-----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, NZ+JeRXHNwKP8wCBhAwx1bz0b/L7Ym9q4K7IlB8rjaFIYRXUG3c0vE+Xwx0f1REZ 7DYrAN5Gi5/621JbzMXBTA== 0000950123-99-003836.txt : 19990518 0000950123-99-003836.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950123-99-003836 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LECHTERS INC CENTRAL INDEX KEY: 0000798186 STANDARD INDUSTRIAL CLASSIFICATION: 5700 IRS NUMBER: 132821526 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-17870 FILM NUMBER: 99603053 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 For the fiscal year ended January 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from To Commission File No. 0-17870 LECHTERS, INC. ---------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW JERSEY No. 13-2821526 - - -------------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1 Cape May Street, Harrison, New Jersey 07029-2404 - - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (973) 481-1100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] - - -------------------------------------------------------------------------------- 2 As of April 16, 1999 17,176,286 shares of Common Stock were outstanding and the aggregate market value of the Common Stock held by non-affiliates of the registrant (based upon the closing price on the NASDAQ National Market on that date) was approximately $24,057,514. For the purposes of such calculation, all outstanding shares of Common Stock have been considered held by non-affiliates, other than the 4,345,612 Shares beneficially owned by directors and executive officers of the registrant. In making such calculation, the registrant does not determine the affiliate or non-affiliate status of any shares for any other purpose. DOCUMENTS INCORPORATED BY REFERENCE Information called for by Part III (Items 10, 11, 12 and 13) is incorporated by reference to the registrant's definitive proxy statement in connection with its Annual Meeting of Shareholders to be held on June 22, 1999. 3 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (Reform Act), the Company is hereby filing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of the Company in this annual report on Form 10-K, in presentations, in response to questions or otherwise. Any statements that express, or involve discussions as to expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as "anticipates", "believes", "estimates", "expects", "intends", "plans", "predicts", "projects", "will likely result", "will continue", or similar expressions) are not statements of historical facts and may be forward-looking. Forward-looking statements involve estimates, assumptions, and uncertainties and are qualified in their entirety by reference to, and are accompanied by, the following important factors, which are difficult to predict, contain uncertainties, are beyond the control of the Company and may cause actual results to differ materially from those contained in forward-looking statements: - - - economic and geographic factors including political and economic risks; - - - changes in and compliance with environmental and safety laws and policies; - - - weather conditions; - - - population growth rates and demographic patterns; - - - competition for retail customers; - - - Year 2000 issues; - - - market demand, including structural market changes; - - - changes in tax rates or policies or in rates of inflation; - - - changes in project costs; - - - unanticipated changes in operating expenses and capital expenditures; - - - capital market conditions; - - - legal and administrative proceedings (whether civil or criminal) and settlements that influence the business and profitability of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. 4 PART I ITEM 1. BUSINESS. HISTORY Lechters, Inc. (together with its subsidiaries, unless the context otherwise requires, the "Company") was incorporated in New Jersey in July 1975 to operate leased houseware and giftware departments in discount department stores. Subsequently, Donald Jonas, then Chairman and Albert Lechter, then President of the Company, recognized an opportunity to operate specialty houseware stores in malls. In 1977, the repositioning of the Company from a leased department operator to a specialty store operator was commenced. The first Lechters Housewares(R) store was opened in Rockaway, New Jersey. New store development emphasized mall locations but was subsequently expanded to include strip center and city locations. The concept was distinctly advantaged in the breadth of its assortment and the convenience of its locations. In 1990, the Company created the Famous Brands Housewares Outlet(R) concept as an additional growth opportunity. The intent of the Famous Brands concept was to represent housewares manufacturers not otherwise having a retail presence in outlet malls, a venue experiencing substantial customer traffic and rapid new center development. The Company's unit expansion peaked in fiscal year 1992 when 81 new stores were opened. As of the end of the current fiscal year, the Company owned and operated 578 stores (443 Lechters Housewares(R) stores, 134 Famous Brands Housewares Outlet(R) and one Cost Less Home Store(SM)) in 42 states and the District of Columbia. The Company continued to reposition its basic concepts. While both concepts featured houseware products, Lechters Housewares(R) has been enhancing its franchise as the country's largest specialty retailer of products for the kitchen. Famous Brands Housewares Outlet(R) continued the process of transitioning the greater portion of its assortment to off-price merchandise in an effort to establish the exceptional value proposition expected in outlet mall locations. The outcome of the repositioning has resulted in the evolution of the Company into two major segments, Specialty Housewares and Off-Price Home Business. Cost Less Home Store(SM), the Company's newest concept, is focused on a "big box" format with 20,000 - 25,000 gross square feet of space. In addition to an expanded offering of the Company's base housewares assortment, the concept has added items including domestics and gourmet foods. The details of both segments' operating strategies follow in this report. The Company operated as a private concern during the period from its inception to its initial public offering on July 25, 1989. The Company's common stock is listed on NASDAQ under the symbol LECH. 1 5 OPERATING STRATEGIES A. MERCHANDISING AND MARKETING Over the past four years, the Company has been engaged in a variety of tests and trials designed to more effectively position itself as a player in the markets in which it competes. Approximately 18 months ago, the decision was reached that the Company needed to re-invent itself in order to compete effectively in the new millennium. While there has been considerable progress in development of growth opportunities for the Company, there remains a number of significant changes in order to exploit these opportunities. Moreover, the Company must prepare for continuous change in the way it does business. To this end, the Company is focusing on the following strategic priorities: - - - Re-deployment of assets into retail concepts that can and will perform at above average levels resulting in stakeholder (customers, employees, investors, and vendors) satisfaction with anticipated returns. Two of these retail concepts are already in place: Lechters Kitchen Place(R) and Cost Less Home Store(SM). - - - Re-energizing the existing Lechters Housewares(R) business with a smaller number of profitable stores, including the Lechters Kitchen Place(R) stores. This business will continue to provide significant positive cash flow as Lechters Housewares(R) contracts and this format will remain a key part of the Company's core business. - - - Famous Brands Housewares Outlet(R) sales will be derived from a smaller number of core stores as the Company closes under-performing locations. - - - Geographic concentration that will allow the Company to effectively support the existing and new concepts with both marketing and management focus. - - - Development of an organizational capability to create (or re-position) and grow retail concepts in markets where meaningful competitive advantage can be achieved. The plans for each of the Company's business segments follow. 2 6 BUSINESS SEGMENTS The Company operates two segments: Specialty Housewares and the Off-Price Home Business. SPECIALTY HOUSEWARES The Specialty Housewares segment is the largest business segment and accounted for 78.3% of total sales in Fiscal 1998. This segment consists of two separate formats: Lechters Housewares(R) and Lechters Kitchen Place(R). Lechters Housewares(R) Lechters Housewares(R) operates in two different size categories; a 3,000 square foot Lechters Housewares(R) store and a 6,000 square foot Super Lechters Housewares(R) store. The 3,000 square foot Lechters Housewares(R) store offers customers an edited assortment of products for the kitchen and home at moderate prices while Super Lechters Housewares(R) stores have a more extensive merchandise assortment. The Company ended the year with 359 Lechters Housewares(R) stores and 84 Super Lechters Housewares(R) stores. Lechters Kitchen Place(R) This format is a re-invention of the Lechters Housewares(R) store. The first two Lechters Kitchen Place(R) stores opened in the fall of 1998. These stores are approximately 5,000 to 6,000 square feet in size. The Lechters Kitchen Place(R) stores include many of the existing Lechters Housewares(R) merchandise categories plus significant expansions including a complete kitchen electric department, an expanded cookware department, a gourmet food department and trade-up assortments in all categories. The store features merchandise, organized by department, in an easy to shop environment and a new, more attractive store design. The price points are higher than the traditional Lechters store with the store positioned between Lechters and department and better specialty stores. The average unit price is targeted at $10.00 vs. $5.87 for Lechters Housewares(R). OFF-PRICE HOME BUSINESS The Off-Price Home Business segment accounted for 21.7% of total sales in Fiscal 1998. This segment consists of two separate formats: Famous Brands Housewares Outlet(R) and Cost Less Home Store(SM) Famous Brands Housewares Outlet(R) Famous Brands is a 4,000 square foot specialty retailer of off-price housewares and products for the home. These stores are located in outlet centers. Lechters operated 134 Famous Brands Stores at the end of Fiscal 1998. Cost Less Home Store(SM) Cost Less Home Store(SM) presents a new growth vehicle for Lechters, Inc. The typical Cost Less Home Store(SM) has approximately 20,000 - 25,000 square feet devoted to the sales of housewares, linens and domestics, kitchen textiles, gifts, home furnishing, furniture, gourmet food and seasonal items. This concept offers exceptional value (discounts up to 70% off of department and specialty store prices) on a 3 7 constantly changing assortment of off-price merchandise in an easy-to-shop environment. One Cost Less Home Store(SM) store opened in November of Fiscal 1998 and a second opened in February of Fiscal 1999. Speciality Housewares Lechters Housewares(R) stores are merchandised and marketed to a large cross section of customers typically found in high-traffic, regional shopping malls having at least two major department stores as "anchors" and with at least 200,000 square feet of retail space for specialty stores. City stores and strip center stores are also operated under this trade name. The Company believes it appeals to a broad range of customers. Research indicates that the primary customer is female from a household with an average annual household income of $40,000 - $50,000. The Lechters Housewares(R) product line is broadly defined as basic housewares (cookware, bakeware, kitchen gadgets, utensils, small electrics, household storage and organization) and decorative housewares (table top, textiles, frames) which accounted for 63% and 37%, respectively, of Fiscal 1998 sales. Of the over 4,000 items in the line, 25% accounted for approximately 48% of current year sales. No individual item accounted for more than 1% of current fiscal year sales. All products sold by the Company are either private label or national brand names including but not limited to Rubbermaid, Durand, Ecko, Farberware, Henckels, Krups, OXO, Pyrex, Wearever Anchor Hocking and T-Fal. The Company's own brands include Cooks Club(R) (cookware, gadgets & utensils), Simple Solutions(R) (storage & organization) and Regent Gallery(R) (frames & accessories). Private label merchandise accounted for approximately 20% of Fiscal 1998 net sales. Lechters Housewares(R) believes that it has unique strengths in several areas. The Company believes that this concept has a strong customer franchise. Research indicates that the Lechters name is known by over 80% of mall shoppers. Over 23 million customer transactions were conducted last year in the Lechters stores and those customers purchased over 57 million items. Lechters has a loyal core of customers who know, trust and shop the store on a recurring basis. Lechters believes that its assortments of kitchen gadgets and picture frames are superior to other national retailers. Lechters also believes that its complete assortment of value priced kitchen products merchandised in conveniently located compact stores offers a meaningful alternative to its competitors. Market research indicates that 27% of Lechters customers purchase gifts and that gift purchases carry a 25% higher average ticket price than non-gift purchases. The Company has developed specific strategies to appeal to the gift customer. Lechters is also a leader in seasonal items and the development of new and fresh merchandise through private label as well as branded products. Lechters strives to ensure that new items, particularly those geared toward specific seasonal business, reflect current color and fashion trends. National brand merchandise is generally priced at department store and specialty retailer "sale prices" everyday. The value of these products is further enhanced by periodic sales and 4 8 promotional events. Lechters Housewares(R) offers unique value through its specially designed private label program. The Company's price advantage reflects its purchasing power and its unique ability to design proprietary product emphasizing design, quality and functionality and secure special savings by importing that product directly from overseas. Items generally range in price from $1.00 to $200.00, with an average selling price of $5.87. All sales are transacted in cash and through third-party credit cards, which accounted for approximately 61% and 39%, of Fiscal 1998 net sales, respectively. The Company runs an advertising campaign consisting of 12 circulars inserted in Sunday newspapers. These newspapers are located in 8 major metropolitan areas across the country. Each insert has a circulation of over 5 million copies and with respect to the numbers of store locations targeted impacts approximately 52% of the Lechters Housewares(R) business. The Company's advertising program began in 1996 and based on continued success has been expanded over the last two years. Funding of the Company's advertising expense is supported in part by cooperative advertising allowances from suppliers. Net advertising expense was 1.7% of Lechters Housewares(R) sales in Fiscal 1998 as compared to 1.8% in Fiscal 1997. The Lechters Housewares(R) business is highly seasonal. As a convenience concept, the chain benefits from the high concentration of traffic about its stores during certain times of the year. Sales are highest during the year-end holiday season. The Company also experiences a strong back-to-school business which commences in late July. In Fiscal 1998, November/December and back-to-school sales accounted for approximately 32% and 19%, respectively, of total year sales. Lechters Kitchen Place(R) stores represent a re-invention of the Lechters Housewares(R) concept. These stores are 5,000 to 6,000 square feet. The merchandise assortment includes most of the existing Lechters businesses plus supplemental categories such as gourmet foods. This concept has an expanded food preparation business to include a much broader assortment of cookware and kitchen electrics. The price points have been increased with a goal of a $10.00 average ticket vs. $5.87 for the Lechters Housewares(R) stores. This trade up in prices has been accomplished by adding better merchandise that the customer expects to find in a specialty store environment. Lastly many of the lower opening price points have been eliminated. Lechters Kitchen Place(R) is positioned between the current Lechters Housewares(R) and better specialty and department stores. The environment is a completely redesigned environment with a new floor plan, fixtures and color scheme. The store is arranged in distinct merchandise departments providing a customer friendly and easy-to-shop environment. Two prototype stores were opened in the fall of 1998. During the spring of 1999 the merchandise mix will be adjusted based on what has been learned. The Company anticipates that additional test stores will be opened within the next 12 months. As a side benefit to this strategy, many of the new, trade up items successfully tested in Lechters Kitchen Place(R) stores are being expanded to Lechters Housewares(R) stores. 5 9 Off-Price Home Business The mission of Famous Brands Housewares Outlet(R) of the Company's Off-Price Home Business segment is to become the leading retailer of off-price housewares in the outlet centers in which it operates and the preferred retailer for U.S. housewares manufacturers to liquidate their excess, discontinued and slow selling inventory. The Company believes it can offer its outlet customers extraordinary savings opportunities as compared to regular priced retailers through its ability to purchase off-price housewares. This commitment to off-price merchandise is a new direction based on a strategic assessment of the market and Famous Brands Housewares Outlet(R) position in the outlet malls. The outlet customer is more price driven than the mall customer and requires a fresh assortment to inspire a purchase decision. Famous Brands Housewares Outlet(R) began Fiscal 1998 with approximately 32% of sales generated by off-price merchandise. The remainder of the assortment was the same as the Lechters Housewares(R) assortment with limited reductions in pricing. At the end of Fiscal 1998, approximately 50% of sales were generated by off-price merchandise. The assortment of off-price merchandise is broader than the assortment offered in Lechters Housewares(R). For example, categories like accent furniture, lighting and decorative silk flower arrangements as well as expanded giftware are periodically added as opportunistic buys present themselves. Their broadened category mix contributes to the "treasure hunt" atmosphere that is so important to the appeal of this business. The Famous Brands Housewares Outlet(R) stores offer an assortment of basic Lechters Housewares(R) merchandise to supplement the constantly changing assortment of off-price purchases. The strategy is supported by a merchandising team dedicated to the Off-Price Home Business. Famous Brands Housewares Outlet(R) stores typically have lower occupancy expenses and leasehold improvement requirements versus stores located in malls, city locations and strip centers. The lower cost structure supports the lower price points of the outlet environment. Given the geographic dispersion of customers who frequent outlet centers, the marketing strategy to drive the Famous Brands Housewares Outlet(R) business will continue to rely primarily on in-store signs, handouts, displays and participation in promotions sponsored by malls. The location of these centers outside major media markets preclude the use of traditional broadcast or print media. The seasonality of the Famous Brands Housewares Outlet(R) business differs slightly from that of Lechters Housewares(R). The summer season represents a greater portion of the annual sales in Famous Brands Housewares Outlet(R) given the increase in leisure travel and the proximity of outlet centers to major routes and vacation destinations. In Fiscal 1998, the November/December period represented 27% of total year sales in Famous Brands Housewares Outlet(R) versus 32% for Lechters Housewares(R). 6 10 During Fiscal 1998 the Company closed 31 Famous Brands Housewares Outlet(R) stores. The Company plans to continue to reduce the number of Famous Brands Housewares Outlet(R) stores, with the intention of operating a core group of profitable stores in viable outlet malls. Cost Less Home Store(SM) is a new strategy that is an outgrowth of the off-price strategy started in the Famous Brands Outlet(R) stores. The typical Cost Less Home Store(SM) is based on a store size of approximately 20,000 to 25,000 square feet in size and is dedicated to the sales of housewares, linens and domestics, kitchen textiles, gifts, home furnishing, ready-to-assemble furniture, oriental and area rugs, gourmet food and seasonal items. This concept features exceptional value on a constantly changing assortment of merchandise. The customer can expect to achieve discounts up to 70% off of department and specialty store prices. Better-branded merchandise is featured with guaranteed lowest prices. The Company believes that it has unique strengths that allow it to compete effectively in the Off-Price Home Business. These strengths include: - A merchandising team with extensive experience in the field of off-price purchasing. - Strong vendor relationships which enable the Company to gain favorable consideration when it competes for off-price merchandise. - The financial ability to purchase large quantities of off-price merchandise and pay promptly. - A distribution system that supports the off-price business. The first Cost Less Home Store(SM) was opened in the Philadelphia metropolitan area in November of Fiscal 1998. A second store was opened in February of Fiscal 1999 in the same market area. Both stores are performing up to expectations. Consumer research indicates that the customer likes the environment and believes that the prices are very attractive. The Company anticipates opening additional Cost Less Home Store(SM) stores in Fiscal 1999. B. PURCHASING, WAREHOUSING AND DISTRIBUTION The Service Office is responsible for virtually all merchandising decisions including product selection, sourcing, pricing and in-store display. Merchandise mix is determined by the Service Office at each store's inception and is dictated by store size and configuration. All categories of merchandise are reviewed and edited on a regular basis to accommodate seasonal sales opportunities and evolving customer requirements. The Company has a dedicated buying staff for each of its segments. The Specialty Housewares buying staff is comprised of a Vice President - General Merchandise Manager, two merchandise managers and six buyers. The Off-Price Home Business buying staff includes a Vice President - General Merchandise Manager, one merchandise manager and five buyers. A Planning and Allocation staff supports the buying staff. That staff includes a Vice President of Merchandise, Planning and Allocation, three senior planners, teams of inventory control specialists and analysts supporting each buying group. 7 11 The Company purchases its products from over 400 suppliers with no supplier accounting for more than 2.7% of Fiscal 1998 receipts. Approximately 65% of its products are purchased in the United States which ensures sufficient flexibility in the management and flow of merchandise. The remaining 35% is proprietary merchandise developed by the Company and imported directly from overseas. This proprietary merchandise is sourced primarily in the Far East. The Company believes that there are alternate sources for virtually all of its products. Most of the Company's merchandise is shipped directly from manufacturers to the Company's distribution centers in Harrison, New Jersey and North Las Vegas, Nevada where it is held until reshipment to the Company's stores. The Company believes that its ability to buy in bulk directly from manufacturers enables the Company to obtain lower merchandise costs, favorable trade terms and a broader selection of products. The Company believes that these facilities are adequate to satisfy its foreseeable distribution requirements. The Company generally maintains an average of ten weeks of supply of Specialty Housewares re-orderable merchandise at the distribution centers. It maintains six weeks of supply of off-price merchandise at the distribution centers, to support the Off-Price Home Business. The Company uses contract carriers to supply its stores with merchandise from its distribution centers. The Company's stores are supplied with merchandise within two to five days of shipping an order from the warehouse, depending upon the store's distance from the distribution centers. On average, stores are supplied with merchandise on a bi-weekly basis. Shipments frequently are increased during peak sales periods and are more frequent to high volume and city locations. The ordering process is facilitated by a Computer Assisted Replenishment (CAR) system. C. STORE OPERATIONS Store Operations' objective is to provide an easy-to-shop store environment supported by knowledgeable, customer oriented and sales focused associates. The Company's stores are designed to attract traffic through prominent in-store displays generally organized according to a store planogram provided by the Service Office. Merchandise is displayed utilizing fixtures designed to maximize versatility in merchandise mix, minimize space requirements and enable customers to purchase through self choice and/or be assisted by an associate. The Company enhances consumer interest by using store front space for seasonal and promotional presentations which are rotated regularly. In addition, it uses selected stores as test sites for the introduction of new products, new product categories and new store designs. The store's organization is headed by a Senior Vice President and supported by a Service Office staff. The latter is responsible for the development of store operations policies and procedures, the design of in-store programs, store associate training programs, coordination of activities with other functions residing in the Service Office and general communications. As of April 1, 1999, the field organization was comprised of 3 Regional Vice Presidents and 1 Regional Manager; each has profit and loss responsibility for several districts and provides leadership to 38 District Managers. The District Managers are responsible for the day-to-day 8 12 operations of the stores. Their supervisory span of control ranges from 12 to 20 stores, supported by Area Managers who are Store Managers with additional oversight responsibility for 1 to 3 additional stores. Stores are typically staffed with a Manager, 2 Assistant Managers and 5 sales/cashier Associates. The stores schedule their labor from a pool of hourly Associates, the majority of whom are part-time. The number of Associates on hand at any one time is a function of customer traffic and scheduled store activities, such as training events and the receipt of merchandise. The Company is committed to the in-store development of its Associates. A training and evaluation program is provided to new Store Managers. Additionally, the Company has developed a program under which it transfers qualified Associates to other stores throughout the country to gain the experience necessary for promotion. All store Associates attend periodic training sessions designed to develop their management, merchandising and customer service skills. The Company believes that the security measures in its stores are strict, reflecting the cash orientation of the Company's business. The Company employs 6 field Loss Prevention Managers, who are responsible for the review of cash register transactions and inventory management procedures, in an effort to control inventory shrinkage. Their periodic reviews are complemented by audit programs that include District Manager conducted reviews and Service Office monitoring of store transaction reports. Particular emphasis is placed on stores with a history of inventory shrinkage in excess of the norm. D. REAL ESTATE The Company considers its ability to obtain and retain attractive, high-traffic store locations to be a critical element of its business and a key determinant of the Company's future growth and profitability. Lechters Housewares(R) mall stores are located primarily in high-traffic regional enclosed projects while strip centers and city stores are located in the premium project or downtown area as defined by market analysis. Famous Brands Housewares Outlet(R) stores are located in the dominant outlet projects nationally. The two Lechters Kitchen Place(R) stores are located in mall locations. The Cost Less Home Store(SM) stores opened to date are located in strip centers. As shown in the following table, the Company operated 443 Lechters Housewares(R) stores as of year-end. These stores range in size from 1,800 to 10,900 square feet and average approximately 3,700 square feet. The Company's 134 Famous Brands Housewares Outlet(R) stores range in size from 3,000 to 7,500 square feet and average 3,900 square feet. The Company opened its first Cost Less Home Store(SM) in November Fiscal 1998 at 18,400 gross square feet. It is anticipated that future stores will range in size from 20,000 to 25,000 square feet. 9 13
Famous Brands Cost Less Houseware Home Total Lechters Housewares(R) Outlet(R) Store(SM) ----- ----------------------------------------- --------- --------- Malls Strips City Sub-Total January 31, 1998: Units 403 38 24 465 161 0 626 Square Feet 1,465,000 142,500 105,300 1,712,800 633,600 0 2,346,400 1998 Additions: Units 1 12 2 15 4 1 20 Square Feet 2,600 38,200 6,200 47,000 13,300 18,400 78,700 1998 Closings: Units 37 0 0 37 31 0 68 Square Feet 118,400 0 0 118,400 117,800 0 236,200 January 30, 1999: Units 367 50 26 443 134 1 578 Square Feet 1,349,200 180,700 111,500 1,641,400 529,100 18,400 2,188,900(1)
(1) Approximately 90% of the total store space of the Company's stores represents selling area. The balance is storage and office space. The Company's present expansion plan will focus on Cost Less Home Stores(SM), Lechters Kitchen Place(R), Lechters Housewares(R) strip center locations and Lechters Housewares(R) city locations. The Company's Fiscal 1999 development plan is to open approximately 24 new stores. In determining where and in what format new stores will be opened, the Company's preference is to backfill existing advertised markets to enhance its marketing and operations leverage. Specific store development decisions give due consideration to such factors as market area demographics, competition, center quality and customer traffic, store location within the center, costs of development and ongoing occupancy expense. Performance comparables are also reviewed if available. The costs of new store development differ by division and further vary with the size of the store and site conditions. As shown below, the costs incurred by the Company to open an average 3,200 square foot store and the estimated cost for a Cost Less Home Store(SM) under typical site conditions are approximately:
Inventory, Leasehold Fixtures net of Preopening Improvements & Equipment Accounts Payable Expense ------------ ----------- ---------------- ------- Lechters Housewares(R) (Malls) $170,000 $ 55,000 $ 95,000 $ 8,000 Lechters Housewares(R) (Strip Centers) $120,000 $ 58,000 $ 89,000 $ 6,000 Lechters Housewares(R) (City) $315,000 $215,000 $134,000 $14,000 Lechters Kitchen Place(R) $315,000 $102,000 $142,000 $14,000 Famous Brands Housewares Outlet(R) $ 61,000 $ 58,000 $ 85,000 $13,000 Cost Less Home Store(SM) $315,000 $215,000 $399,000 $50,000
10 14 The Company actively manages its real estate portfolio to ensure profitability at the store level. In case of an under-performing store, the Company will seek reduction in its occupancy expense under its existing lease agreement or any agreement extending the term thereof. Where profitability is unattainable, the Company will exercise its right to terminate its lease agreement under any volume termination provision or upon expiration of the term. The Company closed sixty-eight (68) stores in Fiscal Year 1998. In Fiscal Year 1999, the Company plans to close sixty (60) to seventy (70) stores. This continued acceleration in store closings is partly to improve the quality of the Company's store locations and partly to redeploy the assets from under-performing locations. The majority of the redeployments are expected to be mall based to strip center locations especially in major markets, wherein the benefits of its advertising programs can be leveraged. The majority of the Company's leases expire or will be subject to termination by the Company over the next four years. While the current real estate environment has improved, the Company does have leverage in the management of its occupancy expenses and flexibility in store location. The Company intends to capitalize on this flexibility by seeking shorter lease terms where it is an advantage and longer lease terms where it makes sense to make a longer commitment. E. INFORMATION TECHNOLOGY The Company relies heavily on technology in the conduct of its business. While fully automated, it is continually reevaluating its systems capabilities to support the current and future needs of the business. The Company's data reside on a combination of platforms connected in an open system, client/server environment. By the end of Fiscal 1999, all production processing will be consolidated on a single platform, the IBM SP2. This restructuring is intended to take advantage of the increased processing power inherent in the most current technology and also eliminate the inefficiency of having to support a more complex and aging hardware configuration. In Fiscal 1998 the Company completed the upgrade of its local area network (LAN) in order to service the greater utilization of decision support applications and electronic communications throughout the organization. The corporate data center is located within the Company's Service Office in Harrison, New Jersey. To ensure continuous operations, the Company also maintains backup system capabilities at a third-party disaster recovery site. In-store systems consist of IBM 4684 and 4694 Point of Sale registers with Symbol Technology laser scanners. This technology enables the efficient processing of customer transactions, daily reporting of basic sales and transaction information, ordering and receipt of inventories, payroll processing and E-mail communication with the Service Office. Additionally, field managers are equipped with laptop computers, which facilitate their communication capabilities and access to essential store, district and region level management reports. The Company controls the level and distribution of merchandise in its distribution centers and stores through the use of an internally developed replenishment system. While sufficient to meet 11 15 the historic distribution characteristics of the business, the development of a more dynamic profile of current and future operations requires a substantially greater degree of functionality. Accordingly, in September 1997, the Company committed to the phased implementation of a replacement merchandising system. The Company expects to complete the installation of JDA's merchandise software by July 1999. The Company's distribution centers are internally operated using an automated warehouse management system, which also incorporates radio frequency laser scanning technology. This system enables the cost efficient handling and control of inventory in a paperless environment. While sufficient to meet the needs of the business in the past, the new business concepts require additional functionality to run the operation. In September 1998, the Company committed to the implementation of a replacement warehouse management system. The Company expects to complete installation of JDA's warehouse management software by August 1999. In Fiscal 1997, the Company successfully installed the first phase of a new financial system. This first phase included the upgrading of basic financial functions relating to the processing of the business. In Fiscal 1998, the Company augmented the new system with substantial planning, decision support and report writing capabilities. During Fiscal 1999, this system will be fully integrated with the aforementioned JDA merchandise system. The Company has aggressively expanded its Electronic Data Interchange (EDI) capabilities and is currently communicating with over 300 of its highest volume vendors. During Fiscal 1999, the Company plans to continue to enhance these vendor partnerships and to integrate EDI technology into additional areas of the business. The Company maintains a Website at `www.lechters.com'. The Website continues to be revamped to make for more graphical appeal and ease of navigation. The site features descriptive Company information, upcoming sales promotions in the stores and basic investor relations materials. While the Company does not presently conduct any commerce through the site, a project is being planned for the near future. With respect to the Year 2000 and the actions both planned and taken by the Company to reduce this risk, please see the "Year 2000" caption of the Company's Management's Discussion and Analysis of Financial Conditions and Results of Operations included in item 7 of this Form 10-K. COMPETITION The business in which the Company is engaged is highly competitive and many items sold by the Company are sold by department stores, general merchandise discount stores, hardware stores, supermarkets and others having greater financial and other resources than the Company. To a lesser extent, the Company also competes with mail order companies and other specialty retailers of home related products. However, the Company believes that it competes favorably with such retailers because the Company offers a broader assortment of housewares merchandise than most of its competitors. Furthermore, its prices are generally lower than those charged by department stores and are generally competitive with those charged by general merchandise discount stores. Nevertheless, there can be no assurance that any or all of the factors listed above which enable the Company to 12 16 compete favorably will not be adopted by companies having greater financial and other resources than the Company. TRADEMARKS The Company has registered in the United States Patent and Trademark Office its service marks "Lechters", "Lechters Home Store", "Lechters Housewares", "The Kitchen Place" and "Famous Brands Housewares Outlet" for retail services, and its trademarks "Lechters", "The Kitchen Place", "Regent Gallery", "Cooks Club", "Perfect Bake", "Perfect Grip" and "Simple Solutions" for certain housewares items. In addition, the Company has applied for registration of other marks used in the operation of its business, and those applications are pending. ASSOCIATES On April 1, 1999, the Company employed 6,246 persons, 2,891 of whom were full-time (30 or more hours per week) and 3,355 of whom were part-time Associates. Of this total, 461 were located at the Company's Harrison, New Jersey Service Office and two distribution centers. Included in this total, 42 were Regional and District Managers, 6 were Loss Prevention Managers and 40 Associates were located at the Company's North Las Vegas, Nevada distribution center. On April 1, 1999, the 172 non-management distribution and office Associates at the Harrison, New Jersey facility were represented by UNITE, Local 99. On April 26, 1999, the Company and UNITE, Local 99 entered into an agreement as to the terms and conditions of a contract covering the distribution Associates for the period from March 16, 1999 to March 15, 2002. The contract covering office employees expires on June 30, 2000. The 5,785 Associates in the Company's 578 retail stores are non-union. The Company has never experienced a strike or other labor disruption and is unaware of any current efforts or plans to organize its non-union Associates. The Company believes that its employee relations are satisfactory. EXECUTIVE OFFICERS The following table shows information regarding executive officers of the Company as of April 20, 1999: Position or Office Term of Employ- Name Age with the Company ment Commenced - - ---- --- ---------------- -------------- Donald Jonas 69 Chairman of the Board, January 1984 and Chief Executive Officer James Shea 53 President November 1994 13 17 Robert J. Harloe 54 Senior Vice President August 1994 - Human Resources Dennis Hickey 51 Senior Vice President January 1991 - Stores Ira S. Rosenberg 65 Vice President, January 1984 Secretary and Corporate Counsel James J. Sheppard 47 Senior Vice President June 1992 and Chief Financial Officer William Sullivan 55 Senior Vice President March 1998 - Real Estate Donald Jonas has been Chairman of the Board and a Director of the Company or its former parent since 1979. From 1979 to January 1994 he was also Chief Executive Officer. Mr. Jonas resumed the position of Chief Executive Officer and became President in January 1996 with the election of James Shea as President in February 1999, Mr. Jonas relinquished title as of that date. He is also a Director of Dress Barn, Inc. James Shea was elected President in February 1999. Prior to that, he was Senior Vice President of Marketing and Merchandising of the Company having been elected in December 1994. Prior to joining the Company in November 1994, Mr. Shea served as Senior Vice President, General Merchandise Manager, Homestore with Kaufmann's, a division of the May Department Stores Company, from 1990 to November 1994. From 1985 through 1990 he was employed by Lechmere, a hardgoods chain, as Vice President and General Merchandise Manager. Mr. Shea was also Vice President of Marketing and Merchandising for Eddie Bauer and spent 12 years with Dayton Department Stores in various merchandising positions. Robert J. Harloe was elected Senior Vice President - Human Resources of the Company in March 1996. Mr. Harloe became Vice President - Human Resources in September 1994 after joining the Company in August 1994. Prior to that he was Senior Vice President of Human Resources for Allied-Lyons Retailing. Allied-Lyons acquired Dunkin Donuts in 1990, where he was employed for 18 years. Dennis Hickey was elected Senior Vice President - Stores of the Company in March 1996. Mr. Hickey became Vice President - Stores in April 1991 after joining the Company in January 1991. Prior to that he was Vice President of Kay Bee Toy Stores, a Division of Melville Corp. from August 1990 to January 1991. From August 1985 to August 1990, Mr. Hickey was Vice President - Store Operations for Circus World Toy Stores, a Division of Greenman Bros. Ira S. Rosenberg has been Corporate Counsel of the Company or its former parent since 1979 and Vice President and Secretary of the Company since 1984. 14 18 James J. Sheppard was elected Senior Vice President and Chief Financial Officer of the Company in June 1998. Prior to that he was Vice President and Corporate Controller having joined the Company as Corporate Controller in June 1992. Mr. Sheppard previously held the positions of Corporate Controller for Deer Park Spring Water and Staff Vice President, Assistant Controller for TW Services. William R. Sullivan was elected Senior Vice President - Real Estate of the Company in April 1998 having joined the Company in March 1998. Prior to that he was employed by Compass Retail, Inc., a division of Equitable Real Estate, from 1990 to 1997 as Executive Vice President - Leasing. Mr. Sullivan previously held the position of Senior Vice President of Leasing for Kravco, Inc. in King of Prussia, Pennsylvania, from 1972 to 1990. Mr. Sullivan started his career in the shopping center business with The Rouse Company. ITEM 2. PROPERTIES. The general offices of the Company are located at 1 Cape May Street, Harrison, New Jersey. The Company leases approximately 550,000 square feet of floor space at this location. Approximately 460,000 square feet are being utilized for the distribution center, and approximately 90,000 square feet for the Company's service offices. This lease expires on January 31, 2007 and the Company has three five-year renewal options. The Company leases a distribution center of approximately 155,000 square feet in North Las Vegas, Nevada. Approximately 151,000 square feet are being utilized for the distribution center, and approximately 4,000 square feet for administrative offices. Constructed and opened in 1993, the facility is designed to enable expansion of an additional 100,000 square feet should the need arise. This lease expires on April 7, 2008 and the Company has four five-year renewal options. The Company leases all of its stores. Lease terms for the Company's stores are generally 10 to 12 years in duration without renewal options or five years with one or more renewal options and provide for a fixed minimum rental plus a percentage of sales once the minimum has been satisfied. However, certain stores are operated under short-term extensions of otherwise expired leases. For additional information concerning the Company's leases, see the section of Item 1 entitled Real Estate and Note 7 to the Consolidated Financial Statements of the Company included elsewhere herein. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock is traded on the over-the-counter market and is included in the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "LECH". The initial public offering of the Common Stock occurred in July 1989. 15 19 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 1998 High Low ----------- ----- --- 1st Quarter 6-15/16 4-3/4 2nd Quarter 6-3/8 4-1/8 3rd Quarter 4-7/8 2-11/16 4th Quarter 3-3/8 2-1/8 Fiscal 1997 High Low ----------- ----- --- 1st Quarter 4-1/8 3-1/8 2nd Quarter 5-1/8 3-1/4 3rd Quarter 5-7/16 3-1/2 4th Quarter 7-3/8 4-7/8
These quotations reflect inter-dealer prices, without retail markups, markdowns or commissions. On April 16, 1999, there were approximately 798 holders of record of the Common Stock. On April 16, 1999, the closing price of the Common Stock was $1.875. The Company has never paid any cash dividends on its Common Stock and does not presently intend to pay any dividends on the Common Stock for the foreseeable future. In addition, the Company's Credit Agreement contains certain covenants which restrict the ability of the Company to pay dividends. See Note 7 to the Consolidated Financial Statements. 16 20 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto set forth elsewhere herein.
Fifty-Two Fifty-Three Fifty-Two Weeks Ended Weeks Ended Weeks Ended --------------------------------------------- ----------- ----------- January 30, January 31, February 1, February 3, January 28, 1999 1998 1997 1996 1995 --------------------------------------------------------------------------- (Dollars in thousands, except share, per share and selected operating data) Income Statement Data: Net sales $ 428,219 $ 445,310 $ 441,243 $ 432,048 $ 399,264 Cost of goods sold (including occupancy and indirect costs) 317,868 325,269 322,110 310,163 282,875 ------------ ------------ ----------- ------------ ----------- Gross profit 110,351 120,041 119,133 121,885 116,389 Selling, general and, administrative expenses 118,606 115,541 110,848 109,414 93,853 Restructuring expense -- -- -- (217) 11,000 Provision for asset impairment 1,543 8,746 370 -- -- ------------ ------------ ----------- ------------ ----------- Operating (loss) income (9,798) (4,246) 7,915 12,688 11,536 Other (Income) expense (1) (117) 1,952 3,372 5,039 5,838 ------------ ------------ ----------- ------------ ----------- (Loss) Income before income tax provision (9,681) (6,198) 4,543 7,649 5,698 Income tax (benefit) provision (3,940) (2,440) 1,200 3,146 2,336 ------------ ------------ ----------- ------------ ----------- Net (loss) income (5,741) (3,758) 3,343 4,503 3,362 Preferred stock dividend requirement 1,010 1,010 842 -- -- ------------ ------------ ----------- ------------ ----------- Net (loss) income available to common shareholders ($ 6,751) ($ 4,768) $ 2,501 $ 4,503 $ 3,362 ============ ============ =========== ============ =========== Net (loss) income per common share (2) (3) Basic ($ 0.39) ($ 0.28) $ 0.15 $ 0.26 $ 0.20 Diluted ($ 0.39) ($ 0.28) $ 0.15 $ 0.26 $ 0.20 Weighted average common shares outstanding (3) (4) Basic 17,176,000 17,159,000 17,155,000 17,147,000 16,898,000 Diluted 17,176,000 17,159,000 17,155,100 17,154,000 16,989,000
17 21
Fifty-Two Fifty-Three Fifty-Two Weeks Ended Weeks Ended Weeks Ended -------------------------------------------- ------------ ----------- January 30, January 31, February 1, February 3, January 28, 1999 1998 1997 1996 1995 - - -------------------------------------------------------------------------------------------------------- (Dollars in thousands, except share, per share and selected operating data) Selected Operating Data: Stores opened during year 20 7 16 48 49 Stores closed during year 68 30 9 11 11 Stores open at year-end 578 626 649 642 605 Total square feet of store space (at year-end) (5) 2,188,900 2,346,400 2,432,200 2,405,100 2,228,195 Sales per average square foot of total space (5) (6) $ 189 $ 186 $ 182 $ 186 $ 187 Percentage increase (decrease) in comparable store sales (7) (1.1%) 0.5% (0.2%) (1.6%) 3.2% Balance Sheet Data: Working capital $ 164,474 $ 163,998 $ 151,954 $ 136,113 $ 134,785 Total assets 267,644 277,434 272,333 272,312 270,710 Long-term debt 61,232 60,001 58,853 75,038 77,777 Shareholders' equity 159,134 165,850 170,408 148,642 143,541 Total debt to total Capitalization 27.8% 26.6% 25.7% 34.4% 36.0%
(1) Other (income) expense includes interest expense net of interest income, gains realized on the sale of government securities and investment income, primarily dividends, from marketable securities. (2) Net (loss) income per share for Fiscal 1998, Fiscal 1997 and Fiscal 1996 was calculated on net (loss) income less the preferred stock dividend requirement. (3) The Company has never paid any cash dividends on its Common Stock. (4) Outstanding shares for the calculation of "basic" net (loss) income per common share is the weighted average of outstanding shares calculated on a daily basis. Outstanding shares for "diluted" net (loss) income per common share includes incremental shares for the Company's incentive stock option plan. The incremental shares represent the average of incremental shares included in the calculation of net (loss) income per common share for each quarter. (5) Approximately 90% of total store space represents selling area. The balance is storage and office space. (6) Average square feet of total store space represents the average of square feet of total store space at the beginning and end of each fiscal year. Sales per average square foot of total store space is the result of dividing net sales for the year by average square feet of total store space. These amounts are not adjusted to reflect the seasonal nature of the Company's sales or the impact of opening stores in different periods during the year. (7) Comparable store sales data are calculated based on each store's time in operation during the prior year (even if such store began operations in the prior year) compared with its corresponding time in operation during the current year. Comparable store sales for Fiscal 1996 and 1995 are reported on a 52-week basis. Comparable store sales for Fiscal 1998 and Fiscal 1997 exclude sales of stores to be closed starting 90 days prior to closing. 18 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS FISCAL 1998 IN COMPARISON WITH FISCAL 1997 Sales for Fiscal 1998, the fifty-two week period ended January 30, 1999, decreased $17,091,000 to $428,219,000, a 3.8% decrease from Fiscal 1997, the fifty-two week period ended January 31, 1998. The decrease in sales was due to the closing of 68 stores during the year which was partially offset by the opening of 20 stores during Fiscal 1998. The decrease was also attributable to the 1.1% decrease in comparable store sales for Fiscal 1998. At the close of the fiscal year, the Company operated 578 stores compared with 626 stores in operation at the end of Fiscal 1997. Gross profit for Fiscal 1998 was $110,351,000, a $9,690,000 decrease from the prior fiscal year. The gross profit rate was 25.8% as a percent of sales, which was 1.2 percentage points below the gross profit rate of Fiscal 1997. The major contributing factors to reduced gross profit from an overall viewpoint was the reduction of sales partially offset by reduced occupancy costs such as common area maintenance, real estate taxes, depreciation and utilities, due to a fewer number of stores in operation. With respect to the gross profit rate, factors which contributed to the reduction from Fiscal 1997 were the additional price reductions due to the continued emphasis on "special buy" and "off-price" strategies and a less favorable inventory shrinkage performance than the prior fiscal year. Selling, general and administrative expenses increased $3,065,000 to $118,606,000. The expense rate was 27.7% of sales which was 1.8 percentage points higher than the prior fiscal year. Due to fewer stores, store operating expenses were lower than the prior fiscal year with the exception of payroll and related benefits. Payroll at the store level increased due to the additional handling required for "off-price" and "special buy" merchandise. Expenses of the Service Office were higher than the prior fiscal year due to additional resources supporting the Company's new concepts and initiatives, increased payroll expense in the distribution centers related to the additional handling needed for "special buy" merchandise and increased occupancy costs, also, at the distribution centers. Information technology costs increased at the Service Office due to the on-going design and installation of new merchandise systems scheduled for completion in Fiscal 1999. The Company recorded a non-cash provision for asset impairment of $1,543,000 for Fiscal 1998 as required by Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of". The provision was determined by a comparison of each store's operating cash flow performance versus the carrying value of the assets at that location. In cases where the undiscounted cash flows produced by the store were not sufficient to recover the carrying value of the long-term assets at the location, the store's assets are adjusted to their estimated fair value. The fair value was estimated by applying a discount rate to the undiscounted cash flows. For Fiscal 1997 the asset impairment provision determined in the same manner was $8,746,000. 19 23 For Fiscal 1998, net other expense (income) was an income of $117,000 versus an expense of $1,952,000 for the comparable fifty-two week period of Fiscal 1997. Interest expense was $151,000 lower than the prior fiscal year at $4,474,000. Interest income increased $1,644,000 over the prior year to $3,978,000 while other investment gain/income increased $274,000 to $613,000. Throughout Fiscal 1998 the Company had higher invested balances and favorable investment market conditions producing the favorable performance compared to the prior year. Income taxes for Fiscal 1998 were at an effective rate of 40.7% which was comparable to the Company's historical income tax rate except for Fiscal 1996 which had an effective rate of 26.4% related to the reversal of residual estimated liabilities for prior years. The income tax provision for Fiscal 1998 is a "benefit" due to the reported loss for the fiscal year. The net loss for Fiscal 1998 was $5,741,000 compared to a net loss for Fiscal 1997 of $3,758,000. The loss was primarily the result of reduced sales and gross profit and additional selling, general and administrative expenses needed to support the Company's new strategies. FISCAL 1997 IN COMPARISON WITH FISCAL 1996 Net sales for Fiscal 1997, the fifty-two week period ended January 31, 1998, increased $4,067,000 to $445,310,000, a 0.9% increase over Fiscal 1996, the fifty-two week period ended February 1, 1997. The increase in sales reflects a 0.5% increase in same store sales, offset in part by a net reduction in store count of 23 (7 openings, 30 closings). At the close of the fiscal year the Company operated 626 stores compared with 649 stores at the close of Fiscal 1996. Gross profit for Fiscal 1997 was $120,041,000, a $908,000 increase over the prior fiscal year. The gross profit rate of 27.0% as a percent of sales equaled the rate for Fiscal 1996. Favorable shrinkage performance and a favorable merchandise mix in Lechters Housewares were offset by additional price reductions, the transition in progress to lower margin off-price merchandise in Famous Brands and the under-absorption of higher occupancy costs. Selling, general and administrative expenses increased $4,693,000 to $115,541,000. The expense rate of 25.9% was 0.8% above the rate for Fiscal 1996. The additional expense reflects the costs of the Company's expanded advertising program, an increase in Service Office payroll to support staffing of the Famous Brands off-price merchandise strategy and new concept development initiative, added investment in information technology and costs relating to the closing of 30 stores. The Company recorded a non-cash provision for asset impairment of $8,746,000 during the fourth quarter of Fiscal 1997. This charge to operating income relates primarily to the write-down of under-performing store long-lived assets in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." The provision reflects the impairment of under-performing properties, some of which were closed in Fiscal 1998. Other expenses for Fiscal 1997 were $1,952,000, a decrease of $1,420,000 from Fiscal 1996. At 0.4% of sales, other expenses were 0.4% below the prior fiscal year rate. Interest expense declined $378,000 primarily as a result of the early retirement of the Senior Notes Payable in Fiscal 20 24 1996. Interest income increased $684,000 and investment gains/income increased $358,000 reflecting the higher levels of invested cash and marketable securities and favorable market rates. Income taxes for Fiscal 1997 were at an effective rate of 39.4% which was comparable to the Company's historical income tax rate except for Fiscal 1996 which had an effective rate of 26.4% related to the reversal of residual estimated liabilities for prior years. The income tax provision for Fiscal 1997 is a "benefit" due to the reported loss for the fiscal year. The net loss for Fiscal 1997 was $3,758,000 compared to a net income for Fiscal 1996 of $3,343,000. The loss was primarily the result of the aforementioned provision for asset impairment. YEAR 2000 The Year 2000 ("Y2K") issue is primarily the result of computer programs using two digits instead of four digits to indicate the year. From the Company's perspective, the major risks associated with the Year 2000 involve areas in which the Company is dependent on others to take appropriate and timely actions before January 1, 2000. Specifically, as a retailer, the Company is dependent upon an uninterrupted supply of merchandise to its stores, upon landlords to provide normal operating conditions at the properties leased by the Company in which to transact business and upon service providers who supply such items as phone service and utilities which allow the Company to operate its stores located in 42 states and the District of Columbia from its headquarters in New Jersey. These key factors must be resolved by outside parties. Without a successful resolution of these factors, the Company will not be able to operate in its normal manner and severe adverse economic consequences will result. With respect to the products sold by the Company, for the most part, they do not contain embedded electronic devices which would make them subject to Y2K issues. To monitor these outside parties in their Y2K process and to ensure that all factors over which it had control from a Y2K perspective were resolved before the start of the Y2K, the Company initiated its Year 2000 compliance project during Fiscal Year 1997 with a review of all existing information technology ("IT") software systems by the vendor. In Fiscal Year 1996, prior to the recognition of the Year 2000 as a significant business risk and in the normal course of business, the Company identified key core systems which needed to be replaced. A new financial suite including modules for general ledger, accounts payable and fixed assets was installed at the beginning of Fiscal 1998. A new merchandise inventory analysis and control system has been acquired. The core software package was installed during Fiscal Year 1998. The new merchandise analysis systems are scheduled to be operational in stages during the first half of Fiscal Year 1999. Finally, the Company has also contracted to install a new warehouse management system which is in the early stages of development and will be implemented by August 1999. All three major systems acquisitions have been certified Year 2000 compliant by the vendor. All new software to be acquired by the Company will be required to be certified as Year 2000 compliant by the vendor. The Company established a Year 2000 Compliance Task Force in the third quarter of Fiscal 1998 whose charter is to review all of the Company's efforts to ensure that the Company will be Year 2000 compliant prior to December 31, 1999. Comprised of representatives from Information Technology, Operations, Finance, Loss Prevention, Merchandising and Human Resources, the task force has reviewed all known potential Year 2000 issues and has established a Master Schedule of items ready to be resolved to ensure that the Y2K will have no adverse impact on the Company. The Y2K Task Force's initial focus was to review steps taken to date primarily in the IT area. The Y2K Task Force also commenced its review of non-IT related issues involving equipment with embedded technology which may not be Year 2000 compliant. This phase of the 21 25 project has been completed it has identified limited amounts of equipment with embedded technology subject to Y2K exposure. Early in Fiscal 1999, the Company mailed a Y2K readiness questionnaire to all of its vendors. A second mailing was also made to key vendors who did not respond to the initial mailing. With the evaluation of the questionnaire results, scheduled to be completed by the end of May 1999, the third phase of the Year 2000 compliance project will focus on evaluating the results of the questionnaire, reviewing the results of the non-IT equipment survey and verifying IT software surveys previously conducted. Based on the completion of the above process, the Y2K Task Force will issue its final Y2K Master Schedule and remediation plan which will be completed by the third quarter of Calendar Year 1999. If deemed necessary, third party consultants will be engaged to evaluate and/or assist in the completion of the plan. The final two phases of the Year 2000 remediation plan involve the establishment of contingency plans scheduled for development during the second quarter of Fiscal Year 1999 and the development of "worst case" scenarios. The development of "worst case" scenarios will be based on the assessment of the Company's readiness and the readiness of its key vendors, major suppliers, landlords and key service suppliers. Given the fact that the Company operates a large number of stores which are geographically dispersed and has a large supplier base, the Company's initial evaluations to date indicate that these two conditions will tend to mitigate potential adverse impacts of the Year 2000 issues. This evaluation, however, is based on certain expectations and assumptions which may ultimately prove to be inaccurate. As part of their oversight responsibilities, the Audit Committee of the Board of Directors has requested and will be provided with periodic status reports, on at least on a monthly basis, on the progress the Company has made with respect to Year 2000 readiness and compliance. The cost of the software purchased for the major systems as described above approximates $4,200,000. Future costs of new software for major systems are estimated to be $1,200,000 for the completion of the merchandise inventory analysis and control system and $1,400,000 for a warehouse management system. Costs of compliance such as hardware upgrades, equipment replacement and miscellaneous software, which are "capitalized" as other assets, are estimated to be $300,000. Costs of re-training or modifications to existing programs will be expensed as incurred and are estimated to be $400,000. It is anticipated that funds for Year 2000 compliance costs will be generated by internal sources. LIQUIDITY AND CAPITAL RESOURCES The combined balances of cash, cash equivalents and marketable securities at January 30, 1999 as shown on the Consolidated Balance Sheet totaled $98,253,000, an increase of $7,111,000 over the combined balances of $91,142,000 at January 31, 1998. As depicted on the Consolidated Statements of Cash Flows, the increase in cash and cash equivalents was $19,108,000 for the fifty-two week period ended January 30, 1999 compared with a $9,373,000 increase for Fiscal 1997. Cash flows from operating activities consist primarily of net (loss) income adjusted for certain non-cash charges such as depreciation and amortization, deferred taxes, loss on disposal of 22 26 fixed assets and the provision for asset impairment. Operating activities also include changes in operating assets, which include accounts receivable, inventory, accounts payable, accrued liabilities and other items. Net cash provided by operating activities for Fiscal 1998 was $16,648,000 compared to $35,617,000 for Fiscal 1997. For Fiscal 1998 there was a net loss of $5,741,000 which reduced cash. Significant offsets to the net loss which provided cash were depreciation and amortization of $16,676,000, the asset impairment provision of $1,543,000 and a decrease in merchandise inventories of $9,810,000. The most significant operating activity reducing cash flow was the increase in other assets due to the increased investments in information technology software. With respect to investing activities, in addition to the decrease in marketable securities of $12,040,000, capital expenditures were $8,580,000 compared to $4,860,000 for Fiscal 1997. Capital expenditures were principally for the construction of and fixtures for new and remodeled stores opened in Fiscal 1998. Other capital expenditures for Fiscal 1998 included significant amounts for computer hardware expenditures related to systems infrastructure enhancements. Planned capital expenditures for Fiscal 1999 are estimated at $14,000,000 - $15,000,000 primarily for new stores, renovations, remodels and computer hardware. With respect to the Company's line of credit, on March 26, 1998, the Company entered into a new $40,000,000 Credit Agreement which replaced the existing credit facility. The Credit Agreement includes a restrictive covenant which prohibits the payment of dividends on the Company's common stock. The Credit Agreement was amended on March 23, 1999 waiving certain operating covenants with respect to consolidated net income and leverage ratio as defined by the Credit Agreement for Fiscal 1998 and adjusting the covenants and fee structure for the balance of the Agreement. The credit facility consists of a $20,000,000 line of credit for direct borrowings and a $20,000,000 line for issuance of Letters of Credit. The term of the new agreement is for three years, with the Letter of Credit component renewable annually during that period. The Letter of Credit component was renewed for another year on March 23, 1999. As of the end of Fiscal 1998, there were no outstanding borrowings under the then existing Credit Agreement. At January 30, 1999 and January 31, 1998 the Company was liable for drawings under outstanding Letters of Credit in the amount of approximately $11,579,000 and $8,299,000, respectively. INFLATION The economy's experienced low inflation, in conjunction with increased competition, has severely restricted pricing opportunities within the housewares segment. In fact, certain lines of merchandise considered commodity in nature have experienced price deflation over the last several years. The result has been adverse pressure on the Company's gross margin and inability to check further profit erosion given the concurrent rise in selling, general and administrative expenses. The Company has responded to the situation by increasing the penetration of its private label program and non-commodity assortment of merchandise, introducing higher price point items to the line and taking selective price increases where the market allows. Additionally, the Company has in place an aggressive program to reduce its cost of operations and financing. 23 27 SEASONALITY The Company's business is highly seasonal. The Company benefits from the higher concentration of traffic in its stores during certain times of the year, especially the July to September "back-to-school" period and the holiday selling seasons of November and December. In addition, the Company expects that its quarterly results of operations will fluctuate depending on the timing and amount of revenue contributed by new stores and the timing of costs associated with the opening of new stores. The Company's current strategy is to open substantially all of its new stores in the first three quarters of the fiscal year in order to minimize business disruptions during the heavy selling season in the last quarter of the fiscal year. See Note 10 of Notes to Consolidated Financial Statements of the Company included elsewhere herein. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 must be adopted by January 30, 2000. The Company has not actively engaged in derivative instruments to hedge its market risks. Accordingly, this statement is not expected to materially impact the Company's financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company imports about 35% of its merchandise from the Far East which subjects it to the market risk of currency fluctuations. However, the Company uniformly utilizes purchase contracts and letters of credit denominated in US dollars to mitigate this risk. Additionally, there are multiple suppliers, both foreign and domestic, of its products. With respect to marketable securities, the Company is subject to the variations in the investment markets. It mitigates this risk by employing the services of a investment management firm which with the Company's oversight invests solely in the highest quality securities and spreads the market risk among various types of securities with varying maturities. With respect to its Credit Agreement, although the Company has not had to borrow funds under the Credit Agreement during Fiscal 1998 and Fiscal 1997, should it need to utilize the line of credit for direct borrowings, the interest rate is subject to market conditions at the time of the borrowing. PART III The information called for by Part III (Items 10, 11, 12 and 13) is incorporated by reference to the Company's definitive proxy statement in connection with its Annual Meeting of Shareholders to be held June 22, 1999. 24 28 PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K. (a) Financial Statements. See the Index immediately following the signature page. (b) Reports on Form 8-K. None. (c) Exhibits. 3.1 Restated Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-29465 (the "Registration Statement")). 3.2 By-laws of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-40372). 4.1 Preferred Stock Purchase Agreement dated April 5, 1996. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 1, 1997.) 4.2 Indenture, dated as of September 27, 1991, between the Company and Chemical Bank, as Trustee. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended January 25, 1992.) 10.1 1989 Stock Option Plan and Form of Agreement pursuant to 1989 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registration Statement). (1.) 10.2 Credit Agreement dated March 26, 1998. (Incorporated herein by reference to Exhibit 10.2 to this Company's Annual Report on Form 10-K for the year ended January 31, 1998). 10.2.1 First Amendment and Waiver to Credit Agreement dated March 23, 1999.* 10.3 Form of Deferred Compensation Agreement (Incorporated herein by reference to Exhibit 10.5 to the Registration Statement). (1.) 10.4 Amendment No. 1 to Deferred Compensation Agreement, dated June 16, 1989. (Incorporated herein by reference to Exhibit 10.5.2 to Amendment No. 1 to the Registration Statement). (1.) 10.5 Amendment No. 2 to Deferred Compensation Agreement, dated August 15, 1989. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended January 26, 1991). (1.) 25 29 10.6 Amendment No. 3 to Deferred Compensation Agreement, dated June 15, 1995. (Incorporated herein by reference to the Company's Form 10-Q for the period ended July 29, 1995). (1.) 10.7 Amendment No. 4 to Deferred Compensation Agreement between the Company and Donald Jonas dated April 8, 1996. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 3, 1996). (1.) 10.8 Form of Consulting Agreement (Incorporated herein by reference to Exhibit 10.9.1 to the Registration Statement). (1.) 10.9 Forms of Amendment of Consulting Agreement (Incorporated herein by reference to Exhibit 10.9.2 to Amendment No. 1 to the Registration Statement). (1.) 10.10 Agreement between the Company and Local 99, UNITE to a collective bargaining agreement covering warehouse employees dated March 16, 1996. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 1, 1997). 10.10.1 Memorandum of Agreement dated April 26, 1999 between the Company and Local 99, UNITE extending the term of Agreement covering warehouse employees dated March 16, 1996 to March 15, 2002.* 10.11 Lease for Distribution Center space (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K, dated January 2, 1992). 10.11.1 Lease Modification Agreement dated June 19, 1995 covering the Distribution Center and Office space in Harrison, NJ. * 10.11.2 Lease Modification Agreement dated July 22, 1998 covering the Distribution Center and Office space in Harrison, NJ. * 10.12 Lease for Distribution Center space. (Incorporated herein by reference to Exhibit 1 to the Company's Form 10-Q, for the period ended July 25, 1992). 10.13 Agreement dated March 27, 1998 between the Company and Local 99, UNITE, covering office employees for a term from July 1, 1997 to June 30, 2000. (Incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended January 31, 1998). 10.14 Memoranda of Agreement dated March 27, 1998 between the Company and Local 99, UNITE, amending, respectively, Agreement dated March 16, 1996 covering warehouse employees and Agreement dated March 27, 1998 covering office employees. (Incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended January 31, 1998). 10.15 Lechters Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the period ended August 1, 1998). (1.) 26 30 21 Subsidiaries of the Company. * 23 Consent of Deloitte & Touche LLP.* 27 Financial Data Schedule * *Filed herewith. (1.) Management Compensatory Plan. 27 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LECHTERS, INC. ---------------------------- (Registrant) By: /s/ Donald Jonas ------------------------ Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- Chairman of the Board, Chief Executive Officer, /s/ DONALD JONAS and Director (Principal Executive Officer) April 27, 1999 - - ----------------------------- -------------- (DONALD JONAS) Senior Vice President (Principal Financial /s/ JAMES J. SHEPPARD Officer and Principal Accounting Officer) April 27, 1999 - - ----------------------------- -------------- (JAMES J. SHEPPARD) /s/ MARTIN BEGUN Director April 27, 1999 - - ----------------------------- -------------- (MARTIN BEGUN) /s/ CHARLES A. DAVIS Director April 27, 1999 - - ----------------------------- -------------- (CHARLES A. DAVIS) /s/ BERNARD D. FISCHMAN Director April 27, 1999 - - ----------------------------- -------------- (BERNARD D. FISCHMAN) /s/ ROBERT KNOX Director April 27, 1999 - - ----------------------------- -------------- (ROBERT KNOX) /s/ ANTHONY MALKIN Director April 27, 1999 - - ----------------------------- -------------- (ANTHONY MALKIN) /s/ ROBERTA MANEKER Director April 27, 1999 - - ----------------------------- -------------- (ROBERTA MANEKER)
28 32 /s/ NORMAN MATTHEWS Director April 27, 1999 - - ----------------------------- -------------- (NORMAN MATTHEWS) /s/ JOHN WOLFF Director April 27, 1999 - - ----------------------------- -------------- (JOHN WOLFF) /s/ STEVE WESTERFIELD Director April 27, 1999 - - ----------------------------- -------------- (STEVE WESTERFIELD)
29 33 LECHTERS, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page ---- MANAGEMENT'S REPORT F-1 INDEPENDENT AUDITORS' REPORT F-2 FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED JANUARY 30, 1999 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Cash Flows F-5 Consolidated Statement of Shareholders' Equity F-6 Notes to Consolidated Financial Statements F-7 - F-21 34 MANAGEMENT'S REPORT To the Shareholders of Lechters, Inc.: We have prepared the consolidated financial statements of Lechters, Inc., including the notes and other financial information appearing in this Annual Report on Form 10-K, and are responsible for the integrity and objectivity of the accompanying financial statements and related information. In order to fulfill this responsibility, policies have been established that require each system of internal accounting control to provide reasonable assurance, giving due regard to the cost of implementing and maintaining the system, that transactions are executed in accordance with management's intention and authorization, that accounting books and records are prepared and maintained so as to permit the preparation of the financial statements in accordance with generally accepted accounting principles, and that accountability for assets, liabilities and equity is maintained. Compliance with these policies is verified, and the continuing adequacy of accounting policies and procedures is evaluated. In addition, Lechters, Inc.'s independent auditors obtain and maintain an understanding of the accounting and administrative controls in place and, based on tests of those controls and of accounting records, render an opinion on the fairness of presentation of the financial statements. The Audit Committee of the Board of Directors, composed of non-management Board members, and management representatives, meet periodically with the independent auditors to receive their reports and direct compliance with their recommendations. Further, we recognize our responsibility to conduct Lechters' business in accordance with high moral and ethical standards. Policies have been established and review programs are maintained to ensure that all business activities are in compliance with these standards. Donald Jonas Chairman of the Board and Chief Executive Officer James J. Sheppard Senior Vice President and Chief Financial Officer F-1 35 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Lechters, Inc. Harrison, New Jersey We have audited the accompanying consolidated balance sheets of Lechters, Inc. and subsidiaries (the "Company") as of January 30, 1999 and January 31, 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended January 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 1999 and January 31, 1998, and the results of their operations and their cash flows for each of the three years in the period ended January 30, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Parsippany, New Jersey March 24, 1999 F-2 36 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share amounts)
January 30, January 31, 1999 1998 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 35,503 $ 16,395 Marketable securities 62,750 74,747 Accounts receivable 4,185 5,084 Merchandise inventories 89,224 99,034 Prepaid expenses 1,734 2,145 -------- -------- Total current assets 193,396 197,405 -------- -------- PROPERTY AND EQUIPMENT: Fixtures and equipment 57,678 58,403 Leasehold improvements 96,452 94,994 -------- -------- 154,130 153,397 Less accumulated depreciation and amortization 88,401 79,891 -------- -------- Net property and equipment 65,729 73,506 -------- -------- OTHER ASSETS 8,519 6,523 -------- -------- TOTAL ASSETS $267,644 $277,434 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 8,982 $ 10,127 Dividends payable-preferred stock 1,010 1,010 Salaries, wages and other accrued expenses 17,156 18,102 Taxes, other than income taxes 1,774 1,227 Income taxes payable -- 2,941 -------- -------- Total current liabilities 28,922 33,407 LONG-TERM DEBT 61,232 60,001 DEFERRED INCOME TAXES 10,538 11,456 OTHER LIABILITIES 7,818 6,720 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Convertible preferred stock, $100 par value authorized 1,000,000 shares, issued and outstanding Series A - 149,999 shares and Series B - 50,001 shares 20,000 20,000 Common stock, no par value,authorized 50,000,000 shares, issued and outstanding 17,176,286 and 17,174,286, 58 58 respectively Accumulated other comprehensive income 109 84 Additional paid-in capital 62,380 62,370 Retained earnings 76,587 83,338 -------- -------- Total shareholders' equity 159,134 165,850 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $267,644 $277,434 ======== ========
See notes to consolidated financial statements. F-3 37 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except share and per share amounts)
Fiscal Year Ended -------------------------------------------- January 30, January 31, February 1, 1999 1998 1997 ------------ ------------ ------------ NET SALES $ 428,219 $ 445,310 $ 441,243 COST OF GOODS SOLD (including occupancy and indirect costs) 317,868 325,269 322,110 ------------ ------------ ------------ GROSS PROFIT 110,351 120,041 119,133 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 118,606 115,541 110,848 PROVISION FOR ASSET IMPAIRMENT 1,543 8,746 370 ------------ ------------ ------------ OPERATING (LOSS)/ INCOME (9,798) (4,246) 7,915 OTHER EXPENSES (INCOME): Interest Expense 4,474 4,625 5,003 Interest Income (3,978) (2,334) (1,650) Net Investment (Gain/Income) Loss (613) (339) 19 ------------ ------------ ------------ (117) 1,952 3,372 ------------ ------------ ------------ (LOSS)/ INCOME BEFORE INCOME TAX PROVISION (9,681) (6,198) 4,543 INCOME TAX (BENEFIT) PROVISION (3,940) (2,440) 1,200 ------------ ------------ ------------ NET (LOSS)/ INCOME (5,741) (3,758) 3,343 Preferred Stock Dividend Requirement 1,010 1,010 842 ------------ ------------ ------------ Net (Loss)/ Income Available to Common Shareholders ($ 6,751) ($ 4,768) $ 2,501 ============ ============ ============ NET (LOSS)/ INCOME PER COMMON SHARE Basic ($ 0.39) ($ 0.28) $ 0.15 ============ ============ ============ Diluted ($ 0.39) ($ 0.28) $ 0.15 ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 17,176,000 17,159,000 17,155,000 ============ ============ ============ Diluted 17,176,000 17,159,000 17,155,100 ============ ============ ============
See notes to consolidated financial statements. F-4 38 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Fiscal Year Ended -------------------------------- January 30, January 31, February 1, 1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ($ 5,741) ($ 3,758) $ 3,343 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Provision for asset impairment 1,543 8,746 370 Depreciation and amortization 16,676 18,014 17,672 Loss on disposal of property and equipment 1,580 1,702 1,067 Deferred income taxes (936) (4,998) (894) Deferred rent 1,075 968 1,160 Other (751) 265 521 Changes in operating assets and liabilities Decrease in accounts receivable 899 477 12 Decrease in merchandise inventories 9,810 1,408 9,456 Decrease (Increase) in prepaid expenses 411 3,589 (215) Increase in other assets (3,433) (3,314) (446) (Decrease) Increase in accounts payable, Accrued salaries, wages and other accrued Expenses and taxes, other than income taxes (1,544) 11,556 (5,089) (Decrease) Increase in income taxes payable (2,941) 962 1,226 -------- -------- -------- Net cash provided by operating activities 16,648 35,617 28,183 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (8,580) (4,860) (8,053) Decrease (Increase) in marketable securities 12,040 (20,471) (16,592) -------- -------- -------- Net cash provided by (used in) investing activities 3,460 (25,331) (24,645) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of convertible preferred stock -- -- 20,000 Expenses of issuance of convertible preferred stock -- -- (500) Repayment of long-term debt -- -- (20,250) Exercise of stock options 10 97 -- Payment of preferred stock dividends (1,010) (1,010) -- -------- -------- -------- Net cash used in financing activities (1,000) (913) (750) -------- -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 19,108 9,373 2,788 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,395 7,022 4,234 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 35,503 $ 16,395 $ 7,022 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 2,769 $ 3,406 $ 4,616 ======== ======== ======== Income taxes $ 2,296 $ 2,073 $ 920 ======== ======== ========
See notes to consolidated financial statements. F-5 39 LECHTERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Amounts in thousands, except share amounts)
Convertible Common Preferred Stock Issued Stock Issued Accumulated Compre- ----------------- ----------------- Additional Other hensive Paid-In Retained Comprehensive Income Shares Amount Shares Amount Capital Earnings Income Total (Loss) ------ ------ ------ ------ ------- -------- ------ ----- ------ BALANCE, FEBRUARY 3, 1996 17,155,086 $58 -- $ -- $ 62,773 $ 85,773 $ 38 $ 148,642 $ -- Net Income -- -- -- -- -- 3,343 -- 3,343 3,343 Other comprehensive income, (loss) net of tax: Unrealized loss on available for sale securities -- -- -- -- -- -- (67) (67) (67) Issuance of convertible preferred stock, net of issuance expenses -- -- 200,000 20,000 (500) -- -- 19,500 -- Declaration of dividend on convertible preferred stock -- -- -- -- -- (1,010) -- (1,010) -- ---------- --- ------- ------- -------- -------- ----- --------- ------- BALANCE, FEBRUARY 1, 1997 17,155,086 58 200,000 20,000 62,273 88,106 (29) 170,408 $ 3,276 ======= Net loss -- -- -- -- -- (3,758) -- (3,758) (3,758) Other comprehensive income, (loss) net of tax: Unrealized gain on available for sale securities -- -- -- -- -- -- 113 113 113 Exercise of stock options 19,200 -- -- -- 97 -- -- 97 -- Declaration of dividend on convertible preferred stock -- -- -- -- -- (1,010) -- (1,010) -- ---------- --- ------- ------- -------- -------- ----- --------- ------- BALANCE, JANUARY 31, 1998 17,174,286 58 200,000 20,000 62,370 83,338 84 165,850 ($3,645) ======= Net Loss -- -- -- -- -- (5,741) -- (5,741) (5,741) Other comprehensive income, (loss) net of tax: Unrealized gain on available for sale securities -- -- -- -- -- -- 25 25 25 Exercise of stock options 2,000 -- -- -- 10 -- -- 10 -- Declaration of dividend on convertible preferred stock -- -- -- -- -- (1,010) -- (1,010) -- ---------- --- ------- ------- -------- -------- ----- --------- ------- Balance, JANUARY 30, 1999 17,176,286 $58 200,000 $20,000 $ 62,380 $ 76,587 $ 109 $ 159,134 ($5,716) ========== === ======= ======= ======== ======== ===== ========= =======
See notes to consolidated financial statements. F-6 40 LECHTERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED JANUARY 30, 1999 (Amount in thousands, except share and per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Business - Lechters, Inc. and its subsidiaries (collectively, the "Company") is a specialty retailer of primarily brand-name basic housewares and decorative housewares. As of January 30, 1999, the Company operated 578 stores in 42 states and the District of Columbia. Basis of Presentation - The consolidated financial statements include the accounts of Lechters, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. b) References to Fiscal 1998, Fiscal 1997 and Fiscal 1996 mean the fiscal year ending on the Saturday closest to the end of January. Fiscal Year 1998, Fiscal Year 1997 and Fiscal Year 1996 were each comprised of 52 weeks. c) Cash and Cash Equivalents and Marketable Securities - The Company considers cash on hand in stores, deposits in banks and all highly liquid debt instruments, with original maturities of 90 days or less when purchased, as cash and cash equivalents. Marketable securities are cash investments, primarily U.S. Government securities, with original maturities exceeding 90 days at time of purchase. The Company classifies marketable securities as "Available for Sale" which are carried at fair value, with any unrealized gains and losses excluded from earnings and reported as a component of other comprehensive income. (See Note 9.) d) Merchandise Inventories - Merchandise inventories are stated on the following methods:
January 30, January 31, 1999 1998 ------- --------- Lower of cost (first-in, first-out) or market as determined by the retail inventory method (stores) $57,912 $ 69,167 Lower of cost (first-in, first-out) or market (distribution centers) 31,312 29,867 ------- --------- $89,224 $ 99,034 ======= =========
F-7 41 The Company includes as inventoriable costs, certain indirect costs, principally purchasing, warehousing and distribution costs, which are necessary to bring inventory to the point of sale. At January 30, 1999 total indirect costs included as part of inventory were approximately $7,900. At January 31, 1998, indirect costs included as part of inventory were approximately $8,500. e) Property and Equipment - Property and equipment are stated at cost. Depreciation and amortization are computed principally by the straight-line method by charges to earnings in amounts sufficient to write-off the cost of depreciable assets over their estimated lives, or where applicable, the terms of the respective leases, whichever is shorter. As required by Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company evaluates each stores' performance and measures the carrying value of each locations' fixed assets, principally leasehold improvements and fixtures, versus its estimated undiscounted future cash flows. When the evaluation of a store location indicates that the undiscounted cash flows are not sufficient to recover the carrying value of the long-term assets at the store, the store assets are adjusted to their fair values. The fair value is estimated by applying a discount rate to the undiscounted cash flows. During Fiscal 1998, the Company recorded a $1,543 provision for the impairment of long lived assets located in stores. The asset impairment provisions recorded in Fiscal 1997 and Fiscal 1996 were $8,746 and $370, respectively. As a result of the asset impairment provisions recorded, depreciation and amortization expenses for the store locations which have been impaired will be reduced in future years. f) Pre-opening Costs - During Fiscal 1998, the Company adopted the policy of expensing pre-opening costs as incurred. In the prior fiscal years, pre-opening costs were capitalized and amortized over a period of 12 months from the date operations commence. This change did not have a material impact on the financial statements for Fiscal 1998. g) Income Taxes - In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company uses the asset and liability method for financial accounting and reporting for income taxes. A valuation allowance is established, when necessary, to reduce the deferred tax assets to their estimated realizable amounts. (See Note 6.) h) Net (Loss) Income per Common Share - In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share", which amended the manner in which net (loss) income per share is calculated and presented on financial statements. In accordance with SFAS No. 128, "basic" net (loss) income per share data were computed by dividing net (loss) income less the dividend requirements for the Company's Convertible Preferred Stock by the weighted average of common shares outstanding during each period presented. For the computation of "diluted" earnings per share, potential shares of common stock related to the Company's 1989 Incentive and Non-Qualified Stock Option Plan were excluded from the Fiscal 1998 and the Fiscal 1997 computations since they would have been anti-dilutive. With respect to the Company's 5% Convertible Subordinated Debentures issued in September 1991, the assumed conversion of these securities would also have had an anti-dilutive effect on the net (loss) income per share data presented for Fiscal 1998, Fiscal 1997 and Fiscal 1996. With respect to the F-8 42 Company's 5.05% Convertible Preferred Stock issued in April 1996, the assumed conversion of the preferred stock would also have had an anti-dilutive effect on the net (loss) income data presented for Fiscal 1998, Fiscal 1997 and Fiscal 1996. The number of shares used in computing basic and diluted net (loss) income per share was determined as follows:
Fiscal Year Ended ------------------------------------------------ January 30, January 31, February 1, 1999 1998 1997 ---------- ---------- ---------- Basic: Weighted average common shares outstanding 17,176,000 17,159,000 17,155,000 ========== ========== ========== Diluted: Weighted average common shares outstanding 17,176,000 17,159,000 17,155,000 Common share equivalents - - 100 ---------- ---------- ---------- 17,176,000 17,159,000 17,155,100 ========== ========== ==========
i) Fair Value of Financial Instruments - SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheet of the Company, for which it is practicable to estimate fair value. The estimated fair values of financial instruments which, are presented herein have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of amounts the Company could realize in a current market exchange. The fair value of the Company's cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values at January 30, 1999 and January 31, 1998, due to the short term maturities of these investments. The fair value of the Company's long-term debt at January 30, 1999 and January 31, 1998 was $43,875 and $53,300 respectively. The carrying value of long-term debt at January 30, 1999 and January 31, 1998 was $61,232 and $60,001 respectively. The fair value of the Company's long-term debt is based on market prices or dealer quotes (for publicly traded debentures). j) Comprehensive Income- During Fiscal 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". Comprehensive income, which is reported in the Statements of Consolidated Shareholders' Equity, is defined as the total change in shareholders' equity during the period other than from transactions with shareholders. For the Company, comprehensive income F-9 43 consists of net income and the net change in unrealized gains and losses, net of taxes, on securities classified for SFAS No. 115 purposes as held available for sale. Accumulated other comprehensive income consists of the accumulated unrealized gains and losses, net of applicable income taxes and net of reclassification adjustments for gains and losses included in net income. k) Recent Accounting Pronouncements - In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 must be adopted by January 30, 2000. The Company has not actively engaged in derivative instruments to hedge its market risks. Accordingly, this statement is not expected to materially impact the Company's financial statements. l) Use of Estimates - The Company utilizes estimates and assumptions in the preparation of financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. m) Reclassifications - Certain reclassifications have been made to the financial statements of prior years to conform with the classifications used for Fiscal 1998. 2. SEGMENT INFORMATION The company has adopted SFAS No. 131, "Disclosures about Segment of an Enterprise and Related Information," effective with the Fiscal year ended January 30, 1999. The statement requires companies to disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. The Company defines its principal business segments into two divisions, the Specialty Housewares segment which operates as Lechters Housewares(R) and Lechters Kitchen Place(R), and the Off-Price Home Business segment which operates as Famous Brands Housewares Outlet(R) and Cost Less Home Store(SM). The contribution of these segments, as well as "corporate and other" for Fiscal 1998, 1997, and 1996 are summarized below. Corporate and other includes general corporate expenses, principally service office expense and distribution centers as well as interest income and expense. F-10 44 The Company's segment disclosures are as follows:
Fiscal Year Ended ------------------------------------- January 30, January 31, February 1, 1999 1998 1997 --------- --------- --------- SALES Specialty Housewares $ 335,483 $ 346,947 $ 340,904 Off-Price Home Business 92,736 98,363 100,339 --------- --------- --------- Total Sales $ 428,219 $ 445,310 $ 441,243 ========= ========= ========= (LOSS) INCOME BEFORE INCOME TAX PROVISION Specialty Housewares $ 17,023 $ 14,664 $ 9,575 Off-Price Home Business (418) 3,954 18,598 Corporate and Other (26,403) (22,864) (20,258) --------- --------- --------- Operating (Loss) / Income (9,798) (4,246) 7,915 Interest (Income) / Expense (117) 1,952 3,372 --------- --------- --------- Total (Loss) Income before income tax provision ($ 9,681) ($ 6,198) $ 4,543 ========= ========= ========= DEPRECIATION AND AMORTIZATION EXPENSE Specialty Housewares $ 9,580 $ 11,178 $ 11,399 Off-Price Home Business 1,639 1,865 1,677 Corporate and Other 5,457 4,971 4,596 --------- --------- --------- Total Depreciation and Amortization Expense $ 16,676 $ 18,014 $ 17,672 ========= ========= ========= CAPITAL ADDITIONS Specialty Housewares $ 5,974 $ 2,363 $ 4,335 Off-Price Home Business 940 516 1,615 Corporate and Other 1,666 1,981 2,103 --------- --------- --------- Total Capital Additions $ 8,580 $ 4,860 $ 8,053 ========= ========= ========= TOTAL ASSETS Specialty Housewares $ 93,571 $ 103,550 $ 122,096 Off-Price Home Business 20,574 25,013 32,415 Corporate and Other 153,499 148,871 117,822 --------- --------- --------- Total Assets $ 267,644 $ 277,434 $ 272,333 ========= ========= =========
F-11 45 3. SHAREHOLDERS' EQUITY a) Convertible Preferred Stock - On April 5, 1996, the Company issued 149,999 shares of Series A Convertible Preferred Stock, $100 par value ("Series A Preferred Stock") and 50,001 shares of Series B Convertible Preferred Stock, $100 par value ("Series B Preferred Stock") at par value. Said shares of Convertible Preferred Stock were sold to Prudential Private Equity Investors III, L.P. for $20,000. Expenses of the private placement were charged to Additional Paid-in Capital. Series A Preferred Stock and Series B Preferred Stock are convertible to Common Stock at a conversion price of $6.25 per share. The Company may at any time require the conversion of all of the outstanding Series A Preferred and all of the outstanding Series B Preferred into shares of Common Stock if the closing price of the Common Stock based on trading in the NASDAQ National Market, or such other stock market on which the Common Stock is then traded, as reported in the Wall Street Journal averages not less than $15.625 over the 60 trading days ending on the date immediately preceding the date of the Company's election to cause such mandatory conversion. The Company must convert all of the outstanding shares of both the Series A Preferred and Series B Preferred simultaneously. Any such mandatory conversion shall only be effected upon written notice delivered to all holders of Series A Preferred and Series B Preferred within 10 days following the date on which the Company elects to cause such conversion. Series A Preferred Stock is convertible to 2,399,984 shares of common stock and has voting rights equivalent to that number of common shares. Series B Preferred Stock is convertible to 800,016 of shares of common stock but has no voting rights. Both Series A Preferred Stock and Series B Preferred Stock receive a dividend of 5.05% payable annually. Robert Knox, a Director of the Company, is Senior Managing Director of Cornerstone Equity Investors, LLC, the investment manager for Prudential Private Equity Investors III, L.P. b) Stock Options - As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company will continue to measure compensation cost for stock option plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees." Accordingly, no compensation cost has been recognized for the Company's stock option plan. If compensation cost for stock options had been determined based on fair values at the grant dates, net income available to common shareholders and net income per share would have been reduced to the pro forma amounts below, for the fiscal years ended January 30, 1999, January 31, 1998 and February 1, 1997. F-12 46
Fiscal Year Ended --------------------------------------- January 30, January 31, February 1, 1999 1998 1997 ------------------------------------------------------------------------------------------- Net (loss) income available to common shareholders: As reported ($6,751) ($4,768) $2,501 Pro-forma ($7,166) ($5,133) $2,079 Net (loss) income per common share: As reported ($0.39) ($0.28) $ 0.15 Pro-forma ($0.42) ($0.31) $ 0.12
The pro forma effect of applying SFAS No. 123 is not necessarily indicative of the effect on reported net income for future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used during the respective years to estimate the fair value of options granted:
Fiscal Year Ended -------------------------------------- January 30, January 31, February 1, 1999 1998 1997 -------------------------------------------------------------------------------- Dividend yield 0% 0% 0% Expected volatility 62% 64% 68% Risk-free interest rate 5.4% 6.2% 6.3% Expected life of options 6 years 6 years 6 years
In June 1989, the Company granted to a consultant a non-qualified option to purchase 120,302 shares of the Company's common stock at a price of $6.65 per share, which reflected the fair market value on the date of grant. The consultant's option is exercisable in annual installments over a period of four years and terminates on the tenth anniversary of the date of each installment. Options granted under the Company's 1989 Incentive Stock Option Plan are granted at market value on the date of grant and are exercisable at a rate of 20% per year over a five-year period commencing with the date of grant and expire in 10 years. Changes in stock options granted under the 1989 Incentive Stock Option Plan were as follows: F-13 47
Fiscal 1998 Fiscal 1997 Fiscal 1996 -------------------------- --------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Beginning Balance 1,424,910 $5.28 1,109,320 $5.36 940,320 $5.80 Granted 96,800 4.25 505,500 4.87 283,990 5.12 Exercised (2,000) 5.00 (19,200) 5.02 - - Canceled (272,980) 5.32 (170,710) 4.97 (114,990) 8.34 --------- --------- --------- Ending balance 1,246,730 $5.18 1,424,910 $5.28 1,109,320 $5.36 ========= ===== ========= ========= ===== Reserved for future grant at year-end 246,980 70,800 405,590 Exercisable 423,874 $5.64 383,446 $5.91 213,730 $6.60 Weighted average fair value of options granted during the year $2.58 $3.15 $3.41
The following table summarizes information concerning stock options granted under the 1989 Incentive Stock Option Plan which were outstanding at January 30, 1999:
Options Outstanding Options Exercisable ---------------------------------------------------------- --------------------------------- Number Outstanding at Weighted Average Weighted Exercisable at Range of January 30, Remaining Contractual Average January 30, Weighted Average Exercise Prices 1999 Life in Years Exercise Price 1999 Exercise Price --------------- -------------- -------------------- -------------- --------------- ---------------- $2.50 to $3.875 95,600 9.0 $ 3.22 11,020 $3.74 4.00 to 5.00 591,060 7.2 4.94 217,264 4.97 5.01 to 8.50 538,520 7.6 5.50 174,040 6.01 10.00 to 13.7 21,550 0.7 10.40 21,550 10.40 --------- ------- $2.50 to $13.75 1,246,730 423,874 ========= =======
c) 1998 Long-Term Incentive Plan - During Fiscal 1998, the Company adopted, with shareholder approval, the 1998 Long-Term Incentive Plan (the "Plan"). The purpose of the Plan is to promote success and enhance the value of the Company by linking the personal interests of the participants to those of the Company's shareholders and customers. The Plan authorizes the grant of up to 1,000,000 shares of Lechters, Inc. common stock. Shares underlying awards that lapse or awards that are not paid may be reused for subsequent awards. Only the number of shares issued net of shares rendered for exercise shall be deemed issued under the Plan. The Plan is administered by a committee of the Board consisting solely of two or more members of the Board, ("the Committee"). Persons eligible to participate in the Plan include all officers, key employees and directors of the Company and its subsidiaries, consultants and advisors to the Company and its subsidiaries and other persons or entities providing goods or services to the Company or its subsidiaries, in each case as determined by the Committee. F-14 48 During Fiscal 1998, there were no grants of Nonqualified Stock Option (NQSO), Incentive Stock Options (ISO), Stock Appreciation Rights (SAR), Restricted Stock Units, Performance Units, Performance Shares or any other awards under the 1998 Long-Term Incentive Plan. 4. LONG-TERM DEBT Long-term debt outstanding is as follows:
Fiscal Year Ended ----------------------------------- January 30, January 31, 1999 1998 ---- ---- Convertible Subordinated Debentures, 5% due 2001 (a) $61,232 $60,001 ======= =======
a) The 5% Convertible Subordinated Debentures (the "Debentures") were issued in 1991 with a yield to maturity of approximately 7.47%. At January 30, 1999 and January 31, 1998, the unamortized original issue discount was $3,768 and $4,999 respectively. The Debentures are convertible into Common Stock of the Company prior to maturity at a conversion of 32.79 shares per $1,000 principal amount at maturity. Amounts charged to income for the amortization of debenture discount were $1,232 and $1,147 for Fiscal 1998 and Fiscal 1997, respectively. The long-term debt at January 30, 1999 of $61,232 is due September 27, 2001. The Debentures have not been and will not be registered under the United States Securities Act of 1933. 5. LINE OF CREDIT At January 30, 1999, the Company had a $40,000 unsecured Credit Agreement (the "Credit Agreement") with a syndicate of banks led by The Chase Manhattan Bank which was entered into on March 26, 1998. The Credit Agreement includes a restrictive covenant, which prohibits the payment of dividends on the Company's common stock. The Credit Agreement was amended March 23, 1999 waiving operating covenants with respect to consolidated net income and leverage ratio as defined by the Credit Agreement for Fiscal 1998 and amended the covenants and fee structure for the balance of the Credit Agreement. The facility consists of a $20,000 line of credit for direct borrowings and a $20,000 line for issuance of Letters of Credit. The Credit Agreement as it relates to the $20,000 line of credit for direct borrowings expires March 26, 2001 and is unsecured. With respect to the $20,000 line for Letter of Credit which is renewable annually has been renewed for one year expiring on March 24, 2000. Borrowings under the Credit Agreement bear a base rate interest of either (1) the higher of the prime rate and the sum of the Federal Funds Rate plus 1/2%, or (2) an Adjusted Eurodollar Rate based on LIBOR. The Credit Agreement requires the maintenance of certain earnings and fixed charge coverage ratios, and the interest rate payable is adjusted by from 0.0% to 2.5% over the above base rate depending on the F-15 49 ratio of consolidated funded debt to earnings before interest, taxes, depreciation, amortization (EBITDA) and non cash charges. At January 30, 1999 and January 31, 1998, the Company was liable for drawings under outstanding letters of credit in the amount of approximately $11,579 and $8,299 respectively. 6. INCOME TAXES The (benefit)/provision for income taxes consists of the following:
Fiscal Year Ended ----------------------------------- January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- Federal: Current ($2,095) $ 1,900 $ 1,448 Deferred (696) (3,803) (625) ------- ------- ------- (2,791) (1,903) 823 ------- ------- ------- State: Current 98 631 625 Deferred (1,247) (1,168) (248) ------- ------- ------- (1,149) (537) 377 ------- ------- ------- ($3,940) ($2,440) $ 1,200 ======= ======= =======
A reconciliation of the statutory Federal income tax rate with the effective rate used for the calculation of the income tax (benefit) provision is as follows:
Fiscal Year Ended ---------------------------------------------- January 30, January 31, February 1, 1999 1998 1997 ---- ---- ---- Statutory Federal income tax rate 34.0% 34.0% 34.0% State income taxes, net of Federal benefit 5.3 5.7 5.5 Reversal of prior year residual estimated liabilities - - (12.4) Other 1.4 (0.3) (0.7) ---- ---- ---- Effective income tax rate 40.7% 39.4% 26.4% ==== ==== ====
F-16 50 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of the non-current deferred tax liability (asset) are as follows:
January 30, January 31, 1999 1998 ---- ---- Accelerated tax depreciation $14,648 $15,156 Reserves not currently deductible (1,541) (2,140) State Net Operating Losses (1,798) (1,214) Credit carryovers (771) (346) ------- ------- $10,538 $11,456 ======= =======
The Company files consolidated Federal and state income tax returns. Deferred income tax expense during Fiscal 1998, 1997 and 1996 principally resulted from the use of accelerated methods of depreciation for tax purposes over the straight-line method used for financial reporting purposes. The alternative minimum tax credit carryforwards can be carried forward indefinitely. The general business credit carryforwards have expiration dates ranging from 2017 through 2018. The Company has state net operating loss carryforwards of approximately $37,000 at January 30, 1999 and $24,800 at January 31, 1998, have which expiration dates ranging from 2003 through 2018. 7. LEASES At January 30, 1999, the Company leased all of its stores and two facilities for its corporate office, warehouse and distribution operations. These operating leases expire on varying dates through January 31, 2009. At January 30, 1999, aggregate minimum rentals in future periods are as follows:
Minimum Fiscal Rental Year Commitment ---- ---------- 1999 $46,745 2000 $40,998 2001 $36,622 2002 $32,645 2003 $27,831 Thereafter $52,951
The preceding does not include contingent rentals which may be payable under certain leases on the basis of percentage of sales in excess of stipulated amounts. The amounts of such additional rentals incurred were as follows: F-17 51
Fiscal Year Amount ---- ------ 1998 $3,524 1997 $3,061 1996 $2,320
Total rent expense was as follows:
Fiscal Year Amount ---- ------ 1998 $52,865 1997 $53,931 1996 $52,729
8. EMPLOYEE BENEFIT PLANS AND OTHER COMMITMENTS Pursuant to collective bargaining agreements, the Company is obligated to make contributions to union-administered health and welfare, retirement and severance funds which provide benefits for the Company's union-represented associates. Payments under these agreements amounted to approximately $948, $967 and $994 in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. In January 1994, the Company adopted a voluntary 401(k) savings plan. The Company matches 25% of each associate's contribution, up to a maximum of 5% of salary. This match is paid in Company common stock purchased by the Trustee on the open market. Approximately $141, $145 and $154 were charged to expense in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. The Company has a Deferred Compensation Plan covering certain key executives which provides that, at retirement, these associates will receive for a 10-year period an annual predetermined benefit, the amount of which is dependent upon their retirement age. The maximum amount that the associate may receive is being accrued for financial reporting purposes over the employment period. Approximately $160, $156 and $129 were charged to expense in Fiscal 1998, Fiscal 1997 and Fiscal 1996, respectively. The Company has entered into consulting agreements with certain senior executives whereby, at retirement, these associates will provide consulting and advisory services for a 10-year period. The maximum aggregate amount payable under these agreements is $475 per year. F-18 52 9. AVAILABLE FOR SALE SECURITIES The following is a summary of the available for sale securities which comprise the balance in "marketable securities" at January 30, 1999 and January 31, 1998:
Gross Gross January 30, Unrealized Unrealized Estimated 1999 Cost Gains Losses Fair Value --------------------- ----- ------ ------ ---------- Government Bonds $43,512 $116 ($35) $43,593 Other Debt Securities 16,051 92 (8) 16,135 Municipal Bonds 3,002 20 - 3,022 ------- ---- --- ------- Total available for sale securities $62,565 $228 ($43) $62,750 ======= ==== ===== =======
Gross Gross January 31, Unrealized Unrealized Estimated 1998 Cost Gains Losses Fair Value ---------------------- ---- ------ ------ ---------- Government Bonds $52,251 $40 ($3) $52,288 Other Debt Securities 17,305 77 (1) 17,381 Municipal Bonds 5,049 29 - 5,078 ------- ---- --- ------- Total available for sale securities $74,605 $146 ($4) $74,747 ======= ==== === =======
The cost and estimated fair value of debt securities at January 30, 1999 by contractual maturity are as follows:
Estimated Cost Fair Value ---- ---------- 1999 $23,579 $23,644 2000 $38,986 $39,106 -------- ------- Total available for sale securities $62,565 $62,750 ======== =========
Net gains from the sales of available for sale securities are reported on the consolidated statement of income as "Net Investment (Gain/Income) Loss". The components of Net Investment (Gain/Income) Loss for Fiscal 1998, Fiscal 1997 and Fiscal 1996 are as follows: F-19 53
Net (Gain) Loss Gross Gross on Sale of Net Investment Fiscal Realized Realized Government Dividend (Gain/Income) Year Gains Losses Securities Income Loss -------------------------------------------------------------------------------- 1998 ($113) $ 9 ($104) ($509) ($613) 1997 ($50) $ 7 ($43) ($296) ($339) 1996 ($9) $28 $19 $0 $19
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Fiscal Quarter Ended -------------------------------------------------------------------- May 2, August 1, October 31, January 30, 1998 1998 1998 1999 ---- ---- ---- ---- Net sales $86,194 $91,422 $95,682 $154,921 Gross profit 21,658 21,560 22,788 44,345 Provision for asset impairment - - - 1,543 Income (loss) before income tax provision ($6,163) ($6,509) ($6,393) $9,384 Net income (loss) ($3,640) ($3,836) ($3,772) $5,507 Net income (loss) per common share (a) (b) ($ 0.23) ($ 0.24) ($ 0.23) $ 0.31 Number of shares used in computing net income (loss) per common share 17,175,000 17,176,000 17,176,000 17,176,000
Fiscal Quarter Ended ------------------------------------------------------------------- May 3, August 2, November 1, January 31, 1997 1997 1997 1998 ---- ---- ---- ---- Net sales $ 85,129 $ 95,114 $ 99,711 $165,356 Gross profit 19,977 22,848 24,809 52,407 Provision for asset impairment - - - 8,746 Income (loss) before income tax provision (7,938) ($5,550) ($3,790) 11,080 Net income (loss) ($4,683) ($3,275) ($2,236) $6,436 Net income (loss) per common share (a) (c) (d) ($ 0.29) ($ 0.21) ($ 0.15) $0.36 Number of shares used in computing net income (loss) per common share 17,155,000 17,155,000 17,155,000 17,172,000
(a) Net (loss) income per common share is calculated based on net (loss) income less the dividend requirement of the Convertible Preferred Stock. F-20 54 (b) Diluted net income per common share, assuming conversion of the 5.05% Convertible Preferred Stock and the elimination of the related dividend was $0.27 for the thirteen weeks ended January 30, 1999 on weighted average shares outstanding of 20,377,000. (c) Diluted net income per common share, assuming conversion of the Company's 5% Convertible Subordinated Debentures and elimination of the related interest costs less applicable income taxes and assuming conversion of the 5.05% Convertible Preferred Stock and elimination of the related dividend was $0.31 per common share for the thirteen weeks ended January 31, 1998 on weighted average shares outstanding of 22,680,000. (d) Difference of $0.01 between full year (loss) income per common share and the resulting (loss) income per common share from the sum of each of the quarters in Fiscal 1997 is due to rounding. F-21 55 Exhibit Index ------------- Item No. Description 3.1 Restated Certificate of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-29465 (the "Registration Statement")). 3.2 By-laws of the Company (Incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 File No. 33-40372). 4.1 Preferred Stock Purchase Agreement dated April 5, 1996. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 1, 1997.) 4.2 Indenture, dated as of September 27, 1991, between the Company and Chemical Bank, as Trustee. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended January 25, 1992.) 10.1 1989 Stock Option Plan and Form of Agreement pursuant to 1989 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.3 to the Registration Statement). (1.) 10.2 Credit Agreement dated March 26, 1998. (Incorporated herein by reference to Exhibit 10.2 to this Company's Annual Report on Form 10-K for the year ended January 31, 1998). 10.2.1 First Amendment and Waiver to Credit Agreement dated March 23, 1999.* 10.3 Form of Deferred Compensation Agreement (Incorporated herein by reference to Exhibit 10.5 to the Registration Statement). (1.) 10.4 Amendment No. 1 to Deferred Compensation Agreement, dated June 16, 1989. (Incorporated herein by reference to Exhibit 10.5.2 to Amendment No. 1 to the Registration Statement). (1.) 10.5 Amendment No. 2 to Deferred Compensation Agreement, dated August 15, 1989. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended January 26, 1991). (1.) 56 Exhibit Index ------------- Item No. Description 10.6 Amendment No. 3 to Deferred Compensation Agreement, dated June 15, 1995. (Incorporated herein by reference to the Company's Form 10-Q for the period ended July 29, 1995). (1.) 10.7 Amendment No. 4 to Deferred Compensation Agreement between the Company and Donald Jonas dated April 8, 1996. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 3, 1996). (1.) 10.8 Form of Consulting Agreement (Incorporated herein by reference to Exhibit 10.9.1 to the Registration Statement). (1.) 10.9 Forms of Amendment of Consulting Agreement (Incorporated herein by reference to Exhibit 10.9.2 to Amendment No. 1 to the Registration Statement). (1.) 10.10 Agreement between the Company and Local 99, UNITE to a collective bargaining agreement covering warehouse employees dated March 16, 1996. (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended February 1, 1997). 10.11 Lease for Distribution Center space (Incorporated herein by reference to Exhibit 1 to the Company's Current Report on Form 8-K, dated January 2, 1992). 10.11.1 Lease Modification Agreement dated June 19, 1995 involving the Distribution Center and Office space in Harrison, NJ. * 10.11.2 Lease Modification Agreement dated July 22, 1998 involving the Distribution Center and Office space in Harrison, NJ. * 10.12 Lease for Distribution Center space. (Incorporated herein by reference to Exhibit 1 to the Company's Form 10-Q, for the period ended July 25, 1992). 10.13 Agreement dated March 27, 1998 between the Company and Local 99, UNITE, covering office employees for a term from July 1, 1997 to June 30, 2000. (Incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended January 31, 1998). 10.14 Memoranda of Agreement dated March 27, 1998 between the Company and Local 99, UNITE, amending, respectively, Agreement dated March 16, 1996 covering warehouse employees and Agreement dated March 27, 1998 covering office employees. (Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended January 31, 1998). 10.15 Lechters Long-Term Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the period ended August 1, 1998). (1.) 57 Exhibit Index ------------- Item No. Description 21 Subsidiaries of the Company. * 23 Consent of Deloitte & Touche LLP.* 27 Financial Data Schedule * *Filed herewith. (1.) Management Compensatory Plan. EX-10.2.1 2 FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT 1 Exhibit 10.2.1 FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT This is the first amendment and waiver (the "Amendment") dated as of March 23, 1999, to the Credit Agreement dated as of March 26, 1998 (the "Credit Agreement") between Lechters, Inc., a New Jersey corporation (the "Borrower"), The Chase Manhattan Bank as Agent, and the Banks listed on the signature pages thereof (individually, each a "Bank", and collectively, the "Banks"). RECITALS A. On March 26, 1998, the Banks loaned $20,000,000.00 in the form of a revolving credit facility and $20,000,000.00 in the form of a letter of credit facility to the Borrower under the terms of the Credit Agreement. B. To evidence its obligations under the Credit Agreement with respect to the Loans the Borrower issued promissory notes dated March 26, 1998. C. As a condition to the effectiveness of the Credit Agreement the Corporate Guarantors executed and delivered to the Banks their Guaranties of the obligations of the Borrower to the Banks. D. The Borrower and the Corporate Guarantors have (i) asked the Banks to waive certain defaults that have arisen under the Credit Agreement and (ii) requested certain amendments to the Credit Agreement. E. The Banks are willing to waive such defaults and make such amendments subject to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the agreement of the parties contained herein, and intending to be legally bound, the parties hereto agree as follows: 1. Recitals and Definitions. Borrower and the Banks acknowledge and agree that the foregoing recitals are true and correct as of the date of this Amendment. Capitalized terms used herein and not defined shall have the meanings assigned to them in the Credit Agreement. 2. Amendments to Article 1 of the Credit Agreement. The chart of applicable margins and fees in Section 1.16(a) is deleted and replaced with the following:
Consolidated Leverage Applicable LIBO Applicable Prime Letter of Ratio Rate Margin Rate Margin Commitment Fee Credit Fees - - --------------------- --------------- ---------------- -------------- ----------- Greater than 3.50x 2.50% 1.25% .625% 2.50%
2
Consolidated Leverage Applicable LIBO Applicable Prime Letter of Ratio Rate Margin Rate Margin Commitment Fee Credit Fees - - --------------------- --------------- ---------------- -------------- ----------- Greater than 3.00x but 2.00% .75% .5% 2.00% less than or equal to 3.50x Greater than 2.10x but 1.50% .25% .375% 1.50% less than or equal to 3.00x Less than or equal to 1.25% 0.0% .3% 1.25% 2.10x
3. Amendments to Article 5 of the Credit Agreement. a. Section 5.04 is replaced with the following: (i) Declare or pay any dividends, either in cash or property, on any shares of its capital stock of any class (except dividends or other distributions payable solely in shares of common stock of the Borrower); or (ii) directly or indirectly, purchase, redeem or retire any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock; or (iii) make any other payment or distribution, either directly or indirectly, in respect of capital stock of the Borrower; or (iv) make, directly or indirectly, any Restricted Investment; it being specifically understood that the Borrower and any Subsidiary will enter into a joint venture only with the prior written consent of all the Banks; except the Borrower may (x) declare and pay preferred dividends not to exceed 6% per annum in respect of the Perpetual Convertible Preferred Stock, and (y) during such time as no Default or Event of Default has occurred and is continuing and provided that no Default or Event of Default shall be caused thereby, purchase, redeem or retire up to 3,000,000 shares in the aggregate of the Borrower's common stock subsequent to the Closing Date, provided that the aggregate price for all such shares purchased, redeemed or retired shall not exceed $5,000,000. b. Section 5.11 is replaced with the following: (i) Prepay, redeem, purchase, defease, retire or otherwise satisfy in any manner prior to the scheduled maturity thereof any of its Indebtedness, other than the Indebtedness under this Agreement or (ii) amend, modify or change in any manner any term or condition of its Indebtedness other than to prepay any Indebtedness payable by any Subsidiary to the Borrower; provided, however, that the Borrower and any Subsidiary may after the Closing Date, after providing at least five Business Days prior written notice to the Banks, make payments of Subordinated Indebtedness in an aggregate amount not to exceed (w) $10,000,000, minus (x) the sum of any repayments of Subordinated Indebtedness made, and Cash Charges taken, in each case between -2- 3 February 1, 1997 and the Closing Date, minus (y) any Cash Charges taken after the Closing Date, and minus (z) any amounts paid toward the purchase, redemption or retiring of any shares of common stock as described in clause (y) of Section 5.04; provided, further, that at the time of such payment, no Default or Event of Default has occurred and is then continuing and provided that no Default or Event of Default shall be caused thereby. 4. Amendments to Article 6 of the Credit Agreement. a. Section 6.03 is deleted and replaced with the following: Permit the ratio of (i) Consolidated Funded Debt to (ii) Consolidated EBITDA as determined as of the last day of each fiscal quarter for the period of the four consecutive preceding fiscal quarters ending on such day to be greater than or equal to (x) 5.00 to 1 through the end of the second quarter of fiscal year 1999, (y) 4.75 to 1 through the end of the third quarter of fiscal year 1999, and (z) 3.00 to 1 thereafter. b. Section 6.05 is deleted and replaced with the following: Have an Annual Adjusted Consolidated Net Income which is less than (i) negative $4,000,000 for the fiscal year ending January 30, 1999, and (ii) zero for any fiscal year thereafter. c. A new Section 6.06 is added to the Credit Agreement as follows: 6.06 Minimum Tangible Net Worth. Have at any time a Tangible Net Worth of less than $145,000,000. 5. Amendments to Article 12 of the Credit Agreement. a. A new defined term "Tangible Net Worth" is added as follows: "Tangible Net Worth" means the amount by which the total assets of any Person exceeds its liabilities, excluding, however, from the determination of total assets, all assets which would be classified as intangible assets under generally accepted accounting principles, consistently applied, such as goodwill, licenses, patents, trademarks, tradenames, copyrights, and franchises, and further excluding from the determination of total assets any obligations due from Subsidiaries, Affiliates, directors, officers, shareholders, partners and employees of the Person. b. The term "Consolidated EBITDA" is hereby replaced with the following: "Consolidated EBITDA" means, for any period, Consolidated Net Income for such period before taking into account interest expense, income taxes, depreciation, amortization and Noncash Charges. c. The term "Consolidated EBITDAR" is hereby replaced with the following: -3- 4 "Consolidated EBITDAR" means, for any period, Consolidated Net Income for such period before taking into account interest expense, rent, income taxes, depreciation, amortization and Noncash Charges. d. The term "Consolidated Fixed Charges" is hereby replaced with the following: "Consolidated Fixed Charges" means, for any period, the sum of (a) the aggregate amount of principal payments of Indebtedness scheduled to have been made by the Borrower and the Consolidated Subsidiaries during such period, determined on a consolidated basis, and (b) to the extent they are taken into account in determining Consolidated Net Income, interest expense, rent and income taxes. e. The term "LC Line Termination Date" is hereby replaced with the following: "LC Line Termination Date" means March 24, 2000 or any extension of that date as agreed to by all the Banks at their sole discretion. 6. Waiver. Provided that the Borrower is in compliance with Sections 6.03, 6.05 and 6.06 as amended herein on the effective date of this Amendment, the Banks hereby waive any Default or Event of Default arising out of a breach of Sections 6.03 or 6.05 prior to such sections being amended herein. 7. General. This Amendment is made pursuant to Section 11.06 of the Credit Agreement, and the parties hereto acknowledge that all provisions of the Credit Agreement, except as amended hereby, shall remain in full force and effect. 8. Definitions. Whenever appearing in the Loan Agreement or any other Loan Document, the term "Credit Agreement" shall be deemed to mean the Credit Agreement as amended hereby. 9. Representations and Warranties. The Borrower hereby represents and warrants to the Banks that, on and as of the date of this Amendment: (a) each of the representations and warranties contained in the Credit Agreement are accurate, (b) such representations and warranties would continue to be accurate if, in each representation or warranty where the term "Loan Documents" appears, the term "Amendment" was to be substituted therefor, (c) no Event of Default has occurred and is continuing or will result from the execution by the Borrower of this Amendment, and (d) that the Loan Documents as amended herein are enforceable in accordance with their terms without any offsets, counterclaims or defenses. -4- 5 10. Amendment Fee. The Borrower shall pay to the Agent for the benefit of the Banks an amendment fee of $200,000 (the "Amendment Fee") in connection with this Amendment which fee shall be due and payable upon the signing of this Amendment. 11. Letter of Credit Renewal Fee. The Borrower shall pay to the Agent for the benefit of the Banks a letter of credit renewal fee of $50,000 (the "LC Renewal Fee") in connection with this Amendment which fee shall be due and payable upon the signing of this Amendment. 12. Arrangement Fee. The Borrower shall pay an arrangement fee to the Agent for the Agent's own account, as required by the letter agreement of even date between the Borrower and the Agent, as may be amended from time to time. 13. Fees of Bank's Counsel. The Borrower shall pay the fees and expenses of McCarter & English in connection with the preparation and negotiation of this Amendment and all related documents. 14. Conditions to Effectiveness. It shall be a condition to the effectiveness of this Amendment that the Bank have received the following: a. This Amendment, duly executed on behalf of the Borrower and the Banks; b. Payment of the Amendment Fee; c. Payment of the LC Renewal Fee; d. Payment of the Arrangement Fee; and e. A certificate from the Secretary of the Borrower (i) stating that there have been no amendments to the Certificate of Incorporation or By-laws of such Borrower since the date of the Credit Agreement, (ii) to which is attached a resolution of the Board of Directors authorizing the execution, delivery and performance of this Amendment, and (iii) setting forth the name and sample signature of the officers of the Borrower authorized to execute and deliver this Amendment. 15. Integration. This Amendment together with the Credit Agreement constitute the entire agreement and understanding among the parties relating to the subject matter hereof and thereof and supersedes all prior proposals, negotiations, agreements and understandings relating to such subject matter. -5- 6 16. Severability. If any provision of this Amendment shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or enforceability without in any manner affecting the validity or enforceability of such provision in any other jurisdiction or the remaining provisions of this Amendment in any other jurisdiction. 17. No Defenses, Off-Sets or Counterclaims. By executing this Amendment, Borrower confirms and acknowledges that as of the date of execution hereof, Borrower has no defenses, off-sets or counterclaims against any of Borrower's obligations to the Banks under the Loan Documents, including the Credit Agreement (as amended hereby). Borrower hereby acknowledges and agrees that the actual amounts outstanding on the date of execution hereof are owing the Banks without defense, offset or counterclaim. 18. Incorporation by Reference. This Amendment is incorporated by reference into the Credit Agreement and the other Loan Documents. Except as otherwise provided herein, all of the other provisions of the Credit Agreement and the other Loan Documents are hereby confirmed and ratified and shall remain in full force and effect as of the date of this Amendment. 19. Governing Law. This Amendment is governed by the laws of the State of New Jersey and is binding upon the Borrowers and the Bank and their respective successors and/or assigns and/or hers and executors, as the case may be. 20. Counterparts. This Amendment may be executed by one or more of the parties in any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, on the date first above written. LECHTERS, INC. By: /s/ James J. Sheppard ____________________________________ Name: James J. Sheppard Title: Sr. Vice President - Chief Financial Officer -6- 7 THE CHASE MANHATTAN BANK, as Agent, Issuing Bank and as a Bank By: /s/ Andrea Johnson ____________________________________ Andrea Johnson Vice President FLEET BANK, NATIONAL ASSOCIATION as Bank By: /s/ Craig W. Trautwein ____________________________________ Craig W. Trautwein Vice President FIRST UNION NATIONAL BANK as Bank By: /s/ John A. Ginter ____________________________________ John A. Ginter Vice President -7- EX-10.10.1 3 MEMORANDUM OF AGREEMENT DATED APRIL 26, 1999 1 Exhibit 10.10.1 Memorandum of Agreement Whereas, Lechters, Inc. ("Employer") and Local 99, UNITE ("Local 99") have been parties to a collective bargaining agreement effective March 16, 1996 to March 15, 1999; and Whereas, the Employer and the Union have engaged in collective bargaining to renew the agreement effective March 16, 1999; and Whereas the parties have reached an agreement concerning terms and conditions to be applicable in the renewal agreement. Now, Therefore it is agreed: 1. Except as modified herein, the collective bargaining agreement is renewed for a new three year term effective March 16, 1999 through March 15, 2002 and all terms and conditions shall continue in full force and effect. 2. Wage increases shall be given as follows: Effective March 16, 1999 $15.50 per week Effective March 16, 2000 $15.50 per week Effective March 16, 2001 $14.00 per week 3. Paragraph 5 addition The 60 day trial period may be extended for an additional 30 calendar days upon consent of the Union, which consent shall not be unreasonably withheld. 4. Substitute for 2nd paragraph in 17(a) Vacation requests shall be submitted during the month of January for the scheduling of vacation periods during the year. If more employees than the Employer is able to permit to take a vacation, then employees shall be granted their vacation preference based on seniority. After January 31 (that is February 1) vacation preference shall be granted on a first come first served basis. 2 5. Add new paragraph to 2. Non-bargaining unit employees may not do bargaining unit work. Notwithstanding the foregoing, this provision shall not be deemed violated when a supervisory employee performs bargaining unit work in the case of a business emergency. 6. Add to the beginning of first sentence to 10(a) "Subject to the paragraph 14 hereof...." 7. Change and add to 43: ..."provided that the Union gives Employer reasonable prior notice of any such meeting." 8. Add to 8 An employee rehired within 6 months of the date his or her employment was terminated, where such termination is voluntary, shall be entitled to full credit for the time of previous service with the Employer with respect to seniority, and full credit after the expiration of 1 year of additional service for the time of previous service with the Employer with respect to vacation eligibility. An employee rehired after the expiration of 6 months after the date his or her employment was terminated, where such termination is voluntary, shall not receive any credit for past service with the Employer. 9. Jury Duty Any employee with 1 year or more of employment who is called for service on a jury shall be excused from work for the days on which he serves and he shall receive for each day of such jury duty, on which he otherwise would have worked, the difference between his straight hours and the payment he received for jury service to a maximum of 15 working days. Employees shall be eligible for such jury duty pay no more than 1 time during the life of this Agreement. The Employer shall be notified of the calls for such duty at least 2 weeks in advance or as reasonably soon as possible after the employee receives notice. The employee shall report to work during the period of such jury duty on whatever days or part of days (so long as it is a period of at least than 4 hours) he or she is not compelled to be in attendance for such duty. The employee shall present written proof of service and the amount of pay received therefore to the employer. 10. Leaves: a. To be eligible for bereavement leave with pay, an employee must have satisfactorily completed 6 months of service. 3 b. Two days leave of absence with pay shall be granted to a covered male worker in connection with the birth of his child. Proof of such occurrence may be required. c. The employment rights of veterans, reservists and members of the National Guard guaranteed by law are incorporated into this Agreement. d. Employees of the Employer who may be called upon to perform business for the Union, which requires absence from duty with the Employer, shall upon written notice to the Employer, be allowed to absent themselves for a reasonable period of time. 11. To be entitled to full vacation employee must work 660 hours in the prior year. If an employee works less than 660 hours but more than 310 hours, he shall receive vacation prorated to the number of hours actually worked. If an employee works less than 310 hours they are not entitled to vacation for that year. 12. Retirement Fund: The Union and the Employer reserves the right during the first year of this agreement to reopen with respect to adjusting contribution rates to various benefit funds to provide employees covered by this agreement to Local 99 Dental Plan along with an enhanced Retirement Program through the National Retirement Fund and maintenance of the Local 99 Health & Welfare Fund. If the parties do not agree there will be no strike and the matter will be referred for arbitration hereunder. 13. Shift Changes shall be by volunteers and new hires. Employees may bid by seniority for the new shift hours as posted by the employer. Those employees assigned to the new shift shall receive a premium of $.50/hour for hours worked on the different shifts. Provisions of the contract with respect to hours of work shall remain; however all employees who are on the different shift will receive the premium set forth herein. 14. Cross training as per attached. 15. No discrimination language shall be as attached. 4 16. Vacation (section 17) shall be amended to provide for no carryover of current vacation. However, all vacation earned in 1999 must be used by 4/30/2000; all pre-1999 vacation may be used without deadline; peak period is October, November, December; maximum entitlement increased during peak period to 3 in distribution and 4 in mezzanine. No limitation on January as a vacation period. 17. Voluntary layoff - limited to 45 days without use of any vacation. If longer, then vacation time is used. 18. FMLA a. No use of vacation for FMLA leave based upon personal illness or disability. b. All other FMLA must use vacation entitlement (current vacation only) c. Non-FMLA personal leave - must use vacation first; thirty (30) days maximum leave. d. Disability leave shall run concurrently with any FMLA entitlement; twenty-six (26) week maximum leave. 19. Overtime - limited to 2 hours if 80% in the department actually works; otherwise 2-1/2 hours maximum for those who work. 20. Safety Shoe Reimbursement - Company will pay 50% to a maximum of $75, twice during the contract. 21. 401K Savings Plan - will be made available to employees under the conditions agreed during negotiations. Dated: April 26, 1999 Local 99, UNITE ("Union") By: __________________ Lechters, Inc. ("Employer") By: __________________ 5 SIDELETTER REOPENING - RETIREMENT FUND AGREEMENT LECHTERS WAREHOUSE CONTRACT Upon reopening of the Lechters Warehouse contract, the parties agree that the following adjustments will be implemented: 1. Effective 09/01/99 the contribution rate to the National Retirement Fund will be reduced to 6%, which as of 01/01/2000 will be changed to 2.2% as continued contributions under the old plan and $.35/hour for all compensated hours (capped at 38.75 hours/week). 2. Effective 1/1/00 and thereafter, the contribution rate to the Local 99 Health and Welfare Fund shall be increased by 1%; and as of 1/1/2001 and thereafter, an additional 1/2% will be contributed to the Local 99 Health and Welfare Fund. Dated: April 26, 1999 Local 99, UNITE --------------------------------- Lechters, Inc. --------------------------------- 6 NO DISCRIMINATION ----------------- 39. There shall be no discrimination in hiring, promotions, discipline, discharge or in any term and condition of employment because of race, creed, color, national origin, sex, age, handicap, disability or religion. Further, the Company agrees that it will not violate the following statutes in hiring, promotions, discipline, discharge or in any term or condition of employment: The Americans with Disabilities Act, 42 U.S.C. Section 12101, et seq. ("ADA"); the Consolidated Omnibus Budget Reconciliation Act, 29 U.S.C. Section 1161, et seq.; the Employee Retirement Income Security Act of 1974, as amended 29 U.S.C. Section 1001, et seq. ("ERISA"); the Conscientious Employee Protection Act, N.J.S.A. 34:19-1, et seq.; the New Jersey Workers Compensation Act, N.J.S.A. 34:15-1, et seq; the Age Discrimination in Employment Act, 29 U.S.C. Section 621, et seq. ("ADEA"); the Reconstruction Era Civil Rights Act, as amended, 42 U.S.C. Section 1981 et seq. ("Civil Rights Act"); the Civil Rights Act of 1991, as amended, 42 U.S.C. Section 1981a et seq. ("CRA of 1991"); the Family and Medical Leave Act, 29 U.S.C. Section 2601 et seq. ("FMLA"); the Fair Labor Standards Act, 29 U.S.C. Section 201 et seq. ("FLSA"); Title VII of the Civil Rights Act of 1964, as amended 42 U.S.C. Section 2000e, et seq. ("Title VII"); the New Jersey Law Against Discrimination, N.J.S.A. 10:5-1, et seq., and/or any other federal, state or local statutes, laws, rules and 7 regulations pertaining to employment, as well as any and all claims under state or federal contract or tort law including breach of contract and breach of a covenant of good faith and fair dealing. The Union on behalf of the Union and all members of the bargaining unit agrees that the exclusive remedy for violations of the agreements set forth above and for violations of the statutes listed above shall be either (1) the submission of a grievance to the grievance procedure herein, and if not satisfactorily resolved, the submission of the grievance to the arbitration provisions and procedures set forth in this agreement; or (2) proceeding to file a charge and/or complaint before the appropriate state or federal agency or court. The Union on behalf of the Union and on behalf of all members of the bargaining unit further agrees that once the employee and/or the Union elects either (1) or (2) above as the exclusive remedy for alleged violations of the agreements set forth above and for violations of the statutes listed above, the Union and/or the employee waives its rights to proceed under the other remedy ------ set forth in (1) and (2) above. 8 LECHTERS, INC. CROSS TRAINING PROPOSAL PROGRAM DEFINITION: - - ------------------ Train 6 warehouse employees ("floaters"), from non-technical positions in more technical aspects of the warehouse operation, specifically, replenishment, breakcase picking and receiving putaway. These employees will be used at the discretion of the Company, to fill in for peak periods, vacations and absent employees, in the above departments. Employees will be replaced in their primary areas, by temporary help, or by other warehouse employees, based on seniority requirements. ELIGIBLE EMPLOYEES: - - ------------------ Any employees in "non-technical" positions, i.e., receiving, shipping and fullcase, who are not qualified to operate material handling equipment or RF devices, will be eligible to bid for floater positions. SELECTION CRITERIA: - - ------------------ Management reserves the right to choose employees based on the bid process, and use as selection criteria attendance and past performance. However, a senior employee, who is equally qualified, will be given selection preference. In the event that an employee is permanently promoted, another floater will be chosen through the bid process. TRAINING: - - -------- A program will consist of training in the operation of RF equipment, replenishment, breakcase picking and putaway. Floaters will be required to be Hi-lift and Fork truck certified. COMPENSATION: - - ------------ Upon satisfactory completion of the training program, the employee's base pay will be increased by a rate of $.25 per hour. In the event that an employee is further promoted to a permanent position, the $.25 will be included as part of the total increase. For example, the floater will be hired in at the same starting rate as other employees in the same position. 9 Distribution Center - Proposed Shift Times Note: Staffing % to be met; voluntary then by seniority
Dates: Feb. 1 thru June 30 Dates: July 1 thru Jan 31 -------------------------- ------------------------- Shift Schedule Department Staffing % Shift Schedule Department Staffing % - - -------------- ---------- ---------- -------------- ---------- ---------- 6:00 a.m. - 2:15 p.m. Replenishment 50% 6:00 a.m. - 2:15 p.m. Replenishment 50% 7:00 a.m. - 3:15 p.m. Replenishment 50% 6:00 a.m. - 2:15 p.m. Shipping 25% 7:00 a.m. - 3:15 p.m. Mezzanine 100% 6:00 a.m. - 2:15 p.m. Full Case 25% 7:00 a.m. - 3:15 p.m. HiLifts 50% 7:00 a.m. - 3:15 p.m. Mezzanine 100% 7:00 a.m. - 3:15 p.m. Full Case 50% 7:00 a.m. - 3:15 p.m. Shipping 50% 7:00 a.m. - 3:15 p.m. Receiving 50% 7:00 a.m. - 3:15 p.m. Replenishment 50% 7:00 a.m. - 3:15 p.m. Shipping 50% 7:00 a.m. - 3:15 p.m. Full Case 50% 7:00 a.m. - 3:15 p.m. Maintenance/Janitors 100% 7:00 a.m. - 3:15 p.m. Receiving 50% 8:00 a.m. - 4:15 p.m. HiLifts 50% 7:00 a.m. - 3:15 p.m. HiLifts 50% 8:00 a.m. - 4:15 p.m. Full Case 50% 7:00 a.m. - 3:15 p.m. Maintenance/Janitors 100% 8:00 a.m. - 4:15 p.m. Receiving 50% 8:00 a.m. - 4:15 p.m. Full Case 25% 8:00 a.m. - 4:15 p.m. Shipping 50% 8:00 a.m. - 4:15 p.m. Receiving 50% 8:00 a.m. - 4:15 p.m. HiLifts 50% 9:00 a.m. - 5:15 p.m. Shipping 25%
EX-10.11.1 4 LEASE MODIFICATION AGREEMENT 1 LEASE MODIFICATION AGREEMENT THIS AGREEMENT, made as of the 19th day of June 1995 by and between LESTER M. ENTIN ASSOCIATES, a New Jersey partnership having offices at 1033 Clifton Avenue, P.O. Box 2189, Clifton, New Jersey 07015 ("Landlord"), and LECHTERS, INC., a New Jersey corporation having offices at One Cape May Street, Harrison, New Jersey 07029 ("Tenant"). W I T N E S S E T H: R E C I T A L S A. On December 23, 1991, Landlord and Tenant entered into an Agreement of Lease (the "Lease") wherein Landlord leased to Tenant, and Tenant leased from Landlord, approximately 490,116 square feet of space (the "Premises") in the building (the "Building") located at One Cape May Street in the Township of Harrison, Hudson County, New Jersey. B. Tenant wishes to lease from Landlord, and Landlord wishes to lease to Tenant, approximately 43,040 square feet of the Building shown on Schedule "A" hereto (the "Additional Space") presently leased by Tri-Chem, Inc. ("Tri-Chem"), effective as of July 1, 1995 (the "Effective Date"). NOW, THEREFORE, for and in consideration of the terms and conditions contained hereinbelow, and intending to be legally bound thereby, Landlord and Tenant hereby agree as follows: 1. The Recitals set forth above are hereby incorporated by reference as if fully set forth in the main body of this Agreement. 2. As of the Effective Date, the Lease shall be deemed amended as follows: (a) The Premises shall consist of approximately 533,156 square feet of space in the Building as shown on Schedule "A" hereto, inclusive of the Additional Space. (b) Tenant shall continue to pay Basic Rent for the 490,116 square feet constituting the Premises prior to the Effective Date on the terms and conditions of Section 2 of the Lease. Tenant shall pay Basic Rent for the Additional Space in accordance with the following schedule:
Period Monthly Basic Rent ------ ------------------ 07/1/95-07/31/95 $16,140.00 08/1/95-08/31/95 -0- 09/1/95-11/30/95 $16,140.00 12/1/95-01/31/96 $16,624.20 02/1/96-01/31/98 $17,457.53 02/1/98-05/31/98 $16,624.20 06/1/98-11/30/00 $17,621.65 12/1/00-05/31/03 $18,678.95 06/1/03-11/30/05 $19,799.69 12/1/05-01/31/07 $20,987.67 First Renewal Term 02/1/07-05/31/08 $20,987.67 06/1/08-11/30/10 $22,246.93 12/1/10-01/31/12 $23,581.74 Second Renewal Term 02/1/12-05/31/13 $23,581.74 06/1/13-11/30/15 $24,996.65 12/1/15-01/31/17 $26,496.45 Third Renewal Term 02/1/17-05/31/18 $26,496.45 06/1/18-11/30/20 $28,086.23 12/1/20-01/31/22 $29,771.41
2 Notwithstanding the foregoing, the Basic Rent for the Additional Space for July 1995 will only be due and payable as long as Landlord completes the work described on Schedule "B" hereto by July 15, 1995, failing which Tenant's obligation to pay Basic Rent for the Additional Space for July 1995 shall be deemed waived. (c) Tenant's Proportionate Share as set forth in Section 3 of the Lease shall be increased from 78.26% to 85.13%. (d) Tenant's monthly estimated payments on account of its Proportionate Share of annual Operating Costs as set forth in Section 4 of the Lease shall be increased from $76,625.54 to $82,254.46. (e) Tenant's percentage of heating costs as set forth in Section 14(a) of the Lease shall be increased from 37.46% to 56.93%, which latter percentage is determined from the ratio of the square footage of the Premises which will be heated (125,831) to the square footage of the Building which is heated (221,018). (f) Section 55 of the Lease shall be amended to provide that during the option period(s), Basic Rent for the 490,116 square feet constituting the Premises prior to the Effective Date shall be payable in accordance with the terms and conditions of Section 2 of the Lease, and Basic Rent for the Additional Space shall be payable in accordance with the terms and conditions of Paragraph 2(b) of this Agreement. 3. Landlord and Tenant acknowledge and agree that the terms and conditions of Section 57 of the Lease, respecting Tenant's right to lease adjacent space presently leased by Tri-Chem as it becomes vacant, does not apply to the Additional Space, inasmuch as Landlord and Tenant have agreed to lease the Additional Space on the terms and conditions contained in this Agreement. 4. Promptly upon the vacating of the Additional Space by Tri-Chem, Landlord shall commence the work described on Schedule "B" hereto, at its sole cost and expense, and shall thereafter proceed to complete same in a reasonably diligent manner, with work to continue uninterrupted (subject to force majeure) during normal business hours. Under no circumstances shall the completion of such work be deemed a condition to any of Tenant's obligations and responsibilities under the Lease, as modified herein, to include but not be limited to the obligation to pay Rent for the Additional Space, except as specifically provided to the contrary in the last sentence of Section 2(b) of this Agreement. 5. Except as specifically modified herein, the Lease is hereby confirmed and ratified in its entirety. 6. Capitalized terms not defined herein shall have the same meaning as provided for in the Lease. 3 7. This is a negotiated Agreement, and shall not be construed against Landlord by virtue of its having been prepared by Landlord's attorneys. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease Modification Agreement as of the day and year first above written. WITNESS: LESTER M. ENTIN ASSOCIATES, Landlord /s/ Suzanne Marysuka By: /s/ Joseph W. Waters - - ----------------------------- ------------------------------------- Joseph Waters, Partners ATTEST: LECHTERS, INC., Tenant /s/ Ira S. Rosenberg By: /s/ L. David Davis - - ----------------------------- -------------------------------------- Ira S. Rosenberg, Secretary L. David Davis Vice President-Administration 4 RENOVATION OF NEW LECHTER'S WAREHOUSE (1) CARPENTRY: Build a deck high sheetrock alcove for fork-lift access with 4 ft. plywood base for security (metal/studs, track, sheetrock, tape, spackle, screws, shots, and stabilizers) Make a 3' x 6'8" opening from cafeteria to "low bay" receiving area with masonry ramp. Make two (2) 12' x 12' openings in sheetrock to existing Lechter's space. (2) MASONRY: Seal all masonry openings as shown on plan by William J. Martin including sealing of all pipe penetrations through masonry fire wall, openings to be closed: man doors (5) 10 x 10 openings (7) (3) ELECTRIC: Install new 400 watts metal halide fixtures as per existing warehouse layout. Remove existing 8' fluorescent fixtures. Wire four (4) new exhaust fans and one (1) new air supply unit. Power to existing light circuits to be re-wired and placed on Lechter's meter (sub-metered). New switches for warehouse to be installed at employee entrance (near boiler room). (4) ARCHITECTURALS: All plans, specifications and code review for construction permits and approvals for issuance of a Certificate of Occupancy (see enclosed contract). (5) ACM REMOVAL SCHEDULE "B" EX-10.11.2 5 LEASE MODIFICATION AGREEMENT 1 LEASE MODIFICATION AGREEMENT THIS AGREEMENT, made as of this 22nd day of July 1998 by and between LESTER M. ENTIN ASSOCIATES, a New Jersey partnership having offices at 1033 Clifton Avenue, P.O. Box 2189, Clifton, New Jersey 07015 ("Landlord"), and LECHTERS, INC., a New Jersey corporation having offices at One Cape May Street, Harrison, New Jersey 07029 ("Tenant"). W I T N E S S E T H: R E C I T A L S A. On December 23, 1991, Landlord and Tenant entered into an Agreement of Lease (the "Lease") wherein Landlord leased to Tenant, and Tenant leased from Landlord, approximately 490,116 square feet of space (the "Premises") in the building (the "Building") located at One Cape May Street in the Township of Harrison, Hudson County, New Jersey. B. Pursuant to a Lease Modification Agreement dated June 19, 1995 (the "First Modification"), Tenant leased from Landlord, and Landlord leased to Tenant, approximately 43,040 square feet of the Building so that the Premises now consists of approximately 533,156 square feet of space. C. Tenant wishes to lease from Landlord, and Landlord wishes to lease to Tenant, approximately 6,800 square feet of office space in the Building as shown on Schedule "A" attached hereto (the "Additional Office Space") effective as of September 1, 1998 (the "Effective Date"). NOW, THEREFORE, for and in consideration of the terms and conditions contained hereinbelow, and intending to be legally bound thereby, Landlord and Tenant hereby agree as follows: 1. The Recitals set forth above are hereby incorporated by reference as if fully set forth in the main body of this Agreement. 2. As of the Effective Date, the Lease shall be deemed amended as follows: (a) The Premises shall consist of approximately 539,956 square feet of space in the Building as shown on Schedule "A" hereto, inclusive of the Additional Office Space, in its "AS IS" condition except for the demising wall to be constructed by Landlord as shown on Schedule "A". (Continued in Rider). (b) Tenant shall continue to pay Basic Rent for the 490,116 square feet constituting the Premises prior to the First Modification on the terms and conditions of Section 2 of the Lease, and for the 43,040 square feet demised pursuant to the First Modification on the terms and conditions of Paragraph 2(b) of the First Modification. As of the Effective Date, and through January 31, 2001, Tenant shall pay Basic Rent for the Additional Office Space at an annual rate of Thirty-Four Thousand ($34,000.00) Dollars, to be payable in equal monthly installments of Two Thousand Eight Hundred Thirty-three and 33/100 ($2,833.33) Dollars each, due on the first (1st) day of each month. The Annual Basic Rent for the Additional Office Space for the period from February 1, 2001 through July 31, 2003, shall be Thirty-Four Thousand ($34,000.00) Dollars, increased by the percentage increase in the Index (as defined in Section 2(c) of the Lease) from August 1998 to January 2001, but in no event less than Thirty-Four Thousand ($34,000.00) Dollars, payable in equal monthly installments on the first (1st) day of each month. The Annual 2 Basic Rent for the Additional Office Space for each thirty (30) month period thereafter during the Term, to include any renewal options, shall be the Annual Basic Rent payable for the preceding thirty (30) month period, increased by the percentage increase in the Index from the month before the commencement of the preceding thirty (30) month period to the month before the commencement of the thirty (30) month period in question, but in no event less than the Annual Basic Rent payable during the preceding thirty (30) month period, payable in equal monthly installments on the first (1st) day of each month. (c) Tenant's Proportionate Share as set forth in Section 3 of the Lease shall be increased from 85.13% to 86.2%. (d) Tenant's monthly estimated payments on account of its Proportionate Share of annual Operating Costs as set forth in Section 4 of the Lease shall be increased from $82,254.46 to $83,303.55. 3. Landlord and Tenant acknowledge and agree that the terms and conditions of Section 57 of the Lease, respecting Tenant's right to lease adjacent space presently leased by Tri-Chem, Inc. as it become vacant, does not apply to the Additional Office Space, inasmuch as Landlord and Tenant have agreed to lease the Additional Office Space on the terms and conditions contained in this Agreement. 4. Approximately 45,000 square feet of the Premises shown on Schedule "B" attached hereto is heated by a boiler which shall be replaced. Following execution hereof, Landlord will diligently and expeditiously commence to replace the boiler with a new heating system in accordance with the plans and specifications attached hereto as Schedule "C", and will complete the installation thereof by September 30, 1998. Upon removal of the boiler and completion of the installation of said new system, (a) Tenant will reimburse Landlord for Forty-two Thousand ($42,000.00) Dollars of the cost thereof as Additional Rent upon presentation by Landlord to Tenant of written proof of the cost of the removal of the boiler and installation of the new system; and (b) those portions of Section 14(a) of the Lease, as amended by Section 2(d) of the First Amendment, relating to Tenant's payment of a percentage of the heating costs of the Building, shall be deleted in their entirety, inasmuch as all heat to the Premises shall thenceforth be separately metered to Tenant (except to the extent provided in Paragraph 5 below). 5. If the heating, ventilating and air conditioning ("HVAC") system which services the Additional Office Space is not separately metered from portions of the Building not leased by Tenant, then Tenant shall pay to Landlord as Additional Rent a percentage of the HVAC consumption for said system as determined by Public Service Electric & Gas Company whose determination shall be final and binding upon the parties hereto. 6. Except as specifically modified herein, the Lease is hereby confirmed and ratified in its entirety. 7. Capitalized terms not defined herein shall have the same meaning as provided for in the Lease. 3 8. This is a negotiated Agreement, and shall not be construed against Landlord by virtue of its having been prepared by Landlord's attorneys. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease Modification Agreement as of the day and year first above written. WITNESS: LESTER M. ENTIN ASSOCIATES, Landlord /s/ Diana McCauley By: /s/ Joseph W. Waters, Partner - - ----------------------------- ------------------------------- Joseph Waters, Partner ATTEST: LECHTERS, INC., Tenant /s/ Ira S. Rosenberg By: /s/ Donald Jones - - ----------------------------- ------------------------------- Ira S. Rosenberg, Secretary President RIDER Paragraph 2(a) continued: In addition to the construction of the demising wall, Landlord shall separate the electrical service for the Premises from the greater area presently served, and install a new switch or switches where designated by Tenant. Landlord's work shall be completed and the Premises delivered to Tenant on or before 9/1/98. Tenant may occupy the Premises prior to the Effective Date to prepare the Premises for its occupancy. 4 LESTER M. ENTIN ASSOCIATES 1033 CLIFTON AVENUE P.O. BOX 2189 CLIFTON, NEW JERSEY 07015 July 22, 1998 Lechters, Inc. One Cape May Street Harrison, NJ 07029 Gentlemen: Notwithstanding anything contained in the contrary in the Lease Modification Agreement made of even date herewith between us (the "Modification") respecting approximately 6,800 square feet of office space in the building (the "Building") located at One Cape May Street, Harrison, New Jersey, this letter will confirm the following understandings between us (all capitalized terms not defined herein shall have the same meaning as set forth in the Modification): 1. As consideration for your right to use the common hallway between the Premises and that portion of the Building not leased by you, you hereby agree to pay, as of the Effective Date, the sum of Eight Hundred ($800.00) Dollars per year, payable in equal monthly installments of Sixty-six and 67/100 ($66.67) Dollars, each due on the first day of the month. Commencing on February 1, 2001, and on the first day of each thirtieth (30th) month thereafter, said sum shall be adjusted in the same manner as provided for the Basic Rent for the Additional Office Space in Paragraph 2(b) of the Modification. 2. In the event the undersigned is unable to separate the electrical service for the Premises as provided in the Rider to Paragraph 2(a) of the Modification, then the provisions of Paragraph 5 of the Modification shall supersede and prevail. 3. In the event the undersigned has not completed construction of the demising wall and additional construction as provided for in Paragraph 2(a) of the Modification by the Effective Date, you shall permit the undersigned to diligently and expeditiously pursue such work to completion, and the terms and provisions of the Modification shall not be affected as a result thereof. 4. In lieu of Landlord's HVAC obligation set forth in the third paragraph of 5 Schedule C, a new gas fired 10 ton roof mounted combination air conditioning and heating unit will be installed by Landlord utilizing the existing distribution ducts and plenurn return. If the foregoing accurately reflects our understanding, please sign where indicated below on the enclosed copy of this letter. Very truly yours, LESTER M. ENTIN ASSOCIATES By: /s/ Joseph Waters -------------------------- Joseph Waters, Partner Accepted and Agreed to this 6th day of Aug., 1998. LECHTERS, INC. By: /s/ Donald Jones -------------------------------------- President 6 SPECIFICATIONS FOR DECOMMISSIONING THE BOILER ROOM AT 1 CAPE MAY STREET, SERVING THE "TRI-CHEM" SPACE, AND APPROXIMATELY 45,000 SQUARE FEET OF THE LECHTERS WAREHOUSE SPACE, AND INSTALLING ALTERNATE HVAC SYSTEM. LESTER M. ENTIN ASSOCIATES will be decommissioning the steam boiler at 1 Cape May Street. Replacing the boiler as a source of heat in the Lechters warehouse space will be: A) 4 300,000 BTU Reznor Model FT Low Profile heating units. These units will be installed by MEYER & DEPEW CO., using Lechters existing natural gas and electric services. The vent stack penetrations to the roof will be conducted by M & M Roofing, who then seal all penetrations with roofing compound. B) Heat for the additional 6,800 square feet of office space to be occupied by Lechters, (formerly Tri-Chem office space) will be provided by a new 10 ton air handler and associated duct furnace. The heat will be provided by a new 300,000 BTU Reznor EEDU series Indoor Duct Furnace, installed by MEYER & DEPEW CO. MEYER & DEPEW CO. will also retrofit make any and all necessary repairs to the existing duct work. Air Conditioning for the 6,800 square feet of office space to be occupied by Lechters, (formerly Tri-Chem office space) will be provided by the existing roof mounted Chiller Tower. MEYER & DEPEW CO. will make any and all necessary repairs to the existing Chiller Tower. The proposed heating and cooling systems will be metered from the current LECHTERS gas and electrical meters. Due to the fact that this office space has a plenum return system, LESTER M. ENTIN ASSOCIATES will be removing the current ceiling tiles located the new office space and replacing the tile, and installing new "egg crate" air return panels. This will ensure that the plenum return system is still operational. Lechters has acknowledged that any communication wiring must be Teflon coated to maintain the integrity of the plenum system. EX-21 6 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY NAME OF SUBSIDIARY STATE OF INCORPORATION - - ------------------ ---------------------- Lechters Alabama, Inc. Alabama Lechters Arizona, Inc. Arizona Lechters Arkansas, Inc. Arkansas Lechters California, Inc. California Lechters Colorado, Inc. Colorado Lechters Connecticut, Inc. Connecticut Lechters Delaware, Inc. Delaware Lechters M Street, Inc. District of Columbia Lechters Florida, Inc. Florida Lechters Georgia, Inc. Georgia Lechters Idaho, Inc. Idaho Lechters Illinois, Inc. Illinois Lechters Indiana, Inc. Indiana Lechters Iowa, Inc. Iowa Lechters Kansas, Inc. Kansas Lechters Kentucky, Inc. Kentucky Lechters Louisiana, Inc. Louisiana Lechters Maine, Inc. Maine Lechters Baltimore, Inc. Baltimore Lechters Holyoke, Inc. Massachusetts 2 Page 2 SUBSIDIARIES OF THE COMPANY NAME OF SUBSIDIARY STATE OF INCORPORATION - - ------------------ ---------------------- Lechters Michigan, Inc. Michigan Lechters Minnesota, Inc. Minnesota Lechters Mississippi, Inc. Mississippi Lechters Missouri, Inc. Missouri Lechters Nebraska, Inc. Nebraska Lechters Nevada, Inc. Nevada Lechters New Hampshire, Inc. New Hampshire Lechters New Jersey, Inc. New Jersey Lechters New Mexico, Inc. New Mexico Lechters New York, Inc. New York Lechters N.Y.C., Inc. New York Lechters North Carolina, Inc. North Carolina Lechters Ohio, Inc. Ohio Lechters Oklahoma, Inc. Oklahoma Lechters Oregon, Inc. Oregon Lechters Pennsylvania, Inc. Pennsylvania Lechters Rhode Island, Inc. Rhode Island Lechters South Carolina, Inc. South Carolina Lechters Tennessee, Inc. Tennessee Lechters Texas, Inc. Texas 3 Page 3 SUBSIDIARIES OF THE COMPANY NAME OF SUBSIDIARY STATE OF INCORPORATION - - ------------------ ---------------------- Lechters Utah, Inc. Utah Lechters Vermont, Inc. Vermont Lechters Springfield, Inc. Virginia Lechters Washington, Inc. Washington Lechters West Virginia, Inc. West Virginia Lechters Wisconsin, Inc. Wisconsin Cooks Club, Inc. New Jersey Regent Gallery, Inc. New Jersey Simple Solutions of NJ, Inc. New Jersey Harrison Investment, Corp. Delaware EX-23 7 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-48560 on Form S-8, in Registration Statement No. 33-46993 on Form S-8 and in Registration Statement No. 333-59759 on Form S-8 of Lechters, Inc. and subsidiaries of our report dated March 24, 1999, appearing in this Annual Report on Form 10-K of Lechters Inc. and subsidiaries for the year ended January 30, 1999. DELOITTE & TOUCHE LLP Parsippany, New Jersey April 27, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JAN-30-1999 FEB-1-1998 JAN-30-1999 35,503 62,750 4,185 0 89,224 193,396 154,130 88,401 267,644 28,922 61,232 0 20,000 58 139,076 267,644 428,219 428,219 317,868 317,868 120,149 0 4,474 (9,681) (3,940) 0 0 0 0 (5,741) (0.39) (0.39)
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