-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BpttN8mO32b+gsGPmoNRWhEBgaxuNil7cNyqwncnJfz4FxyqzUU/EqBcb6FDJlrC jyiCkVuccuG3ztH1wdylLQ== 0000950123-00-004023.txt : 20000427 0000950123-00-004023.hdr.sgml : 20000427 ACCESSION NUMBER: 0000950123-00-004023 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LECHTERS INC CENTRAL INDEX KEY: 0000798186 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 132821526 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-17870 FILM NUMBER: 609251 BUSINESS ADDRESS: STREET 1: 1 CAPE MAY ST CITY: HARRISON STATE: NJ ZIP: 07029 BUSINESS PHONE: 2014811100 MAIL ADDRESS: STREET 1: 1 CAPE MAY ST STREET 2: 1 CAPE MAY ST CITY: HARRISON STATE: NJ ZIP: 07029 10-K405 1 LECHTERS INC 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, WITHOUT PAR VALUE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation 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] 2 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. 3 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. 4 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. 1 5 - 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. 2 6 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. 3 7 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. 4 8 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. 5 9 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. 6 10
FAMOUS COST LECHTERS HOUSEWARES BRANDS LESS -------------------------------------------------- HOUSEWARES HOME MALLS STRIPS CITY SUB-TOTAL OUTLET(R) STORE(SM) TOTAL ------------------------------------------------------------------------------------------- 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)
(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. 7 11 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:
INVENTORY, NET OF LEASEHOLD FIXTURES & ACCOUNTS PRE-OPENING IMPROVEMENTS EQUIPMENT PAYABLE EXPENSE ------------ --------- ------- ------- 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
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 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 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:
TERM OF POSITION OR OFFICE EMPLOYMENT NAME AGE WITH THE COMPANY COMMENCED - ---- --- ---------------- --------- 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
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 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 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.
PRICE OF COMMON STOCK --------------------- FISCAL 1999 HIGH LOW ----------- ---- --- 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
FISCAL 1998 HIGH LOW ----------- ---- --- 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
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 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.
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) 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 ============ ============ ============ ============ ============
13 17
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) 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%
(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 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 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 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 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 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. 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.)
19 23 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 *
* Filed herewith. (1.) Management Compensatory Plan. 20 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.
SIGNATURE TITLE DATE - --------- ----- ---- /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)
21 25 LECHTERS, INC. AND SUBSIDIARIES TABLE OF CONTENTS
PAGE ---- 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
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 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 28 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 29, JANUARY 30, 2000 1999 --------- --------- 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 ========= =========
See notes to consolidated financial statements. F-3 29 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL YEAR ENDED ------------------------------------------------------ JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ------------ ------------ ------------ 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 ============ ============ ============
See notes to consolidated financial statements. F-4 30 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
FISCAL YEAR ENDED -------------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 -------- -------- --------- 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 ======== ======== ========
See notes to consolidated financial statements. F-5 31 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
Accumulated CONVERTIBLE Additional Other Comprehensive COMMON PREFERRED Paid-In Retained Comprehensive Treasury Income STOCK STOCK Capital Earnings Income Stock Total (Loss) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- 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) ========== ========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements. F-6 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:
JANUARY 29, JANUARY 30, 2000 1999 -------- -------- 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 ======== ========
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 33 f) Other Assets: Other assets consist of the following:
January 29, January 30, 2000 1999 ----------- ----------- 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 ======== ========
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:
FISCAL YEAR ENDED ---------------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ---------- ---------- ---------- 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 ========== ========== ==========
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 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 35 The Company's segment disclosures are as follows:
FISCAL YEAR ENDED --------------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 --------- --------- --------- 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 ========= ========= =========
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 $15.625 over the 60 trading days ending on the date immediately preceding the date of the Company's election to cause such mandatory conversion. The Company must convert all of the outstanding shares of both the Series A Preferred and Series B Preferred simultaneously. Any such mandatory conversion shall only be effected upon written notice delivered to all holders of Series A Preferred and Series B Preferred within 10 days following the date on which the Company elects to cause such conversion. F-10 36 Series A Preferred Stock is convertible to 2,399,984 shares of common stock and has voting rights equivalent to that number of common shares. Series B Preferred Stock is convertible to 800,016 of shares of common stock but has no voting rights. Both Series A Preferred Stock and Series B Preferred Stock receive a dividend of 5.05% payable annually. Robert Knox, a Director of the Company, is Senior Managing Director of Cornerstone Equity Investors, LLC, the investment manager for Prudential Private Equity Investors III, L.P. b) Stock Options As permitted by SFAS No. 123, "Accounting for Stock Based Compensation," the Company will continue to measure compensation cost for stock option plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees." Accordingly, no compensation cost has been recognized for the Company's stock option plan. If compensation cost for stock options had been determined based on fair values at the grant dates, net income (loss) available to common shareholders and net income (loss) per share would have been reduced to the pro forma amounts below, for the fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998.
FISCAL YEAR ENDED ----------------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ---------- ---------- ---------- Net loss available to common shareholders: As reported ($ 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)
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:
FISCAL YEAR ENDED ----------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ------ ---- ---- 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
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 37 Changes in stock options granted under the 1989 Incentive Stock Option Plan were as follows:
FISCAL 1999 FISCAL 1998 FISCAL 1997 ----------- ----------- ----------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- 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
The following table summarizes information concerning stock options granted under the 1989 Incentive Stock Option Plan which were outstanding at January 29, 2000:
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 --------------- ---- -------- ----- ---- ----- $ 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 ========= =======
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 38
FISCAL 1999 FISCAL 1998 ----------------------------------- ------------------------------ WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ ---------------- ------ ----------------- 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 =======
The following table summarizes information concerning stock options granted under the 1998 Incentive Stock Option Plan which were outstanding at January 29, 2000:
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 ---------------- ------------ -------------- --------- ------------ -------- $ 1.59 to $1.64 517,500 9.9 $ 1.61 -- $ -- ======= === ======== ======== ==========
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:
FISCAL YEAR ENDED ------------------------------ JANUARY 29, JANUARY 30, 2000 1999 ------- ------- Convertible Subordinated Debentures, 5% due 2001 (a) $57,804 $61,232 ======= =======
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 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 $11,579, respectively. The credit facility is secured by a security interest in substantially all of the Company's assets. F-14 40 6. INCOME TAXES The (benefit)/provision for income taxes before extraordinary item consists of the following:
FISCAL YEAR ENDED -------------------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ------- ------- ------- Federal: Current ($ 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) ======= ======= =======
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:
FISCAL YEAR ENDED --------------------------------------------------- JANUARY 29, JANUARY 30, JANUARY 31, 2000 1999 1998 ------ ------ ------ 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% ====== ====== ======
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 41 The components of the non-current deferred tax liability are as follows:
JANUARY 29, JANUARY 30, 2000 1999 ------- ------- 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 ======= =======
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 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:
MINIMUM FISCAL RENTAL YEAR COMMITMENT ---- ---------- 2000 $ 49,860 2001 42,967 2002 38,033 2003 32,922 2004 26,131 Thereafter 46,766 -------- Total $236,679 ========
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:
FISCAL YEAR AMOUNT ---- ------ 1999 $3,168 1998 3,524 1997 3,061
Total rent expense was as follows:
FISCAL YEAR AMOUNT ---- ------ 1999 $52,959 1998 52,865 1997 53,931
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 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:
GROSS GROSS JANUARY 29, UNREALIZED UNREALIZED ESTIMATED 2000 COST GAINS LOSSES FAIR VALUE ---- ---- ----- ------ ---------- 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 ======= ===== ===== =======
GROSS GROSS JANUARY 30, UNREALIZED UNREALIZED ESTIMATED 1999 COST GAINS LOSSES FAIR VALUE ---- ---- ----- ------ ---------- 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 ======= ==== ==== =======
The cost and estimated fair value of debt securities at January 29, 2000 by contractual maturity are as follows:
ESTIMATED FAIR COST VALUE ---- ----- 2000 $ 56,853 $ 56,786 2001 8,559 8,515 --------- --------- Total available for sale securities $ 65,412 $ 65,301 ========= =========
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:
NET NET (GAIN) LOSS INVESTMENT GROSS GROSS ON SALE OF (GAIN FISCAL REALIZED REALIZED GOVERNMENT DIVIDEND /INCOME) YEAR GAINS LOSSES SECURITIES INCOME LOSS - ---- ----- ------ ---------- ------ ---- 1999 $ (94) $96 $2 $(521) $(519) 1998 (113) 9 (104) (509) (613) 1997 (50) 7 (43) (296) (339)
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 44 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FISCAL QUARTER ENDED --------------------------------------------------------------------------- MAY 1, JULY 31, OCTOBER 30, JANUARY 29, 1999 1999 1999 2000 ------------ ------------ ------------ ------------ 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
FISCAL QUARTER ENDED --------------------------------------------------------------------------- MAY 2, AUGUST 1, OCTOBER 31, JANUARY 30, 1998 1998 1998 1999 ------------ ------------ ------------ ------------ 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
(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 45 EXHIBIT INDEX
ITEM NO. DESCRIPTION - -------- ----------- 3.1 Restated Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-29465 (the "Registration Statement")). 3.2 By-laws of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-40372). 4.1 Preferred Stock Purchase Agreement dated April 5, 1996. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 1, 1997.) 4.2 Indenture, dated as of September 27, 1991, between the Company and Chemical Bank, as Trustee. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended January 25, 1992.) 10.1 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).
46
ITEM NO. DESCRIPTION - -------- ----------- 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.
EX-10.7.1 2 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.7.1 A G R E E M E N T BETWEEN LECHTERS, INC. - AND - DAVID CULLY 2 INDEX
PAGE # ------ 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
3 22. Severability 18 23. Survivorship 18 24. Beneficiaries/References 18 25. Governing Law/Jurisdiction 19 26. Notices 19 27. Headings 19 28. Counterparts 20
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. 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 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. 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 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. 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: 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 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 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: 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. 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 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 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 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, 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 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; 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 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 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, 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 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 EX-10.12.1 3 LEASE FOR DISTRIBUTION CENTER 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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. 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 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 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). 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 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 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 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. 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 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 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. 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 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 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 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. 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] 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) EX-21 4 SUBSIDIARIES OF THE COMPANY 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 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 EX-23 5 CONSENT OF DELOITTE AND TOUCHE LLP. 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 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JAN-29-2000 JAN-31-1999 JAN-29-2000 9,917 65,301 2,881 0 103,100 183,242 148,562 93,780 249,521 35,018 57,804 0 20,000 58 124,103 249,521 420,123 420,123 311,602 311,602 128,664 0 4,556 (21,393) (8,547) 0 0 398 0 (12,448) (0.79) (0.79)
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