-----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, SWNd3KykMsADPXwuhfXHd2HGPrsZDPU4wScikawXLkITk5kjTNJ8JC/WpgtIahNz 574859/80+1an7724xTIlw== 0000950123-97-003818.txt : 19970505 0000950123-97-003818.hdr.sgml : 19970505 ACCESSION NUMBER: 0000950123-97-003818 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970502 SROS: NASD 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: 0203 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17870 FILM NUMBER: 97594374 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-K 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 (FEE REQUIRED) For the fiscal year ended February 1, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from To Commission File No. 0-17870 LECHTERS, INC. ---------------------------------------------------------------------- (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 07029-9998 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (201) 481-1100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] - -------------------------------------------------------------------------------- 2 As of April 18, 1997, 17,155,086 shares of Common Stock were outstanding and the aggregate market value of the Common Stock held by non-affiliates of the registrant (based upon the closing price on the NASDAQ National Market on that date) was approximately $47,077,169. For the purposes of such calculation, all outstanding shares of Common Stock have been considered held by non-affiliates, other than the 4,388,396 Shares beneficially owned by directors and executive officers of the registrant. In making such calculation, the registrant does not determine the affiliate or non-affiliate status of any shares for any other purpose. DOCUMENTS INCORPORATED BY REFERENCE Information called for by Part III (Items 10, 11, 12 and 13) is incorporated by reference to the registrant's definitive proxy statement in connection with its Annual Meeting of Shareholders to be held on June 17, 1997. 3 PART I ITEM 1. BUSINESS. HISTORY Lechters, Inc. (together with its subsidiaries, unless the context otherwise requires, the "Company") was incorporated in New Jersey in July 1975 to operate leased houseware and giftware departments in discount department stores. Subsequently, Donald Jonas, then Chairman and Albert Lechter, then President of the Company, recognized an opportunity to operate specialty houseware stores in malls. In 1977, the repositioning of the Company from a leased department operator to a specialty store operator was commenced. The Company opened its first store in Rockaway, New Jersey, and, has expanded until at February 1, 1997, the Company operated a total of 649 stores as more fully set forth in the table on page 7 herein. During the past five years, the Company increased the number of stores operated by it from 438 on January 1992, including the Famous Brands Housewares Outlets(R) concept added in 1990, and discontinued the use of the Kitchen Place trade name. Stores operated under the name Lechters Housewares(R) are primarily located in malls, but can also be found in strip centers as well as city locations. Stores operated under the name Famous Brands Housewares Outlets(R) are located in outlet centers. Stores formerly operated under the name Kitchen Place are primarily located in strip centers. The Company operated as a private concern during the period from its inception to its initial public offering on July 25, 1989. The Company's common stock is listed on NASDAQ under the symbol LECH. In January 1994 the Company elected Steen Kanter as Chief Executive Officer, replacing Donald Jonas who had held the position since the date the Company was organized. Mr. Kanter left the employ of the Company during January 1996 when it became apparent that there was a difference of philosophy with respect to the future priorities of the Company. Unable to resolve this difference, Mr. Kanter determined that it was in his best interest to consider various career options in all fields. During the period Mr. Kanter acted as C.E.O., Mr. Jonas remained active as Chairman of the Board of Directors and a member of the Board's Executive Committee. Upon the termination of Mr. Kanter's employment during January 1996, Mr. Jonas resumed the position of Chief Executive Officer of the Company. Except as otherwise indicated or the context otherwise requires, references to Fiscal 1995, 1996, 1997 and each subsequent fiscal year shall mean the fiscal year ending on the Saturday closest to January 31st in the following year in accordance with an amendment to the by-laws of the Company adopted in 1996. References to Fiscal 1994 shall mean the fiscal year ending on the last Saturday in January of the following year. 4 MERCHANDISING AND MARKETING The Company's business is conducted through two retail store concepts, namely, Lechters Housewares(R) and Famous Brands Housewares Outlets(R) . The mission of the Lechters Housewares(R) concept is to become the leading housewares retailer in the mall, city and strip environments in which it competes. Lechters Housewares(R) concept is focused on the kitchen, and, also, aggressively pursues the frame, storage and organization business. The merchandise assortment offers moderately priced functional products which solve our customer's problems and capitalize on current trends. Lechters Housewares(R) stores are merchandised and marketed to a large cross section of customers typically found in high-traffic, regional shopping malls having at least two major department stores as "anchors" with at least 200,000 square feet of retail space for specialty stores. City stores and larger stores referred to herein as Super Lechters are also operated under this trade name. Merchandise is displayed utilizing fixtures designed to maximize versatility in merchandise mix, minimize space requirements and enable customers to serve themselves. The Company believes that its wide selection of products, competitive prices and convenient store locations create competitive advantages over traditional sources for home products, such as department stores, specialty stores and general merchandise discount stores. Product categories include cookware, bakeware, kitchen gadgets and utensils, microwave accessories, small electrics, table top, textiles, household storage and organization, frames and other decorative housewares. The product line includes over 4,000 items. All products sold by the Company are either private label or national brand names such as, Rubbermaid, Durand, Ecko, Farberware, Henckels, Krups, OXO, Pyrex, Revere and T-Fal. The Company estimates that approximately 20% of the product line accounted for approximately 75% of Fiscal 1996 net sales. Private label merchandise (Cook's Club(R), Simple Solutions(R), Regent Gallery(R)) which represents approximately 28% of the products sold by the Company, accounted for approximately 31% of Fiscal 1996 net sales. No product accounted for more than 1.0% of Fiscal 1996 net sales. 2 5 The following table shows the approximate contribution to net sales of the Company's two principal product categories for the periods indicated:
Fiscal Fiscal Fiscal Category 1996 1995 1994 -------- ---- ------ ----- Basic Housewares 62% 60% 57% Decorative Housewares 38% 40% 43%
The Company has adopted an every day low pricing strategy. Lechters Housewares(R) merchandise is generally priced at a discount to department stores and other specialty retailers offering similar goods. Its value position is further enhanced by sales and promotional events which also heighten customer awareness and sense of buying urgency. The Company's price advantage reflects its purchasing power and the economies of its private label program. Items generally range in price from $1.00 to $200.00, with most items selling for less than $10.00. All sales are transacted in cash or through third-party credit cards, which accounted for approximately 64% and 36%, respectively, of Fiscal 1996 net sales. During Fiscal 1996 the Company initiated an advertising test in support of the Lechters Housewares(R) business. The test program was conducted in specific markets utilizing circulars, weekly newspaper advertising, and television. The Company also advertises by participating in mall circulars and contributing to mall merchants associations and marketing funds. Advertising expense which had historically averaged approximately 1.0% of net sales increased to 1.2% as a result of new advertising initiatives. The Company intends to expand its advertising test in Fiscal 1997 given the favorable results of the current year initiative. The Lechters Housewares(R) business is highly seasonal. As a convenience concept, the chain benefits from the high concentration of traffic about its stores during certain times of the year. Sales are highest during the year end holiday season, followed by a strong back to school business which commences in late July. In 1996, November/December and back to school sales accounted for approximately 31% and 16%, respectively, of total year sales. 3 6 The mission of the Famous Brands Housewares Outlets(R) concept is to become the leading retailer of off-price housewares in outlet centers and the preferred retailer for U.S. housewares manufacturers to liquidate their excess, discontinued, and slow selling inventory. The Company believes it can offer its outlet customers extraordinary savings opportunities as compared to regular priced retailers through its ability to purchase off-price housewares. This commitment to off price merchandise is a new direction based on a strategic assessment of the market and Famous Brands Housewares Outlets(R) position in the outlet malls. The outlet customer is more price driven than the mall customer and requires a fresh assortment to inspire a purchase decision. The strategy is supported by a merchandising team dedicated to Famous Brands Housewares Outlets(R). The Famous Brands stores offer an assortment of basic Lechters Housewares(R) merchandise to supplement the constantly changing assortment of off-price purchases. Famous Brands Housewares Outlets(R) stores typically have lower occupancy expenses and leasehold improvement requirements versus stores located in malls, city locations and strip centers. The lower cost structure subsequently supports the lower price points of the outlet environment. Given the geographic dispersion of customers who frequent outlet centers, the marketing strategy to drive the Famous Brands Housewares Outlets(R) business will continue to rely primarily on in-store signing, handouts and displays to explain the values to our customer. The seasonality of the Famous Brands Housewares Outlets(R) business differs slightly from that of the Company's Lechters Housewares(R) concept. The summer season represents a greater portion of the annual sales in Famous Brands Housewares Outlets given the increase in leisure travel and the proximity of outlet centers to major routes and vacation destinations. The November and December period represents a slightly lower portion of the year in Famous Brands Housewares Outlets(R) versus Lechters Housewares(R), 26% and 33% respectively. 4 7 PURCHASING, WAREHOUSING AND DISTRIBUTION Service Office management is responsible for virtually all merchandising decisions, including product selection, sourcing, pricing and in-store display. Merchandise mix is determined by the Service Office at each store's inception and is dictated by store size and configuration. All categories of merchandise are reviewed and edited on a regular basis to accommodate seasonal sales opportunities and evolving customer requirements. The Company's buying staff is comprised of a Senior Vice President - General Merchandise Manager, a Vice President - Merchandising, two Merchandise Managers and three buyers. In 1996, a separate buying organization was established to support the Famous Brands Housewares Outlets(R) business. The dedicated staff was deemed necessary given the distinct differences in the two concepts' evolving merchandise strategies and the nature of the transactions involving off-price merchandise. Previously, merchants and buyers bought for both concepts as essentially the same business. The buying staff is supported by a Planning and Allocation staff that includes a Vice President - Merchandise Replishment and Logistics and eight reorder buyers each specializing in certain product categories. The Company purchases its products from over 400 suppliers with no supplier accounting for more than 7% of Fiscal 1996 sales. Approximately 71% of its products are purchased in the United States which ensures sufficient flexibility in the management and flow of merchandise. The remaining 29% is imported merchandise and is sourced primarily in the Far East. The Company believes that there are alternate sources for virtually all of its products. Most of the Company's merchandise is shipped directly from manufacturers to the Company's distribution centers in Harrison, New Jersey and North Las Vegas, Nevada where it is held until reshipment to the Company's stores. The Company believes that its ability to buy in bulk directly from manufacturers enables the Company to obtain lower merchandise costs, favorable trade terms and a broader selection of products. The Company believes that these facilities are adequate to satisfy its foreseeable distribution requirements. The Company generally maintains an average of 10 weeks supply of merchandise at the distribution centers. The stores, themselves, have minimum storage capacity which in instances is augmented by additional lease space in proximity to each store. The Company uses contract carriers to supply its stores with merchandise from its distribution centers. The Company's stores are supplied with merchandise within two to five days of placing an order, depending upon the store's distance from the distribution centers. On average, stores are supplied with merchandise on a bi-weekly basis. Shipments are accelerated during peak sales periods and are more frequent in high volume and city locations. The ordering process is facilitated by a Computer Assisted Replenishment (CAR) system. 5 8 STORE OPERATIONS Store Operations' objective is to provide an easy to shop store environment supported by knowledgeable, customer oriented and sales focused associates. The Company's stores are designed to attract traffic through prominent in-store displays generally organized according to a store planogram provided by the Service Office. The Company attempts to keep the signage and design of its store fronts consistent among its stores to enhance the name recognition of its stores. Merchandise is displayed utilizing fixtures designed to maximize versatility in merchandise mix, minimize space requirements and enable customers to purchase through self choice and/or be assisted by an associate. The Company enhances consumer interest by using store front space for seasonal and promotional presentations which are rotated regularly. In addition, it uses selected stores as test sites for the introduction of new products, new product categories and new store designs. The stores organization is headed by a Senior Vice President and supported by a Service Office staff. The latter is responsible for the development of store operations policies and procedures, the design of in-store programs, store associate training programs, coordination of activities with other functions residing in the Service Office and general communications. As of April 1, 1997, the field organization was comprised of four Regional Vice Presidents and one Regional Manager, who each have profit and loss responsibility for several districts and provide leadership to 45 District Managers. The District Managers, in turn, are responsible for the day to day operations of the stores. Their supervisory span of control ranges from 7 to 23 stores, averaging approximately 14 stores each. Those Districts Managers at the high end of the range are supported by Area Managers who are Store Managers with additional oversight responsibility for 1 to 3 stores. Stores are typically staffed with a Manager, 2 Assistant Managers and 5 sales/cashier Associates. The stores schedule their labor from a pool of hourly Associates, the majority of which are part-time. The number of Associates on hand at any one time is a function of customer traffic and scheduled store activities, such as training events and the receipt of merchandise. Recognizing the value of distinct concept identities, the Company realigned its field organization in 1996 along concept lines. Previously, field management had combined concept responsibility which did not afford the focused attention required of each. The Company is committed to the in-store development of its Associates. A training and evaluation program is provided to new Managers. Additionally, the Company has developed a program under which it transfers qualified Associates to other stores throughout the country to gain the experience necessary for promotion. All store Associates otherwise attend periodic training sessions designed to develop their management, merchandising and customer service skills. The Company believes its pay and benefits package is competitive with retail industry standards. Complemented by the aforementioned training program and promotional opportunities, it enables the Company to attract and retain a quality workforce. The Company believes that the security measures in its stores are strict, reflecting the cash orientation of the Company's business. The Company employs 6 field Loss Prevention Managers, who are responsible for the review of cash register transactions and inventory management procedures, in a effort to control inventory shrinkage. Their periodic reviews are complemented by audit programs to include District Manager conducted reviews and Service Office monitoring of store transaction reports. Particular emphasis is placed on stores with a history of inventory shrinkages in excess of the norm. 6 9 REAL ESTATE The Company considers its ability to obtain and retain attractive, high-traffic store locations to be a critical element of its business and a key determinant of the Company's future growth and profitability. Lechters Housewares(R) mall stores are located primarily in high-traffic regional enclosed projects while strip centers and city stores are located in the premium project or downtown area as defined by market analysis. Famous Brands Housewares Outlets(R) stores are located in the dominant outlet projects nationally. As shown in the following table, the Company operated 396 Lechters Housewares(R) stores as of year end. These stores range in size from 1,800 to 5,700 square feet and average approximately 3,200 square feet. To take advantage of higher volume locations and extended product line opportunities, the Company has also developed a larger format store of which there are 89. Internally referred to as Super Lechters, these stores range in size from 4,500 to 10,900 square feet, averaging 6,000 square feet. The Company's 164 Famous Brands Housewares Outlets(R) stores range in size from 3,000 to 7,500 square feet and average 3,900 square feet. The Company converted its 15 Kitchen Place stores to either Lechters Housewares(R) or Famous Brands Housewares Outlets(R) during 1996.
Lechters Super Famous Kitchen Housewares Lechters Brands Place Total ---------- -------- ------ ----- ----- February 3, 1996 Units 389 88 150 15 642 Square Feet 1,216,000 533,400 597,000 58,700 2,405,100 1996 Additions: Units 4 1 11 0 16 Square Feet 13,300 4,100 39,400 0 56,800 1996 Closings: Units 6 1 2 0 9 Square Feet 17,500 8,000 8,500 0 34,000 Adjustments:(1) Units 9 1 5 (15) 0 Square Feet 39,300 6,500 17,200 (58,700) 4,300 February 1, 1997 Units 396 89 164 0 649 Square Feet 1,251,100 536,000 645,100 0 2,432,200(2)
(1) Includes square footage adjustments due to store categorization shifts including the conversion of Kitchen Place stores. (2) Approximately 90% of the total store space of the Company's stores represents selling area. The balance is storage and office space. 7 10 The Company's present expansion plan is limited and opportunistic given its high level of penetration of the better performing malls and outlet centers, and the need to fully implement new merchandising and promotional strategies. In the near future it perceives the greater opportunity for new store development to lie in strip centers of which the Company had 37 store locations at year end. The Company's Fiscal 1997 development plan is to open approximately 10 new stores. In determining where and in what format new stores will be opened, the Company's preference is to backfill existing markets to enhance its marketing and operations leverage. Specific store development decisions give due consideration to such factors as market area demographics, competition, center quality and customer traffic, store location within the center, costs of development and ongoing occupancy expense. Performance comparables are also reviewed if available. The costs of new store development differ by concept and further varies with the size of the store and site conditions. The costs incurred by the Company to open an average size store under typical site conditions are approximately, as shown below:
Leasehold Fixtures Inventory, Preopening Improvement & Equipment net of A/P Expense ----------- ----------- ---------- ------- Lechters Housewares(R) $210,000 $60,000 $ 80,000 $ 8,000 Super Lechters 255,000 71,000 150,000 15,000 Famous Brands Housewares Outlets(R) 42,000 60,000 80,000 13,000
The Company actively manages its real estate portfolio to ensure profitability at the store level. In case of an underperforming store, the Company will seek reduction in its occupancy expense under its existing lease agreement, or any agreement extending the term thereof. Where profitability is unattainable, the Company will exercise its right to terminate its lease agreement under any volume termination provision or upon expiration of the term. The Company plans to close approximately 15 stores in Fiscal 1997. A majority of the Company's leases expire or will be subject to termination by the Company over the next three years. In the current real estate environment, this gives the Company leverage in the management of its occupancy expenses and flexibility in store location. The Company intends to maintain this flexibility and therefor will seek shorter terms upon renewal in those instances where it is an advantage to do so. This strategy was pursued during Fiscal 1996. 8 11 INFORMATION TECHNOLOGY The Company is heavily reliant upon systems technology in the conduct of its business. Over the years it has migrated its technology and enhanced its software applications to support the more efficient execution of its core operations and the facilitation of its decision support requirements. The Company's core operating systems reside on IBM AS400's, IBM RS6000's, and IBM OS/2 Local Area Network (LAN) servers which are connected in an open systems, client-server environment. The hardware is located in the Company's operations center at the Service Office. To ensure continuous operations, the Company also maintains backup systems capabilities at a third party contracted disaster recovery site. In-store systems consist of IBM 4684 and 4694 Point of Sale registers with Symbol Technology laser scanners. This technology enables the efficient processing of customer transactions, daily reporting of basic sales and transaction information, ordering and receipt of inventories, payroll processing and e-mail communication with the Service Office. Additionally, field managers are equipped with laptop computers which facilitate their communications capabilities and access to essential store, district and region level management reports. The Company has in place a Computer Assisted Replenishment (CAR) system which controls the flow of merchandise to the stores from its distribution centers in Harrison and Las Vegas. The system facilitates the maintenance of in-stock service levels with a minimum required investment in inventory. Additionally, the system's automated shelf marking capability has resulted in substantial store labor savings as the pricing of individual SKU's has been eliminated for most products. The operations of both distribution centers are, in turn, driven by an automated warehouse management system which also incorporates radio frequency laser scanning technology. This system enables the cost efficient handling and control of inventory in a paperless environment. Currently the Company is communicating through Electronic Data Interchange (EDI) with 48 of its highest volume vendors. During 1997 the company plans to continue to build these vendor partnerships and to integrate EDI technology into additional areas of the business. The objective of this technology is to improve the Company's supply chain management and enhance its inventory pipeline flexibility. The Company has been on the World Wide Web since the Fall of 1995 at 'www.lechters.com'. Its home page includes basic company information, a store locator, a customer service feedback form, and promotional information. The Company plans to expand its on-line presence in 1997. The Company is committed to maintaining the integrity and functionality of its information systems. Accordingly, it will continue to upgrade its current technology and expand its applications to ensure their effective support of the business, both internal operations and market focused programs. 9 12 COMPETITION The business in which the Company is engaged is highly competitive and many items sold by the Company are sold by department stores, general merchandise discount stores, hardware stores and others having greater financial and other resources than the Company. To a lesser extent, the Company also competes with mail order companies and other specialty retailers of home-related products. However, the Company believes that it competes favorably with such retailers because in the shopping and outlet centers where the Company's stores are located, the Company's stores are typically the only specialty housewares retailer. The Company offers a broader assortment of housewares merchandise than most of its competitors, and the Company's prices are generally lower than those charged by department stores and are generally competitive with those charged by general merchandise discount stores. Nevertheless, there can be no assurance that any or all of the factors listed above which enable the Company to compete favorably will not be adopted by companies having greater financial and other resources than the Company. ASSOCIATES On April 1, 1997, the Company employed 6,364 persons, 1,949 of whom were full-time (30 or more hours per week) and 4,415 of whom were part-time Associates. Of this total, 464 were located at the Company's Harrison, New Jersey Service Office and two distribution centers, 49 as Regional and District Managers, 6 as Loss Prevention Managers and the balance located at the Company's stores. On April 1, 1997, the 173 non-management office and distribution Associates at the Harrison, New Jersey facility were represented by UNITE, Local 99, under contracts expiring on March 15, 1999 with respect to non-management distribution center Associates and June 30, 1997 with respect to non-management office Associates. The 5,845 Associates in the Company's 649 retail stores are non-union. The 40 Associates at the Company's North Las Vegas, Nevada distribution center are also non-union. The Company has never experienced a strike or other labor disruption and is unaware of any current efforts or plans to organize its non-union Associates. The Company believes that its employee relations are satisfactory. 10 13 TRADEMARKS The Company has registered in the United States Patent and Trademark Office its service marks "Lechters," "Lechters Home Store," "Lechters Housewares," "The Kitchen Place" and "Famous Brands Housewares Outlet" for retail services, and its trademarks "Lechters", "The Kitchen Place", "Regent Gallery", "Cooks Club", "Perfect Bake", and "Simple Solutions" for certain housewares items. EXECUTIVE OFFICERS The following table shows information regarding executive officers of the Company as of April 19, 1997:
Position or Office Term of Employ- Name Age with the Company ment Commenced - ---- --- ---------------- -------------- Donald Jonas 67 Chairman of the Board January 1984 Chief Executive Officer and President Robert J. Harloe 52 Senior Vice President August 1994 - Human Resources Dennis Hickey 49 Senior Vice President January 1991 - Stores Frank J. O'Neill 48 Senior Vice President February 1992 - Director of Real Estate Ira S. Rosenberg 62 Vice President, January 1984 Secretary and Corporate Counsel James Shea 51 Senior Vice President November 1994 and General Merchandise Manager John W. Smolak 48 Senior Vice President February 1995 and Chief Financial Officer
11 14 Donald Jonas has been Chairman of the Board and a Director of the Company or its former parent since 1979. From 1979 to January 1994 he was also Chief Executive Officer. Mr. Jonas resumed the position of Chief Executive Officer and became President in January 1996. He is also a Director of Dress Barn, Inc. Robert J. Harloe was elected Senior Vice President - Human Resources of the Company in March 1996. Mr. Harloe became Vice President - Human Resources in September 1994 after joining the Company in August 1994. Prior to that he was Senior Vice President of Human Resources for Allied-Lyons Retailing. Allied-Lyons acquired Dunkin Donuts in 1990, where he was employed for 18 years. Dennis Hickey was elected Senior Vice President - Stores of the Company in March 1996. Mr. Hickey became Vice President - Stores in April 1991 after joining the Company in January 1991. Prior to that he was Vice President of Kay Bee Toy Stores, a Division of Melville Corp. from August 1990 to January 1991. From August 1985 to August 1990, Mr. Hickey was Vice President - Store Operations for Circus World Toy Stores, a Division of Greenman Bros. Frank J. O'Neill was elected Senior Vice President - Director of Real Estate of the Company in March 1996. Mr. O'Neill became Vice President - Director of Real Estate in April 1992 after joining the Company in February 1992. Prior to that he was employed for 14 years with the Melville Realty Company, most recently as the Senior Vice President. Ira S. Rosenberg has been Corporate Counsel of the Company or its former parent since 1979 and Vice President and Secretary of the Company since 1984. James Shea was elected Senior Vice President - General Merchandise Manager of the Company in December 1994. Prior to joining the Company in November 1994, Mr. Shea served as Senior Vice President, General Merchandise Manager, Homestore with Kaufmann's, a division of May Company, from 1990 to November 1995. From 1985 through 1990 he was employed by Lechmere, a hardgoods chain, as Vice President and General Merchandise Manager. Mr. Shea was also Vice President of Marketing and Merchandising for Eddie Bauer and spent 12 years with Dayton Department Stores in various merchandising positions. John W. Smolak was elected Senior Vice President and Chief Financial Officer of the Company in March 1996. Mr. Smolak became Vice President and Chief Financial Officer in April 1995 after joining the Company in February 1995. Prior to that he was employed by Jungle Jim's Playlands, Inc., a chain of family entertainment centers, as Senior Vice President, Finance and Administration. Mr. Smolak previously held the positions of Vice President, Finance and Chief Financial Officer for Precision Lenscrafters, Inc. and spent six years with the Marriott Corporation, in both the Corporate Finance function and as Vice President and Chief Financial Officer for their Roy Rogers Restaurants division. 12 15 ITEM 2. PROPERTIES. The general offices of the Company are located at 1 Cape May Street, Harrison, New Jersey. The Company leases approximately 540,000 square feet of floor space at this location. Approximately 490,000 square feet are being utilized for the distribution center, and approximately 50,000 square feet for the Company's service offices. This lease expires on January 31, 2007 and the Company has three five-year renewal options. The Company leases approximately 155,000 square foot distribution center in North Las Vegas, Nevada. Approximately 151,000 square feet are being utilized for the distribution center, and approximately 4,000 square feet for administrative offices. Constructed and opened in 1993, the facility is designed to enable expansion of an additional 100,000 square feet should the need arise. This lease expires on March 31, 2008 and the Company has four five-year renewal options. The Company leases all of its stores. Lease terms for the Company's stores are generally 10 to 12 years in duration without renewal options or five years with one or more renewal options and provide for a fixed minimum rental plus a percentage of sales once the minimum has been satisfied. However, certain stores are operated under short term extensions of otherwise expired leases. For additional information concerning the Company's leases, see the section of Item 1 entitled Real Estate and Note 7 to the Consolidated Financial Statements of the Company included elsewhere herein. ITEM 3. LEGAL PROCEEDINGS. There is no material litigation currently pending against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through solicitations of proxies or otherwise. 13 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock is traded on the over-the-counter market and is included in the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "LECH". The initial public offering of the Common Stock occurred in July 1989. The following table sets forth (as reported by NASDAQ) for the periods indicated the closing prices of the Common Stock.
Price of Common Stock --------------------- Fiscal 1996 High Low ----------- ---- --- 1st Quarter 8-1/8 4-1/4 2nd Quarter 7-1/4 4-3/8 3rd Quarter 5-3/4 4-1/4 4th Quarter 5-1/4 3-7/8 Fiscal 1995 High Low ----------- ---- --- 1st Quarter 19 14-3/4 2nd Quarter 16-3/4 12-1/4 3rd Quarter 14-1/4 9-1/4 4th Quarter 10-3/8 4-1/4
These quotations reflect inter-dealer prices, without retail markups, markdowns or commissions. On April 18, 1997, there were approximately 1,051 holders of record of the Common Stock. On April 18, 1997, the closing price of the Common Stock was $3.6875. The Company has never paid any cash dividends on its Common Stock and does not presently intend to pay any dividends on the Common stock for the foreseeable future. In addition, the Company's Credit Agreement contains certain covenants which restrict the ability of the Company to pay dividends. See Notes to the Consolidated Financial Statements. 14 17 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto set forth elsewhere herein.
Fifty-Two Fifty-Three Fifty-Three Weeks Ended Weeks Ended Fifty-Two Weeks Ended Weeks Ended February 1, February 3, January 28, January 29, January 30, 1997 1996 1995 1994 1993 ---- -------------- ------------------ --------------- ----------- (Dollars in thousands, except share, per share and selected operating data) Income Statement Data: Net sales $ 441,243 $ 432,048 $ 399,264 $ 350,196 $ 306,043 Cost of goods sold (including occupancy and indirect costs) 322,110 310,163 282,875 242,833 207,862 ----------- ------------ ----------- ----------- ----------- Gross profit 119,133 121,885 116,389 107,363 98,181 Selling, general and, administrative expenses 111,218 109,414 93,853 83,669 71,252 Restructuring expense -- (217) 11,000 -- -- ----------- ------------ ----------- ----------- ----------- Operating income 7,915 12,688 11,536 23,694 26,929 Other expenses (1) 3,372 5,039 5,838 4,991 2,497 ----------- ------------ ----------- ----------- ----------- Income before income tax provision 4,543 7,649 5,698 18,703 24,432 Income tax provision 1,200 3,146 2,336 7,623 9,044 ----------- ------------ ----------- ----------- ----------- Net income 3,343 4,503 3,362 11,080 15,388 Preferred dividend requirement 842 -- -- -- -- ----------- ------------ ----------- ----------- ----------- Net income available to common shareholders $ 2,501 $ 4,503 $ 3,362 $ 11,080 $ 15,388 =========== ============ =========== =========== =========== Net income per share (2) (3) $ 0.15 $ 0.26 $ 0.20 $ 0.65 $ 0.90 Weighted average shares outstanding 17,155,000 17,288,000 17,095,000 17,100,000 17,178,000
15 18
Fifty-Two Fifty-Three Fifty-Three Weeks Ended Weeks Ended Fifty-Two Weeks Ended Weeks Ended February 1, February 3, January 28, January 29, January 30, 1997 1996 1995 1994 1993 ---- -------------- ------------------ --------------- ----------- (Dollars in thousands, except share, per share and selected operating data) Selected Operating Data: Stores opened during year 16 48 49 61 81 Stores closed during year 9 11 11 7 6 Stores open at year end 649 642 605 567 513 Total square feet of store space (at year end) (4) 2,432,200 2,405,100 2,228,195 2,048,916 1,730,516 Sales per average square foot of total space (4) (5) $ 182 $ 186 $ 187 $ 185 $ 197 Percentage increase (decrease) in comparable store sales (6) (0.2%) (1.6%) 3.2% (1.2%) 2.8% Balance Sheet Data (At Year End): Working capital $ 151,954 $ 136,113 $ 134,785 $ 134,695 $ 137,807 Total assets 272,333 272,312 270,710 256,812 239,019 Long-term debt 58,853 75,038 77,777 82,859 85,006 Shareholders' equity 170,408 148,642 143,541 136,632 125,131 Total debt to total capitalization 25.7% 34.4% 36.0% 38.6% 40.5%
(1) Other expenses includes interest expense net of interest income and gains realized on the sale of government securities. (2) Net income per share for fiscal 1996 was calculated on net income less the preferred stock dividends requirement. (3) All share and per share amounts included herewith have been adjusted to give effect to the 2-for-1 stock split in April 1992. The Company has never paid any cash dividends on its Common Stock. (4) Approximately 90% of total store space represents selling area. The balance is storage and office space. (5) Average square feet of total store space represents the average of square feet of total store space at the beginning and end of each fiscal year. Sales per average square foot of total store space is the result of dividing net sales for the year by average square feet of total store space. These amounts are not adjusted to reflect the seasonal nature of the Company's sales or the impact of opening stores in different periods during the year. (6) Comparable store sales data are calculated based on each store's time in operation during the prior year (even if such store began operations in the prior year) compared with its corresponding time in operation during the current year. Comparable store sales for Fiscal 1996 and 1995 are reported on a 52 week basis. 16 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS FISCAL 1996 IN COMPARISON WITH FISCAL 1995 Net sales for Fiscal 1996, the 52 week period ended February 1, 1997, increased $9,195,000 to $441,243,000, a 2.1% increase over Fiscal 1995, the 53 week period ended February 3, 1996, primarily as a result of the addition of 7 stores and the impact of the introduction of the Company's advertising program. For Fiscal 1995, the Company adopted the National Retail Federation's reporting calendar which resulted in the additional week. On a comparable 52 week basis for both fiscal years, sales increased 3.5% and comparable store sales decreased 0.2%. At the close of the fiscal year, the Company operated 649 stores compared to 642 stores at close of the previous fiscal year, a net increase of 7 stores or 1.1%. Total retail space increased approximately 27,000 square feet to 2,432,000 at February 1, 1997. Gross profit for Fiscal 1996 was $119,133,000, a $2,752,000 decrease from Fiscal 1995. The resulting gross profit rate of 27.0% was 1.2 percentage points below that of Fiscal 1995. Gross profit was favorably impacted by an increase of higher margin merchandise from both foreign and domestic sources. However, promotional pricing associated with the Company's advertising programs and a highly competitive retail market place produced price reductions in excess of last year. Additionally, while inventory shrinkage was at the Company's historical average, it deteriorated from the exceptional performance of the prior year. Finally, rent and other occupancy costs were underabsorbed due to the decline in comparable store sales. Selling, general and administrative expenses increased $1,804,000 to $111,218,000. The expense rate of 25.2% of net sales was 0.1% percentage point below the rate of Fiscal 1995. While expenses increased due to the net addition of 7 stores and the implementation of the Company's advertising programs, savings were achieved in variable expenses such as benefits and Service Office payroll, one less week of operations expense, and the absence of significant contingent liability provisions as were required last year. Other expenses decreased $1,667,000 to $3,372,000, 0.8% of net sales. Interest expense decreased $1,917,000 as the early retirement of the outstanding $20,250,000 of Senior Notes Payable reduced interest expense by $1,787,000 for the year. Interest income of $1,650,000 was $205,000 lower than last year as the balance of marketable securities was lower for most of the year compared with Fiscal 1995. Income taxes for Fiscal 1996 were provided at a rate of 26.4% compared 41.1% for Fiscal 1995. The 1996 tax provision rate was reduced due to the reversal of residual estimated liabilities for prior years. 17 20 FISCAL 1995 IN COMPARISON WITH FISCAL 1994 Net sales for Fiscal 1995 increased $32,784,000 to $432,048,000, an 8.2% increase. Adjusting for the additional week which resulted from the Company's adoption of the retail calendar proposed by the National Retail Federation, net sales on a 52 week basis increased 6.8% over the prior year. Comparable store sales declined 1.6%. Sales growth was due to the opening of new stores. At the end of Fiscal 1995, the Company had 642 stores open compared to 605 at the close of the previous fiscal year, a net increase of 37 stores or a 6.1% increase. Total square feet of store space increased approximately 177,000 square feet during the year to 2,405,081 square feet. Gross profit for Fiscal 1995 was $121,885,000, a $5,496,000 increase over Fiscal 1994. Gross profit was 28.2% of net sales compared with 29.2% of net sales in Fiscal 1994. While the margins generated by merchandise sales were comparable to prior year's, there was an under absorption of rent and other occupancy expense caused by a decline in comparable store sales. Selling, general and administrative expenses increased by $15,561,000 to $109,414,000, and increased 1.8% as a percentage of net sales to 25.3%. The increase in selling, general and administrative expenses was due to planned increases in store and Service Office payroll and benefits and Service Office operating expenses. There was also a reduction in vendor support related to the increase in direct sourced foreign products and a set-a-side for certain contingent events. The Company recorded a pre-tax restructuring charge of $11,000,000 in the second quarter of Fiscal 1994. In the fourth quarter of Fiscal 1995, the Company recorded a $217,000 restructuring credit representing the residual reserve balance remaining after the final charges for inventory writedowns, store closings and severance costs had been determined. The restructuring reserve balance at the beginning of the fiscal year was approximately $2,400,000. At the close of the fiscal year the reserve related to restructuring was $951,000. This represents the final amount necessary to complete the restructuring plan. Other expenses incurred in Fiscal 1995 decreased $799,000 to $5,039,000, 1.2% of net sales. Interest expense for the year decreased $246,000 due to reduced long term debt resulting from scheduled repayments. Interest income improved by $406,000 due to improved cash management and higher interest rates earned on invested funds. The Company also earned a slight profit on government securities transactions compared to a slight loss for Fiscal 1994. The effective income tax rate for the Company was 41.1% for Fiscal 1995, compared with a rate of 41.0% for Fiscal 1994. The effective state rate declined in Fiscal 1995. The increase in the Other portion of the rate was due to other factors such as the expiration of the Targeted Jobs Tax Credit which expired for new hires on January 1, 1995. 18 21 LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and marketable securities at February 1, 1997 as reflected on the Consolidated Balance Sheets increased $19,266,000 over the balances at the close of the prior fiscal year. The increase in cash as depicted in the Statements of Cash Flows was $2,788,000 as net cash provided by operations exceeded cash used for investing activities, including the increase in marketable securities, and cash used in financing activities. Cash flows from operating activities consist primarily of net income adjusted for certain noncash expense items such as depreciation and amortization, deferred taxes and loss on disposal of property and equipment. Operating activities also include changes in accounts receivable, inventory, accounts payable and accrued expenses and other items. Net cash provided by operating activities was $28,604,000 for Fiscal 1996 compared to $9,333,000 for Fiscal 1995. For Fiscal 1996, in addition to net income of $3,343,000, the most significant operating activities providing cash, were depreciation and amortization of $17,113,000 and the reduction of $9,456,000 in merchandise inventories which was the result of strong inventory control measures. The most significant operating activity which reduced operating cash flow was the decrease in accounts payable, accrued liabilities and taxes of $5,089,000 primarily due to reduced vendor accounts payable related to the previously mentioned reduction of inventory. With respect to investing activities, in addition to the increase in marketable securities of $16,592,000, capital expenditures totaled $8,474,000 for Fiscal 1996 compared to $22,626,000 for Fiscal 1995. Capital expenditures were principally for the construction of and fixtures for new stores. During Fiscal 1996, 16 new stores were opened compared to 48 new stores during Fiscal 1995. Other capital expenditures were for renovation and remodeling of existing stores, warehouse equipment and systems enhancements. For Fiscal 1997, totaled planned capital expenditures are $12,000,000 primarily for new stores, renovations, remodels and system enhancements. With respect to financing activities, the Company improved its financial flexibility and liquidity through two significant transactions. On April 5, 1996, the Company issued $20,000,000 in Convertible Preferred Stock (See Note 3). This transaction has provided the Company with additional flexibility to meet its future financing requirements. The proceeds from the preferred stock issuance were utilized in the second transaction, the early repayment of $17,625,000 of the Senior Notes Payable during the first quarter of Fiscal 1996. The remaining Senior Notes Payable of $2,625,000 were retired during the third quarter of Fiscal 1996. During Fiscal 1996, the Company entered into an Amended and Restated Credit Agreement ("Credit Agreement") which provided for borrowings up to $40,000,000 (See Note 5). The unsecured Credit Agreement established a suballocation of $30,000,000 for letters of credit. At the close of Fiscal 1996, there were $9,219,000 in outstanding letters of credit. The term of the Credit Agreement was extended from November 19, 1996 to May 22, 1998. As of the close of Fiscal 1996, there were no borrowings outstanding under the Credit Agreement. 19 22 INFLATION AND SEASONALITY The Company does not believe that its operations have been materially affected by inflation during the two most recent fiscal years. While the Company does not expect that inflation would have a material impact upon operating results, there is no assurance that its business will not be affected by inflation in the future. The Company's business is highly seasonal. The Company benefits from the higher concentration of traffic in its stores during certain times of the year, especially the July to September "Back to School" period and the holiday selling seasons of November and December. In addition, the Company expects that its quarterly results of operations will fluctuate depending on the timing and amount of revenue contributed by new stores and the timing of costs associated with the opening of new stores. The Company's current strategy is to open substantially all of its new stores in the first three quarters of the fiscal year in order to minimize business disruptions during the heavy selling season in the last quarter of the fiscal year. See Note 10 of Notes to Consolidated Financial Statements of the Company included elsewhere herein. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The statement is effective for financial statements for periods ending after December 15, 1997, and changes the method in which earnings or net income per share will be determined. Adoption of this statement by the Company will not have a material impact on earnings per share. 20 23 PART III The information called for by Part III (Items 10, 11, 12 and 13) is incorporated by reference to the Company's definitive proxy statement in connection with its Annual Meeting of Shareholders to be held June 17, 1997. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. See the Index immediately following the signature page. (b) Reports on Form 8-K. None. (c) Exhibits. 3.1 Restated Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-29465 (the "Registration Statement")). 3.2 By-laws of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-40372). 4.1 Preferred Stock Purchase Agreement dated April 5, 1996.* 4.2 Indenture, dated as of September 27, 1991, between the Company and Chemical Bank, as Trustee. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended January 25, 1992). 10.1 1989 Stock Option Plan and form of Agreement pursuant to 1989 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registration Statement). 10.2 Amended and Restated Revolving Credit Agreement as of May 24, 1996. (Incorporated herein by reference to the Company's Form 10-Q, for the period ended May 4, 1996). 21 24 10.3 Form of Deferred Compensation Agreement (Incorporated herein by reference to Exhibit 10.5 to the Registration Statement). 10.4 Amendment No. 1 to Deferred Compensation Agreement, dated June 16, 1989. (Incorporated herein by reference to Exhibit 10.5.2 to Amendment No. 1 to the Registration Statement). 10.5 Amendment No. 2 to Deferred Compensation Agreement, dated August 15, 1989. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended January 26, 1991). 10.6 Amendment No. 3 to Deferred Compensation Agreement, dated June 15, 1995. (Incorporated herein by reference to the Company's Form 10-Q for the period ended July 29, 1995.) 10.7 Amendment No. 4 to Deferred Compensation Agreement between the Company and Donald Jonas dated April 8, 1996. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 3, 1996.) 10.8 Form of Consulting Agreement (Incorporated herein by reference to Exhibit 10.9.1 to the Registration Statement). 10.9 Forms of Amendment of Consulting Agreement (Incorporated herein by reference to Exhibit 10.9.2 to Amendment No. 1 to the Registration Statement). 10.10 Agreement between the Company and Local 99, UNITE to a collective bargaining agreement covering warehouse employees dated March 16, 1996.* 10.11 Lease for distribution Center space (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K, dated January 2, 1992). 10.12 Lease for Distribution Center space. (Incorporated herein by reference to Exhibit 1 to the Company's Form 10-Q, for the period ended July 25, 1992). 21 Subsidiaries of the Company. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 3, 1996.) 23 Consent of Deloitte & Touche LLP.* 24 Powers of Attorney dated April 10, 1997.* *Filed herewith. 22 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LECHTERS, INC. (Registrant) By: /s/ Donald Jonas ------------------------------ Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on May 2, 1997 by the following persons in their respective capacities set forth opposite their names, which include its principal executive officer, its principal financial and accounting officer and a majority of the board of directors.
Signature Title --------- ----- /s/ DONALD JONAS Chairman of the Board and - --------------------------- Chief Executive Officer and Director (DONALD JONAS) (Principal Executive Officer) /s/ JOHN W. SMOLAK Senior Vice President (Principal Financial - --------------------------- Officer and Principal Accounting Officer) (JOHN W. SMOLAK) /s/ MARTIN BEGUN Director - --------------------------- (MARTIN BEGUN*) /s/ CHARLES A. DAVIS Director - --------------------------- (CHARLES A. DAVIS*) /s/ BERNARD D. FISCHMAN Director - --------------------------- (BERNARD D. FISCHMAN*) /s/ ROBERT KNOX Director - --------------------------- (ROBERT KNOX*) /s/ ALBERT LECHTER Director - --------------------------- (ALBERT LECHTER*) /s/ ANTHONY MALKIN Director - --------------------------- (ANTHONY MALKIN*) /s/ ROBERTA MANEKER Director - --------------------------- (ROBERTA MANEKER*)
23 26
Signature Title --------- ----- /s/ NORMAN MATTHEWS Director - ------------------------------------------------ (NORMAN MATTHEWS*) /s/ LEONARD PFEFFER Director - ------------------------------------------------ (LEONARD PFEFFER*) /s/ JOHN WOLFF Director - ------------------------------------------------ (JOHN WOLFF*)
*By: John W. Smolak Attorney-in-fact 24 27 LECHTERS, INC. AND SUBSIDIARIES TABLE OF CONTENTS
Page ---- MANAGEMENT'S REPORT F-1 INDEPENDENT AUDITORS' REPORT F-2 FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED FEBRUARY 1, 1997: Consolidated Balance Sheets F-3 Consolidated Statements of Income F-4 Consolidated Statements of Cash Flows F-5 Consolidated Statements of Shareholders' Equity F-6 Notes to Consolidated Financial Statements F-7 - F-19
28 MANAGEMENT'S REPORT To the Shareholders of Lechters, Inc.: We have prepared Lechters, Inc. consolidated financial statements, including the notes and other financial information appearing in this Annual Report on Form 10-K, and are responsible for the integrity and objectivity of the accompanying financial statements and related information. In order to fulfill this responsibility, policies have been established that require each system of internal accounting control provide reasonable assurance, giving due regard to the cost of implementing and maintaining the system, that transactions are executed in accordance with management's intention and authorization, that accounting books and records are prepared and maintained so as to permit the preparation of the financial statements in accordance with generally accepted accounting principles, and that accountability for assets, liabilities and equity is maintained. Compliance with these policies is verified, and the continuing adequacy of accounting policies and procedures is evaluated. In addition, Lechters, Inc.'s independent auditors obtain and maintain an understanding of the accounting and administrative controls in place and, based on tests of those controls and of accounting records, render an opinion on the fairness of presentation of the financial statements. The Audit Committee of the Board of Directors, composed of non-management Board members, and management representatives, meet periodically with the independent auditors to receive their reports and direct compliance with their recommendations. Further, we recognize our responsibility to conduct Lechters' business in accordance with high moral and ethical standards. Policies have been established and review programs are maintained to ensure that all business activities are in compliance with these standards. Donald Jonas Chairman of the Board and Chief Executive Officer John W. Smolak Senior Vice President and Chief Financial Officer F-1 29 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Lechters, Inc. Harrison, New Jersey We have audited the accompanying consolidated balance sheets of Lechters, Inc. and subsidiaries (collectively the "Company") as of February 1, 1997 and February 3, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ending February 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 1997 and February 3, 1996, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Parsippany, New Jersey March 26, 1997 F-2 30 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share amounts)
February 1, February 3, 1997 1996 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,022 $ 4,234 Marketable securities (Note 9) 54,084 37,606 Accounts receivable 5,561 5,573 Merchandise inventories 100,442 109,898 Prepaid expenses 5,734 5,519 --------- -------- Total current assets 172,843 162,830 --------- -------- PROPERTY AND EQUIPMENT: Fixtures and equipment 66,828 64,688 Leasehold improvements 102,912 100,840 --------- -------- 169,740 165,528 Less accumulated depreciation and amortization 74,356 60,446 --------- -------- Net property and equipment 95,384 105,082 --------- -------- OTHER ASSETS 4,106 4,400 --------- -------- TOTAL ASSETS $ 272,333 $272,312 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,264 $ 7,827 Dividends payable-preferred stock 1,010 -- Salaries, wages and other accrued expenses 13,318 13,546 Taxes, other than income taxes 1,318 1,591 Income taxes payable (Note 6) 1,979 753 Current portion long-term debt (Note 4) -- 3,000 --------- -------- Total current liabilities 20,889 26,717 LONG-TERM DEBT, LESS CURRENT PORTION (Note 4): 58,853 75,038 DEFERRED INCOME TAXES (Note 6) 16,454 17,348 OTHER LIABILITIES 5,729 4,567 COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 7 and 8) SHAREHOLDERS' EQUITY (Note 3): Convertible preferred stock, $100 par value authorized 1,000,000 shares, Issued and outstanding Series A - 149,999 shares and Series B - 50,001 shares 20,000 -- Common stock, no par value, authorized 50,000,000 shares, issued and outstanding 17,155,086 58 58 Unrealized holding gain (loss) on available for sale securities (Note 9) (29) 38 Additional paid-in capital 62,273 62,773 Retained earnings 88,106 85,773 --------- -------- Total shareholders' equity 170,408 148,642 --------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 272,333 $272,312 ========= ========
See notes to consolidated financial statements. F-3 31 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except share and per share amounts)
Fifty-Two Fifty-Three Fifty-Two Weeks Ended Weeks Ended Weeks Ended February 1, February 3, January 28, 1997 1996 1995 ----------- ----------- ------------ NET SALES $ 441,243 $ 432,048 $ 399,264 COST OF GOODS SOLD (including occupancy and indirect costs) 322,110 310,163 282,875 ------------ ------------ ------------ GROSS PROFIT 119,133 121,885 116,389 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 7 and 8) 111,218 109,414 93,853 RESTRUCTURING EXPENSE (Note 2) -- (217) 11,000 ------------ ------------ ------------ OPERATING INCOME 7,915 12,688 11,536 OTHER EXPENSES (INCOME): Interest Expense 5,003 6,920 7,166 Interest Income (1,650) (1,855) (1,449) Loss (Gain) on Sale of Government Securities (Note 9) 19 (26) 121 ------------ ------------ ------------ 3,372 5,039 5,838 ------------ ------------ ------------ INCOME BEFORE INCOME TAX PROVISION 4,543 7,649 5,698 INCOME TAX PROVISION (Note 6) 1,200 3,146 2,336 ------------ ------------ ------------ NET INCOME 3,343 4,503 3,362 Preferred Stock Dividend Requirement 842 -- -- ------------ ------------ ------------ Net Income Available to Common Shareholders $ 2,501 $ 4,503 $ 3,362 ============ ============ ============ NET INCOME PER COMMON SHARE $ 0.15 $ 0.26 $ 0.20 ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 17,155,000 17,288,000 17,095,000 ============ ============ ============
See notes to consolidated financial statements F-4 32 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Fifty-Two Fifty-Three Fifty-Two Weeks Ended Weeks Ended Weeks Ended February 1, February 3, January 28, 1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,343 $ 4,503 $ 3,362 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Restructuring charge -- (217) 11,000 Depreciation and amortization 17,113 16,056 14,269 Loss on disposal of property and equipment 1,067 954 550 Deferred income taxes (894) 3,227 1,397 Deferred rent 1,160 1,020 800 Other 1,297 1,442 579 Changes in operating assets and liabilities, net of effects of restructuring: Decrease (Increase) in accounts receivable 12 1,095 (753) Decrease (Increase) in merchandise inventories 9,456 (12,575) (7,052) Decrease (Increase) in prepaid expenses (215) (918) 761 Decrease (Increase) in other assets 128 (51) 17 Increase (Decrease) in accounts payable, accrued salaries, wages and other accrued expenses and taxes, other than income taxes (5,089) (5,201) 8,911 Increase (Decrease) in income taxes payable 1,226 (2) 425 -------- -------- -------- Net cash provided by operating activities 28,604 9,333 34,266 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (8,474) (22,626) (20,592) (Increase) Decrease in marketable securities (16,592) 6,153 (4,546) -------- -------- -------- Net cash used in investing activities (25,066) (16,473) (25,138) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of convertible preferred stock 20,000 -- -- Expenses of Issuance of convertible preferred stock (500) -- -- Repayment of long-term debt (20,250) (3,750) (6,000) Exercise of stock options -- 350 2,683 -------- -------- -------- Net cash used in financing activities (750) (3,400) (3,317) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,788 (10,540) 5,811 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,234 14,774 8,963 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,022 $ 4,234 $ 14,774 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Unrealized holding gain (loss) on available for sale securities $ (50) $ 64 $ (356) ======== ======== ======== Cash paid (refunded) during the year for: Interest $ 4,616 $ 6,031 $ 6,491 ======== ======== ======== Income taxes $ 920 $ (820) $ 121 ======== ======== ========
See notes to consolidated financial statements. F-5 33 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Amounts in thousands, except share amounts)
Common Convertible Preferred Unrealized Stock Issued Stock Issued Additional Holding ------------------ --------------------- Paid-In Retained Gain Shares Amount Shares Amount Capital Earnings (Loss) Total ------ ------ ------ ------ ------- -------- ------ ----- BALANCE, JANUARY 29, 1994 16,783,472 $58 -- $- $ 58,666 $ 77,908 $ -- $ 136,632 Unrealized holdings loss -- -- -- -- -- -- (210) (210) Exercise of stock options 335,174 -- -- -- 2,683 -- -- 2,683 Tax benefit from exercise of stock options -- -- -- -- 1,074 -- -- 1,074 Net Income -- -- -- -- -- 3,362 -- 3,362 ---------- --- ------- ------- -------- -------- ----- --------- BALANCE, JANUARY 28, 1995 17,118,646 58 -- -- 62,423 81,270 (210) 143,541 Unrealized gain (loss) Adjustment -- -- -- -- -- -- 248 248 Exercise of stock options 36,440 -- -- -- 350 -- -- 350 Net income -- -- -- -- -- 4,503 -- 4,503 ---------- --- ------- ------- -------- -------- ----- --------- BALANCE, FEBRUARY 3, 1996 17,155,086 58 -- -- 62,773 85,773 38 148,642 Unrealized gain (loss) Adjustment -- -- -- -- -- -- (67) (67) Issuance of Convertible Preferred Stock Net of Issuance Expenses -- -- 200,000 20,000 (500) -- -- 19,500 Net Income -- -- -- -- -- 3,343 -- 3,343 Declaration of Dividend on Convertible Preferred Stock -- -- -- -- -- (1,010) -- (1,010) ---------- --- ------- ------- -------- -------- ----- --------- BALANCE, FEBRUARY 1, 1997 17,155,086 $58 200,000 $20,000 $ 62,273 $ 88,106 ($ 29) $ 170,408 ========== === ======= ======= ======== ======== ===== =========
See notes to consolidated financial statements. F-6 34 LECHTERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED FEBRUARY 1, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Business - Lechters, Inc. and its subsidiaries (collectively, the "Company") is a specialty retailer of primarily brand-name basic housewares and decorative housewares. As of February 1, 1997, the Company operated 649 stores in 44 states. b. Basis of Presentation - The consolidated financial statements include the accounts of Lechters, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. References to Fiscal 1996 and Fiscal 1995 mean the fiscal year ending on the Saturday closest to the end of January. References to Fiscal 1994 mean the fiscal year ending on the last Saturday in January of the following year. Fiscal year 1996 was comprised of 52 weeks, Fiscal 1995 was comprised of 53 weeks and fiscal year 1994 was comprised of 52 weeks. c. Cash Equivalents and Marketable Securities - The Company considers cash on hand in stores, deposits in banks and all highly liquid debt instruments, with original maturities of 90 days or less when purchased, as cash and cash equivalents. Marketable securities are cash investments, primarily U.S. Government securities, with original maturities exceeding 90 days at time of purchase. The Company classifies marketable securities as "Available for Sale" which are carried at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net-of-taxes. (See Note 9.) F-7 35 d. Merchandise Inventories - Merchandise inventories are stated on the following methods:
February 1, February 3, 1997 1996 ----------- ----------- Lower of cost (first-in, first-out) or market as determined by the retail inventory method (stores) $ 73,993,000 $ 76,902,000 Lower of cost (first-in, first-out) or market (distribution centers) 26,449,000 32,996,000 ------------ ------------ $100,442,000 $109,898,000 ============ ============
The Company includes as inventoriable costs, certain indirect costs, principally purchasing, warehousing and distribution costs, which are necessary to bring inventory to the point of sale. At February 1, 1997 total indirect costs included as part of inventory were approximately $8,750,000. At February 3, 1996, indirect costs included as part of inventory were approximately $9,600,000. e. Property and Equipment - Property and equipment are stated at cost. Depreciation and amortization are computed principally by the straight-line method by charges to earnings in amounts sufficient to write-off the cost of depreciable assets over their estimated lives, or where applicable, the terms of the respective leases, whichever is shorter. During Fiscal 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of SFAS 121 resulted in a $370,000 provision for Fiscal 1996. f. Preopening Costs - Preopening costs are capitalized and amortized over a period of 12 months from the date operations commence. g. Income Taxes - The Company uses the asset and liability method for financial accounting and reporting for income taxes. A valuation allowance is established, when necessary, to reduce the deferred tax assets to their estimated realizable amounts. (See Note 6.) F-8 36 h. Net Income Per Share - Net income per share data were computed by dividing net income less dividend requirements on the Convertible Preferred Stock by the weighted average number of common shares and common share equivalents outstanding during each period. Common share equivalents include outstanding stock options. The Company's 5% Convertible Subordinated Debentures issued in September 1991 did not qualify as a common stock equivalent at the time of issue and are not included in the calculation of primary net income per share. The 5.05% Convertible Preferred Stock issued in April 1996, also did not qualify as a common stock equivalent at the time of issue and are not included in the calculation of primary net income per share. For the purpose of computing fully diluted net income per share, the assumed conversion of the debentures and the preferred stock would have an anti-dilutive effect on Fiscal 1996 and the assumed conversion of the debentures would have an anti-dilutive effect on Fiscal 1995 and 1994 net income per share. The number of shares used in computing net income per share was determined as follows:
Fiscal Year Ended -------------------------------------------- February 1, February 3, January 28, 1997 1996 1995 ---------- ---------- ----------- Weighted average common shares outstanding 17,155,000 17,147,000 16,898,000 Common share equivalents -- 141,000 197,000 ---------- ---------- ---------- 17,155,000 17,288,000 17,095,000 ========== ========== ==========
i. Fair Value of Financial Instruments - SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheet of the Company, for which it is practicable to estimate fair value. The estimated fair values of financial instruments which are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange. F-9 37 The fair value of the Company's cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values at February 1, 1997 and February 3, 1996, due to the short term maturities of these investments. The fair value of the Company's long-term debt at February 1, 1997 and February 3, 1996 was $41,762,500 and $61,380,000, respectively. The carrying value of long-term debt at February 1, 1997 and February 3, 1996 was $58,853,000 and $78,038,000, respectively. The fair value of the Company's long-term debt is based on market prices or dealer quotes (for publicly traded debentures) and on discounted future cash flows using current interest rates for financial instruments with similar characteristics and maturity (for senior notes). j. Recent Accounting Pronouncements - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The statement is effective for financial statements for periods ending after December 15, 1997, and changes the method in which net income per share will be determined. Adoption of this statement by the Company will not have a material impact on net income per share. k. Use of Estimates - The Company utilizes estimates and assumptions in the preparation of financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. l. Reclassifications - Certain reclassifications have been made to the financial statements of prior years to conform with the classifications used for Fiscal 1996. 2. RESTRUCTURING CHARGE During the second quarter of Fiscal 1994, the Company recorded a pretax restructuring charge of $11,000,000 (approximately $6,500,000 after tax, or $0.38 per share) related to its plan to close 10 unprofitable stores and discontinue various unprofitable merchandise lines. The plan called for the termination of the employment of approximately 19 associates from store operations, the service office and distribution centers. This restructuring was completed in Fiscal 1995 and excess reserves of $217,000 were credited to operating income in Fiscal 1995. F-10 38 3. SHAREHOLDERS' EQUITY a. CONVERTIBLE PREFERRED STOCK - On April 5, 1996, the Company issued 149,999 shares of Series A Convertible Preferred Stock, $100 par value ("Series A Preferred Stock") and 50,001 shares of Series B Convertible Preferred Stock, $100 par value ("Series B Preferred Stock") at par value. Said shares of Convertible Preferred Stock were sold to Prudential Private Equity Investors III, L.P. for $20,000,000. The proceeds from the sale of the Series A and Series B Preferred Stock were used to prepay $15,000,000 of the 9.53% Senior Notes due 2001 and $2,625,000 of the 10.5% Senior Notes due 1998. The balance of the proceeds were used for general corporate purposes. Expenses of the private placement were charged to Additional Paid-in Capital. Series A Preferred Stock and Series B Preferred Stock are convertible to Common Stock at a conversion price of $6.25 per share. Series A Preferred Stock is convertible to 2,399,984 shares of common stock and has voting rights equivalent to that number of common shares. Series B Preferred Stock is convertible to 800,016 of shares of common stock but has no voting rights. Both Series A Preferred Stock and Series B Preferred Stock receive a dividend of 5.05% payable annually. Series A Preferred Stock and Series B Preferred Stock did not qualify as common stock equivalents at the time of issue. Robert Knox, a Director of the Company, is a limited partner in Prudential Private Equity Investors III, L.P. b. STOCK OPTIONS - In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," was issued and is effective for financial statements for fiscal years beginning after December 1995. As permitted by this statement, the Company will continue to measure compensation cost for stock option plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees." Accordingly, no compensation cost has been recognized for the Company's stock option plan. If compensation cost for stock options had been determined based on fair values at the grant dates, net income available to common shareholders and net income per share would have been reduced to the pro forma amounts below, for the fiscal years ended February 1, 1997 and February 3, 1996.
February 1, February 3, 1997 1996 ---------- ---------- Net income available to common shareholders: As reported $ 2,501,000 $ 4,503,000 Pro-forma $ 2,079,000 $ 4,478,000 Net income per share: As reported $ 0.15 $ 0.26 Pro-forma $ 0.12 $ 0.26
The pro forma effect of applying FAS 123 is not necessarily indicative of the effect on reported net income for future years. F-11 39 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used during the respective years to estimate the fair value of options granted:
Fiscal Year Ended ------------------------- February 1, February 3, 1997 1996 ----------- ----------- Dividend yield 0% 0% Expected volatility 68% 51% Risk-free interest rate 6.3% 6.0% Expected life of options 6 years 6 years
Options granted under the Company's 1989 Incentive and Non-Qualified Stock Option Plan are granted at market value on the date of grant and are exercisable at a rate of 20% per year over a five-year period commencing with the date of grant and expire in 10 years. In June 1989, the Company granted to a consultant a non-qualified option to purchase 120,302 shares of the Company's common stock at a price of $6.65 per share, which reflected the fair market value on the date of grant. The option is exercisable in annual installments over a period of four years. Changes in stock options were as follows:
Fiscal 1996 Fiscal 1995 ------------------------------- ------------------------------- Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Beginning balance 940,320 $ 5.80 908,620 $ 13.51 Granted 283,990 5.12 1,135,650 8.04 Exercised 0 0 (36,440) 9.62 Canceled (114,990) 8.34 (1,067,510) 14.62 --------- ----------- ---------- ----------- Ending balance 1,109,320 $ 5.36 940,320 $ 5.80 ========= =========== ========== =========== Reserved for future grant at year end 405,590 574,590 Exercisable 213,730 $ 6.60 136,560 $ 9.48 Weighted average fair value of options granted during the year $ 3.41 $ 4.50
F-12 40 The following table summarizes information concerning stock options outstanding at February 1, 1997:
Options Outstanding Options Exercisable -------------------------------------------------- ------------------------------- Weighted Average Number Outstanding at Remaining Weighted Exercisable at Weighted Number Range of February 1, Contractual Average February 1, Average Exercise Prices 1997 Life in Years Exercise Price 1997 Exercise Price --------------- -------------- ---------------- -------------- -------------- -------------- $ 4.25 to $ 5.00 730,350 9.0 $ 4.99 99,630 $ 5.00 5.01 to 8.50 344,220 8.2 5.61 80,720 6.97 10.00 to 14.50 34,250 2.8 10.52 32,980 10.39 20.50 500 5.4 20.50 400 20.50 --------- ------- $ 4.25 to $ 20.50 1,109,320 213,730 ========= =======
4. LONG-TERM DEBT Long-term debt outstanding is as follows:
February 1, February 3, 1997 1996 ----------- ----------- Senior Notes, 10.5% due 1998 (a) $ -- $ 5,250,000 Senior Notes, 9.53% due 2001 (a) -- 15,000,000 Convertible Subordinated Debentures, 5% due 2001 (b) 58,853,000 57,788,000 ----------- ----------- Total 58,853,000 78,038,000 Less current portion (c) 0 3,000,000 ----------- ----------- $58,853,000 $75,038,000 =========== ===========
(a) During Fiscal Year 1996, the Company retired both series of Senior Notes Payable. Senior Notes (the "1988 Notes") were due September 1, 1998. Interest on the 1988 Notes was payable semiannually on March 1 and September 1 of each year. Beginning September 1, 1994, and each year thereafter until the 1988 Notes were paid in full, the Company was required to repay $3,000,000 of the principal amount of the 1988 Notes. The 9.53% Senior Notes (the "1991 Notes") were due May 1, 2001. Interest on the 1991 Notes was payable semiannually on May 1 and November 1 of each year. Beginning May 1, 1997, and each year thereafter until the 1991 Notes were paid in full, the Company was required to repay $3,000,000 of the principal amount of the 1991 Notes. The Company was able to prepay the 1988 Notes and the 1991 Notes (collectively, the "Notes") at any time, in whole or in part, at a price equal to the greater of par or the present value of the future debt service on the Notes, discounted at 1/2% above the then current yield on U.S. Treasury securities of a maturity comparable to the remaining weighted average life of the Notes. The provisions of the note agreements included a requirement that the Company maintain a current ratio of at least 1.5 to 1 and limitations on liens, sale and leaseback transactions, funded debt, payment of dividends, acquisitions, investments, sales of assets and incurrence of leases. F-13 41 (b) The 5% Convertible Subordinated Debentures (the "Debentures") were issued in 1991 with a yield to maturity of approximately 7.47%. At February 1, 1997 and February 3, 1996, the unamortized original issue discount was $6,147,000 and $7,212,000, respectively. The Debentures are convertible into Common Stock of the Company prior to maturity at a conversion of 32.79 shares per $1,000 principal amount at maturity. Amounts charged to income for the amortization of debenture discount were $1,066,000 and $1,011,000 for Fiscal 1996 and Fiscal 1995, respectively. The Debentures have not been and will not be registered under the United States Securities Act of 1933. (c) The long term debt at February 1, 1997 of $58,853,000 is due in the fiscal year 2001. 5. LINE OF CREDIT At February 1, 1997, the Company had an unused $40,000,000 unsecured Credit Agreement (the "Credit Agreement") with a group of banks. This agreement was amended and restated on May 23, 1996. The Credit Agreement includes a sub-allocation of $30,000,000 for letters of credit. Borrowings under the Credit Agreement bear a base rate interest of either (1) the higher of the prime rate and the sum of the Federal Fund Rate plus 1/2%; or (2) an Adjusted Eurodollar Rate based on LIBOR. The Credit Agreement requires maintenance of certain earnings and fixed charge coverage ratios, and the interest rate payable is adjusted by from 1.4% to 2.5% over the above base rate depending on the ratio of consolidated indebtedness to pre-tax cash earnings. The Credit Agreement expires May 22, 1998. At the end of Fiscal 1996 and Fiscal 1995, there were no borrowings outstanding under the Company's Credit Agreement. At February 1, 1997 and February 3, 1996, the Company was liable for outstanding letters of credit in the amount of approximately $9,219,000 and $8,886,000, respectively. F-14 42 6. INCOME TAXES The provision for income taxes consists of the following:
Fiscal Year Ended ---------------------------------------------- February 1, February 3, January 28, 1997 1996 1995 ------------ ----------- ----------- Federal: Current $ 1,448,000 $ 832,000 $ 677,000 Deferred (625,000) 1,505,000 936,000 ----------- ---------- ---------- 823,000 2,337,000 1,613,000 ----------- ---------- ---------- State: Current 625,000 630,000 262,000 Deferred (248,000) 179,000 461,000 ----------- ---------- ---------- 377,000 809,000 723,000 ----------- ---------- ---------- $ 1,200,000 $3,146,000 $2,336,000 =========== ========== ==========
A reconciliation of the statutory Federal income tax rate with the effective rate is as follows:
Fiscal Year Ended -------------------------------------- February 1, February 3, January 28, 1997 1996 1995 ----------- ----------- ----------- Statutory Federal income tax rate 34.0% 34.0% 34.0% State income taxes, net of Federal benefit 5.5 7.0 8.4 Reversal of prior year residual estimated liabilities (12.4) -- -- Other (0.7) 0.1 (1.4) ---- ---- ---- Effective income tax rate 26.4% 41.1% 41.0% ==== ==== ====
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 43 The components of the non-current deferred tax liability (asset) are as follows:
February 1, February 3, 1997 1996 ------------ ------------ Accelerated tax depreciation $ 18,281,000 $ 18,085,000 Reserve not currently deductible (539,000) (737,000) AMT credit carryovers (1,288,000) -- ------------ ------------ $ 16,454,000 $ 17,348,000 ============ ============
The Company files consolidated Federal and state income tax returns. Deferred income tax expense during Fiscal 1996, 1995 and 1994 principally resulted from the use of accelerated methods of depreciation for tax purposes over the straight-line method used for financial reporting purposes. 7. LEASES At February 1, 1997, the Company leased all of its stores and two facilities for its corporate office, warehouse and distribution operations. These operating leases expire on varying dates to 2008. At February 1, 1997, aggregate minimum rentals in future periods are as follows:
Minimum Fiscal Rental Year Commitment ------ ----------- 1997 $49,919,000 1998 $46,645,000 1999 $41,319,000 2000 $36,735,000 2001 $32,537,000 Thereafter $97,033,000
The preceding does not include contingent rentals which may be payable under certain leases on the basis of percentage of sales in excess of stipulated amounts. The amounts of such additional rentals incurred were as follows:
Fiscal Year Amount ------ ------ 1996 $2,320,000 1995 $1,913,000 1994 $1,708,000
F-16 44 Total rent expense was as follows:
Fiscal Year Amount ------ ------ 1996 $52,729,000 1995 $50,712,000 1994 $45,014,000
8. EMPLOYEE BENEFIT PLANS AND OTHER COMMITMENTS Pursuant to collective bargaining agreements, the Company is obligated to make contributions to union-administered health and welfare, retirement and severance funds which provide benefits for the Company's union-represented associates. Payments under these agreements amounted to approximately $994,000, $1,070,000 and $1,037,000 in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. In January 1994, the Company adopted a voluntary 401(k) savings plan. The Company matches 25% of each associate's contribution, up to a maximum of 5% of salary. This match is paid in Company common stock purchased by the Trustee on the open market. Approximately $154,000, $181,000 and $176,000 were charged to expense in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. The Company has a Deferred Compensation Plan covering certain key executives which provides that, at retirement, these associates will receive for a 10-year period an annual predetermined benefit, the amount of which is dependent upon their retirement age. The maximum amount that the associate may receive is being accrued for financial reporting purposes over the employment period. Approximately $129,000, $134,000 and $71,000 were charged to expense in Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. The Company has entered into consulting agreements with certain senior executives whereby, at retirement, these associates will provide consulting and advisory services for a 10-year period. The maximum aggregate amount payable under these agreements is $400,000 per year. F-17 45 9. AVAILABLE FOR SALE SECURITIES The following is a summary of the available for sale securities which comprise the balance in "marketable securities" at February 1, 1997 and February 3, 1996:
Gross Gross February 1, Unrealized Unrealized Estimated 1997 Cost Gains Losses Fair Value ------------------- ------ ----- ------ ---------- Government Bonds $50,300,000 $ -- $(58,000) $50,242,000 Municipal Bonds 3,834,000 8,000 -- 3,842,000 ----------- ------- -------- ----------- Total available for sale securities $54,134,000 $ 8,000 $(58,000) $54,084,000 =========== ======= ======== ===========
Gross Gross February 3, Unrealized Unrealized Estimated 1996 Cost Gains Losses Fair Value ------------------- ------ ----- ------ ---------- Government Bonds $35,489,000 $60,000 $ (2,000) $35,547,000 Municipal Bonds 2,053,000 6,000 -- 2,059,000 ----------- ------- -------- ----------- Total available for sale securities $37,542,000 $66,000 $ (2,000) $37,606,000 =========== ======= ======== ===========
The cost and estimated fair value of debt securities at February 1, 1997 by contractual maturity are as follows:
Estimated Cost Fair Value ------ ---------- 1997 $35,642,000 $35,625,000 1998 14,658,000 14,617,000 1999 3,834,000 3,842,000 ----------- ----------- Total available for sale securities $54,134,000 $54,084,000 =========== ===========
Net gains from the sales of available for sale securities are reported on the consolidated statement of income as "Loss (Gain) on Sale of Government Securities". The components of "Loss (Gain) on Sales of Government Securities" for Fiscal 1996, 1995 and 1994 are as follows:
Gross Gross Loss (Gain) Fiscal Realized Realized on Sale of Year Gains Losses Government Securities ------ ----- ------ --------------------- 1996 $ (9,000) $ 28,000 $ 19,000 1995 $(114,000) $ 88,000 $ (26,000) 1994 $ (16,000) $137,000 $ 121,000
F-18 46 10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Fiscal Quarter Ended ----------------------------------------------------------------------- May 4, August 3, November 2, February 1, 1996 1996 1996 1997 ------ --------- ----------- ----------- (Amounts in thousands except share and per share amounts) Net sales $ 84,992 $ 92,727 $ 98,495 $ 165,029 Gross profit 20,614 21,878 25,317 51,324 Income (loss) before income tax provision (5,977) (4,793) (2,653) 17,966 Net income (loss) (3,526) (2,828) (1,565) 11,262 Net income (loss) per share (a) (b) (d) $ (0.21) $ (0.18) $ (0.11) $ 0.64 Number of shares used in computing net income (loss) per share 17,155,000 17,155,000 17,155,000 17,155,000
Fiscal Quarter Ended ----------------------------------------------------------------------- April 29, July 29, October 28, February 3, 1995 1995 1995 1996 -------- --------- ----------- ----------- (Amounts in thousands except share and per share amounts) Net sales $ 80,316 $ 88,671 $ 95,148 $ 167,913 Gross profit 20,240 22,745 24,850 54,050 Restructuring expense -- -- -- (217) Income (loss) before income tax provision (3,973) (3,163) (1,559) 16,344 Net income (loss) (2,344) (1,866) (921) 9,634 Net income (loss) per share (a) (c) (d) $ (0.13) $ (0.11) $ (0.05) $ 0.56 Number of shares used in computing net income (loss) per share 17,416,000 17,333,000 17,238,000 17,183,000
(a) Net (loss) income per share is calculated based on net (loss) income less the dividend requirement of the Convertible Preferred Stock. (b) Fully diluted net income per share, assuming conversion of the Company's 5% Convertible Subordinated Debentures and elimination of the related interest costs less applicable income taxes and assuming conversion of the 5.05% Convertible Preferred Stock and elimination of the related dividend was $0.54 for the thirteen weeks ended February 1, 1997 on weighted average shares outstanding of 22,487,000. (c) Fully diluted net income per share, assuming conversion of the Company's 5% Convertible Subordinate Debentures and elimination of the related interest costs less applicable income taxes was $0.53 per share for the fourteen weeks ended February 3, 1996 on weighted average shares outstanding of 19,314,000. (d) Difference of $0.01 between full year income per share and the resulting income per share from the sum of each of the quarters in Fiscal 1996 is due to rounding and Fiscal 1995 is due to the weighted average share calculation and the seasonality of the business. F-19 47 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 3.1 Restated Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-29465 (the "Registration Statement")). 3.2 By-laws of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-40372). 4.1 Preferred Stock Purchase Agreement dated April 5, 1996.* 4.2 Indenture, dated as of September 27, 1991, between the Company and Chemical Bank, as Trustee. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended January 25, 1992). 10.1 1989 Stock Option Plan and form of Agreement pursuant to 1989 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registration Statement). 10.2 Amended and Restated Revolving Credit Agreement as of May 24, 1996. (Incorporated herein by reference to the Company's Form 10-Q, for the period ended May 4, 1996). 10.3 Form of Deferred Compensation Agreement (Incorporated herein by reference to Exhibit 10.5 to the Registration Statement). 10.4 Amendment No. 1 to Deferred Compensation Agreement, dated June 16, 1989. (Incorporated herein by reference to Exhibit 10.5.2 to Amendment No. 1 to the Registration Statement). 10.5 Amendment No. 2 to Deferred Compensation Agreement, dated August 15, 1989. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended January 26, 1991). 10.6 Amendment No. 3 to Deferred Compensation Agreement, dated June 15, 1995. (Incorporated herein by reference to the Company's Form 10-Q for the period ended July 29, 1995.) 10.7 Amendment No. 4 to Deferred Compensation Agreement between the Company and Donald Jonas dated April 8, 1996. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 3, 1996.) 10.8 Form of Consulting Agreement (Incorporated herein by reference to Exhibit 10.9.1 to the Registration Statement). 10.9 Forms of Amendment of Consulting Agreement (Incorporated herein by reference to Exhibit 10.9.2 to Amendment No. 1 to the Registration Statement). 10.10 Agreement between the Company and Local 99, UNITE to a collective bargaining agreement covering warehouse employees dated March 16, 1996.* 10.11 Lease for distribution Center space (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K, dated January 2, 1992). 10.12 Lease for Distribution Center space. (Incorporated herein by reference to Exhibit 1 to the Company's Form 10-Q, for the period ended July 25, 1992). 21 Subsidiaries of the Company. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 3, 1996.) 23 Consent of Deloitte & Touche LLP.* 24 Powers of Attorney dated April 10, 1997.* *Filed herewith. EX-4.1 2 PREFERRED STOCK PURCHASE AGREEMENT 1 LECHTERS, INC. PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF APRIL 5, 1996 2 TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS...............................................................................................1 1.1 Definitions; Interpretation...............................................................................1 ARTICLE II ISSUANCE AND SALE OF PREFERRED STOCK......................................................................5 2.1 Number of Shares and Price................................................................................5 ARTICLE III CLOSING; CLOSING DELIVERIES...............................................................................5 3.1 Closing...................................................................................................5 3.2 Payment for and Delivery of Purchased Shares..............................................................6 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................................................6 4.1 Existence; Qualification; Subsidiaries....................................................................6 4.2 Authorization and Enforceability; Issuance of Shares......................................................6 4.3 Capitalization............................................................................................7 4.4 Private Sale; Voting Agreements...........................................................................7 4.5 Financial Statements; Disclosure..........................................................................8 4.6 Absence of Certain Changes................................................................................9 4.7 Litigation...............................................................................................10 4.8 Licenses, Compliance with Law, Other Agreements, Etc.....................................................10 4.9 Third-Party Approvals....................................................................................10 4.10 No Undisclosed Liabilities...............................................................................11 4.11 Tangible Assets..........................................................................................11 4.12 Inventory................................................................................................11 4.13 Owned Real Property......................................................................................11 4.14 Real Property Leases.....................................................................................11 4.15 Agreements...............................................................................................11 4.16 Intellectual Property....................................................................................12 4.17 Employees................................................................................................12 4.18 ERISA; Employee Benefits.................................................................................12 4.19 Environment, Health and Safety...........................................................................13 4.20 Transactions With Affiliates.............................................................................13 4.21 Taxes....................................................................................................13 4.22 Other Investors..........................................................................................14
(ii) 3 ARTICLE V REPRESENTATIONS AND WARRANTIES OF PPEI...................................................................14 5.1 Authorization and Enforceability.........................................................................14 5.2 Government Approvals.....................................................................................14 ARTICLE VI COMPLIANCE WITH SECURITIES LAWS..........................................................................15 6.1 Investment Intent of Purchaser...........................................................................15 6.2 Status of Purchased Shares...............................................................................15 6.3 Sophistication and Financial Condition of Purchaser......................................................15 6.4 Opportunity for Review of Company Information............................................................15 6.5 Transfer of Preferred Shares and Conversion Shares.......................................................15 ARTICLE VII CONDITIONS PRECEDENT.....................................................................................16 7.1 Closing Deliveries to Purchaser..........................................................................16 7.2 Closing Deliveries to the Company........................................................................17 ARTICLE VIII COVENANTS OF THE COMPANY.................................................................................17 8.1 Restricted Actions.......................................................................................17 8.2 Required Actions.........................................................................................18 8.3 Reservation of Series A Preferred and Common Stock.......................................................19 ARTICLE IX SURVIVAL.................................................................................................20 9.1 Survival.................................................................................................20 ARTICLE X GENERAL PROVISIONS.......................................................................................20 10.1 Successors and Assigns...................................................................................20 10.2 Entire Agreement.........................................................................................20 10.3 Notices..................................................................................................20 10.4 Purchasers Fees and Expenses.............................................................................21 10.5 Amendment and Waiver.....................................................................................21 10.6 Counterparts.............................................................................................22 10.7 Headings.................................................................................................22 10.8 Specific Performance.....................................................................................22 10.9 Remedies Cumulative......................................................................................22 10.10 GOVERNING LAW.............................................................................................22
(iii) 4 TABLE OF CONTENTS (continued) 10.11 No Third Party Beneficiaries..............................................................................22 10.12 Severability..............................................................................................22
Exhibit A Amendment to the Restated Certificate of Incorporation Exhibit B Financial Statements (Incorporated herein by reference to the Company's Form 10-Q, for the period ended May 4, 1996). Exhibit C Registration Rights Agreement Exhibit D Opinion of Counsel (iv) 5 PREFERRED STOCK PURCHASE AGREEMENT PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT") dated as of April 5, 1996 between Lechters, Inc., a New Jersey corporation (the "COMPANY") and Prudential Private Equity Investors III, L.P., a Delaware limited partnership ("PPEI" or the "PURCHASER"). The Purchaser desires to purchase from the Company, and the Company desires to issue to the Purchaser, shares of Series A Convertible Preferred Stock $100 par value of the Company (the "SERIES A PREFERRED") and Series B Convertible Preferred Stock $100 par value of the Company (the "SERIES B PREFERRED"). In consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS; INTERPRETATION. (a) For purposes of this Agreement, the following terms have the indicated meanings: "AFFILIATE" of a person means any other person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such person. "CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION" means the Certificate of Amendment to the Restated Certificate of Incorporation designating the rights and preferences of the Series A Preferred and Series B Preferred adopted by the Board of Directors of the Company and set forth as EXHIBIT A hereto. "CLOSING" has the meaning set forth in Section 3.1. "CLOSING DATE" has the meaning set forth in Section 3.1. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMON STOCK" means the common stock of the Company having no par value. "COMPANY" has the meaning set forth in the recitals hereof. 6 "CONFIDENTIAL INFORMATION" means any information concerning the Company's business other than information that (i) was already known to the Person having a duty to keep confidential such information on a nonconfidential basis prior to the time of disclosure, (ii) is or becomes generally available to the public through no act or omission of such Person or (iii) becomes available to such Person on a nonconfidential basis from a source other than any party hereto (or any agent or representative thereof) if such source was not under a prohibition against disclosing the information to such Person. "CONVERSION SHARES" means shares of Common Stock issued or issuable upon conversion of Preferred Shares. "CURRENT BALANCE SHEET" means the unaudited balance sheet of the Company dated October 28, 1995. "ENVIRONMENTAL AND SAFETY REQUIREMENTS" means all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or by-products, asbestos, polychlorinated biphenyls, noise or radiation. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FINANCIAL STATEMENTS" means the unaudited balance sheets of the Company for the quarterly periods ended April 29, 1995, July 29, 1995, October 28, 1995, each as included in a quarterly report of the Company on Form 10-Q as filed with the SEC pursuant to the Exchange Act and the audited balance sheet of the Company dated January 28, 1995 as included in the Company's annual report on Form 10-K as filed with the SEC pursuant to the Exchange Act and the related unaudited and audited, as applicable, statements of income and consolidated cash flow for the quarterly and fiscal year-to-date periods then ended, each as included in the Company's applicable quarterly report or annual report on Form 10-Q and Form 10-K, as applicable, as filed with the SEC pursuant to the Exchange Act, all of which are attached as EXHIBIT B hereto. "GAAP" means United States generally accepted accounting principles as in effect from time to time, consistently applied. 2 7 "GOVERNMENTAL AGENCY" means any federal, state, local, foreign or other governmental agency, instrumentality, commission, authority, board or body. "INCLUDES" and "INCLUDING" mean includes and including, without limitation. "INTELLECTUAL PROPERTY" means all patents, patent applications and inventions; all trademarks, service marks, trade dress, trade names and corporate names and all goodwill associated therewith; all copyrights; all registrations, applications and renewals for any of the foregoing; all trade secrets, Confidential Information, know-how, technical and computer data, documentation and software, financial, business and marketing plans, customer and supplier lists and all other intellectual property rights; and all copies and tangible embodiments of the foregoing. "IRS" means the Internal Revenue Service. "KNOWLEDGE" or "KNOW" when used with respect to the Company means the knowledge of the senior management of the Company, or any other management personnel that has had significant involvement in the business and affairs of the Company. "LIABILITY" means any liability or obligation (whether absolute or contingent, liquidated or unliquidated or due or to become due). "LIEN" means any lien, mortgage, pledge, security interest, restriction, charge or other encumbrance. "MATERIAL ADVERSE CHANGE" means any material adverse change in the business, condition (financial or otherwise), prospects or results of operations of the Company and its Subsidiaries taken as a whole. "MATERIAL ADVERSE EFFECT" means any material adverse effect on (i) the business, condition (financial or otherwise), prospects or results of operations of the Company and its Subsidiaries taken as a whole, or (ii) the transactions contemplated hereby or by the Related Documents. "ORDINARY COURSE OF BUSINESS" means the ordinary course of business consistent with past practice (including with respect to quantity, quality and frequency). "PERMITTED LIENS" means (i) liens for taxes not yet due and taxes for which adequate provision is made in the Current Balance Sheet, (ii) purchase money security interests in supplies and equipment, (iii) precautionary liens filed by lessors with respect to leased equipment and (iv) encumbrances which are not substantial in amount, do not materially detract from the value of the 3 8 property subject thereto and do not materially impair the use of the property subject thereto or the operation of the Company's business. "PERSON" means any individual, partnership, joint venture, corporation, trust, unincorporated organization or other entity. "PLAN" means any employee benefit plan (as defined in Section 3(3) of ERISA), subject to Title IV of ERISA or the minimum funding requirements of Section 412 of the Code, maintained or contributed to by the Company at any time during the 5-calendar years immediately preceding the date of this Agreement. "PPEI" has the meaning set forth in the recitals hereof. "PREFERRED SHARES" means the Purchased Shares and shares of Series A Preferred issuable upon conversion of the Purchased Shares that are Series B Preferred. "PURCHASED SHARES" has the meaning set forth in Section 2.1. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement between the Company and PPEI in the form of EXHIBIT C hereto. "RELATED DOCUMENTS" means all documents and instruments to be executed or adopted by the Company in connection herewith, including the Certificate of Amendment to the Restated Certificate of Incorporation, the Purchased Shares and the Registration Rights Agreement. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SERIES A PREFERRED" has the meaning set forth in the recitals hereof. "SERIES B PREFERRED" has the meaning set forth in the recitals hereof. "SUBSIDIARY" means any corporation, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by the Company or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by the Company. For purposes hereof, the Company shall be deemed to have a majority ownership interest in a partnership, association or other business entity if the Company, directly or indirectly, is allocated 4 9 a majority of partnership, association or other business entity gains or losses, or is or controls the managing director or general partner of such partnership, association or other business entity. "TAX" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "TAX RETURNS" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "TAXES" means all taxes, charges, fees, levies or other assessments, including all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, estimated, severance, stamp, occupation, property or other taxes, customs duties, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any Governmental Agency. (b) The words "HEREIN", "HEREOF" and "HEREUNDER" refer to this Agreement as a whole and not to any particular article, section or other subdivision of this Agreement. ARTICLE II ISSUANCE AND SALE OF PREFERRED STOCK 2.1 NUMBER OF SHARES AND PRICE. On the terms and subject to the conditions of this Agreement, at the Closing, the Company shall issue to PPEI, 149,999 shares of Series A Preferred and 50,001 shares of Series B Preferred for a price per share of $100.00 (collectively, the "PURCHASED SHARES"). ARTICLE III CLOSING; CLOSING DELIVERIES 3.1 CLOSING. The closing of the transactions contemplated hereby (the "CLOSING") shall take place at 11:00 a.m. on April 5, 1996, at the offices of Kirkland & Ellis, New York, New 5 10 York or at such other time, place and/or date as shall be agreed upon by the parties hereto. The date upon which the Closing occurs is referred to herein as the "CLOSING DATE". 3.2 PAYMENT FOR AND DELIVERY OF PURCHASED SHARES. At the Closing, the Company shall issue and deliver to PPEI, stock certificates for the Purchased Shares duly registered in the name of PPEI, against payment by PPEI, by wire transfer of immediately-available funds to the account designated by the Company, of $20,000,000 as the aggregate purchase price therefor. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to each Purchaser as follows: 4.1 EXISTENCE; QUALIFICATION; SUBSIDIARIES. The Company and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has full corporate power and authority to conduct its business and own and operate its properties as now conducted, owned and operated. The copies of the Restated Certificate of Incorporation and By-Laws of the Company and all amendments thereto previously delivered to PPEI are true, correct and complete copies of such documents. The Company and each Subsidiary is licensed or qualified as a foreign corporation and is in good standing in all jurisdictions where such person is required to be so licensed or qualified, except where the failure to be so licensed, qualified or in good standing would not have a Material Adverse Effect. Except as set forth on SCHEDULE 4.1, the Company has no Subsidiaries and owns no capital stock or other securities of, and has not made any other investment in, any other entity. All of the issued shares of capital stock of each Subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or adverse claims. 4.2 AUTHORIZATION AND ENFORCEABILITY; ISSUANCE OF SHARES. (a) The Company has full power and authority and has taken all required corporate and other action necessary to permit it to execute and deliver this Agreement and the Related Documents and to carry out the terms hereof and thereof and to issue and deliver the Preferred Shares and the Conversion Shares (including adoption of the Certificate of Amendment to the Restated Certificate of Incorporation), and none of such actions will violate any provision of the Restated Certificate of Incorporation of the Company, the ByLaws of the Company or of any applicable law, regulation, order, judgment or decree, or result in the breach of or constitute a default (or an event which, with notice or lapse of time or both would constitute a default) under any material agreement, instrument or understanding to which the Company 6 11 is a party or by which it is bound or by which it will become bound as a result of the transaction contemplated by this Agreement. This Agreement and each of the Related Documents constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general application related to the enforcement of creditor's rights generally and (ii) general principles of equity. (b) The Purchased Shares have been duly authorized and, when issued and delivered in accordance with this Agreement, will be validly issued and outstanding. The Purchased Shares and, when issued, the Preferred Shares other than the Purchased Shares and the Conversion Shares, will be fully paid and nonassessable. The Preferred Shares other than the Purchased Shares, and the Conversion Shares have been duly reserved for issuance upon conversion of the Purchased Shares and the Preferred Shares other than the Purchased Shares and, when so issued, will be duly authorized, validly issued and outstanding, fully paid and nonassessable shares of Series A Preferred or Common Stock, as the case may be. Neither the issuance and delivery of the Purchased Shares nor the issuance and delivery of any Preferred Shares or Conversion Shares upon conversion of any Preferred Shares is subject to any preemptive right of any stockholder of the Company or to any right of first refusal or other similar right in favor of any Person which has not been waived. 4.3 CAPITALIZATION. As of the Closing, the authorized capital stock of the Company shall consist of (i) 50,000,000 shares of Common Stock, without par value, of which 17,155,086 shares are outstanding, 3,200,000 shares are reserved for issuance upon conversion of Preferred Shares, 2,131,350 shares are reserved for issuance upon conversion of the Company s 5% Convertible Subordinated Debentures and 1,444,062 shares are reserved for issuance upon the exercise of certain stock options, and (ii) 1,000,000 shares of Preferred Stock, par value $100 per share, of which (a) 200,000 shares have been designated Series A Preferred, of which 149,999 shares will be sold to the Purchaser pursuant to this Agreement and 50,001 shares are reserved for issuance upon conversion of Series B Preferred and (b) 50,001 shares have been designated Series B Preferred, all of which will be sold to the Purchaser pursuant to this Agreement. At the time of the Closing, all of the outstanding capital stock will be validly issued, fully paid and nonassessable and will have been issued in compliance with all applicable securities laws (including the provisions of the Securities Act and the rules and regulations promulgated thereunder). Except as set forth on SCHEDULE 4.3, as of the Closing, the Company has not granted or issued any options, convertible securities, warrants, calls, pledges, transfer restrictions (except restrictions imposed by federal and state securities laws), liens, rights of first offer, rights of first refusal, antidilution provisions or commitments of any character relating to any issued or unissued shares of capital stock of the Company other than contemplated in the Related Documents. Except as contemplated by this Agreement and the Related Documents or as set forth in SCHEDULE 4.3, there are no preemptive or 7 12 other preferential rights applicable to the issuance and sale of securities of the Company, including the Purchased Shares. 4.4 PRIVATE SALE; VOTING AGREEMENTS. Assuming the accuracy of the representations and warranties made by recipients of the Company's capital stock made in connection with the acquisition of such capital stock, the Company has not violated any applicable federal or state securities laws in connection with the offer, sale and issuance of any of its capital stock. Subject to the accuracy of the Purchaser's representations contained herein, neither the offer, sale and issuance of the Purchased Shares hereunder nor the issuance and delivery of any Preferred Shares or Conversion Shares upon conversion of any Preferred Shares requires registration under the Securities Act or any state securities laws. 4.5 FINANCIAL STATEMENTS; DISCLOSURE. (a) The Financial Statements (together with the notes thereto, as applicable), (i) are true, correct and complete in all material respects, (ii) are in accordance with the books and records of the Company and (iii) fairly present the financial condition and results of operations of the Company as of the dates and for the periods indicated, in accordance with GAAP except that the unaudited balance sheets and related financial statements do not contain an auditors' opinion and do not contain footnotes and are subject to normal year-end audit adjustments. (b) This Agreement together with the schedules, attachments, exhibits, written statements and certificates supplied to the Purchaser by or on behalf of the Company with respect to the transactions contemplated hereby does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading. There is no fact which has not been disclosed to the Purchaser and of which the Company has knowledge, and which has had or would reasonably be anticipated to have a Material Adverse Effect (it being understood that no representation or warranty is made with respect to conditions affecting the Company s industry in general). (c) As of its filing date, each document filed with the SEC by the Company, as amended or supplemented prior to the Closing Date, if applicable, pursuant to the Securities Act and/or the Exchange Act (i) complied in all material respects with the applicable requirements of the Securities Act and/or Exchange Act and (ii) did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each final registration statement filed with the SEC by the Company pursuant to the Securities Act, as of the date such statement became effective (i) complied in all material respects with the applicable requirements of the Securities Act and (ii) did not contain any untrue statement of a material fact or omit to state any material fact required to be stated 8 13 therein or necessary to make the statements therein not misleading (in the case of any prospectus, in light of the circumstances under which they were made). 4.6 ABSENCE OF CERTAIN CHANGES. (a) Except as set forth on SCHEDULE 4.6 since the date of the Current Balance Sheet, neither the Company nor any Subsidiary has: (i) incurred any Liabilities other than current Liabilities incurred, or obligations under contracts entered into, in the Ordinary Course of Business and for individual amounts not greater than $500,000; (ii) paid, discharged or satisfied any claim, Lien or Liability, other than any claim, Lien or Liability (A) reflected or reserved against on the Current Balance Sheet and paid, discharged or satisfied in the Ordinary Course of Business since the date of the Current Balance Sheet or (B) incurred and paid, discharged or satisfied since the date of the Current Balance Sheet, in each case in the Ordinary Course of Business; (iii) sold, leased, assigned or otherwise transferred any of its assets, tangible or intangible (other than sales of inventory in the Ordinary Course of Business and use of supplies in the Ordinary Course of Business); (iv) permitted any of its assets, tangible or intangible, to become subject to any Lien (other than any Permitted Lien); (v) written off as uncollectible any accounts receivable other than in the Ordinary Course of Business and for amounts not greater than $100,000; (vi) terminated or amended or suffered the termination or amendment of, other than in the Ordinary Course of Business, failed to perform in all material respects all of its obligations or suffered or permitted any material default to exist under, any material agreement, license or permit; (vii) suffered any damage, destruction or loss of tangible property (whether or not covered by insurance) which in the aggregate exceeds $250,000; (viii) made any loan (other than intercompany advances) to any other Person (other than advances to employees in the Ordinary Course of Business which do not exceed $10,000 individually or $50,000 in the aggregate); 9 14 (ix) canceled, waived or released any debt, claim or right in an amount or having a value exceeding $100,000; (x) paid any amount to or entered into any agreement, arrangement or transaction with any Affiliate (including its officers, directors and employees) outside the Ordinary Course of Business and which was not approved by a majority of the Company's disinterested directors; (xi) declared, set aside, or paid any dividend or distribution with respect to its capital stock or redeemed, purchased or otherwise acquired any of its capital stock; (xii) other than in the Ordinary Course of Business, granted any increase in the compensation of any officer or employee or made any other change in employment terms of any officer or employee; (xiii) made any change in any method of accounting or accounting practice; (xiv) suffered or caused any other occurrence, event or transaction outside the Ordinary Course of Business which could have a Material Adverse Effect; or (xv) agreed, in writing or otherwise, to any of the foregoing. (b) Since the date of the Current Balance Sheet there has been no Material Adverse Change. 4.7 LITIGATION. As of the date hereof no claim, suit, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any officer or director thereof or the Company's and the Subsidiaries' business which if decided adversely to any such person could have a Material Adverse Effect. 4.8 LICENSES, COMPLIANCE WITH LAW, OTHER AGREEMENTS, ETC. The Company has all material franchises, permits, licenses and other rights to allow it to conduct its business and is not in violation, in any material respects of any order or decree of any court, or of any law, order or regulation of any governmental authority, or of the provisions of any material contract or agreement to which it is a party or by which it is bound, and neither this Agreement nor the Related Documents nor the transactions contemplated hereby or thereby will result in any such violation except where the failure to have any such franchise permit or license or any such violation could not be expected to have a Material Adverse Effect. The Company's and the Subsidiaries' business has been conducted in all material respects in compliance with all federal, state and local laws, ordinances, rules and regulations, except where such violations, defaults or noncompliance would not have a Material Adverse Effect. 10 15 4.9 THIRD-PARTY APPROVALS. Assuming the accuracy of the representations and warranties of the Purchasers contained in this Agreement, the Company is not required to obtain any order, consent, approval or authorization of, or to make any declaration or filing with, any Governmental Agency or other third party (including under any state securities or "blue sky" laws) in connection with the execution and delivery of this Agreement or the Related Documents, or the consummation of the transactions contemplated hereby or thereby to occur on the Closing Date, except for any consents, approvals or authorizations the failure to obtain could not have a Material Adverse Effect. 4.10 NO UNDISCLOSED LIABILITIES. The Company has no Liabilities except (i) as and to the extent of the amounts reflected or reserved against on the Current Balance Sheet (excluding the footnotes thereto) and (ii) liabilities and obligations incurred in the Ordinary Course of Business since the date thereof and (iii) such other liabilities that in the aggregate will not result in a Material Adverse Effect. 4.11 TANGIBLE ASSETS. The Company owns or leases all tangible assets used or reasonably necessary in connection with the conduct of its business. All material tangible assets are free from any Liens (other than Permitted Liens), are free from any material defects, have been maintained in accordance with normal industry practice and any regulatory standard or procedure to which such assets are subject, are in good operating condition and repair (subject to normal wear and tear) and are suitable for the purposes for which such assets are used or proposed to be used, other than liens, defects and wear and tear which in the aggregate could not be expected to have a Material Adverse Effect. 4.12 INVENTORY. All inventory of the Company, whether reflected on the Current Balance Sheet or otherwise, consists of a quality and quantity usable or salable in the Ordinary Course of Business, subject to normal rates of defect or obsolescence not inconsistent with the Company's historical experience. 4.13 OWNED REAL PROPERTY. The Company and its Subsidiaries own no real property. 4.14 REAL PROPERTY LEASES. There exists no event of default (nor any event which with notice or lapse of time would constitute an event of default) with respect to the Company, any Subsidiary and, to the Company's knowledge, with respect to any other party thereto under any agreement pursuant to which the Company is the lessee or lessor of any real property, except for such defaults and defects in enforceability as could not in the aggregate be expected to have a Material Adverse Effect, and all such agreements are in full force and effect and enforceable against the lessor or lessee in accordance with their terms except for such defaults and defects in enforceability as could not in the aggregate be expected to have a Material Adverse Effect. 11 16 4.15 AGREEMENTS. Neither the Company nor any Subsidiary is in default, to the knowledge of the Company there is no basis for any valid claim of default, and to the Company's knowledge no event has occurred which, with notice or lapse of time, would constitute a default, under any agreement, arrangement or understanding to which the Company or any Subsidiary is a party, and to the knowledge of the Company no other Person is in default under any such agreement, in each case other than defaults which in the aggregate could not be expected to have a Material Adverse Effect. Additionally, neither the Company nor any Subsidiary is party to any agreement the performance of which in accordance with its terms (including any termination provision thereof) could be expected to have a Material Adverse Effect. It is understood that this paragraph 4.15 does not relate to real property leases. 4.16 INTELLECTUAL PROPERTY. SCHEDULE 4.16 sets forth a complete list of (i) all patented, registered or applied for Intellectual Property owned or filed by the Company; and (ii) all trade names and material unregistered trademarks used by the Company in connection with its business. The Company owns and possesses all right, title and interest in and to, or has a valid and enforceable license to use, the Intellectual Property necessary for the operation of its business as currently conducted and as currently proposed to be conducted, and no claim by any third party contesting the validity, enforceability, use or ownership of such Intellectual Property has been made or, to the knowledge of the Company, is threatened. The Company has not infringed or misappropriated the Intellectual Property of any third party. 4.17 EMPLOYEES. Except as set forth on SCHEDULE 4.17, since the date of the Current Balance Sheet, no key employees and no group of employees has terminated, or to the knowledge of the Company plans to terminate, employment with the Company or any Subsidiary, as applicable. Except as set forth on SCHEDULE 4.17, the Company is not a party to or bound by any collective bargaining agreement, nor has it experienced any strike, material grievance, material claim of unfair labor practice or other collective bargaining dispute. Except as set forth on Schedule 4.17, to the knowledge of the Company there is no organizational effort being made or threatened by or on behalf of any labor union with respect to its employees. The Company has not committed any unfair labor practice or materially violated any federal, state or local law or regulation regulating employers or the terms and conditions of its employees' employment, including laws regulating employee wages and hours, employment discrimination, employee civil rights, equal employment opportunity and employment of foreign nationals, except for such violations as could not be expected to have a Material Adverse Effect. 4.18 ERISA; EMPLOYEE BENEFITS. Each Plan (other than a Plan which is a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA) that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service or has timely filed for a favorable determination letter from the Internal Revenue Service and no event has occurred since the date of the last determination letter that could 12 17 reasonably be expected to materially adversely affect the qualified status of such Plan. Each Plan (other than a Plan which is a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA) is in full force and effect and has been administered in all material respects in accordance with its terms and is and has been, and each plan administrator and fiduciary of a Plan is acting and has been acting, in compliance in all material respects with all applicable requirements of the Code and ERISA (including the funding, reporting and disclosure and prohibited transaction provisions thereof) and other applicable laws, regulations and rulings in connection with each such Plan. No Plan has been terminated or partially terminated. With respect to each Plan which is a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA, no complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) has occurred, no such Plan is in reorganization or insolvency (within the meaning of Title IV of ERISA) and no material withdrawal liability has been assessed against the Company. The Company or one of its Subsidiaries has made, accrued or provided for all contributions required under each Plan. To the knowledge of the Company, no event has occurred or is reasonably expected to occur with respect to any employee pension benefit plan of the Company or any member of the Company s controlled group (within the meaning of Section 414 of the Code), which could reasonably be expected to directly or indirectly result in any material liability (other than liability arising in the ordinary course) to the Company or any member of its controlled group pursuant to Title IV of ERISA or Section 412 of the Code. No Plan (other than a Plan which is a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA) has incurred an accumulated funding deficiency within the meaning of Section 412 of the Code or Section 302 of ERISA. 4.19 ENVIRONMENT, HEALTH AND SAFETY. (a) The Company (as used in this Section 4.19, Company shall include the Company's Subsidiaries) has complied and is in compliance in all material respects with all Environmental and Safety Requirements that are applicable to the Company's business. (b) The Company has not received any written notice, report or other information regarding any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial or corrective obligations, relating to the Company or its facilities and arising under Environmental and Safety Requirements. (c) The Company has not, either expressly or by operation of law, assumed or undertaken any liability, including without limitation any obligation for corrective or remedial action, of any other person relating to Environmental and Safety Requirements. 4.20 TRANSACTIONS WITH AFFILIATES. Except as disclosed in filings made by the Company with the SEC pursuant to the Securities Act and the Exchange Act, neither the Company 13 18 nor any Subsidiary is party to any agreement, arrangement or transaction with any Affiliate which is material to the Company's and its Subsidiaries business, taken as a whole. 4.21 TAXES. (a) Each of the Company and its Subsidiaries has filed all Tax Returns that it was required to file, and has paid all Taxes shown thereon as owing, except where the failure to file Tax Returns or to pay Taxes would not have a material adverse effect on the financial condition of the Company and its Subsidiaries taken as a whole. (b) None of the Company and its Subsidiaries (A) has been a member of an affiliated group filing a consolidated federal Tax Return (other than a group the common parent of which was the Company) or (B) has any liability for the Taxes of any Person (other than any of the Company and its Subsidiaries) under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. (c) Each of the Company and its Subsidiaries has withheld and paid all taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. (d) There is no dispute or claim concerning any Tax liability of any of the Company and its Subsidiaries either (A) claimed or raised by any authority in writing or (B) as to which any of the directors and officers (and employees responsible for Tax matters) of the Company and its Subsidiaries has knowledge based upon personal contact with any agent of such authority and which is material to the Company and its Subsidiaries taken as a whole. 4.22 OTHER INVESTORS. Set forth on SCHEDULE 4.22 is a list of all shareholders of the Company who as of the date hereof, after giving effect to the terms hereof, own more than 15% of the fully diluted common equity of the Company and sets forth such percentage ownership. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PPEI PPEI hereby represents and warrants to the Company as follows: 5.1 AUTHORIZATION AND ENFORCEABILITY. PPEI has taken all action necessary to permit it to execute and deliver this Agreement and the other documents and instruments to be executed by it pursuant hereto and to carry out the terms hereof and thereof. This Agreement and each such other 14 19 document and instrument, when duly executed and delivered by PPEI, will constitute a valid and binding obligation of PPEI, enforceable against PPEI in accordance with its terms. 5.2 GOVERNMENT APPROVALS. PPEI is not required to obtain any order, consent, approval or authorization of, or to make any declaration or filing with, any Governmental Agency in connection with the execution and delivery of this Agreement and the other documents and instruments to be executed by it pursuant hereto or the consummation of the transactions contemplated hereby and thereby. ARTICLE VI COMPLIANCE WITH SECURITIES LAWS 6.1 INVESTMENT INTENT OF PURCHASER. PPEI represents and warrants to the Company that it is acquiring the Purchased Shares for its own account, with no present intention of selling or otherwise distributing the same to the public. 6.2 STATUS OF PURCHASED SHARES. PPEI has been informed by the Company that the Purchased Shares have not been and will not be registered under the Securities Act or under any state securities laws and are being offered and sold in reliance upon federal and state exemptions for transactions not involving any public offering. 6.3 SOPHISTICATION AND FINANCIAL CONDITION OF PURCHASER. PPEI represents and warrants to the Company that it is an "Accredited Investor" as defined in Regulation D under the Securities Act and that it considers itself to be an experienced and sophisticated investor and to have such knowledge and experience in financial and business matters as are necessary to evaluate the merits and risks of an investment in the Purchased Shares. 6.4 OPPORTUNITY FOR REVIEW OF COMPANY INFORMATION. PPEI acknowledges that it has had the opportunity to ask questions of and receive answers from officers of the Company regarding the Purchased Shares, the Company and its business, prospects and financial condition. 6.5 TRANSFER OF PREFERRED SHARES AND CONVERSION SHARES. (a) Preferred Shares and Conversion Shares may be transferred pursuant to (i) public offerings registered under the Securities Act, (ii) Rule 144 of the SEC (or any similar rule then in force) or (iii) subject to the conditions set forth in Section 6.5(b), any other legally-available means of transfer. 15 20 (b) In connection with any transfer of any Preferred Shares or Conversion Shares (other than a transfer described in Section 6.5(a)(i) or (ii)), the holder of such shares shall deliver written notice to the Company describing in reasonable detail the proposed transfer, together with an opinion of counsel (Kirkland & Ellis or such other counsel which, to the Company's reasonable satisfaction, is knowledgeable in securities law matters) to the effect that such transfer may be effected without registration of such shares under the Securities Act. The holder of the shares being transferred shall not consummate the transfer until (i) the prospective transferee has confirmed to the Company in writing its agreement to be bound by the provisions of this Section 6.5 or (ii) such holder shall have delivered to the Company an opinion of such counsel that no subsequent transfer of such Preferred Shares or Conversion Shares shall require registration under the Securities Act. Promptly upon receipt of any opinion described in clause (ii) of the preceding sentence, the Company shall prepare and deliver in connection with the consummation of the proposed transfer, new certificates for the Preferred Shares or Conversion Shares being transferred that do not bear the legend set forth in Section 6.5(c). (c) Except as provided in Section 6.5(b), each certificate for Preferred Shares or Conversion Shares shall be imprinted with a legend substantially in the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON APRIL 5, 1996 AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAW. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SET FORTH IN THE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF APRIL 5, 1996 BETWEEN THE ISSUER (THE "COMPANY") AND PRUDENTIAL PRIVATE EQUITY INVESTORS III, L.P. THE COMPANY RESERVES THE RIGHT TO REFUSE ANY TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS SHALL BE FURNISHED WITHOUT CHARGE TO THE HOLDER HEREOF UPON WRITTEN REQUEST TO THE COMPANY. 16 21 ARTICLE VII CONDITIONS PRECEDENT 7.1 CLOSING DELIVERIES TO PURCHASER. The following documents and items shall be delivered to Purchaser at or prior to the Closing: (a) Evidence acceptable to Purchaser of adoption by the Company of the Certificate of Amendment to the Restated Certificate of Incorporation; (b) A fully executed and delivered counterpart of the Registration Rights Agreement; (c) The written opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the Company, in the form of EXHIBIT D hereto; (d) certificates of a duly authorized officer of the Company dated as of the Closing Date (A) stating that the following conditions have been satisfied as of the Closing Date, (i) the representations and warranties of the Company contained herein and in any writing delivered pursuant hereto shall be true and correct when made and at and as of the time of the Closing; (ii) No action, suit, investigation or proceeding shall be pending or threatened before any court or Governmental Agency to restrain, prohibit, collect damages as a result of or otherwise challenge this Agreement or any Related Document or any transaction contemplated hereby or thereby; (iii) All acts or covenants required hereunder to be performed by the Company prior to the Closing shall have been fully performed by it; (iv) No Material Adverse Change shall have occurred between the date of the Current Balance Sheet and the Closing Date; and (B) setting forth the resolutions of the board of directors of the Company authorizing the execution and delivery of this Agreement and the Related Documents (including the Certificate of Amendment to the Restated Certificate of Incorporation) and the consummation of the transactions contemplated hereby and thereby and certifying that such resolutions were duly adopted and have not been rescinded or amended; and 17 22 (e) such other documents relating to the transactions contemplated hereby as Purchaser may reasonably request. 7.2 CLOSING DELIVERIES TO THE COMPANY. At Closing, PPEI will deliver to the Company the aggregate purchase price for the Purchased Shares. ARTICLE VIII COVENANTS OF THE COMPANY 8.1 RESTRICTED ACTIONS. Without the prior written consent of the holders of two-thirds of the then outstanding Preferred Shares the Company shall not, and shall not permit any Subsidiary to: (a) become subject to any agreement or instrument which by its terms would (under any circumstances) restrict the Company's right to comply with the terms of this Agreement or any of the Related Documents; (b) use the proceeds from the sale of the Purchased Shares other than for expansion of the number of the Company's store locations, repayment of indebtedness and for other working capital purposes of the Company; or (c) enter into any transaction or series of transactions with any stockholder, director, officer, employee or Affiliate which would require disclosure pursuant to Rule 404 of Regulation S-K under the Securities Act unless such transaction is approved by the Company's disinterested directors. 8.2 REQUIRED ACTIONS. For so long as any Preferred Shares remain outstanding, the Company shall, and shall cause each Subsidiary to: (a) cause all properties owned by the Company or any of its Subsidiaries or used or held for use in the conduct of its business or the business of any of its Subsidiaries to be maintained and kept in good condition, repair and working order (reasonable wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Board of Directors may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that the foregoing shall not prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the management of the Company, 18 23 desirable in the conduct of its business or the business of any of its Subsidiaries and is not disadvantageous in any material respect to the holders of Preferred Shares; (b) preserve and keep in full force and effect the corporate existence, rights (charter and statutory), licenses and franchises of the Company and each of its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries as a whole and that the loss thereof is not disadvantageous in any material respect to the holders of Preferred Shares; (c) maintain the books, accounts and records of the Company and its Subsidiaries in accordance with past custom and practice as used in the preparation of the Financial Statements except to the extent permitted or required by GAAP; (d) keep all of its and its Subsidiaries properties which are of an insurable nature insured with insurers, believed by the Company in good faith to be financially sound and responsible, against loss or damage to the extent that property of similar character is usually so insured by corporations similarly situated and owning like properties (which may include self-insurance, if reasonable and in comparable form to that maintained by companies similarly situated); (e) comply with all material legal requirements and material contractual obligations applicable to the operations and business of the Company and its Subsidiaries and pay all applicable Taxes as they become due and payable; (f) permit representatives of PPEI and their agents (including their counsel, accountants and consultants) to have reasonable access during business hours to the Company s books, records, facilities, key personnel, officers, directors, customers, independent accountants and legal counsel; (g) at all times file all reports (including annual reports, quarterly reports and the information, documentation and other reports) required to be filed by the Company under the Exchange Act and Sections 13 and 15 of the rules and regulations adopted by the SEC thereunder, and the Company shall use its best efforts to file each of such reports on a timely basis, and take such further action as any holder or holders of Securities may reasonably request, all to the extent required to enable such holders to sell Securities pursuant to Rule 144 adopted by the SEC under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the SEC and to enable the Company to register securities with the SEC on Form S-3 or any similar short-form registration statement 19 24 and upon the filing of each such report deliver a copy thereof to each holder of the Preferred Shares; (h) maintain all material Intellectual Property Rights necessary to the conduct of its business and own or have a valid license to use all right, title and interest in and to, such material Intellectual Property Rights. 8.3 RESERVATION OF SERIES A PREFERRED AND COMMON STOCK. The Company shall at all times reserve and keep available out of its authorized but unissued (i) shares of Series A Preferred, solely for the purpose of issuance upon the conversion of the Class B Preferred, such number of shares of Series A Preferred as are issuable upon the conversion of all outstanding shares of Series B Preferred and (ii) shares of Common Stock, solely for the purposes of issuance upon conversion of the Class A Preferred and Class B Preferred, such number of shares of Common Stock as are issuable upon the conversion of all outstanding shares of Class A Preferred and Class B Preferred. All shares of Series A Preferred and Common Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such shares of Series A Preferred and Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately transmitted by the Company upon issuance). ARTICLE IX SURVIVAL 9.1 SURVIVAL. The representations and warranties of the parties hereto contained herein, or in any writing delivered pursuant hereto, shall survive the Closing and expire 30 days following the filing of the Company's annual report on Form 10-K with the SEC for the Company's fiscal year that ends in 1997. 20 25 ARTICLE X GENERAL PROVISIONS 10.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, including each subsequent holder of Preferred Shares or Conversion Shares. Except as otherwise specifically provided herein, this Agreement shall not be assignable by any party without the prior written consent of the other parties hereto. 10.2 ENTIRE AGREEMENT. This Agreement and the other writings referred to herein or delivered pursuant hereto constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior arrangements or understandings. 10.3 NOTICES. All notices, requests, consents and other communications provided for herein shall be in writing and shall be (i) delivered in person, (ii) transmitted by telecopy, (iii) sent by first-class, registered or certified mail, postage prepaid, or (iv) sent by reputable overnight courier service, fees prepaid, to the recipient at the address or telecopy number set forth below, or such other address or telecopy number as may hereafter be designated in writing by such recipient. Notices shall be deemed given upon personal delivery, seven days following deposit in the mail as set forth above, upon acknowledgment by the receiving telecopier or one day following deposit with an overnight courier service. (a) If to the Company: Lechters, Inc. 1 Cape May Street Harrison, New Jersey 07029 Telecopy: (201) 481-4479 Attention: Donald Jonas with a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, New York 10019 Telecopy: (212) 424-8500 Attention: Bernard D. Fischman, Esq. 21 26 (b) If to PPEI: Prudential Private Equity Investors, III, L.P. 717 Fifth Avenue Suite 1100 New York, New York 10022 Telecopy: (212) 826-6798 Attention: Robert Knox, Chairman Robert Getz, Director with a copy to: Kirkland & Ellis 153 East 53rd Street New York, New York 10022 Telecopy: (212) 446-4900 Attention: Frederick Tanne, Esq. 10.4 PURCHASERS FEES AND EXPENSES. The Company shall reimburse PPEI for the reasonable fees and expenses of Kirkland & Ellis incurred in connection with the documentation, negotiation and consummation of the transactions contemplated by this Agreement and the Related Documents. 10.5 AMENDMENT AND WAIVER. No amendment of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Company and the holders of two-thirds of the Preferred Shares and Conversion Shares, taken together. Any failure of the Company to comply with any provision hereof may only be waived in writing by the holders of two-thirds of the Preferred Shares and Conversion Shares, taken together, and any failure of any holder of Preferred Shares or Conversion Shares to comply with any provision hereof may only be waived in writing by the Company. No such waiver shall operate as a waiver of, or estoppel with respect to, any subsequent or other failure. No failure by any party to take any action against any breach of this Agreement or default by any other party shall constitute a waiver of such party's right to enforce any provision hereof or to take any such action. 10.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement. 10.7 HEADINGS. The headings of the various sections of this Agreement have been inserted for reference only and shall not be deemed to be a part of this Agreement. 22 27 10.8 SPECIFIC PERFORMANCE. The Company, on the one hand, and the Purchaser, on the other hand, acknowledge that money damages would not be a sufficient remedy for any breach of this Agreement. It is accordingly agreed that the parties shall be entitled to specific performance and injunctive relief as remedies for any such breach, these remedies being in addition to any of the remedies to which they may be entitled at law or equity. 10.9 REMEDIES CUMULATIVE. Except as otherwise provided herein, the remedies provided herein shall be cumulative and shall not preclude the assertion by any party hereto of any other rights or the seeking of any other remedies against any other party hereto. 10.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE LAWS OF CONFLICT OR CHOICE OF LAWS OF THE STATE OF NEW YORK OR OF ANY OTHER JURISDICTION THAT WOULD RESULT IN THE APPLICATION OF ANY LAWS OTHER THAN THOSE OF THE STATE OF NEW YORK. 10.11 NO THIRD PARTY BENEFICIARIES. Except as specifically set forth or referred to herein, nothing herein is intended or shall be construed to confer upon any person or entity other than the parties hereto and their successors or assigns, any rights or remedies under or by reason of this Agreement. 10.12 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. * * * * * 23 28 IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Agreement as of the date first above written. LECHTERS, INC. By: --------------------------------------- Name: Title: PRUDENTIAL PRIVATE EQUITY INVESTORS III, L.P. By: Prudential Equity Investors, Inc., General Partner By: --------------------------------------- Name: Title: 29 CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF LECHTERS, INC. It is hereby certified that: 1. The name of the corporation is Lechters, Inc. (the Company). 2. The following resolution has been adopted by the Board of Directors of the Company as required by Subsection 14A:7-2(3) of the New Jersey Business Corporation Act: RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of this Company (hereinafter called the Board of Directors ) in accordance with the provisions of the Restated Certificate of Incorporation of the Company, as amended to date, the Board of Directors hereby amends the Restated Certificate of Incorporation by the addition of the following provision stating the respective number, designations, relative rights, preferences and limitations of two series of Preferred Stock of the Company, designated respectively as Series A Convertible Preferred Stock and Series B Convertible Preferred Stock: Section 1. Designation and Amount. 1A. Series A Convertible Preferred Stock. The shares of the Series A Convertible Preferred Stock shall be designated as the Series A Convertible Preferred Stock (the Series A Preferred ) and the number of shares constituting such series shall be 200,000, which number may be increased or decreased by the Board of Directors without a vote of stockholders; provided, however, that such number may not be decreased below the number of then currently outstanding shares of Series A Preferred plus the number of shares of Series A Preferred reserved for issuance upon the conversion of the Series B Preferred (defined below). 1B. Series B Convertible Preferred Stock. The shares of the Series B Convertible Preferred Stock shall be designated as the Series B Convertible Preferred Stock (the Series B Preferred ) and the number of shares constituting such series shall be 50,001, which number may be increased or decreased by the Board of Directors without a vote of stockholders; provided, however, that such number may not be decreased below the number of then currently outstanding shares of Series B Preferred. Section 2. Dividends. 30 2A. General Obligation. When and as declared by the Company's Board of Directors and to the extent permitted under the Corporations, General Act of New Jersey, the Company shall pay preferential dividends in cash to the holders of the Series A Preferred and the Series B Preferred as provided in this Section Dividends on each share of the Series A Preferred (a "Series A Share") and each Share of Series B Preferred (a "Series B Share" the Series A Shares and Series B Shares are referred to generically herein as a "Share") shall accrue on a daily basis at the rate of 5% per annum of the Liquidation Value thereof or 66 2/3% of the average Aa corporate bond yield for the calendar week preceding the issuance, whichever is greater at the time of issuance, from and including the date of issuance of such Share to and including the first to occur of (i) the date on which the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon) is paid to the holder thereof in connection with the liquidation of the Company or the redemption of such Share by the Company, (ii) the date on which such Share is converted into shares of Conversion Stock hereunder or (iii) the date on which such Share is otherwise acquired by the Company. Such dividends shall accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends, and such dividends shall be cumulative such that all accrued and unpaid dividends shall be fully paid or declared with funds irrevocably set apart for payment before any dividends, distributions, redemptions or other payments may be made with respect to any Junior Securities. The date on which the Company initially issues any Share shall be deemed to be its "date of issuance" regardless of the number of times transfer of such Share is made on the stock records maintained by or for the Company and regardless of the number of certificates which may be issued to evidence such Share. 2B. Dividend Payment Date. All dividends which have accrued on the Series A Preferred and the Series B Preferred shall be payable on April 5 of each year, beginning April 5, 1997 (the "Dividend Payment Date"). 2C. Distribution of Partial Dividend Payments. Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued with respect to the Series A Preferred and the Series B Preferred, such payment shall be distributed pro rata among the holders of the Series A Preferred and the Series B Preferred based upon the number of Shares held by each such holder. 2D. Participating Dividends. In the event that the Company declares or pays any dividends upon the Common Stock (whether payable in cash, securities or other property) other than dividends payable solely in shares of Common Stock, the Company shall also declare and pay to the holders of the Series A Preferred and the Series B Preferred at the same time that it declares and pays such dividends to the holders of the Common Stock, the dividends which would have been declared and paid with respect to the Common Stock issuable upon conversion of the Series A Preferred and Series B Preferred had all of the outstanding Series A Preferred and the Series B Preferred been converted immediately prior to the record date for such dividend, or if no record date is fixed, the date as of which the record holders of Common Stock entitled to such dividends are to be determined; provided that if any dividend consists of voting securities, the Company shall make available to each holder of Series A Preferred and Series B Preferred, at such holder's request, dividends consisting of securities which are non-voting (except as otherwise required by law), which -2- 31 are otherwise identical to the dividends consisting of voting securities and which are convertible into such voting securities. Section 3. Liquidation. Upon any liquidation, dissolution or winding up of the Company (whether voluntary or involuntary), each holder of Series A Preferred and Series B Preferred shall be entitled to be paid, before any distribution or payment is made upon any Junior Securities, an amount in cash equal to the aggregate Liquidation Value of all Shares held by such holder (plus all accrued and unpaid dividends thereon), and the holders of Series A Preferred and Series B Preferred shall not be entitled to any further payment. If upon any such liquidation, dissolution or winding up of the Company, the Company's assets to be distributed among the holders of the Series A Preferred and Series B Preferred are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid under this Section 3, then the entire assets available to be distributed to the Company's stockholders shall be distributed pro rata among such holders based upon the aggregate Liquidation Value (plus all accrued and unpaid dividends) of the Series A Preferred and Series B Preferred held by each such holder. Not less than 60 days prior to the payment date stated therein, the Company shall mail written notice of any such liquidation, dissolution or winding up to each record holder of Series A Preferred and each record holder of Series B Preferred, setting forth in reasonable detail the amount of proceeds to be paid with respect to each Share and each share of Common Stock in connection with such liquidation, dissolution or winding up. Section 4. Priority of Series A Preferred and Series B Preferred on Dividends and Redemptions. 4A. No Payments With Respect to Junior Securities. So long as any Series A Preferred and Series B Preferred remains outstanding, without the prior written consent of the holders of a majority of the outstanding shares of Series A Preferred and Series B Preferred, taken together as a single Series, the Company shall not, nor shall it permit any Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly any Junior Securities, nor shall the Company directly or indirectly pay or declare any dividend or make any distribution upon any Junior Securities; provided that the Company may repurchase shares of Common Stock for an aggregate purchase price of no more than $500,000 in any twelve-month period and so long as no Event of Noncompliance is in existence at the time of or immediately after such repurchase or would be caused by such repurchase. 4B. No Issuance of Senior Securities. For so long as any Series A Preferred or Series B Preferred remains outstanding, the Company shall not amend its Restated Certificate of Incorporation or take any other action to approve or issue any capital stock of the Company that is senior in right to the payment of dividends, payment upon liquidation, redemption or otherwise to the Series A Preferred and the Series B Preferred. Additionally, so long as any Series A Preferred and Series B Preferred remains outstanding, the Company shall not amend its Restated Certificate of Incorporation or take any other -3- 32 action that would cause the rights of the Series A Preferred and the rights of the Series B Preferred to differ in any respect other than as specifically set forth in this Certificate of Amendment to the Restated Certificate of Incorporation as in effect on the date of the original issuance of the Series A Preferred and the Series B Preferred. Section 5. Redemptions. 5A. Redemptions or Acquisitions. The Company shall not, nor shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of Series A Preferred or Series B Preferred, except pursuant to a purchase offer made pro rata to all holders of Series A Preferred and Series B Preferred on the basis of the number of Shares owned by each such holder. 5B. Special Redemptions. (i) If a Change in Ownership has occurred or the Company obtains knowledge that a Change in Ownership is proposed to occur, the Company shall give prompt written notice of such Change in Ownership describing in reasonable detail the material terms and date of consummation thereof to each holder of Series A Preferred and each holder of Series B Preferred, but in any event such notice shall not be given later than five days after the occurrence of such Change in Ownership, and the Company shall give each holder of Series A Preferred and each holder of Series B Preferred prompt written notice of any material change in the terms or timing of such transaction. Any holder of Series A Preferred or Series B Preferred may require the Company to redeem all or any portion of the Series A Preferred and/or Series B Preferred owned by such holder at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon) by giving written notice to the Company of such election prior to the later of (a) 21 days after receipt of the Company's notice and (b) 5 days prior to the consummation of the Change in Ownership (the "Expiration Date"). The Company shall give prompt written notice of any such election to all other holders of Series A Preferred and holders of Series B Preferred within 5 days after the receipt thereof, and each such holder shall have until the later of (a) the Expiration Date or (b) 10 days after receipt of such second notice to request redemption hereunder (by giving written notice to the Company) of all or any portion of the Series A Preferred and/or Series B Preferred owned by such holder. Upon receipt of such election(s), the Company shall be obligated to redeem the aggregate number of Shares specified therein on the later of (a) the occurrence of the Change in Ownership or (b) five days after the Company's receipt of such election(s). If any proposed Change in Ownership does not occur, all requests for redemption in connection therewith shall be automatically rescinded, or if there has been a material change in the terms or the timing of the transaction, any holder of Series A Preferred and/or Series B Preferred may rescind such holder's request for redemption by giving written notice of such rescission to the Company. The term "Change in Ownership" means any sale, transfer or issuance or series of sales, transfers and/or issuances of shares of the Company's capital stock by the Company or any holders thereof which results in any Person or group of Persons (as the term "group" is used under the Securities Exchange Act of 1934), other than Prudential Private Equity Investors III, L.P. (or any -4- 33 group of Persons controlled by it), owning 30% or more of the fully diluted capital stock of the Company. (ii) If a Fundamental Change is proposed to occur, the Company shall give written notice of such Fundamental Change describing in reasonable detail the material terms and date of consummation thereof to each holder of Series A Preferred and each holder of Series B Preferred not more than 45 days nor less than 20 days prior to the consummation of such Fundamental Change, and the Company shall give each holder of Series A Preferred and each holder of Series B Preferred prompt written notice of any material change in the terms or timing of such transaction. Any holder of Series A Preferred and any holder of Series B Preferred may require the Company to redeem all or any portion of the Series A Preferred and/or Series B Preferred owned by such holder at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon) by giving written notice to the Company of such election prior to the later of (a) ten days prior to the consummation of the Fundamental Change or (b) ten days after receipt of notice from the Company. The Company shall give prompt written notice of such election to all other holders of Series A Preferred and all other holders of Series B Preferred (but in any event within five days prior to the consummation of the Fundamental Change), and each such holder shall have until two days after the receipt of such notice to request redemption (by written notice given to the Company) of all or any portion of the Series A Preferred and/or Series B Preferred owned by such holder. Upon receipt of such election(s), the Company shall be obligated to redeem the aggregate number of Shares specified therein upon the consummation of such Fundamental Change. If any proposed Fundamental Change does not occur, all requests for redemption in connection therewith shall be automatically rescinded, or if there has been a material change in the terms or the timing of the transaction, any holder of Series A Preferred and any holder of Series B Preferred may rescind such holder's request for redemption by delivering written notice thereof to the Company prior to the consummation of the transaction. The term "Fundamental Change" means (a) any sale or transfer of more than 30% of the assets of the Company and its Subsidiaries on a consolidated basis (measured either by book value in accordance with generally accepted accounting principles consistently applied or by fair market value determined in the reasonable good faith judgment of the Company's Board of Directors) in any transaction or series of transactions (other than sales in the ordinary course of business) and (b) any merger or consolidation to which the Company is a party, except for a merger in which the Company is the surviving Company, the terms of the Series A Preferred and Series B Preferred are not changed and the Series A Preferred and Series B Preferred are not exchanged for cash, securities or other property, and after giving effect to such merger, the holders of the Company's outstanding capital stock possessing a majority of the voting power (under ordinary circumstances) to elect a majority of the Company's Board of Directors immediately prior to the merger shall continue to own the Company's outstanding capital stock possessing the voting power (under ordinary circumstances) to elect a majority of the Company's Board of Directors. -5- 34 Section 6. Voting Rights. 6A. Election of Directors. In the election of directors of the Company, the holders of the Series A Preferred, voting separately as a single Series to the exclusion of all other Series of the Company's capital stock and with each Share of Series A Preferred entitled to one vote, shall be entitled to elect one director to serve on the Company's Board of Directors until his successor is duly elected by the holders of the Series A Preferred or he is removed from office by the holders of the Series A Preferred. If the holders of the Series A Preferred for any reason fail to elect anyone to fill any such directorship, such position shall remain vacant until such time as the holders of the Series A Preferred elect a director to fill such position and shall not be filled by resolution or vote of the Company's Board of Directors or the Company's other stockholders. 6B. Other Voting Rights. The holders of the Series A Preferred shall be entitled to notice of all stockholders meetings in accordance with the Company's bylaws, and the holders of the Series A Preferred shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock voting together as a single Series with each share of Common Stock entitled to one vote per share and each Share of Series A Preferred entitled to one vote for each share of Common Stock issuable upon conversion of the Series A Preferred as of the record date for such vote or, if no record date is specified, as of the date of such vote. Unless otherwise provided in this Certificate of Amendment to the Restated Certificate of Incorporation or pursuant to applicable law, the holders of Series B Preferred shall have no voting rights. Section 7. Conversion. 7A. Conversion Procedure. (i) (a) Subject to making any governmental filings or obtaining any required governmental approval prior to or in connection with any conversion of Shares hereunder, at any time and from time to time, any holder of Series A Preferred or Series B Preferred may convert all or any portion of the Series A Preferred or Series B Preferred held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $100 and dividing the result by the Conversion Price then in effect. (b) Subject to making any governmental filings or obtaining any required governmental approval prior to or in connection with any conversion of Shares hereunder, at any time and from time to time, any holder of Series B Preferred may convert all or any number of the Series B Preferred shares held by such holder into an equal number of Series A Preferred shares. (ii) Except as otherwise provided herein, each conversion of Series A Preferred or Series B Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A Preferred or Series B Preferred to be converted have been surrendered for conversion at the principal office of the Company. At the time any such conversion has been effected, the rights of the holder of the Shares converted as a holder of Series A Preferred or Series B Preferred shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon -6- 35 such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (iii) The conversion rights of any Share subject to redemption hereunder shall terminate on the Redemption Date for such Share unless the Company has failed to pay to the holder thereof the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon). (iv) Notwithstanding any other provision hereof, if a conversion of Series A Preferred or Series B Preferred is to be made in connection with a public offering, a Change in Ownership, a Fundamental Change or other transaction affecting the Company, the conversion of any Shares of Series A Preferred or Series B Preferred may, at the election of the holder thereof, be conditioned upon the consummation of such transaction, in which case such conversion shall not be deemed to be effective until such transaction has been consummated. (v) As soon as possible after a conversion has been effected (but in any event within five business days in the case of subparagraph (a) below), the Company shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment in an amount equal to all accrued dividends with respect to each Share converted which have not been paid prior thereto, plus the amount payable under subparagraph (x) below with respect to such conversion; and (c) a certificate representing any Shares of Series A Pre ferred or Series B Preferred which were represented by the certificate or certificates delivered to the Company in connection with such conversion but which were not converted. (vi) The Company shall declare the payment of all dividends payable under subparagraph (v)(b) above. (vii) The issuance of certificates for shares of Conversion Stock upon conversion of Series A Preferred or Series B Preferred shall be made without charge to the holders of such Series A Preferred or Series B Preferred for any issuance tax in respect thereof or other cost incurred by the Company in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Series A Preferred or Series B Preferred, the Company shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof. (viii) The Company shall not close its books against the transfer of Series A Preferred, Series B Preferred or of Conversion Stock issued or issuable upon conversion of Series A Preferred or Series B Preferred in any manner which interferes with the timely conversion of -7- 36 Series A Preferred or the Series B Preferred. The Company shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including the conversion of Series B Preferred into Series A Preferred) (including, without limitation, making any filings pursuant to the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act ), and any other filings required to be made by the Company). (ix) The Company shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series A Preferred and Series B Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Series A Preferred and Series B Preferred. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company shall not take any action which would cause the number of authorized but unissued shares of Conversion Stock to be less than the number of such shares required to be reserved hereunder for issuance upon conversion of the Series A Preferred and Series B Preferred. (x) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be delivered upon any conversion of the Series A Preferred or Series B Preferred, the Company, in lieu of delivering the fractional share therefor, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. (xi) If the shares of Conversion Stock issuable by reason of conversion of Series A Preferred or Series B Preferred are convertible into or exchangeable for any other stock or securities of the Company, the Company shall, at the converting holder's option, upon surrender of the Shares to be converted by such holder as provided herein together with any notice, statement or payment required to effect such conversion or exchange of Conversion Stock, deliver to such holder or as otherwise specified by such holder a certificate or certificates representing the stock or securities into which the shares of Conversion Stock issuable by reason of such conversion are so convertible or exchangeable, registered in such name or names and in such denomination or denominations as such holder has specified. 7B. Conversion Price. (i) The initial Conversion Price shall be $6.25. In order to prevent dilution of the conversion rights granted under this Section 7, the Conversion Price shall be subject to adjustment from time to time pursuant to this paragraph 7B. (ii) If and whenever the Company issues or sells, or in accordance with paragraph 7C is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, -8- 37 then immediately upon such issue or sale or deemed issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (a) the sum of (1) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale by the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (2) the consideration, if any, received by the Company upon such issue or sale, by (b) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale. (iii) Notwithstanding the foregoing, there shall be no adjustment in the Conversion Price as a result of any issue or sale (or deemed issue or sale) of up to an aggregate of 2,000,000 shares of Common Stock (including any shares subject to any plan of the Company or its Subsidiaries as of the date hereof) to employees or directors of the Company and its Subsidiaries pursuant to stock option plans and stock ownership plans approved by the Company's Board of Directors (as such number of shares is proportionately adjusted for subsequent stock splits, combinations and dividends affecting the Common Stock and as such number includes all such stock options and purchase rights outstanding at the time of the issuance of the Series A Preferred and Series B Preferred). 7C. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under paragraph 7B, the following shall be applicable: (i) Issuance of Rights or Options. If the Company in any manner grants or sells any Options and the price per share for which Common Stock is issuable upon the exercise of such Options, or upon conversion or exchange of any Convertible Securities issuable upon exercise of such Options, is less than the Conversion Price in effect immediately prior to the time of the granting or sale of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Options for such price per share. For purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the granting or sale of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Company upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon conversion or exchange thereof is less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon -9- 38 conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (A) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 6, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be immediately adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold; provided that if such adjustment would result in an increase of the Conversion Price then in effect, such adjustment shall not be effective until 30 days after written notice thereof has been given by the Company to all holders of the Series A Preferred and Series B Preferred. For purposes of paragraph 7C, if the terms of any Option or Convertible Security which was outstanding as of the date of issuance of the Series A Preferred and Series B Preferred are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change; provided that no such change shall at any time cause the Conversion Price hereunder to be increased. (iv) Treatment of Expired Options and Unexercised Convertible Securities. Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Conversion Price then in effect hereunder shall be adjusted immediately to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued; provided that if such expiration or termination would result in an increase in the Conversion Price then in effect, such increase shall not be effective until 30 days after written notice thereof has been given to all holders of the Series A Preferred and Series B Preferred. For purposes of paragraph 7C, the expiration or termination of any Option or Convertible Security which was outstanding as of the date of issuance of the Series A Preferred and Series B Preferred shall not cause the conversion Price hereunder to be adjusted unless, and only to the extent that, a change in the terms of such Option or Convertible Security caused it to be deemed to have been issued after the date of issuance of the Series A Preferred and Series B Preferred. -10- 39 (v) Calculation of Consideration Received. If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor (net of discounts, commissions and related expenses). If any Common Stock, Option or Convertible Security is issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company shall be the Market Price thereof as of the date of receipt. If any Common Stock, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving Company, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Option or Convertible Security, as the case may be. The fair value of any consideration other than cash and securities shall be determined jointly by the Company and the holders of a majority of the outstanding Series A Preferred and Series B Preferred taken as a single Series. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration shall be determined by an independent appraiser experienced in valuing such type of consideration jointly selected by the Company and the holders of a majority of the outstanding Series A Preferred and Series B Preferred taken as a single Series. The determination of such appraiser shall be final and binding upon the parties, and the fees and expenses of such appraiser shall be borne by the Company. (vi) Integrated Transactions. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option shall be deemed to have been issued for a consideration of $.01. (vii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (viii) Record Date. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 7D. Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more Series of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Company at any time combines (by reverse stock split or otherwise) one or more Series of its outstanding -11- 40 shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. 7E. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets or other transaction, in each case which is effected in such a manner that the holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock, is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Company shall make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A Preferred and Series B Preferred taken together as a single Series then outstanding) to insure that each of the holders of Series A Preferred and Series B Preferred shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be) the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Series A Preferred or Series B Preferred, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Series A Preferred and Series B Preferred immediately prior to such Organic Change. In each such case, the Company shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series A Preferred and Series B Preferred taken together as a single Series then outstanding) to insure that the provisions of this Section 7 and Sections 8 and 9 hereof shall thereafter be applicable to the Series A Preferred and Series B Preferred (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Company, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Series A Preferred and Series B Preferred, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument (in form and substance satisfactory to the holders of a majority of the Series A Preferred and Series B Preferred taken together as a single Series then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. 7F. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 7 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A Preferred and Series B Preferred; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 7 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Series A Preferred and Series B Preferred. -12- 41 7G. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Company shall give written notice thereof to all holders of Series A Preferred and Series B Preferred, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company shall give written notice to all holders of Series A Preferred and Series B Preferred at least 20 days prior to the date on which the Company closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata sub scription offer to holders of Common Stock or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Company shall also give written notice to the holders of Series A Preferred and Series B Preferred at least 20 days prior to the date on which any Organic Change shall take place. 7H. Mandatory Conversion. The Company may at any time require the conversion of all of the outstanding Series A Preferred and all of the outstanding Series B Preferred into shares of Common Stock if the closing price of the Common Stock based on trading in the NASDAQ National Market, or such other stock market on which the Common Stock is then traded, as reported in the Wall Street Journal averages not less than $15.625 over the 60 trading days ending on the date immediately preceding the date of the Company's election to cause such mandatory conversion; provided that the Company must elect to cause the conversion of all of the outstanding shares of both the Series A Preferred and Series B Preferred simultaneously. Any such mandatory conversion shall only be effected upon written notice of such mandatory conversion delivered to all holders of Series A Preferred and Series B Preferred within 10 days following the date on which the Company elects to cause such conversion. Each holder of Series A Preferred and Series B Preferred shall assist and cooperate with the Company if it is required to make any governmental filings or obtain any governmental approval prior to or in connection with any such mandatory conversion of Shares hereunder (including, without limitation, making any filings pursuant to the provisions of the HSR Act and any other filings required to be made by such holder). Section 8. Liquidating Dividends. If the Company declares or pays a dividend upon the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company shall pay to the holders of Series A Preferred and Series B Preferred at the time of payment thereof the Liquidating Dividends which would have been paid on the shares of Conversion Stock had such Series A Preferred and Series B Preferred been converted immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends are to be determined; provided that if the Liquidating Dividends consist of voting securities, the Company shall make available to each holder of Series A Preferred and Series B Preferred, at such holder's request, Liquidating Dividends consisting of securities which -13- 42 are non-voting (except as otherwise required by law), which are otherwise identical to the Liquidating Dividends consisting of voting securities and which are convertible into such voting securities. Section 9. Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any Series of Common Stock (the "Purchase Rights"), then each holder of Series A Preferred and Series B Preferred shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Series A Preferred and/or Series B Preferred immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights; provided that if the Purchase Rights involve voting securities, the Company shall make available to each holder of Series A Preferred and Series B Preferred, at such holder's request, Purchase Rights involving securities which are non-voting (except as otherwise required by law), which are otherwise identical to the Purchase Rights involving voting securities and which are convertible into such voting securities. Section 10. Events of Noncompliance. 10A. Definition. An Event of Noncompliance shall have occurred if: (i) the Company fails to pay on any Dividend Payment Date the full amount of dividends then accrued on the Series A Preferred and Series B Preferred, whether or not such payment is legally permissible or is prohibited by any agreement to which the Company is subject; (ii) the Company breaches or otherwise fails to perform or observe any other covenant or agreement set forth in this Certificate of Amendment to the Restated Certificate of Incorporation or in the Purchase Agreement; (iii) any representation or warranty contained in the Purchase Agreement or required to be furnished to any holder of Series A Preferred or Series B Preferred pursuant to the Purchase Agreement, or any information contained in writing required to be furnished by the Company or any Subsidiary to any holder of Series A Preferred or Series B Preferred, is false or misleading in any material respect on the date made or furnished; (iv) the Company or any Subsidiary makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts gen erally as they become due; or an order, judgment or decree is entered adjudicating the Company or any Subsidiary bankrupt or insolvent; or any order for relief with respect to the Company or any Subsidiary is entered under the Federal Bankruptcy Code; or the Company or any Subsidiary petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the Company or any Subsidiary or of -14- 43 any substantial part of the assets of the Company or any Subsidiary, or commences any proceeding (other than a proceeding for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or any Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against the Company or any Subsidiary and either (a) the Company or any such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein or (b) such petition, application or proceeding is not dismissed within 60 days; (v) a judgment in excess of $2,000,000 is rendered against the Company or any Subsidiary and, within 30 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 30 days after the expiration of any such stay, such judgment is not discharged; or (vi) the Company or any Subsidiary defaults in the performance of any obligation or agreement if the effect of such default is to cause an amount exceeding $5,000,000 to become due prior to its stated maturity or to permit the holder or holders of any obligation to cause an amount exceeding $5,000,000 to become due prior to its stated maturity. 10B. Consequences of Events of Noncompliance. (i) If an Event of Noncompliance of the type described in subparagraph 10A(ii) has occurred and continues for a period of 30 days or any other Event of Noncompliance has occurred and is continuing, the dividend rate on the Series A Preferred and Series B Preferred shall increase immediately by an increment of 3 percentage point(s). Thereafter, until such time as no Event of Noncompliance exists, the dividend rate shall increase automatically at the end of each succeeding 90-day period by an additional increment of 3 percentage point(s) (but in no event shall the dividend rate exceed 12%). Any increase of the dividend rate resulting from the operation of this subparagraph shall terminate as of the close of business on the date on which no Event of Noncompliance exists, subject to subsequent increases pursuant to this paragraph. (ii) If an (a) Event of Noncompliance of the type described in subparagraph 10A(ii) has occurred and continued for a period of 30 days, (b) an Event of NonCompliance has occurred pursuant to subparagraph 10A(i) and such Event of NonCompliance has not been cured on or before the 60th day following the date on which such payment was originally due or (c) any other Event of Noncompliance (other than an Event of Noncompliance of the type described in subparagraph 10A(i)) has occurred and is continuing, the holder or holders of a majority of the Series A Preferred and Series B Preferred taken together as a single Series then outstanding may demand (by written notice delivered to the Company) immediate redemption of all or any portion of the Series A Preferred and/or Series B Preferred owned by such holder or holders at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). The Company shall give prompt written notice of such election to the other holders of Series A Preferred and Series B Preferred (but in any event within five days after receipt of the initial demand for redemption), and each such other holder may demand immediate redemption of all or any portion of such holder's Series A Preferred and/or Series B Preferred by giving written notice -15- 44 thereof to the Company within seven days after receipt of the Company's notice. The Company shall redeem all Series A Preferred and Series B Preferred as to which rights under this paragraph have been exercised within 15 days after receipt of the initial demand for redemption. (iii) If at any time the Company is not permitted under applicable law or is otherwise unable to pay any portion of the accrued and unpaid dividends on the Series A Preferred or Series B Preferred which are then due and payable (including upon conversion of any Shares pursuant to Section 6A(vi) above), at each holder's election the Company shall either (1) pay such dividends to the holder as soon thereafter as funds of the Company are legally available for such payment (at the request of any such holder, the Company shall provide such holder with written evidence of such obligation to such holder) or (2) allow such holder to convert such dividends into a number of shares of Conversion Stock determined by dividing the amount of the unpaid dividends to be applied for such purpose, by the lesser of (A) the Conversion Price then in effect and (B) the then current Market Price. (iv) If any Event of Noncompliance exists, each holder of Series A Preferred and each holder of Series B Preferred shall also have any other rights which such holder is entitled to under any contract or agreement at any time and any other rights which such holder may have pursuant to applicable law. Section 11. Registration of Transfer. The Company shall keep at its principal office a register for the registration of Series A Preferred and Series B Preferred. Upon the surrender of any certificate representing Series A Preferred or Series B Preferred at such place, the Company shall, at the request of the record holder of such certificate, execute and deliver (at the Company's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate, and dividends shall accrue on the Series A Preferred or Series B Preferred represented by such new certificate from the date to which dividends have been fully paid on such Series A Preferred or Series B Preferred represented by the surrendered certificate. Section 12. Replacement. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of Series A Preferred or Series B Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such Series represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and -16- 45 dividends shall accrue on the Series A Preferred or Series B Preferred represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. Section 13. Definitions. "Change in Ownership" has the meaning set forth in paragraph 5B hereof. "Common Stock" means, the Company's Common Stock, without par value, and any capital stock of any Series of the Company hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Company. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to subparagraphs 7C(i) and 7C(ii) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Stock" means shares of the Company's Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series A Preferred are issued by an entity other than the Company or there is a change in the type or Series of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Series A Preferred and Series B Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Convertible Securities" means any stock or securities directly or indirectly convertible into or exchangeable for Common Stock. "Fundamental Change" has the meaning set forth in paragraph 5B hereof. "Junior Securities" means any capital stock or other equity securities of the Company, whether outstanding on the date of original issuance of the Series A Preferred and Series B Preferred or issued thereafter, except for the Series A Preferred and Series B Preferred. "Liquidation Value" of any Share as of any particular date shall be equal to $6.25 plus all accrued and unpaid dividends thereon. "Market Price" of any security means the average of the closing prices of such security's sales on all securities exchanges on which such security may at the time be listed, or, if there has been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is not quoted in the NASDAQ System, -17- 46 the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market Price" is being determined and the 20 consecutive business days prior to such day. If at any time such security is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Company and the holders of a majority of the Series A Preferred and Series B Preferred taken together as a single Series. If such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an independent appraiser experienced in valuing securities jointly selected by the Company and the holders of a majority of the Series A Preferred and Series B Preferred taken together as a single Series. The determination of such appraiser shall be final and binding upon the parties, and the Company shall pay the fees and expenses of such appraiser. "Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. "Person" means an individual, a partnership, a Company, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Purchase Agreement" means the Preferred Stock Purchase Agreement, dated as of April __, 1996 by and between the Company and Prudential Private Equity Investors III, L.P., as such agreement may from time to time be amended in accordance with its terms. "Registration Rights Agreement" means the Registration Rights Agreement as defined in the Purchase Agreement. "Redemption Date" as to any Share means the date specified in the notice of any redemption at the Company's option or at the holder's option or the applicable date specified herein in the case of any other redemption; provided that no such date shall be a Redemption Date unless the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon and any required premium with respect thereto) is actually paid in full on such date, and if not so paid in full, the Redemption Date shall be the date on which such amount is fully paid. "Subsidiary" means, with respect to any Person, any Company, limited liability company, partnership, association or other business entity of which (i) if a Company, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other -18- 47 business entity gains or losses or shall be or control the managing general partner of such limited liability company, partnership, association or other business entity. Section 14. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of this Certificate of Amendment to the Restated Certificate of Incorporation without the prior written consent of the holders of a majority of the Series A Preferred and Series B Preferred taken together as a single Series outstanding at the time such action is taken; provided that no such action shall change (a) the rate at which or the manner in which dividends on the Series A Preferred or Series B Preferred accrue or the times at which such dividends become payable or the amount payable on redemption of the Series A Preferred or Series B Preferred or the times at which redemption of Series A Preferred or Series B Preferred is to occur, without the prior written consent of the holders of at least 75% of the Series A Preferred and Series B Preferred taken together as a single Series then outstanding, (b) the Conversion Price of the Series A Preferred or the Series B Preferred or the number of shares or Series of stock into which the Series A Preferred or the Series B Preferred is convertible, without the prior written consent of the holders of at least 75% of the Series A Preferred and Series B Preferred taken together as a single Series then outstanding or (c) the percentage required to approve any change described in clauses (a) and (b) above, without the prior written consent of the holders of at least 75% of the Series A Preferred and Series B Preferred taken together as a single Series then outstanding; and provided further that no change in the terms hereof may be accomplished by merger or consolidation of the Company with another Company or entity unless the Company has obtained the prior written consent of the holders of the applicable percentage of the Series A Preferred and Series B Preferred taken together as a single Series then outstanding. Section 15. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Company, at its principal executive offices and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Company (unless otherwise indicated by any such holder). 3. The resolution set forth in the preceding paragraph was duly adopted by the Board of Directors of the Company on April 1, 1996. 4. The Restated Certificate of Incorporation of the Company is amended so that the number, designations, relative rights, preferences and limitations of Series A Preferred and Series B Preferred, respectively, are as stated in the resolution set forth in paragraph 2 of this Certificate of Amendment to the Restated Certificate of Incorporation of the Company. -19- 48 IN WITNESS WHEREOF, the undersigned duly authorized officer of the Company does swear to and has executed this Certificate of Amendment, as of the __ day of April, 1996, and affirms that the statements made herein are true under penalties of perjury. LECHTERS, INC. By: _______________________________ Title: -20- 49 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of April 5, 1996, between Lechters, Inc., a New Jersey corporation (the "Company"), and Prudential Private Equity Investors III, L.P., a Delaware limited partnership ("PPEI"). RECITALS: (a) PPEI and the Company have entered into a Preferred Stock Purchase Agreement, dated as of the date hereof (the "Stock Purchase Agreement") (capitalized terms used herein and not otherwise defined have the meanings ascribed to such terms in the Stock Purchase Agreement), pursuant to which PPEI is simultaneously with the execution hereof purchasing from the Company the number of shares of Series A Preferred and Series B Preferred of the Company set forth opposite its name on Schedule I hereto. (b) As of the date hereof, the Series A Preferred and Series B Preferred purchased by PPEI pursuant to the Stock Purchase Agreement entitles the holder thereof to receive, upon the conversion thereof, the number of shares of Common Stock as are set forth opposite its name on Schedule I, which number of shares are subject to adjustment as set forth in the provisions of the Certificate of Amendment to the Restated Certificate of Amendment to the Restated Certificate of Incorporation. (1) The Company desires to grant PPEI certain registration rights with respect to the Common Stock. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Demand Registrations. (a) Requests for Registration. Subject to paragraph 1(b) below, the holders of at least 66.67% of the Registrable Securities may request at any time after December 31, 1996 registration under the Securities Act of 1933, as amended (the "Securities Act"), of all or part of their Registrable Securities on Form S-1 or any similar long-form registration ("Long-Form Registrations"), and the holders of at least 66.67% of the Registrable Securities may request registration under the Securities Act of all or part of their Registrable Securities on Form S-2 or S-3 or any similar short-form registration ("Short-Form Registrations") if available. Each request for a Demand Registration shall specify the approximate number of Registrable Securities requested to be registered and the anticipated per share price range for such offering. Within ten days after 50 receipt of any such request, the Company will give written notice of such requested registration to all other holders of Registrable Securities and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. All registrations requested pursuant to this paragraph 1(a) are referred to herein as "Demand Registrations". (b) Long-Form Registrations. Subject to paragraph 1(a), the holders of Registrable Securities will be entitled at any time to request Long-Form Registrations in which (subject to Section 5(b)) the Company will pay all Registration Expenses ("Company-paid Long-Form Registrations"); provided that the holders of Registrable Securities may not request more than three (3) Long-Form Registrations (each a "Demand Long-Form Registration," and each of which shall be a Company-paid Long-Form Registration), such number to be reduced by the number of previously consummated Demand Long-Form Registrations and Demand Short-Form Registrations. A registration will not count as one of the permitted Demand Long-Form Registrations until it has become effective, and no Company-paid Long-Form Registration will count as one of the permitted Demand Long-Form Registrations unless the holders of Registrable Securities are able to register and sell at least 85% of the Registrable Securities requested to be included in such registration; provided that in any event the Company will pay all Registration Expenses in connection with any registration initiated as a Company-paid Long-Form Registration whether or not it has become effective. (c) Short-Form Registrations. In addition to the Long-Form Registrations provided pursuant to paragraph 1(b), the holders of Registrable Securities will be entitled to request up to three (3) Short-Form Registrations (which number shall be reduced by the number of previously consummated Demand Long-Form Registrations and Demand Short-Form Registrations) in which the Company will pay all Registration Expenses. Demand Registrations will be Short-Form Registrations whenever the Company is permitted to use any applicable short form. The Company will use its best efforts to make Short-Form Registrations on Form S-3 available for the sale of Registrable Securities. The holders of Registrable Securities agree that they will not request a Long-Form Registration when the Company is eligible to use a Short-Form Registration; provided that the Company agrees to include in the prospectus included in any Short-Form Registration Statement, such material describing the Company and intended to facilitate the sale of securities being so registered as is reasonably requested for inclusion therein by any of the shareholders selling securities pursuant to such registration statement, whether or not the form used for such registration statement requires the inclusion of such information. (d) Priority on Demand Registrations. The Company will not include in any Demand Registration any securities which are not Registrable Securities without the prior written consent of the holders of at least 50.1% of the Registrable Securities included in such registration. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold therein without adversely affecting the marketability of the offering, the Company will include in such registration prior to the 2 51 inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold without adversely affecting the marketability of the offering, pro rata among the respective holders thereof on the basis of the number of Registrable Securities owned by each holder participating in such offering. (e) Restrictions on Long-Form Registrations and Demand Registrations. The Company will not be obligated to effect any Demand Long-Form Registration during the period starting with the date thirty (30) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred and twenty (120) days after the effective date of, a Company-initiated registration; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective. The Company will not be obligated to effect any Demand Long-Form Registration within six (6) months after the effective date of a previous Long-Form Registration. The Company may postpone for up to six (6) months the filing or the effectiveness of a registration statement for a Demand Registration if the Company and the holders of at least 66.67% of the Registrable Securities agree that such Demand Registration would reasonably be expected to have an adverse effect on any proposal or plan by the Company or any of its subsidiaries to engage in any acquisition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or similar transaction; provided that in such event, the holders of Registrable Securities initially requesting such Demand Registration will be entitled to withdraw such request and such Demand Registration will not count as one of the permitted Demand Registrations hereunder and the Company will pay all Registration Expenses in connection with such registration. 2. Piggyback Registrations. (a) Right to Piggyback. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to (i) a Demand Registration, (ii) a registration in connection with shares issued by the Company in connection with the acquisition of any company or companies or (iii) a registration solely of shares that have been issued pursuant to the Company's employee benefit plans) and the registration form to be used may be used for the registration of Registrable Securities (a "Piggyback Registration"), the Company will give prompt written notice to all holders of Registrable Securities of its intention to effect such a registration and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. (b) Piggyback Expenses. Subject to Section 5(b), the Registration Expenses of the holders of Registrable Securities will be paid by the Company in all Piggyback Registrations. (c) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company will include in such registration (i) first, the securities 3 52 the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of Registrable Securities owned by each holder of Registrable Securities participating in such offering, and (iii) third, other securities requested to be included in such registration; provided that in any event the holders of Registrable Securities shall be entitled to register at least 20% of the securities to be included in any such registration. (d) Priority on Secondary Registrations. If a Piggyback Regis tration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company will include in such registration (i) first, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of Registrable Securities owned by each holder of Registrable Securities participating in such offering, and (ii) second other securities requested to be included in such registration. (e) Selection of Underwriters. If any Piggyback Registration is an underwritten offering, the selection of investment banker(s) and manager(s) for the offering must be approved by the holders of a majority of the Registrable Securities included in such Piggyback Registration. Such approval will not be unreasonably withheld. (f) Other Registrations. If the Company has previously filed a registration statement with respect to Registrable Securities pursuant to Paragraph 1 or pursuant to this Paragraph 2, and if such previous registration has not been withdrawn or abandoned, the Company will not file or cause to be effected any other registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least six months has elapsed from the effective date of such previous registration. 3. Holdback Agreements. (a) Each holder of Registrable Securities agrees not to effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the ninety (90)-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration in which Registrable Securities are included (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree. (b) The Company agrees (i) not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and during the ninety (90)-day period beginning on the effective date 4 53 of any underwritten Demand Registration or any underwritten Piggyback Registration (except as part of such underwritten registration or pursuant to registrations on Form S-8 or any successor form), unless the underwriters managing the registered public offering otherwise agree, and (ii) to cause each holder of at least 5% (on a fully-diluted basis) of its Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock, purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution (including sales pursuant to Rule 144) of any such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree. 4. Registration Procedures. Whenever the holders of Regis trable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company will use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof including the registration of common stock that may be obtained upon conversion of Series A Preferred and/or Series B Preferred held by a holder of Registrable Securities requesting registration as to which the Company has received reasonable assurances that only Registrable Securities will be distributed to the public, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file (in the case of a Demand Registration not more than sixty (60) days after request therefor) with the Securities and Exchange Commission a registration statement with respect to such Registra ble Securities and use its best efforts to cause such registration statement to become effective (provided that as far in advance as practicable before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to the counsel selected by the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel); (b) prepare and file with the Securities and Exchange Com mission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than one hundred and eighty (180) days and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any 5 54 and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction); (e) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (f) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on the National Association of Securities Dealers automated quotation system; (g) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (h) enter into such customary agreements (including under writing agreements in customary form) and take all such other actions as the holders of a majority of the Registrable Securities being sold or the under writers, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including, without limitation, effecting a stock split or a combination of shares); (i) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (j) permit any holder of Registrable Securities which holder, in its sole and exclusive judgment, might be deemed to be an underwriter or a controlling person of the Company, to participate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and its counsel should be included; 6 55 (k) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any common stock included in such registration statement for sale in any jurisdiction, the Company will promptly notify the holders of Registrable Securities and will use its reasonable best efforts promptly to obtain the withdrawal of such order; and (l) obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the holders of a majority of the Registrable Securities being sold reasonably request. 5. Registration Expenses. (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding discounts and commissions) and other Persons retained by the Company (all such expenses being herein called "Registration Expenses"), will be borne as provided in this Agreement, except that the Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the National Association of Securities Dealers automated quotation system. The Company shall not be required to pay an underwriting discount with respect to any shares being sold by any party other than the Company in connection with an underwritten public offering of any of the Company's securities pursuant to this Agreement. (b) In connection with each Company-paid Demand Registration, the Company will reimburse the holders of Registrable Securities covered by such registration for the reasonable fees and expenses (including the fees and expenses of counsel chosen by the holders of a majority of the Registrable Securities initially requesting such registration) incurred by such holders in connection with such registration. To the extent that there are any unreimbursed expenses incurred by the holders of Registrable Securities, each holder shall bear his or her pro rata share of such expenses based upon the number of shares of Registrable Securities held by such holder that are included in such registration relative to the number of all Registrable Securities included in such registration. 7 56 6. Indemnification. (a) The Company agrees to indemnify, to the full extent permitted by law, each holder of Registrable Securities, its officers and directors and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the state ments therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. (b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder will furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder for use in such registration statement or prospectus; provided that the obligation to indemnify will be individual to each holder and will be limited to the net amount of proceeds received by such holder from the sale of Registrable Securities pursuant to such registration statement. (c) Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel rea sonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. 8 57 (d) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and will survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason. 7. Participation in Underwritten Registrations. No Person may participate in any registration hereunder which is underwritten unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements 8. Definitions. "Common Stock" means the Common Stock of the Company, no par value. "Registrable Securities" means (i) any Common Stock issued upon the conversion of any Series A Preferred or Series B Preferred issued pursuant to the Stock Purchase Agreement and any Common Stock issued upon conversion of any Series A Preferred issued upon conversion of any Series B Preferred issued pursuant to the Stock Purchase Agreement (whether held by PPEI or any successor or assignee of PPEI), (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization, and (iii) any other shares of Common Stock held by Persons holding securities described in clauses (i) and (ii) above. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been distributed to the public pursuant to a offering registered under the Securities Act or sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force). For purposes of this Agreement, a Person will be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected. "Registration Expenses" has the meaning set forth in Section 5(a) hereof. 9. Miscellaneous. (a) No Inconsistent Agreements. The Company has not entered and will not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the holders of Registrable Securities in this Agreement. 9 58 (b) Adjustments Affecting Registrable Securities. The Company will not take any action, or permit any change to occur, with respect to its securities which would adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement or which would adversely affect the marketability of such Registrable Securities in any such registration (including, without limitation, effecting a stock split or a combination of shares). (c) Remedies. Any Person having rights under any provision of this Agreement will be entitled to enforce such rights specifically to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement. (d) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only upon the prior written consent of the Company and holders of at least 66.67% of the Registrable Securities. (e) Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the permitted respective successors and assigns of the parties hereto whether so expressed or not. The parties expressly agree that PPEI shall have the right to assign its rights and obligations hereunder to any transferee who, immediately following such transfer, holds at least 10% of the Series A Preferred or Series B Preferred acquired by PPEI pursuant to the Preferred Stock Purchase Agreement. (f) Notices. Except as otherwise expressly provided herein, any and all notices, designations, consents, offers, acceptances or other communications provided for herein shall be given in writing and shall be mailed by first class registered or certified mail, postage prepaid, sent by a nationally recognized overnight courier service or transmitted via telecopier as follows: If to the Company: Lechters, Inc. 1 Cape May Street Harrison, New Jersey 07029-9998 Telecopy: (201) 481-4479 Attention: President 10 59 With a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, New York 10019 Telecopy: (212) 424-8500 Attention: Bernard D. Fischman, Esq. If to PPEI: Prudential Private Equity Investors III, L.P. 717 Fifth Avenue Suite 1100 New York, New York 10022 Facsimile: (212) 826-6798 Attention: Robert Knox, Chairman Robert Getz, Director With a copy to: Kirkland & Ellis Citicorp Center 153 East 53rd Street New York, New York 10022-4675 Facsimile: (212) 446-4900 Attention: Frederick Tanne, Esq. Notice shall be deemed given, for all purposes, when deposited in the United States mail as registered or certified mail, in which event the third day following the date of postmark on the receipt of such registered or certified mail shall conclusively be deemed the date of giving of such notice, on the first Business Day following collection by the courier service or when acknowledged by the receiving telecopier. (g) Interpretation of Agreement; Severability. The provisions of this Agreement shall be applied and interpreted in a manner consistent with each other so as to carry out the purposes and intent of the parties hereto, but if for any reason any provision hereof is determined to be unenforceable or invalid, such provision or such part thereof as may be unenforceable or invalid shall be deemed severed from the Agreement and the remaining provisions carried out with the same force and effect as if the severed provision or part thereof had not been a part of this Agreement. (H) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS (AND NOT THE CONFLICTS OF LAW) OF THE STATE OF NEW YORK. 11 60 (i) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same Agreement. (j) Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all previous agreements. * * * * * 12 61 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first written above. LECHTERS, INC. By: ---------------------------------------- Name: Title: PRUDENTIAL PRIVATE EQUITY INVESTORS III, L.P. By: Prudential Equity Investors, Inc., General Partner By: ---------------------------------------- Name: Title: 62 SCHEDULE I
Shares of Common Stock issuable upon Conversion of Series A Convertible Shares of Series A Shares of Series Preferred Stock Convertible B Convertible and Series B Convertible Name, Address and Telecopier Number Preferred Stock Preferred Stock Preferred Stock - ----------------------------------- --------------- --------------- --------------- Prudential Private Equity Investors III, 149,999 50,001 3,200,000 L.P. c/o Prudential Equity Investors, Inc. 717 Fifth Avenue Suite 1100 New York, New York 10022 Attention: Robert Knox, Chairman Robert Getz, Director Telecopier: (212) 826-6798
63 [Letterhead of LeBoeuf, Lamb, Greene & MacRae, L.L.P] April 5, 1996 Prudential Private Equity Investors, III, L.P. 717 Fifth Avenue Suite 1100 New York, New York 10022 Dear Sirs: We have acted as counsel for Lechters, Inc., a New Jersey corporation (the "Company"), in connection with the issuance and sale of 149,999 shares of the Company's Series A Convertible Preferred Stock, par value $100 per share (the "Series A Preferred") and 50,001 shares of the Company's Series B Convertible Preferred Stock, par value $100 per share (the "Series B Preferred"), for a price per share of $100 pursuant to the Preferred Stock Purchase Agreement, dated as of April 5, 1996 (the "Preferred Stock Purchase Agreement"), between Prudential Private Equity Investors III, L.P. ("PPEI") and the Company. This opinion is being delivered to you pursuant to the provisions of Section 7.1(c) of the Preferred Stock Purchase Agreement. All capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Preferred Stock Purchase Agreement. 64 We have examined (a) an executed counterpart of the Preferred Stock Purchase Agreement, (b) a copy of the Restated Certificate of Incorporation of the Company, as amended through the date hereof, (c) a copy of the By-Laws of the Company, as amended through the date hereof, (d) a copy of the Registration Rights Agreement dated April 5, 1996, (e) a copy of the Certificate of Amendment of the Restated Certificate of Incorporation (the "Certificate of Amendment") establishing the terms of the Series A Preferred and the terms of the Series B Preferred, and (f) a record of the corporate proceedings of the Company relating to the authorization of the issuance of the Series A Preferred and the Series B Preferred and the execution, delivery and performance of the Preferred Stock Purchase Agreement and the Registration Rights Agreement. In addition, we have examined the originals (or copies certified or otherwise identified to our satisfaction) of such other agreements, instruments, certificates, documents and records and have reviewed such questions of law as we have deemed necessary or appropriate for the purposes of the opinions rendered below. In such examination, we have assumed, without inquiry, the genuineness of all signatures on all documents examined by us other than those of the Company, the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as copies and the authenticity of the originals of such latter documents. As to any facts material to our opinions, we have, when relevant facts were not independently established by us, relied upon the aforesaid agreements, instruments, certificates, documents and records. Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that: i. The Company is validly existing and in good standing as a corporation under the laws of the State of New Jersey. ii. The Company is duly qualified as a foreign corporation to transact business in, and is in good standing in, every jurisdiction in which the ownership of its properties or the conduct of its businesses makes such qualification necessary -2- 65 except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. iii. The Company has all necessary corporate power and authority to own its properties and to conduct its businesses in the manner and in the locations presently owned and conducted. iv. The Preferred Stock Purchase Agreement, the Registration Rights Agreement, and the other agreements contemplated by the Preferred Stock Purchase Agreement to which the Company is a party have been duly authorized, executed and delivered by the Company, and each such agreement is a valid and binding obligation of the Company, enforceable in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, conservatorship, receivership, moratorium or similar laws relating to or affecting creditors' rights generally and by general principles of equity. v. The Certificate of Amendment setting forth the rights and preferences of the Series A Preferred and Series B Preferred containing the provisions set forth in Exhibit A to the Preferred Stock Purchase Agreement has been duly adopted by the Board of Directors of the Company and has been duly filed with the Secretary of State of the State of New Jersey. vi. The certificates representing the Series A Preferred and Series B Preferred purchased at the Closing have been duly authorized, executed and delivered by the Company; the Series A Preferred and the Series B Preferred have been validly issued and are fully paid and nonassessable; and there are no statutory or, to our knowledge after due inquiry, contractual preemptive rights of stockholders or, to our knowledge after due inquiry, rights of first refusal with respect to the issuance of such preferred stock which have not been waived. vii. The Common Stock issuable upon conversion of either the Series A Preferred or the Series B Preferred has been duly authorized and reserved for issuance by the Company, there are no statutory or, to our knowledge after due inquiry, contractual preemptive rights of stockholders or, to our knowledge after due inquiry, rights of first refusal with respect to the issuance of such Common Stock, and the Common Stock to be -3- 66 issued upon conversion of such Series A Preferred and Series B Preferred will upon such issuance, assuming issuance pursuant to the terms and conditions of the Series B Preferred, be validly issued, fully paid and nonassessable. viii. The Series A Preferred issuable upon conversion of the Series B Preferred has been duly authorized and reserved for issuance by the Company, there are no statutory or, to our knowledge after due inquiry, contractual preemptive rights of stockholders or, to our knowledge after due inquiry, rights of first refusal with respect to the issuance of such Series A Preferred, and the Series A Preferred to be issued upon conversion of such Series B Preferred will upon such issuance, assuming issuance pursuant to the terms and conditions of the Preferred Stock Purchase Agreement, be validly issued, fully paid and nonassessable. ix. The execution and delivery by the Company of the Preferred Stock Purchase Agreement, the Registration Rights Agreement, and the other agreements contemplated by the Preferred Stock Purchase Agreement, the adoption of the Certificate of Amendment, the offering, sale and issuance of the Series A Preferred and Series B Preferred, the issuance of Common Stock upon conversion of the Series A Preferred or the Series B Preferred and the issuance of the Series A Preferred upon conversion of the Series B Preferred, and the fulfillment of and the compliance with the respective terms thereof by the Company do not and will not (A) conflict with or result in a breach of the terms, conditions or provisions of, (B) constitute a default under, (C) result in the creation of any lien, mortgage, security interest, charge or other encumbrance upon the Company's capital stock or assets pursuant to, (D) give any third party the right to accelerate any obligation under, (E) result in a violation of, or (F) require any authorization, consent, approval, exemption or other action by or notice to any court or administrative or governmental body pursuant to, the Company's Restated Certificate of Incorporation, the Company's By-Laws, any law, statute, rule or regulation which, in our experience, are normally applicable to transactions of the type provided for by the Preferred Stock Purchase Agreement (except that we do not express an opinion with respect to the need to obtain consents, approvals, authorizations or orders pursuant to any law other than the Federal law of the United States, the law of the State of New York and the -4- 67 corporation law of the State of New Jersey), or, to our knowledge, any agreement, instrument, order, judgment or decree to which the Company is subject. x. Assuming the accuracy of the representations and warranties set forth in Article VI of the Preferred Stock Purchase Agreement, the offering, sale and issuance of the Series A Preferred and Series B Preferred pursuant to the Preferred Stock Purchase Agreement do not require registration under the Securities Act of 1933, as amended, or registration or qualification under any securities laws of the State of New York. xi. To the best of our knowledge, as of the date hereof there are no claims, suits, proceedings or investigations pending or, to our knowledge, threatened against or affecting the Company, any officer or director thereof or the Company's business which if decided adversely to any such person alone or in the aggregate, is reasonably likely to have a Material Adverse Effect. In rendering the foregoing opinions, we have relied as to matters of fact, to the extent we deemed it proper, on certificates of responsible officers of the Company and public officials. In rendering the opinion in paragraph 2, we have relied with your permission on the opinion of even date herewith of Ira Rosenberg, General Counsel to the Company. We express no opinion with respect to any laws other than the Federal law of the United States of America, the law of the State of New York and the corporation law of the State of New Jersey. This opinion is delivered solely to you pursuant to the terms of the Preferred Stock Purchase Agreement, and it may not be delivered to, or relied upon in any manner by any other person or entity or for any other purpose without our prior written consent. Very truly yours, /s/ LeBoeuf, Lamb, Greene & MacRae, L.L.P -5- 68 LECHTERS, INC. 1 Cape May Street Harrison, New Jersey 07029 April 5, 1996 LeBoeuf, Lamb, Greene & MacRae, L.L.P 125 W. 55th St. New York, New York 10019 Ladies and Gentlemen: I am Vice President, Secretary and Corporate Counsel for Lechters, Inc., a New Jersey corporation (the "Company"), and am delivering this opinion in connection with the issuance and sale of 149,999 shares of the Company's Series A Convertible Preferred Stock, par value $100 per share (the "Series A Preferred") and 50,001 shares of the Company's Series B Convertible Preferred Stock, par value $100 per share (the "Series B Preferred"), for a price per share of $100 pursuant to the Preferred Stock Purchase Agreement, dated as of April 5, 1996 (the "Preferred Stock Purchase Agreement"), between Prudential Private Equity Investors III, L.P. ("PPEI") and the Company. This opinion is being delivered to you in order to enable you to fulfill the provisions of Section 7.1(c) of the Preferred Stock Purchase Agreement. All capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Preferred Stock Purchase Agreement. I have examined such matters of fact and the originals (or copies certified or otherwise identified to our satisfaction) of such agreements, instruments, certificates, documents and records, and have reviewed such questions of law as I have deemed 69 necessary or appropriate for the purposes of the opinions rendered below. In such examination, I have assumed, without inquiry, the genuineness of all signatures on all documents examined by me other than those of the Company, the authenticity of all documents submitted to me as originals, the conformity to the original documents of all documents submitted to me as copies and the authenticity of the originals of such latter documents. As to any facts material to my opinions, I have, when relevant facts were not independently established by me, relied upon the aforesaid agreements, instruments, certificates, documents and records. Based on the foregoing, and subject to the qualifications stated herein, I am of the opinion that: The Company is duly qualified as a foreign corporation to transact business in, and is in good standing in, every jurisdiction in which the ownership of its properties or the conduct of its businesses makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. This opinion is delivered solely to you so that you may fulfill terms of the Preferred Stock Purchase Agreement, and it may not be delivered to, or relied upon in any manner by any other person or entity or for any other purpose without my prior written consent. Very truly yours, /s/ Ira Rosenberg --------------------------------- Ira Rosenberg -2- 70 Schedule 4.1 Subsidiaries
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 Florida, Inc. Florida Lechters Georgia, Inc. Georgia Lechters Hawaii, Inc. Hawaii Lechters Idaho, Inc. Idaho Lechters Illinois, Inc. Illinois Lechters Indiana, Inc. Indiana Lechters Iowa, Inc. Iowa Lechters Kansas, Inc. Kansas Lechters Kentucky, Inc. Kentucky Lechters Louisiana, Inc. Louisiana Lechters Maine, Inc. Maine Lechters Baltimore, Inc. Maryland Lechters Holyoke, Inc. Massachusetts Lechters Michigan, Inc. Michigan Lechters Minnesota, Inc. Minnesota Lechters Missouri, Inc. Missouri Lechters Nebraska, Inc. Nebraska Lechters Nevada, Inc. Nevada Lechters New Hampshire, Inc. New Hampshire
71 Schedule 4.1 Subsidiaries Page 2
NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- Lechters New Jersey, Inc. New Jersey Lechters New Mexico, Inc. New Mexico Lechters New York, Inc. New York Lechters N.Y.C., Inc. New York Lechters North Carolina, Inc. North Carolina Lechters Ohio, Inc. Ohio Lechters Oklahoma, Inc. Oklahoma Lechters Oregon, Inc. Oregon Lechters Pennsylvania, Inc. Pennsylvania Lechters Rhode Island, Inc. Rhode Island Lechters South Carolina, Inc. South Carolina Lechters Tennessee, Inc. Tennessee Lechters Texas, Inc. Texas Lechters Utah, Inc. Utah Lechters Vermont, Inc. Vermont Lechters Springfield, Inc. Virginia Lechters Washington, Inc. Washington Lechters West Virginia, Inc. West Virginia Lechters Wisconsin, Inc. Wisconsin Cooks Club, Inc. New Jersey Regent Gallery, Inc. New Jersey Simple Solutions of NJ, Inc. New Jersey Harrison Investment Corp. Delaware
72 Schedule 4.3 Options Granted Under Stock Option Plan 1,341,760 Shares Options Granted Not Under Stock Option Plan 102,302 Shares 5% Convertible Subordinated Debentures 2,131,350 Shares 73 Schedule 4.6 None 74 Schedule 4.16 Service Marks and Trademarks Owned By and Registered In The Name of The Company 1. Service Marks: (a) Lechters (b) Lechters Home Store (c) The Kitchen Place (d) Famous Brands Housewares Outlet 2. Trademarks: (a) Lechters (b) The Kitchen Place (c) Cooks Club (d) Regent Gallery (e) Simple Solutions (f) Perfect Bake 75 Schedule 4.17 Collective Bargaining Agreements 1. Agreement dated July 26, 1994 between the Company and the Office and Distribution Employees Union, Local 99, UNITE (then known as ILGWU) covering office workers at 1 Cape May Street, Harrison, NJ, for a term expiring June 30, 1997. .2 Agreement dated March 15, 1993 between the Company and Office and Distribution Employees Union, Local 99, UNITE (then known as ILGWU) covering warehouse workers at 1 Cape May Street, Harrison, NJ, expiring March 15, 1996, amended by Memorandum of Agreement dated April 1, 1996 between the parties extending the term to March 15, 1999. 76 Schedule 4.22 Donald Jonas 20.0% EX-10.10 3 COLLECTIVE BARGAINING AGREEMENT 1 AGREEMENT BETWEEN OFFICE AND DISTRIBUTION EMPLOYEES' UNION LOCAL 99, U.N.I.T.E. AND LECHTERS, INC. (EMPLOYER) * MARCH 16, 1996 - MARCH 15, 1999 2 TABLE OF CONTENTS
PAGE ---- UNION RECOGNITION...................................................... 1 SCOPE OF AGREEMENT..................................................... 1 HIRING OF EMPLOYEES.................................................... 2 UNION SECURITY......................................................... 3 TRIAL PERIOD .......................................................... 3 MANAGEMENT RIGHTS...................................................... 3 TEMPORARY EMPLOYEES.................................................... 4 SENIORITY AND LAYOFFS.................................................. 4 JOB OPENINGS........................................................... 5 HOURS OF WORK.......................................................... 6 OVERTIME PAY........................................................... 6 PAYMENT ON APPEARANCE FOR WORK......................................... 7 GENERAL WAGE INCREASE.................................................. 8 CHANGE IN SHIFT TIMES.................................................. 8 MINIMUM WAGE........................................................... 9 HOLIDAYS............................................................... 9 VACATIONS.............................................................. 12 AUTHORITY TO ACT FOR UNION............................................. 13 NO-STRIKE PROVISION.................................................... 14 NO LOCK-OUT PROVISION.................................................. 14 ARBITRATION............................................................ 15
3 CHECK OFF OF DUES...................................................... 17 BENEFIT FUNDS.......................................................... 17 SEVERANCE FUND-TERMINATION OR DISMISSAL OF BENEFITS.................... 21 DISCHARGE OF EMPLOYEES................................................. 24 SHOP STEWARD AND COMMITTEE............................................. 24 RIGHT OF VISITATION.................................................... 25 STRIKES OF U.N.I.T.E. AFFILIATES....................................... 25 EXAMINATION OF RECORDS................................................. 26 PENALTY UPON FAILURE TO PAY DUES AND CONTRIBUTIONS..................... 26 PENALTY UPON FAILURE TO PAY DUES AND CONTRIBUTIONS..................... 26 PRE-TICKETING AND OTHER PROCESSING OPERATIONS.......................... 26 UNION RECOGNITION IN ADDITIONAL FACILITIES............................. 27 REMOVAL OF FACILITIES.................................................. 27 CONTRACTING OUT........................................................ 27 REORGANIZATION......................................................... 28 SURVIVAL OF LIABILITY.................................................. 28 CONTINUING OBLIGATIONS IN THE EVENT OF SALE OR TRANSFER................ 28 INVALIDITY OF PART OF AGREEMENT........................................ 29 NO DISCRIMINATION...................................................... 29 EXISTING BENEFITS...................................................... 30 JURY DUTY.............................................................. 30 TIME OFF FOR UNION MEETINGS............................................ 30 FIRE DRILLS............................................................ 30
ii 4 NO MODIFICATION OR WAIVER.............................................. 31 DURATION OF AGREEMENT.................................................. 31
iii 5 AGREEMENT made and entered into the 16th of March, 1996, effective as March 16, 1996 by and between LECHTERS, INC. (Employer), located at 1 Cape May Street, Harrison, NJ 07029, herein referred to as the "Employer," and LOCAL 99, U.N.I.T.E. (formerly known as Local 99, I.L.G.W.U.), herein referred to as the "Union." W I T N E S S E T H: WHEREAS, the parties hereto desire to regulate mutual relations between the Employer and the Union with a view toward securing harmonious cooperation between them and averting disputes; and WHEREAS, the Union represents the overwhelming majority of the workers in the job functions hereinafter set forth employed by the Employer; NOW, THEREFORE, in consideration of the mutual promises set forth, the parties hereto agree with each other as follows: UNION RECOGNITION 1. The Employer recognizes the Union as the sole and exclusive bargaining agent and representative of the employees covered by this Agreement for the purposes of collective bargaining with respect to all matters affecting such employees. SCOPE OF AGREEMENT 2. This contract shall apply to and cover warehouse and distribution workers employed in the following job functions in the warehouse and distribution center at One Cape May Street, Harrison, New Jersey and any other warehouse and distribution center within 100 miles from its present location in Harrison, New Jersey to which this Agreement shall apply as set forth in paragraphs 32 and 33 hereof: Shipping Clerks, including sorters, receiving clerks, packers, order pickers, including full case pickers, drivers, hi-lo drivers, fork lift drivers, porters, all warehouse clericals, stock clerks, supply department employees, hi-lift drivers, janitors, lead persons, cycle counters, replenishers and other employees performing the same or similar type work employed by Lechters warehouse and excluding, however, supervisory personnel. 6 The above titles are not intended to define job functions or limit the combinations and overlap of duties, but are only listed for the purpose of determining which employees are covered by this Agreement. The Employer agrees to employ at least two (2) truck drivers who will perform switching of trailers and local delivery duties as assigned by the Employer. a. Current employees covered under the Agreement and trained for use of PDT and RF guns shall receive a bonus as provided for in Exhibit C. b. The Employer will provide to the Union, at least weekly, a list of temporary and lumper employees who worked with a daily recap. Lumpers will perform work only as provided for in Exhibit D. No lumper shall be used both as a Lumper and as a temporary employee in the same work day, or vice versa. Lumpers may not be used until all employees in the receiving department who have been involuntarily laid off shall have been rehired or given the opportunity to return to work unless there is insufficient time to give notice to such laid off employees so that they may return to work. Receiving department employees shall be exempt from plant-wide seniority with respect to layoffs while the Employer is participating in the "lumper" program. Layoffs within the receiving department shall be based on plant-wide seniority within the Department. HIRING OF EMPLOYEES 3. a. The Employer shall have the sole and exclusive right to select and hire its employees. Within forty-eight (48) hours from the time of hiring an employee covered by this Agreement, the Employer shall send a written notice to the Union on an appropriate form supplied by the Union, stating name, address, salary, starting date and job function of such new employee. The Employer agrees to notify the Union of job openings. If a request is made before 11:00 A.M. the Union will use its best efforts to supply workers, if available, on or before the end of the following work day, without regard to their Union membership. The Employer shall be under no obligation to hire such referrals. b. All new employees shall be required to take a pre-placement physical examination at U.N.I.T.E. Health Center without loss of pay. All covered workers who have been employed for one (1) year, shall be given time off at least once during each contract year of this Agreement, without loss of pay, for the purpose of undergoing a physical check-up examination at the Union Health Center. All such examinations shall take place at a time mutually agreed upon and pursuant 2 7 to procedures between the Union and the Employer. c. All eligible covered workers shall be entitled to receive three and one-half (3 1/2) hours with pay, during each contract year, for dental facility visits authorized by the Union, with a minimum allowance of one (1) hour for each visit. UNION SECURITY 4. To the extent permitted by law, good standing membership in the Union shall be a condition of employment for all employees covered by this Agreement on or after the 30th day following the beginning of such employment or the execution or the effective date of this Agreement, whichever is the later, but not before completion of the worker's trial period. For the purpose of this provision, a member of the Union shall be deemed to be in good standing only if his initiation fees and periodic fixed dues are not in arrears for more than thirty (30) days, and notice to that effect has been stated to the Employer by the Union. TRIAL PERIOD 5. A trial period of sixty (60) calendar days is hereby fixed for new employees covered by this Agreement. During such trial period, the Employer may discharge such new employees without cause, without notice to the employees or to the Union and without the consent of the Union. Thereafter, the new employees shall not be subject to discharge except as provided in this Agreement. The trial period shall not be abused by the Employer and any claim of abuse shall be the subject of arbitration hereunder. MANAGEMENT RIGHTS 6. Subject only to the provisions of this Agreement and applicable law, management of the Employer's operations and direction of its working force including, but not limited to the right to schedule and assign work to be performed; hire or rehire employees; promote; layoff or recall employees who are laid off; suspend; discipline or discharge for proper cause; and transfer employees because of lack of work or other legitimate reasons, shall be vested exclusively with the Employer. 3 8 TEMPORARY EMPLOYEES 7. a. The Employer may employ temporary employees who shall not be required to become members of the Union. Such temporary employees may be used by the Employer only to compensate for an absent full-time employee on a one-for-one basis. b. The Employer may supplement the normal work force with no more than ten (10) temporary employees per day between the months of February through May and with no more than fifteen (15) temporary employees between June through January. c. No temporary employee may work for more than sixty (60) calendar days in any six (6) month period. Should any temporary employee remain in the Employer's employ for a period in excess of sixty (60) calendar days in any six (6) month period, then such employees shall thereafter be required to become a member of the Union. d. The Employer shall maintain a daily log of temporary employees who shall sign in and out recording the time of the commencement and termination of work. The log shall set forth that it is for temporary employees. e. Except for temporary employees employed under subsection a. above, before temporary employees are hired, all regular workers must be recalled from layoff before any regular employees can be laid off, all temporaries must be laid off. f. A list of temporary employees will be provided to the Labor-Management Committee on a weekly basis. A list of all Union associates who are absent from work will be provided on a daily basis. g. The Employer shall not abuse the within provisions for temporary help. SENIORITY AND LAYOFFS 8. a. All rehirings and layoffs shall be done in accordance with seniority, i.e. the last employee hired shall be the first employee laid off, and the last employee laid off shall be the first employee rehired. Layoffs and rehirings shall not be on a departmental basis, except where the employee in question is 4 9 unable to perform the required work. Regardless of seniority rights of part-time employees, they shall be the first to be laid off and the last to be rehired, except where a full-time employee is unable or unwilling to perform the required work and except where the part-time employees were formerly full-time employees. For workers employed less than one (1) year, notice of layoff shall be made available by the Employer during the day of such layoff. Workers employed for one (1) year or longer shall receive notice of layoff at least five (5) working days prior to such layoff or such workers shall be paid for said period in lieu of said notice. Part-timers shall be informed of layoff provisions at the time they are hired. Employees on layoff should advise the Personnel Department where they can be reached while on layoff or absent. b. Leaves of absence in case of sickness, pregnancy, jury duty or Union business shall be granted for reasonable periods. Other leaves of absence for personal needs may be requested and shall not unreasonably be withheld. At least five (5) days leave of absence with pay shall be granted in case of death in a worker's immediate family which includes spouse, parent and grandparent, child and grandchild, sister and brother. At least two (2) days leave of absence with pay shall be granted in case of death of a worker's father-in-law or mother-in-law; two (2) days leave of absence with pay shall be granted to a covered male worker in connection with the birth of his child. Proof of such occurrences may be required. c. For the purpose of adjusting any inequities, the Employer or the Union may request a review of a worker's continuing status of employment when an extended layoff period or an extended leave of absence exists. JOB OPENINGS 9. Vacancies on classified jobs or other jobs in the plant shall be posted for no less than three (3) working days. Bidding shall be in writing and awarded to the most senior qualified employee. An employee may apply for a new opening only once in any twelve (12) consecutive month period. The Employer will reassign associates from position to position based on seniority, provided the most junior person has the qualifications and skills to perform the temporary assignment. 5 10 HOURS OF WORK 10. a. The days of work shall be from Monday to Friday inclusive, and the hours of work from 8:00 A.M. to 4:15 P.M. daily, inclusive of one-half (1/2) hour for lunch. The Union shall not unreasonably withhold its consent to vary the start of the work day. Current starting time and lunch hour arrangements heretofore agreed between the Union and the Employer may be continued. b. The Employer shall provide a time clock. All workers shall punch time cards before and after work periods. OVERTIME PAY 11. Employees shall be paid at the rate of time and one-half for overtime after seven and three quarters (7 3/4) hours in a day and for all work performed in excess of thirty-eight and three quarters (38 3/4) hours per week. Overtime at the rate of time and one-half shall be paid for work performed before and after regularly scheduled hours. a. When overtime is needed, employees shall be notified as far in advance as possible in order to allow them to make necessary preparations for working overtime and such notice shall be given no later than the employees' scheduled lunch break if overtime work that day is needed. b. The Union agrees that it will, through its shop committee, cooperate in having employees perform overtime work when it is requested. c. The Company will request volunteers from among the employees who are capable and qualified to perform the overtime work involved. When such overtime work is necessary and there are insufficient volunteers, the employee in the department with the least seniority shall be the first to be required to work. If requested to work overtime, the employee will be required to do so during the peak season between September 1 and December 31, unless he or she has a reasonable excuse for being unable to work. Overtime during the non-peak season shall be voluntary except in the case of an emergency. d. Overtime will be allocated as equally as possible among employees consistent with Section (b). The overtime records shall be available for inspection at the request of the Union. 6 11 e. Where there has been a reduction in working force in a department, no overtime shall be permitted in such department until all employees in that department who have been involuntarily laid off shall have been rehired or given the opportunity to return to work unless there is insufficient time to give notice to such laid off employees so that they may return to work. f. The Company agrees that all disputes under this Article shall be subject to the grievance and arbitration procedures of the Agreement. g. Except as hereinafter provided, during the entire period of this Agreement, Saturday work shall be paid at the rate of time and one-half and Sunday and legal holiday work at the rate of double time. h. A worker who is required to work more than three (3) hours of overtime in any one day shall receive twenty (20) minutes time for supper, shall be paid for such time and, in addition, shall receive supper money of three ($3.00) dollars. PAYMENT ON APPEARANCE FOR WORK 12. a. An employee called into work and who reports to work shall receive one full day's employment or one day's pay for such day. If an employee is called in on Saturday, Sunday and/or holiday, he shall receive at least a minimum of five (5) hours work or a minimum of five (5) hours pay at the applicable overtime rates. b. The Employer shall post notice on its phone call-in system no less than ninety (90) minutes before an employee shift start time advising employees that the facility is closed and they should not appear for work. Employees shall use reasonable efforts, when conditions indicate that the facility may be closed, to call in. In the event notice fails, despite reasonable efforts by the employee, an employee appearing at the facility for work when the facility is closed shall be paid four (4) hours pay. In the event employees are told to leave before the conclusion of their shift because of such conditions, shall receive a full day's pay. Employees may continue to choose to use personal or accrued vacation time to receive payment for any day in which the facility is closed and they would not otherwise receive payment. 7 12 GENERAL WAGE INCREASE 13. a. Employees in the bargaining unit will receive wage adjustments as follows (pro-rata for part-time employees): - March 16, 1996 $15.00/week - March 16, 1997 8.00/week - September 16, 1997 7.00/week - March 16, 1998 8.00/week - September 16, 1998 7.00/week
b. Workers shall hereafter be paid their wages in cash not later than three (3) working days after the end of the work week, except by special arrangement with the Union. Payment of wages by check may be made upon mutual Agreement of the parties. c. In the event of a rise in the cost of living the Union may, at any time during this Agreement, request an upward revision of wages for workers covered under this Agreement. In the event of disagreement between the parties, the matter shall be adjusted in the same manner as any other dispute under this Agreement. CHANGE IN SHIFT TIMES 14. A change in permanent shift times shall occur on April 29, 1996 as follows: - 7:00 a.m. to 3:15 p.m. Mezzanine and Replenishers - 8:00 a.m. to 4:15 p.m. All other employees, however, the Employer may reassign twenty-five (25%) percent of the work force in shipping and twenty-five (25%) percent of full case for the 7:00 a.m. shift. In making such assignment, the Employer will first use volunteers and, if insufficient volunteers are obtained, the Employer will reassign employees based upon reverse shop seniority, with the least senior employee being reassigned. The Employer will provide to the Union a list identifying those employees who are in the Replenishing Department. With respect to any shift commencing on or after 2:00 p.m., shift differentials shall be amended to provide that employees hired after the effective date of this Agreement shall receive a differential of fifty ($.50) cents per hour. 8 13 Current employees shall receive a differential of one dollar and fifty ($1.50) cents per hour (in lieu of the twenty (20%) percent differential provided for in the old agreement). The Company shall first offer current employees the right to change to fifty (50%) percent of the available positions on the other shift before hiring new employees. MINIMUM WAGE 15. a. Employees covered by this Agreement shall receive, at the time of hiring, the minimum wage or salary provided by state law, which is now not less than $5.05 dollars per hour. b. Each new employee regardless of his starting weekly wage, shall receive not less than a seven ($7.00) dollar increase in his weekly wage after the completion of his temporary or trial period. The seven ($7.00) dollar increase shall be retroactively paid to the 31st day of employment. c. The Union reserves the right to request an upward adjustment of the wages prescribed herein to become effective at any time on or after March 16, 1996. In case of a dispute, the matter shall be referred to the Impartial Chairman for his determination in the same manner as any other dispute under this Agreement. d. If, during the term of this Agreement, a new applicable minimum wage law is enacted and/or becomes effective which increases the present applicable minimum hourly rate of pay, then the minimum weekly wage set forth herein shall automatically be adjusted as required and the minimum wage hereunder shall be at no time less than fifteen (15%) percent per hour above such newly established applicable minimum wage. HOLIDAYS 16.a. During the term of this Agreement all workers covered hereunder shall be entitled to receive a full day's pay for each of the following legal or religious holidays; each shall be observed, regardless of the day of the week in which each occurs: 9 14 New Year's Day Martin Luther King Day Washington's Birthday Good Friday Memorial Day July 4th Labor Day Thanksgiving Day Day After Thanksgiving Christmas Eve (December 24th) Christmas Day (December 25th) All covered workers must work the scheduled day before the holiday and the scheduled day after the holiday in order to receive holiday pay; unless excused for bona-fide reasons. In addition to the above, all covered workers shall be entitled to receive four (4) additional guaranteed holidays to be designated by each worker during the calendar year, making a total of fifteen (15) guaranteed holidays. The personal days shall be scheduled subject to management approval based on reasonable staffing requirements, which approval will not be unreasonably withheld. The employee will be guaranteed such personal day during the year. In the event a substantial number of the Employer's workers selects a common date, the Employer may adopt such date as an additional guaranteed holiday and close its business entirely on such date, which shall be binding on all employees. A worker employed after January 1st shall not have the right to select such additional holiday to occur within six (6) months from the start of his employment. However, such worker shall be entitled to holiday pay in the event of a complete shut down by the Employer as indicated above in lieu of the selected date. b. If work is performed on a regular work day or a Saturday and a legal holiday is celebrated on such day, employees shall receive one day's holiday pay plus double time for the number of hours worked. If work is performed on a Sunday which is a legal holiday and it is celebrated on the following Monday, employees shall receive double time for the number of hours worked. If work is performed on a Monday, which is the day of celebration of a legal holiday which fell on the preceding Sunday, employees shall receive one full day's pay plus double time for the number of hours worked. 10 15 c. If a legal holiday falls on Saturday, the Employer may substitute therefore the preceding Friday or the following Monday in lieu of the legal holiday upon reasonable notice. The date of observance of any of the foregoing holidays shall conform to applicable Federal policy regardless of the location of the Employer's offices, warehouses and/or its facilities. An employee absent without just cause on the scheduled work day immediately preceding a holiday or the scheduled work day immediately succeeding a holiday shall not be entitled to receive holiday pay. At the request of the Union, May 1st shall be designated as a holiday but without pay to the covered employees. It is not intended that employees receive more than one day's holiday pay for any one holiday provided for in this Agreement. d. If a legal holiday or holidays fall during the period when a worker is laid off, holiday pay shall be given to the worker upon his recall and return to work. e. The Union and/or the Employer may request a reopening, but not more than once each contract year, for the purpose of reviewing and arranging the specific days on which all of the guaranteed paid holidays shall be observed. f. New employees shall receive no holiday pay for holidays falling within their trial period but after completing their trial period they shall be paid retroactively for any holidays falling in their trial period. Temporary employees shall receive no pay for holidays but upon becoming regular or permanent employees with no break in service they shall be paid retroactively for any holidays. Newly hired employees are not permitted to select floating and/or personal holidays until employed at least six (6) months. If the Employer elects to close its business for a floating holiday, then all workers will be paid. Where possible forty-eight (48) hours prior notification for selection of personal days will be given by employees to the Employer. 11 16 VACATIONS 17. a. The vacation period shall be from February 1st to September 30th of each year, however, where the Employer and the employee agree on a different vacation period the Union shall not unreasonably withhold its consent. Associates may also request vacations between October 1st and December 31st, which will be approved and granted at a rate of five (5) persons per week, but no more than three (3) from the mezzanine and two (2) from all other departments, according to seniority to associates who request vacations during the normal vacation scheduling period. Vacations will be granted at the time most desired by the associate whenever possible, however, the Employer reserves the right to ensure proper coverage for business operations. Vacation requests should be submitted for approval during the normal vacation scheduling period. No vacations will be approved without a minimum of two (2) weeks notice. Vacations with pay will be granted each year, as provided in this Paragraph 17, to covered employees who will have the required length of employment as of Labor Day of each year, except that for covered employees with five (5) or more years of seniority, the date for determining eligibility shall be December 31.
Length of Employment Vacation Period With Pay - -------------------- ------------------------ 1 year and over, but less than 2 years ............................ One week 2 years and over, but less than 5 years ........................... Two weeks 5 years and over, but less than 10 years .......................... Three weeks 10 years and over ................................................. Four weeks
b. An employee who is on the payroll of the Employer on June 1st and who was hired between Labor Day and December 31st of the previous year shall be entitled to receive three (3) working days vacation with pay during the summer vacation period immediately following the beginning of employment. An employee who is hired between January 1st and June 1st of any contract year shall, if he is employed on December 1st of the same year, be entitled to receive three (3) working days of vacation with pay during the winter vacation period of that year. 12 17 All workers, whenever employed, who are eligible to receive three (3) days, one (1) week or two (2) weeks regular vacation with pay and who are employed on December 1st of the same vacation year, shall be entitled to receive an additional three (3) working days of vacation with pay during the winter vacation period of that year. c. Upon consent of an individual worker and the Employer, vacation pay for the third and/or fourth weeks vacation may be given in lieu of vacation. The date of the third and/or fourth weeks vacation shall be mutually arranged and shall be taken between December 1 and January 31. Such arrangements shall be made within a reasonable time prior to the vacation period. d. Whenever a holiday falls within an employee's vacation, and either occurs on a day in the employee's regularly scheduled work-week or is a guaranteed legal holiday, the employee shall be granted an extra day of vacation or an extra day's pay at the option of the Employer. e. (i) Employees employed for fifteen (15) years but less than twenty (20) years shall receive, in addition to four (4) weeks vacation with pay, the sum of Seventy-Five ($75.00) Dollars at the time of vacation by separate payment; employees employed for twenty (20) years, but less than twenty-five (25) years shall receive the sum of One Hundred Fifty ($150.00) Dollars at the time of the mid-winter vacation by separate payment and employees employed for twenty-five (25) years and over shall receive the sum of Two Hundred Fifty ($250.00) Dollars at the time of the mid-winter vacation by separate payment. (ii) Additionally, employees employed for fifteen (15) years, twenty (20) years and twenty-five (25) years shall receive $50.00 on each of the following dates: on the 15th, 20th and 25th anniversary of the starting date of employment of such employees by the Employer. AUTHORITY TO ACT FOR UNION 18. It is understood and agreed that only the following are authorized to act as agents of the Union in the administration of this Agreement and in dealing with and determining any questions which may arise thereunder, or in the relations between the Employer and the Union: Manager and Business Representatives (to be designated by name, in writing, to the Employer) and the Employer Representatives, designated by name, in writing, to the Union. However, the right is reserved to the Union to substitute a different agent or agents or add new agents at any time during the life of this Agreement by serving upon the Employer notice in writing of such change or addition of agents of the Union. No person shall be deemed an agent of the Union unless designated as such by the Union in writing. Neither the shop steward nor any shop committee shall be deemed or construed to be an agent of the Union unless designated in writing as such agent. 13 18 NO-STRIKE PROVISION 19. a. The Union agrees that it will not call, authorize or ratify a strike, or stoppage during the life of this Agreement. Should any unauthorized strike or stoppage of work by covered employees occur, the Union obligates itself, within twenty-four (24) hours after receipt of notice thereof from the Employer, solely to endeavor in good faith to bring about the return to their work of the covered employees who have stopped work. Upon failure of such employees to return to work within the said twenty-four (24) hours, the Employer may at its option consider that all or any of the employees have abandoned their employment. Should the Employer re-employ any such employees, it shall re-employ all of them and shall treat all alike and shall not discriminate among them. Compliance by the Union in good faith with this provision shall be deemed full compliance with the Union's obligations hereunder. As an alternative to submitting the matter to arbitration pursuant to Paragraph 21 hereof, the Employer or shall also have the option of terminating this Agreement upon failure of the Union to comply with this paragraph. b. The foregoing no-strike, no-stoppage obligation shall be wholly suspended and of no force and effect, and the Union may call, authorize or ratify a strike or stoppage at any shop, office, warehouse and/or facility of any Employer during the continuance of any strike or stoppage (not in violation of contract) declared by U.N.I.T.E. or any affiliate thereof at any shop, office, warehouse and/or facility of any firm which is directly or indirectly affiliated with or related to the Employer, or for the Employer's failure to submit to arbitration or to comply with the decisions of the Impartial Chairman within forty-eight (48) hours, or the Employer's failure to pay wages, overtime and/or holiday pay to his covered workers. NO LOCK-OUT PROVISION 20. The Employer agrees that it will not order, authorize or ratify a lock-out during the life of this Agreement. Should the Employer cause a lock-out, or should there result a lock-out for any other reason, notice thereof shall be given by the Union to the Employer. Thereupon, the Employer obligates itself within twenty-four (24) hours after receipt of such notice, solely to endeavor in good faith to have the lock-out terminated and to cause the re-employment of the employees. Upon the failure of the Employer to do so within twenty-four (24) hours, the Union upon failure to reach an Agreement with the Employer shall have the option of terminating this Agreement with respect to the Employer involved, or of submitting 14 19 the matter to arbitration pursuant to Paragraph 21 hereof. ARBITRATION 21. All complaints, disputes or grievances arising directly or indirectly between the Union and the Employer or any of his subsidiary, auxiliary and affiliated firms or his or their successors and assigns, involving questions of interpretation, application, performance or operation of any clause of this Agreement or any acts, conduct or relations between them including, without limitation, any claim against the Employer arising out of any alleged dissolution or termination of his business prior to the expiration of this Agreement or any claim against his successors or assigns arising out of any alleged merger with or purchase of assets from another Employer prior to the expiration of this Agreement, shall be submitted in writing by the party hereto claiming to be aggrieved, to the other party involved or Impartial Chairman, and the Employer involved and the Manager of the Union, or their deputies, shall, in the first instance, jointly investigate such complaints, grievances, or disputes and attempt an adjustment. Decisions reached by them or their deputies shall be binding on them. Should they fail to agree, the question or dispute shall be referred to the Impartial Chairman to be mutually agreed upon and his decision shall be final and binding upon the Union and the Employer. In the event of a default by the Union or the Employer in appearing before the Impartial Chairman, after due written notice shall have been given to the Employer or Union as hereinafter provided, the Impartial Chairman is hereby authorized to render a decision upon the testimony of the party appearing. All decisions reached by the Employer and the Manager of the Union, or their deputies, or rendered by the Impartial Chairman, shall be complied with within forty-eight (48) hours. Should the Employer fail to comply with the decision of the Impartial Chairman within forty-eight (48) hours, the Employer shall automatically lose all rights and privileges under this Agreement and the Union shall be free to take any action it may deem appropriate to enforce the rights of the workers against the Employer, including the right to strike against the Employer. The Union and the Employer designate J.J. Pierson, Esq. to act as Impartial Chairman and Arbitrator in connection with any aforesaid complaint or aforesaid dispute or aforesaid grievance arising during the term of this Agreement, and agree that all hearings had before him or before his successor or successors shall be held in the City of New York. 15 20 The Employer and the Union each agree to pay one-half of the fee of the Arbitrator and each party shall be responsible for its own costs of such arbitration. Should the designated Impartial Chairman resign, refuse to act or be incapable of acting, or should the office become vacant for any reason, the Union and the Employer shall immediately and within five (5) days after the occurrence of such vacancy, designate another person to act as such Impartial Chairman. If they fail to agree, the New Jersey State Board of Mediation shall, on application of either the Union or the Employer, summarily make such appointment on an ad hoc basis for each submitted case. The Impartial Chairman may, as part of his decision, issue any and all mandatory directions, prohibitions or orders directed to or against the Union or the Employer breaching this Agreement or any part thereof. It is the intention and Agreement of the Union and the Employer that the procedure established in this Agreement for the adjustment of disputes shall be the exclusive means for the determination of all disputes, complaints or grievances specified herein, expressly including all strikes, stoppages, lockouts and any and all claims, demands or acts arising therefrom. Neither the Union nor the Employer shall institute any proceedings in a court of law or equity other than to compel arbitration or to enforce the decision and award of the Impartial Chairman, or to compel the production of books and records of the Employer for examination by the Impartial Chairman or his representatives. This provision shall be a complete and bona fide defense to any action or proceeding instituted contrary to the terms hereof. The Employer or the Union, as the case may be, who violates or causes to be violated any provision of this Agreement, shall, whenever this Agreement does not provide for the payment of specified damages, nevertheless pay damages for such violation. The amount of such damages shall be agreed upon by the Union and the Employer and in the event of their inability to agree, it shall be determined by the Impartial Chairman. Since it is difficult to ascertain the specific amount of damages payable, the amount of such damages shall for all purposes be deemed liquidated damages. Whenever the Employer is required to pay such damages, they shall be paid to the Union for and on behalf of itself and to compensate employees who may be entitled to compensation. 16 21 The provisions contained herein do not empower the Impartial Chairman to act with respect to any renegotiation, extension or renewal of this Agreement at the end thereof. The costs of arbitration shall be shared equally by both parties. The Union and the Employer further agree that the notice of hearing before the Impartial Chairman and the service of all papers used in any application to the court in any proceedings to confirm the award of the Impartial Chairman may be made by Certified Mail, Return Receipt Requested, at the last known address of residence of the owner or officer of or place of business of the respondent in such proceeding, within or without the State of New Jersey, as the case may be, including service of the papers conferring jurisdiction of the Union and the Employer upon the court, and the Union and the Employer expressly agree that such award shall be enforceable by appropriate proceedings in any court of competent jurisdiction. If any issue should arise as to the validity of any provision of this Agreement, or the arbitrability of this Agreement, substantive or procedural, the Impartial Chairman shall have exclusive jurisdiction to determine such issue. CHECK OFF OF DUES 22. The Employer, where legally so authorized by an individual employee in writing, agrees to deduct the membership dues, assessments, and initiation fees weekly from the wages or salary of such employee and remit the same to the Union, not less than once a month, by the fifteenth day of the same month. Deductions made after the fifteenth day of the month shall be remitted with the payments of the following month. Sums so deducted by the Employer shall be kept separate and apart from the general funds of the Employer and shall be held in trust by the Employer for the benefit of the Union. BENEFIT FUNDS 23. The term "benefit funds" is the collective designation of the Health & Welfare Fund of Local 99, U.N.I.T.E. (hereafter referred to as the "Health and Welfare Fund"), U.N.I.T.E. National Retirement Fund (hereafter referred to as the "Retirement Fund"), and U.N.I.T.E. Health Services Plan (hereafter referred to as "Health Services Plan"). 17 22 The Employer shall pay monthly to the Union for and on behalf of the benefit funds and during the period indicated the percentages set forth below of his total gross weekly payroll (before deductions for Federal, State and City taxes) of all his employees, covered by this Agreement whether regular or trial workers. When trial workers become permanent, payments by the Employer to the benefit funds will be paid retroactive to the first day of employment. The Employer is not required to make payment to any benefit funds for temporary employees. If temporary employees become regular or permanent employees the Employer's payment to the funds will commence on the first day of regular or permanent employment. Such payments shall be allocated and paid as follows: a. Effective March 16, 1996 fourteen and one-fourth percent (14-1/4%) of gross payroll towards the Health and Welfare Fund, a trust fund established by collective Agreement prior to January 1, 1946 and maintained and administered by a Union Board of Trustees, in trust for the purpose of providing workers with health, welfare, recreational benefits and other services relating specifically to their health and welfare as set forth in the by-laws of such Fund. Upon the demise of an employee the Health and Welfare Fund provides for the payment of death benefits for next of kin. In addition, the sum equal to four-tenths of one percent (.4%) of gross payroll towards the Health and Welfare Fund for the purpose of paying the Employer's share of the Federal Insurance Contributions Act contribution on disability benefits paid by the Health and Welfare Fund. b. Effective March 16, 1996, contributions to the Retirement Fund shall remain at a sum equal to nine (9%) percent of gross payroll towards the Retirement Fund, a trust fund established by collective Agreement for the purpose of providing pensions or annuities on retirement or death of workers. c. Effective March 16, 1996, contributions to the Health Services Plan shall be a sum equal to two and one-half (2 1/2%) percent of gross payroll. The Union reserves the right at any time during the term of the Agreement to request an increased rate of contributions to the Health and Welfare Fund, Retirement Fund and/or the Health Services Plan. In the event of disagreement between the parties the dispute shall be referred to the Impartial Chairman for final determination. 18 23 d. Each of the aforesaid payments under a., b. and c. above shall be remitted on or before the fifteenth (15th) day of the following month. None of the payments made hereunder shall constitute or be deemed wages due to workers. All contributions required to be made under a., b. and c. above shall be allocated by the Employer each week and kept separate and apart from its general funds and held in trust for the benefit of the particular fund. e. The Union agrees that all contributions received for the Health and Welfare Fund shall continue to be held in trust for the sole benefit of such covered employees, deposited and held in an account separately maintained under the name of the Health and Welfare Fund and that the monies in such account shall be used only for the specific purpose of such Fund in accordance with its Constitution, by-laws and rules and regulations and for the administrative expenses thereof, and shall not be used for any other purpose. The Employer shall not have any legal or equitable right, title, claim or interest in or to said Fund or the administration thereof. No individual worker shall have any legal or equitable right, title or interest in, or claim against his or any other Employer's payments toward the Fund or against the Fund except as may be provided by the by-laws or rules and regulations of said Fund. f. The said Retirement Fund and the Health Services Plan shall each be administered in accordance with its by-laws and rules and regulations by a Board of Trustees. Each Board of Trustees shall be composed of Union representatives and an equal number of representatives of the Employer. In the event that the Board of Trustees shall be deadlocked on any issue or matter arising in connection with its Fund, the same shall be decided by a neutral person as set forth in the by-laws and rules and regulations of said Fund, and his decision shall be final and binding. The parties hereto hereby ratify, confirm and approve the composition and membership of each Board of Trustees as now or hereafter constituted. Each Board of Trustees shall adopt and promulgate such by-laws and rules and regulations to effectuate the purpose of its Fund as it may deem necessary and desirable, including the detailed basis upon which payments from each Fund will be made, and shall have the power to modify the same from time to time. The parties hereto agree to be bound thereby and they are hereby incorporated in and made part of this Agreement. 19 24 An annual audit of each Fund shall be made by accountants designated by the Board of Trustees. A statement of the results of such audit shall be made available for inspection by interested persons at the principal office of the Fund and at such other places as may be designated by each Board of Trustees. The Employer shall not have any legal or equitable right, title, claim or interest in or to each said Fund. No individual worker shall have any legal or equitable right, title or interest in, or claim against, his or any other Employer's payments toward said Funds or against said Funds except as may be provided by the by-laws or rules and regulations of said Funds. None of the monies paid into the Retirement Fund and the Health Services Plan shall be used for any purpose other than set forth hereinabove and to pay the operating and administrative expenses of each Fund respectively. The monies of each Fund shall be kept separate and apart from all other monies. g. The aforementioned enumerated powers and duties of the Board of Trustees of said Retirement Fund and Health Services Plan shall not be considered in any way whatsoever as a limitation on the powers and duties of the Board of Trustees of each Fund to do any and all other things which may be necessary or incidental to the proper operation, administration and maintenance of the said Funds, and to fully effectuate their purposes. h. The Union or the Board of Trustees of any such Fund, shall be proper parties in interest to enforce collection of payments due from the Employer toward any said Fund. In the event any amount due from the Employer under this paragraph remains unpaid for thirty (30) days after becoming due, such amount shall automatically bear interest thereafter at the rate of nine (9%) percent per annum and the Employer shall pay the same. The Impartial Chairman may, in connection with any action or proceeding to confirm the award made pursuant to paragraph 24(h), also have the right to direct the Employer to pay to the Union reasonable attorney's fees and expenses in amounts fixed by him and the reasonable costs of investigations to determine the amount due. i. It is agreed that all of the aforesaid payments required to be made under this Paragraph have no relation to eligibility of workers to benefits from the benefit funds; eligibility for benefits shall be determined solely under the rules and regulations of each of the aforesaid Funds which include the detailed basis upon which benefits to eligible workers shall be paid. 20 25 j. The provisions herein relating to the Funds constitute a consideration of this Agreement and are of the essence of this Agreement. Failure by the Employer to pay the amount due from it hereunder to the Funds shall be deemed a breach of this Agreement by the Employer. k. The Board of Trustees or other body administering said benefit funds, including the Union's Health and Welfare Fund, is hereby authorized, in its sole discretion, upon such basis as it deems desirable, and to the extent permitted by law, to transfer or mingle the assets of or to merge any of said benefit Funds with any other benefit fund or funds now existing or hereafter established and provided for in a collective bargaining Agreement with U.N.I.T.E. or an affiliate thereof. In the event of such transfer, mingling or merger, the amounts hereinabove provided to be allocated towards said Funds shall be paid over to the Fund or Funds with which there has been such transfer, mingling or merger. SEVERANCE FUND-TERMINATION OR DISMISSAL BENEFITS 24. The parties hereto recognize the necessity of protecting workers who, for many years, have contributed their loyal service and who, through no fault of their own, find themselves dismissed from their employment by the closing down or reorganization of their Employer's business. It is recognized that this problem is one of special interest and concern to the parties, and that industrial tranquility and stability will be aided and preserved by the establishment of a separate and individual Severance Fund for the Employer. With the express intent and agreement of the parties and, subject to applicable and existing law, the parties agreed to continue the separate individual Severance Fund, the signatories to each such Fund to consist of the Union and the Employer. The exclusive purpose of each such individual Fund is to pay to each covered worker employed by each individual Employer who has been dismissed or terminated from his employment and otherwise meets the eligibility requirements set forth in the Rules and Regulations of each such Fund a lump sum equal to one week's wages multiplied by the number of years of his employment with the Employer. Such payments are designated as termination or severance or dismissal payments, the right to which shall have been earned by covered Employees during their prior service. The Rules and Regulations of each such individual Fund shall comply in all respects with applicable law and shall set forth, among other things, eligibility requirements and all other conditions to be met prior to the payment of benefits. 21 26 a. The Employer shall deposit monthly into a custodian bank account of the jointly administered Severance Fund a sum not to exceed one-half (1/2%) percent of its gross weekly payroll (before deductions for Federal, State and City taxes) of the covered workers, to enable the Fund in due course to pay covered Employees the aforesaid severance or dismissal benefits. The aforesaid payments shall be remitted on or before the fifteenth (15th) day of the following month. b. At the time of the initial deposit and at the end of each calendar year thereafter, the Employer shall submit a written statement to the Union setting forth the names and addresses of each covered worker or workers on whose behalf such payment may be made, their Social Security numbers, job classifications, weekly wages, dates of hiring and number of years of employment, including the amount of deposit. In addition to the foregoing, the Employer shall submit a written statement not less than every three months setting forth information comparable to that presently supplied to the benefit funds referred to in Paragraph 23. The Union shall have the right to examine the Employer's books and records in order to ascertain whether the provisions hereof are being fully complied with and whether said amounts have been fully paid, in the same manner as is provided in this Agreement for the examination of the Employer's books and records for any other purpose. c. The Fund shall be administered in accordance with its By-laws and Rules and Regulations to be promulgated, by Trustees which shall be composed of one Employer and one Union representative, and alternate representatives, one designated by the Employer and by the Union respectively. In the event that the Trustees shall be deadlocked on any issue or matter arising in connection with the Fund, the same shall be decided by a neutral person, namely, the Impartial Chairman acting under the arbitral provisions of this Agreement and his decision shall be final and binding. The Employer hereby ratifies, confirms and approves the composition and membership of the Trustees of the Fund respectively as now or hereafter constituted. All Trustees shall serve without compensation. d. The Trust Fund is hereby declared to be an irrevocable trust and the Trustees of the Fund agree to receive, hold and administer the Trust Fund for the exclusive purpose of providing benefits in accordance with the Rules and Regulations adopted by the Trustees. Interest and dividends accumulated may be used for reasonable, necessary and proper expenses under existing law in the operation and management of the Fund. 22 27 e. The Trustees of the Fund are hereby authorized to adopt and promulgate By-Laws and Rules and Regulations (subject to existing and applicable law) to effectuate the purposes of the Fund as they may deem necessary or desirable, including the detailed basis upon which payments from the Fund will be made and shall have the power to modify same from time to time to carry out more effectively the purposes of the Fund. All By-Laws, Rules and Regulations and amendments thereto, adopted and promulgated by the Trustees of the Fund, shall be deemed incorporated herein and a part hereof with the same force and effect as if set forth in full herein. f. The Trustees of the Fund shall have the power and authority, in their sole discretion to determine the type and kind of investments of the Trust Fund and/or direct a bank custodian to so invest the same. The Trustees of the Fund shall be the financial advisors of the Fund. g. No worker shall make or be required to make any payment whatsoever to any Fund. The Employer agrees that its obligation to make payments toward its Fund shall not be subject to set-off or counterclaim which the Employer may have for any liability of the Union or of any Employee. h. The Employer shall not have any right, title or claim, legal or equitable, in or to any sum paid by it to its Fund or against the Fund itself except as provided for in the Rules and Regulations. No Employee shall have any right, title, interest or claim, legal or equitable, in or to the Employer's payments to its Fund except as provided for in the Rules and Regulations. i. The custodian bank in which the Trust Fund shall be deposited shall issue quarterly statements of income and assets to the Trustees indicating among other things the amount then on deposit, what part thereof, if any, represents accumulated interest, together with any securities held and the transactions for the period. The statements shall be made available for inspection by interested persons at the principal office of each Fund. j. The Trustees of the Fund shall be responsible for filing and reporting disclosure documents with the proper governmental agencies whenever required to do so. k. The aforementioned enumerated powers and duties of the Trustees of the Fund shall not be considered in any way whatsoever as a limitation of the powers and duties of the Trustees to do any and all other things which may 23 28 be necessary or incidental to the proper operation, administration and maintenance of the said Fund and to fully effectuate its purposes under applicable law. l. The provisions herein relating to the Fund constitute a consideration for this Agreement and are the essence of this Agreement. Failure by the Employer to pay the amounts due from it to the Fund shall be deemed a breach of this Agreement by the Employer. The Union shall be a proper party in interest to enforce payment thereof under this Agreement. m. It is intended that the foregoing individual Severance Fund and plans shall not constitute Employee Pension Benefit Plans as defined under the Pension Reform Act of 1974, and the By-laws, Rules and Regulations thereof with respect to the Fund shall be promulgated accordingly. DISCHARGE OF EMPLOYEES 25. No employee covered by this Agreement shall be discharged except for just cause, which includes, but is not limited to incompetency, insubordination, ineligibility for bonding by any reputable bonding company, or continual lateness or continual absence. The Employer shall notify the Union in writing, within forty-eight (48) hours of all cases of discharge of covered employees. Should a dispute or difference arise as to whether or not the discharge was for just cause, the matter shall be submitted to arbitration as provided herein. If the Impartial Chairman finds that the employee was discharged without just cause, he may order reinstatement and may require the payment of back pay in such amount as, in his judgment, the circumstances warrant. SHOP STEWARD AND COMMITTEE 26. a. The Union shall have the right to certify to the Employer one employee to be designated as shop steward and such other employees to be designated as members of the shop committee on the basis of one for every twenty-five employees but not in excess of a total of ten excluding the shop steward. They shall assist the Union in carrying out the intent and purpose of this Agreement. The Union Committee shall meet once per month for a period of one hour. The Employer will not unreasonably withhold consent for special requests for additional time. 24 29 b. During any counselling of a Union employee, a shop steward or a shop committee person must be present. c. Counselling records of employees will be considered stale and of no effect and will be cleared from an employee's personnel records after a two (2) year rolling period with respect to non-attendance matters and after a one (1) year rolling period with respect to attendance matters. A joint Labor-Management Committee shall be established which shall deal with health, safety and training issues of employees. The Labor-Management and Labor-Safety meeting will be held on the third Thursday of every month during regular working hours to review ongoing issues and conditions, make recommendations with respect to operations and conditions, subject to the terms of this Agreement, including issues relating to absenteeism. The Union shall designate the Union members to serve on such committee and the Employer shall designate the Employer members to serve on such committee. RIGHT OF VISITATION 27. Representatives of the Union shall be permitted free access to the establishments where its members are employed, for the purpose of observing if the conditions of this Agreement are maintained, and for any other reasonable purpose arising out of the operation of this Agreement, provided there is no interference with the business of the Employer. STRIKES OF U.N.I.T.E. AFFILIATES 28. As far as is consistent with law it shall not be considered a breach of this Agreement on the part of the Union or on the part of any individual employee, if any employee or employees refuses to enter upon the premises of any employer against whom the Union or an affiliate of U.N.I.T.E. is conducting a bona fide strike, either of their own volition or by direction of the Union nor shall such refusal be cause for discharge or disciplinary action. The word "premises" is herein defined as limited to the area actually and immediately occupied by said Employer and does not include any area or part of a building not physically occupied by said Employer. 25 30 EXAMINATION OF RECORDS 29. The Union shall have the right at all reasonable times and upon reasonable notice to the Employer, to investigate such books and records of the Employer as are necessary in order to ascertain whether the provisions of this Agreement are being fully complied with. The Employer shall have the right to have its representative accompany the Union representative upon such investigation. The Impartial Chairman shall have the right to institute any such investigation. PENALTY UPON FAILURE TO PAY DUES AND CONTRIBUTIONS 30. a. Workers shall be paid for the time lost during which a shop may be stopped due to the failure of the Employer to remit dues, assessments and initiation fees and/or make contributions to the Funds and/or the Employer's failure to pay wages, overtime, vacation and/or holiday pay, all as required herein, only after five (5) days have elapsed after such Employer has received written notice of failure to make such remittances and/or payments, and same have not been paid; such a stoppage for any of the aforementioned reasons is hereby expressly authorized as an exception to Paragraphs 19 and 21 of this Agreement. b. In the event the Employer fails to make payments to the Health and Welfare Fund when due, the Employer shall, after fifteen (15) days notice of delinquency to it by certified mail, be liable to each of its covered workers for any benefits to which such covered workers may become eligible by reason of illness, hospitalization, surgery or otherwise, after said notice. Such liability shall be in addition to other obligations of the Employer under this Agreement. PRE-TICKETING AND OTHER PROCESSING OPERATIONS 31. The manner and methods of all operations in the processing of merchandise as well as office work in connection therewith shall be in the discretion of the Employer, but in no event, except as provided in the following sentence, shall the exercise of such discretion directly or indirectly cause the loss of jobs to regular workers and/or cause their lay-offs. The foregoing is subject to seasonal variations of the post lay-off period and/or to conditions which have a substantial adverse economic affect upon the Employer's business, it being the Employer's intention to contain outside operations in the processing of merchandise and/or office work with a view toward safeguarding the jobs of regular workers and to obviate the necessity of undue lay-offs. 26 31 UNION RECOGNITION IN ADDITIONAL FACILITIES 32. Should the Employer (or its subsidiary or affiliate) open an additional warehouse, office or similar distribution or office facilities beyond 100 miles from its present location in Harrison, New Jersey, notwithstanding the various provisions set forth in the parties' collective bargaining Agreement, the Agreement shall not cover the workers hired at the new facility and shall not govern the terms and conditions of employment of those workers at the new facility until such time as the Union demonstrates that it has been designated by a majority of the employees at such new facility. The determination as to whether the Union has been so designated shall be subject to the arbitration provisions set forth in this Agreement. Until such time as the parties mutually agree upon changes in terms and conditions of employment, the terms of this Agreement shall apply. REMOVAL OF FACILITIES 33. During the term of this Agreement the Employer shall not move its warehouse, office or similar distribution or office facilities from its present location without the Union's consent. In the event the Employer expands or opens any additional or new warehouse or office facilities during the term of this Agreement, it shall not move therefrom without the Union's consent. It is understood, however, that consent shall not be withheld if such contemplated removal is to a location within 100 miles from its present location in Harrison, New Jersey and then, only if the Employer and the Union have mutually agreed upon adjustments, if any in terms and conditions of employment. In the event the parties are unable to mutually agree upon said adjustments, if any, the matters in disagreement shall be referred to the Impartial Chairman for final determination. CONTRACTING OUT 34. Anything in this Agreement to the contrary notwithstanding, contracting out by the Employer to any other warehouse or similar distribution facilities of any of the operations in the processing of merchandise and/or office work is prohibited except when all of the Employer's regular workers are working full time and then, only if such work is given to establishments in contractual relations with the Union. However, the Employer may continue renting temporary warehouse space, including landlord services, for purposes of temporary storage only for products that will be delivered, handled and processed by the Harrison Warehouse Associates. In addition, the Employer may use lumpers in accordance with paragraph 2 and Exhibit D hereof. 27 32 REORGANIZATION 35. The Employer shall have the right in good faith to reorganize its warehouse and/or facilities. A reorganization in good faith shall mean a bona fide reorganization of the Employer's business, necessitated by a permanent curtailment of his business or a fundamental change in the character of his business. SURVIVAL OF LIABILITY 36. a. The Employer, and its subsidiaries or affiliates at the time of the execution of this Agreement and its transferees, successors and assigns and the persons, firms and corporations becoming members thereof subsequent to the date of the execution of this Agreement and their transferees, successors and assigns, shall be and continue to remain liable hereunder for their own obligations respectively, for and during the term hereof. The Impartial Chairman shall have the power to determine whether any person, firm or corporation is a transferee, successor or assign of the Employer. b. Subsidiary or affiliated firms or corporations of the Employer shall, for the purpose of this Agreement, be deemed bound by all terms of this Agreement to the extent that they are Employers of workers covered hereunder. The Impartial Chairman shall have the power to determine whether an alleged subsidiary or affiliate of the Employer is in fact such subsidiary or affiliate. CONTINUING OBLIGATIONS IN THE EVENT OF SALE OR TRANSFER 37. The Employer agrees that: a. it shall not nor permit its subsidiaries and/or affiliates to enter into any partnership, or consolidate or merge with, or be absorbed by any person, firm or concern or sell or transfer its or their business, in whole or in part, to any other person, firm or concerns unless the new or purchasing firm agrees to be bound under this Agreement for the duration hereof and assume all of the obligations, accrued and otherwise, to the workers, the Union and the Benefit Funds hereunder and recognize the Union as the sole and exclusive bargaining agent and representative of the employees covered by this Agreement; b. it will, on its own behalf and on behalf of its subsidiaries and affiliates, give to the Union at least thirty (30) days written notice prior to a final closing of any transaction or disposition enumerated above, and; 28 33 c. it and/or its subsidiaries and affiliates shall be liable to the Union and to the workers for damages, liquidated and otherwise, to be fixed by the Impartial Chairman, for any action, transaction or disposition in violation hereof; and, d. in the event of any transaction or disposition enumerated above, it and/or its subsidiaries and affiliates will nevertheless continue to remain individually, collectively and personally liable under all of the provisions of this Agreement for the duration hereof unless specifically released therefrom by the Union. In addition, the new firm, person or concern shall be liable and responsible to the workers, the Union and the Benefit Funds under the provisions hereof by operation of applicable and decisional law. INVALIDITY OF PART OF AGREEMENT 38. a. If any provision of this Agreement, or the enforcement or performance of such provision is or shall at any time be determined to be contrary to law by or enjoined by a court or administrative agency, then such provision shall not be applicable or enforced or performed except to the extent permitted by law. The Union and the Employer shall thereupon negotiate a substitute provision. If they are unable to agree, the Impartial Chairman shall determine such substitute provision which shall be deemed incorporated into this Agreement. b. If any provision of this Agreement or its application to the Employer, person or circumstance is so held invalid or enjoined, the remainder of this Agreement, or the application of such provision to other Employers, persons or circumstances, shall not be affected thereby. c. The interpretation and enforcement of this Agreement shall be governed by federal law and by the laws of the State of New York not inconsistent therewith. NO DISCRIMINATION 39. There shall be no discrimination in hiring, promotions or in terms and conditions of employment because of race, creed, color, national origin, sex or age. 29 34 EXISTING BENEFITS 41. Existing benefits shall not be reduced during the term of this Agreement. JURY DUTY 42. If, after one year of employment, a covered worker shall be required to serve as a juror (not as a volunteer and if not excused), he shall be entitled to receive the difference between the sums received by him for such jury service and his regular daily pay but such entitlement period shall not exceed three (3) weeks (15 working days) in any one year. A worker who receives notice of jury duty shall immediately notify his Employer. TIME OFF FOR UNION MEETINGS 43. The Employer agrees to grant to his covered workers up to three (3) hours time off, without loss of pay, not more than three times during each year of this Agreement, to attend meetings called and sanctioned by the Union. POOR WORKING CONDITIONS 44. When any working conditions, including, but not limited to excessive heat or cold, may adversely affect a worker's health or create unnecessary burden in the performance of the work, the Employer must correct and alleviate such situation with due diligence. FIRE DRILLS 45. The Employer shall hold two shop fire drills in each year of this Agreement in which workers are to leave the building or move into safety areas or fire towers, as recommended by the local fire department. Workers hired in the period between drills shall be instructed as to the location of all means of egress from the shop. 30 35 NO MODIFICATION OR WAIVER 46. a. The Employer and no worker or group of workers shall have the right to modify or waive any provision of this Agreement. b. The failure of either party to this Agreement to require strict performance of any provision of the Agreement shall not be deemed a waiver or abandonment of any of the rights or remedies provided herein for violation of the Agreement or any provision thereof; nor shall it constitute a waiver or abandonment of any right or remedy herein provided for a subsequent violation of any provision of the Agreement. c. The parties' Agreement dated April 27, 1993 concerning the Supply Department is hereby incorporated by reference as if fully set forth. TRANSPORTATION 47. Transportation considerations will be as set forth in Exhibit E annexed hereto. DURATION OF AGREEMENT 48. The term of this Agreement shall be from March 16, 1996 to March 15, 1999. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the day and year first above written. Lechters, Inc. Office and Distribution Employees' Union, Local 99, U.N.I.T.E. By: /s/ Ira S. Rosenberg By: /s/ Christine Kerber ---------------------------- ------------------------------- Ira S. Rosenberg Christine Kerber Vice President Manager 31 36 LECHTERS, INC. VACATION POLICY UNION DEMAND #7 & COMPANY DEMAND #5 Contract Paragraph 13a. VACATIONS The vacation period shall be from FEBRUARY 1 TO SEPTEMBER 30 of each year, however, where the Employer and the employee agree on a different vacation period the Union shall not unreasonably withhold its consent. Associates may also request vacations between OCTOBER 1 AND DECEMBER 31, which will be approved and granted at a rate of five (5) persons per week, but no more than three (3) from the mezzanine and two (2) from all other departments, according to seniority, to associates who request vacations during the normal vacation scheduling period. Vacations will be granted at the time most desired by the associate whenever possible, however, the Employer reserves the right to require alternative dates in order to ensure proper coverage for business operations. Vacation requests should be submitted for approval during the normal vacation scheduling period. No vacations will be approved with out a minimum of two (2) weeks notice. Vacations with pay will be granted each year, as provided in this paragraph 13, to covered employees who will have the required length of employment as of Labor Day of each year, except that for covered employees with 5 years or more of seniority, the date shall be December 31. Revised March 27, 1996 EXHIBIT A 37 (1) OVERTIME 1.0 When overtime is needed, employees shall be notified as far in advance as possible in order to allow them to make necessary preparations for working overtime and such notice shall be given no later than the employees' scheduled lunch break if overtime that day is needed. 1.1 The Union agrees that it will, through its shop committee, cooperate in having employees perform overtime work when it is requested. 1.2 The Company will request volunteers from among the employees who are capable and qualified to perform the overtime work involved. When such overtime work is necessary and there are insufficient volunteers, the employee in the department with the least seniority shall be the first to be required to work. If requested to work overtime, the employee will be required to do so during the peak season between September 1 and December 31, unless he or she has a reasonable excuse for being unable to work. Overtime during the non-peak season shall be voluntary except in the case of an emergency. 1.3. Overtime will be allocated as equally as possible among employees consistent with Section 1.2. The overtime records shall be available for inspection at the request of the Union. 1.4. Where there has been a reduction in working force in a department, no overtime shall be permitted in such department until all employees in that department who have been involuntarily laid off shall have been rehired or given the opportunity to return to work unless there is insufficient time to give notice to such laid off employees so that they may return to work. 1.5 The Company agrees that all disputes under this Article shall be the subject to the grievance and arbitration procedures of the Agreement. - ------------------ (1) March 26, 1996 EXHIBIT B 38 MEMORANDUM TO: Sydney Gerstein, President Local 99, U.N.I.T.E. FROM: Ira Rosenberg, VP-Secretary/Corporate Counsel Lechters, Inc. DATE: March 26, 1996 RE. COMPUTER TRAINING BONUS FOR WORKERS COVERED BY COLLECTIVE BARGAINING AGREEMENT - MARCH 16, 1996 THROUGH MARCH 15, 1999. As per our agreement, this will be our policy regarding training bonuses paid to employees for PDTs and RF guns: Workers who were employed with Lechters, Inc., covered under the aforementioned collective bargaining agreement as of April 1, 1996 and have not previously received a training bonus, shall be entitled to the following bonuses for successful completion of initial computer equipment training. 1. PDTs - Upon successful completion of training on a PDT, existing employees shall receive a one time "training bonus" in the amount of $50.00, subject to all applicable payroll taxes. 2. RF guns - Upon successful completion of training with a RF gun, existing employees shall receive a one time "training bonus" in the amount of $100.00, subject to all applicable payroll taxes. Workers who are hired after April 1, 1996, and are covered under the aforementioned collective bargaining agreement, shall not be eligible for any bonuses for training on either a PDT or a RF gun, as it is deemed part of the work requirements. Please countersign below and return to me the enclosed copy of this memorandum, evidencing your agreement to the foregoing information. AGREED: Lechters, Inc. by: ________________________ Date:________________ Local 99 by: ______________________________ Date:________________ EXHIBIT C 39 LECHTERS, INC. [LECHTERS LETTERHEAD] UNION PROPOSAL #15 "Lumper" Program Outline 1. "Lumpers" are persons who are hired and paid for by trucking companies. 2. The service of the "lumpers" are a service that the Company is entitled to, without any additional charges, for the limited purpose of unloading trucks operated by the transportation company which hires and pays for the "lumpers." 3. The duties of the "lumpers" are strictly limited to unloading those trucks and placing the merchandise onto pallets on the receiving dock. They are not authorized to move pallets once merchandise is placed onto the pallets. 4. Pallets are provided by Lechters, but Lechters provides no other equipment to the lumpers. 5. Workers employed as "lumpers" will not work for Lechters, Inc. as a temporary employee on the same day they are working as a "lumper". 6. Lechters, Inc. will provide a list of all workers employed as "lumpers" as requested and not less than once a week. April 1, 1996 EXHIBIT D 40 MEMORANDUM TO: Sydney Gerstein, President Local 99, U.N.I.T.E. FROM: Ira Rosenberg, VP-Secretary/Corporate Counsel Lechters, Inc. DATE: March 26, 1996 RE: SUPPLEMENTAL TRANSPORTATION FOR WORKERS COVERED BY COLLECTIVE BARGAINING AGREEMENT - MARCH 16, 1996 THROUGH MARCH 15, 1999. As per our agreement, this will be our policy regarding Company provided supplemental transportation for workers covered by the aforementioned collective bargaining agreement. It is the responsibility of each Associate to arrange their own transportation to and from work for the agreed work schedule, so as to arrive to work on time. However, the Company does agree to provide supplemental transportation in the form of one vehicle, that will pick up and drop off workers at the Harrison PATH station for all regular warehouse shifts, and for any mandatory overtime hours. The Company further agrees to select two (2) union associates who will be primarily responsible for driving other associates to and from the PATH station at the start and conclusion of warehouse shifts, as well as two (2) additional associates who will act as back up drivers in the event of an absence of a primary driver. It is our present intention to select one (1) primary and one (1) back up office union associate to drive the designated vehicle in the morning and one (1) primary and one (1) back up warehouse union associate to drive the designated vehicle in the late afternoon. Associates being considered by the Company for this responsibility, will be subject to a driving record search through the Department of Motor Vehicles. In order to be selected, associates driving record must be in "good standing," and remain in good standing through out the duration of their driving responsibilities. Please countersign below and return to me the enclosed copy of this memorandum, evidencing your agreement to the foregoing information. AGREED: Lechters, Inc. by:. ______________________ Date:________________ Local 99 by: _____________________________ Date:________________ EXHIBIT E EX-23 4 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' REPORT We consent to the incorporation by reference in Registration Statement Number 33-48560 on Form S-8 and in Registration Statement Number 33-46993 on Form S-8 of our report dated March 26, 1997, appearing in this Annual Report on Form 10-K of Lechters, Inc. and Subsidiaries for the year ended February 1, 1997. Deloitte & Touche LLP Parsippany, New Jersey April 29, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR FEB-1-1997 FEB-4-1996 FEB-1-1997 7,022 54,084 5,561 0 100,442 172,843 169,740 74,356 272,333 20,889 58,853 0 20,000 58 150,350 272,333 441,243 441,243 322,110 322,110 111,218 0 5,003 4,543 1,200 0 0 0 0 3,343 .15 .15
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