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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
For the fiscal year ended January 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from To
Commission File 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 07029-2404
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (973) 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. [X]
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As of April 16, 1999 17,176,286 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 $24,057,514.
For the purposes of such calculation, all outstanding shares of Common
Stock have been considered held by non-affiliates, other than the 4,345,612
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 22, 1999.
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SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (Reform Act), the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company in this annual report on Form 10-K, in
presentations, in response to questions or otherwise. Any statements that
express, or involve discussions as to expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, through the
use of words or phrases such as "anticipates", "believes", "estimates",
"expects", "intends", "plans", "predicts", "projects", "will likely result",
"will continue", or similar expressions) are not statements of historical facts
and may be forward-looking.
Forward-looking statements involve estimates, assumptions, and uncertainties and
are qualified in their entirety by reference to, and are accompanied by, the
following important factors, which are difficult to predict, contain
uncertainties, are beyond the control of the Company and may cause actual
results to differ materially from those contained in forward-looking statements:
- - - economic and geographic factors including political and economic risks;
- - - changes in and compliance with environmental and safety laws and policies;
- - - weather conditions;
- - - population growth rates and demographic patterns;
- - - competition for retail customers;
- - - Year 2000 issues;
- - - market demand, including structural market changes;
- - - changes in tax rates or policies or in rates of inflation;
- - - changes in project costs;
- - - unanticipated changes in operating expenses and capital expenditures;
- - - capital market conditions;
- - - legal and administrative proceedings (whether civil or criminal) and
settlements that influence the business and profitability of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of any such factor on
the business or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
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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 first Lechters Housewares(R) store was opened in Rockaway, New
Jersey. New store development emphasized mall locations but was subsequently
expanded to include strip center and city locations. The concept was distinctly
advantaged in the breadth of its assortment and the convenience of its
locations. In 1990, the Company created the Famous Brands Housewares Outlet(R)
concept as an additional growth opportunity. The intent of the Famous Brands
concept was to represent housewares manufacturers not otherwise having a retail
presence in outlet malls, a venue experiencing substantial customer traffic and
rapid new center development.
The Company's unit expansion peaked in fiscal year 1992 when 81 new
stores were opened. As of the end of the current fiscal year, the Company owned
and operated 578 stores (443 Lechters Housewares(R) stores, 134 Famous Brands
Housewares Outlet(R) and one Cost Less Home Store(SM)) in 42 states and the
District of Columbia.
The Company continued to reposition its basic concepts. While both
concepts featured houseware products, Lechters Housewares(R) has been enhancing
its franchise as the country's largest specialty retailer of products for the
kitchen. Famous Brands Housewares Outlet(R) continued the process of
transitioning the greater portion of its assortment to off-price merchandise
in an effort to establish the exceptional value proposition expected in outlet
mall locations. The outcome of the repositioning has resulted in the evolution
of the Company into two major segments, Specialty Housewares and Off-Price Home
Business. Cost Less Home Store(SM), the Company's newest concept, is focused on
a "big box" format with 20,000 - 25,000 gross square feet of space. In addition
to an expanded offering of the Company's base housewares assortment, the
concept has added items including domestics and gourmet foods. The details of
both segments' operating strategies follow in this report.
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.
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OPERATING STRATEGIES
A. MERCHANDISING AND MARKETING
Over the past four years, the Company has been engaged in a variety of
tests and trials designed to more effectively position itself as a player in the
markets in which it competes. Approximately 18 months ago, the decision was
reached that the Company needed to re-invent itself in order to compete
effectively in the new millennium.
While there has been considerable progress in development of growth
opportunities for the Company, there remains a number of significant changes in
order to exploit these opportunities. Moreover, the Company must prepare for
continuous change in the way it does business.
To this end, the Company is focusing on the following strategic
priorities:
- - - Re-deployment of assets into retail concepts that can and will perform at
above average levels resulting in stakeholder (customers, employees,
investors, and vendors) satisfaction with anticipated returns. Two of these
retail concepts are already in place: Lechters Kitchen Place(R) and Cost Less
Home Store(SM).
- - - Re-energizing the existing Lechters Housewares(R) business with a smaller
number of profitable stores, including the Lechters Kitchen Place(R) stores.
This business will continue to provide significant positive cash flow as
Lechters Housewares(R) contracts and this format will remain a key part of the
Company's core business.
- - - Famous Brands Housewares Outlet(R) sales will be derived from a smaller number
of core stores as the Company closes under-performing locations.
- - - Geographic concentration that will allow the Company to effectively support
the existing and new concepts with both marketing and management focus.
- - - Development of an organizational capability to create (or re-position) and
grow retail concepts in markets where meaningful competitive advantage can be
achieved.
The plans for each of the Company's business segments follow.
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BUSINESS SEGMENTS
The Company operates two segments: Specialty Housewares and the Off-Price Home
Business.
SPECIALTY HOUSEWARES
The Specialty Housewares segment is the largest business segment and accounted
for 78.3% of total sales in Fiscal 1998. This segment consists of two separate
formats: Lechters Housewares(R) and Lechters Kitchen Place(R).
Lechters Housewares(R)
Lechters Housewares(R) operates in two different size categories; a
3,000 square foot Lechters Housewares(R) store and a 6,000 square foot
Super Lechters Housewares(R) store. The 3,000 square foot Lechters
Housewares(R) store offers customers an edited assortment of
products for the kitchen and home at moderate prices while Super
Lechters Housewares(R) stores have a more extensive merchandise
assortment. The Company ended the year with 359 Lechters Housewares(R)
stores and 84 Super Lechters Housewares(R) stores.
Lechters Kitchen Place(R)
This format is a re-invention of the Lechters Housewares(R) store. The
first two Lechters Kitchen Place(R) stores opened in the fall of 1998.
These stores are approximately 5,000 to 6,000 square feet in size. The
Lechters Kitchen Place(R) stores include many of the existing Lechters
Housewares(R) merchandise categories plus significant expansions
including a complete kitchen electric department, an expanded cookware
department, a gourmet food department and trade-up assortments in all
categories. The store features merchandise, organized by department, in
an easy to shop environment and a new, more attractive store design.
The price points are higher than the traditional Lechters store with
the store positioned between Lechters and department and better
specialty stores. The average unit price is targeted at $10.00 vs.
$5.87 for Lechters Housewares(R).
OFF-PRICE HOME BUSINESS
The Off-Price Home Business segment accounted for 21.7% of total sales in Fiscal
1998. This segment consists of two separate formats: Famous Brands Housewares
Outlet(R) and Cost Less Home Store(SM)
Famous Brands Housewares Outlet(R)
Famous Brands is a 4,000 square foot specialty retailer of off-price
housewares and products for the home. These stores are located in outlet
centers. Lechters operated 134 Famous Brands Stores at the end of Fiscal
1998.
Cost Less Home Store(SM)
Cost Less Home Store(SM) presents a new growth vehicle for Lechters, Inc.
The typical Cost Less Home Store(SM) has approximately 20,000 - 25,000
square feet devoted to the sales of housewares, linens and domestics,
kitchen textiles, gifts, home furnishing, furniture, gourmet food and
seasonal items. This concept offers exceptional value (discounts up to 70%
off of department and specialty store prices) on a
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constantly changing assortment of off-price merchandise in an easy-to-shop
environment. One Cost Less Home Store(SM) store opened in November of
Fiscal 1998 and a second opened in February of Fiscal 1999.
Speciality Housewares
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" and with at least
200,000 square feet of retail space for specialty stores. City stores and strip
center stores are also operated under this trade name. The Company believes it
appeals to a broad range of customers. Research indicates that the primary
customer is female from a household with an average annual household income of
$40,000 - $50,000.
The Lechters Housewares(R) product line is broadly defined as basic
housewares (cookware, bakeware, kitchen gadgets, utensils, small electrics,
household storage and organization) and decorative housewares (table top,
textiles, frames) which accounted for 63% and 37%, respectively, of Fiscal 1998
sales. Of the over 4,000 items in the line, 25% accounted for approximately 48%
of current year sales. No individual item accounted for more than 1% of current
fiscal year sales.
All products sold by the Company are either private label or national
brand names including but not limited to Rubbermaid, Durand, Ecko, Farberware,
Henckels, Krups, OXO, Pyrex, Wearever Anchor Hocking and T-Fal. The Company's
own brands include Cooks Club(R) (cookware, gadgets & utensils), Simple
Solutions(R) (storage & organization) and Regent Gallery(R) (frames &
accessories). Private label merchandise accounted for approximately 20% of
Fiscal 1998 net sales.
Lechters Housewares(R) believes that it has unique strengths in several
areas. The Company believes that this concept has a strong customer franchise.
Research indicates that the Lechters name is known by over 80% of mall shoppers.
Over 23 million customer transactions were conducted last year in the Lechters
stores and those customers purchased over 57 million items. Lechters has a loyal
core of customers who know, trust and shop the store on a recurring basis.
Lechters believes that its assortments of kitchen gadgets and picture
frames are superior to other national retailers. Lechters also believes that its
complete assortment of value priced kitchen products merchandised in
conveniently located compact stores offers a meaningful alternative to its
competitors.
Market research indicates that 27% of Lechters customers purchase gifts
and that gift purchases carry a 25% higher average ticket price than non-gift
purchases. The Company has developed specific strategies to appeal to the gift
customer.
Lechters is also a leader in seasonal items and the development of new
and fresh merchandise through private label as well as branded products.
Lechters strives to ensure that new items, particularly those geared toward
specific seasonal business, reflect current color and fashion trends.
National brand merchandise is generally priced at department store and
specialty retailer "sale prices" everyday. The value of these products is
further enhanced by periodic sales and
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promotional events. Lechters Housewares(R) offers unique value through its
specially designed private label program. The Company's price advantage reflects
its purchasing power and its unique ability to design proprietary product
emphasizing design, quality and functionality and secure special savings by
importing that product directly from overseas.
Items generally range in price from $1.00 to $200.00, with an average
selling price of $5.87. All sales are transacted in cash and through third-party
credit cards, which accounted for approximately 61% and 39%, of Fiscal 1998 net
sales, respectively.
The Company runs an advertising campaign consisting of 12 circulars
inserted in Sunday newspapers. These newspapers are located in 8 major
metropolitan areas across the country. Each insert has a circulation of over 5
million copies and with respect to the numbers of store locations targeted
impacts approximately 52% of the Lechters Housewares(R) business. The Company's
advertising program began in 1996 and based on continued success has been
expanded over the last two years.
Funding of the Company's advertising expense is supported in part by
cooperative advertising allowances from suppliers. Net advertising expense was
1.7% of Lechters Housewares(R) sales in Fiscal 1998 as compared to 1.8% in
Fiscal 1997.
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. The Company also experiences a strong back-to-school
business which commences in late July. In Fiscal 1998, November/December and
back-to-school sales accounted for approximately 32% and 19%, respectively, of
total year sales.
Lechters Kitchen Place(R) stores represent a re-invention of the
Lechters Housewares(R) concept. These stores are 5,000 to 6,000 square feet. The
merchandise assortment includes most of the existing Lechters businesses plus
supplemental categories such as gourmet foods. This concept has an expanded food
preparation business to include a much broader assortment of cookware and
kitchen electrics. The price points have been increased with a goal of a $10.00
average ticket vs. $5.87 for the Lechters Housewares(R) stores. This trade up in
prices has been accomplished by adding better merchandise that the customer
expects to find in a specialty store environment. Lastly many of the lower
opening price points have been eliminated.
Lechters Kitchen Place(R) is positioned between the current Lechters
Housewares(R) and better specialty and department stores. The environment is a
completely redesigned environment with a new floor plan, fixtures and color
scheme. The store is arranged in distinct merchandise departments providing a
customer friendly and easy-to-shop environment.
Two prototype stores were opened in the fall of 1998. During the spring
of 1999 the merchandise mix will be adjusted based on what has been learned. The
Company anticipates that additional test stores will be opened within the next
12 months. As a side benefit to this strategy, many of the new, trade up items
successfully tested in Lechters Kitchen Place(R) stores are being expanded to
Lechters Housewares(R) stores.
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Off-Price Home Business
The mission of Famous Brands Housewares Outlet(R) of the Company's
Off-Price Home Business segment is to become the leading retailer of off-price
housewares in the outlet centers in which it operates 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 Outlet(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.
Famous Brands Housewares Outlet(R) began Fiscal 1998 with approximately
32% of sales generated by off-price merchandise. The remainder of the assortment
was the same as the Lechters Housewares(R) assortment with limited reductions in
pricing. At the end of Fiscal 1998, approximately 50% of sales were generated by
off-price merchandise.
The assortment of off-price merchandise is broader than the assortment
offered in Lechters Housewares(R). For example, categories like accent
furniture, lighting and decorative silk flower arrangements as well as expanded
giftware are periodically added as opportunistic buys present themselves. Their
broadened category mix contributes to the "treasure hunt" atmosphere that is so
important to the appeal of this business. The Famous Brands Housewares Outlet(R)
stores offer an assortment of basic Lechters Housewares(R) merchandise to
supplement the constantly changing assortment of off-price purchases. The
strategy is supported by a merchandising team dedicated to the Off-Price Home
Business.
Famous Brands Housewares Outlet(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 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 Outlet(R)
business will continue to rely primarily on in-store signs, handouts, displays
and participation in promotions sponsored by malls. The location of these
centers outside major media markets preclude the use of traditional broadcast or
print media.
The seasonality of the Famous Brands Housewares Outlet(R) business
differs slightly from that of Lechters Housewares(R). The summer season
represents a greater portion of the annual sales in Famous Brands Housewares
Outlet(R) given the increase in leisure travel and the proximity of outlet
centers to major routes and vacation destinations. In Fiscal 1998, the
November/December period represented 27% of total year sales in Famous Brands
Housewares Outlet(R) versus 32% for Lechters Housewares(R).
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During Fiscal 1998 the Company closed 31 Famous Brands Housewares
Outlet(R) stores. The Company plans to continue to reduce the number of Famous
Brands Housewares Outlet(R) stores, with the intention of operating a core group
of profitable stores in viable outlet malls.
Cost Less Home Store(SM) is a new strategy that is an outgrowth of the
off-price strategy started in the Famous Brands Outlet(R) stores. The typical
Cost Less Home Store(SM) is based on a store size of approximately 20,000 to
25,000 square feet in size and is dedicated to the sales of housewares, linens
and domestics, kitchen textiles, gifts, home furnishing, ready-to-assemble
furniture, oriental and area rugs, gourmet food and seasonal items. This concept
features exceptional value on a constantly changing assortment of merchandise.
The customer can expect to achieve discounts up to 70% off of department and
specialty store prices. Better-branded merchandise is featured with guaranteed
lowest prices.
The Company believes that it has unique strengths that allow it to
compete effectively in the Off-Price Home Business. These strengths include:
- A merchandising team with extensive experience in the field of off-price
purchasing.
- Strong vendor relationships which enable the Company to gain favorable
consideration when it competes for off-price merchandise.
- The financial ability to purchase large quantities of off-price
merchandise and pay promptly.
- A distribution system that supports the off-price business.
The first Cost Less Home Store(SM) was opened in the Philadelphia
metropolitan area in November of Fiscal 1998. A second store was opened in
February of Fiscal 1999 in the same market area. Both stores are performing up
to expectations. Consumer research indicates that the customer likes the
environment and believes that the prices are very attractive.
The Company anticipates opening additional Cost Less Home Store(SM)
stores in Fiscal 1999.
B. PURCHASING, WAREHOUSING AND DISTRIBUTION
The Service Office 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 has a dedicated buying staff for each of its segments. The
Specialty Housewares buying staff is comprised of a Vice President - General
Merchandise Manager, two merchandise managers and six buyers. The Off-Price
Home Business buying staff includes a Vice President - General Merchandise
Manager, one merchandise manager and five buyers.
A Planning and Allocation staff supports the buying staff. That staff
includes a Vice President of Merchandise, Planning and Allocation, three senior
planners, teams of inventory control specialists and analysts supporting each
buying group.
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The Company purchases its products from over 400 suppliers with no
supplier accounting for more than 2.7% of Fiscal 1998 receipts. Approximately
65% of its products are purchased in the United States which ensures sufficient
flexibility in the management and flow of merchandise. The remaining 35% is
proprietary merchandise developed by the Company and imported directly from
overseas. This proprietary merchandise 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 ten weeks of supply of
Specialty Housewares re-orderable merchandise at the distribution centers. It
maintains six weeks of supply of off-price merchandise at the distribution
centers, to support the Off-Price Home Business.
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 shipping an order from the
warehouse, depending upon the store's distance from the distribution centers. On
average, stores are supplied with merchandise on a bi-weekly basis. Shipments
frequently are increased during peak sales periods and are more frequent to high
volume and city locations. The ordering process is facilitated by a Computer
Assisted Replenishment (CAR) system.
C. 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. 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 store's 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, 1999, the field organization was comprised of 3 Regional
Vice Presidents and 1 Regional Manager; each has profit and loss responsibility
for several districts and provides leadership to 38 District Managers. The
District Managers are responsible for the day-to-day
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operations of the stores. Their supervisory span of control ranges from 12 to 20
stores, supported by Area Managers who are Store Managers with additional
oversight responsibility for 1 to 3 additional 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
whom 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.
The Company is committed to the in-store development of its Associates.
A training and evaluation program is provided to new Store 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 attend periodic
training sessions designed to develop their management, merchandising and
customer service skills.
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 an effort to
control inventory shrinkage. Their periodic reviews are complemented by audit
programs that include District Manager conducted reviews and Service Office
monitoring of store transaction reports. Particular emphasis is placed on stores
with a history of inventory shrinkage in excess of the norm.
D. 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
Outlet(R) stores are located in the dominant outlet projects nationally. The
two Lechters Kitchen Place(R) stores are located in mall locations. The Cost
Less Home Store(SM) stores opened to date are located in strip centers.
As shown in the following table, the Company operated 443 Lechters
Housewares(R) stores as of year-end. These stores range in size from 1,800 to
10,900 square feet and average approximately 3,700 square feet. The Company's
134 Famous Brands Housewares Outlet(R) stores range in size from 3,000 to 7,500
square feet and average 3,900 square feet. The Company opened its first Cost
Less Home Store(SM) in November Fiscal 1998 at 18,400 gross square feet. It is
anticipated that future stores will range in size from 20,000 to 25,000 square
feet.
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<TABLE>
<CAPTION>
Famous Brands Cost Less
Houseware Home Total
Lechters Housewares(R) Outlet(R) Store(SM) -----
----------------------------------------- --------- ---------
Malls Strips City Sub-Total
<S> <C> <C> <C> <C> <C> <C> <C>
January 31, 1998:
Units 403 38 24 465 161 0 626
Square Feet 1,465,000 142,500 105,300 1,712,800 633,600 0 2,346,400
1998 Additions:
Units 1 12 2 15 4 1 20
Square Feet 2,600 38,200 6,200 47,000 13,300 18,400 78,700
1998 Closings:
Units 37 0 0 37 31 0 68
Square Feet 118,400 0 0 118,400 117,800 0 236,200
January 30, 1999:
Units 367 50 26 443 134 1 578
Square Feet 1,349,200 180,700 111,500 1,641,400 529,100 18,400 2,188,900(1)
</TABLE>
(1) Approximately 90% of the total store space of the Company's stores
represents selling area. The balance is storage and office space.
The Company's present expansion plan will focus on Cost Less Home
Stores(SM), Lechters Kitchen Place(R), Lechters Housewares(R) strip center
locations and Lechters Housewares(R) city locations. The Company's Fiscal 1999
development plan is to open approximately 24 new stores.
In determining where and in what format new stores will be opened, the
Company's preference is to backfill existing advertised 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 division and further vary
with the size of the store and site conditions. As shown below, the costs
incurred by the Company to open an average 3,200 square foot store and the
estimated cost for a Cost Less Home Store(SM) under typical site conditions are
approximately:
<TABLE>
<CAPTION>
Inventory,
Leasehold Fixtures net of Preopening
Improvements & Equipment Accounts Payable Expense
------------ ----------- ---------------- -------
<S> <C> <C> <C> <C>
Lechters Housewares(R) (Malls) $170,000 $ 55,000 $ 95,000 $ 8,000
Lechters Housewares(R) (Strip Centers) $120,000 $ 58,000 $ 89,000 $ 6,000
Lechters Housewares(R) (City) $315,000 $215,000 $134,000 $14,000
Lechters Kitchen Place(R) $315,000 $102,000 $142,000 $14,000
Famous Brands Housewares Outlet(R) $ 61,000 $ 58,000 $ 85,000 $13,000
Cost Less Home Store(SM) $315,000 $215,000 $399,000 $50,000
</TABLE>
10
<PAGE> 14
The Company actively manages its real estate portfolio to ensure
profitability at the store level. In case of an under-performing 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 closed sixty-eight (68) stores in Fiscal Year 1998. In
Fiscal Year 1999, the Company plans to close sixty (60) to seventy (70) stores.
This continued acceleration in store closings is partly to improve the quality
of the Company's store locations and partly to redeploy the assets from
under-performing locations. The majority of the redeployments are expected to
be mall based to strip center locations especially in major markets, wherein
the benefits of its advertising programs can be leveraged.
The majority of the Company's leases expire or will be subject to
termination by the Company over the next four years. While the current real
estate environment has improved, the Company does have leverage in the
management of its occupancy expenses and flexibility in store location. The
Company intends to capitalize on this flexibility by seeking shorter lease terms
where it is an advantage and longer lease terms where it makes sense to make a
longer commitment.
E. INFORMATION TECHNOLOGY
The Company relies heavily on technology in the conduct of its
business. While fully automated, it is continually reevaluating its systems
capabilities to support the current and future needs of the business.
The Company's data reside on a combination of platforms connected in
an open system, client/server environment. By the end of Fiscal 1999, all
production processing will be consolidated on a single platform, the IBM SP2.
This restructuring is intended to take advantage of the increased processing
power inherent in the most current technology and also eliminate the
inefficiency of having to support a more complex and aging hardware
configuration. In Fiscal 1998 the Company completed the upgrade of its local
area network (LAN) in order to service the greater utilization of decision
support applications and electronic communications throughout the organization.
The corporate data center is located within the Company's Service
Office in Harrison, New Jersey. To ensure continuous operations, the Company
also maintains backup system capabilities at a third-party 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 communication
capabilities and access to essential store, district and region level management
reports.
The Company controls the level and distribution of merchandise in its
distribution centers and stores through the use of an internally developed
replenishment system. While sufficient to meet
11
<PAGE> 15
the historic distribution characteristics of the business, the development of a
more dynamic profile of current and future operations requires a substantially
greater degree of functionality. Accordingly, in September 1997, the Company
committed to the phased implementation of a replacement merchandising system.
The Company expects to complete the installation of JDA's merchandise software
by July 1999.
The Company's distribution centers are internally operated using 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. While sufficient to meet the
needs of the business in the past, the new business concepts require additional
functionality to run the operation. In September 1998, the Company committed to
the implementation of a replacement warehouse management system. The Company
expects to complete installation of JDA's warehouse management software by
August 1999.
In Fiscal 1997, the Company successfully installed the first phase of a
new financial system. This first phase included the upgrading of basic financial
functions relating to the processing of the business. In Fiscal 1998, the
Company augmented the new system with substantial planning, decision support and
report writing capabilities. During Fiscal 1999, this system will be fully
integrated with the aforementioned JDA merchandise system.
The Company has aggressively expanded its Electronic Data Interchange
(EDI) capabilities and is currently communicating with over 300 of its highest
volume vendors. During Fiscal 1999, the Company plans to continue to enhance
these vendor partnerships and to integrate EDI technology into additional areas
of the business.
The Company maintains a Website at `www.lechters.com'. The Website
continues to be revamped to make for more graphical appeal and ease of
navigation. The site features descriptive Company information, upcoming sales
promotions in the stores and basic investor relations materials. While the
Company does not presently conduct any commerce through the site, a project is
being planned for the near future.
With respect to the Year 2000 and the actions both planned and taken by
the Company to reduce this risk, please see the "Year 2000" caption of the
Company's Management's Discussion and Analysis of Financial Conditions and
Results of Operations included in item 7 of this Form 10-K.
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, supermarkets 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 the Company offers a broader assortment of
housewares merchandise than most of its competitors. Furthermore, its 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
12
<PAGE> 16
compete favorably will not be adopted by companies having greater financial and
other resources than the Company.
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", "Perfect Grip" and "Simple Solutions"
for certain housewares items. In addition, the Company has applied for
registration of other marks used in the operation of its business, and those
applications are pending.
ASSOCIATES
On April 1, 1999, the Company employed 6,246 persons, 2,891 of whom
were full-time (30 or more hours per week) and 3,355 of whom were part-time
Associates. Of this total, 461 were located at the Company's Harrison, New
Jersey Service Office and two distribution centers. Included in this total, 42
were Regional and District Managers, 6 were Loss Prevention Managers and 40
Associates were located at the Company's North Las Vegas, Nevada distribution
center.
On April 1, 1999, the 172 non-management distribution and office
Associates at the Harrison, New Jersey facility were represented by UNITE, Local
99. On April 26, 1999, the Company and UNITE, Local 99 entered into an agreement
as to the terms and conditions of a contract covering the distribution
Associates for the period from March 16, 1999 to March 15, 2002. The contract
covering office employees expires on June 30, 2000. The 5,785 Associates in the
Company's 578 retail stores are 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.
EXECUTIVE OFFICERS
The following table shows information regarding executive officers of
the Company as of April 20, 1999:
Position or Office Term of Employ-
Name Age with the Company ment Commenced
- - ---- --- ---------------- --------------
Donald Jonas 69 Chairman of the Board, January 1984
and Chief Executive
Officer
James Shea 53 President November 1994
13
<PAGE> 17
Robert J. Harloe 54 Senior Vice President August 1994
- Human Resources
Dennis Hickey 51 Senior Vice President January 1991
- Stores
Ira S. Rosenberg 65 Vice President, January 1984
Secretary and
Corporate Counsel
James J. Sheppard 47 Senior Vice President June 1992
and Chief Financial
Officer
William Sullivan 55 Senior Vice President March 1998
- Real Estate
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 with the election of James Shea as
President in February 1999, Mr. Jonas relinquished title as of that date. He is
also a Director of Dress Barn, Inc.
James Shea was elected President in February 1999. Prior to that, he
was Senior Vice President of Marketing and Merchandising of the Company having
been elected 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 the May Department Stores Company, from 1990 to
November 1994. 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.
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.
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.
14
<PAGE> 18
James J. Sheppard was elected Senior Vice President and Chief
Financial Officer of the Company in June 1998. Prior to that he was Vice
President and Corporate Controller having joined the Company as Corporate
Controller in June 1992. Mr. Sheppard previously held the positions of
Corporate Controller for Deer Park Spring Water and Staff Vice President,
Assistant Controller for TW Services.
William R. Sullivan was elected Senior Vice President - Real Estate of
the Company in April 1998 having joined the Company in March 1998. Prior to that
he was employed by Compass Retail, Inc., a division of Equitable Real Estate,
from 1990 to 1997 as Executive Vice President - Leasing. Mr. Sullivan previously
held the position of Senior Vice President of Leasing for Kravco, Inc. in King
of Prussia, Pennsylvania, from 1972 to 1990. Mr. Sullivan started his career in
the shopping center business with The Rouse Company.
ITEM 2. PROPERTIES.
The general offices of the Company are located at 1 Cape May Street,
Harrison, New Jersey. The Company leases approximately 550,000 square feet of
floor space at this location. Approximately 460,000 square feet are being
utilized for the distribution center, and approximately 90,000 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 a distribution center of approximately 155,000
square feet 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 April 7, 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.
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.
15
<PAGE> 19
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 1998 High Low
----------- ----- ---
<S> <C> <C>
1st Quarter 6-15/16 4-3/4
2nd Quarter 6-3/8 4-1/8
3rd Quarter 4-7/8 2-11/16
4th Quarter 3-3/8 2-1/8
<CAPTION>
Fiscal 1997 High Low
----------- ----- ---
<S> <C> <C>
1st Quarter 4-1/8 3-1/8
2nd Quarter 5-1/8 3-1/4
3rd Quarter 5-7/16 3-1/2
4th Quarter 7-3/8 4-7/8
</TABLE>
These quotations reflect inter-dealer prices, without retail markups,
markdowns or commissions.
On April 16, 1999, there were approximately 798 holders of record of
the Common Stock. On April 16, 1999, the closing price of the Common Stock was
$1.875.
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 Note 7
to the Consolidated Financial Statements.
16
<PAGE> 20
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-Two
Weeks Ended Weeks Ended Weeks Ended
--------------------------------------------- ----------- -----------
January 30, January 31, February 1, February 3, January 28,
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
(Dollars in thousands, except share, per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 428,219 $ 445,310 $ 441,243 $ 432,048 $ 399,264
Cost of goods sold
(including occupancy
and indirect costs) 317,868 325,269 322,110 310,163 282,875
------------ ------------ ----------- ------------ -----------
Gross profit 110,351 120,041 119,133 121,885 116,389
Selling, general and,
administrative expenses 118,606 115,541 110,848 109,414 93,853
Restructuring expense -- -- -- (217) 11,000
Provision for
asset impairment 1,543 8,746 370 -- --
------------ ------------ ----------- ------------ -----------
Operating (loss) income (9,798) (4,246) 7,915 12,688 11,536
Other (Income) expense (1) (117) 1,952 3,372 5,039 5,838
------------ ------------ ----------- ------------ -----------
(Loss) Income before
income tax provision (9,681) (6,198) 4,543 7,649 5,698
Income tax (benefit)
provision (3,940) (2,440) 1,200 3,146 2,336
------------ ------------ ----------- ------------ -----------
Net (loss) income (5,741) (3,758) 3,343 4,503 3,362
Preferred stock dividend
requirement 1,010 1,010 842 -- --
------------ ------------ ----------- ------------ -----------
Net (loss) income
available to common
shareholders ($ 6,751) ($ 4,768) $ 2,501 $ 4,503 $ 3,362
============ ============ =========== ============ ===========
Net (loss) income
per common share (2) (3)
Basic ($ 0.39) ($ 0.28) $ 0.15 $ 0.26 $ 0.20
Diluted ($ 0.39) ($ 0.28) $ 0.15 $ 0.26 $ 0.20
Weighted average common
shares outstanding (3) (4)
Basic 17,176,000 17,159,000 17,155,000 17,147,000 16,898,000
Diluted 17,176,000 17,159,000 17,155,100 17,154,000 16,989,000
</TABLE>
17
<PAGE> 21
<TABLE>
<CAPTION>
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
-------------------------------------------- ------------ -----------
January 30, January 31, February 1, February 3, January 28,
1999 1998 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share, per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Stores opened during year 20 7 16 48 49
Stores closed during year 68 30 9 11 11
Stores open at year-end 578 626 649 642 605
Total square feet of store
space (at year-end) (5) 2,188,900 2,346,400 2,432,200 2,405,100 2,228,195
Sales per average square
foot of total space (5) (6) $ 189 $ 186 $ 182 $ 186 $ 187
Percentage increase
(decrease) in comparable
store sales (7) (1.1%) 0.5% (0.2%) (1.6%) 3.2%
Balance Sheet Data:
Working capital $ 164,474 $ 163,998 $ 151,954 $ 136,113 $ 134,785
Total assets 267,644 277,434 272,333 272,312 270,710
Long-term debt 61,232 60,001 58,853 75,038 77,777
Shareholders' equity 159,134 165,850 170,408 148,642 143,541
Total debt to total
Capitalization 27.8% 26.6% 25.7% 34.4% 36.0%
</TABLE>
(1) Other (income) expense includes interest expense net of interest income,
gains realized on the sale of government securities and investment income,
primarily dividends, from marketable securities.
(2) Net (loss) income per share for Fiscal 1998, Fiscal 1997 and Fiscal 1996
was calculated on net (loss) income less the preferred stock dividend
requirement.
(3) The Company has never paid any cash dividends on its Common Stock.
(4) Outstanding shares for the calculation of "basic" net (loss) income per
common share is the weighted average of outstanding shares calculated on a
daily basis. Outstanding shares for "diluted" net (loss) income per common
share includes incremental shares for the Company's incentive stock option
plan. The incremental shares represent the average of incremental shares
included in the calculation of net (loss) income per common share for each
quarter.
(5) Approximately 90% of total store space represents selling area. The balance
is storage and office space.
(6) 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.
(7) 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. Comparable store sales for Fiscal 1998 and Fiscal 1997
exclude sales of stores to be closed starting 90 days prior to closing.
18
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL 1998 IN COMPARISON WITH FISCAL 1997
Sales for Fiscal 1998, the fifty-two week period ended January 30,
1999, decreased $17,091,000 to $428,219,000, a 3.8% decrease from Fiscal 1997,
the fifty-two week period ended January 31, 1998. The decrease in sales was due
to the closing of 68 stores during the year which was partially offset by the
opening of 20 stores during Fiscal 1998. The decrease was also attributable to
the 1.1% decrease in comparable store sales for Fiscal 1998. At the close of the
fiscal year, the Company operated 578 stores compared with 626 stores in
operation at the end of Fiscal 1997.
Gross profit for Fiscal 1998 was $110,351,000, a $9,690,000 decrease
from the prior fiscal year. The gross profit rate was 25.8% as a percent of
sales, which was 1.2 percentage points below the gross profit rate of Fiscal
1997. The major contributing factors to reduced gross profit from an overall
viewpoint was the reduction of sales partially offset by reduced occupancy costs
such as common area maintenance, real estate taxes, depreciation and utilities,
due to a fewer number of stores in operation. With respect to the gross profit
rate, factors which contributed to the reduction from Fiscal 1997 were the
additional price reductions due to the continued emphasis on "special buy" and
"off-price" strategies and a less favorable inventory shrinkage performance than
the prior fiscal year.
Selling, general and administrative expenses increased $3,065,000 to
$118,606,000. The expense rate was 27.7% of sales which was 1.8 percentage
points higher than the prior fiscal year. Due to fewer stores, store operating
expenses were lower than the prior fiscal year with the exception of payroll and
related benefits. Payroll at the store level increased due to the additional
handling required for "off-price" and "special buy" merchandise. Expenses of the
Service Office were higher than the prior fiscal year due to additional
resources supporting the Company's new concepts and initiatives, increased
payroll expense in the distribution centers related to the additional handling
needed for "special buy" merchandise and increased occupancy costs, also, at the
distribution centers. Information technology costs increased at the Service
Office due to the on-going design and installation of new merchandise systems
scheduled for completion in Fiscal 1999.
The Company recorded a non-cash provision for asset impairment of
$1,543,000 for Fiscal 1998 as required by Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of". The provision was determined by a
comparison of each store's operating cash flow performance versus the carrying
value of the assets at that location. In cases where the undiscounted cash flows
produced by the store were not sufficient to recover the carrying value of the
long-term assets at the location, the store's assets are adjusted to their
estimated fair value. The fair value was estimated by applying a discount rate
to the undiscounted cash flows. For Fiscal 1997 the asset impairment provision
determined in the same manner was $8,746,000.
19
<PAGE> 23
For Fiscal 1998, net other expense (income) was an income of $117,000
versus an expense of $1,952,000 for the comparable fifty-two week period of
Fiscal 1997. Interest expense was $151,000 lower than the prior fiscal year at
$4,474,000. Interest income increased $1,644,000 over the prior year to
$3,978,000 while other investment gain/income increased $274,000 to $613,000.
Throughout Fiscal 1998 the Company had higher invested balances and favorable
investment market conditions producing the favorable performance compared to the
prior year.
Income taxes for Fiscal 1998 were at an effective rate of 40.7% which
was comparable to the Company's historical income tax rate except for Fiscal
1996 which had an effective rate of 26.4% related to the reversal of residual
estimated liabilities for prior years. The income tax provision for Fiscal 1998
is a "benefit" due to the reported loss for the fiscal year.
The net loss for Fiscal 1998 was $5,741,000 compared to a net loss for
Fiscal 1997 of $3,758,000. The loss was primarily the result of reduced sales
and gross profit and additional selling, general and administrative expenses
needed to support the Company's new strategies.
FISCAL 1997 IN COMPARISON WITH FISCAL 1996
Net sales for Fiscal 1997, the fifty-two week period ended January 31,
1998, increased $4,067,000 to $445,310,000, a 0.9% increase over Fiscal 1996,
the fifty-two week period ended February 1, 1997. The increase in sales reflects
a 0.5% increase in same store sales, offset in part by a net reduction in store
count of 23 (7 openings, 30 closings). At the close of the fiscal year the
Company operated 626 stores compared with 649 stores at the close of Fiscal
1996.
Gross profit for Fiscal 1997 was $120,041,000, a $908,000 increase over
the prior fiscal year. The gross profit rate of 27.0% as a percent of sales
equaled the rate for Fiscal 1996. Favorable shrinkage performance and a
favorable merchandise mix in Lechters Housewares were offset by additional price
reductions, the transition in progress to lower margin off-price merchandise in
Famous Brands and the under-absorption of higher occupancy costs.
Selling, general and administrative expenses increased $4,693,000 to
$115,541,000. The expense rate of 25.9% was 0.8% above the rate for Fiscal 1996.
The additional expense reflects the costs of the Company's expanded advertising
program, an increase in Service Office payroll to support staffing of the Famous
Brands off-price merchandise strategy and new concept development initiative,
added investment in information technology and costs relating to the closing of
30 stores.
The Company recorded a non-cash provision for asset impairment of
$8,746,000 during the fourth quarter of Fiscal 1997. This charge to operating
income relates primarily to the write-down of under-performing store long-lived
assets in accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to
Be Disposed Of." The provision reflects the impairment of under-performing
properties, some of which were closed in Fiscal 1998.
Other expenses for Fiscal 1997 were $1,952,000, a decrease of
$1,420,000 from Fiscal 1996. At 0.4% of sales, other expenses were 0.4% below
the prior fiscal year rate. Interest expense declined $378,000 primarily as a
result of the early retirement of the Senior Notes Payable in Fiscal
20
<PAGE> 24
1996. Interest income increased $684,000 and investment gains/income increased
$358,000 reflecting the higher levels of invested cash and marketable securities
and favorable market rates.
Income taxes for Fiscal 1997 were at an effective rate of 39.4% which
was comparable to the Company's historical income tax rate except for Fiscal
1996 which had an effective rate of 26.4% related to the reversal of residual
estimated liabilities for prior years. The income tax provision for Fiscal 1997
is a "benefit" due to the reported loss for the fiscal year.
The net loss for Fiscal 1997 was $3,758,000 compared to a net income
for Fiscal 1996 of $3,343,000. The loss was primarily the result of the
aforementioned provision for asset impairment.
YEAR 2000
The Year 2000 ("Y2K") issue is primarily the result of computer
programs using two digits instead of four digits to indicate the year. From the
Company's perspective, the major risks associated with the Year 2000 involve
areas in which the Company is dependent on others to take appropriate and
timely actions before January 1, 2000. Specifically, as a retailer, the Company
is dependent upon an uninterrupted supply of merchandise to its stores, upon
landlords to provide normal operating conditions at the properties leased by
the Company in which to transact business and upon service providers who supply
such items as phone service and utilities which allow the Company to operate
its stores located in 42 states and the District of Columbia from its
headquarters in New Jersey. These key factors must be resolved by outside
parties. Without a successful resolution of these factors, the Company will not
be able to operate in its normal manner and severe adverse economic
consequences will result. With respect to the products sold by the Company, for
the most part, they do not contain embedded electronic devices which would make
them subject to Y2K issues.
To monitor these outside parties in their Y2K process and to ensure
that all factors over which it had control from a Y2K perspective were resolved
before the start of the Y2K, the Company initiated its Year 2000 compliance
project during Fiscal Year 1997 with a review of all existing information
technology ("IT") software systems by the vendor.
In Fiscal Year 1996, prior to the recognition of the Year 2000 as a
significant business risk and in the normal course of business, the Company
identified key core systems which needed to be replaced. A new financial suite
including modules for general ledger, accounts payable and fixed assets was
installed at the beginning of Fiscal 1998. A new merchandise inventory analysis
and control system has been acquired. The core software package was installed
during Fiscal Year 1998. The new merchandise analysis systems are scheduled to
be operational in stages during the first half of Fiscal Year 1999. Finally, the
Company has also contracted to install a new warehouse management system which
is in the early stages of development and will be implemented by August 1999.
All three major systems acquisitions have been certified Year 2000 compliant by
the vendor. All new software to be acquired by the Company will be required to
be certified as Year 2000 compliant by the vendor.
The Company established a Year 2000 Compliance Task Force in the third
quarter of Fiscal 1998 whose charter is to review all of the Company's efforts
to ensure that the Company will be Year 2000 compliant prior to December 31,
1999. Comprised of representatives from Information Technology, Operations,
Finance, Loss Prevention, Merchandising and Human Resources, the task force has
reviewed all known potential Year 2000 issues and has established a Master
Schedule of items ready to be resolved to ensure that the Y2K will have no
adverse impact on the Company. The Y2K Task Force's initial focus was to review
steps taken to date primarily in the IT area.
The Y2K Task Force also commenced its review of non-IT related issues
involving equipment with embedded technology which may not be Year 2000
compliant. This phase of the
21
<PAGE> 25
project has been completed it has identified limited amounts of equipment with
embedded technology subject to Y2K exposure. Early in Fiscal 1999, the Company
mailed a Y2K readiness questionnaire to all of its vendors. A second mailing
was also made to key vendors who did not respond to the initial mailing.
With the evaluation of the questionnaire results, scheduled to be
completed by the end of May 1999, the third phase of the Year 2000 compliance
project will focus on evaluating the results of the questionnaire, reviewing
the results of the non-IT equipment survey and verifying IT software surveys
previously conducted. Based on the completion of the above process, the Y2K
Task Force will issue its final Y2K Master Schedule and remediation plan which
will be completed by the third quarter of Calendar Year 1999. If deemed
necessary, third party consultants will be engaged to evaluate and/or assist in
the completion of the plan.
The final two phases of the Year 2000 remediation plan involve the
establishment of contingency plans scheduled for development during the second
quarter of Fiscal Year 1999 and the development of "worst case" scenarios. The
development of "worst case" scenarios will be based on the assessment of the
Company's readiness and the readiness of its key vendors, major suppliers,
landlords and key service suppliers. Given the fact that the Company operates a
large number of stores which are geographically dispersed and has a large
supplier base, the Company's initial evaluations to date indicate that these two
conditions will tend to mitigate potential adverse impacts of the Year 2000
issues. This evaluation, however, is based on certain expectations and
assumptions which may ultimately prove to be inaccurate.
As part of their oversight responsibilities, the Audit Committee of the
Board of Directors has requested and will be provided with periodic status
reports, on at least on a monthly basis, on the progress the Company has made
with respect to Year 2000 readiness and compliance.
The cost of the software purchased for the major systems as described
above approximates $4,200,000. Future costs of new software for major systems
are estimated to be $1,200,000 for the completion of the merchandise inventory
analysis and control system and $1,400,000 for a warehouse management system.
Costs of compliance such as hardware upgrades, equipment replacement and
miscellaneous software, which are "capitalized" as other assets, are estimated
to be $300,000. Costs of re-training or modifications to existing programs will
be expensed as incurred and are estimated to be $400,000. It is anticipated that
funds for Year 2000 compliance costs will be generated by internal sources.
LIQUIDITY AND CAPITAL RESOURCES
The combined balances of cash, cash equivalents and marketable
securities at January 30, 1999 as shown on the Consolidated Balance Sheet
totaled $98,253,000, an increase of $7,111,000 over the combined balances of
$91,142,000 at January 31, 1998. As depicted on the Consolidated Statements of
Cash Flows, the increase in cash and cash equivalents was $19,108,000 for the
fifty-two week period ended January 30, 1999 compared with a $9,373,000 increase
for Fiscal 1997.
Cash flows from operating activities consist primarily of net (loss)
income adjusted for certain non-cash charges such as depreciation and
amortization, deferred taxes, loss on disposal of
22
<PAGE> 26
fixed assets and the provision for asset impairment. Operating activities also
include changes in operating assets, which include accounts receivable,
inventory, accounts payable, accrued liabilities and other items. Net cash
provided by operating activities for Fiscal 1998 was $16,648,000 compared to
$35,617,000 for Fiscal 1997. For Fiscal 1998 there was a net loss of $5,741,000
which reduced cash. Significant offsets to the net loss which provided cash were
depreciation and amortization of $16,676,000, the asset impairment provision of
$1,543,000 and a decrease in merchandise inventories of $9,810,000. The most
significant operating activity reducing cash flow was the increase in other
assets due to the increased investments in information technology software.
With respect to investing activities, in addition to the decrease in
marketable securities of $12,040,000, capital expenditures were $8,580,000
compared to $4,860,000 for Fiscal 1997. Capital expenditures were principally
for the construction of and fixtures for new and remodeled stores opened in
Fiscal 1998. Other capital expenditures for Fiscal 1998 included significant
amounts for computer hardware expenditures related to systems infrastructure
enhancements.
Planned capital expenditures for Fiscal 1999 are estimated at
$14,000,000 - $15,000,000 primarily for new stores, renovations, remodels and
computer hardware.
With respect to the Company's line of credit, on March 26, 1998, the
Company entered into a new $40,000,000 Credit Agreement which replaced the
existing credit facility. The Credit Agreement includes a restrictive covenant
which prohibits the payment of dividends on the Company's common stock. The
Credit Agreement was amended on March 23, 1999 waiving certain operating
covenants with respect to consolidated net income and leverage ratio as defined
by the Credit Agreement for Fiscal 1998 and adjusting the covenants and fee
structure for the balance of the Agreement. The credit facility consists of a
$20,000,000 line of credit for direct borrowings and a $20,000,000 line for
issuance of Letters of Credit.
The term of the new agreement is for three years, with the Letter of
Credit component renewable annually during that period. The Letter of Credit
component was renewed for another year on March 23, 1999. As of the end of
Fiscal 1998, there were no outstanding borrowings under the then existing Credit
Agreement. At January 30, 1999 and January 31, 1998 the Company was liable for
drawings under outstanding Letters of Credit in the amount of approximately
$11,579,000 and $8,299,000, respectively.
INFLATION
The economy's experienced low inflation, in conjunction with increased
competition, has severely restricted pricing opportunities within the housewares
segment. In fact, certain lines of merchandise considered commodity in nature
have experienced price deflation over the last several years. The result has
been adverse pressure on the Company's gross margin and inability to check
further profit erosion given the concurrent rise in selling, general and
administrative expenses. The Company has responded to the situation by
increasing the penetration of its private label program and non-commodity
assortment of merchandise, introducing higher price point items to the line and
taking selective price increases where the market allows. Additionally, the
Company has in place an aggressive program to reduce its cost of operations and
financing.
23
<PAGE> 27
SEASONALITY
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 June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 must be adopted by
January 30, 2000. The Company has not actively engaged in derivative
instruments to hedge its market risks. Accordingly, this statement is not
expected to materially impact the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company imports about 35% of its merchandise from
the Far East which subjects it to the market risk of currency fluctuations.
However, the Company uniformly utilizes purchase contracts and letters of
credit denominated in US dollars to mitigate this risk. Additionally, there are
multiple suppliers, both foreign and domestic, of its products. With respect to
marketable securities, the Company is subject to the variations in the
investment markets. It mitigates this risk by employing the services of a
investment management firm which with the Company's oversight invests solely in
the highest quality securities and spreads the market risk among various types
of securities with varying maturities.
With respect to its Credit Agreement, although the Company has not had
to borrow funds under the Credit Agreement during Fiscal 1998 and Fiscal 1997,
should it need to utilize the line of credit for direct borrowings, the interest
rate is subject to market conditions at the time of the borrowing.
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 22, 1999.
24
<PAGE> 28
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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.
(Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended February 1, 1997.)
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). (1.)
10.2 Credit Agreement dated March 26, 1998. (Incorporated herein by
reference to Exhibit 10.2 to this Company's Annual Report on
Form 10-K for the year ended January 31, 1998).
10.2.1 First Amendment and Waiver to Credit Agreement dated March 23,
1999.*
10.3 Form of Deferred Compensation Agreement (Incorporated herein
by reference to Exhibit 10.5 to the Registration Statement).
(1.)
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). (1.)
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). (1.)
25
<PAGE> 29
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). (1.)
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). (1.)
10.8 Form of Consulting Agreement (Incorporated herein by reference
to Exhibit 10.9.1 to the Registration Statement). (1.)
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). (1.)
10.10 Agreement between the Company and Local 99, UNITE to a
collective bargaining agreement covering warehouse employees
dated March 16, 1996. (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
February 1, 1997).
10.10.1 Memorandum of Agreement dated April 26, 1999 between the
Company and Local 99, UNITE extending the term of Agreement
covering warehouse employees dated March 16, 1996 to
March 15, 2002.*
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).
10.11.1 Lease Modification Agreement dated June 19, 1995 covering the
Distribution Center and Office space in Harrison, NJ. *
10.11.2 Lease Modification Agreement dated July 22, 1998 covering the
Distribution Center and Office space in Harrison, NJ. *
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).
10.13 Agreement dated March 27, 1998 between the Company and Local
99, UNITE, covering office employees for a term from July 1,
1997 to June 30, 2000. (Incorporated herein by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the year ended January 31, 1998).
10.14 Memoranda of Agreement dated March 27, 1998 between the
Company and Local 99, UNITE, amending, respectively, Agreement
dated March 16, 1996 covering warehouse employees and
Agreement dated March 27, 1998 covering office employees.
(Incorporated herein by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the year ended
January 31, 1998).
10.15 Lechters Long-Term Incentive Plan. (Incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
period ended August 1, 1998). (1.)
26
<PAGE> 30
21 Subsidiaries of the Company. *
23 Consent of Deloitte & Touche LLP.*
27 Financial Data Schedule *
*Filed herewith.
(1.) Management Compensatory Plan.
27
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
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 by the following persons on behalf of the registrant
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board, Chief Executive Officer,
/s/ DONALD JONAS and Director (Principal Executive Officer) April 27, 1999
- - ----------------------------- --------------
(DONALD JONAS)
Senior Vice President (Principal Financial
/s/ JAMES J. SHEPPARD Officer and Principal Accounting Officer) April 27, 1999
- - ----------------------------- --------------
(JAMES J. SHEPPARD)
/s/ MARTIN BEGUN Director April 27, 1999
- - ----------------------------- --------------
(MARTIN BEGUN)
/s/ CHARLES A. DAVIS Director April 27, 1999
- - ----------------------------- --------------
(CHARLES A. DAVIS)
/s/ BERNARD D. FISCHMAN Director April 27, 1999
- - ----------------------------- --------------
(BERNARD D. FISCHMAN)
/s/ ROBERT KNOX Director April 27, 1999
- - ----------------------------- --------------
(ROBERT KNOX)
/s/ ANTHONY MALKIN Director April 27, 1999
- - ----------------------------- --------------
(ANTHONY MALKIN)
/s/ ROBERTA MANEKER Director April 27, 1999
- - ----------------------------- --------------
(ROBERTA MANEKER)
</TABLE>
28
<PAGE> 32
<TABLE>
<S> <C> <C>
/s/ NORMAN MATTHEWS Director April 27, 1999
- - ----------------------------- --------------
(NORMAN MATTHEWS)
/s/ JOHN WOLFF Director April 27, 1999
- - ----------------------------- --------------
(JOHN WOLFF)
/s/ STEVE WESTERFIELD Director April 27, 1999
- - ----------------------------- --------------
(STEVE WESTERFIELD)
</TABLE>
29
<PAGE> 33
LECHTERS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
MANAGEMENT'S REPORT F-1
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED
JANUARY 30, 1999
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statement of Shareholders' Equity F-6
Notes to Consolidated Financial Statements F-7 - F-21
<PAGE> 34
MANAGEMENT'S REPORT
To the Shareholders of Lechters, Inc.:
We have prepared the consolidated financial statements of Lechters, Inc.,
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 to 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
James J. Sheppard
Senior Vice President and
Chief Financial Officer
F-1
<PAGE> 35
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 (the "Company") as of January 30, 1999 and January 31, 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended January 30, 1999.
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 January 30, 1999
and January 31, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended January 30, 1999 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 24, 1999
F-2
<PAGE> 36
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 35,503 $ 16,395
Marketable securities 62,750 74,747
Accounts receivable 4,185 5,084
Merchandise inventories 89,224 99,034
Prepaid expenses 1,734 2,145
-------- --------
Total current assets 193,396 197,405
-------- --------
PROPERTY AND EQUIPMENT:
Fixtures and equipment 57,678 58,403
Leasehold improvements 96,452 94,994
-------- --------
154,130 153,397
Less accumulated depreciation and amortization 88,401 79,891
-------- --------
Net property and equipment 65,729 73,506
-------- --------
OTHER ASSETS 8,519 6,523
-------- --------
TOTAL ASSETS $267,644 $277,434
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,982 $ 10,127
Dividends payable-preferred stock 1,010 1,010
Salaries, wages and other accrued expenses 17,156 18,102
Taxes, other than income taxes 1,774 1,227
Income taxes payable -- 2,941
-------- --------
Total current liabilities 28,922 33,407
LONG-TERM DEBT 61,232 60,001
DEFERRED INCOME TAXES 10,538 11,456
OTHER LIABILITIES 7,818 6,720
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
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 20,000
Common stock, no par value,authorized 50,000,000 shares,
issued and outstanding 17,176,286 and 17,174,286, 58 58
respectively
Accumulated other comprehensive income 109 84
Additional paid-in capital 62,380 62,370
Retained earnings 76,587 83,338
-------- --------
Total shareholders' equity 159,134 165,850
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $267,644 $277,434
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 37
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 428,219 $ 445,310 $ 441,243
COST OF GOODS SOLD (including occupancy
and indirect costs) 317,868 325,269 322,110
------------ ------------ ------------
GROSS PROFIT 110,351 120,041 119,133
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 118,606 115,541 110,848
PROVISION FOR ASSET IMPAIRMENT 1,543 8,746 370
------------ ------------ ------------
OPERATING (LOSS)/ INCOME (9,798) (4,246) 7,915
OTHER EXPENSES (INCOME):
Interest Expense 4,474 4,625 5,003
Interest Income (3,978) (2,334) (1,650)
Net Investment (Gain/Income) Loss (613) (339) 19
------------ ------------ ------------
(117) 1,952 3,372
------------ ------------ ------------
(LOSS)/ INCOME BEFORE INCOME TAX PROVISION (9,681) (6,198) 4,543
INCOME TAX (BENEFIT) PROVISION (3,940) (2,440) 1,200
------------ ------------ ------------
NET (LOSS)/ INCOME (5,741) (3,758) 3,343
Preferred Stock Dividend Requirement 1,010 1,010 842
------------ ------------ ------------
Net (Loss)/ Income Available to Common Shareholders ($ 6,751) ($ 4,768) $ 2,501
============ ============ ============
NET (LOSS)/ INCOME PER COMMON SHARE
Basic ($ 0.39) ($ 0.28) $ 0.15
============ ============ ============
Diluted ($ 0.39) ($ 0.28) $ 0.15
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 17,176,000 17,159,000 17,155,000
============ ============ ============
Diluted 17,176,000 17,159,000 17,155,100
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 38
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------
January 30, January 31, February 1,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($ 5,741) ($ 3,758) $ 3,343
Adjustments to reconcile net (loss)/income to net cash
provided by operating activities:
Provision for asset impairment 1,543 8,746 370
Depreciation and amortization 16,676 18,014 17,672
Loss on disposal of property and equipment 1,580 1,702 1,067
Deferred income taxes (936) (4,998) (894)
Deferred rent 1,075 968 1,160
Other (751) 265 521
Changes in operating assets and liabilities
Decrease in accounts receivable 899 477 12
Decrease in merchandise inventories 9,810 1,408 9,456
Decrease (Increase) in prepaid expenses 411 3,589 (215)
Increase in other assets (3,433) (3,314) (446)
(Decrease) Increase in accounts payable,
Accrued salaries, wages and other accrued
Expenses and taxes, other than income taxes (1,544) 11,556 (5,089)
(Decrease) Increase in income taxes payable (2,941) 962 1,226
-------- -------- --------
Net cash provided by operating activities 16,648 35,617 28,183
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,580) (4,860) (8,053)
Decrease (Increase) in marketable securities 12,040 (20,471) (16,592)
-------- -------- --------
Net cash provided by (used in) investing activities 3,460 (25,331) (24,645)
-------- -------- --------
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)
Exercise of stock options 10 97 --
Payment of preferred stock dividends (1,010) (1,010) --
-------- -------- --------
Net cash used in financing activities (1,000) (913) (750)
-------- -------- --------
INCREASE IN CASH AND CASH
EQUIVALENTS 19,108 9,373 2,788
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 16,395 7,022 4,234
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 35,503 $ 16,395 $ 7,022
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 2,769 $ 3,406 $ 4,616
======== ======== ========
Income taxes $ 2,296 $ 2,073 $ 920
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 39
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible
Common Preferred
Stock Issued Stock Issued Accumulated Compre-
----------------- ----------------- Additional Other hensive
Paid-In Retained Comprehensive Income
Shares Amount Shares Amount Capital Earnings Income Total (Loss)
------ ------ ------ ------ ------- -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
FEBRUARY 3, 1996 17,155,086 $58 -- $ -- $ 62,773 $ 85,773 $ 38 $ 148,642 $ --
Net Income -- -- -- -- -- 3,343 -- 3,343 3,343
Other comprehensive income,
(loss) net of tax:
Unrealized loss on
available for sale
securities -- -- -- -- -- -- (67) (67) (67)
Issuance of convertible
preferred stock, net of
issuance expenses -- -- 200,000 20,000 (500) -- -- 19,500 --
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 $ 3,276
=======
Net loss -- -- -- -- -- (3,758) -- (3,758) (3,758)
Other comprehensive income,
(loss) net of tax:
Unrealized gain on
available for sale
securities -- -- -- -- -- -- 113 113 113
Exercise of stock options 19,200 -- -- -- 97 -- -- 97 --
Declaration of dividend on
convertible preferred stock -- -- -- -- -- (1,010) -- (1,010) --
---------- --- ------- ------- -------- -------- ----- --------- -------
BALANCE,
JANUARY 31, 1998 17,174,286 58 200,000 20,000 62,370 83,338 84 165,850 ($3,645)
=======
Net Loss -- -- -- -- -- (5,741) -- (5,741) (5,741)
Other comprehensive income,
(loss) net of tax:
Unrealized gain on
available for sale
securities -- -- -- -- -- -- 25 25 25
Exercise of stock options 2,000 -- -- -- 10 -- -- 10 --
Declaration of dividend on
convertible preferred stock -- -- -- -- -- (1,010) -- (1,010) --
---------- --- ------- ------- -------- -------- ----- --------- -------
Balance,
JANUARY 30, 1999 17,176,286 $58 200,000 $20,000 $ 62,380 $ 76,587 $ 109 $ 159,134 ($5,716)
========== === ======= ======= ======== ======== ===== ========= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 40
LECHTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED JANUARY 30, 1999
(Amount in thousands, except share and per share amounts)
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 January 30, 1999, the Company operated 578
stores in 42 states and the District of Columbia.
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.
b) References to Fiscal 1998, Fiscal 1997 and Fiscal
1996 mean the fiscal year ending on the Saturday closest to
the end of January. Fiscal Year 1998, Fiscal Year 1997 and
Fiscal Year 1996 were each comprised of 52 weeks.
c) Cash and 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 component of other comprehensive income. (See
Note 9.)
d) Merchandise Inventories - Merchandise inventories are
stated on the following methods:
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
------- ---------
<S> <C> <C>
Lower of cost (first-in, first-out) or
market as determined by the retail
inventory method (stores) $57,912 $ 69,167
Lower of cost (first-in, first-out) or
market (distribution centers) 31,312 29,867
------- ---------
$89,224 $ 99,034
======= =========
</TABLE>
F-7
<PAGE> 41
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 January 30, 1999 total indirect costs
included as part of inventory were approximately $7,900. At
January 31, 1998, indirect costs included as part of inventory
were approximately $8,500.
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. As
required by Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", the Company
evaluates each stores' performance and measures the carrying
value of each locations' fixed assets, principally leasehold
improvements and fixtures, versus its estimated undiscounted
future cash flows. When the evaluation of a store location
indicates that the undiscounted cash flows are not sufficient
to recover the carrying value of the long-term assets at the
store, the store assets are adjusted to their fair values. The
fair value is estimated by applying a discount rate to the
undiscounted cash flows. During Fiscal 1998, the Company
recorded a $1,543 provision for the impairment of long lived
assets located in stores. The asset impairment provisions
recorded in Fiscal 1997 and Fiscal 1996 were $8,746 and $370,
respectively. As a result of the asset impairment provisions
recorded, depreciation and amortization expenses for the store
locations which have been impaired will be reduced in future
years.
f) Pre-opening Costs - During Fiscal 1998, the Company
adopted the policy of expensing pre-opening costs as incurred.
In the prior fiscal years, pre-opening costs were capitalized
and amortized over a period of 12 months from the date
operations commence. This change did not have a material
impact on the financial statements for Fiscal 1998.
g) Income Taxes - In accordance with SFAS No. 109,
"Accounting for 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.)
h) Net (Loss) Income per Common Share - In February
1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share", which amended the manner
in which net (loss) income per share is calculated and
presented on financial statements. In accordance with SFAS No.
128, "basic" net (loss) income per share data were computed by
dividing net (loss) income less the dividend requirements for
the Company's Convertible Preferred Stock by the weighted
average of common shares outstanding during each period
presented. For the computation of "diluted" earnings per
share, potential shares of common stock related to the
Company's 1989 Incentive and Non-Qualified Stock Option Plan
were excluded from the Fiscal 1998 and the Fiscal 1997
computations since they would have been anti-dilutive. With
respect to the Company's 5% Convertible Subordinated
Debentures issued in September 1991, the assumed conversion of
these securities would also have had an anti-dilutive effect
on the net (loss) income per share data presented for Fiscal
1998, Fiscal 1997 and Fiscal 1996. With respect to the
F-8
<PAGE> 42
Company's 5.05% Convertible Preferred Stock issued in April
1996, the assumed conversion of the preferred stock would also
have had an anti-dilutive effect on the net (loss) income data
presented for Fiscal 1998, Fiscal 1997 and Fiscal 1996.
The number of shares used in computing basic and diluted net
(loss) income per share was determined as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Weighted average common
shares outstanding 17,176,000 17,159,000 17,155,000
========== ========== ==========
Diluted:
Weighted average common
shares outstanding 17,176,000 17,159,000 17,155,000
Common share equivalents - - 100
---------- ---------- ----------
17,176,000 17,159,000 17,155,100
========== ========== ==========
</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.
The fair value of the Company's cash and cash
equivalents, accounts receivable and accounts payable
approximate their carrying values at January 30, 1999
and January 31, 1998, due to the short term maturities
of these investments. The fair value of the Company's
long-term debt at January 30, 1999 and January 31, 1998
was $43,875 and $53,300 respectively. The carrying value
of long-term debt at January 30, 1999 and January 31,
1998 was $61,232 and $60,001 respectively. The fair
value of the Company's long-term debt is based on market
prices or dealer quotes (for publicly traded
debentures).
j) Comprehensive Income- During Fiscal 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive
Income". Comprehensive income, which is reported in the
Statements of Consolidated Shareholders' Equity, is
defined as the total change in shareholders' equity
during the period other than from transactions with
shareholders. For the Company, comprehensive income
F-9
<PAGE> 43
consists of net income and the net change in unrealized
gains and losses, net of taxes, on securities classified
for SFAS No. 115 purposes as held available for sale.
Accumulated other comprehensive income consists of the
accumulated unrealized gains and losses, net of
applicable income taxes and net of reclassification
adjustments for gains and losses included in net income.
k) Recent Accounting Pronouncements - In June
1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No.
133 must be adopted by January 30, 2000. The Company has
not actively engaged in derivative instruments to hedge
its market risks. Accordingly, this statement is not
expected to materially impact the Company's financial
statements.
l) 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.
m) Reclassifications - Certain reclassifications
have been made to the financial statements of prior
years to conform with the classifications used for
Fiscal 1998.
2. SEGMENT INFORMATION
The company has adopted SFAS No. 131, "Disclosures about Segment of an
Enterprise and Related Information," effective with the Fiscal year
ended January 30, 1999. The statement requires companies to disclose
segment data based on how management makes decisions about allocating
resources to segments and measuring their performance. The Company
defines its principal business segments into two divisions, the
Specialty Housewares segment which operates as Lechters Housewares(R)
and Lechters Kitchen Place(R), and the Off-Price Home Business segment
which operates as Famous Brands Housewares Outlet(R) and Cost Less Home
Store(SM). The contribution of these segments, as well as "corporate
and other" for Fiscal 1998, 1997, and 1996 are summarized below.
Corporate and other includes general corporate expenses, principally
service office expense and distribution centers as well as interest
income and expense.
F-10
<PAGE> 44
The Company's segment disclosures are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
January 30, January 31, February 1,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
SALES
Specialty Housewares $ 335,483 $ 346,947 $ 340,904
Off-Price Home Business 92,736 98,363 100,339
--------- --------- ---------
Total Sales $ 428,219 $ 445,310 $ 441,243
========= ========= =========
(LOSS) INCOME BEFORE INCOME TAX PROVISION
Specialty Housewares $ 17,023 $ 14,664 $ 9,575
Off-Price Home Business (418) 3,954 18,598
Corporate and Other (26,403) (22,864) (20,258)
--------- --------- ---------
Operating (Loss) / Income (9,798) (4,246) 7,915
Interest (Income) / Expense (117) 1,952 3,372
--------- --------- ---------
Total (Loss) Income before income tax provision ($ 9,681) ($ 6,198) $ 4,543
========= ========= =========
DEPRECIATION AND AMORTIZATION EXPENSE
Specialty Housewares $ 9,580 $ 11,178 $ 11,399
Off-Price Home Business 1,639 1,865 1,677
Corporate and Other 5,457 4,971 4,596
--------- --------- ---------
Total Depreciation and Amortization Expense $ 16,676 $ 18,014 $ 17,672
========= ========= =========
CAPITAL ADDITIONS
Specialty Housewares $ 5,974 $ 2,363 $ 4,335
Off-Price Home Business 940 516 1,615
Corporate and Other 1,666 1,981 2,103
--------- --------- ---------
Total Capital Additions $ 8,580 $ 4,860 $ 8,053
========= ========= =========
TOTAL ASSETS
Specialty Housewares $ 93,571 $ 103,550 $ 122,096
Off-Price Home Business 20,574 25,013 32,415
Corporate and Other 153,499 148,871 117,822
--------- --------- ---------
Total Assets $ 267,644 $ 277,434 $ 272,333
========= ========= =========
</TABLE>
F-11
<PAGE> 45
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. 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. 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. The Company must convert 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 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.
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.
Robert Knox, a Director of the Company, is Senior Managing
Director of Cornerstone Equity Investors, LLC, the investment
manager for Prudential Private Equity Investors III, L.P.
b) Stock Options - As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," 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 January
30, 1999, January 31, 1998 and February 1, 1997.
F-12
<PAGE> 46
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------
January 30, January 31, February 1,
1999 1998 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) income available to common shareholders:
As reported ($6,751) ($4,768) $2,501
Pro-forma ($7,166) ($5,133) $2,079
Net (loss) income per common share:
As reported ($0.39) ($0.28) $ 0.15
Pro-forma ($0.42) ($0.31) $ 0.12
</TABLE>
The pro forma effect of applying SFAS No. 123 is not
necessarily indicative of the effect on reported net income for future
years.
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
--------------------------------------
January 30, January 31, February 1,
1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 62% 64% 68%
Risk-free interest rate 5.4% 6.2% 6.3%
Expected life of options 6 years 6 years 6 years
</TABLE>
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 consultant's option is exercisable in
annual installments over a period of four years and terminates on the
tenth anniversary of the date of each installment.
Options granted under the Company's 1989 Incentive 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.
Changes in stock options granted under the 1989 Incentive Stock Option
Plan were as follows:
F-13
<PAGE> 47
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997 Fiscal 1996
-------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance 1,424,910 $5.28 1,109,320 $5.36 940,320 $5.80
Granted 96,800 4.25 505,500 4.87 283,990 5.12
Exercised (2,000) 5.00 (19,200) 5.02 - -
Canceled (272,980) 5.32 (170,710) 4.97 (114,990) 8.34
--------- --------- ---------
Ending balance 1,246,730 $5.18 1,424,910 $5.28 1,109,320 $5.36
========= ===== ========= ========= =====
Reserved for future grant at
year-end 246,980 70,800 405,590
Exercisable 423,874 $5.64 383,446 $5.91 213,730 $6.60
Weighted average fair
value of options
granted during the
year $2.58 $3.15 $3.41
</TABLE>
The following table summarizes information concerning stock
options granted under the 1989 Incentive Stock Option Plan which were
outstanding at January 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ---------------------------------
Number
Outstanding at Weighted Average Weighted Exercisable at
Range of January 30, Remaining Contractual Average January 30, Weighted Average
Exercise Prices 1999 Life in Years Exercise Price 1999 Exercise Price
--------------- -------------- -------------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$2.50 to $3.875 95,600 9.0 $ 3.22 11,020 $3.74
4.00 to 5.00 591,060 7.2 4.94 217,264 4.97
5.01 to 8.50 538,520 7.6 5.50 174,040 6.01
10.00 to 13.7 21,550 0.7 10.40 21,550 10.40
--------- -------
$2.50 to $13.75 1,246,730 423,874
========= =======
</TABLE>
c) 1998 Long-Term Incentive Plan - During Fiscal 1998, the Company adopted,
with shareholder approval, the 1998 Long-Term Incentive Plan (the "Plan"). The
purpose of the Plan is to promote success and enhance the value of the Company
by linking the personal interests of the participants to those of the Company's
shareholders and customers. The Plan authorizes the grant of up to 1,000,000
shares of Lechters, Inc. common stock. Shares underlying awards that lapse or
awards that are not paid may be reused for subsequent awards. Only the number of
shares issued net of shares rendered for exercise shall be deemed issued under
the Plan. The Plan is administered by a committee of the Board consisting solely
of two or more members of the Board, ("the Committee"). Persons eligible to
participate in the Plan include all officers, key employees and directors of the
Company and its subsidiaries, consultants and advisors to the Company and its
subsidiaries and other persons or entities providing goods or services to the
Company or its subsidiaries, in each case as determined by the Committee.
F-14
<PAGE> 48
During Fiscal 1998, there were no grants of Nonqualified Stock
Option (NQSO), Incentive Stock Options (ISO), Stock Appreciation Rights (SAR),
Restricted Stock Units, Performance Units, Performance Shares or any other
awards under the 1998 Long-Term Incentive Plan.
4. LONG-TERM DEBT
Long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
January 30, January 31,
1999 1998
---- ----
<S> <C> <C>
Convertible Subordinated Debentures,
5% due 2001 (a) $61,232 $60,001
======= =======
</TABLE>
a) The 5% Convertible Subordinated Debentures (the "Debentures") were
issued in 1991 with a yield to maturity of approximately 7.47%. At
January 30, 1999 and January 31, 1998, the unamortized original
issue discount was $3,768 and $4,999 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 $1,232 and $1,147 for Fiscal 1998 and
Fiscal 1997, respectively. The long-term debt at January 30, 1999
of $61,232 is due September 27, 2001.
The Debentures have not been and will not be registered under
the United States Securities Act of 1933.
5. LINE OF CREDIT
At January 30, 1999, the Company had a $40,000 unsecured
Credit Agreement (the "Credit Agreement") with a syndicate of banks led
by The Chase Manhattan Bank which was entered into on March 26, 1998.
The Credit Agreement includes a restrictive covenant, which prohibits
the payment of dividends on the Company's common stock. The Credit
Agreement was amended March 23, 1999 waiving operating covenants with
respect to consolidated net income and leverage ratio as defined by the
Credit Agreement for Fiscal 1998 and amended the covenants and fee
structure for the balance of the Credit Agreement. The facility
consists of a $20,000 line of credit for direct borrowings and a
$20,000 line for issuance of Letters of Credit. The Credit Agreement as
it relates to the $20,000 line of credit for direct borrowings expires
March 26, 2001 and is unsecured. With respect to the $20,000 line for
Letter of Credit which is renewable annually has been renewed for one
year expiring on March 24, 2000. 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 Funds Rate plus 1/2%, or (2) an Adjusted
Eurodollar Rate based on LIBOR. The Credit Agreement requires the
maintenance of certain earnings and fixed charge coverage ratios, and
the interest rate payable is adjusted by from 0.0% to 2.5% over the
above base rate depending on the
F-15
<PAGE> 49
ratio of consolidated funded debt to earnings before interest, taxes,
depreciation, amortization (EBITDA) and non cash charges.
At January 30, 1999 and January 31, 1998, the Company was
liable for drawings under outstanding letters of credit in the amount
of approximately $11,579 and $8,299 respectively.
6. INCOME TAXES
The (benefit)/provision for income taxes consists of the
following:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal:
Current ($2,095) $ 1,900 $ 1,448
Deferred (696) (3,803) (625)
------- ------- -------
(2,791) (1,903) 823
------- ------- -------
State:
Current 98 631 625
Deferred (1,247) (1,168) (248)
------- ------- -------
(1,149) (537) 377
------- ------- -------
($3,940) ($2,440) $ 1,200
======= ======= =======
</TABLE>
A reconciliation of the statutory Federal income tax rate with
the effective rate used for the calculation of the income tax (benefit)
provision is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income
tax rate 34.0% 34.0% 34.0%
State income taxes, net of
Federal benefit 5.3 5.7 5.5
Reversal of prior year
residual estimated liabilities - - (12.4)
Other 1.4 (0.3) (0.7)
---- ---- ----
Effective income tax rate 40.7% 39.4% 26.4%
==== ==== ====
</TABLE>
F-16
<PAGE> 50
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.
The components of the non-current deferred tax liability
(asset) are as follows:
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
---- ----
<S> <C> <C>
Accelerated tax depreciation $14,648 $15,156
Reserves not currently
deductible (1,541) (2,140)
State Net Operating Losses (1,798) (1,214)
Credit carryovers (771) (346)
------- -------
$10,538 $11,456
======= =======
</TABLE>
The Company files consolidated Federal and state income tax
returns. Deferred income tax expense during Fiscal 1998, 1997 and 1996
principally resulted from the use of accelerated methods of
depreciation for tax purposes over the straight-line method used for
financial reporting purposes. The alternative minimum tax credit
carryforwards can be carried forward indefinitely. The general business
credit carryforwards have expiration dates ranging from 2017 through
2018. The Company has state net operating loss carryforwards of
approximately $37,000 at January 30, 1999 and $24,800 at January 31,
1998, have which expiration dates ranging from 2003 through 2018.
7. LEASES
At January 30, 1999, 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 through
January 31, 2009.
At January 30, 1999, aggregate minimum rentals in future
periods are as follows:
<TABLE>
<CAPTION>
Minimum
Fiscal Rental
Year Commitment
---- ----------
<S> <C> <C>
1999 $46,745
2000 $40,998
2001 $36,622
2002 $32,645
2003 $27,831
Thereafter $52,951
</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:
F-17
<PAGE> 51
<TABLE>
<CAPTION>
Fiscal
Year Amount
---- ------
<S> <C> <C>
1998 $3,524
1997 $3,061
1996 $2,320
</TABLE>
Total rent expense was as follows:
<TABLE>
<CAPTION>
Fiscal
Year Amount
---- ------
<S> <C> <C>
1998 $52,865
1997 $53,931
1996 $52,729
</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 $948, $967 and $994 in Fiscal 1998, Fiscal
1997 and Fiscal 1996, 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 $141,
$145 and $154 were charged to expense in Fiscal 1998, Fiscal 1997 and
Fiscal 1996, 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 $160, $156
and $129 were charged to expense in Fiscal 1998, Fiscal 1997 and Fiscal
1996, 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 $475 per
year.
F-18
<PAGE> 52
9. AVAILABLE FOR SALE SECURITIES
The following is a summary of the available for sale
securities which comprise the balance in "marketable securities" at
January 30, 1999 and January 31, 1998:
<TABLE>
<CAPTION>
Gross Gross
January 30, Unrealized Unrealized Estimated
1999 Cost Gains Losses Fair Value
--------------------- ----- ------ ------ ----------
<S> <C> <C> <C> <C>
Government Bonds $43,512 $116 ($35) $43,593
Other Debt Securities 16,051 92 (8) 16,135
Municipal Bonds 3,002 20 - 3,022
------- ---- --- -------
Total available for
sale securities $62,565 $228 ($43) $62,750
======= ==== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
January 31, Unrealized Unrealized Estimated
1998 Cost Gains Losses Fair Value
---------------------- ---- ------ ------ ----------
<S> <C> <C> <C> <C>
Government Bonds $52,251 $40 ($3) $52,288
Other Debt Securities 17,305 77 (1) 17,381
Municipal Bonds 5,049 29 - 5,078
------- ---- --- -------
Total available for
sale securities $74,605 $146 ($4) $74,747
======= ==== === =======
</TABLE>
The cost and estimated fair value of debt securities at
January 30, 1999 by contractual maturity are as follows:
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
---- ----------
<S> <C> <C> <C>
1999 $23,579 $23,644
2000 $38,986 $39,106
-------- -------
Total available for
sale securities $62,565 $62,750
======== =========
</TABLE>
Net gains from the sales of available for sale securities are
reported on the consolidated statement of income as "Net Investment
(Gain/Income) Loss". The components of Net Investment (Gain/Income)
Loss for Fiscal 1998, Fiscal 1997 and Fiscal 1996 are as follows:
F-19
<PAGE> 53
<TABLE>
<CAPTION>
Net (Gain) Loss
Gross Gross on Sale of Net Investment
Fiscal Realized Realized Government Dividend (Gain/Income)
Year Gains Losses Securities Income Loss
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 ($113) $ 9 ($104) ($509) ($613)
1997 ($50) $ 7 ($43) ($296) ($339)
1996 ($9) $28 $19 $0 $19
</TABLE>
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal Quarter Ended
--------------------------------------------------------------------
May 2, August 1, October 31, January 30,
1998 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $86,194 $91,422 $95,682 $154,921
Gross profit 21,658 21,560 22,788 44,345
Provision for asset impairment - - - 1,543
Income (loss) before income
tax provision ($6,163) ($6,509) ($6,393) $9,384
Net income (loss) ($3,640) ($3,836) ($3,772) $5,507
Net income (loss) per common share (a) (b) ($ 0.23) ($ 0.24) ($ 0.23) $ 0.31
Number of shares used in computing
net income (loss) per common share 17,175,000 17,176,000 17,176,000 17,176,000
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarter Ended
-------------------------------------------------------------------
May 3, August 2, November 1, January 31,
1997 1997 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 85,129 $ 95,114 $ 99,711 $165,356
Gross profit 19,977 22,848 24,809 52,407
Provision for asset impairment - - - 8,746
Income (loss) before income
tax provision (7,938) ($5,550) ($3,790) 11,080
Net income (loss) ($4,683) ($3,275) ($2,236) $6,436
Net income (loss) per common share
(a) (c) (d) ($ 0.29) ($ 0.21) ($ 0.15) $0.36
Number of shares used in computing
net income (loss) per common share 17,155,000 17,155,000 17,155,000 17,172,000
</TABLE>
(a) Net (loss) income per common share is calculated based on net (loss)
income less the dividend requirement of the Convertible Preferred
Stock.
F-20
<PAGE> 54
(b) Diluted net income per common share, assuming conversion of the 5.05%
Convertible Preferred Stock and the elimination of the related dividend
was $0.27 for the thirteen weeks ended January 30, 1999 on weighted
average shares outstanding of 20,377,000.
(c) Diluted net income per common 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 $0.31 per common share for the thirteen weeks
ended January 31, 1998 on weighted average shares outstanding of
22,680,000.
(d) Difference of $0.01 between full year (loss) income per common share
and the resulting (loss) income per common share from the sum of each
of the quarters in Fiscal 1997 is due to rounding.
F-21
<PAGE> 55
Exhibit Index
-------------
Item 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.
(Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended February 1, 1997.)
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). (1.)
10.2 Credit Agreement dated March 26, 1998. (Incorporated herein by
reference to Exhibit 10.2 to this Company's Annual Report on
Form 10-K for the year ended January 31, 1998).
10.2.1 First Amendment and Waiver to Credit Agreement dated March 23,
1999.*
10.3 Form of Deferred Compensation Agreement (Incorporated herein
by reference to Exhibit 10.5 to the Registration Statement).
(1.)
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). (1.)
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). (1.)
<PAGE> 56
Exhibit Index
-------------
Item No. Description
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). (1.)
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). (1.)
10.8 Form of Consulting Agreement (Incorporated herein by reference
to Exhibit 10.9.1 to the Registration Statement). (1.)
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). (1.)
10.10 Agreement between the Company and Local 99, UNITE to a
collective bargaining agreement covering warehouse employees
dated March 16, 1996. (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
February 1, 1997).
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).
10.11.1 Lease Modification Agreement dated June 19, 1995 involving the
Distribution Center and Office space in Harrison, NJ. *
10.11.2 Lease Modification Agreement dated July 22, 1998 involving the
Distribution Center and Office space in Harrison, NJ. *
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).
10.13 Agreement dated March 27, 1998 between the Company and Local
99, UNITE, covering office employees for a term from July 1,
1997 to June 30, 2000. (Incorporated herein by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the year ended January 31, 1998).
10.14 Memoranda of Agreement dated March 27, 1998 between the
Company and Local 99, UNITE, amending, respectively, Agreement
dated March 16, 1996 covering warehouse employees and
Agreement dated March 27, 1998 covering office employees.
(Incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended January 31,
1998).
10.15 Lechters Long-Term Incentive Plan. (Incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
period ended August 1, 1998). (1.)
<PAGE> 57
Exhibit Index
-------------
Item No. Description
21 Subsidiaries of the Company. *
23 Consent of Deloitte & Touche LLP.*
27 Financial Data Schedule *
*Filed herewith.
(1.) Management Compensatory Plan.
<PAGE> 1
Exhibit 10.2.1
FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT
This is the first amendment and waiver (the "Amendment") dated as of
March 23, 1999, to the Credit Agreement dated as of March 26, 1998 (the "Credit
Agreement") between Lechters, Inc., a New Jersey corporation (the "Borrower"),
The Chase Manhattan Bank as Agent, and the Banks listed on the signature pages
thereof (individually, each a "Bank", and collectively, the "Banks").
RECITALS
A. On March 26, 1998, the Banks loaned $20,000,000.00 in the form of a revolving
credit facility and $20,000,000.00 in the form of a letter of credit facility to
the Borrower under the terms of the Credit Agreement.
B. To evidence its obligations under the Credit Agreement with respect to the
Loans the Borrower issued promissory notes dated March 26, 1998.
C. As a condition to the effectiveness of the Credit Agreement the Corporate
Guarantors executed and delivered to the Banks their Guaranties of the
obligations of the Borrower to the Banks.
D. The Borrower and the Corporate Guarantors have (i) asked the Banks to waive
certain defaults that have arisen under the Credit Agreement and (ii) requested
certain amendments to the Credit Agreement.
E. The Banks are willing to waive such defaults and make such amendments subject
to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the agreement of the parties
contained herein, and intending to be legally bound, the parties hereto agree as
follows:
1. Recitals and Definitions.
Borrower and the Banks acknowledge and agree that the foregoing
recitals are true and correct as of the date of this Amendment. Capitalized
terms used herein and not defined shall have the meanings assigned to them in
the Credit Agreement.
2. Amendments to Article 1 of the Credit Agreement.
The chart of applicable margins and fees in Section 1.16(a) is deleted
and replaced with the following:
<TABLE>
<CAPTION>
Consolidated Leverage Applicable LIBO Applicable Prime Letter of
Ratio Rate Margin Rate Margin Commitment Fee Credit Fees
- - --------------------- --------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C>
Greater than 3.50x 2.50% 1.25% .625% 2.50%
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Consolidated Leverage Applicable LIBO Applicable Prime Letter of
Ratio Rate Margin Rate Margin Commitment Fee Credit Fees
- - --------------------- --------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C>
Greater than 3.00x but 2.00% .75% .5% 2.00%
less than or equal to
3.50x
Greater than 2.10x but 1.50% .25% .375% 1.50%
less than or equal to
3.00x
Less than or equal to 1.25% 0.0% .3% 1.25%
2.10x
</TABLE>
3. Amendments to Article 5 of the Credit Agreement.
a. Section 5.04 is replaced with the following:
(i) Declare or pay any dividends, either in cash or property,
on any shares of its capital stock of any class (except dividends or
other distributions payable solely in shares of common stock of the
Borrower); or (ii) directly or indirectly, purchase, redeem or retire
any shares of its capital stock of any class or any warrants, rights or
options to purchase or acquire any shares of its capital stock; or
(iii) make any other payment or distribution, either directly or
indirectly, in respect of capital stock of the Borrower; or (iv) make,
directly or indirectly, any Restricted Investment; it being
specifically understood that the Borrower and any Subsidiary will enter
into a joint venture only with the prior written consent of all the
Banks; except the Borrower may (x) declare and pay preferred dividends
not to exceed 6% per annum in respect of the Perpetual Convertible
Preferred Stock, and (y) during such time as no Default or Event of
Default has occurred and is continuing and provided that no Default or
Event of Default shall be caused thereby, purchase, redeem or retire up
to 3,000,000 shares in the aggregate of the Borrower's common stock
subsequent to the Closing Date, provided that the aggregate price for
all such shares purchased, redeemed or retired shall not exceed
$5,000,000.
b. Section 5.11 is replaced with the following:
(i) Prepay, redeem, purchase, defease, retire or otherwise
satisfy in any manner prior to the scheduled maturity thereof any of
its Indebtedness, other than the Indebtedness under this Agreement or
(ii) amend, modify or change in any manner any term or condition of its
Indebtedness other than to prepay any Indebtedness payable by any
Subsidiary to the Borrower; provided, however, that the Borrower and
any Subsidiary may after the Closing Date, after providing at least
five Business Days prior written notice to the Banks, make payments of
Subordinated Indebtedness in an aggregate amount not to exceed (w)
$10,000,000, minus (x) the sum of any repayments of Subordinated
Indebtedness made, and Cash Charges taken, in each case between
-2-
<PAGE> 3
February 1, 1997 and the Closing Date, minus (y) any Cash Charges taken
after the Closing Date, and minus (z) any amounts paid toward the
purchase, redemption or retiring of any shares of common stock as
described in clause (y) of Section 5.04; provided, further, that at the
time of such payment, no Default or Event of Default has occurred and
is then continuing and provided that no Default or Event of Default
shall be caused thereby.
4. Amendments to Article 6 of the Credit Agreement.
a. Section 6.03 is deleted and replaced with the following:
Permit the ratio of (i) Consolidated Funded Debt to (ii)
Consolidated EBITDA as determined as of the last day of each fiscal
quarter for the period of the four consecutive preceding fiscal
quarters ending on such day to be greater than or equal to (x) 5.00 to
1 through the end of the second quarter of fiscal year 1999, (y) 4.75
to 1 through the end of the third quarter of fiscal year 1999, and (z)
3.00 to 1 thereafter.
b. Section 6.05 is deleted and replaced with the following:
Have an Annual Adjusted Consolidated Net Income which is less
than (i) negative $4,000,000 for the fiscal year ending January 30,
1999, and (ii) zero for any fiscal year thereafter.
c. A new Section 6.06 is added to the Credit Agreement as
follows:
6.06 Minimum Tangible Net Worth.
Have at any time a Tangible Net Worth of less than
$145,000,000.
5. Amendments to Article 12 of the Credit Agreement.
a. A new defined term "Tangible Net Worth" is added as
follows:
"Tangible Net Worth" means the amount by which the total
assets of any Person exceeds its liabilities, excluding, however, from
the determination of total assets, all assets which would be classified
as intangible assets under generally accepted accounting principles,
consistently applied, such as goodwill, licenses, patents, trademarks,
tradenames, copyrights, and franchises, and further excluding from the
determination of total assets any obligations due from Subsidiaries,
Affiliates, directors, officers, shareholders, partners and employees
of the Person.
b. The term "Consolidated EBITDA" is hereby replaced with the
following:
"Consolidated EBITDA" means, for any period, Consolidated Net
Income for such period before taking into account interest expense,
income taxes, depreciation, amortization and Noncash Charges.
c. The term "Consolidated EBITDAR" is hereby replaced with the
following:
-3-
<PAGE> 4
"Consolidated EBITDAR" means, for any period, Consolidated Net
Income for such period before taking into account interest expense,
rent, income taxes, depreciation, amortization and Noncash Charges.
d. The term "Consolidated Fixed Charges" is hereby replaced
with the following:
"Consolidated Fixed Charges" means, for any period, the sum of
(a) the aggregate amount of principal payments of Indebtedness
scheduled to have been made by the Borrower and the Consolidated
Subsidiaries during such period, determined on a consolidated basis,
and (b) to the extent they are taken into account in determining
Consolidated Net Income, interest expense, rent and income taxes.
e. The term "LC Line Termination Date" is hereby replaced with
the following:
"LC Line Termination Date" means March 24, 2000 or any
extension of that date as agreed to by all the Banks at their sole
discretion.
6. Waiver.
Provided that the Borrower is in compliance with Sections 6.03, 6.05
and 6.06 as amended herein on the effective date of this Amendment, the Banks
hereby waive any Default or Event of Default arising out of a breach of Sections
6.03 or 6.05 prior to such sections being amended herein.
7. General.
This Amendment is made pursuant to Section 11.06 of the Credit
Agreement, and the parties hereto acknowledge that all provisions of the Credit
Agreement, except as amended hereby, shall remain in full force and effect.
8. Definitions.
Whenever appearing in the Loan Agreement or any other Loan Document,
the term "Credit Agreement" shall be deemed to mean the Credit Agreement as
amended hereby.
9. Representations and Warranties.
The Borrower hereby represents and warrants to the Banks that, on and
as of the date of this Amendment: (a) each of the representations and warranties
contained in the Credit Agreement are accurate, (b) such representations and
warranties would continue to be accurate if, in each representation or warranty
where the term "Loan Documents" appears, the term "Amendment" was to be
substituted therefor, (c) no Event of Default has occurred and is continuing or
will result from the execution by the Borrower of this Amendment, and (d) that
the Loan Documents as amended herein are enforceable in accordance with their
terms without any offsets, counterclaims or defenses.
-4-
<PAGE> 5
10. Amendment Fee.
The Borrower shall pay to the Agent for the benefit of the Banks an
amendment fee of $200,000 (the "Amendment Fee") in connection with this
Amendment which fee shall be due and payable upon the signing of this Amendment.
11. Letter of Credit Renewal Fee.
The Borrower shall pay to the Agent for the benefit of the Banks a
letter of credit renewal fee of $50,000 (the "LC Renewal Fee") in connection
with this Amendment which fee shall be due and payable upon the signing of this
Amendment.
12. Arrangement Fee.
The Borrower shall pay an arrangement fee to the Agent for the Agent's
own account, as required by the letter agreement of even date between the
Borrower and the Agent, as may be amended from time to time.
13. Fees of Bank's Counsel.
The Borrower shall pay the fees and expenses of McCarter & English in
connection with the preparation and negotiation of this Amendment and all
related documents.
14. Conditions to Effectiveness.
It shall be a condition to the effectiveness of this Amendment that the
Bank have received the following:
a. This Amendment, duly executed on behalf of the Borrower and
the Banks;
b. Payment of the Amendment Fee;
c. Payment of the LC Renewal Fee;
d. Payment of the Arrangement Fee; and
e. A certificate from the Secretary of the Borrower (i)
stating that there have been no amendments to the Certificate of
Incorporation or By-laws of such Borrower since the date of the Credit
Agreement, (ii) to which is attached a resolution of the Board of
Directors authorizing the execution, delivery and performance of this
Amendment, and (iii) setting forth the name and sample signature of the
officers of the Borrower authorized to execute and deliver this
Amendment.
15. Integration.
This Amendment together with the Credit Agreement constitute the entire
agreement and understanding among the parties relating to the subject matter
hereof and thereof and supersedes all prior proposals, negotiations, agreements
and understandings relating to such subject matter.
-5-
<PAGE> 6
16. Severability.
If any provision of this Amendment shall be held invalid or
unenforceable in whole or in part in any jurisdiction, such provision shall, as
to such jurisdiction, be ineffective to the extent of such invalidity or
enforceability without in any manner affecting the validity or enforceability of
such provision in any other jurisdiction or the remaining provisions of this
Amendment in any other jurisdiction.
17. No Defenses, Off-Sets or Counterclaims.
By executing this Amendment, Borrower confirms and acknowledges that as
of the date of execution hereof, Borrower has no defenses, off-sets or
counterclaims against any of Borrower's obligations to the Banks under the Loan
Documents, including the Credit Agreement (as amended hereby). Borrower hereby
acknowledges and agrees that the actual amounts outstanding on the date of
execution hereof are owing the Banks without defense, offset or counterclaim.
18. Incorporation by Reference.
This Amendment is incorporated by reference into the Credit Agreement
and the other Loan Documents. Except as otherwise provided herein, all of the
other provisions of the Credit Agreement and the other Loan Documents are hereby
confirmed and ratified and shall remain in full force and effect as of the date
of this Amendment.
19. Governing Law.
This Amendment is governed by the laws of the State of New Jersey and
is binding upon the Borrowers and the Bank and their respective successors
and/or assigns and/or hers and executors, as the case may be.
20. Counterparts.
This Amendment may be executed by one or more of the parties in any
number of separate counterparts, and all of said counterparts taken together
shall be deemed to constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, on the date
first above written.
LECHTERS, INC.
By: /s/ James J. Sheppard
____________________________________
Name: James J. Sheppard
Title: Sr. Vice President -
Chief Financial Officer
-6-
<PAGE> 7
THE CHASE MANHATTAN BANK,
as Agent, Issuing Bank and as a Bank
By: /s/ Andrea Johnson
____________________________________
Andrea Johnson
Vice President
FLEET BANK, NATIONAL ASSOCIATION
as Bank
By: /s/ Craig W. Trautwein
____________________________________
Craig W. Trautwein
Vice President
FIRST UNION NATIONAL BANK
as Bank
By: /s/ John A. Ginter
____________________________________
John A. Ginter
Vice President
-7-
<PAGE> 1
Exhibit 10.10.1
Memorandum of Agreement
Whereas, Lechters, Inc. ("Employer") and Local 99, UNITE ("Local 99") have been
parties to a collective bargaining agreement effective March 16, 1996 to March
15, 1999; and
Whereas, the Employer and the Union have engaged in collective bargaining to
renew the agreement effective March 16, 1999; and
Whereas the parties have reached an agreement concerning terms and conditions to
be applicable in the renewal agreement.
Now, Therefore it is agreed:
1. Except as modified herein, the collective bargaining agreement is renewed
for a new three year term effective March 16, 1999 through March 15, 2002
and all terms and conditions shall continue in full force and effect.
2. Wage increases shall be given as follows:
Effective March 16, 1999 $15.50 per week
Effective March 16, 2000 $15.50 per week
Effective March 16, 2001 $14.00 per week
3. Paragraph 5 addition
The 60 day trial period may be extended for an additional 30 calendar days upon
consent of the Union, which consent shall not be unreasonably withheld.
4. Substitute for 2nd paragraph in 17(a)
Vacation requests shall be submitted during the month of January for the
scheduling of vacation periods during the year. If more employees than the
Employer is able to permit to take a vacation, then employees shall be granted
their vacation preference based on seniority. After January 31 (that is February
1) vacation preference shall be granted on a first come first served basis.
<PAGE> 2
5. Add new paragraph to 2.
Non-bargaining unit employees may not do bargaining unit work. Notwithstanding
the foregoing, this provision shall not be deemed violated when a supervisory
employee performs bargaining unit work in the case of a business emergency.
6. Add to the beginning of first sentence to 10(a)
"Subject to the paragraph 14 hereof...."
7. Change and add to 43:
..."provided that the Union gives Employer reasonable prior notice of any such
meeting."
8. Add to 8
An employee rehired within 6 months of the date his or her employment was
terminated, where such termination is voluntary, shall be entitled to full
credit for the time of previous service with the Employer with respect to
seniority, and full credit after the expiration of 1 year of additional service
for the time of previous service with the Employer with respect to vacation
eligibility. An employee rehired after the expiration of 6 months after the date
his or her employment was terminated, where such termination is voluntary, shall
not receive any credit for past service with the Employer.
9. Jury Duty
Any employee with 1 year or more of employment who is called for service on a
jury shall be excused from work for the days on which he serves and he shall
receive for each day of such jury duty, on which he otherwise would have worked,
the difference between his straight hours and the payment he received for jury
service to a maximum of 15 working days. Employees shall be eligible for such
jury duty pay no more than 1 time during the life of this Agreement. The
Employer shall be notified of the calls for such duty at least 2 weeks in
advance or as reasonably soon as possible after the employee receives notice.
The employee shall report to work during the period of such jury duty on
whatever days or part of days (so long as it is a period of at least than 4
hours) he or she is not compelled to be in attendance for such duty. The
employee shall present written proof of service and the amount of pay received
therefore to the employer.
10. Leaves:
a. To be eligible for bereavement leave with pay, an employee must have
satisfactorily completed 6 months of service.
<PAGE> 3
b. Two 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 occurrence may
be required.
c. The employment rights of veterans, reservists and members of the National
Guard guaranteed by law are incorporated into this Agreement.
d. Employees of the Employer who may be called upon to perform business for
the Union, which requires absence from duty with the Employer, shall upon
written notice to the Employer, be allowed to absent themselves for a reasonable
period of time.
11. To be entitled to full vacation employee must work 660 hours in the prior
year. If an employee works less than 660 hours but more than 310 hours, he
shall receive vacation prorated to the number of hours actually worked. If
an employee works less than 310 hours they are not entitled to vacation for
that year.
12. Retirement Fund:
The Union and the Employer reserves the right during the first year of this
agreement to reopen with respect to adjusting contribution rates to various
benefit funds to provide employees covered by this agreement to Local 99
Dental Plan along with an enhanced Retirement Program through the National
Retirement Fund and maintenance of the Local 99 Health & Welfare Fund. If
the parties do not agree there will be no strike and the matter will be
referred for arbitration hereunder.
13. Shift Changes shall be by volunteers and new hires. Employees may bid by
seniority for the new shift hours as posted by the employer. Those
employees assigned to the new shift shall receive a premium of $.50/hour
for hours worked on the different shifts. Provisions of the contract with
respect to hours of work shall remain; however all employees who are on the
different shift will receive the premium set forth herein.
14. Cross training as per attached.
15. No discrimination language shall be as attached.
<PAGE> 4
16. Vacation (section 17) shall be amended to provide for no carryover of
current vacation. However, all vacation earned in 1999 must be used by
4/30/2000; all pre-1999 vacation may be used without deadline; peak period
is October, November, December; maximum entitlement increased during peak
period to 3 in distribution and 4 in mezzanine. No limitation on January as
a vacation period.
17. Voluntary layoff - limited to 45 days without use of any vacation. If
longer, then vacation time is used.
18. FMLA
a. No use of vacation for FMLA leave based upon personal illness or
disability.
b. All other FMLA must use vacation entitlement (current vacation only)
c. Non-FMLA personal leave - must use vacation first; thirty (30) days
maximum leave.
d. Disability leave shall run concurrently with any FMLA entitlement;
twenty-six (26) week maximum leave.
19. Overtime - limited to 2 hours if 80% in the department actually works;
otherwise 2-1/2 hours maximum for those who work.
20. Safety Shoe Reimbursement - Company will pay 50% to a maximum of $75, twice
during the contract.
21. 401K Savings Plan - will be made available to employees under the
conditions agreed during negotiations.
Dated: April 26, 1999
Local 99, UNITE ("Union")
By: __________________
Lechters, Inc. ("Employer")
By: __________________
<PAGE> 5
SIDELETTER
REOPENING - RETIREMENT FUND AGREEMENT
LECHTERS WAREHOUSE CONTRACT
Upon reopening of the Lechters Warehouse contract, the parties agree that the
following adjustments will be implemented:
1. Effective 09/01/99 the contribution rate to the National Retirement
Fund will be reduced to 6%, which as of 01/01/2000 will be changed to
2.2% as continued contributions under the old plan and $.35/hour for
all compensated hours (capped at 38.75 hours/week).
2. Effective 1/1/00 and thereafter, the contribution rate to the Local
99 Health and Welfare Fund shall be increased by 1%; and as of
1/1/2001 and thereafter, an additional 1/2% will be contributed to
the Local 99 Health and Welfare Fund.
Dated: April 26, 1999
Local 99, UNITE
---------------------------------
Lechters, Inc.
---------------------------------
<PAGE> 6
NO DISCRIMINATION
-----------------
39. There shall be no discrimination in hiring, promotions, discipline,
discharge or in any term and condition of employment because of race, creed,
color, national origin, sex, age, handicap, disability or religion. Further, the
Company agrees that it will not violate the following statutes in hiring,
promotions, discipline, discharge or in any term or condition of employment:
The Americans with Disabilities Act, 42 U.S.C. Section 12101, et seq.
("ADA"); the Consolidated Omnibus Budget Reconciliation Act, 29 U.S.C. Section
1161, et seq.; the Employee Retirement Income Security Act of 1974, as amended
29 U.S.C. Section 1001, et seq. ("ERISA"); the Conscientious Employee Protection
Act, N.J.S.A. 34:19-1, et seq.; the New Jersey Workers Compensation Act,
N.J.S.A. 34:15-1, et seq; the Age Discrimination in Employment Act, 29 U.S.C.
Section 621, et seq. ("ADEA"); the Reconstruction Era Civil Rights Act, as
amended, 42 U.S.C. Section 1981 et seq. ("Civil Rights Act"); the Civil Rights
Act of 1991, as amended, 42 U.S.C. Section 1981a et seq. ("CRA of 1991"); the
Family and Medical Leave Act, 29 U.S.C. Section 2601 et seq. ("FMLA"); the Fair
Labor Standards Act, 29 U.S.C. Section 201 et seq. ("FLSA"); Title VII of the
Civil Rights Act of 1964, as amended 42 U.S.C. Section 2000e, et seq. ("Title
VII"); the New Jersey Law Against Discrimination, N.J.S.A. 10:5-1, et seq.,
and/or any other federal, state or local statutes, laws, rules and
<PAGE> 7
regulations pertaining to employment, as well as any and all claims under state
or federal contract or tort law including breach of contract and breach of a
covenant of good faith and fair dealing.
The Union on behalf of the Union and all members of the bargaining unit
agrees that the exclusive remedy for violations of the agreements set forth
above and for violations of the statutes listed above shall be either (1) the
submission of a grievance to the grievance procedure herein, and if not
satisfactorily resolved, the submission of the grievance to the arbitration
provisions and procedures set forth in this agreement; or (2) proceeding to file
a charge and/or complaint before the appropriate state or federal agency or
court.
The Union on behalf of the Union and on behalf of all members of the
bargaining unit further agrees that once the employee and/or the Union elects
either (1) or (2) above as the exclusive remedy for alleged violations of the
agreements set forth above and for violations of the statutes listed above, the
Union and/or the employee waives its rights to proceed under the other remedy
------
set forth in (1) and (2) above.
<PAGE> 8
LECHTERS, INC.
CROSS TRAINING PROPOSAL
PROGRAM DEFINITION:
- - ------------------
Train 6 warehouse employees ("floaters"), from non-technical positions in more
technical aspects of the warehouse operation, specifically, replenishment,
breakcase picking and receiving putaway. These employees will be used at the
discretion of the Company, to fill in for peak periods, vacations and absent
employees, in the above departments.
Employees will be replaced in their primary areas, by temporary help, or by
other warehouse employees, based on seniority requirements.
ELIGIBLE EMPLOYEES:
- - ------------------
Any employees in "non-technical" positions, i.e., receiving, shipping and
fullcase, who are not qualified to operate material handling equipment or RF
devices, will be eligible to bid for floater positions.
SELECTION CRITERIA:
- - ------------------
Management reserves the right to choose employees based on the bid process, and
use as selection criteria attendance and past performance. However, a senior
employee, who is equally qualified, will be given selection preference. In the
event that an employee is permanently promoted, another floater will be chosen
through the bid process.
TRAINING:
- - --------
A program will consist of training in the operation of RF equipment,
replenishment, breakcase picking and putaway. Floaters will be required to be
Hi-lift and Fork truck certified.
COMPENSATION:
- - ------------
Upon satisfactory completion of the training program, the employee's base pay
will be increased by a rate of $.25 per hour. In the event that an employee is
further promoted to a permanent position, the $.25 will be included as part of
the total increase. For example, the floater will be hired in at the same
starting rate as other employees in the same position.
<PAGE> 9
Distribution Center - Proposed Shift Times
Note: Staffing % to be met; voluntary then by seniority
<TABLE>
<CAPTION>
Dates: Feb. 1 thru June 30 Dates: July 1 thru Jan 31
-------------------------- -------------------------
Shift Schedule Department Staffing % Shift Schedule Department Staffing %
- - -------------- ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
6:00 a.m. - 2:15 p.m. Replenishment 50% 6:00 a.m. - 2:15 p.m. Replenishment 50%
7:00 a.m. - 3:15 p.m. Replenishment 50% 6:00 a.m. - 2:15 p.m. Shipping 25%
7:00 a.m. - 3:15 p.m. Mezzanine 100% 6:00 a.m. - 2:15 p.m. Full Case 25%
7:00 a.m. - 3:15 p.m. HiLifts 50% 7:00 a.m. - 3:15 p.m. Mezzanine 100%
7:00 a.m. - 3:15 p.m. Full Case 50% 7:00 a.m. - 3:15 p.m. Shipping 50%
7:00 a.m. - 3:15 p.m. Receiving 50% 7:00 a.m. - 3:15 p.m. Replenishment 50%
7:00 a.m. - 3:15 p.m. Shipping 50% 7:00 a.m. - 3:15 p.m. Full Case 50%
7:00 a.m. - 3:15 p.m. Maintenance/Janitors 100% 7:00 a.m. - 3:15 p.m. Receiving 50%
8:00 a.m. - 4:15 p.m. HiLifts 50% 7:00 a.m. - 3:15 p.m. HiLifts 50%
8:00 a.m. - 4:15 p.m. Full Case 50% 7:00 a.m. - 3:15 p.m. Maintenance/Janitors 100%
8:00 a.m. - 4:15 p.m. Receiving 50% 8:00 a.m. - 4:15 p.m. Full Case 25%
8:00 a.m. - 4:15 p.m. Shipping 50% 8:00 a.m. - 4:15 p.m. Receiving 50%
8:00 a.m. - 4:15 p.m. HiLifts 50%
9:00 a.m. - 5:15 p.m. Shipping 25%
</TABLE>
<PAGE> 1
LEASE MODIFICATION AGREEMENT
THIS AGREEMENT, made as of the 19th day of June 1995 by and between
LESTER M. ENTIN ASSOCIATES, a New Jersey partnership having offices at 1033
Clifton Avenue, P.O. Box 2189, Clifton, New Jersey 07015 ("Landlord"), and
LECHTERS, INC., a New Jersey corporation having offices at One Cape May Street,
Harrison, New Jersey 07029 ("Tenant").
W I T N E S S E T H:
R E C I T A L S
A. On December 23, 1991, Landlord and Tenant entered into an
Agreement of Lease (the "Lease") wherein Landlord leased to Tenant, and Tenant
leased from Landlord, approximately 490,116 square feet of space (the
"Premises") in the building (the "Building") located at One Cape May Street in
the Township of Harrison, Hudson County, New Jersey.
B. Tenant wishes to lease from Landlord, and Landlord wishes to
lease to Tenant, approximately 43,040 square feet of the Building shown on
Schedule "A" hereto (the "Additional Space") presently leased by Tri-Chem, Inc.
("Tri-Chem"), effective as of July 1, 1995 (the "Effective Date").
NOW, THEREFORE, for and in consideration of the terms and conditions
contained hereinbelow, and intending to be legally bound thereby, Landlord and
Tenant hereby agree as follows:
1. The Recitals set forth above are hereby incorporated by
reference as if fully set forth in the main body of this Agreement.
2. As of the Effective Date, the Lease shall be deemed amended as
follows:
(a) The Premises shall consist of approximately 533,156
square feet of space in the Building as shown on
Schedule "A" hereto, inclusive of the Additional Space.
(b) Tenant shall continue to pay Basic Rent for the 490,116
square feet constituting the Premises prior to the
Effective Date on the terms and conditions of Section 2
of the Lease. Tenant shall pay Basic Rent for the
Additional Space in accordance with the following
schedule:
<TABLE>
<CAPTION>
Period Monthly Basic Rent
------ ------------------
<S> <C>
07/1/95-07/31/95 $16,140.00
08/1/95-08/31/95 -0-
09/1/95-11/30/95 $16,140.00
12/1/95-01/31/96 $16,624.20
02/1/96-01/31/98 $17,457.53
02/1/98-05/31/98 $16,624.20
06/1/98-11/30/00 $17,621.65
12/1/00-05/31/03 $18,678.95
06/1/03-11/30/05 $19,799.69
12/1/05-01/31/07 $20,987.67
First Renewal Term
02/1/07-05/31/08 $20,987.67
06/1/08-11/30/10 $22,246.93
12/1/10-01/31/12 $23,581.74
Second Renewal Term
02/1/12-05/31/13 $23,581.74
06/1/13-11/30/15 $24,996.65
12/1/15-01/31/17 $26,496.45
Third Renewal Term
02/1/17-05/31/18 $26,496.45
06/1/18-11/30/20 $28,086.23
12/1/20-01/31/22 $29,771.41
</TABLE>
<PAGE> 2
Notwithstanding the foregoing, the Basic Rent for the
Additional Space for July 1995 will only be due and
payable as long as Landlord completes the work described
on Schedule "B" hereto by July 15, 1995, failing which
Tenant's obligation to pay Basic Rent for the Additional
Space for July 1995 shall be deemed waived.
(c) Tenant's Proportionate Share as set forth in Section 3 of
the Lease shall be increased from 78.26% to 85.13%.
(d) Tenant's monthly estimated payments on account of its
Proportionate Share of annual Operating Costs as set
forth in Section 4 of the Lease shall be increased from
$76,625.54 to $82,254.46.
(e) Tenant's percentage of heating costs as set forth in
Section 14(a) of the Lease shall be increased from 37.46%
to 56.93%, which latter percentage is determined from the
ratio of the square footage of the Premises which will be
heated (125,831) to the square footage of the Building
which is heated (221,018).
(f) Section 55 of the Lease shall be amended to provide that
during the option period(s), Basic Rent for the 490,116
square feet constituting the Premises prior to the
Effective Date shall be payable in accordance with the
terms and conditions of Section 2 of the Lease, and Basic
Rent for the Additional Space shall be payable in
accordance with the terms and conditions of Paragraph
2(b) of this Agreement.
3. Landlord and Tenant acknowledge and agree that the terms and
conditions of Section 57 of the Lease, respecting Tenant's right to lease
adjacent space presently leased by Tri-Chem as it becomes vacant, does not
apply to the Additional Space, inasmuch as Landlord and Tenant have agreed to
lease the Additional Space on the terms and conditions contained in this
Agreement.
4. Promptly upon the vacating of the Additional Space by
Tri-Chem, Landlord shall commence the work described on Schedule "B" hereto, at
its sole cost and expense, and shall thereafter proceed to complete same in a
reasonably diligent manner, with work to continue uninterrupted (subject to
force majeure) during normal business hours. Under no circumstances shall the
completion of such work be deemed a condition to any of Tenant's obligations
and responsibilities under the Lease, as modified herein, to include but not be
limited to the obligation to pay Rent for the Additional Space, except as
specifically provided to the contrary in the last sentence of Section 2(b) of
this Agreement.
5. Except as specifically modified herein, the Lease is hereby
confirmed and ratified in its entirety.
6. Capitalized terms not defined herein shall have the same
meaning as provided for in the Lease.
<PAGE> 3
7. This is a negotiated Agreement, and shall not be construed
against Landlord by virtue of its having been prepared by Landlord's attorneys.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease
Modification Agreement as of the day and year first above written.
WITNESS: LESTER M. ENTIN ASSOCIATES,
Landlord
/s/ Suzanne Marysuka By: /s/ Joseph W. Waters
- - ----------------------------- -------------------------------------
Joseph Waters, Partners
ATTEST: LECHTERS, INC., Tenant
/s/ Ira S. Rosenberg By: /s/ L. David Davis
- - ----------------------------- --------------------------------------
Ira S. Rosenberg, Secretary L. David Davis
Vice President-Administration
<PAGE> 4
RENOVATION OF NEW LECHTER'S WAREHOUSE
(1) CARPENTRY:
Build a deck high sheetrock alcove for fork-lift access with 4 ft.
plywood base for security (metal/studs, track, sheetrock, tape,
spackle, screws, shots, and stabilizers)
Make a 3' x 6'8" opening from cafeteria to "low bay" receiving area
with masonry ramp.
Make two (2) 12' x 12' openings in sheetrock to existing Lechter's
space.
(2) MASONRY:
Seal all masonry openings as shown on plan by William J. Martin
including sealing of all pipe penetrations through masonry fire wall,
openings to be closed:
man doors (5) 10 x 10 openings (7)
(3) ELECTRIC:
Install new 400 watts metal halide fixtures as per existing warehouse
layout.
Remove existing 8' fluorescent fixtures.
Wire four (4) new exhaust fans and one (1) new air supply unit.
Power to existing light circuits to be re-wired and placed on Lechter's
meter (sub-metered).
New switches for warehouse to be installed at employee entrance (near
boiler room).
(4) ARCHITECTURALS:
All plans, specifications and code review for construction permits and
approvals for issuance of a Certificate of Occupancy (see enclosed
contract).
(5) ACM REMOVAL
SCHEDULE "B"
<PAGE> 1
LEASE MODIFICATION AGREEMENT
THIS AGREEMENT, made as of this 22nd day of July 1998 by and between
LESTER M. ENTIN ASSOCIATES, a New Jersey partnership having offices at 1033
Clifton Avenue, P.O. Box 2189, Clifton, New Jersey 07015 ("Landlord"), and
LECHTERS, INC., a New Jersey corporation having offices at One Cape May Street,
Harrison, New Jersey 07029 ("Tenant").
W I T N E S S E T H:
R E C I T A L S
A. On December 23, 1991, Landlord and Tenant entered into an
Agreement of Lease (the "Lease") wherein Landlord leased to Tenant, and Tenant
leased from Landlord, approximately 490,116 square feet of space (the
"Premises") in the building (the "Building") located at One Cape May Street in
the Township of Harrison, Hudson County, New Jersey.
B. Pursuant to a Lease Modification Agreement dated June 19,
1995 (the "First Modification"), Tenant leased from Landlord, and Landlord
leased to Tenant, approximately 43,040 square feet of the Building so that the
Premises now consists of approximately 533,156 square feet of space.
C. Tenant wishes to lease from Landlord, and Landlord wishes to
lease to Tenant, approximately 6,800 square feet of office space in the
Building as shown on Schedule "A" attached hereto (the "Additional Office
Space") effective as of September 1, 1998 (the "Effective Date").
NOW, THEREFORE, for and in consideration of the terms and conditions
contained hereinbelow, and intending to be legally bound thereby, Landlord and
Tenant hereby agree as follows:
1. The Recitals set forth above are hereby incorporated by
reference as if fully set forth in the main body of this Agreement.
2. As of the Effective Date, the Lease shall be deemed amended
as follows:
(a) The Premises shall consist of approximately 539,956
square feet of space in the Building as shown on Schedule "A" hereto, inclusive
of the Additional Office Space, in its "AS IS" condition except for the
demising wall to be constructed by Landlord as shown on Schedule "A".
(Continued in Rider).
(b) Tenant shall continue to pay Basic Rent for the 490,116
square feet constituting the Premises prior to the First Modification on the
terms and conditions of Section 2 of the Lease, and for the 43,040 square feet
demised pursuant to the First Modification on the terms and conditions of
Paragraph 2(b) of the First Modification. As of the Effective Date, and through
January 31, 2001, Tenant shall pay Basic Rent for the Additional Office Space
at an annual rate of Thirty-Four Thousand ($34,000.00) Dollars, to be payable
in equal monthly installments of Two Thousand Eight Hundred Thirty-three and
33/100 ($2,833.33) Dollars each, due on the first (1st) day of each month. The
Annual Basic Rent for the Additional Office Space for the period from February
1, 2001 through July 31, 2003, shall be Thirty-Four Thousand ($34,000.00)
Dollars, increased by the percentage increase in the Index (as defined in
Section 2(c) of the Lease) from August 1998 to January 2001, but in no event
less than Thirty-Four Thousand ($34,000.00) Dollars, payable in equal monthly
installments on the first (1st) day of each month. The Annual
<PAGE> 2
Basic Rent for the Additional Office Space for each thirty (30)
month period thereafter during the Term, to include any renewal
options, shall be the Annual Basic Rent payable for the preceding
thirty (30) month period, increased by the percentage increase in
the Index from the month before the commencement of the preceding
thirty (30) month period to the month before the commencement of
the thirty (30) month period in question, but in no event less
than the Annual Basic Rent payable during the preceding thirty
(30) month period, payable in equal monthly installments on the
first (1st) day of each month.
(c) Tenant's Proportionate Share as set forth in Section 3 of the Lease
shall be increased from 85.13% to 86.2%.
(d) Tenant's monthly estimated payments on account of its Proportionate
Share of annual Operating Costs as set forth in Section 4 of the
Lease shall be increased from $82,254.46 to $83,303.55.
3. Landlord and Tenant acknowledge and agree that the terms and conditions
of Section 57 of the Lease, respecting Tenant's right to lease adjacent
space presently leased by Tri-Chem, Inc. as it become vacant, does not
apply to the Additional Office Space, inasmuch as Landlord and Tenant have
agreed to lease the Additional Office Space on the terms and conditions
contained in this Agreement.
4. Approximately 45,000 square feet of the Premises shown on Schedule "B"
attached hereto is heated by a boiler which shall be replaced. Following
execution hereof, Landlord will diligently and expeditiously commence to
replace the boiler with a new heating system in accordance with the plans
and specifications attached hereto as Schedule "C", and will complete the
installation thereof by September 30, 1998. Upon removal of the boiler and
completion of the installation of said new system, (a) Tenant will
reimburse Landlord for Forty-two Thousand ($42,000.00) Dollars of the cost
thereof as Additional Rent upon presentation by Landlord to Tenant of
written proof of the cost of the removal of the boiler and installation of
the new system; and (b) those portions of Section 14(a) of the Lease, as
amended by Section 2(d) of the First Amendment, relating to Tenant's
payment of a percentage of the heating costs of the Building, shall be
deleted in their entirety, inasmuch as all heat to the Premises shall
thenceforth be separately metered to Tenant (except to the extent provided
in Paragraph 5 below).
5. If the heating, ventilating and air conditioning ("HVAC") system which
services the Additional Office Space is not separately metered from
portions of the Building not leased by Tenant, then Tenant shall pay to
Landlord as Additional Rent a percentage of the HVAC consumption for said
system as determined by Public Service Electric & Gas Company whose
determination shall be final and binding upon the parties hereto.
6. Except as specifically modified herein, the Lease is hereby confirmed and
ratified in its entirety.
7. Capitalized terms not defined herein shall have the same meaning as
provided for in the Lease.
<PAGE> 3
8. This is a negotiated Agreement, and shall not be construed against
Landlord by virtue of its having been prepared by Landlord's attorneys.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease
Modification Agreement as of the day and year first above written.
WITNESS: LESTER M. ENTIN ASSOCIATES,
Landlord
/s/ Diana McCauley By: /s/ Joseph W. Waters, Partner
- - ----------------------------- -------------------------------
Joseph Waters, Partner
ATTEST: LECHTERS, INC., Tenant
/s/ Ira S. Rosenberg By: /s/ Donald Jones
- - ----------------------------- -------------------------------
Ira S. Rosenberg, Secretary President
RIDER
Paragraph 2(a) continued:
In addition to the construction of the demising wall, Landlord shall separate
the electrical service for the Premises from the greater area presently served,
and install a new switch or switches where designated by Tenant. Landlord's
work shall be completed and the Premises delivered to Tenant on or before
9/1/98. Tenant may occupy the Premises prior to the Effective Date to prepare
the Premises for its occupancy.
<PAGE> 4
LESTER M. ENTIN ASSOCIATES
1033 CLIFTON AVENUE
P.O. BOX 2189
CLIFTON, NEW JERSEY 07015
July 22, 1998
Lechters, Inc.
One Cape May Street
Harrison, NJ 07029
Gentlemen:
Notwithstanding anything contained in the contrary in the Lease
Modification Agreement made of even date herewith between us (the
"Modification") respecting approximately 6,800 square feet of office space in
the building (the "Building") located at One Cape May Street, Harrison, New
Jersey, this letter will confirm the following understandings between us (all
capitalized terms not defined herein shall have the same meaning as set forth
in the Modification):
1. As consideration for your right to use the common hallway between the
Premises and that portion of the Building not leased by you, you hereby agree
to pay, as of the Effective Date, the sum of Eight Hundred ($800.00) Dollars per
year, payable in equal monthly installments of Sixty-six and 67/100 ($66.67)
Dollars, each due on the first day of the month. Commencing on February 1,
2001, and on the first day of each thirtieth (30th) month thereafter, said sum
shall be adjusted in the same manner as provided for the Basic Rent for the
Additional Office Space in Paragraph 2(b) of the Modification.
2. In the event the undersigned is unable to separate the electrical
service for the Premises as provided in the Rider to Paragraph 2(a) of the
Modification, then the provisions of Paragraph 5 of the Modification shall
supersede and prevail.
3. In the event the undersigned has not completed construction of the
demising wall and additional construction as provided for in Paragraph 2(a) of
the Modification by the Effective Date, you shall permit the undersigned to
diligently and expeditiously pursue such work to completion, and the terms and
provisions of the Modification shall not be affected as a result thereof.
4. In lieu of Landlord's HVAC obligation set forth in the third paragraph
of
<PAGE> 5
Schedule C, a new gas fired 10 ton roof mounted combination air conditioning
and heating unit will be installed by Landlord utilizing the existing
distribution ducts and plenurn return.
If the foregoing accurately reflects our understanding, please sign where
indicated below on the enclosed copy of this letter.
Very truly yours,
LESTER M. ENTIN ASSOCIATES
By: /s/ Joseph Waters
--------------------------
Joseph Waters, Partner
Accepted and Agreed to this
6th day of Aug., 1998.
LECHTERS, INC.
By: /s/ Donald Jones
--------------------------------------
President
<PAGE> 6
SPECIFICATIONS FOR DECOMMISSIONING THE BOILER ROOM AT 1 CAPE MAY STREET,
SERVING THE "TRI-CHEM" SPACE, AND APPROXIMATELY 45,000 SQUARE FEET OF THE
LECHTERS WAREHOUSE SPACE, AND INSTALLING ALTERNATE HVAC SYSTEM.
LESTER M. ENTIN ASSOCIATES will be decommissioning the steam boiler at 1 Cape
May Street. Replacing the boiler as a source of heat in the Lechters warehouse
space will be:
A) 4 300,000 BTU Reznor Model FT Low Profile heating units. These units
will be installed by MEYER & DEPEW CO., using Lechters existing natural gas and
electric services. The vent stack penetrations to the roof will be conducted by
M & M Roofing, who then seal all penetrations with roofing compound.
B) Heat for the additional 6,800 square feet of office space to be
occupied by Lechters, (formerly Tri-Chem office space) will be provided by a
new 10 ton air handler and associated duct furnace. The heat will be provided
by a new 300,000 BTU Reznor EEDU series Indoor Duct Furnace, installed by MEYER
& DEPEW CO. MEYER & DEPEW CO. will also retrofit make any and all necessary
repairs to the existing duct work.
Air Conditioning for the 6,800 square feet of office space to be occupied
by Lechters, (formerly Tri-Chem office space) will be provided by the existing
roof mounted Chiller Tower. MEYER & DEPEW CO. will make any and all necessary
repairs to the existing Chiller Tower.
The proposed heating and cooling systems will be metered from the current
LECHTERS gas and electrical meters. Due to the fact that this office space has
a plenum return system, LESTER M. ENTIN ASSOCIATES will be removing the current
ceiling tiles located the new office space and replacing the tile, and
installing new "egg crate" air return panels. This will ensure that the plenum
return system is still operational. Lechters has acknowledged that any
communication wiring must be Teflon coated to maintain the integrity of the
plenum system.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
NAME OF SUBSIDIARY STATE OF INCORPORATION
- - ------------------ ----------------------
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 M Street, Inc. District of Columbia
Lechters Florida, Inc. Florida
Lechters Georgia, Inc. Georgia
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. Baltimore
Lechters Holyoke, Inc. Massachusetts
<PAGE> 2
Page 2
SUBSIDIARIES OF THE COMPANY
NAME OF SUBSIDIARY STATE OF INCORPORATION
- - ------------------ ----------------------
Lechters Michigan, Inc. Michigan
Lechters Minnesota, Inc. Minnesota
Lechters Mississippi, Inc. Mississippi
Lechters Missouri, Inc. Missouri
Lechters Nebraska, Inc. Nebraska
Lechters Nevada, Inc. Nevada
Lechters New Hampshire, Inc. New Hampshire
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
<PAGE> 3
Page 3
SUBSIDIARIES OF THE COMPANY
NAME OF SUBSIDIARY STATE OF INCORPORATION
- - ------------------ ----------------------
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
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-48560 on Form S-8, in Registration Statement No. 33-46993 on Form S-8 and in
Registration Statement No. 333-59759 on Form S-8 of Lechters, Inc. and
subsidiaries of our report dated March 24, 1999, appearing in this Annual Report
on Form 10-K of Lechters Inc. and subsidiaries for the year ended January 30,
1999.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
April 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-1-1998
<PERIOD-END> JAN-30-1999
<CASH> 35,503
<SECURITIES> 62,750
<RECEIVABLES> 4,185
<ALLOWANCES> 0
<INVENTORY> 89,224
<CURRENT-ASSETS> 193,396
<PP&E> 154,130
<DEPRECIATION> 88,401
<TOTAL-ASSETS> 267,644
<CURRENT-LIABILITIES> 28,922
<BONDS> 61,232
0
20,000
<COMMON> 58
<OTHER-SE> 139,076
<TOTAL-LIABILITY-AND-EQUITY> 267,644
<SALES> 428,219
<TOTAL-REVENUES> 428,219
<CGS> 317,868
<TOTAL-COSTS> 317,868
<OTHER-EXPENSES> 120,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,474
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