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(i) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same Agreement.
(j) Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof, and
supersedes all previous agreements.
* * * * *
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<PAGE> 61
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the date first written above.
LECHTERS, INC.
By:
----------------------------------------
Name:
Title:
PRUDENTIAL PRIVATE EQUITY
INVESTORS III, L.P.
By: Prudential Equity Investors, Inc.,
General Partner
By:
----------------------------------------
Name:
Title:
<PAGE> 62
SCHEDULE I
<TABLE>
<CAPTION>
Shares of
Common Stock
issuable upon
Conversion of
Series A
Convertible
Shares of Series A Shares of Series Preferred Stock
Convertible B Convertible and Series B Convertible
Name, Address and Telecopier Number Preferred Stock Preferred Stock Preferred Stock
- ----------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Prudential Private Equity Investors III, 149,999 50,001 3,200,000
L.P.
c/o Prudential Equity Investors, Inc.
717 Fifth Avenue
Suite 1100
New York, New York 10022
Attention: Robert Knox, Chairman
Robert Getz, Director
Telecopier: (212) 826-6798
</TABLE>
<PAGE> 63
[Letterhead of LeBoeuf, Lamb, Greene & MacRae, L.L.P]
April 5, 1996
Prudential Private Equity
Investors, III, L.P.
717 Fifth Avenue
Suite 1100
New York, New York 10022
Dear Sirs:
We have acted as counsel for Lechters, Inc., a New Jersey
corporation (the "Company"), in connection with the issuance and sale of 149,999
shares of the Company's Series A Convertible Preferred Stock, par value $100 per
share (the "Series A Preferred") and 50,001 shares of the Company's Series B
Convertible Preferred Stock, par value $100 per share (the "Series B
Preferred"), for a price per share of $100 pursuant to the Preferred Stock
Purchase Agreement, dated as of April 5, 1996 (the "Preferred Stock Purchase
Agreement"), between Prudential Private Equity Investors III, L.P. ("PPEI") and
the Company. This opinion is being delivered to you pursuant to the provisions
of Section 7.1(c) of the Preferred Stock Purchase Agreement. All capitalized
terms used but not otherwise defined herein shall have the meanings ascribed to
them in the Preferred Stock Purchase Agreement.
<PAGE> 64
We have examined (a) an executed counterpart of the Preferred
Stock Purchase Agreement, (b) a copy of the Restated Certificate of
Incorporation of the Company, as amended through the date hereof, (c) a copy of
the By-Laws of the Company, as amended through the date hereof, (d) a copy of
the Registration Rights Agreement dated April 5, 1996, (e) a copy of the
Certificate of Amendment of the Restated Certificate of Incorporation (the
"Certificate of Amendment") establishing the terms of the Series A Preferred and
the terms of the Series B Preferred, and (f) a record of the corporate
proceedings of the Company relating to the authorization of the issuance of the
Series A Preferred and the Series B Preferred and the execution, delivery and
performance of the Preferred Stock Purchase Agreement and the Registration
Rights Agreement. In addition, we have examined the originals (or copies
certified or otherwise identified to our satisfaction) of such other agreements,
instruments, certificates, documents and records and have reviewed such
questions of law as we have deemed necessary or appropriate for the purposes of
the opinions rendered below.
In such examination, we have assumed, without inquiry, the
genuineness of all signatures on all documents examined by us other than those
of the Company, the authenticity of all documents submitted to us as originals,
the conformity to the original documents of all documents submitted to us as
copies and the authenticity of the originals of such latter documents. As to any
facts material to our opinions, we have, when relevant facts were not
independently established by us, relied upon the aforesaid agreements,
instruments, certificates, documents and records.
Based on the foregoing, and subject to the qualifications
stated herein, we are of the opinion that:
i. The Company is validly existing and in good standing as a
corporation under the laws of the State of New Jersey.
ii. The Company is duly qualified as a foreign corporation to
transact business in, and is in good standing in, every jurisdiction in which
the ownership of its properties or the conduct of its businesses makes such
qualification necessary
-2-
<PAGE> 65
except where the failure to be so qualified or in good standing would not have a
Material Adverse Effect.
iii. The Company has all necessary corporate power and
authority to own its properties and to conduct its businesses in the manner and
in the locations presently owned and conducted.
iv. The Preferred Stock Purchase Agreement, the Registration
Rights Agreement, and the other agreements contemplated by the Preferred Stock
Purchase Agreement to which the Company is a party have been duly authorized,
executed and delivered by the Company, and each such agreement is a valid and
binding obligation of the Company, enforceable in accordance with its terms,
except to the extent that such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, conservatorship, receivership,
moratorium or similar laws relating to or affecting creditors' rights generally
and by general principles of equity.
v. The Certificate of Amendment setting forth the rights and
preferences of the Series A Preferred and Series B Preferred containing the
provisions set forth in Exhibit A to the Preferred Stock Purchase Agreement has
been duly adopted by the Board of Directors of the Company and has been duly
filed with the Secretary of State of the State of New Jersey.
vi. The certificates representing the Series A Preferred and
Series B Preferred purchased at the Closing have been duly authorized, executed
and delivered by the Company; the Series A Preferred and the Series B Preferred
have been validly issued and are fully paid and nonassessable; and there are no
statutory or, to our knowledge after due inquiry, contractual preemptive rights
of stockholders or, to our knowledge after due inquiry, rights of first refusal
with respect to the issuance of such preferred stock which have not been waived.
vii. The Common Stock issuable upon conversion of either the
Series A Preferred or the Series B Preferred has been duly authorized and
reserved for issuance by the Company, there are no statutory or, to our
knowledge after due inquiry, contractual preemptive rights of stockholders or,
to our knowledge after due inquiry, rights of first refusal with respect to the
issuance of such Common Stock, and the Common Stock to be
-3-
<PAGE> 66
issued upon conversion of such Series A Preferred and Series B Preferred will
upon such issuance, assuming issuance pursuant to the terms and conditions of
the Series B Preferred, be validly issued, fully paid and nonassessable.
viii. The Series A Preferred issuable upon conversion of the
Series B Preferred has been duly authorized and reserved for issuance by the
Company, there are no statutory or, to our knowledge after due inquiry,
contractual preemptive rights of stockholders or, to our knowledge after due
inquiry, rights of first refusal with respect to the issuance of such Series A
Preferred, and the Series A Preferred to be issued upon conversion of such
Series B Preferred will upon such issuance, assuming issuance pursuant to the
terms and conditions of the Preferred Stock Purchase Agreement, be validly
issued, fully paid and nonassessable.
ix. The execution and delivery by the Company of the Preferred
Stock Purchase Agreement, the Registration Rights Agreement, and the other
agreements contemplated by the Preferred Stock Purchase Agreement, the adoption
of the Certificate of Amendment, the offering, sale and issuance of the Series A
Preferred and Series B Preferred, the issuance of Common Stock upon conversion
of the Series A Preferred or the Series B Preferred and the issuance of the
Series A Preferred upon conversion of the Series B Preferred, and the
fulfillment of and the compliance with the respective terms thereof by the
Company do not and will not (A) conflict with or result in a breach of the
terms, conditions or provisions of, (B) constitute a default under, (C) result
in the creation of any lien, mortgage, security interest, charge or other
encumbrance upon the Company's capital stock or assets pursuant to, (D) give any
third party the right to accelerate any obligation under, (E) result in a
violation of, or (F) require any authorization, consent, approval, exemption or
other action by or notice to any court or administrative or governmental body
pursuant to, the Company's Restated Certificate of Incorporation, the Company's
By-Laws, any law, statute, rule or regulation which, in our experience, are
normally applicable to transactions of the type provided for by the Preferred
Stock Purchase Agreement (except that we do not express an opinion with respect
to the need to obtain consents, approvals, authorizations or orders pursuant to
any law other than the Federal law of the United States, the law of the State of
New York and the
-4-
<PAGE> 67
corporation law of the State of New Jersey), or, to our knowledge, any
agreement, instrument, order, judgment or decree to which the Company is
subject.
x. Assuming the accuracy of the representations and warranties
set forth in Article VI of the Preferred Stock Purchase Agreement, the offering,
sale and issuance of the Series A Preferred and Series B Preferred pursuant to
the Preferred Stock Purchase Agreement do not require registration under the
Securities Act of 1933, as amended, or registration or qualification under any
securities laws of the State of New York.
xi. To the best of our knowledge, as of the date hereof there
are no claims, suits, proceedings or investigations pending or, to our
knowledge, threatened against or affecting the Company, any officer or director
thereof or the Company's business which if decided adversely to any such person
alone or in the aggregate, is reasonably likely to have a Material Adverse
Effect.
In rendering the foregoing opinions, we have relied as to
matters of fact, to the extent we deemed it proper, on certificates of
responsible officers of the Company and public officials. In rendering the
opinion in paragraph 2, we have relied with your permission on the opinion of
even date herewith of Ira Rosenberg, General Counsel to the Company.
We express no opinion with respect to any laws other than the
Federal law of the United States of America, the law of the State of New York
and the corporation law of the State of New Jersey. This opinion is delivered
solely to you pursuant to the terms of the Preferred Stock Purchase Agreement,
and it may not be delivered to, or relied upon in any manner by any other person
or entity or for any other purpose without our prior written consent.
Very truly yours,
/s/ LeBoeuf, Lamb, Greene & MacRae, L.L.P
-5-
<PAGE> 68
LECHTERS, INC.
1 Cape May Street
Harrison, New Jersey 07029
April 5, 1996
LeBoeuf, Lamb, Greene & MacRae, L.L.P
125 W. 55th St.
New York, New York 10019
Ladies and Gentlemen:
I am Vice President, Secretary and Corporate Counsel for
Lechters, Inc., a New Jersey corporation (the "Company"), and am delivering this
opinion in connection with the issuance and sale of 149,999 shares of the
Company's Series A Convertible Preferred Stock, par value $100 per share (the
"Series A Preferred") and 50,001 shares of the Company's Series B Convertible
Preferred Stock, par value $100 per share (the "Series B Preferred"), for a
price per share of $100 pursuant to the Preferred Stock Purchase Agreement,
dated as of April 5, 1996 (the "Preferred Stock Purchase Agreement"), between
Prudential Private Equity Investors III, L.P. ("PPEI") and the Company. This
opinion is being delivered to you in order to enable you to fulfill the
provisions of Section 7.1(c) of the Preferred Stock Purchase Agreement. All
capitalized terms used but not otherwise defined herein shall have the meanings
ascribed to them in the Preferred Stock Purchase Agreement.
I have examined such matters of fact and the originals (or
copies certified or otherwise identified to our satisfaction) of such
agreements, instruments, certificates, documents and records, and have reviewed
such questions of law as I have deemed
<PAGE> 69
necessary or appropriate for the purposes of the opinions rendered below.
In such examination, I have assumed, without inquiry, the
genuineness of all signatures on all documents examined by me other than those
of the Company, the authenticity of all documents submitted to me as originals,
the conformity to the original documents of all documents submitted to me as
copies and the authenticity of the originals of such latter documents. As to any
facts material to my opinions, I have, when relevant facts were not
independently established by me, relied upon the aforesaid agreements,
instruments, certificates, documents and records.
Based on the foregoing, and subject to the qualifications
stated herein, I am of the opinion that:
The Company is duly qualified as a foreign corporation to
transact business in, and is in good standing in, every jurisdiction in which
the ownership of its properties or the conduct of its businesses makes such
qualification necessary except where the failure to be so qualified or in good
standing would not have a Material Adverse Effect.
This opinion is delivered solely to you so that you may
fulfill terms of the Preferred Stock Purchase Agreement, and it may not be
delivered to, or relied upon in any manner by any other person or entity or for
any other purpose without my prior written consent.
Very truly yours,
/s/ Ira Rosenberg
---------------------------------
Ira Rosenberg
-2-
<PAGE> 70
Schedule 4.1
Subsidiaries
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
<S> <C>
Lechters Alabama, Inc. Alabama
Lechters Arizona, Inc. Arizona
Lechters Arkansas, Inc. Arkansas
Lechters California, Inc. California
Lechters Colorado, Inc. Colorado
Lechters Connecticut, Inc. Connecticut
Lechters Delaware, Inc. Delaware
Lechters Florida, Inc. Florida
Lechters Georgia, Inc. Georgia
Lechters Hawaii, Inc. Hawaii
Lechters Idaho, Inc. Idaho
Lechters Illinois, Inc. Illinois
Lechters Indiana, Inc. Indiana
Lechters Iowa, Inc. Iowa
Lechters Kansas, Inc. Kansas
Lechters Kentucky, Inc. Kentucky
Lechters Louisiana, Inc. Louisiana
Lechters Maine, Inc. Maine
Lechters Baltimore, Inc. Maryland
Lechters Holyoke, Inc. Massachusetts
Lechters Michigan, Inc. Michigan
Lechters Minnesota, Inc. Minnesota
Lechters Missouri, Inc. Missouri
Lechters Nebraska, Inc. Nebraska
Lechters Nevada, Inc. Nevada
Lechters New Hampshire, Inc. New Hampshire
</TABLE>
<PAGE> 71
Schedule 4.1
Subsidiaries
Page 2
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
<S> <C>
Lechters New Jersey, Inc. New Jersey
Lechters New Mexico, Inc. New Mexico
Lechters New York, Inc. New York
Lechters N.Y.C., Inc. New York
Lechters North Carolina, Inc. North Carolina
Lechters Ohio, Inc. Ohio
Lechters Oklahoma, Inc. Oklahoma
Lechters Oregon, Inc. Oregon
Lechters Pennsylvania, Inc. Pennsylvania
Lechters Rhode Island, Inc. Rhode Island
Lechters South Carolina, Inc. South Carolina
Lechters Tennessee, Inc. Tennessee
Lechters Texas, Inc. Texas
Lechters Utah, Inc. Utah
Lechters Vermont, Inc. Vermont
Lechters Springfield, Inc. Virginia
Lechters Washington, Inc. Washington
Lechters West Virginia, Inc. West Virginia
Lechters Wisconsin, Inc. Wisconsin
Cooks Club, Inc. New Jersey
Regent Gallery, Inc. New Jersey
Simple Solutions of NJ, Inc. New Jersey
Harrison Investment Corp. Delaware
</TABLE>
<PAGE> 72
Schedule 4.3
Options Granted Under Stock Option Plan 1,341,760 Shares
Options Granted Not Under Stock Option Plan 102,302 Shares
5% Convertible Subordinated Debentures 2,131,350 Shares
<PAGE> 73
Schedule 4.6
None
<PAGE> 74
Schedule 4.16
Service Marks and Trademarks Owned By and Registered In
The Name of The Company
1. Service Marks:
(a) Lechters
(b) Lechters Home Store
(c) The Kitchen Place
(d) Famous Brands Housewares Outlet
2. Trademarks:
(a) Lechters
(b) The Kitchen Place
(c) Cooks Club
(d) Regent Gallery
(e) Simple Solutions
(f) Perfect Bake
<PAGE> 75
Schedule 4.17
Collective Bargaining Agreements
1. Agreement dated July 26, 1994 between the Company and the Office and
Distribution Employees Union, Local 99, UNITE (then known as ILGWU) covering
office workers at 1 Cape May Street, Harrison, NJ, for a term expiring June 30,
1997.
.2 Agreement dated March 15, 1993 between the Company and Office and
Distribution Employees Union, Local 99, UNITE (then known as ILGWU) covering
warehouse workers at 1 Cape May Street, Harrison, NJ, expiring March 15, 1996,
amended by Memorandum of Agreement dated April 1, 1996 between the parties
extending the term to March 15, 1999.
<PAGE> 76
Schedule 4.22
Donald Jonas 20.0%
<PAGE> 1
AGREEMENT
BETWEEN
OFFICE AND DISTRIBUTION EMPLOYEES' UNION
LOCAL 99, U.N.I.T.E.
AND
LECHTERS, INC. (EMPLOYER)
*
MARCH 16, 1996 - MARCH 15, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNION RECOGNITION...................................................... 1
SCOPE OF AGREEMENT..................................................... 1
HIRING OF EMPLOYEES.................................................... 2
UNION SECURITY......................................................... 3
TRIAL PERIOD .......................................................... 3
MANAGEMENT RIGHTS...................................................... 3
TEMPORARY EMPLOYEES.................................................... 4
SENIORITY AND LAYOFFS.................................................. 4
JOB OPENINGS........................................................... 5
HOURS OF WORK.......................................................... 6
OVERTIME PAY........................................................... 6
PAYMENT ON APPEARANCE FOR WORK......................................... 7
GENERAL WAGE INCREASE.................................................. 8
CHANGE IN SHIFT TIMES.................................................. 8
MINIMUM WAGE........................................................... 9
HOLIDAYS............................................................... 9
VACATIONS.............................................................. 12
AUTHORITY TO ACT FOR UNION............................................. 13
NO-STRIKE PROVISION.................................................... 14
NO LOCK-OUT PROVISION.................................................. 14
ARBITRATION............................................................ 15
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
CHECK OFF OF DUES...................................................... 17
BENEFIT FUNDS.......................................................... 17
SEVERANCE FUND-TERMINATION OR DISMISSAL OF BENEFITS.................... 21
DISCHARGE OF EMPLOYEES................................................. 24
SHOP STEWARD AND COMMITTEE............................................. 24
RIGHT OF VISITATION.................................................... 25
STRIKES OF U.N.I.T.E. AFFILIATES....................................... 25
EXAMINATION OF RECORDS................................................. 26
PENALTY UPON FAILURE TO PAY DUES AND CONTRIBUTIONS..................... 26
PENALTY UPON FAILURE TO PAY DUES AND CONTRIBUTIONS..................... 26
PRE-TICKETING AND OTHER PROCESSING OPERATIONS.......................... 26
UNION RECOGNITION IN ADDITIONAL FACILITIES............................. 27
REMOVAL OF FACILITIES.................................................. 27
CONTRACTING OUT........................................................ 27
REORGANIZATION......................................................... 28
SURVIVAL OF LIABILITY.................................................. 28
CONTINUING OBLIGATIONS IN THE EVENT OF SALE OR TRANSFER................ 28
INVALIDITY OF PART OF AGREEMENT........................................ 29
NO DISCRIMINATION...................................................... 29
EXISTING BENEFITS...................................................... 30
JURY DUTY.............................................................. 30
TIME OFF FOR UNION MEETINGS............................................ 30
FIRE DRILLS............................................................ 30
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
NO MODIFICATION OR WAIVER.............................................. 31
DURATION OF AGREEMENT.................................................. 31
</TABLE>
iii
<PAGE> 5
AGREEMENT made and entered into the 16th of March, 1996, effective as March
16, 1996 by and between LECHTERS, INC. (Employer), located at 1 Cape May Street,
Harrison, NJ 07029, herein referred to as the "Employer," and LOCAL 99,
U.N.I.T.E. (formerly known as Local 99, I.L.G.W.U.), herein referred to as the
"Union."
W I T N E S S E T H:
WHEREAS, the parties hereto desire to regulate mutual relations between the
Employer and the Union with a view toward securing harmonious cooperation
between them and averting disputes; and
WHEREAS, the Union represents the overwhelming majority of the workers in
the job functions hereinafter set forth employed by the Employer;
NOW, THEREFORE, in consideration of the mutual promises set forth, the
parties hereto agree with each other as follows:
UNION RECOGNITION
1. The Employer recognizes the Union as the sole and exclusive bargaining
agent and representative of the employees covered by this Agreement for the
purposes of collective bargaining with respect to all matters affecting such
employees.
SCOPE OF AGREEMENT
2. This contract shall apply to and cover warehouse and distribution
workers employed in the following job functions in the warehouse and
distribution center at One Cape May Street, Harrison, New Jersey and any other
warehouse and distribution center within 100 miles from its present location in
Harrison, New Jersey to which this Agreement shall apply as set forth in
paragraphs 32 and 33 hereof:
Shipping Clerks, including sorters, receiving clerks, packers,
order pickers, including full case pickers, drivers, hi-lo
drivers, fork lift drivers, porters, all warehouse clericals,
stock clerks, supply department employees, hi-lift drivers,
janitors, lead persons, cycle counters, replenishers and other
employees performing the same or similar type work employed by
Lechters warehouse and excluding, however, supervisory
personnel.
<PAGE> 6
The above titles are not intended to define job functions or limit the
combinations and overlap of duties, but are only listed for the purpose of
determining which employees are covered by this Agreement.
The Employer agrees to employ at least two (2) truck drivers who will
perform switching of trailers and local delivery duties as assigned by the
Employer.
a. Current employees covered under the Agreement and trained for use of
PDT and RF guns shall receive a bonus as provided for in Exhibit C.
b. The Employer will provide to the Union, at least weekly, a list of
temporary and lumper employees who worked with a daily recap. Lumpers will
perform work only as provided for in Exhibit D. No lumper shall be used both as
a Lumper and as a temporary employee in the same work day, or vice versa.
Lumpers may not be used until all employees in the receiving department who have
been involuntarily laid off shall have been rehired or given the opportunity to
return to work unless there is insufficient time to give notice to such laid off
employees so that they may return to work. Receiving department employees shall
be exempt from plant-wide seniority with respect to layoffs while the Employer
is participating in the "lumper" program. Layoffs within the receiving
department shall be based on plant-wide seniority within the Department.
HIRING OF EMPLOYEES
3. a. The Employer shall have the sole and exclusive right to select and
hire its employees. Within forty-eight (48) hours from the time of hiring an
employee covered by this Agreement, the Employer shall send a written notice to
the Union on an appropriate form supplied by the Union, stating name, address,
salary, starting date and job function of such new employee. The Employer agrees
to notify the Union of job openings. If a request is made before 11:00 A.M. the
Union will use its best efforts to supply workers, if available, on or before
the end of the following work day, without regard to their Union membership. The
Employer shall be under no obligation to hire such referrals.
b. All new employees shall be required to take a pre-placement physical
examination at U.N.I.T.E. Health Center without loss of pay. All covered workers
who have been employed for one (1) year, shall be given time off at least once
during each contract year of this Agreement, without loss of pay, for the
purpose of undergoing a physical check-up examination at the Union Health
Center. All such examinations shall take place at a time mutually agreed upon
and pursuant
2
<PAGE> 7
to procedures between the Union and the Employer.
c. All eligible covered workers shall be entitled to receive three and
one-half (3 1/2) hours with pay, during each contract year, for dental facility
visits authorized by the Union, with a minimum allowance of one (1) hour for
each visit.
UNION SECURITY
4. To the extent permitted by law, good standing membership in the Union
shall be a condition of employment for all employees covered by this Agreement
on or after the 30th day following the beginning of such employment or the
execution or the effective date of this Agreement, whichever is the later, but
not before completion of the worker's trial period. For the purpose of this
provision, a member of the Union shall be deemed to be in good standing only if
his initiation fees and periodic fixed dues are not in arrears for more than
thirty (30) days, and notice to that effect has been stated to the Employer by
the Union.
TRIAL PERIOD
5. A trial period of sixty (60) calendar days is hereby fixed for new
employees covered by this Agreement. During such trial period, the Employer may
discharge such new employees without cause, without notice to the employees or
to the Union and without the consent of the Union. Thereafter, the new employees
shall not be subject to discharge except as provided in this Agreement. The
trial period shall not be abused by the Employer and any claim of abuse shall be
the subject of arbitration hereunder.
MANAGEMENT RIGHTS
6. Subject only to the provisions of this Agreement and applicable law,
management of the Employer's operations and direction of its working force
including, but not limited to the right to schedule and assign work to be
performed; hire or rehire employees; promote; layoff or recall employees who are
laid off; suspend; discipline or discharge for proper cause; and transfer
employees because of lack of work or other legitimate reasons, shall be vested
exclusively with the Employer.
3
<PAGE> 8
TEMPORARY EMPLOYEES
7. a. The Employer may employ temporary employees who shall not be required
to become members of the Union. Such temporary employees may be used by the
Employer only to compensate for an absent full-time employee on a one-for-one
basis.
b. The Employer may supplement the normal work force with no more than
ten (10) temporary employees per day between the months of February through May
and with no more than fifteen (15) temporary employees between June through
January.
c. No temporary employee may work for more than sixty (60) calendar days
in any six (6) month period. Should any temporary employee remain in the
Employer's employ for a period in excess of sixty (60) calendar days in any six
(6) month period, then such employees shall thereafter be required to become a
member of the Union.
d. The Employer shall maintain a daily log of temporary employees who
shall sign in and out recording the time of the commencement and termination of
work. The log shall set forth that it is for temporary employees.
e. Except for temporary employees employed under subsection a. above,
before temporary employees are hired, all regular workers must be recalled from
layoff before any regular employees can be laid off, all temporaries must be
laid off.
f. A list of temporary employees will be provided to the
Labor-Management Committee on a weekly basis. A list of all Union associates who
are absent from work will be provided on a daily basis.
g. The Employer shall not abuse the within provisions for temporary
help.
SENIORITY AND LAYOFFS
8. a. All rehirings and layoffs shall be done in accordance with seniority,
i.e. the last employee hired shall be the first employee laid off, and the last
employee laid off shall be the first employee rehired. Layoffs and rehirings
shall not be on a departmental basis, except where the employee in question is
4
<PAGE> 9
unable to perform the required work. Regardless of seniority rights of part-time
employees, they shall be the first to be laid off and the last to be rehired,
except where a full-time employee is unable or unwilling to perform the required
work and except where the part-time employees were formerly full-time employees.
For workers employed less than one (1) year, notice of layoff shall be made
available by the Employer during the day of such layoff. Workers employed for
one (1) year or longer shall receive notice of layoff at least five (5) working
days prior to such layoff or such workers shall be paid for said period in lieu
of said notice. Part-timers shall be informed of layoff provisions at the time
they are hired. Employees on layoff should advise the Personnel Department where
they can be reached while on layoff or absent.
b. Leaves of absence in case of sickness, pregnancy, jury duty or Union
business shall be granted for reasonable periods. Other leaves of absence for
personal needs may be requested and shall not unreasonably be withheld. At least
five (5) days leave of absence with pay shall be granted in case of death in a
worker's immediate family which includes spouse, parent and grandparent, child
and grandchild, sister and brother. At least two (2) days leave of absence with
pay shall be granted in case of death of a worker's father-in-law or
mother-in-law; two (2) days leave of absence with pay shall be granted to a
covered male worker in connection with the birth of his child. Proof of such
occurrences may be required.
c. For the purpose of adjusting any inequities, the Employer or the
Union may request a review of a worker's continuing status of employment when an
extended layoff period or an extended leave of absence exists.
JOB OPENINGS
9. Vacancies on classified jobs or other jobs in the plant shall be posted
for no less than three (3) working days. Bidding shall be in writing and awarded
to the most senior qualified employee. An employee may apply for a new opening
only once in any twelve (12) consecutive month period.
The Employer will reassign associates from position to position based on
seniority, provided the most junior person has the qualifications and skills to
perform the temporary assignment.
5
<PAGE> 10
HOURS OF WORK
10. a. The days of work shall be from Monday to Friday inclusive, and the
hours of work from 8:00 A.M. to 4:15 P.M. daily, inclusive of one-half (1/2)
hour for lunch. The Union shall not unreasonably withhold its consent to vary
the start of the work day. Current starting time and lunch hour arrangements
heretofore agreed between the Union and the Employer may be continued.
b. The Employer shall provide a time clock. All workers shall punch time
cards before and after work periods.
OVERTIME PAY
11. Employees shall be paid at the rate of time and one-half for overtime
after seven and three quarters (7 3/4) hours in a day and for all work performed
in excess of thirty-eight and three quarters (38 3/4) hours per week. Overtime
at the rate of time and one-half shall be paid for work performed before and
after regularly scheduled hours.
a. When overtime is needed, employees shall be notified as far in
advance as possible in order to allow them to make necessary preparations for
working overtime and such notice shall be given no later than the employees'
scheduled lunch break if overtime work that day is needed.
b. The Union agrees that it will, through its shop committee, cooperate
in having employees perform overtime work when it is requested.
c. The Company will request volunteers from among the employees who are
capable and qualified to perform the overtime work involved. When such overtime
work is necessary and there are insufficient volunteers, the employee in the
department with the least seniority shall be the first to be required to work.
If requested to work overtime, the employee will be required to do so during the
peak season between September 1 and December 31, unless he or she has a
reasonable excuse for being unable to work. Overtime during the non-peak season
shall be voluntary except in the case of an emergency.
d. Overtime will be allocated as equally as possible among employees
consistent with Section (b). The overtime records shall be available for
inspection at the request of the Union.
6
<PAGE> 11
e. Where there has been a reduction in working force in a department, no
overtime shall be permitted in such department until all employees in that
department who have been involuntarily laid off shall have been rehired or given
the opportunity to return to work unless there is insufficient time to give
notice to such laid off employees so that they may return to work.
f. The Company agrees that all disputes under this Article shall be
subject to the grievance and arbitration procedures of the Agreement.
g. Except as hereinafter provided, during the entire period of this
Agreement, Saturday work shall be paid at the rate of time and one-half and
Sunday and legal holiday work at the rate of double time.
h. A worker who is required to work more than three (3) hours of
overtime in any one day shall receive twenty (20) minutes time for supper, shall
be paid for such time and, in addition, shall receive supper money of three
($3.00) dollars.
PAYMENT ON APPEARANCE FOR WORK
12. a. An employee called into work and who reports to work shall receive
one full day's employment or one day's pay for such day. If an employee is
called in on Saturday, Sunday and/or holiday, he shall receive at least a
minimum of five (5) hours work or a minimum of five (5) hours pay at the
applicable overtime rates.
b. The Employer shall post notice on its phone call-in system no less
than ninety (90) minutes before an employee shift start time advising employees
that the facility is closed and they should not appear for work. Employees shall
use reasonable efforts, when conditions indicate that the facility may be
closed, to call in. In the event notice fails, despite reasonable efforts by the
employee, an employee appearing at the facility for work when the facility is
closed shall be paid four (4) hours pay. In the event employees are told to
leave before the conclusion of their shift because of such conditions, shall
receive a full day's pay. Employees may continue to choose to use personal or
accrued vacation time to receive payment for any day in which the facility is
closed and they would not otherwise receive payment.
7
<PAGE> 12
GENERAL WAGE INCREASE
13. a. Employees in the bargaining unit will receive wage adjustments as
follows (pro-rata for part-time employees):
<TABLE>
<S> <C>
- March 16, 1996 $15.00/week
- March 16, 1997 8.00/week
- September 16, 1997 7.00/week
- March 16, 1998 8.00/week
- September 16, 1998 7.00/week
</TABLE>
b. Workers shall hereafter be paid their wages in cash not later than
three (3) working days after the end of the work week, except by special
arrangement with the Union. Payment of wages by check may be made upon mutual
Agreement of the parties.
c. In the event of a rise in the cost of living the Union may, at any
time during this Agreement, request an upward revision of wages for workers
covered under this Agreement. In the event of disagreement between the parties,
the matter shall be adjusted in the same manner as any other dispute under this
Agreement.
CHANGE IN SHIFT TIMES
14. A change in permanent shift times shall occur on April 29, 1996 as
follows:
- 7:00 a.m. to 3:15 p.m. Mezzanine and Replenishers
- 8:00 a.m. to 4:15 p.m. All other employees, however, the
Employer may reassign twenty-five (25%) percent of the work force in shipping
and twenty-five (25%) percent of full case for the 7:00 a.m. shift. In making
such assignment, the Employer will first use volunteers and, if insufficient
volunteers are obtained, the Employer will reassign employees based upon reverse
shop seniority, with the least senior employee being reassigned. The Employer
will provide to the Union a list identifying those employees who are in the
Replenishing Department.
With respect to any shift commencing on or after 2:00 p.m., shift
differentials shall be amended to provide that employees hired after the
effective date of this Agreement shall receive a differential of fifty ($.50)
cents per hour.
8
<PAGE> 13
Current employees shall receive a differential of one dollar and fifty ($1.50)
cents per hour (in lieu of the twenty (20%) percent differential provided for in
the old agreement). The Company shall first offer current employees the right to
change to fifty (50%) percent of the available positions on the other shift
before hiring new employees.
MINIMUM WAGE
15. a. Employees covered by this Agreement shall receive, at the time of
hiring, the minimum wage or salary provided by state law, which is now not less
than $5.05 dollars per hour.
b. Each new employee regardless of his starting weekly wage, shall
receive not less than a seven ($7.00) dollar increase in his weekly wage after
the completion of his temporary or trial period. The seven ($7.00) dollar
increase shall be retroactively paid to the 31st day of employment.
c. The Union reserves the right to request an upward adjustment of the
wages prescribed herein to become effective at any time on or after March 16,
1996. In case of a dispute, the matter shall be referred to the Impartial
Chairman for his determination in the same manner as any other dispute under
this Agreement.
d. If, during the term of this Agreement, a new applicable minimum wage
law is enacted and/or becomes effective which increases the present applicable
minimum hourly rate of pay, then the minimum weekly wage set forth herein shall
automatically be adjusted as required and the minimum wage hereunder shall be at
no time less than fifteen (15%) percent per hour above such newly established
applicable minimum wage.
HOLIDAYS
16.a. During the term of this Agreement all workers covered hereunder shall
be entitled to receive a full day's pay for each of the following legal or
religious holidays; each shall be observed, regardless of the day of the week in
which each occurs:
9
<PAGE> 14
New Year's Day
Martin Luther King Day
Washington's Birthday
Good Friday
Memorial Day
July 4th
Labor Day
Thanksgiving Day
Day After Thanksgiving
Christmas Eve (December 24th)
Christmas Day (December 25th)
All covered workers must work the scheduled day before the holiday
and the scheduled day after the holiday in order to receive holiday pay; unless
excused for bona-fide reasons. In addition to the above, all covered workers
shall be entitled to receive four (4) additional guaranteed holidays to be
designated by each worker during the calendar year, making a total of fifteen
(15) guaranteed holidays. The personal days shall be scheduled subject to
management approval based on reasonable staffing requirements, which approval
will not be unreasonably withheld. The employee will be guaranteed such personal
day during the year.
In the event a substantial number of the Employer's workers selects a
common date, the Employer may adopt such date as an additional guaranteed
holiday and close its business entirely on such date, which shall be binding on
all employees. A worker employed after January 1st shall not have the right to
select such additional holiday to occur within six (6) months from the start of
his employment. However, such worker shall be entitled to holiday pay in the
event of a complete shut down by the Employer as indicated above in lieu of the
selected date.
b. If work is performed on a regular work day or a Saturday and a legal
holiday is celebrated on such day, employees shall receive one day's holiday pay
plus double time for the number of hours worked. If work is performed on a
Sunday which is a legal holiday and it is celebrated on the following Monday,
employees shall receive double time for the number of hours worked. If work is
performed on a Monday, which is the day of celebration of a legal holiday which
fell on the preceding Sunday, employees shall receive one full day's pay plus
double time for the number of hours worked.
10
<PAGE> 15
c. If a legal holiday falls on Saturday, the Employer may substitute
therefore the preceding Friday or the following Monday in lieu of the legal
holiday upon reasonable notice.
The date of observance of any of the foregoing holidays shall conform
to applicable Federal policy regardless of the location of the Employer's
offices, warehouses and/or its facilities.
An employee absent without just cause on the scheduled work day
immediately preceding a holiday or the scheduled work day immediately succeeding
a holiday shall not be entitled to receive holiday pay.
At the request of the Union, May 1st shall be designated as a holiday
but without pay to the covered employees.
It is not intended that employees receive more than one day's holiday
pay for any one holiday provided for in this Agreement.
d. If a legal holiday or holidays fall during the period when a worker
is laid off, holiday pay shall be given to the worker upon his recall and return
to work.
e. The Union and/or the Employer may request a reopening, but not more
than once each contract year, for the purpose of reviewing and arranging the
specific days on which all of the guaranteed paid holidays shall be observed.
f. New employees shall receive no holiday pay for holidays falling
within their trial period but after completing their trial period they shall be
paid retroactively for any holidays falling in their trial period.
Temporary employees shall receive no pay for holidays but upon
becoming regular or permanent employees with no break in service they shall be
paid retroactively for any holidays.
Newly hired employees are not permitted to select floating and/or
personal holidays until employed at least six (6) months. If the Employer elects
to close its business for a floating holiday, then all workers will be paid.
Where possible forty-eight (48) hours prior notification for
selection of personal days will be given by employees to the Employer.
11
<PAGE> 16
VACATIONS
17. a. The vacation period shall be from February 1st to September 30th of
each year, however, where the Employer and the employee agree on a different
vacation period the Union shall not unreasonably withhold its consent.
Associates may also request vacations between October 1st and December 31st,
which will be approved and granted at a rate of five (5) persons per week, but
no more than three (3) from the mezzanine and two (2) from all other
departments, according to seniority to associates who request vacations during
the normal vacation scheduling period. Vacations will be granted at the time
most desired by the associate whenever possible, however, the Employer reserves
the right to ensure proper coverage for business operations.
Vacation requests should be submitted for approval during the normal
vacation scheduling period. No vacations will be approved without a minimum of
two (2) weeks notice.
Vacations with pay will be granted each year, as provided in this
Paragraph 17, to covered employees who will have the required length of
employment as of Labor Day of each year, except that for covered employees with
five (5) or more years of seniority, the date for determining eligibility shall
be December 31.
<TABLE>
<CAPTION>
Length of Employment Vacation Period With Pay
- -------------------- ------------------------
<S> <C>
1 year and over, but less than 2 years ............................ One week
2 years and over, but less than 5 years ........................... Two weeks
5 years and over, but less than 10 years .......................... Three weeks
10 years and over ................................................. Four weeks
</TABLE>
b. An employee who is on the payroll of the Employer on June 1st and who
was hired between Labor Day and December 31st of the previous year shall be
entitled to receive three (3) working days vacation with pay during the summer
vacation period immediately following the beginning of employment.
An employee who is hired between January 1st and June 1st of any
contract year shall, if he is employed on December 1st of the same year, be
entitled to receive three (3) working days of vacation with pay during the
winter vacation period of that year.
12
<PAGE> 17
All workers, whenever employed, who are eligible to receive three (3)
days, one (1) week or two (2) weeks regular vacation with pay and who are
employed on December 1st of the same vacation year, shall be entitled to receive
an additional three (3) working days of vacation with pay during the winter
vacation period of that year.
c. Upon consent of an individual worker and the Employer, vacation pay
for the third and/or fourth weeks vacation may be given in lieu of vacation. The
date of the third and/or fourth weeks vacation shall be mutually arranged and
shall be taken between December 1 and January 31. Such arrangements shall be
made within a reasonable time prior to the vacation period.
d. Whenever a holiday falls within an employee's vacation, and either
occurs on a day in the employee's regularly scheduled work-week or is a
guaranteed legal holiday, the employee shall be granted an extra day of vacation
or an extra day's pay at the option of the Employer.
e. (i) Employees employed for fifteen (15) years but less than twenty
(20) years shall receive, in addition to four (4) weeks vacation with pay, the
sum of Seventy-Five ($75.00) Dollars at the time of vacation by separate
payment; employees employed for twenty (20) years, but less than twenty-five
(25) years shall receive the sum of One Hundred Fifty ($150.00) Dollars at the
time of the mid-winter vacation by separate payment and employees employed for
twenty-five (25) years and over shall receive the sum of Two Hundred Fifty
($250.00) Dollars at the time of the mid-winter vacation by separate payment.
(ii) Additionally, employees employed for fifteen (15) years, twenty
(20) years and twenty-five (25) years shall receive $50.00 on each of the
following dates: on the 15th, 20th and 25th anniversary of the starting date of
employment of such employees by the Employer.
AUTHORITY TO ACT FOR UNION
18. It is understood and agreed that only the following are authorized to
act as agents of the Union in the administration of this Agreement and in
dealing with and determining any questions which may arise thereunder, or in the
relations between the Employer and the Union: Manager and Business
Representatives (to be designated by name, in writing, to the Employer) and the
Employer Representatives, designated by name, in writing, to the Union.
However, the right is reserved to the Union to substitute a different
agent or agents or add new agents at any time during the life of this Agreement
by serving upon the Employer notice in writing of such change or addition of
agents of the Union.
No person shall be deemed an agent of the Union unless designated as
such by the Union in writing. Neither the shop steward nor any shop committee
shall be deemed or construed to be an agent of the Union unless designated in
writing as such agent.
13
<PAGE> 18
NO-STRIKE PROVISION
19. a. The Union agrees that it will not call, authorize or ratify a
strike, or stoppage during the life of this Agreement. Should any unauthorized
strike or stoppage of work by covered employees occur, the Union obligates
itself, within twenty-four (24) hours after receipt of notice thereof from the
Employer, solely to endeavor in good faith to bring about the return to their
work of the covered employees who have stopped work. Upon failure of such
employees to return to work within the said twenty-four (24) hours, the Employer
may at its option consider that all or any of the employees have abandoned their
employment. Should the Employer re-employ any such employees, it shall re-employ
all of them and shall treat all alike and shall not discriminate among them.
Compliance by the Union in good faith with this provision shall be deemed full
compliance with the Union's obligations hereunder. As an alternative to
submitting the matter to arbitration pursuant to Paragraph 21 hereof, the
Employer or shall also have the option of terminating this Agreement upon
failure of the Union to comply with this paragraph.
b. The foregoing no-strike, no-stoppage obligation shall be wholly
suspended and of no force and effect, and the Union may call, authorize or
ratify a strike or stoppage at any shop, office, warehouse and/or facility of
any Employer during the continuance of any strike or stoppage (not in violation
of contract) declared by U.N.I.T.E. or any affiliate thereof at any shop,
office, warehouse and/or facility of any firm which is directly or indirectly
affiliated with or related to the Employer, or for the Employer's failure to
submit to arbitration or to comply with the decisions of the Impartial Chairman
within forty-eight (48) hours, or the Employer's failure to pay wages, overtime
and/or holiday pay to his covered workers.
NO LOCK-OUT PROVISION
20. The Employer agrees that it will not order, authorize or ratify a
lock-out during the life of this Agreement. Should the Employer cause a
lock-out, or should there result a lock-out for any other reason, notice thereof
shall be given by the Union to the Employer. Thereupon, the Employer obligates
itself within twenty-four (24) hours after receipt of such notice, solely to
endeavor in good faith to have the lock-out terminated and to cause the
re-employment of the employees. Upon the failure of the Employer to do so within
twenty-four (24) hours, the Union upon failure to reach an Agreement with the
Employer shall have the option of terminating this Agreement with respect to the
Employer involved, or of submitting
14
<PAGE> 19
the matter to arbitration pursuant to Paragraph 21 hereof.
ARBITRATION
21. All complaints, disputes or grievances arising directly or indirectly
between the Union and the Employer or any of his subsidiary, auxiliary and
affiliated firms or his or their successors and assigns, involving questions of
interpretation, application, performance or operation of any clause of this
Agreement or any acts, conduct or relations between them including, without
limitation, any claim against the Employer arising out of any alleged
dissolution or termination of his business prior to the expiration of this
Agreement or any claim against his successors or assigns arising out of any
alleged merger with or purchase of assets from another Employer prior to the
expiration of this Agreement, shall be submitted in writing by the party hereto
claiming to be aggrieved, to the other party involved or Impartial Chairman, and
the Employer involved and the Manager of the Union, or their deputies, shall, in
the first instance, jointly investigate such complaints, grievances, or disputes
and attempt an adjustment. Decisions reached by them or their deputies shall be
binding on them. Should they fail to agree, the question or dispute shall be
referred to the Impartial Chairman to be mutually agreed upon and his decision
shall be final and binding upon the Union and the Employer. In the event of a
default by the Union or the Employer in appearing before the Impartial Chairman,
after due written notice shall have been given to the Employer or Union as
hereinafter provided, the Impartial Chairman is hereby authorized to render a
decision upon the testimony of the party appearing.
All decisions reached by the Employer and the Manager of the
Union, or their deputies, or rendered by the Impartial Chairman, shall be
complied with within forty-eight (48) hours. Should the Employer fail to comply
with the decision of the Impartial Chairman within forty-eight (48) hours, the
Employer shall automatically lose all rights and privileges under this Agreement
and the Union shall be free to take any action it may deem appropriate to
enforce the rights of the workers against the Employer, including the right to
strike against the Employer.
The Union and the Employer designate J.J. Pierson, Esq. to act as
Impartial Chairman and Arbitrator in connection with any aforesaid complaint or
aforesaid dispute or aforesaid grievance arising during the term of this
Agreement, and agree that all hearings had before him or before his successor or
successors shall be held in the City of New York.
15
<PAGE> 20
The Employer and the Union each agree to pay one-half of the fee
of the Arbitrator and each party shall be responsible for its own costs of such
arbitration.
Should the designated Impartial Chairman resign, refuse to act or
be incapable of acting, or should the office become vacant for any reason, the
Union and the Employer shall immediately and within five (5) days after the
occurrence of such vacancy, designate another person to act as such Impartial
Chairman. If they fail to agree, the New Jersey State Board of Mediation shall,
on application of either the Union or the Employer, summarily make such
appointment on an ad hoc basis for each submitted case.
The Impartial Chairman may, as part of his decision, issue any and
all mandatory directions, prohibitions or orders directed to or against the
Union or the Employer breaching this Agreement or any part thereof.
It is the intention and Agreement of the Union and the Employer
that the procedure established in this Agreement for the adjustment of disputes
shall be the exclusive means for the determination of all disputes, complaints
or grievances specified herein, expressly including all strikes, stoppages,
lockouts and any and all claims, demands or acts arising therefrom. Neither the
Union nor the Employer shall institute any proceedings in a court of law or
equity other than to compel arbitration or to enforce the decision and award of
the Impartial Chairman, or to compel the production of books and records of the
Employer for examination by the Impartial Chairman or his representatives. This
provision shall be a complete and bona fide defense to any action or proceeding
instituted contrary to the terms hereof.
The Employer or the Union, as the case may be, who violates or
causes to be violated any provision of this Agreement, shall, whenever this
Agreement does not provide for the payment of specified damages, nevertheless
pay damages for such violation. The amount of such damages shall be agreed upon
by the Union and the Employer and in the event of their inability to agree, it
shall be determined by the Impartial Chairman.
Since it is difficult to ascertain the specific amount of damages
payable, the amount of such damages shall for all purposes be deemed liquidated
damages. Whenever the Employer is required to pay such damages, they shall be
paid to the Union for and on behalf of itself and to compensate employees who
may be entitled to compensation.
16
<PAGE> 21
The provisions contained herein do not empower the Impartial
Chairman to act with respect to any renegotiation, extension or renewal of this
Agreement at the end thereof. The costs of arbitration shall be shared equally
by both parties.
The Union and the Employer further agree that the notice of
hearing before the Impartial Chairman and the service of all papers used in any
application to the court in any proceedings to confirm the award of the
Impartial Chairman may be made by Certified Mail, Return Receipt Requested, at
the last known address of residence of the owner or officer of or place of
business of the respondent in such proceeding, within or without the State of
New Jersey, as the case may be, including service of the papers conferring
jurisdiction of the Union and the Employer upon the court, and the Union and the
Employer expressly agree that such award shall be enforceable by appropriate
proceedings in any court of competent jurisdiction.
If any issue should arise as to the validity of any provision of
this Agreement, or the arbitrability of this Agreement, substantive or
procedural, the Impartial Chairman shall have exclusive jurisdiction to
determine such issue.
CHECK OFF OF DUES
22. The Employer, where legally so authorized by an individual employee in
writing, agrees to deduct the membership dues, assessments, and initiation fees
weekly from the wages or salary of such employee and remit the same to the
Union, not less than once a month, by the fifteenth day of the same month.
Deductions made after the fifteenth day of the month shall be remitted with the
payments of the following month. Sums so deducted by the Employer shall be kept
separate and apart from the general funds of the Employer and shall be held in
trust by the Employer for the benefit of the Union.
BENEFIT FUNDS
23. The term "benefit funds" is the collective designation of the Health &
Welfare Fund of Local 99, U.N.I.T.E. (hereafter referred to as the "Health and
Welfare Fund"), U.N.I.T.E. National Retirement Fund (hereafter referred to as
the "Retirement Fund"), and U.N.I.T.E. Health Services Plan (hereafter referred
to as "Health Services Plan").
17
<PAGE> 22
The Employer shall pay monthly to the Union for and on behalf of
the benefit funds and during the period indicated the percentages set forth
below of his total gross weekly payroll (before deductions for Federal, State
and City taxes) of all his employees, covered by this Agreement whether regular
or trial workers. When trial workers become permanent, payments by the Employer
to the benefit funds will be paid retroactive to the first day of employment.
The Employer is not required to make payment to any benefit funds for temporary
employees.
If temporary employees become regular or permanent employees the
Employer's payment to the funds will commence on the first day of regular or
permanent employment.
Such payments shall be allocated and paid as follows:
a. Effective March 16, 1996 fourteen and one-fourth percent
(14-1/4%) of gross payroll towards the Health and Welfare Fund, a trust fund
established by collective Agreement prior to January 1, 1946 and maintained and
administered by a Union Board of Trustees, in trust for the purpose of providing
workers with health, welfare, recreational benefits and other services relating
specifically to their health and welfare as set forth in the by-laws of such
Fund. Upon the demise of an employee the Health and Welfare Fund provides for
the payment of death benefits for next of kin. In addition, the sum equal to
four-tenths of one percent (.4%) of gross payroll towards the Health and Welfare
Fund for the purpose of paying the Employer's share of the Federal Insurance
Contributions Act contribution on disability benefits paid by the Health and
Welfare Fund.
b. Effective March 16, 1996, contributions to the Retirement Fund
shall remain at a sum equal to nine (9%) percent of gross payroll towards the
Retirement Fund, a trust fund established by collective Agreement for the
purpose of providing pensions or annuities on retirement or death of workers.
c. Effective March 16, 1996, contributions to the Health Services
Plan shall be a sum equal to two and one-half (2 1/2%) percent of gross payroll.
The Union reserves the right at any time during the term of the Agreement to
request an increased rate of contributions to the Health and Welfare Fund,
Retirement Fund and/or the Health Services Plan. In the event of disagreement
between the parties the dispute shall be referred to the Impartial Chairman for
final determination.
18
<PAGE> 23
d. Each of the aforesaid payments under a., b. and c. above shall
be remitted on or before the fifteenth (15th) day of the following month. None
of the payments made hereunder shall constitute or be deemed wages due to
workers. All contributions required to be made under a., b. and c. above shall
be allocated by the Employer each week and kept separate and apart from its
general funds and held in trust for the benefit of the particular fund.
e. The Union agrees that all contributions received for the Health
and Welfare Fund shall continue to be held in trust for the sole benefit of such
covered employees, deposited and held in an account separately maintained under
the name of the Health and Welfare Fund and that the monies in such account
shall be used only for the specific purpose of such Fund in accordance with its
Constitution, by-laws and rules and regulations and for the administrative
expenses thereof, and shall not be used for any other purpose.
The Employer shall not have any legal or equitable right,
title, claim or interest in or to said Fund or the administration thereof. No
individual worker shall have any legal or equitable right, title or interest in,
or claim against his or any other Employer's payments toward the Fund or against
the Fund except as may be provided by the by-laws or rules and regulations of
said Fund.
f. The said Retirement Fund and the Health Services Plan shall
each be administered in accordance with its by-laws and rules and regulations by
a Board of Trustees. Each Board of Trustees shall be composed of Union
representatives and an equal number of representatives of the Employer. In the
event that the Board of Trustees shall be deadlocked on any issue or matter
arising in connection with its Fund, the same shall be decided by a neutral
person as set forth in the by-laws and rules and regulations of said Fund, and
his decision shall be final and binding. The parties hereto hereby ratify,
confirm and approve the composition and membership of each Board of Trustees as
now or hereafter constituted.
Each Board of Trustees shall adopt and promulgate such by-laws
and rules and regulations to effectuate the purpose of its Fund as it may deem
necessary and desirable, including the detailed basis upon which payments from
each Fund will be made, and shall have the power to modify the same from time to
time. The parties hereto agree to be bound thereby and they are hereby
incorporated in and made part of this Agreement.
19
<PAGE> 24
An annual audit of each Fund shall be made by accountants
designated by the Board of Trustees. A statement of the results of such audit
shall be made available for inspection by interested persons at the principal
office of the Fund and at such other places as may be designated by each Board
of Trustees.
The Employer shall not have any legal or equitable right,
title, claim or interest in or to each said Fund. No individual worker shall
have any legal or equitable right, title or interest in, or claim against, his
or any other Employer's payments toward said Funds or against said Funds except
as may be provided by the by-laws or rules and regulations of said Funds.
None of the monies paid into the Retirement Fund and the Health
Services Plan shall be used for any purpose other than set forth hereinabove and
to pay the operating and administrative expenses of each Fund respectively. The
monies of each Fund shall be kept separate and apart from all other monies.
g. The aforementioned enumerated powers and duties of the Board of
Trustees of said Retirement Fund and Health Services Plan shall not be
considered in any way whatsoever as a limitation on the powers and duties of the
Board of Trustees of each Fund to do any and all other things which may be
necessary or incidental to the proper operation, administration and maintenance
of the said Funds, and to fully effectuate their purposes.
h. The Union or the Board of Trustees of any such Fund, shall be
proper parties in interest to enforce collection of payments due from the
Employer toward any said Fund. In the event any amount due from the Employer
under this paragraph remains unpaid for thirty (30) days after becoming due,
such amount shall automatically bear interest thereafter at the rate of nine
(9%) percent per annum and the Employer shall pay the same. The Impartial
Chairman may, in connection with any action or proceeding to confirm the award
made pursuant to paragraph 24(h), also have the right to direct the Employer to
pay to the Union reasonable attorney's fees and expenses in amounts fixed by him
and the reasonable costs of investigations to determine the amount due.
i. It is agreed that all of the aforesaid payments required to be
made under this Paragraph have no relation to eligibility of workers to benefits
from the benefit funds; eligibility for benefits shall be determined solely
under the rules and regulations of each of the aforesaid Funds which include the
detailed basis upon which benefits to eligible workers shall be paid.
20
<PAGE> 25
j. The provisions herein relating to the Funds constitute a
consideration of this Agreement and are of the essence of this Agreement.
Failure by the Employer to pay the amount due from it hereunder to the Funds
shall be deemed a breach of this Agreement by the Employer.
k. The Board of Trustees or other body administering said benefit
funds, including the Union's Health and Welfare Fund, is hereby authorized, in
its sole discretion, upon such basis as it deems desirable, and to the extent
permitted by law, to transfer or mingle the assets of or to merge any of said
benefit Funds with any other benefit fund or funds now existing or hereafter
established and provided for in a collective bargaining Agreement with
U.N.I.T.E. or an affiliate thereof. In the event of such transfer, mingling or
merger, the amounts hereinabove provided to be allocated towards said Funds
shall be paid over to the Fund or Funds with which there has been such transfer,
mingling or merger.
SEVERANCE FUND-TERMINATION OR DISMISSAL BENEFITS
24. The parties hereto recognize the necessity of protecting workers who,
for many years, have contributed their loyal service and who, through no fault
of their own, find themselves dismissed from their employment by the closing
down or reorganization of their Employer's business. It is recognized that this
problem is one of special interest and concern to the parties, and that
industrial tranquility and stability will be aided and preserved by the
establishment of a separate and individual Severance Fund for the Employer. With
the express intent and agreement of the parties and, subject to applicable and
existing law, the parties agreed to continue the separate individual Severance
Fund, the signatories to each such Fund to consist of the Union and the
Employer.
The exclusive purpose of each such individual Fund is to pay to each
covered worker employed by each individual Employer who has been dismissed or
terminated from his employment and otherwise meets the eligibility requirements
set forth in the Rules and Regulations of each such Fund a lump sum equal to one
week's wages multiplied by the number of years of his employment with the
Employer. Such payments are designated as termination or severance or dismissal
payments, the right to which shall have been earned by covered Employees during
their prior service. The Rules and Regulations of each such individual Fund
shall comply in all respects with applicable law and shall set forth, among
other things, eligibility requirements and all other conditions to be met prior
to the payment of benefits.
21
<PAGE> 26
a. The Employer shall deposit monthly into a custodian bank account of
the jointly administered Severance Fund a sum not to exceed one-half (1/2%)
percent of its gross weekly payroll (before deductions for Federal, State and
City taxes) of the covered workers, to enable the Fund in due course to pay
covered Employees the aforesaid severance or dismissal benefits. The aforesaid
payments shall be remitted on or before the fifteenth (15th) day of the
following month.
b. At the time of the initial deposit and at the end of each calendar
year thereafter, the Employer shall submit a written statement to the Union
setting forth the names and addresses of each covered worker or workers on whose
behalf such payment may be made, their Social Security numbers, job
classifications, weekly wages, dates of hiring and number of years of
employment, including the amount of deposit. In addition to the foregoing, the
Employer shall submit a written statement not less than every three months
setting forth information comparable to that presently supplied to the benefit
funds referred to in Paragraph 23. The Union shall have the right to examine the
Employer's books and records in order to ascertain whether the provisions hereof
are being fully complied with and whether said amounts have been fully paid, in
the same manner as is provided in this Agreement for the examination of the
Employer's books and records for any other purpose.
c. The Fund shall be administered in accordance with its By-laws and
Rules and Regulations to be promulgated, by Trustees which shall be composed of
one Employer and one Union representative, and alternate representatives, one
designated by the Employer and by the Union respectively. In the event that the
Trustees shall be deadlocked on any issue or matter arising in connection with
the Fund, the same shall be decided by a neutral person, namely, the Impartial
Chairman acting under the arbitral provisions of this Agreement and his decision
shall be final and binding. The Employer hereby ratifies, confirms and approves
the composition and membership of the Trustees of the Fund respectively as now
or hereafter constituted. All Trustees shall serve without compensation.
d. The Trust Fund is hereby declared to be an irrevocable trust and the
Trustees of the Fund agree to receive, hold and administer the Trust Fund for
the exclusive purpose of providing benefits in accordance with the Rules and
Regulations adopted by the Trustees. Interest and dividends accumulated may be
used for reasonable, necessary and proper expenses under existing law in the
operation and management of the Fund.
22
<PAGE> 27
e. The Trustees of the Fund are hereby authorized to adopt and
promulgate By-Laws and Rules and Regulations (subject to existing and applicable
law) to effectuate the purposes of the Fund as they may deem necessary or
desirable, including the detailed basis upon which payments from the Fund will
be made and shall have the power to modify same from time to time to carry out
more effectively the purposes of the Fund. All By-Laws, Rules and Regulations
and amendments thereto, adopted and promulgated by the Trustees of the Fund,
shall be deemed incorporated herein and a part hereof with the same force and
effect as if set forth in full herein.
f. The Trustees of the Fund shall have the power and authority, in
their sole discretion to determine the type and kind of investments of the Trust
Fund and/or direct a bank custodian to so invest the same. The Trustees of the
Fund shall be the financial advisors of the Fund.
g. No worker shall make or be required to make any payment whatsoever
to any Fund. The Employer agrees that its obligation to make payments toward its
Fund shall not be subject to set-off or counterclaim which the Employer may have
for any liability of the Union or of any Employee.
h. The Employer shall not have any right, title or claim, legal or
equitable, in or to any sum paid by it to its Fund or against the Fund itself
except as provided for in the Rules and Regulations. No Employee shall have any
right, title, interest or claim, legal or equitable, in or to the Employer's
payments to its Fund except as provided for in the Rules and Regulations.
i. The custodian bank in which the Trust Fund shall be deposited shall
issue quarterly statements of income and assets to the Trustees indicating among
other things the amount then on deposit, what part thereof, if any, represents
accumulated interest, together with any securities held and the transactions for
the period. The statements shall be made available for inspection by interested
persons at the principal office of each Fund.
j. The Trustees of the Fund shall be responsible for filing and
reporting disclosure documents with the proper governmental agencies whenever
required to do so.
k. The aforementioned enumerated powers and duties of the Trustees of
the Fund shall not be considered in any way whatsoever as a limitation of the
powers and duties of the Trustees to do any and all other things which may
23
<PAGE> 28
be necessary or incidental to the proper operation, administration and
maintenance of the said Fund and to fully effectuate its purposes under
applicable law.
l. The provisions herein relating to the Fund constitute a
consideration for this Agreement and are the essence of this Agreement. Failure
by the Employer to pay the amounts due from it to the Fund shall be deemed a
breach of this Agreement by the Employer. The Union shall be a proper party in
interest to enforce payment thereof under this Agreement.
m. It is intended that the foregoing individual Severance Fund and
plans shall not constitute Employee Pension Benefit Plans as defined under the
Pension Reform Act of 1974, and the By-laws, Rules and Regulations thereof with
respect to the Fund shall be promulgated accordingly.
DISCHARGE OF EMPLOYEES
25. No employee covered by this Agreement shall be discharged except for
just cause, which includes, but is not limited to incompetency, insubordination,
ineligibility for bonding by any reputable bonding company, or continual
lateness or continual absence. The Employer shall notify the Union in writing,
within forty-eight (48) hours of all cases of discharge of covered employees.
Should a dispute or difference arise as to whether or not the discharge
was for just cause, the matter shall be submitted to arbitration as provided
herein. If the Impartial Chairman finds that the employee was discharged without
just cause, he may order reinstatement and may require the payment of back pay
in such amount as, in his judgment, the circumstances warrant.
SHOP STEWARD AND COMMITTEE
26. a. The Union shall have the right to certify to the Employer one
employee to be designated as shop steward and such other employees to be
designated as members of the shop committee on the basis of one for every
twenty-five employees but not in excess of a total of ten excluding the shop
steward. They shall assist the Union in carrying out the intent and purpose of
this Agreement. The Union Committee shall meet once per month for a period of
one hour. The Employer will not unreasonably withhold consent for special
requests for additional time.
24
<PAGE> 29
b. During any counselling of a Union employee, a shop steward or a shop
committee person must be present.
c. Counselling records of employees will be considered stale and of no
effect and will be cleared from an employee's personnel records after a two (2)
year rolling period with respect to non-attendance matters and after a one (1)
year rolling period with respect to attendance matters. A joint Labor-Management
Committee shall be established which shall deal with health, safety and training
issues of employees. The Labor-Management and Labor-Safety meeting will be held
on the third Thursday of every month during regular working hours to review
ongoing issues and conditions, make recommendations with respect to operations
and conditions, subject to the terms of this Agreement, including issues
relating to absenteeism. The Union shall designate the Union members to serve on
such committee and the Employer shall designate the Employer members to serve on
such committee.
RIGHT OF VISITATION
27. Representatives of the Union shall be permitted free access to the
establishments where its members are employed, for the purpose of observing if
the conditions of this Agreement are maintained, and for any other reasonable
purpose arising out of the operation of this Agreement, provided there is no
interference with the business of the Employer.
STRIKES OF U.N.I.T.E. AFFILIATES
28. As far as is consistent with law it shall not be considered a breach of
this Agreement on the part of the Union or on the part of any individual
employee, if any employee or employees refuses to enter upon the premises of any
employer against whom the Union or an affiliate of U.N.I.T.E. is conducting a
bona fide strike, either of their own volition or by direction of the Union nor
shall such refusal be cause for discharge or disciplinary action. The word
"premises" is herein defined as limited to the area actually and immediately
occupied by said Employer and does not include any area or part of a building
not physically occupied by said Employer.
25
<PAGE> 30
EXAMINATION OF RECORDS
29. The Union shall have the right at all reasonable times and upon
reasonable notice to the Employer, to investigate such books and records of the
Employer as are necessary in order to ascertain whether the provisions of this
Agreement are being fully complied with. The Employer shall have the right to
have its representative accompany the Union representative upon such
investigation. The Impartial Chairman shall have the right to institute any such
investigation.
PENALTY UPON FAILURE TO PAY DUES AND CONTRIBUTIONS
30. a. Workers shall be paid for the time lost during which a shop may be
stopped due to the failure of the Employer to remit dues, assessments and
initiation fees and/or make contributions to the Funds and/or the Employer's
failure to pay wages, overtime, vacation and/or holiday pay, all as required
herein, only after five (5) days have elapsed after such Employer has received
written notice of failure to make such remittances and/or payments, and same
have not been paid; such a stoppage for any of the aforementioned reasons is
hereby expressly authorized as an exception to Paragraphs 19 and 21 of this
Agreement.
b. In the event the Employer fails to make payments to the Health and
Welfare Fund when due, the Employer shall, after fifteen (15) days notice of
delinquency to it by certified mail, be liable to each of its covered workers
for any benefits to which such covered workers may become eligible by reason of
illness, hospitalization, surgery or otherwise, after said notice. Such
liability shall be in addition to other obligations of the Employer under this
Agreement.
PRE-TICKETING AND OTHER PROCESSING OPERATIONS
31. The manner and methods of all operations in the processing of
merchandise as well as office work in connection therewith shall be in the
discretion of the Employer, but in no event, except as provided in the following
sentence, shall the exercise of such discretion directly or indirectly cause the
loss of jobs to regular workers and/or cause their lay-offs. The foregoing is
subject to seasonal variations of the post lay-off period and/or to conditions
which have a substantial adverse economic affect upon the Employer's business,
it being the Employer's intention to contain outside operations in the
processing of merchandise and/or office work with a view toward safeguarding the
jobs of regular workers and to obviate the necessity of undue lay-offs.
26
<PAGE> 31
UNION RECOGNITION IN ADDITIONAL FACILITIES
32. Should the Employer (or its subsidiary or affiliate) open an additional
warehouse, office or similar distribution or office facilities beyond 100 miles
from its present location in Harrison, New Jersey, notwithstanding the various
provisions set forth in the parties' collective bargaining Agreement, the
Agreement shall not cover the workers hired at the new facility and shall not
govern the terms and conditions of employment of those workers at the new
facility until such time as the Union demonstrates that it has been designated
by a majority of the employees at such new facility. The determination as to
whether the Union has been so designated shall be subject to the arbitration
provisions set forth in this Agreement. Until such time as the parties mutually
agree upon changes in terms and conditions of employment, the terms of this
Agreement shall apply.
REMOVAL OF FACILITIES
33. During the term of this Agreement the Employer shall not move its
warehouse, office or similar distribution or office facilities from its present
location without the Union's consent. In the event the Employer expands or opens
any additional or new warehouse or office facilities during the term of this
Agreement, it shall not move therefrom without the Union's consent. It is
understood, however, that consent shall not be withheld if such contemplated
removal is to a location within 100 miles from its present location in Harrison,
New Jersey and then, only if the Employer and the Union have mutually agreed
upon adjustments, if any in terms and conditions of employment. In the event the
parties are unable to mutually agree upon said adjustments, if any, the matters
in disagreement shall be referred to the Impartial Chairman for final
determination.
CONTRACTING OUT
34. Anything in this Agreement to the contrary notwithstanding, contracting
out by the Employer to any other warehouse or similar distribution facilities of
any of the operations in the processing of merchandise and/or office work is
prohibited except when all of the Employer's regular workers are working full
time and then, only if such work is given to establishments in contractual
relations with the Union. However, the Employer may continue renting temporary
warehouse space, including landlord services, for purposes of temporary storage
only for products that will be delivered, handled and processed by the Harrison
Warehouse Associates. In addition, the Employer may use lumpers in accordance
with paragraph 2 and Exhibit D hereof.
27
<PAGE> 32
REORGANIZATION
35. The Employer shall have the right in good faith to reorganize its
warehouse and/or facilities. A reorganization in good faith shall mean a bona
fide reorganization of the Employer's business, necessitated by a permanent
curtailment of his business or a fundamental change in the character of his
business.
SURVIVAL OF LIABILITY
36. a. The Employer, and its subsidiaries or affiliates at the time of the
execution of this Agreement and its transferees, successors and assigns and the
persons, firms and corporations becoming members thereof subsequent to the date
of the execution of this Agreement and their transferees, successors and
assigns, shall be and continue to remain liable hereunder for their own
obligations respectively, for and during the term hereof. The Impartial Chairman
shall have the power to determine whether any person, firm or corporation is a
transferee, successor or assign of the Employer.
b. Subsidiary or affiliated firms or corporations of the Employer
shall, for the purpose of this Agreement, be deemed bound by all terms of this
Agreement to the extent that they are Employers of workers covered hereunder.
The Impartial Chairman shall have the power to determine whether an alleged
subsidiary or affiliate of the Employer is in fact such subsidiary or affiliate.
CONTINUING OBLIGATIONS IN THE EVENT OF SALE OR TRANSFER
37. The Employer agrees that:
a. it shall not nor permit its subsidiaries and/or affiliates to enter
into any partnership, or consolidate or merge with, or be absorbed by any
person, firm or concern or sell or transfer its or their business, in whole or
in part, to any other person, firm or concerns unless the new or purchasing firm
agrees to be bound under this Agreement for the duration hereof and assume all
of the obligations, accrued and otherwise, to the workers, the Union and the
Benefit Funds hereunder and recognize the Union as the sole and exclusive
bargaining agent and representative of the employees covered by this Agreement;
b. it will, on its own behalf and on behalf of its subsidiaries and
affiliates, give to the Union at least thirty (30) days written notice prior to
a final closing of any transaction or disposition enumerated above, and;
28
<PAGE> 33
c. it and/or its subsidiaries and affiliates shall be liable to the
Union and to the workers for damages, liquidated and otherwise, to be fixed by
the Impartial Chairman, for any action, transaction or disposition in violation
hereof; and,
d. in the event of any transaction or disposition enumerated above, it
and/or its subsidiaries and affiliates will nevertheless continue to remain
individually, collectively and personally liable under all of the provisions of
this Agreement for the duration hereof unless specifically released therefrom by
the Union. In addition, the new firm, person or concern shall be liable and
responsible to the workers, the Union and the Benefit Funds under the provisions
hereof by operation of applicable and decisional law.
INVALIDITY OF PART OF AGREEMENT
38. a. If any provision of this Agreement, or the enforcement or
performance of such provision is or shall at any time be determined to be
contrary to law by or enjoined by a court or administrative agency, then such
provision shall not be applicable or enforced or performed except to the extent
permitted by law. The Union and the Employer shall thereupon negotiate a
substitute provision. If they are unable to agree, the Impartial Chairman shall
determine such substitute provision which shall be deemed incorporated into this
Agreement.
b. If any provision of this Agreement or its application to the
Employer, person or circumstance is so held invalid or enjoined, the remainder
of this Agreement, or the application of such provision to other Employers,
persons or circumstances, shall not be affected thereby.
c. The interpretation and enforcement of this Agreement shall be
governed by federal law and by the laws of the State of New York not
inconsistent therewith.
NO DISCRIMINATION
39. There shall be no discrimination in hiring, promotions or in terms and
conditions of employment because of race, creed, color, national origin, sex or
age.
29
<PAGE> 34
EXISTING BENEFITS
41. Existing benefits shall not be reduced during the term of this
Agreement.
JURY DUTY
42. If, after one year of employment, a covered worker shall be required to
serve as a juror (not as a volunteer and if not excused), he shall be entitled
to receive the difference between the sums received by him for such jury service
and his regular daily pay but such entitlement period shall not exceed three (3)
weeks (15 working days) in any one year.
A worker who receives notice of jury duty shall immediately notify his
Employer.
TIME OFF FOR UNION MEETINGS
43. The Employer agrees to grant to his covered workers up to three (3)
hours time off, without loss of pay, not more than three times during each year
of this Agreement, to attend meetings called and sanctioned by the Union.
POOR WORKING CONDITIONS
44. When any working conditions, including, but not limited to excessive
heat or cold, may adversely affect a worker's health or create unnecessary
burden in the performance of the work, the Employer must correct and alleviate
such situation with due diligence.
FIRE DRILLS
45. The Employer shall hold two shop fire drills in each year of this
Agreement in which workers are to leave the building or move into safety areas
or fire towers, as recommended by the local fire department. Workers hired in
the period between drills shall be instructed as to the location of all means of
egress from the shop.
30
<PAGE> 35
NO MODIFICATION OR WAIVER
46. a. The Employer and no worker or group of workers shall have the right
to modify or waive any provision of this Agreement.
b. The failure of either party to this Agreement to require strict
performance of any provision of the Agreement shall not be deemed a waiver or
abandonment of any of the rights or remedies provided herein for violation of
the Agreement or any provision thereof; nor shall it constitute a waiver or
abandonment of any right or remedy herein provided for a subsequent violation of
any provision of the Agreement.
c. The parties' Agreement dated April 27, 1993 concerning the Supply
Department is hereby incorporated by reference as if fully set forth.
TRANSPORTATION
47. Transportation considerations will be as set forth in Exhibit E annexed
hereto.
DURATION OF AGREEMENT
48. The term of this Agreement shall be from March 16, 1996 to March 15,
1999.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the
day and year first above written.
Lechters, Inc. Office and Distribution Employees' Union,
Local 99, U.N.I.T.E.
By: /s/ Ira S. Rosenberg By: /s/ Christine Kerber
---------------------------- -------------------------------
Ira S. Rosenberg Christine Kerber
Vice President Manager
31
<PAGE> 36
LECHTERS, INC.
VACATION POLICY
UNION DEMAND #7 & COMPANY DEMAND #5
Contract Paragraph 13a.
VACATIONS
The vacation period shall be from FEBRUARY 1 TO SEPTEMBER 30 of each year,
however, where the Employer and the employee agree on a different vacation
period the Union shall not unreasonably withhold its consent. Associates may
also request vacations between OCTOBER 1 AND DECEMBER 31, which will be approved
and granted at a rate of five (5) persons per week, but no more than three (3)
from the mezzanine and two (2) from all other departments, according to
seniority, to associates who request vacations during the normal vacation
scheduling period.
Vacations will be granted at the time most desired by the associate whenever
possible, however, the Employer reserves the right to require alternative dates
in order to ensure proper coverage for business operations. Vacation requests
should be submitted for approval during the normal vacation scheduling period.
No vacations will be approved with out a minimum of two (2) weeks notice.
Vacations with pay will be granted each year, as provided in this paragraph 13,
to covered employees who will have the required length of employment as of Labor
Day of each year, except that for covered employees with 5 years or more of
seniority, the date shall be December 31.
Revised March 27, 1996
EXHIBIT A
<PAGE> 37
(1) OVERTIME
1.0 When overtime is needed, employees shall be notified as far in advance as
possible in order to allow them to make necessary preparations for working
overtime and such notice shall be given no later than the employees' scheduled
lunch break if overtime that day is needed.
1.1 The Union agrees that it will, through its shop committee, cooperate in
having employees perform overtime work when it is requested.
1.2 The Company will request volunteers from among the employees who are capable
and qualified to perform the overtime work involved. When such overtime work is
necessary and there are insufficient volunteers, the employee in the department
with the least seniority shall be the first to be required to work. If requested
to work overtime, the employee will be required to do so during the peak season
between September 1 and December 31, unless he or she has a reasonable excuse
for being unable to work. Overtime during the non-peak season shall be voluntary
except in the case of an emergency.
1.3. Overtime will be allocated as equally as possible among employees
consistent with Section 1.2. The overtime records shall be available for
inspection at the request of the Union.
1.4. Where there has been a reduction in working force in a department, no
overtime shall be permitted in such department until all employees in that
department who have been involuntarily laid off shall have been rehired or given
the opportunity to return to work unless there is insufficient time to give
notice to such laid off employees so that they may return to work.
1.5 The Company agrees that all disputes under this Article shall be the subject
to the grievance and arbitration procedures of the Agreement.
- ------------------
(1) March 26, 1996
EXHIBIT B
<PAGE> 38
MEMORANDUM
TO: Sydney Gerstein, President
Local 99, U.N.I.T.E.
FROM: Ira Rosenberg, VP-Secretary/Corporate Counsel Lechters, Inc.
DATE: March 26, 1996
RE. COMPUTER TRAINING BONUS FOR WORKERS COVERED BY COLLECTIVE BARGAINING
AGREEMENT - MARCH 16, 1996 THROUGH MARCH 15, 1999.
As per our agreement, this will be our policy regarding training bonuses paid to
employees for PDTs and RF guns:
Workers who were employed with Lechters, Inc., covered under the aforementioned
collective bargaining agreement as of April 1, 1996 and have not previously
received a training bonus, shall be entitled to the following bonuses for
successful completion of initial computer equipment training.
1. PDTs - Upon successful completion of training on a PDT, existing
employees shall receive a one time "training bonus" in the amount of
$50.00, subject to all applicable payroll taxes.
2. RF guns - Upon successful completion of training with a RF gun,
existing employees shall receive a one time "training bonus" in the
amount of $100.00, subject to all applicable payroll taxes.
Workers who are hired after April 1, 1996, and are covered under the
aforementioned collective bargaining agreement, shall not be eligible for any
bonuses for training on either a PDT or a RF gun, as it is deemed part of the
work requirements.
Please countersign below and return to me the enclosed copy of this memorandum,
evidencing your agreement to the foregoing information.
AGREED:
Lechters, Inc. by: ________________________ Date:________________
Local 99 by: ______________________________ Date:________________
EXHIBIT C
<PAGE> 39
LECHTERS, INC.
[LECHTERS LETTERHEAD] UNION PROPOSAL #15
"Lumper" Program Outline
1. "Lumpers" are persons who are hired and paid for by trucking companies.
2. The service of the "lumpers" are a service that the Company is entitled to,
without any additional charges, for the limited purpose of unloading trucks
operated by the transportation company which hires and pays for the
"lumpers."
3. The duties of the "lumpers" are strictly limited to unloading those trucks
and placing the merchandise onto pallets on the receiving dock. They are
not authorized to move pallets once merchandise is placed onto the pallets.
4. Pallets are provided by Lechters, but Lechters provides no other equipment
to the lumpers.
5. Workers employed as "lumpers" will not work for Lechters, Inc. as a
temporary employee on the same day they are working as a "lumper".
6. Lechters, Inc. will provide a list of all workers employed as "lumpers" as
requested and not less than once a week.
April 1, 1996
EXHIBIT D
<PAGE> 40
MEMORANDUM
TO: Sydney Gerstein, President Local 99, U.N.I.T.E.
FROM: Ira Rosenberg, VP-Secretary/Corporate Counsel Lechters, Inc.
DATE: March 26, 1996
RE: SUPPLEMENTAL TRANSPORTATION FOR WORKERS COVERED BY COLLECTIVE
BARGAINING AGREEMENT - MARCH 16, 1996 THROUGH MARCH 15, 1999.
As per our agreement, this will be our policy regarding Company provided
supplemental transportation for workers covered by the aforementioned collective
bargaining agreement.
It is the responsibility of each Associate to arrange their own transportation
to and from work for the agreed work schedule, so as to arrive to work on time.
However, the Company does agree to provide supplemental transportation in the
form of one vehicle, that will pick up and drop off workers at the Harrison PATH
station for all regular warehouse shifts, and for any mandatory overtime hours.
The Company further agrees to select two (2) union associates who will be
primarily responsible for driving other associates to and from the PATH station
at the start and conclusion of warehouse shifts, as well as two (2) additional
associates who will act as back up drivers in the event of an absence of a
primary driver. It is our present intention to select one (1) primary and one
(1) back up office union associate to drive the designated vehicle in the
morning and one (1) primary and one (1) back up warehouse union associate to
drive the designated vehicle in the late afternoon.
Associates being considered by the Company for this responsibility, will be
subject to a driving record search through the Department of Motor Vehicles. In
order to be selected, associates driving record must be in "good standing," and
remain in good standing through out the duration of their driving
responsibilities.
Please countersign below and return to me the enclosed copy of this memorandum,
evidencing your agreement to the foregoing information.
AGREED:
Lechters, Inc. by:. ______________________ Date:________________
Local 99 by: _____________________________ Date:________________
EXHIBIT E
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' REPORT
We consent to the incorporation by reference in Registration Statement Number
33-48560 on Form S-8 and in Registration Statement Number 33-46993 on Form S-8
of our report dated March 26, 1997, appearing in this Annual Report on Form 10-K
of Lechters, Inc. and Subsidiaries for the year ended February 1, 1997.
Deloitte & Touche LLP
Parsippany, New Jersey
April 29, 1997
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