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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 29, 2000
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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY NO. 13-2821526
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1 CAPE MAY STREET, HARRISON, NEW JERSEY 07029-2404
(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:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
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None None
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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 SK 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 14, 2000 16,061,186 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 $18,349,898.
For the purposes of such calculation, all outstanding shares of Common
Stock have been considered held by non-affiliates, other than the 4,317,251
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 20, 2000.
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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 10K, 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, among others, 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;
- 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 stores were known for
the breadth of their assortment and the convenience of their locations. In 1990,
the Company created the Famous Brands Housewares Outlet(R) concept with the
intent of offering housewares manufacturers not otherwise having a retail
presence in outlet malls, a venue experiencing substantial customer traffic and
rapid new center development.
The Company continued to reposition its basic concepts. While both
concepts feature 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, special buy
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 comprised
of Lechters Housewares(R) and Lechters Kitchen Place (R) and Off-Price Home
Business comprised of Famous Brands Housewares Outlet (R) and Cost Less Home
Store(SM), the Company's newest concept, which is a "big box" format of 18,400 -
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, home textiles, ready-to-assemble furniture, home decor and gifts. The
details of both segments' operating strategies follow in this report.
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 523 stores (401 Lechters Housewares(R) stores, 117 Famous Brands
Housewares Outlet(R) stores and five Cost Less Home Store(SM) stores in 41
states and the District of Columbia.
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.
OPERATING STRATEGIES
A. MERCHANDISING AND MARKETING
The Company regularly evaluates its business and operations to more
effectively position itself in the markets in which it competes.
The Company continues to focus on the following strategic priorities:
- Redeployment of assets into retail concepts to perform at
above average levels resulting in stakeholder (customers,
employees, investors, and vendors) satisfaction with
anticipated returns. Two of these retail concepts have been
initiated: Lechters Kitchen Place(R) and Cost Less Home
Store(SM). The Company continues to evaluate and modify these
concepts.
- Re-energizing the existing Lechters Housewares(R) business
with fewer but more profitable stores. This business is
expected to continue to provide significant positive cash flow
and remain a key part of the Company's core business.
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- Famous Brands Housewares Outlet(R) sales will be derived from
a smaller core of profitable stores in viable markets.
- Geographic concentration that will allow the Company to
effectively support the existing and new concepts with both
marketing and management focus.
- Establishment of a viable presence in the newest sales medium,
the Internet.
The plans for each of the Company's business segments follow:
BUSINESS SEGMENTS
The Company currently 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 77% of total sales in Fiscal 1999, 78% in Fiscal 1998 and 78% in
Fiscal 1997. 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 prototype 3,000 square foot Lechters
Housewares(R) store and a prototype 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 315
Lechters Housewares(R) stores, 82 Super Lechters Housewares(R)
stores and four Kitchen Place(R) Stores.
LECHTERS KITCHEN PLACE(R)
The prototype Lechters Kitchen Place(R) store includes many of
the existing Lechters Housewares(R) merchandise categories
plus additional assortments 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. $6.40 for
Lechters Housewares(R). The first two Lechters Kitchen
Place(R) stores opened in the fall of 1998. Two additional
Lechters Kitchen Place(R) stores opened during Fiscal 1999.
The prototype Lechters Kitchen Place(R) stores are
approximately 5,000 to 6,000 square feet in size.
OFF-PRICE HOME BUSINESS
The Off-Price Home Business segment accounted for 23% of total sales in
Fiscal 1999, 22% in Fiscal 1998 and 22% in Fiscal 1997. 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 3,000 to 7,500 square foot specialty
retailer of off-price, special buy housewares and products for
the home. These stores are located in outlet centers. Lechters
operated 117 Famous Brands Stores at the end of Fiscal 1999.
COST LESS HOME STORE(SM)
Cost Less Home Store(SM) presents a new concept for Lechters.
The typical Cost Less Home Store(SM) has approximately 18,400
- 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 constantly
changing assortment of off-price, special buy merchandise in
an easy to shop environment. Four Cost Less Home Store(SM)
stores were opened in Fiscal 1999 bringing the total number
of stores in operation to five.
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SPECIALTY 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 to $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 and frames) which accounted for 64% and 36%, respectively, of Fiscal
1999 sales. Of the over 4,000 items in the line, no individual item accounted
for more than 1% of Fiscal 1999 sales.
All products sold by the Company are either private label or national
brand names including but not limited to Rubbermaid, Cuisinart, Ecko,
Farberware, Henckels, Krups, OXO, Pyrex, Wearever Anchor Hocking and TFal. The
Company's own brands include Cooks Club(R) (cookware, gadgets and utensils),
Simple Solutions(R) (storage and organization) and Regent Gallery(R) (frames and
accessories). Private label merchandise accounted for approximately 22% of
Fiscal 1999 net sales.
The Lechters Housewares(R) concept 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 Housewares(R) believes that one of its strengths lies in its
assortments of kitchen gadgets and picture frames, which it considers superior
to other national retailers. Lechters Housewares(R) also believes that its
complete assortment of value priced kitchen products, merchandised in
conveniently located compact stores, offers a meaningful alternative to its
competitors.
Lechters Housewares(R) is also a leader in seasonal items and the
development of new and fresh merchandise through private label as well as
branded products. Lechters Housewares(R) 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 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 $6.40. All sales are transacted in cash and through third party
credit cards, which accounted for approximately 57% and 43%, of Fiscal 1999 net
sales, respectively.
The Company runs an advertising campaign consisting of 14 circulars
inserted in Sunday newspapers. These newspapers are located in eight 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 64% 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 three years.
Funding of the Company's advertising expense is supported in part by
cooperative advertising allowances from suppliers. Net advertising expense was
1.9% of Lechters Housewares(R) sales in Fiscal 1999 as compared to 1.7% in
Fiscal 1998.
The Lechters Housewares(R) business is highly seasonal. As a
convenience concept, the segment 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. Specialty Housewares also experiences a strong
back-to-school business, which commences in late July. In Fiscal 1999,
November/December and back-to-school sales accounted for approximately 31% and
19%, respectively, of total year sales.
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Lechters Kitchen Place(R) prototype stores are 5,000 to 6,000
square feet. The merchandise assortment includes most of the existing Lechters
Housewares(R) merchandise 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. $6.40 for the Lechters
Housewares(R) stores. This trade-up in prices is expected to be accomplished by
adding better merchandise that the customer expects to find in a specialty store
environment. Lastly, many items at lower 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 completely redesigned 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.
OFF-PRICE HOME BUSINESS
The goal 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 and home related products 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 the Famous Brands Housewares Outlet(R) can offer
its outlet customers extraordinary savings opportunities as compared to regular
priced retailers through its ability to purchase off-price special buy
housewares. This commitment to off-price merchandise is a new direction based on
a strategic assessment of the market and the position of Famous Brands
Housewares Outlet(R) 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 1999 with approximately
50% of sales generated by off-price merchandise. The remainder of the assortment
was similar to the Lechters Housewares(R) assortment with limited reductions in
pricing. At the end of Fiscal 1999, approximately 60% 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
giftwares are periodically added as opportunistic buys present themselves. The
broadened category mix contributes to the "treasure hunt" atmosphere that is so
important to the appeal of this business. The strategy is supported by a
merchandising team dedicated to the Off-Price Home Business segment.
Famous Brands Housewares Outlet(R) stores typically have lower
occupancy expenses and leasehold improvement requirements than 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 the Company's advertised 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 1999, the
November/December period represented 25% of total year sales in Famous Brands
Housewares Outlet(R) versus 31% for Lechters Housewares(R).
During Fiscal 1999 the Company closed 17 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 concept that is an outgrowth of the
off-price special buy strategy started in the Famous Brands Housewares Outlet(R)
stores. The typical Cost Less Home Store(SM) is based on a store size of
approximately 18,000 to 25,000 square feet 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 receive discounts of up to
70% off department and specialty store prices.
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The Company believes that Cost Less Home Store(SM) 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 special buy 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. Four Cost Less Home Store(SM)
were opened in Fiscal 1999. Two of the new locations were in the greater
Philadelphia metropolitan area. The two other locations were in Wilmington,
Delaware and Elizabeth, New Jersey. 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)
locations in Fiscal 2000. The Company recently entered an agreement to lease a
new warehouse facility in eastern Pennsylvania, which will be designed to handle
the increasing volume of special buy, off-price merchandise.
B. PURCHASING, WAREHOUSING AND DISTRIBUTION
The Service Office, located in Harrison, New Jersey, 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, one merchandise manager and six buyers. The Off-Price Home
Business buying staff includes a Senior Vice President - General Merchandise
Manager, one Vice President - Merchandise Manager and five buyers.
A Planning and Allocation staff supports the buying staff. That staff
includes senior planners, teams of inventory control specialists and analysts
supporting each buying group.
The Company purchases its products from over 400 major suppliers with
no supplier accounting for more than 2.7% of Fiscal 1999 receipts. Approximately
80% of its products are purchased in the United States, which ensures sufficient
flexibility in the management and flow of merchandise. The remaining 20% 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 has entered into a
lease for a new distribution center in Hazleton, Pennsylvania. This facility
will handle the distribution of product for the Company's special buy, off -
price merchandise for stores east of Mississippi. The initial phase of this new
facility is projected to be operational by July 2000.
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
distribution center, depending upon the store's distance from the center. On
average, stores are supplied with merchandise on a biweekly 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.
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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, 2000, the field organization was comprised of 3 Regional
Vice Presidents and 1 Regional Manager; each with profit and loss responsibility
for several districts and provides leadership to 35 District Managers. The
District Managers are responsible for the day-to-day operations of 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. As of April
1, 2000 the Company employed 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 obtaining and retaining attractive, high-traffic
store locations 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 malls while strip
centers and city stores are located in dominant strip centers or downtown areas
as defined by market analysis. Famous Brands Housewares Outlet(R) stores are
located in the dominant outlets nationally. The four Lechters Kitchen Place(R)
stores are located in mall locations. Four of the five Cost Less Home Store(SM)
stores opened to date are located in power strip centers and one is located in a
2-level enclosed outlet mall.
As shown in the following table, the Company operated 401 Lechters
Housewares(R) stores which included 4 Lechters Kitchen Place(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 117 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's Cost Less Home Store(SM) locations
average 21,000 gross square feet and range in size from 18,400 to 25,000 square
feet.
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<TABLE>
<CAPTION>
FAMOUS COST
LECHTERS HOUSEWARES BRANDS LESS
-------------------------------------------------- HOUSEWARES HOME
MALLS STRIPS CITY SUB-TOTAL OUTLET(R) STORE(SM) TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
1999 Additions:
Units 1 5 4 10 0 4 14
Square Feet 5,400 14,800 11,300 31,500 0 86,600 118,100
1999 Closings:
Units 48 3 1 52 17 0 69
Square Feet 148,200 12,300 3,600 164,100 64,900 0 229,000
January 29, 2000:
Units 320 52 29 401 117 5 523
Square Feet 1,206,400 183,200 119,200 1,508,800 464,200 105,000 2,078,000(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
Store(SM), Lechters Kitchen Place(R), Lechters Housewares(R) strip center
locations and Lechters Housewares(R) City locations. The Company's Fiscal 2000
development plan is to open approximately 20 new stores.
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In determining where and in what format new stores will be opened, the
Company's preference is to backfill 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 on going 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,
NET OF
LEASEHOLD FIXTURES & ACCOUNTS PRE-OPENING
IMPROVEMENTS EQUIPMENT PAYABLE EXPENSE
------------ --------- ------- -------
<S> <C> <C> <C> <C>
Lechters Housewares(R) (Malls) $256,000 $ 48,000 $107,000 $ 14,000
Lechters Housewares(R) (Strip Centers) $ 96,000 $ 48,000 $102,000 $ 14,000
Lechters Housewares(R) (City) $400,000 $ 48,000 $146,000 $ 14,000
Lechters Kitchen Place(R) $256,000 $ 64,000 $187,000 $ 14,000
Famous Brands Housewares Outlet(R) $ 96,000 $ 48,000 $100,000 $ 14,000
Cost Less Home Store(SM) $240,000 $205,000 $430,000 $100,000
</TABLE>
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 terminate its lease agreement upon expiration of
the term or will exercise a volume termination provision, if any.
The Company closed sixty-nine (69) stores in Fiscal Year 1999. In
Fiscal Year 2000, the Company plans to close approximately 25 to 30 stores
resulting in a more stable store count in future years. The Company's approach
is to increase the concentration of store in markets in which the Company
advertises.
The majority of the Company's store leases expire or will be subject
to termination over the next three years.
E. INFORMATION TECHNOLOGY
The Company relies heavily on technology to conduct its business. It is
continually reevaluating and upgrading its systems capabilities and technology
infrastructure to support the current and future needs of the business.
The Company's data resides on a combination of platforms using IBM
equipment in an IBM AS400 and an IBM RS6000 open system, client server
environment. The Company is strategically moving towards the consolidation of
all production systems to an IBM RS6000 SP2 platform. The recent acquisition of
the IBM SP2 - S80 will enable the Company to effectively convert its
merchandising systems acquired from JDA Software, Inc. ("JDA") onto a single
platform. This hardware configuration represents the latest technology offered
by IBM in this platform arena.
In-Store Systems consist of IBM 4684 and 4694 Point Of Sales registers
and Symbol Technology scanners. One of the key initiatives of the Company in
Fiscal 2000 is a project to evaluate and select a new complete store systems
software package and associated hardware. This project is in progress and the
Company expects to complete their evaluation and selection of a new store
systems solution by July 2000 with an anticipated Fiscal 2001 rollout. In
conjunction, the Company has undertaken a second major initiative for store
systems which is to reevaluate all existing support services.
8
<PAGE> 12
The Company controls the level and distribution of merchandise in the
distribution centers and stores through the use of an internally developed
replenishment system. Since acquiring JDA's Open Database Merchandising System
(ODBMS) in September 1997, the Company has continued to implement each
respective module of the new system and conversely converted its operation from
legacy systems to the new technology. The Company expects to convert over to the
JDA Replenishment Module during the 3rd Quarter Fiscal 2000.
The Company's distribution centers are internally operated using an
automated warehouse management system operating on the IBM AS400, which also
incorporates radio frequency technology. While this was sufficient to meet
business needs in the past, the new business concepts required additional
functionality and tighter controls to run the operation. In September 1998 the
Company acquired JDA's Warehouse Management System (WCC) which is an open
system, client server solution that works in conjunction with the JDA
Merchandising Systems (ODBMS). The Company has been running the new Warehouse
Management System for supplies and fixtures merchandise in its distribution
centers. The Company expects to complete the installation and convert over all
merchandise to the new system by the end of the 2nd Quarter of Fiscal 2000.
In Fiscal 1997 the Company successfully installed its new financial
system which is an open system, client server solution provided by Oracle
Corporation. In Fiscal 1998 the Company augmented the new system with
substantial planning, decision support and report writing capabilities provided
by Oracle Corporation. The final phase of implementation to the financial suite
will be the integration of JDA's Merchandising system's financial applications
Stock Ledger, Sales Audit, and Invoice Reconciliation, which will work in
conjunction with the Oracle financial system. The Company expects to complete
this integration during Fiscal 2001.
The Company maintains a Website at: www.lechters.com. The Website
features descriptive Company information, upcoming sales promotions in the
stores and the basic investor relations materials. An e-commerce project is
presently in progress, which will enable the Company to conduct commerce through
the Website.
In a continuing effort to enhance the technology infrastructure the
Company has acquired a new telephone PBX system to replace its old technology
system. The Company expects to implement the new telephone system during 2nd
Quarter Fiscal 2000.
In Fiscal 1999 the Company successfully remediated or replaced all
systems to meet the Year 2000 compliance requirements without any significant
incident.
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 competitive with
those charged by general merchandise discount stores. Nevertheless, there can be
no assurance that any or all of the factors listed above, which enable the
Company to compete favorably, will not be adopted by companies having greater
financial and other resources than the Company.
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", "Famous Brands Housewares Outlet" for retail
services, and its trademarks ,"The Kitchen Place", "Regent Gallery", "Cooks
Club", "Perfect Bake", "Perfect Grip" "Simple Solutions" and "Cable Cop" for
certain houseware 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, 2000, the Company employed 6,119 persons, 2,376 of whom
were fulltime (30 or more hours per week) and 3,743 of whom were part-time
Associates. Of this total, 454 were located at the Company's Harrison, New
Jersey Service Office and two distribution centers. Included in this total, 39
were Regional and District Managers, 6 were Loss Prevention Managers and 42 were
Associates located at the Company's North Las Vegas, Nevada distribution center.
9
<PAGE> 13
On April 1, 2000, the 181 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 5,665 Associates in the
Company's 523 retail stores are nonunion.
The Company has never experienced a strike or other labor disruption
and is unaware of any current efforts or plans to organize its nonunion
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, 2000:
<TABLE>
<CAPTION>
TERM OF
POSITION OR OFFICE EMPLOYMENT
NAME AGE WITH THE COMPANY COMMENCED
- ---- --- ---------------- ---------
<S> <C> <C> <C>
Donald Jonas 70 Chairman of the Board, January 1984
and Chief Executive Officer
David K. Cully 47 President, Chief Operating Officer January 2000
Robert J. Harloe 55 Senior Vice President-Human Resources August 1994
Dennis Hickey 52 Senior Vice President-Stores January 1991
William R. Sullivan 56 Senior Vice President-Real Estate March 1998
Robert A. Roche 55 Senior Vice President-General May 1997
Merchandise Manager Off-Price
Home Business
Mark I. Lilien 46 Senior Vice President-Operations March 2000
Sheon Karol 42 Vice President-General Counsel May 1999
</TABLE>
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 in January 1996 and served as President from January 1996 to February
1999. He is also a Director of Dress Barn, Inc.
David K. Cully was elected President, Chief Operating Officer in
January 2000. From 1993 to 2000, he served in various senior management
capacities including Vice President, GMM of Barnes & Noble Retail Stores and
President, Barnes & Noble Distribution. His other retail experience includes
senior management roles at both Egghead Discount Software and Waldenbooks.
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 PLC. Allied
Lyons acquired Dunkin Donuts, Inc. 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., Inc.
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, a division of Equitable Real Estate, from
1990 to 1997, as Executive Vice President Leasing. Mr. Sullivan 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.
10
<PAGE> 14
Robert A. Roche was elected Senior Vice President-General Merchandise
Manager Off-Price Home Business of the Company in January 2000. Mr. Roche joined
the Company as Vice President-General Merchandise Manager Famous Brands
Housewares Outlet in May 1997. Prior to that he was President/Owner of Ristar
International from 1995 to 1997. From 1994 to 1995 Mr. Roche was Merchandise
Manager of Schottenstein/Value City Stores. From 1973 to 1994 Mr. Roche was Vice
President Merchandising of Ann & Hope, Inc.
Mark I. Lilien joined the Company as Senior Vice President-Operations
in March 2000. Prior to that he was Executive Vice President, Chief Operating
Officer of Wilton Industries from 1997 to 2000. From 1994 to 1996 Mr. Lilien was
employed by the McGraw-Hill Companies as Vice President, Administration,
Distribution and Production. From 1992 to 1994 Mr. Lilien was employed by
Lechters, Inc. as Vice President-Planning and Distribution and Logistics. Mr.
Lilien was employed by Barnes and Noble Bookstores from 1989 to 1991 as Vice
President-Systems and Distribution, from 1991 to 1992 and as Vice President
Strategic Planning.
Sheon Karol was elected Vice President-General Counsel in May 1999.
Prior to that he was employed by The Caldor Corporation from 1995 to 1999 as
Assistant General Counsel. Mr. Karol previously held positions with the New York
law firms of Parker Chapin Flattau & Klimpl and Kaye, Scholer, Fierman, Hays
and Handler.
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.
In March 2000 the Company entered into a ten and one-half year lease
for a new distribution center in Hazleton, Pennsylvania. This facility will
handle the distribution of products for the Company's special buy, off-price
merchandise. Phase I of the new facility, consisting of 110,000 square feet, is
projected to be in operation by July 2000 and Phase II, consisting of 99,000
square feet, by December 2000. The Company has an option, exercisable prior to
March 2002, to lease an additional 99,000 square feet.
The Company leases all of its stores. Lease terms for the Company's
stores other than Cost Less Home Store(SM) locations, 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. Cost Less Home Store(SM)
lease terms are generally 10 years in duration with three 5-year options.
For additional information concerning the Company's leases, see the
section of Item 1. entitled Real Estate and Note 7 to the Consolidated Financial
Statements of the Company included elsewhere herein.
ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its subsidiaries are defendants in actions
commenced by vendors, customers, former employees and others that are incidental
to the normal course of its business. Similarly situated persons have asserted
claims against the Company but have not made those claims the subject of
litigation. The Company believes that the ultimate outcome of the foregoing
actions and claims pending will not have a material adverse effect on its
consolidated financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE> 15
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 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 1999 HIGH LOW
----------- ---- ---
<S> <C> <C>
1st Quarter 2-5/8 1-17/32
2nd Quarter 3-5/8 1-25/32
3rd Quarter 2-23/32 1-3/4
4th Quarter 2 1-15/32
</TABLE>
<TABLE>
<CAPTION>
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
</TABLE>
These quotations reflect inter-dealer prices, without retail markups,
markdowns or commissions.
On April 14, 2000, there were approximately 795 holders of record of
the Common Stock. On April 14, 2000, the closing price of the Common Stock was
$1.5625.
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 that restrict the ability of the Company to pay dividends. See Note 5
to the Consolidated Financial Statements of the Company included elsewhere
herein.
12
<PAGE> 16
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
WEEKS ENDED FIFTY-THREE
--------------------------------------------------------------- WEEKS ENDED
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except share, per share and selected operating data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 420,123 $ 428,219 $ 445,310 $ 441,243 $ 432,048
Cost of goods sold (including
occupancy and indirect costs) 311,602 317,868 325,269 322,110 310,163
------------ ------------ ------------ ------------ ------------
Gross profit 108,521 110,351 120,041 119,133 121,885
Selling, general and
administrative expenses 125,979 118,606 115,541 110,848 109,414
Restructuring expense adjustment -- -- -- -- (217)
Provision for asset impairment 2,685 1,543 8,746 370 --
------------ ------------ ------------ ------------ ------------
Operating (loss) income (20,143) (9,798) (4,246) 7,915 12,688
Other expense (income)(1) 1,250 (117) 1,952 3,372 5,039
------------ ------------ ------------ ------------ ------------
(Loss) income before income
tax provision and extraordinary item (21,393) (9,681) (6,198) 4,543 7,649
Income tax (benefit) provision (8,547) (3,940) (2,440) 1,200 3,146
------------ ------------ ------------ ------------ ------------
Net (loss) income -before extraordinary item (12,846) (5,741) (3,758) 3,343 4,503
Extraordinary gain on early retirement
of debentures, net of tax 398 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net (loss) income (12,448) (5,741) (3,758) 3,343 4,503
Preferred stock dividend requirement 1,010 1,010 1,010 842 --
------------ ------------ ------------ ------------ ------------
Net (loss) income available
to common shareholders ($ 13,458) ($ 6,751) ($ 4,768) $ 2,501 $ 4,503
============ ============ ============ ============ ============
Net (loss) income per common share(2)(3)
Basic
(Loss) income before extraordinary item ($ 0.81) ($ 0.39) ($ 0.28) $ 0.15 $ 0.26
Extraordinary Item $ 0.02 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net (loss) income ($ 0.79) ($ 0.39) ($ 0.28) $ 0.15 $ 0.26
============ ============ ============ ============ ============
Diluted
(Loss) income before extraordinary item ($ 0.81) ($ 0.39) ($ 0.28) $ 0.15 $ 0.26
Extraordinary item $ 0.02 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net (loss) income ($ 0.79) ($ 0.39) ($ 0.28) $ 0.15 $ 0.26
============ ============ ============ ============ ============
Weighted average common shares
outstanding(3)(4)
Basic 16,956,000 17,176,000 17,159,000 17,155,000 17,147,000
============ ============ ============ ============ ============
Diluted 16,956,000 17,176,000 17,159,000 17,155,100 17,154,000
============ ============ ============ ============ ============
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
FIFTY-TWO
WEEKS ENDED FIFTY-THREE
--------------------------------------------------------------- WEEKS ENDED
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(Dollars in thousands, except share, per share and selected operating data)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Stores opened during year 14 20 7 16 48
Stores closed during year 69 68 30 9 11
Stores open at year-end 523 578 626 649 642
Total square feet of store
space (at year-end) (5) 2,078,000 2,188,900 2,346,400 2,432,200 2,405,100
Sales per average square
foot of total space (5) (6) $ 197 $ 189 $ 186 $ 182 $ 186
Percentage increase (decrease)
in comparable store sales (7) 1.2% (1.1%) 0.5% (0.2%) (1.6%)
BALANCE SHEET DATA:
Working capital $ 148,224 $ 164,474 $ 163,998 $ 151,954 $ 136,113
Total assets 249,521 267,644 277,434 272,333 272,312
Long-term debt 57,804 61,232 60,001 58,853 75,038
Shareholders' equity 144,161 159,134 165,850 170,408 148,642
Total debt to total capitalization 28.6% 27.8% 26.6% 25.7% 34.4%
</TABLE>
(1) Other expense (income) includes interest expense net of interest
income, net gains realized on the sale of government securities and
investment income, primarily dividends from marketable securities.
(2) Net (loss) income per share for Fiscal 1999, 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
1999, Fiscal 1998 and Fiscal 1997 exclude sales of stores closed
starting 90 days prior to closing. With respect to the Company's Cost
Less Home Store(SM) concept, comparable store sales calculation starts
when the store is open for 65 weeks.
14
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
FISCAL 1999 IN COMPARISON WITH FISCAL 1998
Sales for Fiscal 1999, the fifty-two week period ended January 29,
2000, decreased $8.1 million to $420.1 million, a 1.9% decrease from Fiscal
1998, the fifty-two week period ended January 30, 1999. The decrease in sales
was due to the closing of 69 stores during the year, which was partially offset
by the opening of 14 stores during Fiscal 1999. The decrease was also offset by
the 1.2% increase in comparable store sales for Fiscal 1999. Total sales for the
Specialty Housewares segment decreased 3.3% to $324.5 million while sales for
Off-Price Home Business segment increased 3.1% to $95.6 million. By segment,
comparable store sales for the Specialty Housewares increased 0.5% while the
Off-Price Home Business increased 4.3%. At the close of the fiscal year, the
Company operated 523 stores compared with 578 stores in operation at the end of
Fiscal 1998.
Gross profit for Fiscal 1999 was $108.5 million, a $1.8 million
decrease from the prior fiscal year. The gross profit rate was 25.8% of sales,
which was flat against the prior year. By segment, the gross profit rates were
24.5% for Specialty Housewares and 30.4% for the Off-Price Home segment. The
difference in gross profit rate between segments was due to lower occupancy
costs in the Off-Price Home Business segment. The major contributing factor to
the decrease in gross profit was the reduction in sales, which was partially
offset by reduced occupancy costs, such as common area maintenance, real estate
taxes, depreciation and utilities due to fewer stores in operation.
Selling, general and administrative expenses increased $7.4 million to
$126.0 million. The expense rate was 30.0% of sales, which was 2.3 percentage
points higher than the prior fiscal year. Store operating expenses increased
over the prior year primarily in the area of advertising due to the increase of
two additional circulars and costs associated with the promotion of the
Company's Cost Less Home Store(SM) concept. 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 at the distribution centers.
Information technology costs increased at the Service Office due to the ongoing
design and installation of new merchandise systems scheduled for completion in
Fiscal 2001 and consultant fees for Year 2000 software remediation.
The Company recorded a non-cash provision for asset impairment of $2.7
million for Fiscal 1999 as required by Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
for and Long-Lived Assets To Be Disposed Of" ("SFAS No. 121"). 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 1998 the asset
impairment provision determined in the same manner was $1.5 million.
For Fiscal 1999, net other expense (income) was a net expense of $1.3
million versus net income of $0.1 million for Fiscal 1998. Interest expense was
$0.08 million higher than the prior fiscal year at $4.6 million due to increased
debt discount amortization. Interest income decreased $1.2 million from the
prior year to $2.8 million while other net investment income decreased $0.09
million to $0.5 million. Throughout Fiscal 1999 the Company had lower invested
balances producing the unfavorable performance compared to the prior year.
By operating segment Specialty Housewares contributed income before
income taxes of $8.1 million and the Off-Price Home Business contributed income
before income taxes of $5.2 million, which were offset by Corporate and other
expenses of $33.4 million for Fiscal 1999. See Note 2 to the Consolidated
Financial Statements of the Company included elsewhere herein.
Income taxes for Fiscal 1999 were at an effective rate of 40.0%. The
income tax provision for Fiscal 1999 and 1998 is a "benefit" due to the reported
loss for the fiscal year.
The Company recognized an extraordinary gain of $0.4 million, net of
tax, from the repurchase of $4.9 million of Convertible Subordinated Debentures
prior to their due date of September 27, 2001.
The net loss for Fiscal 1999 was $12.4 million compared to a net loss
for Fiscal 1998 of $5.7 million. The increased loss was primarily the result of
higher selling, general and administrative expenses needed to support the
Company's new strategies initiatives including Y2K remediation. In addition the
higher net loss was also due to reduced sales and gross profit, and the net
effect of other contributing factors noted above.
15
<PAGE> 19
FISCAL 1998 IN COMPARISON WITH FISCAL 1997
Sales for Fiscal 1998, the fifty-two week period ended January 30,
1999, decreased $17.1 million to $428.2 million, 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.
Total sales for the Specialty Housewares segment decreased 3.3% to $335.5
million and for the Off-Price Home Business segment decreased 5.7% to $92.7
million. By segment, comparable stores sales for Specialty Housewares decreased
0.4% and the Off-Price Home Business decreased 3.8%. 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 $110.4 million, a $9.7 million
decrease from the prior fiscal year. The gross profit rate was 25.8% of sales,
which was 1.2 percentage points below the gross profit rate of Fiscal 1997. By
segment, Specialty Housewares had a gross profit rate of 25.9% and Off-Price
Home Business had a gross profit rate of 25.1%. The major contributing factor 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 $3.1 million to
$118.6 million. 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 at the
distribution centers. Information technology costs increased at the Service
Office due to the ongoing design and installation of new merchandise systems
scheduled for completion in Fiscal 1999.
The Company recorded a non-cash provision for asset impairment of $1.5
million for Fiscal 1998 as required by SFAS No. 121. 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 were
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 $8.7 million.
For Fiscal 1998, net other expense (income) was an income of $0.1
million versus an expense of $2.0 million for the comparable fifty-two week
period of Fiscal 1997. Interest expense was $0.2 million lower than the prior
fiscal year at $4.5 million. Interest income increased $1.6 million over the
prior year to $4.0 million while other investment income increased $0.3 million
to $0.6 million. Throughout Fiscal 1998 the Company had higher invested balances
and favorable investment market conditions producing the favorable performance
compared to the prior year.
By operating segment Specialty Housewares contributed income before
income taxes of $17.0 million offset by the Off-Price Home Business loss before
income taxes of $0.4 million, and Corporate and other expenses of $26.4 million
for Fiscal 1998. See Note 2 to the Consolidated Financial Statements of the
Company included elsewhere herein.
Income taxes for Fiscal 1998 were at an effective rate of 40.7%. The
income tax provision for Fiscal 1998 and 1997 is a "benefit" due to the reported
loss for the fiscal year.
The net loss for Fiscal 1998 was $5.7 million compared to a net loss
for Fiscal 1997 of $3.8 million. 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.
16
<PAGE> 20
YEAR 2000 COMPLIANCE
Over the past two years, the Company engaged in a major initiative to
ensure that the Company's systems would be Year 2000 ("Y2K") compliant and thus
minimize the impact of Y2K on the Company's operations. Initially, the Y2K
project focused on replacement of legacy systems with systems certified as Y2K
complaint by vendors. Due to unavoidable delays in the replacement process, the
Company in the third quarter of Fiscal 1999 implemented a legacy system
remediation process, which remediated all major software systems that had not
been replaced. The Company completed all testing and remediation of its core
systems and all contingency plans prior to December 31, 1999. There were no
significant Y2K related incidents or failures which adversely impacted the
Company.
Costs associated with Y2K included both software purchased and software
remediation costs. Software purchased to date for the completion of the three
major systems, totaled approximately $7.0 million. Estimated additional costs
which will be incurred for the purchase of software which are charged to Other
Assets and amortized over their useful life is estimated to be $0.5 million for
the remainder of the merchandise package and $0.3 million for the warehouse
system. Miscellaneous equipment, computer hardware and other costs, which are
capitalized, are estimated to be $0.3 million. Costs of software remediation and
staff re-training on systems being remediated, which are expensed as incurred,
were $1.5 million. The Company will continue to monitor its internal systems,
major vendors and service providers for any issues that may arise related to
Y2K.
LIQUIDITY AND CAPITAL RESOURCES
The combined balances of cash, cash equivalents and marketable
securities at January 29, 2000 as shown on the Consolidated Balance Sheet
totaled $75.2 million, a decrease of $23.0 million over the combined balances of
$98.3 million at January 30, 1999. As depicted on the Consolidated Statements of
Cash Flows, the decrease in cash and cash equivalents was $25.6 million for the
fifty-two week period ended January 29, 2000 compared with a $19.1 million
increase for Fiscal 1998.
Cash flows from operating activities consist primarily of net loss
adjusted for certain non-cash charges such as depreciation and amortization,
deferred taxes, loss on disposal of 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 used in operating activities for Fiscal 1999 was $9.0
million compared to net cash provided by operating activities of $16.6 million
for Fiscal 1998. For Fiscal 1999 there was a net loss of $12.4 million, which
reduced cash. Significant offsets to the net loss, were depreciation and
amortization of $17.2 million, asset impairment provision of $2.7 million and
the increase in accounts payable and accrued expenses of $6.1 million. The most
significant operating activities reducing cash flow were the increase in
merchandise inventories of $13.9 million, other assets of $5.2 million due to
the increased investments in information technology software, and deferred
income taxes of $7.9 million.
With respect to investing activities, capital expenditures were $7.3
million compared to $8.6 million for Fiscal 1998. Capital expenditures were
principally for the construction and fixtures for new and remodeled stores
opened in Fiscal 1999. Other capital expenditures for Fiscal 1999 included
significant amounts for computer hardware expenditures related to systems
infrastructure enhancements. Marketable securities increased $2.8 million.
Planned capital expenditures for Fiscal 2000 are estimated at $20
million to $21 million primarily for new stores, renovations, remodels and
computer hardware.
Cash flows from financing activities decreased $5.4 million as a result
of the $1.3 million repurchase of treasury stock and the $4.1 million repurchase
of $4.9 million face value of the Company's Convertible Subordinated Debentures.
On November 30, 1999, the Company entered into a new $120 million
senior secured revolving credit facility with BankBoston Retail Finance Inc. and
other financial institutions, replacing the Company's credit agreement
which was to expire on March 26, 2001. The new credit facility includes a $30
million sublimit for the issuance of letters of credit (both standby and
documentary). The proceeds of the credit facility may be used for: (i) the
retirement of the Company's preexisting revolving credit facility; (ii) on-going
working capital requirements; (iii) the replacement, refinancing or retirement
of certain of the Company's securities, as described below; and/or (iv) other
general corporate purposes. The credit facility is scheduled to mature on
December 1, 2003.
The credit facility permits the Company to repurchase its 5%
convertible subordinated debentures and/or up to $10 million of its capital
stock, provided that the Company can show excess availability under the credit
facility of not less than $25 million, after giving effect to the repurchases.
During the first quarter of Fiscal 2000, the Company repurchased an additional
$16.7 million of debentures, and announced a stock repurchase program of up to 3
million shares.
17
<PAGE> 21
The Company's maximum borrowing under the credit facility may not
exceed the lesser of (a) $120 million and (b) the total of (i) 72% (78% for
fiscal months of September through December of each year) of the cost value of
the Company's acceptable inventory, including eligible letter of credit
inventory; plus (ii) 80% of the Company's eligible credit card accounts
receivable; plus (iii) 95% of the Company's cash and acceptable investments held
in a BankBoston custody account; minus (iv) applicable reserves.
The credit facility contains certain covenants, including limitations
on capital expenditures, indebtedness and transactions with affiliates and a
prohibition on the payment of dividends, other than scheduled payments of
preferred dividends by the Company and dividends paid to the Company by its
subsidiaries.
Advances under the credit facility will bear interest per annum at the
BankBoston base rate plus the applicable margin (0% to 0.50%) or the Eurodollar
rate plus the applicable margin (1.75% to 2.25%), at the Company's option. The
applicable margins are determined based upon the Company's excess availability
under the credit facility. As of January 29, 2000 the base rate applicable
margin was 0% and the Eurodollar rate applicable margin was 1.75%.
The Company will pay an unused line fee of 0.30% per annum on the
unused portion of the credit facility, a standby letter of credit fee equal to
the applicable Eurodollar margin less 25 basis points per annum of the total
face amount of each outstanding letter of credit, a documentary letter of credit
fee equal to 1.25% per annum of the total face amount of each outstanding letter
of credit and certain other fees.
As of January 29, 2000 and January 30, 1999 there were no outstanding
borrowings under the new or old facility and the Company was liable for drawings
under outstanding letters of credit in the amount of approximately $7.6 million
and $11.6 million, respectively.
The credit facility is secured by a security interest in substantially
all of the Company's assets.
INFLATION
The low rate of 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.
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 11 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." In July 1999, the FASB delayed
the effective date to fiscal years beginning after June 15, 2000. The Company
has not actively utilized derivative instruments to hedge its market risks.
Accordingly, this statement is not expected to materially impact the Company's
financial statements.
18
<PAGE> 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company imports about 20% 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, for 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 an 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.
Although the Company has not had to borrow funds under the Credit
Agreement during Fiscal 1999 and Fiscal 1998, 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.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
See the consolidated financial statements of the company and
Subsidiaries attached hereto and listed on the index to consolidated financial
statements set forth in Item 14. of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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 20, 2000.
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.
<TABLE>
<S> <C>
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 Loan and Security Agreement dated November 30, 1999 among the Company,
BankBoston Retail Finance, Inc., as Agent, BankBoston Robertson
Stephens, Inc., as syndication agent, and certain listed Banks.
(Incorporated herein by reference to the Company's Form 10-Q for the
period ended October 30, 1999).
10.2 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.)
10.3 Form of Deferred Compensation Agreement (Incorporated herein by
reference to Exhibit 10.5 to the Registration Statement). (1.)
</TABLE>
19
<PAGE> 23
<TABLE>
<S> <C>
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.)
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.)
10.7.1 Employment Agreement between the Company and David K. Cully dated
January 3, 2000.*(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. (Incorporated herein
by reference to the Company's Form 10-K for the year ended January 30,
1999).
10.10.2 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).
10.11 Lease for Distribution Center space dated December 23, 1991 covering
the Distribution and office space in Harrison, NJ (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. (Incorporated
herein by reference to the Company's Form 10-K for the year ended
January 30, 1999).
10.11.2 Lease Modification Agreement dated July 22, 1998 covering the
Distribution Center and Office space in Harrison, NJ. (Incorporated
herein by reference to the Company's Form 10-K for the year ended
January 30, 1999).
10.12 Lease for Distribution Center space, in North Las Vegas, Nevada.
(Incorporated herein by reference to Exhibit 1 to the Company's Form
10-Q, for the period ended July 25, 1992).
10.12.1 Lease for Distribution Center located in Hazleton, Pennsylvania, dated
March 23, 2000.*
10.13 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.)
21 Subsidiaries of the Company .*
23 Consent of Deloitte & Touche LLP.*
27 Financial Data Schedule *
</TABLE>
* Filed herewith.
(1.) Management Compensatory Plan.
20
<PAGE> 24
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>
/s/ DONALD JONAS Chairman of the Board, Chief April 25, 2000
(DONALD JONAS) Executive Officer and Director
(Principal Executive Officer)
/s/ DAVID K. CULLY President, Chief Operating Officer and Director April 25, 2000
(DAVID K. CULLY)
/s/ JOHN D. SULLIVAN Principal Accounting Officer, Vice President and April 25, 2000
(JOHN D. SULLIVAN) Corporate Controller
/s/ DANIEL L. ANDERTON Principal Financial Officer, Vice President April 25, 2000
(DANIEL L. ANDERTON) of Finance
/s/ MARTIN BEGUN Director April 25, 2000
(MARTIN BEGUN)
/s/ CHARLES A. DAVIS Director April 25, 2000
(CHARLES A. DAVIS)
/s/ BERNARD D. FISCHMAN Director April 25, 2000
(BERNARD D. FISCHMAN)
/s/ ROBERT KNOX Director April 25, 2000
(ROBERT KNOX)
/s/ ANTHONY MALKIN Director April 25, 2000
(ANTHONY MALKIN)
/s/ ROBERTA MANEKER Director April 25, 2000
(ROBERTA MANEKER)
/s/ NORMAN MATTHEWS Director April 25, 2000
(NORMAN MATTHEWS)
/s/ STEVE WESTERFIELD Director April 25, 2000
(STEVE WESTERFIELD)
/s/ JOHN WOLFF Director April 25, 2000
(JOHN WOLFF)
</TABLE>
21
<PAGE> 25
LECHTERS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT'S REPORT F-1
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS AS OF JANUARY 29, 2000, JANUARY 30, 1999 AND
FOR THE THREE YEARS ENDED JANUARY 29, 2000
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statement of Shareholders' Equity F-5
Notes to Consolidated Financial Statements F-7 - F-19
</TABLE>
<PAGE> 26
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
David K. Cully
President, Chief Operating Officer
F-1
<PAGE> 27
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 29, 2000 and January 30,
1999, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended January
29, 2000. 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 audits 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 29,
2000 and January 30, 1999, and the results of their operations and their cash
flows for each of the three years in the period ended January 29, 2000 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, New Jersey
March 23, 2000
F-2
<PAGE> 28
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,917 $ 35,503
Marketable securities 65,301 62,750
Accounts receivables 2,881 4,185
Merchandise inventories 103,100 89,224
Prepaid expenses 2,043 1,734
--------- ---------
Total current assets 183,242 193,396
--------- ---------
PROPERTY AND EQUIPMENT:
Fixtures and equipment 56,194 57,678
Leasehold improvements 92,368 96,452
--------- ---------
148,562 154,130
Less accumulated depreciation and
amortization 93,780 88,401
--------- ---------
Net property and equipment 54,782 65,729
--------- ---------
OTHER ASSETS 11,497 8,519
--------- ---------
TOTAL ASSETS $ 249,521 $ 267,644
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,305 $ 8,982
Dividends payable preferred stock 1,010 1,010
Salaries, wages and other accrued expenses 15,662 17,156
Taxes, other than income taxes 2,041 1,774
--------- ---------
Total current liabilities 35,018 28,922
LONG-TERM DEBT 57,804 61,232
DEFERRED INCOME TAXES 2,556 10,538
OTHER LIABILITIES 9,982 7,818
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 17,176,286, respectively 58 58
Accumulated other comprehensive (loss) income (65) 109
Additional paid in capital 62,380 62,380
Retained earnings 63,129 76,587
--------- ---------
145,502 159,134
Less: Treasury Stock
Common Stock - 684,000 shares at cost (1,341) --
--------- ---------
Total shareholders' equity 144,161 159,134
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 249,521 $ 267,644
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 29
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 420,123 $ 428,219 $ 445,310
COST OF GOODS SOLD
(including occupancy and indirect costs) 311,602 317,868 325,269
------------ ------------ ------------
GROSS PROFIT 108,521 110,351 120,041
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 125,979 118,606 115,541
PROVISION FOR ASSET IMPAIRMENT 2,685 1,543 8,746
------------ ------------ ------------
OPERATING LOSS (20,143) (9,798) (4,246)
OTHER EXPENSE (INCOME):
Interest expense 4,556 4,474 4,625
Interest income (2,787) (3,978) (2,334)
Net investment gain/income (519) (613) (339)
------------ ------------ ------------
Total other expenses (income) 1,250 (117) 1,952
------------ ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (21,393) (9,681) (6,198)
INCOME TAX BENEFIT (8,547) (3,940) (2,440)
------------ ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM (12,846) (5,741) (3,758)
EXTRAORDINARY ITEM gain on early extinguishment
of debentures (net of income tax of $265) 398 -- --
------------ ------------ ------------
NET LOSS (12,448) (5,741) (3,758)
Preferred stock dividend requirement 1,010 1,010 1,010
------------ ------------ ------------
Net Loss available to common shareholders $ (13,458) $ (6,751) $ (4,768)
============ ============ ============
NET LOSS PER COMMON SHARE
Basic
Loss before extraordinary item $ (0.81) $ (0.39) $ (0.28)
Extraordinary item .02 -- --
------------ ------------ ------------
Net Loss $ (0.79) $ (0.39) $ (0.28)
============ ============ ============
Diluted
Loss before extraordinary item $ (0.81) $ (0.39) $ (0.28)
Extraordinary item .02 -- --
------------ ------------ ------------
Net Loss $ (0.79) $ (0.39) $ (0.28)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - Basic and Diluted 16,956,000 17,176,000 17,159,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 30
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($12,448) ($ 5,741) ($ 3,758)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for asset impairment 2,685 1,543 8,746
Depreciation and amortization 17,164 16,676 18,014
Loss on disposal of property and equipment 1,538 1,580 1,702
Gain on repurchase of debentures (663) -- --
Deferred income taxes (7,860) (936) (4,998)
Deferred rent 2,125 1,075 968
Other 429 (751) 265
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,304 899 477
(Increase)/decrease in merchandise inventories (13,876) 9,810 1,408
(Increase)/decrease in prepaid expenses (309) 411 3,589
Increase in other assets (5,163) (3,433) (3,314)
Increase/(decrease) in accounts payable, accrued salaries,
wages and other accrued expenses
and taxes, other than income taxes 6,096 (1,544) 11,556
(Decrease) increase in income taxes payable -- (2,941) 962
-------- -------- --------
Net cash (used in) provided by operating activities (8,978) 16,648 35,617
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,348) (8,580) (4,860)
(Increase)/decrease in marketable securities (2,847) 12,040 (20,471)
-------- -------- --------
Net cash (used in) provided by investing activities (10,195) 3,460 (25,331)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options -- 10 97
Payment of preferred stock dividends (1,010) (1,010) (1,010)
Purchase of treasury stock (1,341) -- --
Repurchase of debentures (4,062) -- --
-------- -------- --------
Net cash used in financing activities (6,413) (1,000) (913)
-------- -------- --------
(DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS (25,586) 19,108 9,373
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 35,503 16,395 7,022
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,917 $ 35,503 $ 16,395
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 3,324 $ 2,769 $ 3,406
======== ======== ========
Income taxes $ 95 $ 2,296 $ 2,073
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 31
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
CONVERTIBLE Additional Other Comprehensive
COMMON PREFERRED Paid-In Retained Comprehensive Treasury Income
STOCK STOCK Capital Earnings Income Stock Total (Loss)
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE February 1, 1997 $ 58 $ 20,000 $ 62,273 $ 88,106 ($29) -- $ 170,408
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 -- -- 97 -- -- -- 97 --
Declaration of dividend on
convertible preferred
stock -- -- -- (1,010) -- -- (1,010) --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE January 31, 1998 58 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 -- -- 10 -- -- -- 10 --
Declaration of dividend on
convertible preferred
stock -- -- -- (1,010) -- -- (1,010) --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, January 30, 1999 58 20,000 62,380 76,587 109 -- 159,134 ($ 5,716)
=========
Net Loss -- -- -- (12,448) -- -- (12,448) (12,448)
Other comprehensive income,
(loss) net of tax:
Unrealized loss on
available for sale
securities -- -- -- -- (174) -- (174) (174)
Purchase of Treasury Stock -- -- -- -- -- (1,341) (1,341) --
Declaration of dividend on
convertible preferred
stock -- -- -- (1,010) -- -- (1,010) --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, January 29, 2000 $ 58 $ 20,000 $ 62,380 $ 63,129 ($ 65) ($ 1,341) $ 144,161 ($ 12,622)
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 32
LECHTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED JANUARY 29, 2000
(AMOUNTS 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. The Company operates two business
segments which are Specialty Housewares and Off-Price Home Business. (See
note 2.) As of January 29, 2000, the Company operated 523 stores in 41
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 1999, Fiscal 1998 and Fiscal 1997 mean the fiscal
year ending on the Saturday closest to the end of January. Fiscal Year
1999, Fiscal Year 1998 and Fiscal Year 1997 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 29, JANUARY 30,
2000 1999
-------- --------
<S> <C> <C>
Lower of cost (first-in, first-out) or
market as determined by the retail
inventory method (stores) $ 64,229 $ 57,912
Lower of cost (first-in, first-out)
or market (distribution centers) 38,871 31,312
-------- --------
$103,100 $ 89,224
======== ========
</TABLE>
The Company includes as inventoriable costs, certain indirect costs,
principally purchasing, warehousing and distribution costs, which are
necessary to bring inventory to the point of sale. At January 29, 2000
total indirect costs included as part of inventory were approximately
$8,200. At January 30, 1999, indirect costs included as part of inventory
were approximately $7,900.
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
1999, the Company recorded a $2,685 provision for the impairment of long-
lived assets located in stores. The asset impairment provisions recorded
in Fiscal 1998 and Fiscal 1997 were $1,543 and $8,746, 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-7
<PAGE> 33
f) Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash surrender value of key person life
insurance policies $ 2,904 $ 2,783
Prepaid loan expense 1,055 160
Other deferred charges 1,241 529
Security deposits 383 345
Capitalized software 9,570 7,399
Amortization of software (3,656) (2,697)
-------- --------
Total other assets $ 11,497 $ 8,519
======== ========
</TABLE>
g) Preopening Costs: During Fiscal 1998, the Company adopted the policy of
expensing preopening costs as incurred. In the prior fiscal years,
preopening 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 1999 and Fiscal 1998.
h) 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.)
i) 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 and
1998 Long-Term Incentive Plan were excluded from the Fiscal 1999 and
the Fiscal 1998 computations since they would have been antidilutive.
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 antidilutive effect on the net (loss) income per
share data presented for Fiscal 1999, Fiscal 1998 and Fiscal 1997. With
respect to the Company's 5.05% Convertible Preferred Stock issued in
April 1996, the assumed conversion of the preferred stock would also
have had an antidilutive effect on the net (loss) income data presented
for Fiscal 1999, Fiscal 1998 and Fiscal 1997.
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 29, JANUARY 30, JANUARY 31,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic:
Weighted average common shares outstanding 16,956,000 17,176,000 17,159,000
========== ========== ==========
Diluted:
Weighted average common shares outstanding 16,956,000 17,176,000 17,159,000
========== ========== ==========
</TABLE>
j) Fair Value of Financial Instruments: SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of the fair
value of financial instruments, both assets and liabilities recognized and
not recognized in the consolidated balance sheet of the company, for which
it is practicable to estimate fair value. The estimated fair values of
financial instruments which are presented herein have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting
market data to develop estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of amounts the Company
could realize in a current market exchange.
F-8
<PAGE> 34
The fair value of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate their carrying values at
January 29, 2000 and January 30, 1999, due to the short term maturities of
these items. The fair value of the Company's long-term debt at January 29,
2000 and January 30, 1999 was $51,047 and $43,876, respectively. The
carrying value of long-term debt at January 29, 2000 and January 29, 1999
was $57,804 and $61,232, respectively. The fair value of the Company's
long-term debt is based on market prices or dealer quotes (for publicly
traded debentures).
k) 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 consists of net income or loss 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.
l) Recent Accounting Pronouncements: In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." In
July 1999 the FASB delayed the effective date to fiscal years beginning
after June 15, 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.
m) 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.
n) Reclassifications: Certain reclassifications have been made to the
financial statements of prior years to conform with the classifications
used for Fiscal 1999.
2. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments 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 into two segments, 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 1999, 1998,
and 1997 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-9
<PAGE> 35
The Company's segment disclosures are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
SALES
Specialty Housewares $ 324,537 $ 335,483 $ 346,947
Off-Price Home Business 95,586 92,736 98,363
--------- --------- ---------
Total Sales $ 420,123 $ 428,219 $ 445,310
========= ========= =========
(LOSS) INCOME BEFORE INCOME TAX BENEFIT
Specialty Housewares $ 8,054 $ 17,023 $ 14,664
Off-Price Home Business 5,168 (418) 3,954
Corporate and Other (33,365) (26,403) (22,864)
--------- --------- ---------
Operating Loss (20,143) (9,798) (4,246)
Interest Expense/(Income) 1,250 (117) 1,952
--------- --------- ---------
Total Loss before income
tax benefit ($ 21,393) ($ 9,681) ($ 6,198)
========= ========= =========
DEPRECIATION AND AMORTIZATION EXPENSE
Specialty Housewares $ 9,296 $ 9,580 $ 11,178
Off-Price Home Business 1,740 1,639 1,865
Corporate and Other 6,128 5,457 4,971
--------- --------- ---------
Total Depreciation and Amortization
Expense $ 17,164 $ 16,676 $ 18,014
========= ========= =========
CAPITAL ADDITIONS
Specialty Housewares $ 4,387 $ 5,974 $ 2,363
Off-Price Home Business 1,561 940 516
Corporate and Other 1,400 1,666 1,981
--------- --------- ---------
Total Capital Additions $ 7,348 $ 8,580 $ 4,860
========= ========= =========
TOTAL ASSETS
Specialty Housewares $ 91,256 $ 93,571 $ 103,550
Off-Price Home Business 23,505 20,574 25,013
Corporate and Other 134,760 153,499 148,871
--------- --------- ---------
Total Assets $ 249,521 $ 267,644 $ 277,434
========= ========= =========
</TABLE>
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 $15.625 over
the 60 trading days ending on the date immediately preceding the date of
the Company's election to cause such mandatory conversion. The Company
must convert all of the outstanding shares of both the Series A Preferred
and Series B Preferred simultaneously. Any such mandatory conversion shall
only be effected upon written notice delivered to all holders of Series A
Preferred and Series B Preferred within 10 days following the date on
which the Company elects to cause such conversion.
F-10
<PAGE> 36
Series A Preferred Stock is convertible to 2,399,984 shares of common
stock and has voting rights equivalent to that number of common shares.
Series B Preferred Stock is convertible to 800,016 of shares of common
stock but has no voting rights. Both Series A Preferred Stock and Series B
Preferred Stock receive a dividend of 5.05% payable annually.
Robert Knox, a Director of the Company, is Senior Managing Director of
Cornerstone Equity Investors, LLC, the investment manager for Prudential
Private Equity Investors III, L.P.
b) Stock Options As permitted by SFAS No. 123, "Accounting for Stock Based
Compensation," the Company will continue to measure compensation cost for
stock option plans in accordance with Accounting Principles Board Opinion
No. 25, "Accounting For Stock Issued to Employees." Accordingly, no
compensation cost has been recognized for the Company's stock option plan.
If compensation cost for stock options had been determined based on fair
values at the grant dates, net income (loss) available to common
shareholders and net income (loss) per share would have been reduced to
the pro forma amounts below, for the fiscal years ended January 29, 2000,
January 30, 1999 and January 31, 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net loss available to
common shareholders:
As reported ($ 13,458) ($ 6,751) ($ 4,768)
Proforma ($ 13,804) ($ 7,166) ($ 5,133)
Net loss per common share:
As reported ($ 0.79) ($ 0.39) ($ 0.28)
Proforma ($ 0.81) ($ 0.42) ($ 0.31)
</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 29, JANUARY 30, JANUARY 31,
2000 1999 1998
------ ---- ----
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 88% 62% 64%
Risk free interest rate 5.9% 5.4% 6.2%
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 and
terminates on the tenth anniversary of the date of each installment. This
option expires in December 2002.
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 expires in 10 years.
F-11
<PAGE> 37
Changes in stock options granted under the 1989 Incentive Stock Option Plan were
as follows:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
----------- ----------- -----------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance 1,246,730 $5.18 1,424,910 $5.28 1,109,320 $5.36
Granted 62,500 1.98 96,800 4.25 505,500 4.87
Exercised -- (2,000) 5.00 (19,200) 5.02
Canceled (290,410) 5.42 (272,980) 5.32 (170,710) 4.97
--------- -------- ---------
Ending balance 1,018,820 $4.87 1,246,730 $5.18 1,424,910 $5.28
========= ==== ========= ===== ========= =====
Reserved for future
grant at year end -- 246,980 70,800
Exercisable 499,660 $5.26 423,874 $5.64 383,446 $5.91
Weighted average fair
value of options
granted during the
year $1.29 $2.58 $3.15
</TABLE>
The following table summarizes information concerning stock options granted
under the 1989 Incentive Stock Option Plan which were outstanding at January 29,
2000:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------- -----------------------------
WEIGHTED
AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
AT CONTRACTUAL AVERAGE AT AVERAGE
RANGE OF JANUARY 29, LIFE EXERCISE JANUARY 29, EXERCISE
EXERCISE PRICES 2000 IN YEARS PRICE 2000 PRICE
--------------- ---- -------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$ 1.75 to $ 3.875 143,500 8.5 $2.75 21,200 $3.68
4.25 to 5.00 511,100 6.2 4.95 289,640 4.97
5.06 to 5.94 306,500 7.2 5.21 137,100 5.17
6.50 to 13.75 57,720 1.9 7.69 51,720 7.82
----------------- --------- -------
$ 1.75 to $13.75 1,018,820 499,660
========= =======
</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 of Directors, ("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.
During Fiscal 1999, there were no grants of Non-Qualified Stock Option
(NQSO), Stock Appreciation Rights (SAR), Restricted Stock Units,
Performance Units or Performance Shares. Incentive Stock Options (ISO)
granted during Fiscal 1999 under the 1998 Long-Term Incentive Plan are as
follows:
F-12
<PAGE> 38
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
----------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ -----------------
<S> <C> <C> <C> <C>
Beginning Balance -- $0.00 -- --
Granted 517,500 1.61 -- --
------- ----- ---------- --------
Exercised -- -- -- --
Canceled -- -- -- --
------- ----- ---------- --------
Ending balance 517,500 $1.61 -- --
======= ===== ========== ========
Reserved for future grant at year-end 482,500 1,000,000
======= =========
Exercisable
Weighted average fair value of
options granted during the year $ 1.23
=======
</TABLE>
The following table summarizes information concerning stock options granted
under the 1998 Incentive Stock Option Plan which were outstanding at January 29,
2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS
------------------- EXERCISABLE
WEIGHTED -----------------------------
AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
AT CONTRACTUAL AVERAGE AT AVERAGE
RANGE OF JANUARY 29, LIFE EXERCISE JANUARY 29, EXERCISE
EXERCISE PRICES 2000 IN YEARS PRICE 2000 PRICE
---------------- ------------ -------------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 1.59 to $1.64 517,500 9.9 $ 1.61 -- $ --
======= === ======== ======== ==========
</TABLE>
d) Treasury Stock - In May 1999, the Board of Directors authorized the
repurchase of up to one million shares of the Company's common stock to
allow the Company to repurchase shares from time to time when warranted by
market conditions. There have been 684,000 shares purchased under this
authorization through January 29, 2000 at an average cost of $1.96 per
share. In March 2000, the Board of Directors authorized an additional
repurchase of up to 3 million shares of the Company's common stock. This
program authorizes the buyback of up to 20.1% of its outstanding common
shares.
4. LONG-TERM DEBT
Long-Term debt outstanding is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------
JANUARY 29, JANUARY 30,
2000 1999
------- -------
<S> <C> <C>
Convertible Subordinated Debentures, 5% due 2001 (a) $57,804 $61,232
======= =======
</TABLE>
a) The 5% Convertible Subordinated Debentures (the "Debentures") were issued
in 1991 with a yield to maturity of approximately 7.47%. At January 29,
2000 and January 30, 1999, the unamortized original issue discount was
$2,251 and $3,768 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 $1,323 and $1,232 for Fiscal 1999
and Fiscal 1998, respectively. The long-term debt at January 29, 2000 of
$57,804 is due September 27, 2001.
In January 2000, the Company repurchased $4.9 million of its Convertible
Subordinated Debentures prior to their due date. The Company realized an
extraordinary gain of $0.4 million net of tax on this transaction.
The Debentures have not been and will not be registered under the United
States Securities Act of 1933.
F-13
<PAGE> 39
5. SENIOR SECURED REVOLVING CREDIT FACILITY
On November 30, 1999, the Company entered into a new $120 million senior
secured revolving credit facility with BankBoston Retail Finance Inc. and other
financial institutions, replacing the Company's credit agreement which was to
expire on March 26, 2001. The new credit facility includes a $30 million
sub-limit for the issuance of letters of credit (both standby and documentary).
The proceeds of the credit facility may be used for: (i) the retirement of the
Company's preexisting revolving credit facility; (ii) on-going working capital
requirements; (iii) the replacement, refinancing or retirement of certain of the
Company's securities, as described below; and/or (iv) other general corporate
purposes. The credit facility is scheduled to mature on December 1, 2003.
The credit facility permits the Company to repurchase its 5% convertible
subordinated debentures and/or up to $10 million of its capital stock, provided
that the Company can show excess availability under the credit facility of not
less than $25 million, after giving effect to the repurchases.
The Company's maximum borrowing under the credit facility may not exceed
the lesser of (a) $120 million and (b) the total of (i) 72% (78% for fiscal
months of September through December of each year) of the cost value of the
Company's acceptable inventory, including eligible letter of credit inventory;
plus (ii) 80% of the Company's eligible credit card accounts receivable; plus
(iii) 95% of the Company's cash and acceptable investments held in a BankBoston
custody account; minus (iv) applicable reserves.
The credit facility contains certain covenants, including limitations on
capital expenditures, indebtedness and transactions with affiliates and a
prohibition on the payment of dividends, other than scheduled payments of
preferred dividends by the Company and dividends paid to the Company by its
subsidiaries.
Advances under the credit facility will bear interest per annum at the
BankBoston base rate plus the applicable margin (0% to 0.50%) or the Eurodollar
rate plus the applicable margin (1.75% to 2.25%), at the Company's option. The
applicable margins are determined based upon the Company's excess availability
under the credit facility. As of January 29, 2000 the base rate applicable
margin was 0% and the Eurodollar rate applicable margin was 1.75%.
The Company will pay an unused line fee of 0.30% per annum on the unused
portion of the credit facility, a standby letter of credit fee equal to the
applicable Eurodollar margin less 25 basis points per annum of the total face
amount of each outstanding letter of credit, a documentary letter of credit fee
equal to 1.25% per annum of the total face amount of each outstanding letter of
credit and certain other fees.
As of January 29, 2000 and January 30, 1999, there were no outstanding
borrowings under the new or old facility and the Company was liable for drawings
under outstanding letters of credit in the amount of approximately $7,651 and
$11,579, respectively.
The credit facility is secured by a security interest in substantially all
of the Company's assets.
F-14
<PAGE> 40
6. INCOME TAXES
The (benefit)/provision for income taxes before extraordinary item consists of
the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Federal:
Current ($ 543) ($2,095) $ 1,900
Deferred (7,194) (696) (3,803)
------- ------- -------
(7,737) (2,791) (1,903)
------- ------- -------
State:
Current 120 98 631
Deferred (1,335) (2,042) (1,168)
------- ------- -------
(1,215) (1,944) (537)
------- ------- -------
Increase in Valuation Allowance 405 795 --
------- ------- -------
($8,547) ($3,940) ($2,440)
======= ======= =======
</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 29, JANUARY 30, JANUARY 31,
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 3.7 13.5 5.7
Increase in Valuation Allowance (1.9) (8.2) --
Other 4.2 1.4 (0.3)
------ ------ ------
Effective income tax rate 40.0% 40.7% 39.4%
====== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
F-15
<PAGE> 41
The components of the non-current deferred tax liability are as follows:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
------- -------
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable $ 232 $ 51
Accrued expenses 3,369 4,233
General business and alternative minimum tax credits 859 771
Net operating loss carryforwards 8,018 2,593
------- -------
Total deferred tax assets 12,478 7,648
Less: Valuation allowance 1,200 795
------- -------
Total net deferred tax assets 11,278 6,853
Deferred Tax Liabilities:
Accelerated tax depreciation 12,518 14,648
Inventory 247 499
Other, Net 1,069 2,244
------- -------
Total net deferred tax liabilities 13,834 17,391
------- -------
Net Deferred Income Tax Liability $ 2,556 $10,538
======= =======
</TABLE>
Realization of the deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of any net operating loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that the recorded deferred tax asset, net of valuation allowance provided,
will be utilized. The Company files consolidated Federal and separate company
state income tax returns. The alternative minimum tax credit carryforwards can
be carried forward indefinitely. The general business credit carryforwards have
expiration dates ranging from 2017 through 2019. The Company has a Federal net
operating loss carryforward of approximately $16,340 at January 29, 2000, which
expires in 2019. The Company has state net operating loss carry forwards of
approximately $46,286 at January 29, 2000, and $37,000 at January 30, 1999,
which have expiration dates ranging from 2000 through 2019.
F-16
<PAGE> 42
7. LEASES
At January 29, 2000, 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 29, 2000, aggregate minimum rentals in future periods are as
follows:
<TABLE>
<CAPTION>
MINIMUM
FISCAL RENTAL
YEAR COMMITMENT
---- ----------
<S> <C>
2000 $ 49,860
2001 42,967
2002 38,033
2003 32,922
2004 26,131
Thereafter 46,766
--------
Total $236,679
========
</TABLE>
The proceeding does not include contingent rentals which may be payable
under certain leases on the basis of percentage of sales in excess of
stipulated amounts. The amounts of such additional rentals incurred were
as follows:
<TABLE>
<CAPTION>
FISCAL
YEAR AMOUNT
---- ------
<S> <C>
1999 $3,168
1998 3,524
1997 3,061
</TABLE>
Total rent expense was as follows:
<TABLE>
<CAPTION>
FISCAL
YEAR AMOUNT
---- ------
<S> <C>
1999 $52,959
1998 52,865
1997 53,931
</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 $995, $948 and $967 in Fiscal 1999, Fiscal 1998 and Fiscal
1997, 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 $151, $141 and $145 were charged
to expense in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
The Company has a Deferred Compensation Plan covering certain key
executives which provides that, at retirement, these executives 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 executives may receive is being accrued for financial reporting
purposes over the employment period. Approximately $160, $160 and $156
were charged to expense in Fiscal 1999, Fiscal 1998 and Fiscal 1997,
respectively.
The Company has entered into consulting agreements with certain senior
executives whereby, at retirement, these executives will provide
consulting and advisory services for a 10-year period. The maximum
aggregate amount payable under these agreements is $675 per year.
F-17
<PAGE> 43
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 29, 2000 and
January 30, 1999:
<TABLE>
<CAPTION>
GROSS GROSS
JANUARY 29, UNREALIZED UNREALIZED ESTIMATED
2000 COST GAINS LOSSES FAIR VALUE
---- ---- ----- ------ ----------
<S> <C> <C> <C> <C>
Government Bonds $43,194 $- $ (99) $43,095
Other Debt Securities 22,218 7 (19) 22,206
------- ----- ----- -------
Total available for sale securities $65,412 $7 $(118) $65,301
======= ===== ===== =======
</TABLE>
<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>
The cost and estimated fair value of debt securities at January 29, 2000 by
contractual maturity are as follows:
<TABLE>
<CAPTION>
ESTIMATED
FAIR
COST VALUE
---- -----
<S> <C> <C>
2000 $ 56,853 $ 56,786
2001 8,559 8,515
--------- ---------
Total available for sale securities $ 65,412 $ 65,301
========= =========
</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 1999, Fiscal 1998 and
Fiscal 1997 are as follows:
<TABLE>
<CAPTION>
NET NET
(GAIN) LOSS INVESTMENT
GROSS GROSS ON SALE OF (GAIN
FISCAL REALIZED REALIZED GOVERNMENT DIVIDEND /INCOME)
YEAR GAINS LOSSES SECURITIES INCOME LOSS
- ---- ----- ------ ---------- ------ ----
<S> <C> <C> <C> <C> <C>
1999 $ (94) $96 $2 $(521) $(519)
1998 (113) 9 (104) (509) (613)
1997 (50) 7 (43) (296) (339)
</TABLE>
10. SUBSEQUENT EVENTS (UNAUDITED)
On April 15, 2000, the Company repurchased $16.7 million of its
Convertible Subordinated Debentures prior to their due date of September
27, 2001. The Company will realize an extraordinary gain of $.9 million,
net of tax, on this transaction.
In March 2000, the Board of Directors authorized the repurchase of up to 3
million shares of the Company's common stock in addition to the remaining
amount of shares from the May 3, 1999 stock repurchase authorization. This
program authorizes the buyback of up to 20.1% of its outstanding common
shares. As of April 14, 2000 the Company had repurchased 431,000 shares of
common stock at an average cost of $1.63.
F-18
<PAGE> 44
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
---------------------------------------------------------------------------
MAY 1, JULY 31, OCTOBER 30, JANUARY 29,
1999 1999 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 83,407 $ 90,913 $ 94,837 $ 150,966
Gross profit $ 21,570 $ 20,284 $ 23,326 $ 43,341
Provision for asset
impairment -- -- -- $ 2,685
(Loss) Income before income
tax provision and extraordinary item ($ 7,250) ($ 9,974) ($ 9,090) $ 4,921
Net (loss) income-before extraordinary item ($ 4,277) ($ 5,885) ($ 5,364) $ 2,680
Extraordinary Item, net of tax -- -- -- 398
Net (loss) income ($ 4,277) ($ 5,885) ($ 5,364) $ 3,078
Net (loss) income per
common share before extraordinary item (a)(b)(d) ($ 0.26) ($ 0.36) ($ 0.33) $ 0.15
Extraordinary Item -- -- -- $ 0.02
------------ ------------ ------------ ------------
Net (loss) income ($ 0.26) ($ 0.36) ($ 0.33) $ 0.17
Number of shares used in
computing net income (loss)
per common share basic and diluted 17,176,000 17,098,000 17,048,000 16,500,000
</TABLE>
<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
(Loss) income before income tax provision ($ 6,163) ($ 6,509) ($ 6,393) $ 9,384
Net (loss) income ($ 3,640) ($ 3,836) ($ 3,772) $ 5,507
Net (loss) income per common share (a)(c) ($ 0.23) ($ 0.24) ($ 0.23) $ 0.31
Number of shares used in computing net (loss)
income per common share 17,175,000 17,176,000 17,176,000 17,176,000
</TABLE>
(a) Net (loss) income per common share is calculated based on net (loss)
income less the dividend requirement of the Convertible Preferred Stock.
(b) Diluted net income per common share, assuming the conversion of the 5.05%.
Convertible Preferred Stock and elimination of the related dividend was
$0.16, $0.14 before extraordinary item, for the thirteen weeks ended
January 29, 2000 on weighted average shares outstanding of 19,706,000.
(c) 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.
(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 1999 is due to rounding.
F-19
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION
- -------- -----------
<S> <C>
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 Loan and Security Agreement dated November 30, 1999 among the
Company, BankBoston Retail Finance, Inc., as Agent, BancBoston
Robertson Stephens, Inc., as syndication agent, and certain listed
Banks. (Incorporated herein by reference to the Company's Form 10-Q
for the period ended October 30, 1999).
10.2 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.)
10.3 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.)
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.)
10.7.1 Employment Agreement between the Company and David K. Cully dated
January 3, 2000.*(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. (Incorporated
herein by reference to the Company's Form 10-K for the year ended
January 30, 1999).
10.10.2 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).
</TABLE>
<PAGE> 46
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION
- -------- -----------
<S> <C>
10.11 Lease for Distribution Center space dated December 23, 1991 covering
the Distribution and office space in Harrison, NJ (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. (Incorporated
herein by reference to the Company's Form 10-K for the year ended
January 30, 1999).
10.11.2 Lease Modification Agreement dated July 22, 1998 covering the
Distribution Center and Office space in Harrison, NJ. (Incorporated
herein by reference to the Company's Form 10-K for the year ended
January 30, 1999).
10.12 Lease for Distribution Center space, in North Las Vegas, Nevada.
(Incorporated herein by reference to Exhibit 1 to the Company's Form
10-Q, for the period ended July 25, 1992).
10.12.1 Lease for Distribution Center located in Hazleton, Pennsylvania,
dated March 23, 2000.*
10.13 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.)
21 Subsidiaries of the Company .*
23 Consent of Deloitte & Touche LLP.*
27 Financial Data Schedule *
* Filed herewith.
(1.) Management Compensatory Plan.
</TABLE>
<PAGE> 1
EXHIBIT 10.7.1
A G R E E M E N T
BETWEEN
LECHTERS, INC.
- AND -
DAVID CULLY
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE #
------
<S> <C>
1. Definitions 1
2. Term of Employment 2
3. Position, Duties and Responsibilities 2
4. Base Salary 3
5. Annual Incentive Awards 3
6. Long-Term Stock Incentive Programs 3
7. Employee Benefit Programs 3
8. Disability 3
9. Reimbursement of Business and Other Expenses 4
10. Termination of Employment 4
11. Confidentiality: Cooperation with Regard to Litigation 13
12. Non-competition 14
13. Non-solicitation of Employees 15
14. Remedies 15
15. Resolution of Disputes 16
16. Indemnification 16
17. Effect of Agreement on Other Benefits 17
18. Assignability: Binding Nature 17
19. Representation 17
20. Entire Agreement 18
21. Amendment or Waiver 18
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
22. Severability 18
23. Survivorship 18
24. Beneficiaries/References 18
25. Governing Law/Jurisdiction 19
26. Notices 19
27. Headings 19
28. Counterparts 20
</TABLE>
<PAGE> 4
EMPLOYMENT AGREEMENT
AGREEMENT made and entered into as of the 3rd day of January, 2000
by and between Lechters, Inc., a New Jersey corporation (together with its
successors and assigns, the "Company"), and David Cully ("Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive pursuant to an
agreement embodying the terms of such employment (this "Agreement") and the
Executive desires to enter into this Agreement and to accept such employment,
subject to the terms and provisions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
1. Definitions.
(a) "Approved Early Retirement" shall have the meaning
set forth in Section 10(f) below.
(b) "Base Salary" shall have the meaning set forth in
Section 4 below.
(c) "Board" shall have the meaning set forth in Section
3(a) below.
(d) "Cause" shall have the meaning set forth in Section
10(b) below.
(e) "Change in Control" shall have the meaning set forth
in Section 10(c) below.
(f) "Committee" shall have the meaning set forth in
Section 4 below.
(g) "Confidential Information" shall have the meaning set
forth in Section 11(c) below.
(h) "Constructive Termination Without Cause" shall have
the meaning set forth in Section 10(c) below.
(i) "Effective Date" shall have the meaning set forth in
Section 2(a) below.
(j) "Normal Retirement" shall have the meaning set forth
in Section 10(f) below.
<PAGE> 5
(k) "Original Term of Employment" shall have the meaning
set forth in Section 2(a) below.
(l) "Renewal Term" shall have the meaning set forth in
Section 2(a) below.
(m) "Restriction Period" shall have the meaning set forth
in Section 12(b) below.
(n) "Severance Period" shall have the meaning set forth
in Section 10(c)(ii) below, except as provided
otherwise in Section 10(e) below.
(o) "Subsidiary" shall have the meaning set forth in
Section 11(d) below.
(p) "Term of Employment" shall have the meaning set forth
in Section 2(a) below.
(q) "Termination Without Cause" shall have the meaning
set forth in Section 10(c) below.
2. Term of Employment.
(a) The term of the Executive's employment under this
Agreement shall commence on January 3, 2000 (the "Effective Date") and end on
February 1, 2003 (the "Original Term of Employment"), unless terminated earlier
in accordance herewith. The Original Term of Employment shall be automatically
renewed for successive one-year terms (the "Renewal Terms") unless at least 180
days prior to the expiration of the Original Term of Employment or any Renewal
Term, either Party notifies the other Party in writing that he or it is electing
to terminate this Agreement at the expiration of the then current Term of
Employment. "Term of Employment" shall mean the Original Term of Employment and
all Renewal Terms.
(b) Notwithstanding anything in this Agreement to the
contrary, upon the written request of the Company or the Executive, made more
than one hundred eight (180) days prior to the expiration of the Original Term
of Employment or the then current Renewal Term, the Parties shall meet to
discuss the provisions of this Agreement as they will apply to the next Renewal
Term. Neither party shall have any obligation to modify any of the terms of this
Agreement for the next Renewal Term.
3. Position, Duties and Responsibilities.
(a) Generally. Executive shall serve as a senior
executive, President and COO, of the Company, and his principal place of
employment shall be within the State of New Jersey. Executive shall serve as a
member of the Executive Committee, and shall have and perform such duties,
responsibilities, and authorities as shall be specified by the CEO or Board of
Directors from time to time and as are reasonable and customary for a senior
executive of a publicly held corporation of the size, type, and nature of the
Company as they may exist from time to time and as are consistent with such
position and status. Executive shall devote
<PAGE> 6
substantially all of his business time and attention (except for periods of
vacation or absence due to illness), and his best efforts, abilities,
experience, and talent to his position and the businesses of the Company.
(b) Reporting. Members of the Company's senior management
responsible for the following functional pyramids shall report to the Executive:
- Finance;
- Information Technology;
- Logistics;
- Real Estate;
- Legal;
- Store Operations;
- Merchandising, Planning, Advertising & Visual;
- Human Resources.
(c) Board Position. The Executive shall be elected to a
seat on the Company's Board of Directors.
(d) Other Activities. Anything herein to the contrary
notwithstanding, nothing in this Agreement shall preclude the Executive from (i)
serving on the boards of directors of a reasonable number of other corporations
or the boards of a reasonable number of trade associations and/or charitable
organizations, (ii) engaging in charitable activities and community affairs, and
(iii) managing his personal investments and affairs, provided that such
activities do not materially interfere with the proper performance of his duties
and responsibilities under this Agreement.
4. Base Salary.
The Executive shall be paid an annualized salary, ("Base
Salary") payable in accordance with the regular payroll practices of the Company
(i.e. those applicable to executive salaried employees) of not less than
$450,000, subject to review (not less frequently than annually) for increase at
the discretion of the Compensation Committee (the "Committee") of the Company's
Board of Directors (the "Board"). The Executive's Base Salary shall never be
less than $450,000 per year at any time during his Term of Employment.
(a) Signing Bonus. On the next payday following thirty
days after the Effective Date, the Company shall pay the Executive a Signing
Bonus of One Hundred Fifty Thousand ($150,000) Dollars, less applicable
withholding. The Signing Bonus shall be a one-time payment, paid in
consideration of the Executive's loss of his 1999 bonus from his prior employer
and shall be in addition to the Executive's Base Salary, annual incentive
awards, long-term incentive programs and other compensation and benefits payable
under this Agreement.
<PAGE> 7
5. Annual Incentive Awards.
During the fiscal year ending January 31, 2001, the Company
and the Executive will develop an Incentive Bonus Plan which will include annual
established performance plan achievement goals with a target annual incentive
award opportunity for the Executive of up to 75% of Base Salary. Payment of
annual incentive awards shall be made at the same time that other senior-level
executives receive their incentive awards, but no later than the April 10th
immediately following the applicable fiscal year. For the first fiscal year
ending January 31, 2001, the Executive's Incentive Bonus will be One Hundred
Fifty Thousand ($150,000) Dollars, less applicable withholdings, and shall be
paid not later than April 6, 2001.
6. Long-Term Incentive Programs.
(a) On the Commencement Date the Executive shall be
issued options to purchase three hundred fifty thousand (350,000) shares of the
Company's voting common stock at a purchase price of One and 594/1000 ($1.594)
Dollars per share, vesting at seventy thousand (70,000) options per year on
January 3, 2001, on January 3, 2002, on January 3, 2003, on January 3, 2004, and
on January 3, 2005. The stock options shall be subject to the terms of the
Company's Stock Option Plan.
(b) The Executive shall be eligible to participate in any
of the Company's long-term incentive compensation programs (including other
stock options and stock grants).
7. Employee Benefit Programs.
(a) Auto Allowance. The Company will pay the Executive a
five hundred ($500) dollar per month auto allowance, plus an annual year-end
"gross up" payment in amount necessary to cover income taxes on the auto
allowance and the gross-up payment.
(b) Health Benefits. The Executive will be eligible to
participate in the Company's group health insurance program throughout the Term
of Employment, beginning with the Commencement Date of his employment.
(c) Life Insurance. Throughout the Term of Employment,
the Company will provide the Executive with the premiums to purchase a term life
policy for an amount equal to two times (2x) his annual Base Salary. The
Executive may designate the owner and/or the beneficiary of the policy.
(d) Vacation. The Executive shall be entitled to such
vacation, personal, and holiday time as are made available to the Company's
senior-level executives; provided, however, that his vacation time shall not be
less than four weeks per calendar year.
(e) General Benefits. During the Term of Employment, the
Executive shall be
<PAGE> 8
entitled to participate in such employee pension and welfare benefit plans and
programs of the Company as are made available to the Company's senior-level
executives or to its employees generally, as such plans or programs may be in
effect from time to time, including, without limitation, health, medical,
dental, long-term disability, travel accident and life insurance plans.
8. Disability.
() During the Term of Employment, as well as during the Severance
Period, the Executive shall be entitled to disability coverage as described in
this Section 8(a). In the event the Executive becomes disabled, as that term is
defined under the Company's Long-Term Disability Plan, the Executive shall be
entitled to receive pursuant to the Company's Long-Term Disability Plan or
otherwise, and in place of his Base Salary, an amount equal to 60% of his Base
Salary, at the annual rate in effect on the commencement date of his eligibility
for the Company's long-term disability benefits ("Commencement Date") for a
period beginning on the Commencement Date and ending with the earlier to occur
of (A) the Executive's attainment of age 65 or (B) the Executive's voluntary
termination and commencement of retirement benefits from the Company in
accordance with Section 10 (f) below. If (i) the Executive ceases to be disabled
during the Term of Employment (as determined in accordance with the terms of the
Long-Term Disability Plan), (ii) his position or another senior executive
position is then vacant and (iii) the Company requests in writing that he resume
such position, he may elect to resume such position by written notice to the
Company within 30 days after the Company delivers its request. If he resumes
such position, he shall thereafter be entitled to his Base Salary at the annual
rate in effect on the Commencement Date and, for the year he resumes his
position, a pro rata annual incentive award. If he ceases to be disabled during
the Term of Employment and is offered his position or another senior executive
position within 30 days after notifying the Company that he is no longer
disabled, but does not resume his position in accordance with the preceding
sentence, he shall be treated as if he voluntarily terminated his employment
pursuant to Section 10(d) as of the date the Executive ceases to be disabled. If
the Executive is not offered his position or another senior executive position
within 30 days after notifying the Company that he is no longer disabled during
the Term of Employment, he shall be treated as if his employment was terminated
Without Cause pursuant to Section 10(c) as of the date the Executive ceases to
be disabled.
() During the period the Executive is entitled to receive
disability benefits pursuant to Section 8(a) above, he shall continue to be
treated as an employee for purposes of all employee benefits and entitlements in
which he was participating on the Commencement Date, including without
limitation, the benefits and entitlements referred to in Sections 6 and 7 above,
except that the Executive shall not be entitled to receive any further annual
salary increases after the date he becomes disabled, but shall be entitled to a
pro rata share of any annual incentive bonus and a pro rata share of any new
long-term incentive plan grants for the period of his active employment during
the calendar year the disability occurred.
9. Reimbursement of Business and Other Expenses.
<PAGE> 9
The Executive is authorized to incur reasonable expenses in
carrying out his duties and responsibilities under this Agreement, and the
Company shall promptly reimburse him for all business expenses incurred in
connection therewith, subject to documentation in accordance with such Company
policies as are generally applicable to its senior executives. Auto insurance,
gas and maintenance will be reimbursable as an expense item.
10. Termination of Employment.
(a) Termination Due to Death. In the event the
Executive's employment with the Company is terminated due to his death, his
estate or his beneficiaries, as the case may be, shall be entitled to and their
sole remedies under this Agreement shall be:
(i) base Salary through the date of death, which
shall be paid in a single lump sum not later
than 15 days following the Executive's
death;
(ii) pro rata annual incentive award for the year
in which termination occurs, based on
performance valuation at the end of such
year and payable in a cash lump sum promptly
(but in no event later than 15 days)
thereafter;
(iii) elimination of all restrictions on any
deferred stock awards outstanding at the
time of his death;
(iv) immediate vesting of all outstanding stock
options and the right to exercise such stock
options for a period of one year following
death (or such longer period as may be
provided in stock options granted to other
similarly situated executive officers of the
Company) or for the remainder of the
exercise period, if less;
(v) immediate vesting of all outstanding
long-term incentive awards and a pro rata
payment of such awards based on target
performance, payable in a cash lump sum
promptly (but in no event later than 15
days) after his death;
(vi) The balance of any incentive awards earned
as of January 31 of the prior fiscal year
(but not yet paid), which shall be paid in a
single lump sum not later than 15 days
following the Executive's death;
(vii) other or additional benefits then due or
earned in accordance with applicable plans
and programs of the Company, or which are
required by applicable law.
(b) Termination by the Company for Cause.
(i) "Cause" shall mean:
<PAGE> 10
(A) the Executive's willful and
material breach of Sections 11, 12
or 13 of this Agreement;
(B) the Executive is convicted of a
felony involving moral turpitude;
or
(C) the Executive engages in conduct
that constitutes willful gross
neglect or willful gross misconduct
in carrying out his duties under
this Agreement, resulting, in
either case, in harm to the
financial condition or reputation
of the Company.
For purposes of this Agreement, an act or failure to act on Executive's part
shall be considered "willful" if it was done or omitted to be done by him not in
good faith, and shall not include any act or failure to act resulting from any
incapacity of Executive.
(ii) A termination for Cause shall not take
effect unless the provisions of this
paragraph (ii) are complied with. The
Executive shall be given written notice by
the Company of its intention to terminate
him for Cause, such notice (A) to state in
detail the particular act or acts or failure
or failures to act that constitute the
grounds on which the proposed termination
for Cause is based and (B) to be given
within 90 days of the Company's learning of
such act or acts or failure or failures to
act. The Executive shall have 20 days after
the date that such written notice has been
given to him in which to cure such conduct,
to the extent such cure is possible. If he
fails to cure such conduct, the Executive
shall then be entitled to a hearing before
the Committee of the Board. Such hearing
shall be held within 25 days of such notice
to the Executive, provided he requests such
hearing within 10 days of the written notice
from the Company of the intention to
terminate him for Cause. If, within five
days following such hearing, the Executive
is furnished written notice by the Board
confirming that, in its judgment, grounds
for Cause on the basis of the original
notice exist, he shall thereupon be
terminated for Cause.
(iii) In the event the Company terminates the
Executive's employment for Cause, he shall
be entitled to and his sole remedies under
this Agreement shall be:
(A) Base Salary through the date of the
termination of his employment for
Cause, which shall be paid in a
single lump sum not later than 15
days following the Executive's
termination of employment;
(B) The balance of any incentive awards
earned as of January 31 of the
prior fiscal year (but not yet
paid), which shall be paid in a
single lump sum not later than 15
days following the Executive's
termination of employment;
(C) Other or additional benefits then
due or earned in accordance with
applicable plans and programs of
the Company, or which are required
by applicable law.
(c) Termination Without Cause or Constructive Termination
Without Cause Prior
<PAGE> 11
to Change in Control. In the event the Executive's employment with the Company
is terminated without Cause (which termination shall be effective as of the date
specified by the Company in a written notice to the Executive, which shall not
be effective sooner than 10 business days after the notice is delivered to the
Executive), other than due to death, or in the event there is a Constructive
Termination Without Cause (as defined below), in either case prior to a Change
in Control (as defined below) the Executive shall be entitled to and his sole
remedies under this Agreement shall be:
(i) Base Salary through the date of termination
of the Executive's employment, which shall
be paid in a single lump sum not later than
15 days following the Executive's
termination of employment;
(ii) Base Salary, at the annualized rate in
effect on the date of termination of the
Executive's employment (or in the event a
reduction in Base Salary is a basis for a
Constructive Termination Without Cause, then
the Base Salary in effect immediately prior
to such reduction), for a period that is the
longest of the following (the "Severance
Period"):
(A) 12 months or;
(B) 2 months for each full or partial
year that the Executive has been
employed by the Company up to a
maximum of twenty-four months;
(iii) immediate vesting of all outstanding stock
options scheduled to vest during the
Severance Period, and the right to exercise
(to extent exercisable), such stock options
during the Severance Period or for the
remainder of the exercise period, if less:
(iv) immediate vesting of outstanding long-term
incentive awards accrued and scheduled to
vest during the Severance Period and payment
of such incentive awards at the same time
and in the same manner as the awards would
have been paid had the Executive remained
employed;
(v) the balance of any incentive awards earned
as of January 31 of the prior fiscal year
(but not yet paid), which shall be paid in a
single lump sum not later than 15 days
following the Executive's termination of
employment;
(vi) continued participation in all medical,
health and life insurance plans at the same
benefit level at which he was participating
on the date of the termination of his
employment until the earlier of:
(A) the end of the Severance Period; or
(B) the date, or dates, he receives
equivalent coverage and benefits
under the plans and programs of a
subsequent employer (such coverage
and benefits to be determined on a
coverage-by-coverage, or
benefit-by-benefit, basis);
provided that (1) if the Executive
is precluded from continuing his
participation in any employee
benefit plan or program as provided
in this clause (vi) of this Section
10(c), he shall receive cash
<PAGE> 12
payments equal on an after-tax
basis to the cost to him of
obtaining the benefits provided
under the plan or program in which
he is unable to participate for the
period specified in this clause
(vi) of this Section 10(c), (2)
such cost shall be deemed to be the
lowest reasonable cost that would
be incurred by the Executive in
obtaining such benefit himself on
an individual basis, and (3)
payment of such amounts shall be
made quarterly in advance; and
(vii) other or additional benefits then due or
earned in accordance with applicable plans
and programs of the Company or which are
required by law.
"Termination Without Cause" shall mean the Executive's
employment is terminated by the Company for any reason other than Cause (as
defined in Section 10(b)).
"Constructive Termination Without Cause" shall mean a
termination of the Executive's employment at his initiative as provided in this
Section 10(c) following the occurrence, without the Executive's written consent,
of one or more of the following events (except as a result of a prior
termination):
(A) an assignment of any duties to
Executive which are inconsistent
with his status as a senior
executive of the Company;
(B) any decrease in annual Base Salary
from what is then being paid to him
(e.g. even if the reduced Base
Salary is still in excess of the
$450,000 minimum Base Salary):
(C) any other failure by the Company to
perform any material obligation
under, or breach by the Company of
any material provision of, this
Agreement that is not cured within
30 days, after specific written
notice by the Executive thereof to
the Company; or
(D) any failure to secure the agreement
of any successor corporation or
other entity to the Company to
fully assume the Company's
obligations under this Agreement;
or
(E) the occurrence, without the
Executive's written consent, of a
relocation of his principal place
of employment outside the State of
New Jersey.
A "Change in Control" shall be deemed to have occurred if there is:
<PAGE> 13
a purchase or other acquisition by any person, entity or group
of persons, within the meaning of section 13(d) or 14(d) of
the Securities Exchange Act of 1934 ("Act"), or any comparable
successor provisions (other than Donald Jonas or a group
controlled by Donald Jonas), of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Act) of 40
percent or more of either the outstanding shares of common
stock or the combined voting power of Company's then
outstanding voting securities entitled to vote generally, or
the approval by the stockholders of Company of a
reorganization, merger, or consolidation, in each case, with
respect to which persons who were stockholders of Company
immediately prior to such reorganization, merger or
consolidation do not, immediately thereafter, own more than 50
percent of the combined voting power entitled to vote
generally in the election of directors of the reorganized,
merged or consolidated Company's then outstanding securities,
or a
liquidation or dissolution of Company or of the sale of all or
substantially all of Company's assets.
(d) Voluntary Termination by the Executive. In the event
of a termination of this Agreement pursuant to Section 2(a) or, a termination of
employment by the Executive on his own initiative after delivery of 10 business
days advance written notice [other than a termination due to death, a
Constructive Termination Without Cause, or Approved Early Retirement or Normal
Retirement pursuant to Section 10(f) below], the Executive shall have the same
entitlements as provided in Section 10(b)(iii) above for a termination for
Cause, provided that at the Company's election, furnished in writing to the
Executive within 15 days following such notice of termination, (the time being
of the essence) the Company shall in addition pay the Executive 100% of his Base
Salary for a period of 12 months following such termination in exchange for the
Executive not engaging in competition with the Company or any Subsidiary as set
forth in Section 12(a) below. Notwithstanding any implication to the contrary,
the Executive shall not have the right to terminate his employment with the
Company during the Term of Employment except in the event of a termination of
this Agreement pursuant to Section 2(a), a Constructive Termination Without
Cause, Approved Early Retirement, or Normal Retirement, and any other voluntary
termination of employment during the Term of Employment in violation of this
Agreement shall be considered a material breach; provided, however, if the
Company elects to pay the Executive 100% of his Base Salary in accordance with
this Section 10(d), the Company shall waive any and all claims it may have
against the Executive for any breach of this Agreement relating to his voluntary
termination of employment unless the Executive is found by a court of competent
jurisdiction not to be in compliance with Sections 11, 12 or 13, below; provided
further, however, that, notwithstanding anything contained in the foregoing to
the contrary, it is not the intention of the Company to waive any claims it may
have against any third parties relating to a voluntary termination by the
Executive in violation of this Agreement.
<PAGE> 14
In the event that the Executive anticipates a potential breach on his
part of the voluntary termination provisions of this Agreement, he shall discuss
the terms of his potential separation with the Company, at which point the
Company will within 15 days advise the Executive based upon his representations,
whether it will exercise its option to pay the Executive 100% of his Base Salary
in exchange for the Executive not engaging in competition with the Company or
any subsidiary as set forth in Section 12(a) below.
(e) Termination Without Cause: Constructive Termination
Without Cause or Voluntary Termination Following Change in Control. In the event
the Executive's employment with the Company is terminated by the Company without
Cause (which termination shall be effective as of the date specified by the
Company in a written notice to the Executive, and which shall not be effective
sooner than 10 business days after the notice is delivered to the Executive),
other than due to death, or in the event there is a Constructive Termination
Without Cause (as defined above), in either case within one year following a
Change in Control (as defined above), the Executive shall be entitled to and his
sole remedies under this Agreement shall be:
(i) Base Salary through the date of termination
of the Executive's employment, which shall
be paid in a single lump sum not later than
15 days following the Executive's
termination of employment;
(ii) an amount equal to two times the Executive's
Base Salary at the annualized rate in effect
on the date of termination of the
Executive's employment (or in the event a
reduction in Base Salary is a basis for a
Constructive Termination Without Cause, then
the Base Salary in effect immediately prior
to such reduction), payable in a cash lump
sum promptly (but in no event later than 15
days) following the Executive's termination
of employment.
(iii) elimination of all restrictions on any
deferred stock awards outstanding at the
time of termination of employment;
(iv) immediate vesting of all outstanding stock
options and the right to exercise such stock
options during the Severance Period (as
defined below) or for the remainder of the
exercise period, if less;
(v) immediate vesting of all outstanding
long-term incentive awards and a pro rata
payment of such awards based on target
performance, payable in a cash lump sum
promptly (but in no event later than 15
days) following the Executive's termination
of employment;
(vi) the balance of any incentive awards earned
as of January 31 of the prior fiscal year
(but not yet paid), which shall be paid in a
single lump sum not later than 15 days
following the Executive's termination of
employment;
(vii) continued participation in all medical,
health and life insurance plans at the same
benefit level at which he was participating
on the date of termination of his employment
until the earlier of:
(A) the end of the Severance Period (as
defined below); or
(B) the date, or dates, he receives
equivalent coverage and benefits
under the plans and programs of a
subsequent employer (such coverage
and benefits to be determined on a
coverage-by-coverage, or
benefit-by-benefit, basis);
provided that (1) if the Executive
is precluded from continuing his
participation in any employee
benefit plan or program as
<PAGE> 15
provided in this clause (ix) of
this Section 10(e), he shall
receive cash payments equal on an
after-tax basis to the cost to him
of obtaining the benefits provided
under the plan or program in which
he is unable to participate for the
period specified in this clause
(ix) of this Section 10(e), (2)
such cost shall be deemed to be the
lowest reasonable cost that would
be incurred by the Executive in
obtaining such benefit himself on
an individual basis, and (3)
payment of such amounts shall be
made quarterly in advance; and
(viii) pro rata annual incentive award for the year
in which termination occurs, based on
performance evaluation at the end of such
year and payable in a cash lump sum promptly
(but in no event later than 15 days)
thereafter;
(ix) other or additional benefits then due or
earned in accordance with applicable plans
and programs of the Company, or which are
required by applicable law.
For purposes of any termination pursuant to this Section 10(e), the term
"Severance Period" shall mean the period of 24 months following the termination
of the Executive's employment.
(f) Approved Early Retirement or Normal Retirement. Upon
the Executive's Approved Early Retirement or Normal Retirement (each as defined
below), the Executive shall be entitled to and his sole remedies under this
Agreement shall be:
(i) Base Salary through the date of termination
of the Executive's employment, which shall
be paid in a single lump sum not later than
15 days following the Executive's
termination of employment;
(ii) pro rata annual incentive award for the year
in which termination occurs, based on
performance valuation at the end of such
year and payable in a cash lump sum promptly
(but in no event later than 15 days)
thereafter;
(iii) continued vesting (as if the Executive
remained employed by the Company) of any
deferred stock awards outstanding at the
time of his termination of employment;
(iv) continued vesting of all outstanding stock
options and the right to exercise such stock
options for a period of one year following
the later of the date the options are fully
vested or the Executive's
<PAGE> 16
termination of employment (or such longer
period as may be provided in stock options
granted to other similarly situated
executive officers of the Company) or for
the remainder of the exercise period, if
less;
(v) continued vesting (as if the Executive
remained employed by the Company) of all
outstanding long-term incentive awards and
payment of such awards based on valuation at
the end of the performance period, payable
in a cash lump sum promptly (but in no event
later than 15 days) thereafter;
(vi) the balance of any incentive awards earned
as of January 31 of the prior fiscal year
(but not yet paid), which shall be paid in a
single lump sum not later than 15 days
following the Executive's termination of
employment;
(vii) continued participation in all medical,
health and life insurance plans at the same
benefit level at which he was participating
on the date of the termination of his
employment until the earlier of:
(A) the Executive's attainment of age
65; or
(B) the date, or dates, he receives
substantially equivalent coverage
and benefits under the plans and
programs of a subsequent employer
(such coverage and benefits to be
determined on a
coverage-by-coverage, or
benefit-by-benefit, basis);
provided, that (1) if the Executive
is precluded from continuing his
participation in any employee
benefit plan or program as provided
in this clause (vii) of this
Section 10(f), he shall receive
cash payments equal on an after-tax
basis to the cost to him of
obtaining the benefits provided
under the plan or program in which
he is unable to participate for the
period specified in this clause
(vii) of this Section 10(f), (2)
such cost shall be deemed to be the
lowest cost that would be incurred
by the Executive in obtaining such
benefit himself on an individual
basis, and (3) payment of such
amounts shall be made quarterly in
advance; and
<PAGE> 17
(viii) other or additional benefits then due or
earned in accordance with applicable plans
and programs of the Company, or which are
required by applicable law.
"Approved Early Retirement" shall mean the Executive's voluntary
termination of employment with the Company at or after attaining age 60 if such
termination is approved in advance by the Committee.
"Normal Retirement" shall mean the Executive's voluntary termination of
employment with the Company at or after attaining age 65.
(g) Duty to Mitigate. The Executive agrees that in the
event of termination of employment under subparagraph (c), (d) or (e) above, he
will use his best efforts to immediately secure alternative comparable
employment which is not violative of the Non-Competition, Non-Solicitation and
Confidentiality provisions contained herein. Upon securing alternative
employment, the Executive will immediately notify the Company and the Company
will reduce (but not below zero) all payments pursuant to paragraphs (c)(ii)
[i.e. Base Salary during the applicable Severance Period] and/or (e)(ii) [i.e.
Base Salary during the applicable Severance Period] by the base salary he is
then being paid, but the Company shall continue to provide and pay all other
remedies set forth in the applicable termination Section set forth above. The
Executive's duty to mitigate shall not require that he seek nor accept any
position that is not comparable to the one he has as a senior executive of the
Company.] However, should the Executive accept non-comparable employment,
Lechters may still reduce all payments made pursuant to paragraphs c(ii) and
e(ii). If the Company has exercised its salary continuation option under
paragraph 10(d), it may not reduce said salary continuation payments by more
than 50% upon the Executive's securing alternative non-competitive employment.
The Company agrees that in the event of termination of the Executive's
employment under subparagraph (d) above, it will use its best efforts to
mitigate its damages in accordance with the law.
(h) Nature of Payments. Any amounts due under this
Section 10 are in the nature of severance payments considered to be reasonable
by the Company and are not in the nature of a penalty.
(i) No Further Liability Release In the event of the
Executive's termination of employment, payment made and performance by the
Company in accordance with this Section 10 shall operate to fully discharge and
release the Company and its directors, officers, employees, subsidiaries,
affiliates, stockholders, successors, assigns, agents and representatives from
any further obligation or liability with respect to the Executive's rights under
this Agreement. Other than payment and performance under this Section 10, the
Company and its directors, officers, employees, subsidiaries, affiliates,
stockholders, successors, assigns, agents and representatives shall have no
further obligation or liability to the Executive or any other person under this
Agreement in the event of the Executive's termination of employment. The Company
shall have the right to condition payments pursuant to paragraphs c(ii) [i.e.
Base Salary during the applicable Severance Period] and/or (e)(ii) [i.e. Base
Salary during the applicable Severance period]] of any severance or other
amounts pursuant to this Section 10 upon the delivery by the Executive to the
Company of a release in the form satisfactory to the Company releasing any and
all claims the Executive may have against the Company and its directors,
<PAGE> 18
officers, employees, subsidiaries, affiliates, stockholders, successors,
assigns, agents and representatives under this Agreement.
11. Confidentiality: Cooperation with Regard to Litigation.
(a) During the Term of Employment and thereafter, the
Executive shall not, without the prior written consent of the Company, disclose
to anyone (except in good faith in the ordinary course of business to a person
who will be advised by the Executive to keep such information confidential) or
make use of any Confidential Information except in the performance of his duties
hereunder or when required to do so by legal process, by any governmental agency
having supervisory authority over the business of the Company or by any
administrative or legislative body (including a committee thereof) that requires
him to divulge, disclose or make accessible such information. In the event that
the Executive is so ordered, he shall give prompt written notice to the Company
in order to allow the Company the opportunity to object to or otherwise resist
such order.
(b) During the Term of Employment and thereafter,
Executive shall not disclose the existence or contents of this Agreement beyond
what is disclosed in the proxy statement or documents filed with the government
unless and to the extent such disclosure is required by law, by a governmental
agency, or in a document required by law to be filed with a governmental agency
or in connection with enforcement of his rights under this Agreement. In the
event that disclosure is so required, the Executive shall give prompt written
notice to the Company in order to allow the Company the opportunity to object to
or otherwise resist such requirement. This restriction shall not apply to such
disclosure by him to members of his immediate family, his tax, legal or
financial advisors, any lender, or tax authorities, or to potential future
employers to the extent necessary, each of whom shall be advised not to disclose
such information.
(c) "Confidential Information" shall mean all information
concerning the business of the Company or any Subsidiary relating to any of
their products, product development, trade secrets, customers, suppliers,
finances, and business plans and strategies. Excluded from the definition of
Confidential Information is information (i) that is or becomes part of the
public domain, other than through the breach of this Agreement by the Executive
or (ii) regarding the Company's business or industry properly acquired by the
Executive in the course of his career as an executive in the Company's industry
and independent of the Executive's employment by the Company. For this purpose,
information known or available generally within the trade or industry of the
Company or any Subsidiary shall be deemed to be known or available to the
public.
(d) "Subsidiary" shall mean any corporation controlled
directly or indirectly by the Company.
(e) The Executive agrees to cooperate with the Company,
during the Term of Employment and thereafter (including following the
Executive's termination of employment for any reason), by making himself
reasonably available to testify on behalf of the Company or any Subsidiary in
any action, suit, or proceeding, whether civil, criminal, administrative, or
<PAGE> 19
investigative, and to assist the Company, or any Subsidiary, in any such action,
suit, or proceeding, by providing information and meeting and consulting with
the Board or its representatives or counsel, or representatives or counsel to
the Company, or any Subsidiary as requested; provided, however that the same
does not materially interfere with his then current professional activities. The
Company agrees to reimburse the Executive, on an after-tax basis, for all
expenses actually incurred in connection with his provision of testimony or
assistance.
12. Non-competition.
(a) During the Restriction Period (as defined in Section
12(b) below), the Executive shall not engage in Competition with the Company or
any Subsidiary. "Competition" shall mean engaging in any activity, except as
provided below, for a Competitor of the Company or any Subsidiary, whether as an
employee, consultant, principal, agent, officer, director, partner, shareholder
(except as a less than one percent shareholder of a publicly traded company) or
otherwise. A "Competitor' shall mean, (i) Linens & Things, Inc., Bed, Bath &
Beyond, Inc. and any successor or successors thereto); (ii) any specialty or off
price retailer if 40% or more of its revenues (based on the most recent
quarterly or annual financial statements available) are derived from the sale of
home textiles or housewares; (iii) any corporation, other entity, or start-up
corporation or other entity engaged primarily or organized for the purpose of
engaging primarily in the sale of home textiles or housewares. If the Executive
commences employment or becomes a consultant, principal, agent, officer,
director, partner, or shareholder of any entity that is not a Competitor at the
time the Executive initially becomes employed or becomes a consultant,
principal, agent, officer, director, partner, or shareholder of the entity,
future activities of such entity shall not result in a violation of this
provision unless (x) such activities were contemplated by the Executive at the
time the Executive initially became employed or becomes a consultant, principal,
agent, officer, director, partner, or shareholder of the entity or (y) the
Executive commences directly or indirectly overseeing or managing the activities
of an entity which becomes a Competitor during the Restriction Period, which
activities are competitive with the activities of the Company or Subsidiary. The
Executive shall not be deemed indirectly overseeing or managing the activities
of such Competitor which are competitive with the activities of the Company or
Subsidiary so long as he does not regularly participate in discussions with
regard to the conduct of the competing business.
(b) For the purposes of this Section 12, "Restriction
Period" shall mean the period beginning with the Effective Date and ending with:
(i) in the case of a termination of the
Executive's employment without Cause or a
Constructive Termination Without Cause, the
Restriction Period shall terminate
immediately upon the Executive's termination
of employment;
(ii) in the case of a termination of the
Executive's employment for Cause, the first
anniversary of such termination;
<PAGE> 20
(iii) in the case of a voluntary termination of
the Executive's employment pursuant to
Section 2(a) or 10(d) above followed by the
Company's election to pay the Executive (and
subject to the payment of) 100% of his Base
Salary and the timely payment of such Base
Salary, as provided in Section 10(d) above,
the first anniversary of such termination;
(iv) in the case of a voluntary termination of
the Executive's employment pursuant to
Section 10(d) above which is not followed by
the Company's election to pay the Executive
such 100% of Base Salary [or upon the
failure of the Company to make timely
payment of such Base Salary after it has
made such election], the date of such
termination; or
(v) in the case of Approved Early Retirement or
Normal Retirement pursuant to Section 10(f)
above, the remainder of the Term of
Employment.
13. Non-solicitation of Employees.
During the period beginning with the Effective Date and ending
one year following the termination of the Executive's employment, the Executive
shall not induce employees of the Company or any Subsidiary to terminate their
employment; provided, however, that the foregoing shall not be construed to
prevent the Executive from engaging in generic nontargeted advertising for
employees generally. During such period, the Executive shall not hire, either
directly or through any employee, agent or representative, any employee of the
Company or any Subsidiary or any person who was employed by the Company or any
Subsidiary within 180 days of such hiring.
14. Remedies.
In addition to whatever other rights and remedies the Company
may have at equity or in law, if the Executive materially breaches any of the
provisions contained in Sections 11, 12 or 13 above, and the Executive fails to
fully cure said breach within 7 days of written notice of such breach, the
Company shall have the right to immediately terminate all payments and benefits
due under this Agreement and shall have the right to seek injunctive relief. The
Executive acknowledges that such a breach of Sections 11, 12 or 13 would cause
irreparable injury and that money damages would not provide an adequate remedy
for the Company; provided, however, the foregoing shall not prevent the
Executive from contesting the issuance of any such injunction on the ground that
no violation or threatened violation of Section 11, 12 or 13 has occurred.
15. Resolution of Disputes.
Any controversy or claim arising out of or relating to this
Agreement or any breach or asserted breach hereof or questioning the validity
and binding effect hereof arising under or in connection with this Agreement,
other than seeking injunctive relief under Section
<PAGE> 21
14, shall be resolved by binding arbitration, to be held within the State of New
Jersey at an office closest to the Company's principal offices where the
Executive performs his primary services in accordance with the rules and
procedures of the American Arbitration Association, except that disputes arising
under or in connection with Sections 11, 12 and 13 above shall be submitted to
the federal or state courts in the State of New Jersey. Judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof. Pending the resolution of any arbitration or court proceeding, the
Company shall continue payment of all amounts and benefits due the Executive
under this Agreement. All costs and expenses of any arbitration or court
proceeding (including fees and disbursements of counsel) shall be borne by the
respective party incurring such costs and expenses, but the Company shall
reimburse the Executive for such reasonable costs and expenses in the event he
substantially prevails in such arbitration or court proceeding.
16. Indemnification.
(a) Company Indemnity. The Company agrees that if the
Executive is made a party, or is threatened to be made a party, to any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director, officer or
employee of the Company or any Subsidiary or is or was serving at the request of
the Company or any Subsidiary as a director, officer, member, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether or not the
basis of such Proceeding is the Executive's alleged action in an official
capacity while serving as a director, officer, member, employee or agent, the
Executive shall be indemnified and held harmless by the Company to the fullest
extent legally permitted, or authorized, by the Company's certificate of
incorporation or bylaws or resolutions of the Company's Board or, if greater, by
the laws of the State of New Jersey against all cost, expense, liability and
loss (including, without limitation, attorney's fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by the Executive in connection therewith, and
such indemnification shall continue as to the Executive even if he has ceased to
be a director, member, officer, employee or agent of the Company or other entity
and shall inure to the benefit of the Executive's heirs, executors and
administrators. The Company shall advance to the Executive all reasonable costs
and expenses to be incurred by him in connection with a Proceeding within 20
days after receipt by the Company of a written request for such advance. Such
request shall include an undertaking by the Executive to repay the amount of
such advance if it shall ultimately be determined that he is not entitled to be
indemnified against such costs and expenses. The provisions of this Section
16(a) shall not be deemed exclusive of any other rights of indemnification to
which the Executive may be entitled or which may be granted to him, and it shall
be in addition to any rights of indemnification to which he may be entitled
under any policy of insurance.
(b) No Presumption Regarding Standard of Conduct. Neither
the failure of the Company (including its Board, independent legal counsel or
stockholders) to have made a determination prior to the commencement of any
proceeding concerning payment of amounts claimed by the Executive under Section
16(a) above that indemnification of the Executive is proper because he has met
the applicable standard of conduct, nor a determination by the
<PAGE> 22
Company (including its Board, independent legal counsel or stockholders) that
the Executive has not met such applicable standard of conduct, shall create a
presumption that the Executive has not met the applicable standard of conduct.
(c) Liability Insurance. The Company agrees to continue
and maintain a directors and officers' liability insurance policy covering the
Executive to the extent the Company provides such coverage for its other
executive officers.
17. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement, the
existence of this Agreement shall not be interpreted to preclude, prohibit or
restrict the Executive's participation in any other employee benefit or other
plans or programs in which he currently participates.
18. Assignability: Binding Nature.
This Agreement shall be binding upon and inure to the benefit
of the Parties and their respective successors, heirs (in the case of the
Executive) and permitted assigns. No rights or obligations of the Company under
this Agreement may be assigned or transferred by the Company except that such
rights or obligations may be assigned or transferred in connection with the sale
or transfer of all or substantially all of the assets of the Company, provided
that the assignee or transferee is the successor to all or substantially all of
the assets of the Company and such assignee or transferee assumes the
liabilities, obligations and duties of the Company, as contained in this
Agreement, either contractually or as a matter of law, and further provided that
no such assignment by the Company shall relieve the Company of its obligations
to the Executive under this Agreement. The Company further agrees that, in the
event of a sale or transfer of assets as described in the preceding sentence, it
shall take whatever action it legally can in order to cause such assignee or
transferee to expressly assume the liabilities, obligations and duties of the
Company hereunder. No rights or obligations of the Executive under this
Agreement may be assigned or transferred by the Executive other than his rights
to compensation and benefits, which may be transferred only by will or operation
of law, except as provided in Section 24 below.
19. Representation.
Each of the Parties represents and warrants to the other that
he/it are fully authorized and empowered to enter into this Agreement and that
the performance of his/its obligations under this Agreement will not violate any
agreement between he/it and any other person, firm or organization.
20. Entire Agreement.
This Agreement contains the entire understanding and agreement
between the Parties concerning the subject matter hereof and, as of the
Effective Date, supersedes all prior agreements, understandings, discussions,
negotiations and undertakings, whether written or oral,
<PAGE> 23
between the Parties with respect thereto, including, without limitation any
prior change in control agreement between the Parties.
21. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by the Executive and an authorized
officer of the Company. Except as set forth herein, no delay or omission to
exercise any right, power or remedy accruing to any Party shall impair any such
right, power or remedy or shall be construed to be a waiver of or an
acquiescence to any breach hereof. No waiver by either Party of any breach by
the other Party of any condition or provision contained in this Agreement to be
performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Executive or an authorized
officer of the Company, as the case may be.
22. Severability.
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
23. Survivorship.
The respective rights and obligations of the Parties hereunder
shall survive any termination of the Executive's employment to the extent
necessary to the intended preservation of such rights and obligations.
24. Beneficiaries/References.
The Executive shall be entitled, to the extent permitted under
any applicable law, to select and change a beneficiary or beneficiaries to
receive any compensation or benefit payable hereunder following the Executive's
death by giving the Company written notice thereof. In the event of the
Executive's death or a judicial determination of his incompetence, reference in
this Agreement to the Executive shall be deemed, where appropriate, to refer to
his beneficiary, estate or other legal representative.
25. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of New Jersey without reference to
principles of conflict of laws. Subject to Section 15, the Company and the
Executive hereby consent to the jurisdiction of any or all of the following
courts for purposes of resolving any dispute under this Agreement: (i) the
United States District Court for New Jersey or (ii) any of the courts of the
State of New Jersey. The Company and the Executive further agree that any
service of process or notice requirements in any such proceeding shall be
satisfied if the rules of such court relating thereto have been
<PAGE> 24
substantially satisfied. The Company and the Executive hereby waive, to the
fullest extent permitted by applicable law, any objection which it or he may now
or hereafter have to such jurisdiction and any defense of inconvenient forum.
26. Notices.
Any notice given to a Party shall be in writing and shall be
deemed to have been given when delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the Party concerned at the address indicated below or to such changed address as
such Party may subsequently give such notice of:
If to the Company:Lechters, Inc.
1 Cape May Street
Harrison, New Jersey 07029-2404
Attention: Corporate Counsel and
Senior Vice President Human Resources
If to the Executive:David Cully
9 Meadow Run Road
Princeton Junction, New Jersey 08550
27. Headings.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
28. Counterparts.
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
LECHTERS, INC.
By:____________________________Executive:__________________________________
Donald Jonas, David Cully,
Chairman & CEO President & Chief Operating Officer
<PAGE> 1
AGREEMENT OF LEASE
THIS AGREEMENT OF LEASE (the "Lease") is made as of this 22nd day of
March, 2000, by and between ROBERT K. MERICLE, an adult individual d/b/a
"MERICLE PROPERTIES", with an office located at c/o Mericle Development Corp.,
600 Baltimore Drive, East Mountain Corporate Center, Wilkes-Barre, Pennsylvania
18702 (the "Lessor") and LECHTERS PENNSYLVANIA, INC., a Pennsylvania
corporation, with offices located at 1 Cape May Street, Harrison, New Jersey
07029-2404 (the "Lessee").
W I T N E S S E T H:
WHEREAS, Lessor is the fee simple owner of certain real property
containing an aggregate of approximately 16.472 acres of land located within
that certain industrial park known as the "Humboldt Industrial Park" (the
"Park") and specifically located at Parcel No. 46 and Parcel No. 46A, Oak Ridge
Road, Humboldt Industrial Park, Hazle Township, Luzerne County, Pennsylvania, as
more particularly described on Exhibit "A-1" attached hereto and made a part
hereof (collectively, "Parcel No. 46"); and
WHEREAS, Lessor is also the fee simple owner of certain additional real
property containing approximately 18.308 acres of land also located within the
Park and specifically located at Parcel # 49, Oak Ridge Road, Humboldt
Industrial Park, Hazle Township, Luzerne County, Pennsylvania, as more
particularly described on Exhibit "A-2" attached hereto and made a part hereof
("Parcel No. 49"); and
WHEREAS, Parcel No. 46 and Parcel No. 49 are adjacent and contiguous to
one another; and
WHEREAS, the Lessor shall, after the date of this Lease, subdivide
Parcel No.49 into two (2) parcels, the first of which shall contain
approximately 5.308 acres of land, approximately as shown as "Parcel No. 49A" on
Exhibit "A-3" attached hereto and made a part hereof ("Parcel No. 49A"), and the
second of which shall contain approximately 13 acres of land, approximately as
shown as "Parcel No. 49B" also on Exhibit "A-3" attached hereto and made a part
hereof ("Parcel No. 49B"); and
WHEREAS, the Lessor shall combine Parcel No. 46 and Parcel No. 49A into
one (1) contiguous parcel of land which shall contain a total of approximately
21.78 acres of land, approximately as shown on Exhibit "A-4" attached hereto and
made a part hereof (the "Real Property"); and
WHEREAS, Parcel No. 46 is, as of the date of this Lease, improved with,
inter alia, a commercial/industrial building containing one hundred and ten
thousand (110,000) square feet of space, as shown by the shaded area on Exhibit
"B-1" attached hereto and made a part hereof (the "Phase I Building"); and
WHEREAS, the Lessor and the Lessee are both desirous of having the
Lessor construct on a portion of the remaining lands of Parcel No. 46 an
addition to the Phase I Building, which addition to the Phase I Building shall
contain an additional ninety-nine thousand (99,000) square feet of space, as
shown by the shaded area on Exhibit "B-2" attached hereto and made a part hereof
(the "Phase II Building"); and
WHEREAS, the Phase I Building and the Phase II Building are hereinafter
collectively shown as the shaded area on Exhibit "B-3" attached hereto and made
a part hereof and are hereinafter collectively referred to as the "Building";
and
WHEREAS, the Lessor desires to lease the Building to the Lessee, upon
the terms and conditions
<PAGE> 2
hereinafter contained; and
WHEREAS, the Lessor desires to permit the Lessee to utilize (i) a
portion of Parcel No. 46 as shown by the shaded area on Exhibit "C-1" attached
hereto and made a part hereof for the Lessee's use for the parking of forty-six
(46) vehicles (the "Phase I Parking Area"), and (ii) another portion of Parcel
No. 46 as shown by the shaded area on Exhibit "C-4" attached hereto and made a
part hereof for the Lessee's use for the storage of approximately forty (40)
trailers (the "Trailer Storage Area"), and (iii) another portion of Parcel No.
46 as shown by the shaded area on Exhibit "D-1" attached hereto and made a part
hereof for the Lessee's use for purposes of vehicular and pedestrian ingress and
egress (the "Phase I Access Area"), all upon the terms and provisions
hereinafter contained; and
WHEREAS, subsequent to the Lessor's substantial completion of the
construction of the Phase II Building on a portion of the remaining lands of
Parcel No. 46, the Lessor desires to permit the Lessee to also utilize (i)
another portion of Parcel No. 46 as shown by the shaded area on Exhibit "C-2"
attached hereto and made a part hereof for the Lessee's use for the parking of
an additional forty (40) vehicles (the "Phase II Parking Area"), and (ii)
another portion of Parcel No. 46 as shown by the shaded area on Exhibit "D-2"
attached hereto and made a part hereof for the Lessee's use for purposes of
vehicular and pedestrian ingress and egress (the "Phase II Access Area"), all
upon the terms and provisions hereinafter contained; and
WHEREAS, the Phase I Parking Area and the Phase II Parking Area are
hereinafter collectively shown as the shaded area on Exhibit "C-3" attached
hereto and made a part hereof and are hereinafter collectively referred to as
the "Parking Area"; and
WHEREAS, the Phase I Access Area and the Phase II Access Area are
hereinafter collectively shown as the shaded area on Exhibit "D-3" attached
hereto and made a part hereof and are hereinafter collectively referred to as
the "Access Area"; and
WHEREAS, the Lessee desires to lease the Building from the Lessor and
to utilize the Parking Area, the Trailer Storage Area and the Access Area, all
upon the terms and provisions hereinafter contained.
NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) to
each in hand paid, the receipt of which is hereby acknowledged, and the mutual
covenants, promises and agreements herein set forth, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged between the parties, the Lessor and Lessee, intending to be legally
bound, hereby agree as follows:
1. Subdivision of Parcel No. 49. Promptly after the date of the
execution of this Lease first above written, the Lessor shall, at its sole cost
and expense, file all submissions necessary for, and diligently and in good
faith pursue to final approvals, the subdivision of Parcel No. 49 into Parcel
No. 49A and Parcel 49B and, thereafter, or concurrently therewith, the Lessor
shall combine Parcel No. 46 and Parcel No. 49A into one (1) contiguous parcel of
land to form the Real Property.
2. Construction of the Phase II Building. The Lessor shall, promptly
after the date of the execution of this Lease first above written and at the
Lessor's sole cost and expense, commence the construction of the Phase II
Building as hereinafter more particularly set forth. The Lessor shall,
thereafter, diligently and in good faith, pursue to completion the construction
of the Phase II Building.
3. Lease and Use of the Building; Use of the Parking Area, the Access
Area and the Trailer Storage Area.
(a) Lessor does hereby demise and let unto the Lessee the
Building and the Lessee does hereby hire and rent from the Lessor the Building
upon the terms and conditions set forth in this Lease. The
<PAGE> 3
use of the Building by Lessee shall be only for general office space and for use
as a warehouse/distribution center for the warehousing and distribution of goods
and products which do not pose a serious threat of environmental risk to the
Lessor, the Building or the Real Property or which are not highly flammable
goods and products which would not pose a serious threat of risk of fire to the
Lessor or the Building, and no other uses shall be conducted from the Building.
All of such uses shall be subject to the covenants, terms and conditions
hereinafter contained and the covenants, conditions and restrictions applicable
to the Park. The Lessee shall not carry on any unlawful business in or about the
Building.
(b) The Lessee may utilize the Parking Area only for the
parking of vehicles and may utilize the Trailer Storage Area only for the
parking or storage of excess trailers and other vehicles and may utilize the
Access Area only for vehicular and pedestrian ingress and egress. The Lessee
shall not park, and shall use reasonable good faith efforts to prohibit its
agents, employees, visitors or invitees from parking, within the Access Area at
any time and the Lessee shall use reasonable good faith efforts to keep the
Access Area open and accessible at all times to provide emergency vehicle access
to and through the Real Property.
4. Term.
(a) The term of this Lease (the "Term") shall be for a
period of ten (10) years and six (6) months from the Phase I Commencement Date
(hereinafter defined) unless the Term is otherwise extended pursuant to the
provisions of Paragraphs 38 or 39 of this Lease. The Term of this Lease shall,
with respect to the Phase I Building, commence on approximately June 1, 2000
(the "Anticipated Phase I Commencement Date"), but the exact date shall be that
date (the "Phase I Commencement Date") which is the later to occur of (i) the
date upon which the Lessor has substantially completed the construction of the
Phase I Lessor's Improvements (hereinafter defined), or (ii) June 1, 2000. The
parties anticipate that by (i) no later than April 1, 2000, the Lessor shall
cause the Contractor (hereinafter defined) to commence the construction of the
Phase I Lessor's Improvements, (ii) no later than April 15, 2000, the Lessor
shall provide the Lessee with construction access to the office portion of the
Phase I Building, subject to the Lessee's Early Access Compliance Requirements
(hereinafter defined), in order for the Lessee's telecommunications contractor
to commence the installation of the Lessee's telecommunications wiring, (iii) no
later than May 1, 2000, the Lessor shall provide the Lessee with construction
access to the warehouse portion of the Phase I Building, subject to the Lessee's
Early Access Compliance Requirements, in order for the Lessee's contractor to
commence the installation of the Lessee's racking systems within the warehouse
portion of the Phase I Building (the "Anticipated Phase I Racking Installation
Date"), (iv) no later than May 15, 2000, the Lessor shall provide the Lessee
with access to either of the front or rear office area(s) of the Phase I
Building, subject to the Lessee's Early Access Compliance Requirements, in order
for the Lessee to interview potential employees, and (v) no later than the
Anticipated Phase I Commencement Date (i.e., by no later than June 1, 2000), the
Lessor shall substantially complete the construction of the Phase I Lessor's
Improvements, subject to the Lessor' s subsequent completion of any punch list
items with respect thereto. Possession of the Phase I Building for purposes of
the Lessees's occupancy thereof shall be delivered to the Lessee on the Phase I
Commencement Date in a substantially completed condition with respect to the
Phase I Lessor's Improvements, all as set forth in Paragraph 20 of this Lease.
(b) The Term of this Lease shall, with respect to the
Phase II Building, commence on approximately October 15, 2000 (the "Phase II
Outside Completion Date"), but the exact date shall be that date (the "Phase II
Commencement Date") upon which the Lessor has substantially completed the
construction of the Phase II Lessor's Improvements (hereinafter defined). The
parties further anticipate that by (i) no later than September 15, 2000, the
Lessor shall provide the Lessee with construction access to the warehouse
portion of the Phase II Building, subject to the Lessee's Early Access
Compliance Requirements, in order for the Lessee's contractor to commence the
installation of the Lessee's racking systems within the warehouse portion of the
Phase II Building (the "Anticipated Phase II Racking Installation Date"), (ii)
no later than October 1, 2000, the Lessor shall provide the Lessee with access
to the Phase II Building, subject to the Lessee's Early Access Compliance
Requirements, for the Lessee to begin to deliver product into the
<PAGE> 4
Phase II Building (the "Anticipated Phase II Product Delivery Date"), and (iii)
no later than the Phase II Outside Completion Date, the Lessor shall
substantially complete the construction of the Phase II Lessor's Improvements,
subject to the Lessor's subsequent completion of any punch list items with
respect thereto. Possession of the Phase II Building for purposes of the
Lessee's occupancy thereof shall be delivered to the Lessee on the Phase II
Commencement Date with respect to the Phase II Lessor's Improvements, all as set
forth in Paragraph 20 of this Lease.
(c) The Term shall expire, unless otherwise extended
pursuant to the provisions of Paragraphs 38 and 39 of this Lease, at 12:00
midnight on that date which is ten (10) years and six (6) months following the
Phase I Commencement Date (the "Termination Date"). Anything contained in this
Lease to the contrary notwithstanding, the Termination Date shall be the same
date for the termination of this Lease with respect to both the Phase I Building
and the Phase II Building and, therefore, the Term with respect to the entire
Building shall expire on the Termination Date. Upon the Termination Date, this
Lease shall terminate and the Lessee shall surrender the entire Building (i.e.,
the Phase I Building and the Phase II Building and the Phase III Building
(hereinafter defined), if applicable) to the Lessor in accordance with the terms
and conditions of this Lease.
(d) With respect to the Lessee's early access to the
Building, or portions thereof, as hereinabove expressly set forth in Paragraphs
4(a) and (b) above, the Lessee shall have access to those portions of the
Building as hereinabove expressly provided prior to the Phase I Commencement
Date and the Phase II Commencement Date, as the case may be, for the sole
purposes as expressly provided in Paragraphs 4(a) and (b) above; provided,
however, such early access by the Lessee into such portions of the Building
prior to the Phase I Commencement Date with respect to early access to the Phase
I Building, and prior to the Phase II Commencement Date with respect to early
access to the Phase II Building, shall all be subject to the Lessee's compliance
with the following qualifications and limitations (collectively, the "Lessee's
Early Access Compliance Requirements"): (i) the Lessee shall have such early
access only to such applicable portions of the Building upon which the Lessor
has substantially completed the construction of the applicable Lessor's
Improvements (hereinafter defined) as hereinafter set forth; (ii) the Lessee
shall provide to the Lessor, prior to such early access by the Lessee,
acceptable certificates of all insurance policies which the Lessee is required
to obtain under this Lease; (iii) the Lessee's early access, prior to the Phase
I Commencement Date or the Phase II Commencement Date, as the case may be, shall
be coordinated with the Contractor in order to minimize any interference with
the Lessor's construction of the Phase II Building and the applicable Lessor's
Improvements in the Phase I Building and/or the Phase II Building; and (iv) the
Lessee shall enter the Building and install the Lessee's equipment, racking and
the Lessee's Improvements (hereinafter defined) therein prior to the applicable
Commencement Date at the Lessee's sole risk, cost and expense and the Lessee
shall indemnify, defend and hold the Lessor harmless from and against any
damages, costs, expenses or claims incurred by the Lessor arising out of the
Lessee's negligence or willful misconduct in connection with the Lessee's entry
into the Building prior to such applicable Commencement Date.
(e) (A) Anything contained in this Lease to the contrary
notwithstanding, (i) if the construction of the Phase I Lessor's Improvements
have not been substantially completed by that date which is fifteen (15) days
after the Anticipated Phase I Commencement Date (the "Phase I Commencement
Damages Date"), or (ii) if the Lessor has not provided the Lessee with
construction access to the warehouse portion of the Phase I Building in order
for the Lessee's contractor to commence the installation of the Lessee's racking
systems within the warehouse portion of the Phase I Building by that date which
is fifteen (15) days after the Anticipated Phase I Racking Installation Date
(the "Phase I Racking Damages Date")(provided, however, such Anticipated Phase I
Commencement Date, Anticipated Phase I Racking Installation Date, Phase I
Commencement Damages Date and the Phase I Racking Damages Date shall all be
automatically extended for delays caused by Force Majeure (hereinafter defined)
or delays caused by, or attributable to, the Lessee), then the Lessee may
require the Lessor to pay to the Lessee, as compensation for damages and not as
a penalty, and the Lessee's
<PAGE> 5
sole remedy for any such delay shall be the sum of One Thousand Eighty-Five and
00/100 Dollars ($1,085.00) per day for each day of delay in the substantial
completion of the construction of the Phase I Lessor's Improvements after the
Phase I Commencement Damages Date or for each day of delay in providing the
Lessee with construction access to the warehouse portion of the Phase I Building
in order for the Lessee's contractor to commence installation of the Lessee's
racking systems in the warehouse portion of the Phase I Building after the Phase
I Racking Damages Date (subject to an automatic extension thereof due to delays
caused by Force Majeure or delays caused by, or attributable to, the Lessee);
provided, however, if both of such delays by the Lessor shall occur, then the
Lessee shall only be entitled to recover such damages of One Thousand
Eighty-Five and 00/100 Dollars ($1,085.00) per day for both delays and not the
sum of Two Thousand One Hundred Seventy and 00/100 Dollars ($2,170.00) per day
(i.e., the Lessee may not recover double damages).
(B) In addition, (i) if the Phase II Building or the
Phase II Lessor's Improvements have not been substantially completed by that
date which is fifteen (15) days after the Phase II Outside Completion Date (the
"Phase II Commencement Damages Date"), or (ii) if the Lessor has not provided
the Lessee with construction access to the warehouse portion of the Phase II
Building in order for the Lessee's contractor to commence the installation of
the Lessee's racking systems within the warehouse portion of the Phase II
Building by that date which is fifteen (15) days after the Anticipated Phase II
Racking Installation Date (the "Phase II Racking Damages Date"), or (iii) if the
Lessor has not provided the Lessee with access to the Phase II Building in order
for the Lessee to begin to deliver product into the Phase II Building by that
date which is fifteen (15) days after the Anticipated Phase II Product Delivery
Date (the "Phase II Product Delivery Damages Date") (provided, however, such
Phase II Outside Completion Date, Anticipated Phase II Racking Installation
Date, Phase II Commencement Damages Date, Phase II Racking Damages Date,
Anticipated Phase II Product Delivery Date and Phase II Product Delivery Damages
Date shall all be automatically extended for delays caused by Force Majeure or
delays caused by, or attributable to, the Lessee), then the Lessee may require
the Lessor to pay to the Lessee, as compensation for damages and not as a
penalty, and the Lessee' sole remedy for any such delay, shall be the sum of
Nine Hundred Seventy-Five and 00/100 Dollars ($975.00) per day for each day of
delay in the substantial completion of the construction of the Phase II Building
or the Phase II Lessor's Improvements after the Phase II Commencement Damages
Date or for each day of delay in providing the Lessee with construction access
to the warehouse portion of the Phase II Building in order for the Lessee's
contractor to commence installation of the Lessee's racking systems in the
warehouse portion of the Phase II Building after the Phase II Racking Damages
Date or for each day of delay in providing the Lessee with access to the Phase
II Building in order for the Lessee to begin to deliver product into the Phase
II Building after the Phase II Product Delivery Damages Date (subject to an
automatic extension thereof due to delays caused by Force Majeure or delays
caused by, or attributable to, the Lessee); provided, however, if both of such
delays by the Lessor shall occur, then the Lessee shall only be entitled to
recover such damages of Nine Hundred Seventy-Five and 00/100 Dollars ($975.00)
per day for both delays and not the sum of One Thousand Nine Hundred Fifty and
00/100 Dollars ($1,950.00) per day (i.e., the Lessee may not recover double
damages). In addition, if the construction of (W) the Phase I Lessor's
Improvements have not been substantially completed by July 1, 2000, or (X) the
Phase II Building and the Phase II Lessor's Improvements have not been
substantially completed by November 15, 2000, then , in either of such events,
the Lessor shall use its reasonable efforts to locate alternate, short-term
space for the Lessee's conduct of its business (the "Alternate Space") until
such time as the Lessor has substantially completed the construction of the
Phase I Lessor's Improvements and the Phase II Building and the Phase II
Lessor's Improvements; provided, however, if any such delay is caused by the
Lessor (and not the result of Force Majeure or delays caused by, or attributable
to, the Lessee), then the Lessor shall be responsible for the payment of all
rent with respect to the Alternate Space, but if any such delay is
<PAGE> 6
caused by, or attributable to, the result of Force Majeure or delays caused by,
or attributable to, the Lessee, then the Lessee shall be responsible for the
payment of all rent with respect to the Alternate Space. In either event,
however, the Lessor shall waive any leasing fees or commissions otherwise
payable to the Lessor as a commercial real estate broker with respect to the
leasing of such Alternate Space to the Lessee. Anything further contained in
this Lease to the contrary notwithstanding, if the construction of (Y) the Phase
I Lessor's Improvements have not been substantially completed by August 1, 2000
(subject to an extension thereof due to delays caused by Force Majeure or delays
caused by, or attributable to, the Lessee), or (Z) the Phase II Building and the
Phase II Lessor's Improvements have not been substantially completed by December
31, 2000 (subject to an extension thereof due to delays caused by Force Majeure
or delays caused by, or attributable to, the Lessee), then, in either of such
events, the Lessee shall have the right to terminate this Lease with respect to
the entire Building by providing written notice thereof to the Lessor, whereupon
this Lease shall so terminate and, thereafter, neither the Lessor nor the Lessee
shall have any further liability and obligations under this Lease.
(f) Any provisions of this Lease to the contrary
notwithstanding, the Lessee's obligation to commence paying Rent (hereinafter
defined) with respect to the Phase I Building shall begin on the earlier of (i)
the date that the Lessee actually commences its full business operations from
the Phase I Building without any material interference with the Lessee's
business operations by the Lessor as a result of the Lessor's completion of its
construction activities within the Building (provided, however, the Lessee's
early access to the Phase I Building as provided in Paragraph 4(d) above and as
necessary for the Lessee to construct the Phase I Lessee's Improvements pursuant
to Paragraph 20 shall not be deemed to be the Lessee's commencement of its full
business operations from the Phase I Building), or (ii) the date of substantial
completion of the construction of the Phase I Lessor's Improvements. The
Lessee's obligation to commence paying Rent with respect to the Phase II
Building shall begin on the earlier of (i) the date that the Lessee actually
commences its full business operations from the Phase II Building without any
material interference with the Lessee's business operations by the Lessor as a
result of the Lessor's completion of its construction activities within the
Building (provided, however, the Lessee's early access to the Phase II Building
as provided in Paragraph 4(d) above and as necessary for the Lessee to construct
the Phase II Lessee's Improvements pursuant to Paragraph 20 shall not be deemed
to be the Lessee's commencement of its full business operations from the Phase
III Building), or (ii) the date of substantial completion of the construction of
the Phase II Lessor's Improvements. For purposes of this Lease, "substantially
complete", "substantially completed" or "substantial completion" shall mean that
construction of the applicable Lessor's Improvements have been completed in
accordance with the Plans and Specifications set forth on Exhibits "E-1" or
"E-2" respectively attached hereto and made a part hereof (other than for de
minimus field changes and construction variations), subject to the completion of
any punch list items, and that the Lessor has obtained plans approved by the
Pennsylvania Department of Labor and Industry with respect to such applicable
Lessor's Improvements and provided that the Lessor's Improvements have been
completed so as to permit the lawful use and occupancy thereof. The Lessor shall
notify the Lessee no less than ten (10) days prior to the anticipated Phase I
Commencement Date and the anticipated Phase II Commencement Date with respect to
the Lessor's anticipated substantial completion of the Phase I Lessor's
Improvements and the Phase II Building and the Phase II Lessor's Improvements.
Upon the Termination Date, this Lease shall automatically terminate and the
Lessee shall surrender the Building to the Lessor in accordance with the terms
and conditions of this Lease. The Lessor and the Lessee hereby acknowledge and
agree that the Lessee may, upon the Termination Date, elect to either (i) remove
the Lessee's racking from the Building provided, however, if the Lessee elects
to do so, then the Lessee shall cut all bolts and other fasteners which are used
to secure such racking to the floor so that they are completely flush with the
floor and then fill and grout such areas so that the affected portions of the
floor are left smooth and not pitted, or (ii) leave the Lessee's racking in the
Building, whereupon such
<PAGE> 7
racking shall automatically become the property of the Lessor.
5. Minimum Rent. Lessee shall pay to Lessor as minimum rent (the
"Minimum Rent") for the Building the following:
(a) Commencing on the Phase I Commencement Date and
continuing thereafter during the next approximately four (4) months through the
day immediately preceding the Phase II Commencement Date, the monthly Minimum
Rent for the Lessee's lease of the Phase I Building shall be Thirty-Three
Thousand and 00/100 Dollars ($33,000.00), which shall be payable in equal
monthly installments of Thirty-Three Thousand and 00/100 Dollars ($33,000.00)
each, based upon an annual Minimum Rent of Three and 60/100 Dollars ($3.60) per
square foot multiplied by the total number of square feet contained in the Phase
I Building (i.e., 110,000 square feet).
(b) Commencing on the Phase II Commencement Date and
continuing thereafter during the next twelve (12) months through the day
immediately preceding the first (1st) anniversary of the Phase II Commencement
Date, the total annual Minimum Rent for the entire Building (i.e., the Phase I
Building and the Phase II Building) shall be, subject to adjustment as
hereinafter provided, Seven Hundred Fifty-Two Thousand Four Hundred and 00/100
Dollars ($752,400.00), payable in equal monthly installments of Sixty-Two
Thousand Seven Hundred and 00/100 Dollars ($62,700.00) each (based upon an
annual Minimum Rent of Three and 60/100 Dollars ($3.60) multiplied by the total
number of square feet of space contained in the entire Building (i.e., the Phase
I Building and the Phase II Building, or 209,000 square feet). The Phase II
Building shall contain ninety-nine thousand (99,000) square feet of space as
measured by the Lessor's architect or engineer (and verified by the Lessee) from
structural line to structural line of the Phase II Building (the "structural
line" shall be the outside face of the structural steel of the Phase II
Building). If the Phase II Building contains less than ninety-nine thousand
(99,000) square feet of space, then the Minimum Rent for the Phase II Building
shall be reduced to reflect the actual number of square feet of space contained
in the Phase II Building.
(c) Commencing on the first (1st) anniversary of the
Phase II Commencement Date and continuing thereafter on each anniversary date
thereof through the Termination Date (each of said dates is hereinafter referred
to as an "Adjustment Date"), the annual Minimum Rent shall be increased by
adding to the Minimum Rent which was in effect for the lease year immediately
preceding the applicable Adjustment Date that amount which is determined by
multiplying the annual Minimum Rent which was in effect for the lease year
immediately preceding the applicable Adjustment Date by two percent (2%).
(d) The Minimum Rent only attributable to each of the
Abatement Months (hereinafter defined) shall be abated and the Lessee shall not
be obligated to pay the Minimum Rent attributable to the Phase I Building, the
Phase II Building or the Phase III Building, as the case may be, for the
Abatement Months. With respect to the following phases of the Building, the
following months of Minimum Rent only shall be abated (collectively, the
"Abatement Months"): (i) with respect to the Phase I Building, the Minimum Rent
only attributable to the first two (2) months of the first (1st) lease year of
the Term applicable only to the Phase I Building (i.e., the first and second
month immediately following the Phase I Commencement Date) shall be abated, (ii)
with respect to the Phase II Building, the Minimum Rent only attributable to the
first two (2) months of the first (1st) lease year of the Term applicable only
to the Phase II Building (i.e., the first and second month immediately following
the Phase II Commencement Date) shall be abated, and (iii) with respect to the
Phase III Building (if the Lessee properly exercises its Expansion Option as
hereinafter expressly provided in Paragraph 39 of this Lease), the Minimum Rent
only attributable to the first two (2) months of the first (1st) lease year of
the Term applicable only to the Phase III Building (if any) (i.e., the first and
second month immediately following the Phase III Commencement Date (hereinafter
defined)) shall be abated. During the Abatement Months, the Minimum Rent only
attributable to the applicable Phase of the Building shall be abated and the
Lessee shall not be obligated to pay the Minimum Rent attributable to such
applicable Phase I Building, the Phase II Building or the Phase III Building
only during each of the applicable
<PAGE> 8
Abatement Months; provided, however, the Lessee shall be responsible for the
payment of all Additional Rent (hereinafter defined) during all of the Abatement
Months.
(e) In each instance, the Minimum Rent shall be payable
in advance, without prior notice or demand and without any right of offset of
the Lessee (except as hereinafter expressly provided), at the address of the
Lessor, the first of such monthly installments with respect to the Phase I
Building to be payable within ten (10) days after notice from the Lessor that
the Phase I Commencement Date has occurred (or shall occur on a date certain)
and, thereafter, on or before the first day of each month and the first of such
monthly installments with respect to the Phase II Building to be payable within
ten (10) days after notice from the Lessor that the Phase II Commencement Date
has occurred (or shall occur on a date certain) and, thereafter, on or before
the first day of each month, all of which is subject to the Minimum Rent
abatement provisions during the Abatement Months as set forth in Paragraph 5(d)
above. In the event that any Minimum Rent or Additional Rent (the Minimum Rent
and the Additional Rent are hereinafter collectively referred to as the "Rent")
is not received by Lessor on the date set forth for payment, then Lessee shall
pay to Lessor (i) a late fee equal to five percent (5%) of the delinquent
installment of Rent (the "Late Fee"), (ii) interest on such delinquent
installment at a rate equal to the "Prime Rate of Interest" published from time
to time in the "Money Mart" Section of The Wall Street Journal (the "Prime
Rate") plus three percent (3%) from the date that such installment was due
through the date that such installment is actually received by the Lessor (the
"Late Interest"), and (iii) all reasonable costs and charges incurred by Lessor
in connection with its collection of the late payment (collectively, the "Late
Costs"), all of which shall be due under this Lease as, and shall become,
Additional Rent. If any month of the Term, or if the period of time between the
Phase I Commencement Date and the day immediately preceding the Phase II
Commencement Date, contain, in either event, less than a full calendar month,
then the Rent shall be pro-rated for the actual number of days contained in such
month or during such period of time. The foregoing notwithstanding, the Lessor
hereby agrees to waive its right to collect the Late Fee and the Late Interest
only two (2) times in any period of twelve (12) consecutive months during the
Term of this Lease if the Lessor receives the delinquent installment of Rent
from the Lessee within ten (10) days following the date upon which the Lessor
has provided the Lessee with a written notice stating that the Lessor has not
received the installment of Rent when due.
6. Security Deposit. The Lessee has delivered to the Lessor on or
before the date of this Lease the aggregate sum of Sixty-Two Thousand Seven
Hundred and 00/100 Dollars ($62,700.00) as the security deposit under this Lease
(together with any interest earned thereon, the "Deposit"). The Deposit shall be
applied by the Lessor as security for the full and faithful performance by
Lessee of Lessee's obligations under this Lease and for the payment of repairing
any damages to the Building, the Parking Area, the Trailer Storage Area or the
Access Area which arise during this Lease and for which the Lessee is liable
hereunder in either event, which Lessee fails to perform in accordance with the
terms of this Lease after any notice from the Lessor which is required to be
provided under this Lease has been so provided and after the expiration of any
applicable cure period therefor without such cure having been made. The Deposit
shall be held in a separate, interest-bearing security deposit account (such
account shall not be co-mingled with Lessor's funds) in a financial institution
of Lessor's choice. Interest accruing while the Deposit is in the account shall
be charged to the Lessee's Employer Identification Number 22-2273840. Upon the
termination of this Lease, the portion of the Deposit then being held by the
Lessor hereunder, less any amount applied for damages caused by the Lessee or
sums due Lessor for any breach or default under this Lease by Lessee, will be
promptly refunded to the Lessee.
7. Property Taxes.
(a) The Lessee shall pay to the Lessor any and all real
property taxes and assessments attributable to the Building and the Real
Property payable for the Term of this Lease including, but not limited to, taxes
resulting from any increases in the assessed value of, or for improvements made
to, the Building and the Real Property (collectively, the "Property Taxes"). The
Property Taxes for which the Lessee
<PAGE> 9
shall be responsible for payment shall be all Property Taxes which are incurred
during, or attributable to, all periods of time within the Term and any Property
Taxes which are attributable to a period of time which is prior to the
commencement of the Term or which extends beyond the Term shall be pro rated so
that the Lessee's portion of Property Taxes shall be only that portion which is
incurred during, or attributable to, the Term. The Lessee's payment of such
Property Taxes shall be payable by Lessee, as Additional Rent to Lessor either:
(i) within thirty (30) days following written notice of the total amount thereof
from Lessor to Lessee, together with copies of receipted tax bills for prior
years requested by Lessee not previously delivered to Lessee, but in no event
more than ten (10) days prior to the final day of any applicable "rebate period"
or "discount period" for the payment of such Property Taxes, or (ii) in twelve
(12) equal monthly installments pursuant to the Property Tax Budget (hereinafter
defined) as hereinafter set forth. The Lessor shall provide to the Lessee a copy
of the bill or invoice for such Property Taxes which Lessor receives from the
applicable taxing authority, together with a written explanation indicating in
reasonable detail the manner in which the Lessor calculated the amount of
Property Taxes due by the Lessee pursuant to this Paragraph 7. In addition, the
Lessor shall provide to the Lessee, upon the request of the Lessee, copies of
the "paid" tax bills for the Property Taxes paid with respect to the Building
and the Real Property during the Term.
(b) Anything contained in Paragraph 7(a) above or
elsewhere in this Lease to the contrary notwithstanding, if the Property Taxes
attributable solely to the Phase I Building and the Phase I Land (hereinafter
defined) for the first twelve (12) months of the Term following the Phase I
Commencement Date (provided, however, such first year Property Taxes
attributable to the Phase I Building and the Phase I Land shall be finally
determined only after the Lessor's completion of any and all tax assessment
appeals with respect thereto) exceed Sixty Thousand Five Hundred and 00/100
Dollars ($60,500.00) (i.e., $0.55 per square foot of space contained in the
Phase I Building), then any such excess therein (any such excess above such
$0.55 per square foot of space contained in the Phase I Building is hereinafter
referred to as the "Phase I First Year Excess Property Tax Amount") shall be
paid for by the Lessor throughout the Term; provided, however, the Lessee shall
continue to be responsible for any and all increases in the Property Taxes
attributable to the Phase I Building and the Phase I Land (other than the Phase
I First Year Excess Property Tax Amount, for which the Lessor shall be
responsible) resulting from any cause, such as, but not limited to, millage
increase, re-assessments and so forth. For purposes of this Paragraph 7, the
term "Phase I Land" shall mean only that certain portion of Parcel No. 46
containing approximately 8.31 acres of land as more particularly shown as the
shaded area on Exhibit "A-5" attached hereto and made a part hereof.
Accordingly, as of the date of this Lease, Parcel No. 46 contains approximately
16.472 acres of land, and 8.31 acres of which is the Phase I Land and,
therefore, the Phase I Land is comprised of 50.5% of all of Parcel No. 46 (such
percentage having been determined by dividing the total number of acres
contained in the Phase I Land (i.e., 8.31 acres) by the total number of acres
contained in all of Parcel No. 46 (i.e., 16.472 acres)). As of the date of this
Lease, Property Taxes, in Luzerne County, Pennsylvania, are determined based
upon the sum of (i) an assessment based upon the value of the improvements, and
(ii) another assessment based upon the value of the land. For purposes of
illustration only, if, based upon the final determination of the property tax
assessment with respect to Parcel No. 46 and the Phase I Building (i.e.,
following the final determination of the property tax assessment with respect to
Parcel No. 46 and the Phase I Building and after the Lessor's final completion
of any and all property tax assessment appeals with respect to such property tax
assessment), the total Property Taxes with respect to the Phase I Building and
all of Parcel No. 46 for the first twelve (12) months following the Phase I
Commencement Date is $66,000 and, if such amount of Property Taxes is comprised
of $60,000.00 attributable to the improvements (i.e., the Phase I Building) and
if the remaining $6,000.00 of such total amount of Property Taxes is
attributable to the land portion of the assessment (i.e, the entire Parcel No.
46), then, of such $6,000.00 amount attributable to the land assessment with
respect to all of Parcel No. 46, $3,030.00 of such land portion of the Property
Taxes shall be deemed to be applicable to the Phase I Land (i.e., 50.5% of
$6,000.00). Accordingly, the total amount of Property Taxes attributable to the
Phase I Building and the Phase I Land, during the first twelve (12) months of
the Term following the Phase I Commencement Date (as shall be determined
following the final conclusion of any and all property tax assessment appeals)
would be $63,030 (i.e., $60,000 attributable to the Phase I Building plus
$3,030.00
<PAGE> 10
attributable to the Phase I Land) and , therefore, the Phase I First Year Excess
Property Tax Amount would be $2,530.00 (i.e., $63,030.00 less $60,500.00) and
the Lessor would, therefore, throughout the Term, be responsible for the payment
of the Phase I First Year Excess Property Tax Amount only and the Lessee would
be responsible for all other Property Taxes. Anything contained in this Lease to
the contrary notwithstanding, if the total Property Taxes with respect to the
Phase I Building and the Phase I Land for the first twelve (12) months following
the Phase I Commencement Date (as shall be determined following the final
conclusion of any and all property tax assessment appeals and as the same shall
be calculated as hereinabove provided) is equal to, or less than, $60,500, then
the Phase I First Year Excess Property Tax Amount shall be -0- and, therefore,
the Lessor shall have no responsibility for the payment of any Phase I First
Year Excess Property Tax Amount throughout the Term of the Lease.
(c) Anything contained in this Lease to the contrary
notwithstanding, if the Lessor's lender(s), from time to time, requires the
monthly payment to, and escrow of, Property Taxes with Lessor's lender, then the
Lessor may, at any time during the Term, elect to provide the Lessee with a
budget of the annual Property Taxes based upon the current or prior year's, tax
bill or the Lessor's good faith estimate of the tax bills to be received in the
applicable calendar year; provided, however, Lessor's estimate(s) shall be made
based upon the approved budgets of the applicable taxing authorities and the
approved millages therefrom and multiplied by the then applicable assessments
(the "Property Tax Budget"). The Lessor's preparation of the Property Tax Budget
shall be the Lessor's good faith estimate thereof only and the Lessee shall be
responsible for the full payment of any and all actual Property Taxes (other
than the Phase I First Year Excess Property Tax Amount, if any, as determined in
Paragraph 7(b) above) irrespective of the amounts therefor set forth in the
Property Tax Budget. If the Lessor elects to prepare a Property Tax Budget as
hereinabove set forth, then the Lessee shall pay to the Lessor on the first
(1st) day of each calendar month during the Term one-twelfth (1/12th) of the
amount set forth in the Property Tax Budget. As soon as reasonably practicable
after the Lessor's receipt of the actual tax bill, the Lessor shall provide the
Lessee with an invoice indicating the difference between the amounts of Property
Taxes actually due and the amounts paid thereon by the Lessee pursuant to the
Property Tax Budget, together with copies of paid bills required by the Lessee.
The Lessee shall, within thirty (30) days after the Lessee's receipt of such
invoice, pay to the Lessor any amount set forth therein which represents an
underpayment of the amount of Property Taxes actually due. If, however, the
amount paid by the Lessee toward all of the Property Taxes pursuant to the
Property Tax Budget exceeds the actual amounts therefor, then the Lessor shall
credit such excess amount against the Lessee's next monthly payment(s) of the
budgeted Property Taxes unless such refund would occur following the Termination
Date, in which event the Lessor will promptly refund such overpayment to the
Lessee.
(d) If, at any time during the Term, (i) a surcharge,
fee, excise or tax is levied or imposed upon utilities consumed at, or waste
discharged from, the Building, or upon parking spaces which are a part of the
Parking Area or the Trailer Storage Area, or for any governmental service
furnished to the Building or persons visiting or occupying the same; or (ii) the
method of taxation of real property is changed from the method in existence on
the date of this Lease, so that real estate taxes are replaced by one or more
other types of alternative tax (collectively hereinafter referred to as
"Replacement Taxes"); then, the Lessee shall pay either to the governmental body
involved or, if assessed against, or collectible by, the Lessor or if the same
shall be lienable against the Real Property or the Building, then in any of such
events, the Lessee shall pay the same to the Lessor, as Additional Rent, the
amount of such (A) surcharge, fee, excise or tax on utilities, waste, parking
spaces or governmental services; and (B) such Replacement Taxes. Nothing herein
contained is intended to require the Lessee to pay any tax levied, assessed or
imposed upon Lessor based upon Lessor's net income, excise profits or net
taxable revenues or receipts.
(e) If, at any time during the Term, the Lessee believes
that the Property Taxes are excessive, then the Lessee may request that the
Lessor appeal such property taxes to the Luzerne County Board of Assessment
Appeals or any other applicable governmental entity provided that all of the
reasonable costs and expenses associated with any such tax appeal shall be
borne, and paid for, by the Lessee and, upon
<PAGE> 11
the Lessor's receipt of such a request from the Lessee and the Lessor's receipt
of such costs and expenses from the Lessee, the Lessor shall appeal such
property tax assessment and promptly, diligently and in good faith pursue such
tax appeal. If any such appeal of such property tax assessment is successful
resulting in a refund of Property Taxes previously and actually paid by the
Lessee, then the Lessor shall promptly pay to the Lessee any refund thereof
actually received by the Lessor and to which the Lessee is entitled to a refund
pursuant to this sentence. If, however, the Lessor has failed or refused to
commence the appeal not later than fifteen (15) days prior to the deadline for
filing such appeal, then the Lessee may, at its sole cost and expense and after
providing prior notice to the Lessor (and giving the Lessor the opportunity to
appear at all hearings and meetings with the Lessee), appeal such property tax
assessment and the Lessee shall be repaid by the Lessor for any amounts
previously paid to Lessor in connection with the requested appeal.
(f) In the event that any special assessments shall be
payable in a lump sum or on an installment basis, Lessor shall elect to pay such
special assessments on the installment basis, and Lessee shall reimburse Lessor
only those installments which shall become due and payable during the Term of
this Lease. Any such installments due and payable in the years in which this
Lease commences and terminates shall be prorated proportionately.
8. Insurance.
(a) Liability Insurance. The Lessee, at its sole cost and
expense, shall secure and maintain throughout the Term commercial general
liability insurance issued by a reputable insurance company licensed to issue
such insurance in the Commonwealth of Pennsylvania and insuring both Lessor and
Lessee against death and personal injuries to one or more persons in the amount
of Three Million Dollars ($3,000,000.00) (provided, however, the aforesaid
amount shall be increased, from time to time, during the Term to reflect
increases in the rate of inflation) with respect to property damage/bodily
injury or death to one or more persons in any one occurrence in connection with
Lessee's use and occupancy of the Building and the Lessee's use of the Parking
Area, the Trailer Storage Area, the Access Area and the Real Property and
irrespective of whether such liability arises as a consequence of the negligence
of Lessor, its agents, servants or employees. Lessee shall, prior to the Phase I
Commencement Date, furnish to Lessor a certificate of the insurance company
issuing such insurance evidencing such coverage with the Lessor included as an
additional insured and such certificate shall contain a provision to the effect
that such coverage may not be canceled, materially changed or not renewed
without providing prior written notice to Lessor, such written notice shall be
given to the Lessor no less than ten (10) days prior to the effective date of
any such cancellation, change or renewal (but the Lessee shall use reasonable,
good faith efforts to require its insurer to provide no less than thirty (30)
days' prior written notice to the Lessor of the effective date of any such
cancellation, change or non-renewal).
(b) Casualty Insurance. The Lessor shall secure and
maintain throughout the Term fire, casualty and extended coverage insurance
covering the Building including all improvements now or hereafter made thereto,
for no less than eighty percent (80%) of the replacement cost thereof and
together with rent interruption insurance. Lessee shall, however, pay to the
Lessor, as Additional Rent, in connection with the Budget set forth in Paragraph
10(b) of this Lease, the total premium due for such insurance with respect to
the Building. The foregoing notwithstanding, the Lessee shall, at its sole cost
and expense, be responsible for, and pay the cost of, fire and extended coverage
insurance on all of Lessee's personal property, furniture, trade fixtures and
trade equipment located within the Building. Lessee further agrees to install in
the Building, fire extinguishers, or any other devices of a non-capital nature,
as is required by Lessor's insurance carrier and local building codes prior to
the occupancy of the Building and further agrees that in the event the insurance
company or local building codes should require change in the nature of this
equipment (but not with respect to the Building's fire suppression/sprinkler
system within the Building which shall be the responsibility of the Lessor),
Lessee will effect such changes at Lessee's sole cost and expense.
9. Utilities. The Lessee shall pay all bills, when due, which may
be incurred during the Term
<PAGE> 12
for all utilities to the Building including, without limitation, all light,
electric power, gas, heat, water (including potable and fire sprinkler water),
sewer, trash removal, telephone, cable and any and all other utilities
(collectively the "Utilities") and any and all other fees, costs, expenses or
charges applicable to all Utilities consumed by the Lessee or applicable to the
Building, the Parking Area, the Trailer Storage Area, the Access Area and the
Real Property. The Utilities to the Building shall be separately-metered and,
therefore, the Lessee shall pay all bills therefor when due directly to the
utility company providing such Utilities. Should the Lessee fail to pay any
bills as aforesaid, the Lessor shall have the right, after providing written
notice to the Lessee and Lessee's failure to pay the same within thirty (30)
days after the date of Lessor's notice, to pay the same, and the amount so paid
shall be chargeable to the Lessee as Additional Rent and shall be paid
immediately with interest allowable at the Prime Rate plus three percent (3%),
from the date of such payment by the Lessor. The Lessee shall, upon the request
of the Lessor, provide the Lessor with a signed Written Request and
Authorization Form authorizing all utility companies that provide utility
service(s) to the Building (i.e., utility services which are provided to the
Building and which are billed directly to the Lessee and not through the Lessor
as a pass-through expense) to provide to the Lessor any information requested by
the Lessor regarding the demand, usage and consumption of such utility(ies)
within the Building. The Lessor may utilize any such utility demand, usage and
consumption information for, inter alia, purposes of comparing the utilities
used within the Building with utility consumption within other buildings owned
and/or managed by the Lessor.
10. Additional Rent; Annual Budget.
(a) It is the agreement and intention of the Lessor and
the Lessee that the Minimum Rent to Lessor be "net, net, net" of any and all
Property Taxes (other than the Phase I First Year Excess Property Tax Amount, if
any), insurance costs and premiums, Utilities, maintenance costs and expenses,
management fees (as the same shall be limited as hereinafter expressly set
forth) and any and all other costs and expenses attributable to the Building
(except as otherwise expressly set forth herein), the Real Property, the Parking
Area and the Access Area, except as otherwise expressly provided for in this
Lease. Accordingly, in addition to the Lessee's payment of all Property Taxes
(other than the Phase I First Year Excess Property Tax Amount) as hereinabove
set forth in Paragraph 7(b) of this Lease, and its payment of all insurance
costs and premiums incurred by the Lessor as hereinabove set forth in Paragraph
8 of this Lease, and all Utilities as hereinabove set forth in Paragraph 9 of
this Lease, the Lessee shall also pay for (i) all Grounds Maintenance Costs
(hereinafter defined) as hereinafter set forth in this Paragraph 10 of this
Lease, and (ii) all maintenance costs and expenses, management fees (as the same
shall be limited as hereinafter expressly set forth) and any and all such other
costs and expenses attributable to the Building, the Real Property, the Parking
Area, the Trailer Storage Area and the Access Area, and (iii) all of the
maintenance costs and expenses attributable to the upkeep, maintenance and
repairs to the Building (except only for structural repairs only to the roof,
foundation and exterior walls of the Building, underground utility lines to the
Building and for keeping the roof of the Building in a watertight condition (but
not excluding costs associated with the cleaning of gutters and down spouts for
which the Lessee shall be responsible for payment) and the "Warranty Items"
(hereinafter defined) for a period of twelve (12) months after the (A) Phase I
Commencement Date as to those Warranty Items within the Phase I Building and as
to those Warranty Items which have been, or which are required under the terms
of this Lease to be, completed as of the Phase I Commencement Date, and (B)
Phase II Commencement Date, as to those Warranty Items which are required to be
completed in connection with the Lessor's construction of the Phase II Building,
all of which shall be the Lessor's sole responsibility as provided for
hereinafter). Any and all sums which may become due and payable by Lessee under
the terms of this Lease (other than the Minimum Rent), together with any late
fees, penalties or additional interest thereon for non-payment, shall
hereinafter collectively be referred to as "Additional Rent." The Lessor shall
provide to the Lessee, upon request, an allocation of the Additional Rent
showing in reasonable detail the manner in which the Additional Rent was
calculated by the Lessor.
(b) The Lessor shall provide the Lessee with an annual
budget (as the same may be amended at any time and from time to time by the
Lessor, the "Budget") setting forth the Lessor's projection
<PAGE> 13
of (i) all insurance costs and premiums, and (ii) all Grounds Maintenance Costs,
and (iii) the management fee (as the same shall be limited as hereinafter
expressly set forth), and (iv) any and all other costs and expenses included in
the Additional Rent which the Lessor reasonably and in good faith anticipates
for the current year of the Term (collectively, "Service Costs"); provided,
however, Services Costs shall not include any repairs actually covered by any
warranty or proceeds of insurance. The foregoing notwithstanding, the costs for
Utilities for the Building shall not be included in the Budget and the Lessee
shall pay for all of such Utilities directly to the company providing such
Utilities to the Building at the time that the Lessee is billed therefor.
Anything contained in this Lease to the contrary notwithstanding, the Lessor's
preparation of the Budget shall be Lessor's good faith estimate thereof only
based upon the actual costs incurred for the prior calendar year plus any
reasonably anticipated costs and expenses for the then applicable year, plus any
anticipated increases in the actual costs incurred for the prior calendar year
(provided, however, any such increases shall not exceed five percent (5%) of
said prior year's costs) and the Lessor shall have no liability for any errors
or omissions therein and the Lessee shall be responsible for the full payment of
any and all actual amounts incurred with respect to all of the foregoing items
irrespective of the amounts therefor set forth in the Budget. The Lessee shall
pay to the Lessor on the first (1st) day of each calendar month during the Term
of this Lease one-twelfth (1/12th) of the amount set forth in the Budget. As
soon as reasonably practicable after the expiration of each calendar year, the
Lessor shall provide the Lessee with an invoice indicating the difference
between the amounts actually incurred for all of the foregoing items for such
calendar year and the amounts paid thereon by the Lessee. The Lessor shall, upon
the request of the Lessee, provide the Lessee with copies of invoices and
back-up documentation used by the Lessor in preparing and providing all
Additional Rent statements to the Lessee. The Lessee shall, within thirty (30)
days after the Lessee's receipt of such invoice and the back-up documentation
reasonably requested by the Lessee, pay to the Lessor any amount set forth
therein which represents an underpayment of the amount actually incurred
therefor during such calendar year or, if the amount paid by the Lessee toward
all of the foregoing items exceeds the actual amounts incurred therefor during
such calendar year, then the Lessor shall credit to the Lessee's next monthly
payment(s) of Minimum Rent such excess amounts unless such credit for such
excess amount paid would occur following the Termination Date, in which event
the Lessor will promptly refund such overpayment to the Lessee. The foregoing
notwithstanding, if at any time during the Term, the Lessor determines that the
Budget is inaccurate, the Lessor may amend such Budget by providing written
notice thereof to the Lessee, together with supporting documentation and an
explanation of the reason why the Lessor has determined that the Budget is
inaccurate. In addition, the Lessor may at any time during the Term provide the
Lessee with an additional invoice and supporting documentation for any
significant amounts not included in the Budget, whereupon the Lessee shall,
within thirty (30) days after the Lessee's receipt of such invoice, pay to the
Lessor any amount set forth therein.
11. Maintenance of the Building; Parking Area, Trailer Storage
Area and Access Area.
(a) The Lessee shall be responsible for all repairs to
the Building (excluding only structural repairs only to the roof, foundation and
exterior walls of the Building, underground utility lines to the Building and
for keeping the roof of the Building in a watertight condition (but not
excluding costs associated with the cleaning of gutters and down spouts for
which the Lessee shall be responsible for payment) and the Warranty Items for a
period of twelve (12) months after the substantial completion thereof, all of
which the Lessor shall be responsible for) and the Lessee shall maintain the
same in good condition and repair, normal wear and tear excepted, and shall
furnish Lessor prompt written notice of any and all material accidents, fires or
other damage occurring on or to the Building. All refuse of any kind shall be
removed from the Building at reasonable intervals by, and at the sole cost of,
the Lessee.
(b) The Lessee shall also be responsible for the costs of
exterior landscape maintenance of the Real Property, the Parking Area, the
Trailer Storage Area and the Access Area (including grass cutting, the upkeep,
maintenance and replacement of all shrubs, plantings and other landscape
materials), and snow and ice removal from the Access Area, the Parking Area and
the Trailer Storage Area; provided, however, the Lessor shall provide any such
exterior landscape maintenance services to the Building and the Real Property
<PAGE> 14
and the Lessee shall reimburse the Lessor for all Grounds Maintenance Costs as
set forth in Paragraph 10 of this Lease. The Lessee shall make, and shall be
responsible for the costs and expenses associated with making, any and all other
repairs to the Building, the Parking Area, the Trailer Storage Area and the
Access Area except only for structural repairs only to the roof, foundation and
exterior walls of the Building, underground utility lines to the Building and
for keeping the roof of the Building in a watertight condition (but not
excluding costs associated with the cleaning of gutters and down spouts for
which the Lessee shall be responsible for payment) and for the Warranty Items
during the period of twelve (12) months after the substantial completion
thereof. The foregoing notwithstanding, the Lessor may, at its option, elect to
provide, or elect to have provided, any maintenance services and repairs with
respect to the Building including the mechanical, electrical, plumbing and HVAC
system(s) thereof and equipment located therein and, if the Lessor elects to
provide any such services, the Lessor may charge, and the Lessee shall pay, such
fees for such services as would otherwise be paid to outside parties on a
competitive basis. In addition, the Lessor may charge a reasonable management
fee with respect to its management of the Building and, in such event, the
Lessee shall be responsible for the payment thereof; provided, however, such
annual management fee shall equal three percent (3%) of the annual Minimum Rent
and such management fee shall be in lieu of any administrative fee or overhead
charges of the Lessor with respect to its management of the Building. In
addition, the Lessor shall make available to the Lessee the benefit of any
manufacturer's warranties that the Lessor receives from the manufacturer(s) of
any building equipment or systems with respect to the Building or the equipment
or systems located therein; provided, however, the Lessor makes no
representation or warranty to the Lessee with respect to the existence of, nor
to the extent of, any such warranty(ies). In addition, with respect to the
Lessor's Improvements and the existing improvements to the Phase I Building
(including the HVAC units, the mechanical equipment in the Building, the
structural integrity of the floors, the structural integrity of the concrete
dolly pads for the trailer loading areas, the roads and the paved areas only
(collectively, the "Warranty Items"), the Lessor shall be responsible for any
defects in the construction, workmanship, materials and equipment (but not for
ordinary maintenance, servicing and routine repairs for which the Lessee shall
be responsible) for a period of twelve (12) months after the (A) Phase I
Commencement Date as to those Warranty Items within the Phase I Building and as
to those Warranty Items which have been, or which are required under the terms
of this Lease to be, completed as of the Phase I Commencement Date, and (B)
Phase II Commencement Date as to those Warranty Items within the Phase II
Building and as to those Warranty Items which are required to be completed in
connection with the Lessor's construction of the Phase II Building; provided,
however, the Lessor shall have no responsibility for any such items if any
damages are caused by the Lessee's improper use or maintenance thereof and the
Lessor shall have no responsibility for any such items after such twelve (12)
month period. For purposes of this Paragraph 11, "Grounds Maintenance Costs"
shall be any and all costs and expenses incurred by the Lessor with respect to
the grounds maintenance and upkeep of the Real Property including, without
limitation, all landscape maintenance such as grass cutting, the upkeep,
maintenance and replacement of all shrubs, plantings and other landscape
materials, snow and ice removal from all exterior portions of the Real Property
including all sidewalks, stairways, entrances and exits, the Parking Area, the
Trailer Storage Area and the Access Area. If, during the Term of this Lease (but
not more frequently than one (1) time in any lease year), the Lessee reasonably
believes that the costs being charged by any third party vendor for any services
being provided by such vendor to the Real Property or the Building are excessive
and if the Lessee is able to procure the same services from another reputable
service provider at a cost which is significantly less than the cost that is
then being charged, then the Lessee shall so notify the Lessor thereof and the
Lessor shall be required to obtain at least two (2) competitive bids (in
addition to the Lessee's procured bid) for such services from reputable service
providers and the Lessor shall select the lowest qualified bid for such service
at the end of the then applicable contract term of the current service provider.
12. Quiet Enjoyment. If the Lessee faithfully and
diligently performs the terms of this Lease imposed on Lessee, the Lessee shall
have exclusive, peaceful possession, use, and quiet enjoyment of the Building
during the Term.
13. Waiver of Subrogation. Each party hereby waives any
and every claim which arises or may
<PAGE> 15
arise in its favor and against the other party hereto during the Term for any
and all loss or damage to any of its property located within, or upon, or
constituting a part of, the Building, which loss or damage is, or is to be,
covered, by the terms of this Lease, by valid and collectible fire and extended
coverage insurance policies, and if and to the extent reimbursement is made,
even if such loss or damage shall be brought about by default or negligence of
the other party or by its employees, agents, servants or any persons claiming
under them and each party shall include a waiver of subrogation provision in its
applicable insurance policy(ies).
14. Damage or Destruction of the Building. Except as otherwise
hereinafter set forth, in the event the Building is damaged or partially
destroyed by fire or other casualty, Lessor shall restore the same to
substantially the same condition as existed prior to the occurrence of such fire
or other casualty. However, in the event the Building shall be damaged or
destroyed by fire or other casualty during the last year of the Term to such
extent as to preclude the repair and replacement thereof within one hundred and
twenty (120) days subsequent to the date of such event, Lessor shall have the
right to either utilize the insurance proceeds, if any, to reconstruct the
Building or, in the alternative, elect to receive payment of the insurance
proceeds and terminate this Lease; provided, however, in such event, if the
Lessee properly exercises its Extension Option (hereinafter defined) pursuant to
the provisions of Paragraph 38 of this Lease, then the Lessor's right to so
terminate this Lease shall become null and void and the Lessor shall then be
obligated to so reconstruct the Building. Lessee shall not be obligated to pay
any rentals or other amounts under this Lease applicable to any period when the
Building is untenantable due to any such damage or destruction; provided,
however, the Lessee shall be obligated to pay Rent with respect to any portion
of the Building which is actually being occupied and used by the Lessee during
the period when the Building is being repaired or restored.
15. Condemnation.
(a) In the event that all or twenty-five percent (25%) or
more of the Building is taken by any condemnation or eminent domain proceedings,
then either the Lessee or Lessor shall have the right to terminate this Lease by
delivering written notice of such election to the other party, and, in such
event, all obligations of Lessee and Lessor hereunder with respect to the period
of time subsequent to such taking, shall, thereafter, terminate and this Lease
shall be null and void and of no further force and effect. If, however, less
than twenty-five percent (25%) of the Building is taken by the exercise of the
right of condemnation or eminent domain, this Lease shall continue with respect
to the remaining portion of the Building, and the Minimum Rent herein specified
to be paid by Lessee shall be ratably reduced according to the area of the
Building which is so taken. Lessor shall be entitled to assert and receive any
damages due from the condemning governmental unit or other entity exercising any
such right of condemnation or eminent domain. The foregoing notwithstanding, the
Lessee shall have the right to assert against any such condemning governmental
unit or other entity exercising any such right of condemnation or eminent domain
a claim for any damages incurred by the Lessee with respect to costs and
expenses incurred by the Lessee in connection with the relocation of its
business from the Building to another location or losses sustained to its
business as a result of the condemnation or eminent domain proceeding or with
respect to losses incurred by the Lessee with respect to the value of the
Lessee's equipment and trade fixtures and if any such award is not payable
directly to Lessee by the condemning authority, then the Lessee shall have the
right to receive such award from the award payable to the Lessor if the Lessee's
award was contained in, and made a part of, the award paid to the Lessor;
provided, however, the Lessee shall not have the right to assert any claim for
losses incurred with respect to the Lessee's loss of its leasehold interest.
(b) In the event that any material portion of the Parking
Area or the Trailer Storage Area is permanently taken by any condemnation or
eminent domain proceedings, then, unless the Lessor shall relocate such Parking
Area or Trailer Storage Area so taken to another reasonable location on the Real
Property in order to restore the parking spaces and/or the trailer storage
spaces so taken, the Lessee may elect to terminate this Lease by delivering
written notice thereof to the Lessor, whereupon all
<PAGE> 16
obligations of Lessee and Lessor under this Lease shall terminate and this Lease
shall become null and void and of no further force and effect and, thereafter,
neither the Lessor nor the Lessee shall have any further liability under this
Lease. Finally, if the access to the Real Property or the Building is
permanently taken by any condemnation or eminent domain proceedings so that the
Lessee cannot gain access to the Real Property or the Building and if reasonable
access to the Real Property or the Building cannot be restored, relocated or
otherwise provided to the Real Property and the Building, then the Lessee shall
have the right to terminate this Lease by delivering written notice thereof to
the Lessor, whereupon all obligations of Lessee and Lessor under this Lease
shall terminate and this Lease shall become null and void and of no further
force and effect and, thereafter, neither the Lessor nor the Lessee shall have
any further liability under this Lease.
16. No Waste. No waste shall be committed by the Lessee, and at
the end of the Term, the Building shall be returned to the Lessor in
substantially as good condition as existed on the Phase I Commencement Date with
respect to the Phase I Building and as existed on the Phase II Commencement Date
with respect to the Phase II Building, ordinary wear and tear and damage by
casualty or condemnation excepted.
17. Hazardous Substances.
(a) The Lessee represents and warrants to the Lessor that
the Building, the Parking Area, the Trailer Storage Area, the Access Area and
the Real Property shall be kept free from contamination by or from any hazardous
substances or hazardous waste (as such terms are defined and/or used in
applicable state or federal law or in the regulations issued thereunder
including, without limitation, the Federal Comprehensive Environmental Response,
Compensation and Liability Act) released by Lessee, its agents, employees or
contractors. The Lessee also agrees that it will not store, utilize or engage in
operations at or within the Building, the Parking Area, the Trailer Storage
Area, the Access Area and the Real Property or affecting the Building, the
Parking Area, the Trailer Storage Area, the Access Area and the Real Property
which involve the generation, manufacture, refining, transportation, treatment,
storage, handling or disposal of hazardous substances or hazardous waste,
medical waste or medical waste products or environmentally deleterious material;
provided, however, the Lessee may use and store limited quantities of those
hazardous materials as are routinely used in (i) office operations, and/or (ii)
warehouse and distribution center operations with respect to the warehousing and
distribution of household products and consumer good products for sale to the
general public provided the Lessee will at all times, at Lessee's cost and
expense, comply with and conform to all laws, statutes, ordinances, rules,
regulations, notices and orders of all governmental and regulating authorities
or any board of fire underwriters, or any insurance organization or company with
respect to the handling, storage, use and treatment of any hazardous substances
or waste on or which affect the Building, the Parking Area, the Trailer Storage
Area, the Access Area and the Real Property used, stored or released by the
Lessee, its agents, employees or contractors. The Lessee shall not cause or
permit to exist as a result of an intentional or unintentional action or
omission on its part or on the part of any of the Lessee's agents of releasing,
spilling, leaking, pumping, pouring, emitting, emptying or dumping from, on or
about the Building or the Real Property of any such hazardous substances or
waste.
(b) The Lessee shall indemnify, defend and hold harmless,
the Lessor, its successors and assigns, any officer, director, shareholder,
employee or any agent of Lessor from any and all liability, damages, costs,
claims, suits, actions, legal or administrative proceedings, interests, losses,
expenses, and attorney's fees and appellate attorneys' fees (including any such
fees and expenses incurred in enforcing this indemnity) resulting from or
arising out of, or in any way connected with, injury to, or the death of, any
person (including any indemnified party) or damage to property of any kind
wherever located and by whomever owned (including that of any indemnified party)
or otherwise arising out of, or in any way
<PAGE> 17
connected with, the presence on, in or under the Building, the Parking Area, the
Trailer Storage Area, the Access Area and the Real Property of any hazardous
substances or hazardous waste; provided, however, that it must be shown that
such hazardous substance or hazardous waste were introduced in, to or under the
Building, the Parking Area, the Trailer Storage Area, the Access Area and the
Real Property by the Lessee, or its employees, contractors, agents, invitees,
guests, or its successors, assigns or sublessees, if any. This indemnification
is an independent covenant and shall survive the expiration or earlier
termination of this Lease. Lessee will not be liable in any way for any
environmental contamination occurring prior to the Phase I Commencement Date or
resulting from acts or omissions that took place prior thereto unless caused by
the acts or omissions of the Lessee.
(c) Based solely upon those two (2) certain Phase I
Environmental Site Assessments, both prepared by Synergist, Inc., one dated
January 13, 1997 and the other dated February 12, 1999 (collectively, the "Phase
I Assessment"), the Lessor represents and warrants to the Lessee that the Lessor
has no knowledge of the existence in the Building or on the Real Property of any
contamination by or from any hazardous substances or hazardous waste (as such
terms are defined and/or used in applicable state or federal law or in the
regulations issued thereunder including, without limitation, the Federal
Comprehensive Environmental Response, Compensation and Liability Act). The
Lessor represents and warrants to the Lessee that the Phase I Assessment is the
only report prepared by or for the Lessor regarding the environmental condition
of the Real Property and that a true and complete copy of the Phase I Assessment
has been provided to the Lessee. The Lessor also agrees that it will not store,
utilize or engage in operations at or within the Building, the Parking Area, the
Trailer Storage Area, the Access Area and the Real Property or affecting the
Building, the Parking Area, the Trailer Storage Area, the Access Area and the
Real Property which involve the generation, manufacture, refining,
transportation, treatment, storage, handling or disposal of hazardous substances
or hazardous waste, medical waste or medical waste products or environmentally
deleterious material and the Lessor will at all times, at Lessor's cost and
expense, comply with and conform to all laws, statutes, ordinances, rules,
regulations, notices and orders of all governmental and regulating authorities
or any board of fire underwriters, or any insurance organizations or company
with respect to the treatment of any hazardous substances or waste on or which
affect the Building, the Parking Area, the Trailer Storage Area, the Access Area
and the Real Property. The Lessor shall not cause or permit to exist as a result
of an intentional or unintentional action or omission on its part or on the part
of any of the Lessor's agents of releasing, spilling, leaking, pumping, pouring,
emitting, emptying or dumping from, on or about the Building or the Real
Property of any hazardous substances or waste.
(d) The Lessor shall indemnify, defend and hold harmless,
the Lessee, its successors and assigns, any officer, director, shareholder,
employee or any agent of Lessee from any and all liability, damages, costs,
claims, suits, actions, legal or administrative proceedings, interests, losses,
expenses, and attorney's fees and appellate attorneys' fees (including any such
fees and expenses incurred in enforcing this indemnity) resulting from or
arising out of, or in any way connected with, injury to, or the death of, any
person (including any indemnified party) or damage to property of any kind
wherever located and by whomever owned (including that of any indemnified party)
or otherwise arising out of, or in any way connected with, the presence on, in
or under the Building, the Parking Area, the Trailer Storage Area, the Access
Area and the Real Property of any hazardous substances or hazardous waste
existing on, in, or under the Building or the Real Property, the Parking Area,
the Trailer Storage Area and/or the Access Area prior to the Phase I Building
Commencement Date, or if it is shown to have been introduced in, to or under the
Building, the Parking Area, the Trailer Storage Area, the Access Area and the
Real Property during the Term, or any extension or renewal thereof or at any
other time, by the Lessor, or its employees, contractors, agents, invitees,
guests or other lessees. This indemnification is an independent covenant and
shall survive the expiration or earlier termination of this Lease.
<PAGE> 18
18. Compliance with Laws. The Lessor shall construct the Lessor's
Improvements in such a manner so that the Lessor's Improvements shall meet and
comply with the current building codes of Hazle Township, Luzerne County, the
Commonwealth of Pennsylvania and all Federal requirements (other than for the
ADA (hereinafter defined)) including, without limitation, the Pennsylvania
Universal Accessibility Act. Lessee shall, thereafter, comply with all
requirements of duly constituted public authorities, and with the terms of any
state or federal statute, regulation, and of any local ordinance, applicable to
the Lessee or to the Lessee's use of the Building, the Parking Area, the Trailer
Storage Area and the Access Area; provided, however, the Lessee shall have the
right to contest the applicability of any such statute, regulation, ordinance or
requirements so long as the Lessee takes such measures as are reasonably
required(such as the posting of a bond or other surety) in order to assure the
Lessor that the Lessor's interests in the Building and the Real Property shall
not be jeopardized in anyway by the Lessee's contest of the applicability of any
such statute, regulation, ordinance or requirements. In addition, the Lessee
shall indemnify, defend and save Lessor harmless from any and all penalties,
fines, costs or other damages resulting from the Lessee's failure to so comply
with all of such requirements, statutes, regulations or ordinances. With respect
to the ADA, if it is finally determined in the form of a non-appealable decision
by a court of competent jurisdiction of an enforcement action that the Lessor's
Improvements (for which the Lessor is, or was, responsible for the initial
construction or renovation pursuant to the provisions of this Lease) fail to
comply with the requirements of the Americans with Disabilities Act of 1990 (the
"ADA"), as of the date of this Lease, then the Lessor shall, at the Lessor's
cost and expense, correct such Lessor's Improvements so that the Lessor's
Improvements so initially constructed by the Lessor do comply with the ADA, as
of the date of this Lease, and Lessor shall indemnify, defend and save the
Lessee harmless from an against all claims and costs (including reasonable
attorney's fees and court costs) resulting from Lessor's Improvements' failure
to so comply with the requirements of the ADA.
19. Hold Over. Except as Lessor otherwise may consent in writing,
Lessee agrees, without further notice or demand, to promptly surrender
possession of the Building to Lessor at the expiration, or earlier termination,
of this Lease. Any holding over by Lessee beyond the Term shall be under and
subject to the same terms and provisions as contained herein, except, however,
that the Minimum Rent shall, after the end of the Term, be one hundred and fifty
percent (150%) of the Minimum Rent as existed in the immediately preceding month
and, in all such events, the term of any such hold over shall be on a
month-to-month basis and shall be terminable upon thirty (30) days notice to
either party by the other.
20. Improvements to Building; Alterations.
(a) The Lessor shall, prior to (i) the Phase I
Commencement Date, substantially complete, or cause Mericle Construction, Inc.
(the "Contractor") to substantially complete, those improvements to the Phase I
Building as are more particularly described on the Plans and Specifications set
forth on Exhibit "E-1" attached hereto and made a part hereof (the "Phase I
Lessor's Improvements"), and (ii) the Phase II Commencement Date, substantially
complete, or cause the Contractor to substantially complete, the construction of
the Phase II Building and those improvements to the Phase II Building as are
more particularly described on the Plans and Specifications set forth on Exhibit
"E-2" attached hereto and made a part hereof (the "Phase II Lessor's
Improvements"). The Phase I Lessor's Improvements and the Phase II Lessor's
Improvements are hereinafter collectively referred to as the "Lessor's
Improvements". The Lessor, or the Contractor, shall construct the Lessor's
Improvements in a good and workmanlike manner.
(b) The Lessee shall substantially complete, or cause the
substantial completion of, those improvements to (i) the Phase I Building as are
more particularly described on the Plans and Specifications set forth on Exhibit
"F-1" attached hereto and made a part hereof (the "Phase I Lessee's
Improvements"), and (ii) the Phase II Building as are more particularly
described on the Plans and Specifications set forth on Exhibit "F-2" attached
hereto and made a part hereof (the "Phase II Lessee's
<PAGE> 19
Improvements"). The Phase I Lessee's Improvements and the Phase II Lessee's
Improvements are hereinafter collectively referred to as the "Lessee's
Improvements". The Lessee may commence construction of the applicable Lessee's
Improvements only after providing reasonable prior notice to the Lessor. Lessor
and Lessee shall coordinate the performance of their respective construction
activities with one another so that the Lessor and the Lessee minimize
interference with the other party's construction activities. The Lessee shall
construct, or cause to be constructed, the Lessee's Improvements in a good and
workmanlike manner. Except as provided in Subparagraph 20(c) below, the Lessee
may not make any changes, alterations or substitutions to the Lessee's
Improvements once they have been approved by the Lessor without first obtaining
the Lessor's prior written consent to any such changes, alterations or
substitutions, such consent of the Lessor shall not be unreasonably withheld.
conditioned or delayed.
(c) The Lessee may not make any structural alterations
(other than the Lessee's Improvements as hereinabove defined) to the Building
without Lessor's prior written consent, which consent shall be in the sole and
absolute discretion of the Lessor. In addition, the Lessee may not make any
other alterations, changes or improvements to the Building which affect, in any
way, the mechanical, electrical or plumbing systems of the Building without
first obtaining the Lessor's prior written consent, which consent shall not be
unreasonably withheld, conditioned or delayed. The foregoing notwithstanding,
the Lessee may, however, construct any non-structural alterations or
improvements to the Building or any other alterations or improvements which do
not affect, in any way, the mechanical, electrical or plumbing systems of the
Building after providing notice to the Lessor (along with a copy of the plans,
if any, and a list of materials to be used with respect to any such
non-structural alterations or improvements or any other alterations or
improvements which do not affect, in any way, the mechanical, electrical or
plumbing systems of the Building), but without requiring the Lessor's consent
with respect thereto. All such alterations and improvements permitted hereunder
or made with the Lessor's prior written consent as hereinabove set forth shall
become the property of the Lessor upon the termination of this Lease without the
necessity of any further notice or action on the part of the Lessor or the
Lessee and without any reimbursement or compensation therefor by the Lessor to
the Lessee; provided, however, that, notwithstanding the foregoing, so long as
the Lessee is not in default under this Lease, and, during the Term, the Lessor
shall not have title to, and Lessee shall have the right to remove, its trade
fixtures, moveable office equipment and furniture.
(d) Except as otherwise provided in this Lease, the
Lessee shall, at its own cost and expense, immediately upon the expiration or
earlier termination of this Lease, return the Building to the Lessor in
substantially as good condition as existed on the Phase I Commencement Date with
respect to the Phase I Building, ordinary wear and tear and damages by casualty
or condemnation excepted and as existed on the Phase II Commencement Date with
respect to the Phase II Building, ordinary wear and tear and damages by casualty
or condemnation excepted and, in the event that the Lessee does not do so in a
good and workmanlike manner, the Lessor may do so and, in such event, the Lessee
shall be responsible for all costs and expenses associated therewith and the
Lessor may, in addition to all other rights and remedies available to it in law
or at equity, apply the Deposit toward the same. The foregoing notwithstanding,
the Lessee shall not be obligated to remove any of the Lessor's Improvements or
those portions of the Lessee's Improvements which were constructed in the
Building (i) with the prior written approval of the Lessor and to which the
Lessor did not indicate in writing, at the time of its providing such prior
written approval for the construction thereof, that the Lessee would be under an
obligation to remove the same at the expiration or earlier termination of this
Lease, or (ii) as expressly permitted under this Lease without the Lessor's
approval; provided, however, the Lessor's Improvements and such Lessee's
Improvements shall immediately and automatically become the property of the
Lessor upon the expiration or earlier termination of this Lease without the
necessity of any further notice or action on the part of the Lessor or the
Lessee and without any reimbursement or compensation therefor by the Lessor to
the Lessee. Any Lessee's Improvements or other alterations made to the Building
either without the Lessor's prior written consent where such consent was
required, or with such prior written consent of the Lessor but to which the
Lessor indicated must be removed upon the expiration or earlier termination of
this Lease, shall be removed by the Lessee upon the expiration
<PAGE> 20
or earlier termination of this Lease and the Building shall be restored by the
Lessee to the same condition as existed as of the Commencement Date, all at the
Lessee's sole cost and expense. The Lessor and the Lessee hereby acknowledge and
agree that the Lessee may, upon the Termination Date, elect to either (i) remove
the Lessee's racking from the Building provided, however, if the Lessee elects
to do so, then the Lessee shall cut all bolts and other fasteners which are used
to secure such racking to the floor so that they are completely flush with the
floor and then fill and grout such areas so that the affected portions of the
floor are left smooth and not pitted, or (ii) leave the Lessee's racking in the
Building, whereupon such racking shall automatically become the property of the
Lessor.
(e) Whenever a period of time is prescribed in this Lease
for action to be taken by the Lessor regarding the construction of the Lessor's
Improvements, the Lessor shall not be liable or responsible for, and there shall
be excluded from the computation of any such period of time, any unavoidable
delays due to force majeure, which term shall include strikes, riots, acts of
God, shortages of labor or materials, war, governmental approvals, laws,
regulations or restrictions or any other cause of any kind whatsoever which is
beyond the reasonable control of the Lessor (collectively, "Force Majeure").
(f) If any mechanics' liens are placed upon the Building
or the Real Property as a result of Lessee's act or omission, Lessee will, upon
being notified of same, promptly remove them as a lien against the Building and
the Real Property either by payment, bonding or other method prescribed by law.
The foregoing notwithstanding, the Lessee shall have the right to contest any
such mechanic's liens provided the Lessee posts a bond or other surety
reasonably acceptable to the Lessor in order to remove any such lien against the
Building or the Real Property pending the Lessee's final resolution thereof.
21. Signs. Except as otherwise expressly set forth in this
Paragraph 21, the Lessee hereby agrees that it will not place or suffer to be
placed or maintained on any exterior door, exterior wall or window of the
Building or elsewhere on the Real Property any sign, awning or canopy, or
advertising matter of any kind, and will not place or maintain any decoration,
lettering or advertising matter on the glass of any window or exterior door of
the Building, which is not, in all events, in conformity with the rules and
regulations of the Park, without first obtaining Lessor's prior written approval
and consent, such approval and consent thereto not to be unreasonably withheld,
conditioned or delayed by the Lessor. The foregoing notwithstanding, the Lessee
shall have the right to erect, at its sole cost and expense, a tombstone sign at
the entrance to the Real Property and the Lessee shall also have the right to
affix to the exterior walls of the Building, building-mounted signage once the
Lessor has reviewed and approved the Lessee's proposed design, size, location
and method of installation of such signage, such approval not to be unreasonably
withheld, conditioned or delayed. Once the Lessor has approved the Lessee's
signage, the Lessor may not revoke or change any such approval. Lessee further
agrees to maintain such sign as may be approved by Lessor in good condition and
repair at all times and upon the expiration of this Lease, the Lessee shall, at
the direction of the Lessor and at the Lessee's cost and expense, remove any
such identification signage (leaving any pylon, monument, base, frame or other
mechanism to which the Lessee's identification sign was attached and all
lighting and electrical appurtenances thereto) and the Lessee shall repair any
damage to the Building, pylon, monument, base, frame or other mechanism to which
the Lessee's identification sign was attached as a result of the Lessee's
attachment of its signage thereto. In addition, the Lessor's name and logo shall
be included on any monument sign in front of the Building (such Lessor's sign
shall be situated on the monument sign beneath the Lessee's identification sign)
indicating that the Building is owned and managed by the Lessor (the size, style
and colors of any such Lessor's sign and logo shall be similar to Lessor's other
signs and logo within Northeastern Pennsylvania).
<PAGE> 21
22. Liability. The Lessor shall not be liable for any injury to
any person while on or in the Building or on the Real Property or for damage to
property while located in or on the Building or the Real Property, whether owned
by Lessor, Lessee or third parties, whether caused by or resulting from any act,
or omission, of Lessor or any of its respective agents, servants or employees,
or by fire, or by any other casualty or condition existing on or resulting to
the Building or the Real Property during the Term (except for acts caused
intentionally or by the negligence of Lessor, its agents, employees or
contractors or resulting from the Lessor's failure to perform its obligations
under this Lease), and Lessee shall maintain all of the insurance policies and
coverages referred to in this Lease which the Lessee is required to secure and
carry under this Lease and to insure Lessor against any loss or liability on
account of any such claim. Lessor shall not be liable for any damage to any
property at any time located within or about the Building or the Real Property
including, but not limited to, property of Lessee, by whatsoever cause (except
for acts caused intentionally or by the negligence of Lessor, its agents,
employees or contractors or resulting from the Lessor's failure to perform its
obligations under this Lease), nor shall Lessor be liable in any claim for
damages by reason of inconvenience or interruption to the business of Lessee,
irrespective of the cause therefor (except for acts caused intentionally or by
the negligence of Lessor, its agents, employees or contractors or resulting from
the Lessor's failure to perform its obligations under this Lease).
23. Assignment and Sublease.
(a) The Lessee may, at any time, sublease the Building or
any portion thereof or assign this Lease without the prior written consent of
the Lessor; provided, however, that (i) in the event of any such subletting or
assignment, the Lessee and the Guarantor (hereinafter defined) shall, except as
otherwise hereinafter expressly provided, both continue to remain liable to
Lessor for all sums due hereunder and for the performance of all covenants and
duties of Lessee, and (ii) the Lessee must prove, to the reasonable satisfaction
of the Lessor, that the business of such proposed assignee or sublessee poses no
greater fire, casualty risk, or potential for environmental contamination to the
Building than did the business of the Lessee. In the event of any sublease or
assignment by the Lessee under this Paragraph 23, the Lessee shall be
responsible, at its sole cost and expense, for performing all of the leasehold
improvements and tenant fit-out requirements (i.e., the construction of any
demising walls and so forth) required to comply with all building codes and
other governmental approvals with respect to any such sublease or assignment.
Anything contained in this Lease to the contrary notwithstanding, if the Lessee
elects to assign this Lease to an assignee which is a company designated to be
in the top 50 of the "Fortune 500" companies, as of the effective date of any
such proposed assignment, then, and in such event, upon such assignment to a top
50 "Fortune 500" company and upon such company's assumption or guaranty of all
of the Lessee's obligations under this Lease in a manner which is reasonably
acceptable to the Lessor, the Lessee and the Guarantor shall be relieved of all
further liability under this Lease.
(b) If, pursuant to the provisions of this Paragraph 23,
the Lessee subleases any portion of the Building or assigns its interest under
this Lease as permitted under this Lease, then the Lessee shall pay to Lessor
fifty percent (50%) of the Sublease Profits (hereinafter defined) when received
in respect of such sublease or assignment. The "Sublease Profits," as such term
is used in this Paragraph 23 of this Lease, shall mean any rent, consideration,
income, remuneration or other sums or value received from any sublessee or
assignee which is in excess of the Minimum Rent and all Additional Rent payable
by the Lessee under this Lease for such period of time; provided, however, in
calculating any such excess, any reasonable and direct costs and expenses
actually incurred and paid by the Lessee to secure any such sublessee or
assignee (such as reasonable leasing commissions, reasonable attorney's fees and
expenses or rent abatements or inducements or subtenant improvement allowances
and including any recapture of the Lessee's initial fit-out costs of the
Building, but not the costs of moving to the Building) shall be credited
against, and deducted from, any such rent, consideration, income or other sum
received by the Lessee in connection with any such sublease or assignment;
provided, however, Lessee's obligation to pay Rent shall in no way be reduced in
the event the rent, consideration, income or other sum received by Lessee in
connection with such sublease or assignment
<PAGE> 22
is less than the Rent payable hereunder. Nothing contained in this Paragraph 23
shall be construed as modifying, in any way, the requirements for an assignment
of this Lease or sublease of the Building pursuant to this Paragraph 23 nor
construed as modifying, in any way, the Lessee's (or the Guarantor's) continued
liability for all of the payment and performance obligations of the Lessee under
this Lease. The foregoing notwithstanding, the Sublease Profits shall be split
50/50 between the Lessor and the Lessee, but only with respect to the initial
Term of this Lease and, therefore, with respect to any subleases which occur
during either of the Extension Periods, all Sublease Profits shall be paid to,
and retained by, the Lessor and the Lessee shall have no right to any such
Sublease Profits during either of the Extension Periods.
(c) If, following a permitted sublease as hereinabove set
forth, the Lessee is in breach of any of the obligations under this Lease, then
the Lessor agrees to send a written notice of such breach to such sublessee(at
the last known address of such sublessee which was provided to the Lessor in
writing) (as well as to the Lessee) and such sublessee shall have the same time
periods provided to the Lessee hereunder in order to cure any such breach;
provided, however, if such breach is not properly cured by the Lessee within
such permitted time period, the sublessee hereunder shall have an additional ten
(10) days after the expiration of such permitted time period within which to
cure such breach. In addition, if, following a permitted assignment of this
Lease as hereinabove set forth, the assignee is in breach of the obligations
under this Lease, then the Lessor agrees to send a written notice of such breach
to the prior (i.e., assignor) Lessee (at the last known address of the Lessee
which was provided to the Lessor in writing by the Lessee) (as well as to the
then current Lessee) and the prior (i.e., assignor) Lessee shall have the same
time periods provided to the then current Lessee hereunder in order to cure any
such breach; provided, however, if such breach is not properly cured by the then
current Lessee within such permitted time period, the prior (i.e., assignor)
Lessee hereunder shall have an additional ten (10) days after the expiration of
such permitted time period within which to cure such breach.
24. Inspection of the Building. It is further agreed and
understood that the Lessor may enter the Building at any time during the Term,
upon reasonable advance notice to Lessee, in the presence of the Lessee and
during Lessee's business hours for the purposes of (a) ascertaining whether the
Building is kept in good order and repair; except, however, in an emergency
situation, in which event, the Lessor shall have the right to enter in and upon
the Building absolutely and without notice, and (b) showing the Building for the
Lessor's marketing purposes to other prospective tenants, purchasers, lenders or
other parties with whom the Lessor conducts, or is interested in conducting,
business provided, however, the Lessor shall first coordinate any such showing
of the Building pursuant to this subparagraph 24(b) with the Lessee's senior
management at the Building in order to minimize any interference with the
Lessee's business operations within the Building.
25. Default; Cumulative Remedies.
(a) If the Lessee (i) does not pay in full any
installment of Rent, and/or other charge or payment herein agreed to be paid by
Lessee, within the period of ten (10) days after notice thereof from the Lessor
to the Lessee, or (ii) violates or fails to perform or otherwise breaches any
covenant or agreement herein contained, which violation, failure or breach
remains uncured for a period of thirty (30) days after written notice has been
given by Lessor to Lessee (provided, however, if any such non-monetary default
of the Lessee requires more than thirty (30) days within which to cure such
non-monetary default, then the Lessee shall have an additional reasonable period
of time within which to cure such default and no breach or default shall be
deemed to exist so long as the Lessee promptly commences such cure and
diligently and in good faith pursues such cure to completion and so long as such
additional reasonable period of time for Lessee's cure does not jeopardize the
Lessor's interest in the Building or the Real Property or impose any additional
risk upon the Lessor), or (iii) makes an assignment for the benefit of
creditors, or if a petition is filed by (and granted) or filed against Lessee
for the appointment of a receiver, resulting in an order or decree which
continues unstayed and in effect for a period in excess of sixty (60) days, or a
bill in equity or other proceeding for the appointment of a receiver of Lessee
is filed and granted, resulting in an order or decree which continues unstayed
and in effect for a period in excess of sixty (60) days or if proceedings for
<PAGE> 23
reorganization or composition of creditors under any state or federal law is
instituted by or against Lessee, resulting in an order or decree which continues
unstayed and in effect for a period in excess of sixty (60) days, THEN, and in
any of said events, there shall be deemed to be by virtue thereof, a breach of
this Lease and Lessor may:
(A) declare all or any part of the Rent for the entire
unexpired balance of the Term of this Lease to be immediately due and payable
and the Lessee shall be obligated to pay the same and, with respect to any
installment of Rent which is not received by the Lessor on the date set forth
for payment, the Lessee shall be obligated to pay to the Lessor, the Late Fee,
the Late Interest and the Late Costs, all of which shall be due under this Lease
as, and shall become, Additional Rent; provided, however, any such accelerated
Rent which shall be paid by the Lessee to the Lessor prior to the date upon
which it would have otherwise been due and payable had no such breach or default
of the Lessee occurred, shall be discounted to its then present value, as of the
date of the Lessee's actual payment thereof, using an annual discount rate equal
to the Prime Rate as then exists; and provided, further, the Lessor shall use
reasonable efforts to relet the Building and otherwise mitigate the Lessee's
damages and any Rent actually received by the Lessor from any replacement lessee
which is applicable to the then unexpired balance of the Term of this Lease
shall be used first to pay the Lessor for all of its costs and expenses
associated with reletting the Building and then any amounts actually received by
the Lessor from any such replacement lessee which is applicable to the then
unexpired balance of the Term of this Lease and which is in excess of the Rent
due for the then unexpired balance of the Term of this Lease shall be promptly
refunded to the Lessee until the Lessee has been repaid for the accelerated Rent
which it actually paid to the Lessor; and/or
(B) terminate the Term of this Lease by legal proceedings
without any right on the part of the Lessee to save the forfeiture by payment of
any sum then due or by other performance of any condition, term or covenant;
and/or
(C) collect from Lessee any and all reasonable costs and
expenses incurred by Lessor or as a result of the Lessee's breach including,
without limitation, reasonable attorneys' fees which Lessor was required to
incur in enforcing the terms of this Lease and utilize the Deposit to pay the
same; and/or
(D) assert and pursue any and all such other rights and
remedies available to Lessor in law or at equity.
(b) All of the remedies hereinbefore given to Lessor and Lessee
and all rights and remedies given to them by law or equity shall be cumulative
and concurrent. The exercise by either Lessor or Lessee of any particular right
shall not be a waiver by either party of any other right herein granted to
Lessor and/or Lessee. If Lessor, at any time or times, shall accept the Rent or
the payment of other charges due from Lessee hereunder after the same shall
become due and payable, such acceptance shall not excuse delay upon subsequent
occasion or constitute or be construed as a waiver of any of Lessor's rights.
(c) Should any party hereto employ an attorney for the purpose of
enforcing rights under this Lease, or any amendment thereto, or any judgment
based on this Lease, in any legal proceeding whatsoever, including bankruptcy,
arbitration, declaratory relief or other litigation, the prevailing party shall
be entitled to receive from the other party reimbursement for all reasonable
attorneys' fees and all court costs and expenses, and such reimbursement shall
be included in any settlement, judgment or final order issued with respect to
that proceeding. The "prevailing party" means the party which has clearly
prevailed with respect to its position.
(d) If the Lessor violates or fails to perform or otherwise
breaches any covenant or agreement herein contained, which violation, failure or
breach remains uncured for a period of thirty
<PAGE> 24
(30) days after written notice has been given by Lessee to Lessor, which written
notice from Lessee to Lessor shall expressly include a statement that Lessee may
resort to self-help pursuant to the provisions of Subparagraph (A) below if the
Lessor has not cured such violation, failure or breach within such time period
(provided, however, if any such default of the Lessor requires more than thirty
(30) days within which to cure such default, then the Lessor shall have an
additional reasonable period of time within which to cure such default and no
breach or default shall be deemed to exist so long as the Lessor promptly
commences such cure and diligently and in good faith pursues such cure to
completion), then, or in such event, there shall be deemed to be by virtue
thereof, a breach of this Lease and Lessee may:
(A) resort to self-help in order to cure Lessor's
violation, failure or breach and seek reimbursement from the Lessor for all
reasonable costs and expenses incurred by the Lessee in curing Lessor's
violation, failure or breach; provided, however, the Lessee shall have no right
to offset Rent with respect to such reimbursement of such costs and expenses
except as otherwise expressly provided in Subparagraph (B) below; and/or
(B) collect from the Lessor any and all reasonable and
actual direct costs and expenses (but not any consequential or punitive damages)
incurred by Lessee as a result of the Lessor's violation, failure or breach
including, without limitation, reasonable attorney's fees which Lessee was
required to incur in enforcing the terms of this Lease; provided, however, the
Lessee shall not offset Rent with respect to such reimbursement of such costs
and expenses until after the Lessee has obtained from a court of competent
jurisdiction a final and non-appealable judgment against the Lessor with respect
to such violation, failure or breach by the Lessor and, in the event the Lessee
has so obtained from a court of competent jurisdiction a final and
non-appealable judgment against the Lessor with respect to such violation,
failure or breach by the Lessor, then such offset of Rent may only be up to the
amount set forth in such judgment; and/or
(C) assert and pursue any and all such other rights and
remedies available to Lessee in law or at equity provided, however, any such
other rights and remedies shall be specifically limited and controlled by the
provisions of Subparagraphs 25(d)(A) and (B) above.
26. Representations and Warranties.
(a) Lessee's Representations and Warranties. The Lessee
hereby represents and warrants to the Lessor as follows:
(i) the Lessee is a corporation legally
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania;
(ii) the Lessee has the full legal authority and
power to enter into, and to perform its obligations under, this Lease;
(iii) all requisite corporate action has been
taken by the Lessee to legally authorize the execution and delivery of this
Lease and the performance of its obligations hereunder; and
(iv) this Lease is, and shall be, legally binding
upon, and enforceable against, the Lessee in accordance with its terms.
<PAGE> 25
(b) Lessor's Representations and Warranties. The Lessor
hereby represents and warrants to the Lessee as follows:
(i) the Lessor is an adult individual residing
in the Commonwealth of Pennsylvania;
(ii) the Lessor has the full legal authority and
power to enter into, and to perform its obligations under, this Lease; and
(iii) the Lessor owns fee simple title to the Real
Property, subject to any liens, claims, encumbrances or restrictions of records;
and
(iv) this Lease is, and shall be, legally binding
upon, and enforceable against, the Lessor in accordance with its terms.
27. Binding Upon Successors and Assigns. All rights and
liabilities herein given to or imposed upon the respective parties hereto shall
extend to, and be binding upon, their respective heirs, personal
representatives, successors and permitted assigns.
28. Mortgages. This Lease shall become subject and subordinate to
all mortgages which hereafter affect this Lease or the Building, and to all
renewals, modifications, consolidations, replacements and extensions thereof
upon the holder of any mortgage upon the Building or the Real Property providing
to the Lessee an agreement, in a form which is mutually and reasonably
acceptable to the Lessee and the Lessor's mortgage holder, providing, among
other things, that so long as the Lessee is not in default of its obligations
under this Lease after receipt of required notice thereof and expiration of any
applicable cure periods, the Lessee's rights under this Lease shall continue
without disturbance by such mortgage holder. In confirmation of such
subordination, non-disturbance and attornment, the Lessee shall execute promptly
any reasonable certificate that Lessor, or its mortgagee(s), may request
pursuant thereto.
29. Severable. The terms, covenants and provisions of this Lease
are severable and divisible and, if any of the said terms, covenants and
provisions shall be invalidated by law or for other reason, the force and effect
of the other terms, covenants and provisions shall be deemed to be unaffected
and be legally enforceable as though the provisions invalidated had not been
herein set forth.
30. Notice. Any notice required to be given hereunder shall be
given to parties hereto as follows or at such other addresses as the parties
hereto, or either of them, may from time to time designate by notification to
the other in writing by registered or certified mail, postage prepaid:
If to Lessor: Mr. Robert K. Mericle
c/o Mericle Development Corp.
600 Baltimore Drive
East Mountain Corporate Center
Wilkes-Barre, Pennsylvania 18702
<PAGE> 26
With a copy to: Lewis A. Sebia
Chief Operating Officer
Mericle Development Corp.
600 Baltimore Drive
East Mountain Corporate Center
Wilkes-Barre, Pennsylvania 18702
If to Lessee: Lechters Pennsylvania, Inc.
1 Cape May Street
Harrison, New Jersey 07029-2404
Attention: Chief Financial Officer
With a copy to: Lechters, Inc.
(as the Guarantor)
1 Cape May Street
Harrison, New Jersey 07029-2404
Attention: Chief Financial Officer
And with a copy to: Sheon Karol, Esquire
Vice President and General Counsel
Lechters, Inc.
1 Cape May Street
Harrison, New Jersey 07029-2404
31. No Recording. This Lease shall not be recorded with the
Recorder of Deeds or in any other public office for the recording of documents.
Both Lessor and Lessee agree that this Lease is binding upon each of them and is
enforceable with respect to the Building without such recording; provided,
however, the Lessor and the Lessee hereby agree to execute and record in the
Office of the Recorder of Deeds in and for Luzerne County, Pennsylvania a
Memorandum of this Lease in the form attached as Exhibit "G" hereto and made a
part hereof (the "Memorandum") and the cost of recording such Memorandum shall
be borne by the Lessee. Simultaneously with the execution of the Memorandum, the
Lessor and the Lessee shall also execute and deliver to the escrow agent (the
"Escrow Agent") identified in the Escrow Agreement (hereinafter defined) a
Termination of Memorandum which shall be in the form attached as Exhibit "H"
hereto and made a part hereof (the "Termination"). The Escrow Agent shall hold
the Termination in escrow pursuant to the terms and conditions set forth in the
Escrow Agreement which shall be executed by each of the Lessor, the Lessee and
the Escrow Agent simultaneously with the execution of this Lease and which
Escrow Agreement shall be in the form attached as Exhibit "I" hereto and made a
part hereof (the "Escrow Agreement"). The Escrow Agent shall immediately record
the Termination in the Office of the Recorder of Deeds in and for Luzerne
County, Pennsylvania in accordance with the terms of the Escrow Agreement.
32. Broker. Except as otherwise expressly set forth in this
Paragraph 32, neither party has any responsibility to compensate any broker in
connection with the execution of this Lease. The foregoing notwithstanding, upon
the execution and commencement of this Lease, the Lessor shall pay a leasing
brokerage commission to Insignia ESG (the "Broker") pursuant to a separate
written agreement between the Lessor and the Broker. Except for the leasing
commission to the Broker, each party hereby agrees to indemnify, defend and hold
the other harmless from and against any liability, obligation, cost, fee or
expenses arising as a result of any claim by or through the indemnitor. The
Lessor shall indemnify, defend and hold the Lessee harmless from and against
<PAGE> 27
any liability, obligation, cost, fee or expense arising as a result of any claim
by the Broker.
33. Estoppel Certificates. The Lessor and the Lessee agree at any
time, within twenty (20) days' written request of the other, to execute,
acknowledge and deliver to the other party a written statement certifying that
this Lease is unmodified and in full force and effect (or, if there have been
modifications), and the dates to which the Minimum Rent, Additional Rent and
other charges have been paid in advance, if any, it being intended that any such
statement pursuant to this Paragraph 33 may be relied upon by the parties and
any prospective purchaser, mortgagee, permitted assignee or permitted sublessee
of the Building or Real Property.
34. Guaranty. The Lessee shall, on or before the date of this
Lease, deliver to the Lessor a fully-executed Guaranty and Suretyship Agreement
in the form attached as Exhibit "K" hereto and made a part hereof (the
"Guaranty") from Lechters, Inc., the Lessee's parent company (the "Guarantor").
Pursuant to the Guaranty, the Guarantor shall unconditionally and irrevocably
guaranty all of the payment and performance obligations of the Lessee under this
Lease.
35. Financial Information. The Lessee shall deliver to the Lessor,
prior to the date of this Lease and thereafter from time to time during the Term
and upon the request of the Lessor, the most recent Annual Report of the
Guarantor.
36. Limited Liability of Lessor. Notwithstanding any provision to
the contrary contained herein, Lessee shall look solely to the estate of Lessor
in and to the Real Property and the Building only (and the proceeds of any sale
thereof but only if the Lessee has prior to, or as of, the actual date of any
such sale, secured a judgment from a court of competent jurisdiction against the
Lessor and then the proceeds of such sale of the Building or the Real Property
may be attached by the Lessee, but only up to the amount of the judgment so
secured prior to, or as of, the date of such sale in order to satisfy the
judgment so secured by the Lessee and if the Lessor's default under this Lease
relates to the Lessor's failure to restore the Building following an event of
casualty or condemnation action as it is required to do under the terms of this
Lease, then the insurance proceeds or condemnation awards received by the Lessor
shall be included as well) (collectively, the "Specified Assets") in the event
of any claim against Lessor arising out of or in connection with this Lease, the
relationship of Lessor and Lessee or Lessee's use of the Building (collectively,
"Lessee's Claims"), and Lessee agrees that the liability of Lessor arising out
of or in connection therewith shall be limited to the Specified Assets. No
properties or assets of Lessor, other than the Specified Assets, shall be
subject to levy, execution or other enforcement procedures for the satisfaction
of any judgment (or other judicial process) or for the satisfaction of any other
remedy of Lessee arising out of or in connection with the Lessee's Claims.
Anything contained in this Lease to the contrary notwithstanding, the Lessor
may, at its option, and without providing notice to, or obtaining the consent
of, the Lessee, sell, transfer or convey the Real Property or the Building
thereon and, in accordance therewith, the Lessor may, at its option, and without
providing notice to, or obtaining the consent of, the Lessee, assign this Lease
to any purchaser or transferee of the Real Property, the Building or any portion
thereof and upon such assignment, the Lessor's assignee shall automatically
become the Lessor under this Lease and the Lessor herein stated shall, from and
after the effective date of such assignment, be relieved of all further
liability under this Lease.
37. Paragraph 37 Has Been Intentionally Deleted.
<PAGE> 28
38. Extension Options.
(a) The Lessor grants to the Lessee two (2) consecutive
options (individually, an "Extension Option" and collectively, the "Extension
Options") to extend the Term of this Lease, each of such options being for a
period of five (5) years (hereinafter collectively referred to as the "Extension
Periods"), provided the Lessee exercises such Extension Options as set forth
below, and provided further that, except as otherwise provided in Paragraph
39(c) below, there has been no assignment of this Lease or sublease of the
Building or any portion thereof by the Lessee and provided that there exists
either on the date the Lessee notifies the Lessor of its intent to exercise
either of the Extension Options or at any time thereafter up to and including
the date upon which the applicable Extension Period is to commence, no uncured
default under this Lease. The Extension Options shall be personal to the Lessee
and, except as otherwise provided in Paragraph 39(c) below, the same shall not
be applicable to any successor or assignee of the Lessee (other than a corporate
successor or affiliate of the Lessee) and, except as otherwise provided in
Paragraph 39(c) below, the Lessee's successors or assigns (other than a
corporate successor or affiliate of the Lessee) may not exercise the Extension
Options as set forth in this Lease and as permitted under the terms of this
Lease. The Lessee may exercise each of such Extension Options only by serving on
the Lessor written notice of its intent to exercise the applicable Extension
Option (the "Lessee's Exercise Notice") on that date which is twelve (12) months
prior to (i) the Termination Date in the case of the first Extension Period (the
"First Extension Period"), and (ii) the expiration of the First Extension Period
in the case of the second Extension Period (the "Second Extension Period"). The
First Extension Period, if properly exercised pursuant to the provisions of this
Paragraph 38, shall commence (except as may otherwise be provided under
Paragraph 39(f) below) on that date which is ten (10) years and six (6) months
after the Phase I Commencement Date and the Second Extension Period, if properly
exercised pursuant to the provisions of this Paragraph 38, shall commence
(except as may otherwise be provided under Paragraph 39(f) below) on that date
which is fifteen (15) years and six (6) months afer the Phase I Commencement
Date. In the event the Lessee does not timely and properly exercise its
Extension Options to extend the Term of this Lease for the Extension Periods, or
if the Lessor has not received the Lessee's Exercise Notice by that date which
is twelve (12) months prior to (a) the Termination Date, in the case of the
First Extension Period, and (b) the expiration of the First Extension Period in
the case of the Second Extension Period, then this Paragraph 38 shall become
null and void and of no further force and effect and the Lessee shall have no
such Extension Options.
(b) Once the Lessee exercises either of its Extension Options,
such exercise may not be revoked except as provided in Subparagraph (iii) below.
Anything contained in this Lease to the contrary notwithstanding, the Lessee's
exercise of either of its Extension Options shall be applicable only to the
entire Building (i.e., all of the Phase I Building and the Phase II Building and
the Phase III Building, if applicable) and the Lessee shall not have the right
to exercise either of its Extension Options for only a portion of the Building.
The Minimum Rent for the first (1st) year of the First Extension Period shall be
equal to one hundred and ten percent (110%) of the Minimum Rent as existed
immediately prior to the Termination Date. The Minimum Rent for the first (1st)
year of the Second Extension Period shall be equal to ninety-five percent (95%)
of the then "Fair Market Rental Rate" (hereinafter defined) for the Building;
provided, however, the Minimum Rent for the first (1st) year of the Second
Extension Period shall in no event be less than one hundred and ten percent
(110%) of the Minimum Rent as existed immediately prior to the final day of the
First Extension Period. The term "Fair Market Rental Rate" for the purposes of
this Lease shall mean the annual amount of Minimum Rent that a willing,
comparable lessee would pay, and a willing, comparable lessor of a comparable
building as the Building (in its "as is" condition) in the vicinity of the
Building would accept, at arm's length, for a comparable amount of space for a
comparable period of time. In order to determine the Minimum Rent for the first
(1st) year of the Second Extension Period, the Lessor shall propose to Lessee a
Fair Market Rental Rate by using its good faith judgment. The Lessor shall
provide to the Lessee written notice of such proposed Fair Market Rental Rate
within fifteen (15) days after the date that the Lessor receives the Lessee's
Exercise Notice applicable to the Second Extension Period. The Lessee shall have
fifteen (15) days (the "Lessee's Review Period") after receipt of the Lessor's
notice of the proposed Fair
<PAGE> 29
Market Rental Rate within which to accept or reject such proposed Fair Market
Rental Rate. If the Lessee does not accept the Lessor's proposed Fair Market
Rental Rate, then it must reject the same by providing written notice of such
rejection to the Lessor prior to the expiration of the Lessee's Review Period.
If the Lessee does not provide a written notice of rejection to the Lessor prior
to the expiration of the Lessee's Review Period, then the Lessee shall
conclusively be deemed to have accepted the Lessor's proposed Fair Market Rental
Rate and the Minimum Rent for the first (1st) year of the Second Extension
Period shall be equal to the Lessor's proposed Fair Market Rental Rate. In the
event, however, that the Lessee timely and properly rejects the Lessor's
proposed Fair Market Rental Rate by delivering to Lessor written notice of
Lessee's rejection thereof prior to the expiration of the Lessee's Review
Period, then the Lessee shall, at the time of providing its written notice to
Lessor rejecting the Lessor's proposed Fair Market Rental Rate, also provide to
the Lessor a written counter-proposal proposing a different Fair Market Rental
Rate for the Building for the first (1st) year of the Second Extension Period.
The Lessor and the Lessee shall negotiate in good faith to attempt to reach a
mutually acceptable Fair Market Rental Rate for the first (1st) year of the
Second Extension Period; provided, however, if, within fifteen (15) days after
the Lessor's receipt of the Lessee's counter-proposal, the Lessor and the Lessee
have been unable to reach a mutually agreeable Fair Market Rental Rate for the
first (1st) year of the Second Extension Period, then either party may require
that the determination of the Fair Market Rental Rate be made as follows:
(i) The Lessor and the Lessee shall attempt to agree upon, and jointly
appoint, a single real estate appraiser who shall, by profession, be a licensed
real estate broker who shall have been active over the five (5) year period
ending on the date of such appointment in the leasing of
commercial/industrial/manufacturing properties in the vicinity of the Building
and shall not be affiliated with either of the Lessor or the Lessee. The real
estate appraiser so appointed shall determine the Fair Market Rental Rate of the
Building for the first (1st) year of the Second Extension Period within fifteen
(15) days of his/her appointment, taking into account the requirements of this
Paragraph 38 regarding the same. Such real estate appraiser may conduct such
investigation as the real estate appraiser, in his or her sole discretion,
determines is necessary.
(ii) If the Lessor and the Lessee fail to agree upon and
appoint a real estate appraiser within fifteen (15)
days after the expiration of the Lessee's Review
Period, then each of the Lessor and the Lessee shall
appoint one (1) appraiser and the two (2) appraisers
so appointed shall appoint a third (3rd) appraiser
(all of such appraisers meeting the same
qualifications set forth in Subparagraph (i) above)
and the third (3rd) appraiser so appointed shall make
the determination of the Fair Market Rental Rate as
hereinabove set forth.
(iii) The decision of the real estate appraiser with
respect to its determination of the Fair Market Rental Rate of the Building for
the first (1st) year of the Second Extension Period shall be communicated to the
Lessor and the Lessee and the Lessee shall then have five (5) business days
after receipt thereof within which to either accept or reject such determination
of the Fair Market Rental Rate of the Building for the first (1st) year of the
Second Extension Period and if the Lessee accepts such determination, then such
Fair Market Rental Rate shall be binding upon the Lessor and the Lessee;
provided, however, if the Lessee does not accept such determination, then the
Lessee's Extension Option with respect to the Second Extension Period shall
become null and void and shall be of no further force and effect and this Lease
shall, therefore, automatically terminate on the final day of the First
Extension Period.
(iv) The cost of such determination by the real estate
appraiser(s) shall be paid for by the Lessor and the Lessee equally.
Commencing on the first (1st) day of the second (2nd) lease year of each
Extension Period and continuing thereafter on each anniversary date thereof
throughout each Extension Period (each of which dates is hereinafter referred to
as an "Extension Period Adjustment Date"), the Minimum Rent for each year of
each
<PAGE> 30
Extension Period following the applicable Extension Period Adjustment Date shall
be increased pursuant to the provisions set forth in Paragraph 5(c) above (i.e.,
the Minimum Rent shall be increased by two percent (2%) per annum).
(c) All Additional Rent under this Lease shall continue uninterrupted
from the Phase I Commencement Date through the expiration of the Term and, if
applicable, the Extension Periods. The Lessor shall deliver the Building and the
Lessee shall accept the Building for each Extension Period in its then "as is"
condition. All other terms and conditions of this Lease shall remain in full
force and effect during the Extension Periods; provided, however, during the
First Extension Period, the Lessee shall have only one (1) option to extend the
Term of this Lease for the Second Extension Period and during the Second
Extension Period, the Lessee shall have no additional options to extend the Term
of this Lease.
39. Expansion Option.
(a) The Lessor and the Lessee hereby acknowledge and agree
that, subject to the terms and conditions hereinafter set forth, the Lessee
shall have the option (the "Expansion Option"), by providing a written notice to
the Lessor (the "Expansion Option Election Notice") at any time prior to the
second (2nd) anniversary of the Phase I Commencement Date (such two (2) year
period being hereinafter referred to as the "Expansion Option Exercise Period"),
of requiring the Lessor to expand the Building by constructing an additional
ninety-nine thousand (99,000) square feet of space as shown as the shaded area
on Exhibit "B-4" attached hereto and made a part hereof (the "Phase III
Building") for a total Phase I Building, Phase II Building and Phase III
Building of three hundred and eight thousand (308,000) square feet of space. The
Lessor's Improvements with respect to the Phase III Building (the "Phase III
Lessor's Improvements") shall be similar to the Phase II Lessor's Improvements,
but in any event, the Phase III Lessor's Improvements shall comply with all then
applicable laws. The actual date upon which the Lessor receives the Lessee's
Expansion Option Election Notice shall hereinafter be referred to as the
"Expansion Option Notification Date". If the Lessee properly exercises its
Expansion Option as hereinafter set forth, then the Lessor shall construct the
Phase III Building upon that certain portion of the Real Property immediately
adjacent to the westerly side wall of the Building as shown on Exhibit "B-4"
attached hereto and made a part hereof. If the Lessee fails to provide the
Lessor with the Expansion Option Election Notice by the final day of the
Expansion Option Exercise Period, then the Lessee's Expansion Option shall
automatically cease and terminate and the Lessee shall have no such Expansion
Option and thereupon the Lessor shall have the right to recapture and remove
from this Lease any or all of that portion of the Real Property as shown as the
shaded area on Exhibit "A-6" attached hereto and made a part hereof (the
"Recapture Land"), whereupon the Recapture Land, or such portion thereof as may
be so designated by the Lessor, shall be removed from the applicability of this
Lease and the Lessor may, thereafter, utilize and develop such portion of the
Recapture Land.
(b) The annual Minimum Rent for the Phase III Building for the
first twelve (12) months following the Phase III Commencement Date (hereinafter
defined) shall be Three and 75/100 Dollars ($3.75) per square feet of space
contained in the Phase III Building as measured by the Lessor's architect or
engineer (and verified by the Lessee) from structural line to "structural line"
of the Phase III Building (as defined in Paragraph 5(b) of this Lease), but not
exceeding ninety-nine thousand (99,000) square feet of space; provided, however,
such annual Minimum Rent for the Phase III Building shall be increased
commencing on the first (1st) anniversary of the Phase III Commencement Date and
continuing on each anniversary date thereafter, pursuant to the provisions of
Paragraph 5(c) above (i.e., the Minimum Rent attributable to the Phase III
Building shall be increased by two percent (2%) per annum). Upon the Lessee's
proper exercise of the Expansion Option, the entire Term of this
<PAGE> 31
Lease for the entire Building (i.e., the Phase I Building, the Phase II Building
and the Phase III Building) shall be automatically re-set to be a new ten (10)
year Term from the Phase III Commencement Date. Accordingly, the Term for the
entire Building (i.e., including the Phase I Building, the Phase II Building and
the Phase III Building) shall automatically be re-set to be a new ten (10) year
Term from the Lessor's substantial completion of the construction of the Phase
III Building (the "Phase III Commencement Date") and, therefore, the First
Extension Period, if properly exercised pursuant to the provisions of Paragraph
38 above, shall automatically be deemed to commence upon that date which is the
tenth (10th) anniversary date of the Phase III Commencement Date and the Second
Extension Period, if properly exercised pursuant to the provisions of Paragraph
38 above, shall automatically be deemed to commence upon that date which is the
fifteenth (15th) year anniversary date of the Phase III Commencement Date. Once
the Lessee exercises its Expansion Option, the exercise thereof may not be
revoked, except as provided in Paragraph 39(c) below. The Minimum Rent
attributable to the Phase III Building shall be "net, net, net" to the Lessor
and, therefore, the Lessee shall be responsible for the payment of all
Additional Rent with respect to the Phase III Building.
(c) If the Phase III Commencement Date has not occurred for
any reason on or before the date which is twelve (12) months after the Expansion
Option Notification Date (other than for delays caused by Force Majeure
(excluding any delays caused by governmental action or inaction) or delays
caused by, or attributable to, the Lessee), the Lessee may, by written notice to
Lessor:
(i) terminate this Lease, whereupon this Lease shall
so terminate as of a date specified in Lessee's notice and, thereafter, neither
the Lessor nor the Lessee shall have any further liability and obligations under
this Lease, or
(ii) continue this Lease with respect to the Phase I
Building and Phase II Building, in which event (x) the Lessor shall have the
right to recapture and remove all or any portion of the Recapture Land from the
applicability of this Lease and the Lessor may, thereafter, utilize and develop
such portion of the Recapture Land, (y) Paragraph 23(b) shall be deemed omitted
from this Lease, and (z) notwithstanding anything contained in Paragraph 38(a)
to the contrary, a successor or assignee of the Lessee may exercise the
Extension Options as set forth in this Lease.
(d) The Expansion Option shall be personal to the Lessee and the
same shall not be applicable to any successor or assignee of
the Lessee (other than a corporate successor or affiliate of
the Lessee) and the Lessee's successors or assigns (other than
a corporate successor or affiliate of the Lessee) may not
exercise the Expansion Option as set forth in this Lease and
as permitted under the terms of this Lease. The Lessee may
exercise its Expansion Option only by serving on the Lessor
the Lessee's Expansion Option Election Notice prior to the
expiration of the Expansion Option Exercise Period. In the
event the Lessee does not timely and properly exercise its
Expansion Option, then the Expansion Option shall
automatically become null and void and of no further force and
effect and the Lessee shall no longer have the Expansion
Option.
(e) Anything contained in this Paragraph 39 to the contrary
notwithstanding, the Minimum Rent applicable to the Phase I Building and the
Phase II Building shall continue to be as expressly set forth in this Lease and,
except as set forth in Subparagraph (f) below and on Exhibit "J" attached to
this Lease and made a part hereof, shall not be affected by the Lessee's
exercise of its Expansion Option.
<PAGE> 32
(f) The Lessor and the Lessee hereby acknowledge and agree
that the requirements under this Paragraph 39 for the re-setting of a new ten
(10) year term for the entire Building (i.e., including the Phase I Building,
the Phase II Building and the Phase III Building) upon the Lessee's exercise of
the Expansion Option must be reconciled within the context of the Lessee's two
(2) Extension Options of five (5) years each under Paragraph 38 of this Lease.
Accordingly, the Lessor and the Lessee hereby acknowledge and agree that, upon
the Lessee's exercise of its Expansion Option under this Paragraph 39, then the
first five (5) year Extension Period under Paragraph 38 of this Lease shall
commence upon the tenth (10th) year anniversary date of the Phase III
Commencement Date as opposed to that date which is ten (10) years and six (6)
months after the Phase I Commencement Date under this Lease and the second (2nd)
five (5) year Extension Period under Paragraph 38 of this Lease shall,
therefore, commence upon the fifteenth (15th) year anniversary date of the Phase
III Commencement Date as opposed to that date which is fifteen (15) years and
six (6) months after the Phase I Commencement Date under this Lease. For
purposes of illustration only, if the Lessee elects to have the Building
expanded pursuant to its Expansion Option under this Paragraph 39 and if the
Phase III Building is delivered by the Lessor to the Lessee on that date which
is two (2) years and six (6) months following the Phase I Commencement Date,
then the Term for the entire Building (i.e., including the Phase I Building, the
Phase II Building and the Phase III Building) would automatically be re-set to
be a new ten (10) year Term from the Phase III Commencement Date(i.e., ten (10)
years from that date which is two (2) years and six (6) months from the Phase I
Commencement Date) and, therefore, the Lessee's First Extension Period under
Paragraph 38 of this Lease would (if properly exercised by the Lessee as
expressly set forth in Paragraph 38 of this Lease) commence on that date which
is twelve (12) years and six (6) months following the Phase I Commencement Date
as opposed to commencing on what would have otherwise been the original
Termination Date under this Lease. Furthermore, anything contained in this Lease
to the contrary notwithstanding, upon the Lessee's proper exercise of its
Expansion Option as hereinabove set forth, the Termination Date under this Lease
shall automatically be extended to, and shall become, that date which is the day
immediately preceding the tenth (10th) year anniversary date of the Phase III
Commencement Date. If the Lessee properly exercises its Expansion Option as set
forth in this Paragraph 39, then the Minimum Rent for the Phase I Building, the
Phase II Building and the Phase III Building shall be as set forth on Exhibit
"J" attached to this Lease and made a part hereof.
40. Not Construed Against Drafter. Any presumption of law which
provides that an agreement shall be construed against the drafter is hereby
waived by the parties to this Agreement, each party being represented by legal
counsel.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 33
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
parties have caused this Lease to be duly executed as of the day and year first
above written.
WITNESS: LESSOR:
ROBERT K. MERICLE, an adult individual d/b/a
"MERICLE PROPERTIES"
_______________________ BY: ________________________________________
ROBERT K. MERICLE
ATTEST: LESSEE:
LECHTERS PENNSYLVANIA, INC.,
a Pennsylvania corporation
_________________________ BY: _______________________________________
Title: Its:
_________ (CORP SEAL)
<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. Maryland
Lechters Holyoke, Inc. Massachusetts
Lechters Michigan, Inc. Michigan
Lechters Minnesota, Inc. Minnesota
Lechters Mississippi, Inc. Mississippi
Lechters Missouri, Inc. Missouri
Lechters Nebraska, Inc. Nebraska
Lechters Nevada, Inc. Nevada
<PAGE> 2
SUBSIDIARIES OF THE COMPANY
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ -----------------------
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
Lechters Utah, Inc. Utah
Lechters Vermont, Inc. Vermont
Lechters Springfield, Inc. Virginia
Lechters Washington, Inc. Washington
Lechters West Virginia West Virginia
Lechters Wisconsin, Inc. Wisconsin
Cooks Club, Inc. New Jersey
Regent Gallery, Inc. New Jersey
Simple Solutions of NJ, Inc. New Jersey
Cost Less Home Store, Inc. New Jersey
Cost Less Home Store, Inc New York
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. 333-359759 on Form S-8 of Lechters, Inc. and
subsidiaries of our report dated March 23, 2000, appearing in this Annual Report
on Form 10-K of Lechters Inc. and subsidiaries for the year ended January 29,
2000.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
April 25, 2000
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