<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended February 3, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from To
Commission File No. 0-17870
LECHTERS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY No. 13-2821526
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(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1 Cape May Street, Harrison, NEW JERSEY 07029-9998
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (201) 481-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES x NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
<PAGE>
As of April 12, 1996, 17,155,086 shares of Common Stock were
outstanding and the aggregate market value of the Common Stock held by
non-affiliates of the registrant (based upon the closing price on the
NASDAQ National Market on that date) was approximately $82,906,194.
For the purposes of such calculation, all outstanding shares of
Common Stock have been considered held by non-affiliates, other than
the 4,400,287 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.
All share and per share information included herein has been
adjusted to give effect to a two-for-one stock split in April 1992.
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 18, 1996.
<PAGE>
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, Chairman and the major shareholder of Belscot Retailers, Inc.
("Belscot"), and Albert Lechter, President and then a major
shareholder of the Company, recognized an opportunity to operate
specialty houseware stores in malls. In 1977, the repositioning of
the Company from a leased department operator to a specialty store
operator was commenced.
The Company opened its first store in Rockaway, New Jersey, and,
has expanded until at February 3, 1996, the Company operated a total
of 642 stores as more fully set forth in the table on page 6 hereof.
Stores operated under the name of Lechters and Lechters Housewares are
primarily located in malls, but can also be found in strip centers as
well as city locations; stores operated under the name of Famous
Brands Housewares Outlet are located in outlet centers and stores
operated under the name Kitchen Place are located in malls as well as
in strip centers.
During the past five years, the Company increased the number of
stores operated by it from 364 on January 1991 and added the Famous
Brands Housewares Outlet and Super Lechters store formats and, during
January 1994 elected Steen Kanter as Chief Executive Officer,
replacing Donald Jonas who had held the position since the date the
Company was organized. Mr. Kanter left the employ of the Company
during January 1996 when it became apparent that there was a
difference of philosophy with respect to the future priorities of the
Company. Unable to resolve this difference, Mr. Kanter determined
that it was in his best interest to consider various career options in
all fields. During the period Mr. Kanter acted as C.E.O., Mr. Jonas
remained active as Chairman of the Board of Directors and a member of
the Board's Executive Committee. Upon the termination of Mr. Kanter's
employment during January 1996, Mr. Jonas resumed the position of
Chief Executive Officer of the Company.
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Except as otherwise indicated or the context otherwise requires,
references to Fiscal 1995, 1996 and each subsequent fiscal year shall
mean the fiscal year ending on the Saturday closest to January 31st in
the following year in accordance with an amendment to the by-laws of
the Company adopted in 1995. References to Fiscal 1994 and Fiscal 1993
shall mean the fiscal year ending on the last Saturday in January of
the following year.
Merchandising and Marketing
The Company's mission is to be the leading housewares retailer in
the specialty and housewares environment. The merchandise assortment
is focused on products for the kitchen. In addition, the Company
aggressively pursues the frame and storage business. Products sold
are moderate in price. Products offered include cookware, bakeware,
kitchen gadgets and utensils, microwave accessories, glassware,
frames, household storage items, towels, placemats, napkins and
aprons. For its Lechters Housewares stores, the Company generally
targets a large cross section of customers typically found in high-
traffic, regional shopping malls having at least two major department
stores as "anchors" with at least 200,000 square feet of retail space
for specialty stores. Merchandise is displayed utilizing fixtures
designed to maximize versatility in merchandise mix, minimize space
requirements and enable customers to serve themselves. The Company
believes that its wide selection of products, competitive prices and
convenient store locations create competitive advantages over
traditional sources for home products, such as department stores,
specialty stores and general merchandise discount stores. The Company
engages in a program of remodeling its older stores.
Lechters' mall stores stock over 6,000 items comprised of basic
housewares (gadgets, cookware, small electric, closet and storage
items) and decorative housewares (glassware, flatware, dinnerware,
ceramics, kitchen textiles and glass and wooden accessories). All the
products sold by the Company are either private label or national
brand name such as, Rubbermaid, Durand, Ecko, Farberware, Henckels,
Krups, OXO, Pyrex, Revere and Tefal. The Company estimates that
approximately 17% of the Company's items accounted for approximately
50% of Fiscal 1995 net sales. Items generally range in price from
$1.00 to $200.00, with most items selling for less than $10.00.
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The following table shows the contribution to net sales of the
Company's two principal product categories for the periods indicated:
Fiscal Fiscal Fiscal
Category 1995 1994 1993
Basic Housewares 59.9% 57.3% 54.9%
Decorative Housewares 40.1% 42.7% 45.1%
The Company sells its merchandise for cash and through third-
party credit cards, which accounted for approximately 66% and 34%,
respectively, of Fiscal 1995 sales. The Company advertises by
participating in mall circulars and contributing to mall merchants
associations and marketing funds. Advertising expense historically
has averaged approximately 0.8% of net sales, including the expense of
both circulars and association and marketing fund contributions.
The stores operating under the name of Lechters Housewares are
principally located in regional shopping malls. These stores, of
which there were 389 as of February 3, 1996, average approximately
3,000 square feet with more recent openings averaging 4,000 square
feet. To take advantage of high volume locations, the Company has
developed a larger format (referred to as a Super Lechters) which
averages approximately 6,000 square feet and carries extended lines of
traditional Lechters products. There were 88 such stores in place at
year end, 55 the result of relocation or expansion of existing smaller
stores and 24 openings in malls where Lechters previously did not
operate. The remaining nine are located in New York City.
Of the aforementioned stores operated as Lechters Housewares, 24
are located in the cities of Chicago and New York. They average
approximately 4,000 square feet (6,000 square feet for the nine larger
format stores) and offer a merchandise mix similar to a Lechters' mall
store and certain product assortments oriented toward a more affluent
apartment dweller.
At February 3, 1996, the Company operated 150 stores under the
name Famous Brand Housewares Outlet. These stores average
approximately 4,000 square feet and are located in manufacturers'
outlet centers. These stores represent the Company's entry into the
growing manufacturers' outlet store business, and represent a
cooperative effort between the Company and certain of its leading
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suppliers which have authorized the Company to sell their merchandise
and use their trademarks and distinctive logos in the outlet store
format developed by the Company. These stores offer a merchandise mix
of special purchases from cooperative suppliers at attractive prices
together with merchandise similar to a Lechters' mall store. Famous
Brands Housewares Outlet stores typically have lower occupancy costs
and investments in leasehold improvements, allowing the Company to
charge lower prices while maintaining its profit margins.
In addition to its mall and outlet stores, the Company operates
15 stores under the name The Kitchen Place. It is the Company's
intention to convert all Kitchen Place stores to either Lechters
Housewares or Famous Brands Housewares Outlets during 1996.
Service Office (home office) management is responsible for
virtually all merchandising decisions, including pricing, promotions
and markdowns. Merchandise mix is determined by the Service Office at
each store's inception and is dictated by store size and
configuration. This merchandise mix is then reviewed by District
Managers in concert with the Service Office to adapt to sales trends.
All categories of merchandise are reviewed and edited on a regular
basis to accommodate seasonal sales opportunities and evolving
customer requirements.
Purchasing, Warehousing and Distribution
The Company's buying staff is comprised of a Senior Vice
President - General Merchandise Manager, a Vice President -
Merchandise, a Divisional Merchandise Manager, six Buyers and seven
Reorder Buyers each specializing in certain product categories. The
Company purchases its products from over 400 suppliers. Approximately
72% of its products are purchased in the United States. The Company's
largest supplier accounted in Fiscal 1995 for approximately 5.2% of
merchandise purchases. 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 (490,000 square feet) and North Las Vegas, Nevada (155,000
square feet) 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
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costs, favorable trade terms and a broader selection of products. The
Company uses contract carriers to supply its stores with merchandise
from its distribution centers. The Company's stores are supplied with
merchandise within two to five days of placing an order, depending
upon the store's distance from the distribution centers. On average,
stores are supplied with merchandise on a bi-weekly basis. This is an
efficient ordering process enabled by the implementation of a Computer
Assisted Replenishment (CAR) System. Shipments are accelerated during
the back-to-school and holiday periods. In addition, the Company uses
the distribution centers to warehouse its bulk purchases of goods,
enabling it to lower its cost of goods and ensure a continued flow of
products to its stores. The Company generally maintains an average of
10 weeks supply of merchandise at the distribution centers. The
Company currently utilizes one-shift at its distribution centers to
service its stores and it believes it will be able to service its
stores, including additional stores, on a one-shift basis for the
foreseeable future.
Merchandise Information Systems
In January, 1991 the Company completed installation of a point of
sale ("POS") system in all of its stores and a compatible computer
with ancillary software in its service office. The system has
provided information to enhance the Company's ability to adjust
merchandise assortments in response to buying trends and to improve
inventory control.
In September, 1993 the Company implemented barcode scanning of
UPC codes at point of sales (POS). This implementation was a major
step in improving accuracy of SKU level sales and inventory reporting,
as well as decreasing customer wait time at check out.
By the end of Fiscal 1994, the Company completed the installation
of a Computer Assisted Replenishment (CAR) system. The system is
designed to enable the stores to achieve a higher in-stock position
through the acceptance or enhancement of computer suggested reorder
quantities. In addition, the Company completed the implementation of
a shelf marking system. This system allows for a significant
reduction in the handling of merchandise by eliminating individual
pricing of the majority of the SKU's.
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In January, 1995 the Company completed the implementation of a
"paperless" break pack carton scanning system in the distribution
centers. This system, combined with the scanning of full case
shipments implemented in 1993, allows carton level receiving at the
store level, greatly improving inventory accuracy and decreasing labor
in the stores. This implementation has also accounted for an increase
in productivity in the distribution centers.
Store Locations
The Company considers its ability to obtain 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' mall stores are located primarily in high-traffic regional
enclosed projects while strip center and city stores are located in
the premium project or downtown area as defined by market analysis.
Famous Brands Housewares Outlet stores are located in the dominant
outlet projects nationally. Approximately 90% of the total store
space of the Company's stores represents selling area. The balance is
storage and office space.
The following table shows information concerning the Company's
stores:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Lechters Super Famous
Stores Lechters Brands Other Total
January 28, 1995:
Units 383 76 128 18 605
Square Feet 1,186,209 459,133 512,327 70,526 2,228,195
1995 Additions:
Units 21 3 24 - 48
Square Feet 75,218 15,187 92,833 - 183,238
1995 Closings:
Units (6) - (3) (2) (11)
Square Feet (19,047) - (12,030) (6,840) (37,917)
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Adjustments:(1)
Units (9) 9 1 (1) 0
Square Feet (26,370) 59,097 3,838 (5,000) 31,565
February 3, 1996
Units 389 88 150 15 642
Square Feet 1,216,010 533,417 596,968 58,686 2,405,081
</TABLE>
(1) Includes square footage adjustments due to store categorization
shifts.
The store locations currently leased by the Company range in size
from 1,800 square feet to 10,900 square feet and the Company
anticipates that future Lechters Housewares stores will range from
approximately 3,000 square feet to 4,000 square feet, and Super
Lechters format will range in size from approximately 4,500 square
feet to 6,500 square feet. Famous Brands Housewares Outlet will range
from 3,500 square feet to 4,500 square feet.
The Company's stores are designed to attract traffic through
prominent in-store displays generally organized according to a store
planogram provided by the Service Office. The Company attempts to
keep the signage and design of its store fronts consistent among its
stores to enhance the name recognition of its stores. Merchandise is
displayed utilizing fixtures designed to maximize versatility in
merchandise mix, minimize space requirements and enable customers to
serve themselves. The Company enhances consumer interest by using
front store 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 and product categories.
Stores
The Company positions its stores so that they will be perceived
as a problem solver, specialist, and natural resource in basic
products for kitchen and home to include food preparation, food
service, frames, storage and organization, seasonal and related basic
housewares. The Company believes that it is offering a current,
basic, logical assortment of good value, (quality, design, function,
and price) for personal use or gifts to its customers.
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The Company realizes how critical it is that the stores present
and communicate the breadth and depth of its assortment, its product
features and benefits, competitive pricing, and commitment to customer
service. The store and merchandise assortment layouts make it
possible for the customer to purchase through self choice and/or be
assisted by an associate.
The Company is committed to provide a dynamic, learning work
environment for its store Associates. A training and evaluation
program is provided to new Managers. Associates attend periodic
training sessions designed to develop their management and
merchandising skills.
The Company is committed to a policy of promotion from within.
The historic growth of the Company typically has provided
opportunities for the promotion of qualified associates. Management
believes these opportunities will continue to be an important
incentive for motivated Associates and will enhance retention with the
Company. In order to maintain the quality of its store management,
the Company has developed a program under which its transfers
qualified Associates, as required, to staff stores throughout the
country and offers promotions to Assistant Managers and Trainees to
encourage these transfers.
On April 12, 1996, the Company employed four Regional Vice
Presidents and one Regional Manager, who each have profit and loss
responsibility for several districts and provide leadership to 45
District Managers, each of whom in turn is responsible for the
supervision of a group of stores, which range in number from 7 to 17.
Stores are typically staffed with one manager, two Assistant Managers
and five sales/cashier Associates.
Beginning in Fiscal 1996 the Company formed a region of nine
districts that is exclusively made up of Famous Brands Housewares
Outlet stores. This segregation of concepts will enable the District
Managers to provide focused direction that supports maximizing sales
and profits in the outlet environment.
The Company believes that the security measures in its stores are
strict, reflecting the cash orientation of the Company's business.
The Company employs six field Loss Prevention Managers, who are
responsible for the review of cash register transactions and inventory
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management procedures, in a effort to control inventory shrinkage.
Their periodic reviews are complemented by extensive audit programs to
include District Manager conducted reviews. Particular emphasis is
placed on stores with a history of inventory shrinkages in excess of
the norm.
Expansion Strategy
The Company's expansion strategy is to open approximately 20 new
stores and to close approximately 10 stores in Fiscal 1996. The
Company has leased or is under lease negotiations with respect to the
remaining stores to be opened in Fiscal 1996. The Company's future
plans to open stores will depend upon leasing opportunities available
to the Company and other factors. The Company believes the number of
suitable sites likely to be made available in the future will permit
desired growth.
In addition, the Company intends to expand and relocate
approximately five to 10 existing stores during Fiscal 1996. The
focus of this plan is to place existing stores in more favorable
locations within the same project where they currently exist and to
increase the floor area of these stores so that a wider selection of
merchandise can be offered. Many of the Company's mall stores are
candidates for relocation and expansion and the Company plans to
continue to relocate and expand existing stores over the next several
years based upon the opportunities that become available and other
factors.
The Company also has leases for a number of existing stores that
will be coming up for renewal over the next several years. If
appropriate, these stores will either be renewed in place and
remodeled or relocated and expanded within the same shopping center.
In determining where to open new stores and the appropriate
format for each of such stores, the Company evaluates the market area
for customer demographics and competition, anchor stores and store
location, the amount of consumer traffic generated by the development,
and the occupancy, construction and other costs associated with
opening a new store. In determining whether to relocate or expand an
existing store, the same factors are evaluated as well as the
performance of the existing store and the opportunity to improve
performance by relocating and expanding.
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The Company estimates its average cash requirements to open a new
traditional Lechters Housewares mall store to be approximately
$270,200 for fixtures and improvements, approximately $10,000 for its
POS register system, approximately $80,000 for inventory investment
(net of trade payables) and approximately $8,000 in preopening costs.
The estimated average cash requirements to open a new Famous
Brands Housewares Outlet is approximately $199,000, including
approximately $93,000 for fixtures and improvements, approximately
$13,000 for its POS register system, approximately $80,000 for
inventory investment (net of trade payables) and approximately $13,000
in preopening costs.
Competition
The business in which the Company is engaged is highly
competitive and many items sold by the Company are sold by department
stores, general merchandise discount stores, hardware stores and
others having greater financial and other resources than the Company.
To a lesser extent, the Company also competes with mail order
companies and other specialty retailers of home-related products.
However, the Company believes that it competes favorably with such
retailers because in the shopping and outlet centers where the
Company's stores are located, the Company's stores are typically the
only specialty housewares retailer. The Company offers a broader
assortment of housewares merchandise than most of its competitors, and
the Company's prices are generally lower than those charged by
department stores and are generally competitive with those charged by
general merchandise discount stores. Nevertheless, there can be no
assurance that any or all of the factors listed above which enable the
Company to compete favorably will not be adopted by companies having
greater financial and other resources than the Company.
Associates
On April 1, 1996, the Company employed 7,416 persons, 3,070 of
whom were full-time (30 or more hours per week) and 4,346 of whom were
part-time Associates. Of this total, 445 were located at the
Company's Harrison, New Jersey Service Office and two distribution
centers, 51 as Regional and District Managers, six as Loss Prevention
Managers and the balance located at the Company's stores.
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On April 1, 1996, the 220 non-management office and distribution
Associates at the Harrison, New Jersey facility were represented by
Unite, Local 99, under contracts expiring on March 15, 1999 with
respect to non-management distribution center Associates and June 30,
1997 with respect to non-management office workers. The 6,914
Associates in the Company's 644 retail stores are non-union. The 40
Associates at the Company's North Las Vegas, Nevada distribution
center are also non-union. The Company has never experienced a strike
or other labor disruption and is unaware of any current efforts or
plans to organize its non-union Associates. The Company believes that
its employee relations are satisfactory.
Trademarks
The Company has registered in the United States Patent and
Trademark Office its service marks "Lechters", "The Kitchen Place" and
"Famous Brands Housewares Outlet" for retail services, and its
trademarks "Lechters", "The Kitchen Place", "Regent Gallery", "Cooks
Club", "Perfect Bake", and "Simple Solutions" for certain housewares
items.
Executive Officers
The following table shows information regarding executive
officers of the Company as of April 12, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Position or Office Term of Employ-
Name Age with the Company ment Commenced
Donald Jonas 66 Chairman of the Board. January 1984
Chief Executive
Officer and President
Robert J. Harloe 51 Senior Vice President August 1994
- Human Resources
Dennis Hickey 48 Senior Vice President January 1991
- Stores
Frank J. O'Neill 47 Senior Vice President February 1992
- Director of Real
Estate
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Ira S. Rosenberg 61 Vice President, January 1984
Secretary and
Corporate Counsel
James Shea 50 Senior Vice President November 1994
and General
Merchandise Manager
John W. Smolak 47 Senior Vice President February 1995
and Chief Financial
Officer
</TABLE>
Donald Jonas has been Chairman of the Board and a Director of the
Company or its former parent since 1979. From 1979 to January 1994 he
was also Chief Executive Officer. Mr. Jonas resumed the position of
Chief Executive Officer and became President in January 1996. He is
also a Director of Dress Barn, Inc.
Robert J. Harloe was elected Senior Vice President - Human
Resources of the Company in March 1996. Mr. Harloe became Vice
President - Human Resources in September 1994 after joining the
Company in August 1994. Prior to that he was Senior Vice President of
Human Resources for Allied-Lyons Retailing. Allied-Lyons acquired
Dunkin Donuts in 1990, where he was employed for 18 years.
Dennis Hickey was elected Senior Vice President - Stores of the
Company in March 1996. Mr. Hickey became Vice President - Stores in
April 1991 after joining the Company in January 1991. Prior to that
he was Vice President of Kay Bee Toy Stores, a Division of Melville
Corp. from August 1990 to January 1991. From August 1985 to August
1990, Mr. Hickey was Vice President - Store Operations for Circus
World Toy Stores, a Division of Greenman Bros.
Frank J. O'Neill was elected Senior Vice President - Director of
Real Estate of the Company in March 1996. Mr. O'Neill became Vice
President - Director of Real Estate in April 1992 after joining the
Company in February 1992. Prior to that he was employed for 14 years
with the Melville Realty Company, most recently as the Senior Vice
President.
Ira S. Rosenberg has been Corporate Counsel of the Company or its
former parent since 1979 and Vice President and Secretary of the
Company since 1984.
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James Shea was elected Senior Vice President - General
Merchandise Manager of the Company in December 1994. Prior to joining
the Company in November 1994, Mr. Shea served as Senior Vice
President, General Merchandise Manager, Homestore with Kaufmann's, a
division of May Company, from 1990 to November 1995. From 1985
through 1990 he was employed by Lechmere, a hardgoods chain, as Vice
President and General Merchandise Manager. Mr. Shea was also Vice
President of Marketing and Merchandising for Eddie Bauer and spent 12
years with Dayton Department Stores in various merchandising
positions.
John W. Smolak was elected Senior Vice President and Chief
Financial Officer of the Company in March 1996. Mr. Smolak became
Vice President and Chief Financial Officer in April 1995 after joining
the Company in February 1995. Prior to that he was employed by Jungle
Jim's Playlands, Inc., a chain of family entertainment centers, as
Senior Vice President, Finance and Administration. Mr. Smolak
previously held the positions of Vice President, Finance and Chief
Financial Officer for Precision Lenscrafters, Inc. and spent six years
with the Marriott Corporation, in both the Corporate Finance function
and as Vice President and Chief Financial Officer for their Roy Rogers
Restaurants division.
Item 2. Properties
The general offices of the Company are located at 1 Cape May
Street, Harrison, New Jersey. The Company leases approximately
540,000 square feet of floor space at this location. Approximately
490,000 square feet are being utilized for the distribution center,
and approximately 50,000 square feet for the Company's service
offices. This lease expires on January 31, 2007 and the Company has
three five-year renewal options.
The Company leases approximately 155,000 square foot distribution
center in North Las Vegas, Nevada. Approximately 151,000 square feet
are being utilized for the distribution center, and approximately
4,000 square feet for administrative offices. Constructed and opened
in 1993, the facility is designed to enable expansion of an additional
100,000 square feet should the need arise.
The Company leases all of its stores. Lease terms for the
Company's stores are generally 10 to 12 years in duration without
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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.
For additional information concerning the Company's leases, see
Note 7 to the Consolidated Financial Statements of the Company
included elsewhere herein.
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Item 3. Legal Proceedings.
There is no material litigation currently pending against the
Company.
On March 20, 1996 the previously reported pending litigation by
Steen Kanter, former CEO and Vice Chairman of the Company against the
Company was settled and discontinued. The parties agreed that the
terms of the settlement which had no material impact on the Company,
shall remain confidential.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders through
solicitations of proxies or otherwise.
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Part II
Item 5. Market For the Registrant's Common Equity and Related
Stockholder Matters.
The Common Stock is traded on the over-the-counter market and is
included in the National Market System of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the
symbol "LECH". The initial public offering of the Common Stock
occurred in July 1989.
The following table sets forth (as reported by NASDAQ) for the
periods indicated the closing prices of the Common Stock.
Price of Common Stock
Fiscal 1995 High Low
1st Quarter 19 14-3/4
2nd Quarter 16-3/4 12-1/4
3rd Quarter 14-1/4 9-1/4
4th Quarter 10-3/8 4-1/4
Fiscal 1994 High Low
1st Quarter 15-1/2 11-1/4
2nd Quarter 14-1/4 11
3rd Quarter 19 13-1/4
4th Quarter 18-1/8 15-1/4
These quotations reflect inter-dealer prices, without retail
markups, markdowns or commissions.
On April 12, 1996, there were approximately 1,071 holders of
record of the Common Stock. On April 12, 1996, the closing price of
the Common Stock was $6.50.
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 and the Company's Note Agreements relating to the issuance
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of the Company's Senior Notes contain certain covenants which restrict
the ability of the Company to pay dividends. See Notes to the
Consolidated Financial Statements.
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read
in conjunction with the consolidated financial statements and notes
thereto set forth elsewhere herein.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Fifty-Three Fifty-Two Weeks Ended Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
February 3, January 28, January 29, January 30, January 25,
1996 1995 1994 1993 1992
(Dollars in thousands, except per share and selected
operating data)
Income Statement Data:
Net sales $432,048 $399,264 $350,196 $306,043 $234,314
Cost of goods sold
(including occupancy
and indirect costs) 310,163 282,875 242,833 207,862 158,581
Gross profit 121,885 116,389 107,363 98,181 75,733
Selling, general and
administrative expenses 109,414 93,853 83,669 71,252 53,849
Restructuring expense (217) 11,000 -- -- --
Operating income 12,688 11,536 23,694 26,929 21,884
Other expenses (1) 5,039 5,838 4,991 2,497 1,600
Income before income
tax provision 7,649 5,698 18,703 24,432 20,284
Income tax provision 3,146 2,336 7,623 9,044 7,259
Net income $ 4,503 $ 3,362 $ 11,080 $ 15,388 $ 13,025
======== ======== ======== ======== ========
Net income per share (2) $0.26 $0.20 $0.65 $0.90 $0.80
======== ======== ======== ======== ========
Weighted average
shares outstanding 17,288,000 17,095,000 17,100,000 17,178,000 16,322,000
Selected Operating Data:
Stores opened during year 48 49 61 81 77
-17-
<PAGE>
Stores closed during year 11 11 7 6 3
Stores open at year end 642 605 567 513 438
Total square feet of
store space (at year
end) (3) 2,405,081 2,228,195 2,048,916 1,730,516 1,368,198
Sales per average
square foot of total
space (3) (4) $186 $187 $185 $197 $190
Percentage increase
(decrease) in comparable
store sales (5) (1.7%) 3.2% (1.2%) 2.8% 2.0%
Balance Sheet Data
(At Year End):
Working capital $136,113 $134,785 $134,695 $137,807 $142,652
Total assets 272,312 270,710 256,812 239,019 220,425
Long-term debt 75,038 77,777 82,859 85,006 84,199
Shareholders' equity 148,642 143,541 136,632 125,131 109,450
Total debt to total
capitalization 34.4% 36.0% 38.6% 40.5% 43.5%
___________________________________________________________________________________
</TABLE>
(1) Other expenses includes interest expense net of interest income
and gains realized on the sale of government securities.
(2) All share and per share amounts included herewith have been
adjusted to give effect to the 2-for-1 stock split in April 1992.
The Company has never paid any cash dividends on its Common
Stock.
(3) Approximately 90% of total store space represents selling area.
The balance is storage and office space.
(4) 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.
(5) 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.
-18-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
The Company's sales continued to grow during Fiscal 1995 but at a
lower rate than recent years. Net sales for 1995 were $432,048,000,
an 8.2% increase over 1994. During 1995, the Company elected to
adjust its reporting to the National Retail Federation's fiscal
calendar. This action resulted in Fiscal 1995 being a 53 week fiscal
year. Excluding the additional week of sales, the sales increase for
1995 was 6.8%. Fiscal year 1994 had a 14.0% increase over Fiscal
1993, a compound growth rate of 11.1% for the two fiscal years. With
respect to comparable store sales, 1995 had a decline of 1.7% compared
with a 3.2% increase for 1994 and a 1.2% decrease for 1993. The
variation in the comparable store performance is indicative of a
retail industry which continues to be challenged by excess competition
and conservative consumer spending patterns. Sales results were
further impacted in 1995 and 1994 by the Company's current effort to
reposition both store concepts. The Company continues to be the
dominant specialty houseware retailer with national coverage. During
the past year the Company has continued to address needs in systems
and managerial resources. Merchandise has been sharply edited in line
with the goals of the Fiscal 1994 restructuring. The Company has also
edited its portfolio of stores, selectively opening new locations and
closing existing locations which have not achieved acceptable
financial returns. Additionally, the Company continues to renovate
and remodel its older stores to take advantage of new merchandise
strategies.
Results of Operations
The following table sets forth selected income statement data of
the Company expressed as a percentage of net sales for the periods
indicated below:
-19-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
February 3, January 28, January 29,
1996 1995 1994
Net sales 100.0% 100.0% 100.0%
Cost of goods sold
(Including occupancy
and indirect costs) 71.8 70.8 69.3
Gross profit 28.2 29.2 30.7
Selling, general and
administrative expenses 25.3 23.5 23.9
Restructuring expense -- 2.8 --
Operating income 2.9 2.9 6.8
Other expense (income) 1.2 1.5 1.4
Income before income tax
provision 1.7 1.4 5.4
Income tax provision 0.7 0.6 2.2
Net income 1.0% 0.8% 3.2%
====== ====== ======
</TABLE>
Fiscal 1995 in Comparison with Fiscal 1994
Net sales for Fiscal 1995 increased $32,784,000 to $432,048,000,
an 8.2% increase. Adjusting for the additional week which resulted
from the Company's adoption of the retail calendar proposed by the
National Retail Federation, net sales on a 52 week basis increased
6.8% over last year. Comparable store sales declined 1.7%. Sales
growth was due to the opening of new stores. At the end of Fiscal
1995, the Company had 642 stores open compared to 605 at the close of
the previous fiscal year, a net increase of 37 stores or a 6.1%
increase. Total square feet of store space increased approximately
177,000 square feet during the year to 2,405,081 square feet.
Gross profit for Fiscal 1995 was $121,885,000, a $5,496,000
increase over last year. Gross profit was 28.2% of sales which was
1.0% below last year as a percent of sales. While the margins
generated by merchandise sales were comparable to last year's, there
-20-
<PAGE>
was an under absorption of rent and other occupancy expense caused by
a decline in comparable store sales.
Selling, general and administrative expenses increased
$15,561,000 to $109,414,000, or 25.3% of net sales, a 1.8% point
increase versus the prior year. The increase in selling, general and
administrative expenses was due to planned increases in store and
Service Office payroll and benefits and Service Office operating
expenses. There was also a reduction in vendor support related to the
increase in direct sourced foreign products and a set-a-side for
certain contingent events.
The Company recorded a pre-tax restructuring charge of
$11,000,000 in the second quarter of Fiscal 1994. In the fourth
quarter of Fiscal 1995, the Company recorded a $217,000 restructuring
credit representing the residual reserve balance remaining after the
final charges for inventory writedowns, store closings and severance
costs had been determined. The restructuring reserve balance at the
beginning of the fiscal year was approximately $2,400,000. At the
close of the fiscal year the reserve related to restructuring was
$951,000. This represents the final amount necessary to complete the
restructuring plan.
Other expenses for Fiscal 1995 decreased $799,000 to $5,039,000,
1.2% of net sales, a decline of 0.3% points versus the prior year.
Interest expense for the year decreased $246,000 due to reduced long
term debt resulting from scheduled repayments. Interest income
improved by $406,000 due to improved cash management and higher
interest rates earned on invested funds. The Company also earned a
slight profit on government securities transactions compared to a
slight loss for Fiscal 1994.
The effective income tax rate for the Company was 41.1% for
Fiscal 1995, a 0.1% point increase over the rate for Fiscal 1994. The
effective state rate declined in Fiscal 1995. The increase in the
Other portion of the rate was due to other factors such as the
expiration of the Targeted Jobs Tax Credit which expired for new hires
on January 1, 1995.
-21-
<PAGE>
Fiscal 1994 in Comparison with Fiscal 1993
Net sales for Fiscal 1994 increased 14.0% to $399,264,000 from
$350,196,000 for Fiscal 1993. This increase was primarily
attributable to an increase in the number of stores open during the
year, complemented by the full year impact of prior year store
openings and an increase in comparable store sales. At the end of
Fiscal 1994, there were 605 stores open compared with 567 stores open
at the end of Fiscal 1993, an increase of 38 stores (6.7%) translating
to an increase of approximately 179,000 square feet. During Fiscal
1994, the Company's comparable store sales increased 3.2% over the
prior year's comparable period.
Gross profit for Fiscal 1994 was $116,389,000, or 29.2% of net
sales, compared with $107,363,000, or 30.7% of net sales, during
Fiscal 1993. The decrease in gross profit as a percentage of sales is
primarily due to the planned change in merchandise mix and decrease in
foreign sourced products which carry higher gross margins. The
Company is in the transition of adjusting the depth and breadth of its
merchandise assortment with greater emphasis on traditional cookware
and houseware products, private labeled merchandise and direct foreign
sourced goods. Additionally, gross margin was impacted by occupancy
costs which as a percentage of sales were slightly higher than the
prior year.
Selling, general and administrative expenses decreased as a
percentage of net sales to 23.5% during Fiscal 1994 from 23.9% during
Fiscal 1993. The year over year decrease was primarily attributable
to a decrease in store salaries as a percentage of sales in Fiscal
1994. This was due to the implementation of more efficient staffing
practices made possible by the application of systems technology in
support of store level activities. In addition, Fiscal 1993 includes
costs associated with the opening of the Company's western
distribution center located in North Las Vegas, Nevada.
During the second quarter of Fiscal 1994, the Company recorded a
pretax restructuring charge of $11,000,000 (approximately $6,500,000
after tax or $0.38 per share) related to its initial plan to close 15
unprofitable stores and discontinue various unprofitable merchandise
lines. The plan called for the termination of the employment of
approximately 19 associates from store operations, the Service Office
and distribution centers. During the fourth quarter of Fiscal 1994,
-22-
<PAGE>
the Company revised its estimate of the number of store closings to 10
stores and reduced the related store closing provision by $3,000,000.
However, the Company also increased its estimate of the provision to
discontinue unprofitable merchandise lines, resulting from higher than
projected markdowns to liquidate those merchandise lines by a similar
amount. The revised estimated restructuring charge includes the
following:
Inventory writedown $ 7,400,000
Store closing:
Property and equipment writeoffs 1,800,000
Store closing and lease
termination costs 1,200,000
Severance costs 600,000
$11,000,000
===========
During Fiscal 1994, the Company used approximately $6,800,000 to
markdown discontinued merchandise lines, approximately $1,500,000 to
close five of the 10 stores, and approximately $300,000 to pay related
severance costs. The remaining restructuring reserve as of January
28, 1995 was approximately $2,400,000 and it was estimated by
management to be sufficient to complete the revised restructuring plan
by June 1995.
Other expenses increased $847,000 to $5,838,000 in Fiscal 1994.
This increase was almost entirely attributable to a decrease versus
the prior year of $898,000 in net gains realized on the sales of
government securities.
The Company's effective tax rate increased to 41.0% during Fiscal
1994 from 40.8% during Fiscal 1993. The increase reflects an increase
in state income tax rates.
Liquidity and Capital Resources
Cash and cash equivalents and marketable securities decreased
$16,273,000 during Fiscal 1995 as the cash needed for financing and
operating needs of the business exceeded cash provided by operations.
-23-
<PAGE>
For Fiscal 1995 cash provided by operating activities was
$9,333,000 compared to $34,266,000 for Fiscal 1994, a decrease of
$24,933,000. The Fiscal 1994 non-cash Restructuring Charge of
$11,000,000 was one of the major components of this decrease between
fiscal years. Inventory increased $12,575,000, a $5,523,000 increment
over Fiscal 1994 due to both the net addition of 37 new store
locations and lower than anticipated comparable store sales. Accounts
payable, accrued salaries, wages and other accrued expenses other than
income taxes declined by $5,201,000 compared to an $8,911,000 increase
in Fiscal 1994 resulting in a year to year decrease in operating cash
flow of $14,112,000. The major cause of this decrease was the
increased proportion of imported merchandise which requires the use of
cash sooner in the purchasing cycle.
Capital expenditures were $22,626,000 and $20,592,000 in Fiscal
1995 and Fiscal 1994, respectively. Capital expenditures for Fiscal
1995 primarily consisted of construction costs and fixtures for 48 new
stores and major remodelings and renovations.
Total planned capital expenditures for Fiscal 1996 are estimated
at $15,000,000. These expenditures are primarily for the construction
of and fixtures for new stores and for remodeling of existing stores.
As disclosed in Note 10 - Subsequent Event of the Notes to the
Consolidated Financial Statements, the Company has taken action which
provides additional flexibility in meeting its liquidity and financial
needs. On April 5, 1996, the Company issued $20,000,000 in
Convertible Preferred Stock. The proceeds of this issuance will be
used to pay down a portion of the Company's Long-Term Debt as well as
for general corporate purposes. The Convertible Preferred Stock
dividend rate is estimated to be slightly lower than the after tax
interest cost of the Long-Term Debt which is being paid off by a
portion of the proceeds.
Inflation and Seasonality
The Company does not believe that its operations have been
materially affected by inflation during the two most recent fiscal
years. While the Company does not expect that inflation would have a
material impact upon operating results, there is no assurance that its
business will not be affected by inflation in the future.
-24-
<PAGE>
The Company's business exhibits substantial seasonality. In
general, sales volumes vary directly with mall traffic, which is
heaviest during the third and fourth quarters of the fiscal year,
particularly in November and December. In addition, the Company
expects that its quarterly results of operations will fluctuate
depending on the timing and amount of revenue contributed by new
stores and the timing of costs associated with the opening of new
stores. The Company's current strategy is to open substantially all
of its new stores in the first three quarters of the fiscal year in
order to minimize business disruptions during the heavy selling season
in the last quarter of the fiscal year. See Note 11 of Notes to
Consolidated Financial Statements of the Company included elsewhere
herein.
Recent Accounting Pronounements
In March 1995, the Financial Accounting Standards Board issued
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." This Statement is effective for fiscal
years beginning December 15, 1995. The Statement establishes
accounting standards for the impairment of long-lived assets, certain
intangibles, and goodwill related to those assets to be held and used,
and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company intends to adopt the new Statement when
required in Fiscal 1996 and does not expect the adoption to have a
material effect on its consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This
Statement is also effective for fiscal years beginning December 15,
1995. The Statement establishes a fair value method of accounting for
stock-based employee compensation plans. Under the fair value method,
compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is
usually the vesting period. The Statement encourages but does not
require the adoption of the fair value method of accounting for
employee stock-based transactions. The Statement also requires
increased footnote disclosures, regardless of the method chosen to
measure and recognize compensation for employee stock-based
arrangements. The Company has not yet determined if it will elect to
change to the fair value method, nor has it evaluated the impact of
-25-
<PAGE>
the new Statement on net income and earnings per share should it elect
to make such a change.
-26-
<PAGE>
Item 8. Financial Statements.
See Index immediately following the signature page.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
-27-
<PAGE>
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 18, 1996.
-28-
<PAGE>
Part IV
Item 14. Exhibits and Reports on Form 8-K.
(a) 1. Financial Statements. See the Index immediately following
the signature page.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated January
2, 1992.
(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 Form of Note Agreement for the Company's 10.5% Senior Notes
due September 1, 1998 (Incorporated herein by reference to
Exhibit 4.2 to the Registration Statement).
4.2 Form of Note Agreement for the Company's 9.53% Notes due May
1, 2001. (Incorporated herein by reference to Exhibit 3 to
the Company's Form 10-Q, for the period ended April 27,
1991).
4.3 Amendment to the Company's 10.5% Senior Notes and 9.53%
Senior Notes, dated July 29, 1994. (Incorporated herein by
reference to Exhibit 4.2 to the Company's Form 10-Q, for the
period ended July 30, 1994).
4.4 Indenture, dated as of September 27, 1991, between the
Company and Chemical Bank, as Trustee.
9.1 Form of Voting Agreement (Incorporated herein by reference
to Exhibit 9.1 to the Registration Statement).
-29-
<PAGE>
10.1 1989 Stock Option Plan and form of Agreement pursuant to
1989 Stock Option Plan. (Incorporated herein by reference
to Exhibit 10.3 to the Registration Statement).
10.2 Revolving Credit Agreement dated November 19, 1993.
(Incorporated herein by reference to the Company's Form 10-
Q, for the period ended October 30, 1993).
10.3 Amendment to the Company's Credit Agreement dated September
6, 1994. (Incorporated herein by reference to Exhibit 1 to
the Company's Form 10-Q, for the period ended October 29,
1994).
10.4 Form of Deferred Compensation Agreement (Incorporated herein
by reference to Exhibit 10.5 to the Registration Statement).
10.5 Amendment No. 1 to Deferred Compensation Agreement, dated
June 16, 1989. (Incorporated herein by reference to Exhibit
10.5.2 to Amendment No. 1 to the Registration Statement).
10.6 Amendment No. 2 to Deferred Compensation Agreement, dated
August 15, 1989. (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
January 26, 1991).
10.7 Amendment No. 4 to Deferred Compensation Agreement between
the Company and Donald Jonas dated April 8, 1996.*
10.8 Memorandum of Agreement between the Company and Local 99,
UNITE to a collective bargaining agreement covering
warehouse employees dated April 1, 1996.*
10.9 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).
10.9.1 Form of Consulting Agreement (Incorporated herein by
reference to Exhibit 10.9.1 to the Registration Statement).
10.9.2 Forms of Amendment of Consulting Agreement (Incorporated
herein by reference to Exhibit 10.9.2 to Amendment No. 1 to
the Registration Statement).
-30-
<PAGE>
10.10 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).
22 Subsidiaries of the Company.*
24 Consent of Deloitte & Touche LLP.*
25 Powers of Attorney dated March 5, 1996.*
*Filed herewith.
-31-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LECHTERS, INC.
By /S/ Donald Jonas
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on May 3, 1996 by the following
persons in their respective capacities set forth opposite their names,
which include its principal executive officer, its principal financial
and accounting officer and a majority of the board of directors.
/S/ Donald Jonas Chairman of the Board and
Chief Executive Officer and Director
(Principal Executive Officer)
/S/ John W. Smolak Senior Vice President (Principal Financial
Officer and Principal Accounting Officer
*Martin Begun Director
*Charles A. Davis Director
*Bernard D. Fischman Director
*Robert Knox Director
*Albert Lechter Director
*Anthony Malkin Director
*Roberta Maneker Director
-32-
<PAGE>
*Norman Matthews Director
*Leonard Pfeffer Director
*John Wolff Director
*By /S/John W. Smolak
John W. Smolak
Attorney-in-fact
-33-
<PAGE>
LECHTERS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
MANAGEMENT'S REPORT F-1
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED
FEBRUARY 3, 1996:
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Shareholders' Equity F-6
Notes to Consolidated Financial Statements F-7 - F-21
<PAGE>
MANAGEMENT'S REPORT
To the Shareholders of Lechters, Inc.:
We have prepared Lechters, Inc. consolidated financial statements,
including the notes and other financial information appearing in this
Annual Report on form 10-K, and are responsible for the integrity and
objectivity of the accompanying financial statements and related
information. In order to fulfill this responsibility, policies have
been established that require each system of internal accounting
control provide reasonable assurance, giving due regard to the cost of
implementing and maintaining the system, that transactions are
executed in accordance with management's intention and authorization,
that accounting books and records are prepared and maintained so as to
permit the preparation of the financial statements in accordance with
generally accepted accounting principles, and that accountability for
assets, liabilities and equity is maintained.
Compliance with these policies is verified, and the continuing
adequacy of accounting policies and procedures is evaluated. In
addition, Lechters, Inc.'s independent auditors obtain and maintain an
understanding of the accounting and administrative controls in place
and, based on tests of those controls and of accounting records,
render an opinion on the fairness of presentation of the financial
statements. The Audit Committee of the Board of Directors, composed
of non-management Board members, and management representatives, meet
periodically with the independent auditors to receive their reports
and direct compliance with their recommendations.
Further, we recognize our responsibility to conduct Lechters' business
in accordance with high moral and ethical standards. Policies have
been established and review programs are maintained to ensure that all
business activities are in compliance with these standards.
/S/ Donald Jonas
Donald Jonas
` Chairman of the Board and
Chief Executive Officer
/S/ John W. Smolak
John W. Smolak
Senior Vice President and
Chief Financial Officer
F-1
<PAGE>
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 as of February 3, 1996 and January 28,
1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ending
February 3, 1996. 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 Lechters, Inc. and
subsidiaries as of February 3, 1996 and January 28, 1995, and the
results of their operations and their cash flows for each of the three
years in the period ended February 3, 1996 in conformity with
generally accepted accounting principles.
/S/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
March 21, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
<S> <C> <C>
February 3, January 28,
1996 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,234 $ 14,774
Marketable securities 37,606 43,339
Accounts receivable 5,573 6,668
Merchandise inventories 109,898 97,323
Prepaid expenses 5,519 4,601
Total current assets 162,830 166,705
PROPERTY AND EQUIPMENT:
Fixtures and equipment 64,688 53,786
Leasehold improvements 100,840 92,954
165,528 146,740
Less accumulated depreciation
and amortization 60,446 47,265
Net property and equipment 105,082 99,475
OTHER ASSETS 4,400 4,530
TOTAL ASSETS $272,312 $270,710
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,827 $ 15,453
Salaries, wages and other accrued
expenses 13,546 9,906
Taxes, other than income taxes 1,591 2,806
Federal and state income taxes (Note 6) 753 755
Current portion long-term debt (Note 4) 3,000 3,000
Total current liabilities 26,717 31,920
LONG-TERM DEBT, LESS CURRENT PORTION
(Notes 4 and 10): 75,038 77,777
DEFERRED INCOME TAXES (Note 6) 17,348 13,949
OTHER LIABILITIES 4,567 3,523
COMMITMENTS AND CONTINGENCIES (Notes 2, 3,
7 and 8)
SHAREHOLDERS' EQUITY (Notes 3 and 10):
Preferred stock, $100 par value
authorized 1,000,000 shares,
None issued -- --
Common stock, without par value,
authorized 50,000,000 shares,
issued and outstanding 17,155,086
and 17,118,646 shares, respectively 58 58
Unrealized holding gain (loss) on
available for sale securities (Note 9) 38 (210)
Additional paid-in capital 62,773 62,423
Retained earnings 85,773 81,270
Total shareholders' equity 148,642 143,541
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $272,312 $270,710
======== ========
See notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share amounts)
<S> <C> <C> <C>
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
February 3, January 28, January 29,
1996 1995 1994
NET SALES $432,048 $399,264 $350,196
COST OF GOODS SOLD (including occupancy
and indirect costs) 310,163 282,875 242,833
GROSS PROFIT 121,885 116,389 107,363
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(Notes 7 and 8) 109,414 93,853 83,669
RESTRUCTURING EXPENSE (Note 2) (217) 11,000 --
OPERATING INCOME 12,688 11,536 23,694
OTHER EXPENSES (INCOME):
Interest Expense 6,920 7,166 7,256
Interest Income (1,855) (1,449) (1,488)
Loss (Gain) on Sale of Government
Securities (Note 9) (26) 121 (777)
5,039 5,838 4,991
INCOME BEFORE INCOME TAX PROVISION 7,649 5,698 18,703
INCOME TAX PROVISION (Note 6) 3,146 2,336 7,623
NET INCOME $ 4,503 $ 3,362 $ 11,080
======== ======== ========
NET INCOME PER SHARE $0.26 $0.20 $0.65
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 17,288,000 17,095,000 17,100,000
========== ========== ==========
See notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<S> <C> <C> <C>
Fifty-Three Fifty-Two Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
February 3, January 28, January 29,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,503 $ 3,362 $ 11,080
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Restructuring charge (217) 11,000 --
Depreciation and amortization 16,056 14,269 12,182
Loss on disposal of property and equipment 954 550 306
Deferred income taxes 3,227 1,397 4,359
Straight line rent 1,020 800 600
Other 1,442 579 387
Changes in operating assets and liabilities, net
of effects of restructuring:
Decrease (Increase) in accounts receivable 1,095 (753) (3,243)
(Increase) in merchandise inventories (12,575) (7,052) (12,473)
Decrease (Increase) in prepaid expenses (918) 761 (980)
Decrease (Increase) in other assets (51) 17 (265)
Increase (Decrease) in accounts payable,
accrued salaries, wages and other accrued
expenses and taxes, other than income taxes (5,201) 8,911 1,787
Increase (Decrease) in income taxes payable (2) 425 (1,463)
Net cash provided by (used in) operating
activities 9,333 34,266 12,277
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (22,626) (20,592) (29,182)
(Increase) Decrease in marketable securities 6,153 (4,546) 21,520
Net cash used in investing activities (16,473) (25,138) (7,662)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (3,750) (6,000) --
Exercise of stock options 350 2,683 421
Net cash (used in) provided by financing
activities (3,400) (3,317) 421
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (10,540) 5,811 5,036
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,774 8,963 3,927
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,234 $ 14,774 $ 8,963
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Unrealized holding gain (loss) on available
for sale securities $ 64 $ (356) $ --
======== ======== ========
Cash paid (refunded) during the year for:
Interest $ 6,031 $ 6,491 $ 6,375
======== ======== ========
Taxes $ (820) $ 121 $ 7,316
======== ======== ========
See notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C>
Common Additional Unrealized
Stock Issued Paid-In Retained Holding
Shares Amount Capital Earnings (Loss) Total
BALANCE, JANUARY 30,
1993 16,738,472 $58 $58,245 $66,828 $ -- $125,131
Exercise of stock
options 45,000 -- 421 -- -- 421
Net income -- -- -- 11,080 -- 11,080
BALANCE, JANUARY 29,
1994 16,783,472 58 58,666 77,908 -- 136,632
Unrealized holdings
loss -- -- -- -- (210) (210)
Exercise of stock
options 335,174 -- 2,683 -- -- 2,683
Tax benefit from
exercise of
stock options -- -- 1,074 -- -- 1,074
Net income -- -- -- 3,362 -- 3,362
BALANCE, JANUARY 28,
1995 17,118,646 58 62,423 81,270 (210) 143,541
Unrealized gain/
(loss) adjustment -- -- -- -- 248 248
Exercise of stock
options 36,440 -- 350 -- -- 350
Net income -- -- -- 4,503 -- 4,503
BALANCE, FEBRUARY 3,
1996 17,155,086 $58 $62,773 $85,773 $ 38 $148,642
========== === ======= ======= ====== ========
See notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
LECHTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED FEBRUARY 3, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business - Lechters, Inc. and its subsidiaries
(collectively, the "Company") is a specialty retailer of
primarily brand-name basic housewares and decorative
housewares. As of February 3, 1996, the Company operated
642 stores in 44 states.
b. Basis of Presentation - The consolidated financial
statements include the accounts of Lechters, Inc. and its
subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
References to Fiscal 1995 mean the fiscal year ending on the
Saturday closest to the end of January. References to
Fiscal 1994 and Fiscal 1993 mean the fiscal year ending on
the last Saturday in January of the following year. Fiscal
year 1995 was comprised of 53 weeks and fiscal years 1994
and 1993 were comprised of 52 weeks.
c. Cash Equivalents and Marketable Securities - The Company
considers cash on hand in stores, deposits in banks and all
highly liquid debt instruments, with maturities of 90 days
or less when purchased, as cash and cash equivalents.
Marketable securities are cash investments, primarily U.S.
Government securities, with maturities exceeding 90 days at
time of purchase.
Effective January 30, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities".
This statement requires that investments in debt and equity
securities classified as available for sale be carried at
fair value. Previously, fixed income securities classified
as available for sale were carried at the lower of aggregate
amortized cost or fair value. At February 3, 1996 and
F-7
<PAGE>
January 28, 1995, the fair value of marketable securities
approximated carrying value. Unrealized gains and losses
are reflected as a separate component of Shareholders'
Equity, net of deferred income taxes. At February 3, 1996,
Shareholders' Equity was increased $38,000 (net of $26,000
in deferred income taxes) and at January 28, 1995,
Shareholders' Equity was decreased by $210,000 (net of
$146,000 in deferred income taxes). In accordance with the
statement, prior period financial statements have not been
restated.
d. Merchandise Inventories - Merchandise inventories are stated
on the following methods:
February 3, January 28,
1996 1995
Lower of cost (first-in,
first-out) or market as
determined by the retail
inventory method (stores) $ 76,902,000 $62,682,000
Lower of cost (first-in,
first-out) or market
(warehouses) 32,996,000 34,641,000
$109,898,000 $97,323,000
============ ===========
The Company includes as inventoriable costs, following IRS
code section 263A, certain indirect costs, principally
purchasing, warehousing and distribution costs, which are
necessary to bring inventory to the point of sale. For
Fiscal 1995 and Fiscal 1994, indirect costs included as part
of inventory increased approximately $1,000,000 for each
year, respectively. At February 3, 1996 total indirect
costs included as part of inventory were approximately
$9,600,000. At January 28, 1995, indirect costs included as
part of inventory were approximately $8,600,000.
e. Property and Equipment - Property and equipment are stated
at cost. Depreciation and amortization are computed
F-8
<PAGE>
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.
f. Preopening Costs - Preopening costs are capitalized and
amortized over a period of 12 months from the date
operations commenced.
g. Income Taxes - Deferred income taxes reflect the future tax
consequences of differences between the tax bases of assets
and liabilities and their financial reporting amounts at
year-end. For prior years, amounts provided for income
taxes were based on income reported for financial statement
purposes. Deferred income taxes were provided for timing
differences as certain income and expense items were
reported for financial statement purposes in periods
different from the periods in which such items were
recognized for tax purposes.
h. Net Income Per Share - Net income per share data were
computed by dividing net income by the weighted average
number of common shares and common share equivalents
outstanding during each period. Common share equivalents
include outstanding stock options. The Company's 5%
Convertible Subordinated Debentures issued in September 1991
did not qualify as a common stock equivalent at the time of
issue and are not included in the calculation of primary net
income per share. For the purpose of computing fully
diluted net income per share, the assumed conversion of such
debentures would have an anti-dilutive effect on Fiscal
1995, 1994 and 1993 net income per share.
The number of shares used in computing net income per share
was determined as follows:
F-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fiscal Year Ended
February 3, January 28, January 29,
1996 1995 1994
Weighted average common
shares outstanding 17,147,000 16,898,000 16,768,000
Common share equivalents 141,000 197,000 332,000
17,288,000 17,095,000 17,100,000
========== ========== ==========
</TABLE>
I. Fair Value of Financial Instruments - SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial
instruments, both assets and liabilities recognized and not
recognized in the consolidated balance sheet of the Company,
for which it is practicable to estimate fair value. The
estimated fair values of financial instruments which are
presented herein have been determined by the Company using
available market information and appropriate valuation
methodologies. However, considerable judgement 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 February 3, 1996 and January 28, 1995,
due to the short term maturities of these investments. The
fair value of the Company's long-term debt at February 3,
1996 and January 28, 1995 was $61,380,000 and $75,325,000,
respectively. The carrying value of long-term debt at
February 3, 1996 and January 28, 1995 was $78,038,000 and
$80,777,000, respectively. The fair value of the Company's
long-term debt is based on market prices or dealer quotes
(for publicly traded debentures) and on discounted future
cash flows using current interest rates for financial
instruments with similar characteristics and maturity (for
senior notes).
F-10
<PAGE>
j. Recent Accounting Pronouncements - In March 1995, the
Financial Accounting Standards Board issued 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." This Statement is effective for
fiscal years beginning December 15, 1995. The Statement
establishes accounting standards for the impairment of long-
lived assets, certain intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. The
Company intends to adopt the new Statement when required in
Fiscal 1996 and does not expect the adoption to have a
material effect on its consolidated financial statements.
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement is also effective for fiscal
years beginning December 15, 1995. The Statement
establishes a fair value method of accounting for stock-
based employee compensation plans. Under the fair value
method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over
the service period, which is usually the vesting period.
The Statement encourages but does not require the adoption
of the fair value method of accounting for employee stock-
based transactions. The Statement also requires increased
footnote disclosures, regardless of the method chosen to
measure and recognize compensation for employee stock-based
arrangements. The Company has not yet determined if it will
elect to change to the fair value method, nor has it
evaluated the impact of the new Statement on net income and
earnings per share should it elect to make such a change.
k. Use of Estimates - The Company utilizes estimates and
assumptions in the preparation of financial statements in
conformity with generally accepted accounting principles.
These estimates and assumptions affect the reported amounts
of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements. The estimates and assumptions also affect the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these
estimates.
F-11
<PAGE>
l. Reclassifications - Certain reclassifications have been made
to the financial statements of prior years to conform with
the classifications used for Fiscal 1995.
2. RESTRUCTURING CHARGE
During the second quarter of Fiscal 1994, the Company recorded a
pretax restructuring charge of $11,000,000 (approximately
$6,500,000 after tax, or $0.38 per share) related to its plan to
close 10 unprofitable stores and discontinue various unprofitable
merchandise lines. The plan called for the termination of the
employment of approximately 19 associates from store operations,
the service office and distribution centers. This restructuring
was completed in Fiscal 1995 and excess reserves of $217,000 were
credited to operating income in 1995.
3. SHAREHOLDERS' EQUITY
Stock Options - Options granted under the Company's 1989
Incentive and Non-Qualified Stock Option Plan are granted at
market value on the date of grant and are exercisable at a rate
of 20% per year over a five-year period commencing with the date
of grant.
In June 1989, the Company granted to a consultant a non-qualified
option to purchase 120,302 shares of the Company's common stock
at a price of $6.65 per share, which reflected the fair market
value on the date of grant. The option is exercisable in annual
installments over a period of four years.
The Stock Option Plan transactions for fiscal years 1995, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
February 3, January 28, January 29,
1996 1995 1994
Options outstanding, beginning
of period 667,906 901,070 611,020
Granted 1,135,960 387,550 454,700
Exercised (36,440) (335,174) (45,000)
Canceled (1,067,520) (285,540) (119,650)
F-12
<PAGE>
Options outstanding, end of period 699,906 667,906 901,070
Option price range $ 5.00 $ 6.38 $ 6.38
to to to
$20.50 $23.00 $23.00
Options exercisable, end of period 136,560 273,950 221,450
Options available for grant, end
of period 574,590 643,040 145,050
</TABLE>
As of February 3, 1996, 1,632,962 shares of common stock were
reserved for issuance in the connection with exercise of stock
options.
4. LONG-TERM DEBT
Long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
February 3, January 28,
1996 1995
Senior Notes, 10.5% due 1998 (a) $ 5,250,000 $ 9,000,000
Senior Notes, 9.53% due 2001 (a) 15,000,000 15,000,000
Convertible Subordinated
Debentures, 5% due 2001 (b) 57,788,000 56,777,000
Total 78,038,000 80,777,000
Less current portion (c) 3,000,000 3,000,000
$75,038,000 $77,777,000
=========== ===========
</TABLE>
(a) The 10.5% Senior Notes (the "1988 Notes") are due September
1, 1998. Interest on the 1988 Notes is payable semiannually
on March 1 and September 1 of each year. Beginning
September 1, 1994, and each year thereafter until the 1988
Notes are paid in full, the Company is required to repay
$3,000,000 of the principal amount of the 1988 Notes. The
9.53% Senior Notes (the "1991 Notes") are due May 1, 2001.
Interest on the 1991 Notes is payable semiannually on May 1
and November 1 of each year. Beginning May 1, 1997, and
each year thereafter until the 1991 Notes are paid in full,
F-13
<PAGE>
the Company is required to repay $3,000,000 of the principal
amount of the 1991 Notes. The Company may prepay the 1988
Notes and the 1991 Notes (collectively, the "Notes") at any
time, in whole or in part, at a price equal to the greater
of par or the present value of the future debt service on
the Notes, discounted at 1/2% above the then current yield
on U.S. Treasury securities of a maturity comparable to the
remaining weighted average life of the Notes. The
provisions of the note agreements include a requirement that
the Company maintain a current ratio of at least 1.5 to 1
and limitations on liens, sale and leaseback transactions,
funded debt, payment of dividends, acquisitions,
investments, sales of assets and incurrence of leases.
(b) The 5% Convertible Subordinated Debentures (the
"Debentures") were issued in 1991 with a yield to maturity
of approximately 7.47%. At February 3, 1996 and January 28,
1995, the unamortized original issue discount was $7,213,000
and $8,223,000, respectively. The Debentures are
convertible into Common Stock of the Company prior to
maturity at a conversion of 32.79 shares per $1,000
principal amount at maturity. Amounts charged to income for
the amortization of debenture discount were $1,011,000 and
$918,000 for Fiscal 1995 and Fiscal 1994, respectively.
The Debentures have not been and will not be registered
under the United States Securities Act of 1933.
(c) Aggregate annual maturities of long-term debt are as
follows:
Fiscal
Year Amount
1996 $ 3,000,000
1997 5,250,000
1998 3,000,000
1999 3,000,000
2000 3,000,000
Thereafter 60,788,000
$78,038,000
(See Note 10) ===========
F-14
<PAGE>
5. LINE OF CREDIT
At February 3, 1996, the Company had an unused $40,000,000 Credit
Agreement (the "Credit Agreement") with a group of banks.
Borrowings under the Credit Agreement bear base rate interest on
either (1) the higher of the prime rate and the sum of the
Federal Fund Rate plus 1/2%; or (2) an Adjusted Eurodollar Rate.
The Credit Agreement requires maintenance of certain earnings and
fixed charge coverage ratios, and the interest rate payable is
adjusted by from 1/2% to 1 1/4% over the above base rate
depending on the ratio of consolidated indebtedness to pre-tax
cash earnings. The Credit Agreement expires November 1996. At
the end of Fiscal 1995 there were no borrowings outstanding under
the Company's Credit Agreement.
At February 3, 1996, the Company also had two letter of credit
facilities for an aggregate of $35,000,000. At February 3, 1996
and January 28, 1995, the Company was liable for outstanding
letters of credit in the amount of approximately $8,886,000 and
$8,765,000, respectively.
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fiscal Year Ended
February 3, January 28, January 29,
1996 1995 1994
Federal:
Current $ 832,000 $ 677,000 $2,707,000
Deferred 1,505,000 936,000 3,146,000
2,337,000 1,613,000 5,853,000
State:
Current 630,000 262,000 557,000
Deferred 179,000 461,000 1,213,000
809,000 723,000 1,770,000
$3,146,000 $2,336,000 $7,623,000
========== ========== ==========
</TABLE>
F-15
<PAGE>
A reconciliation of the statutory Federal income tax rate with
the effective rate is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fiscal Year Ended
February 3, January 28, January 29,
1996 1995 1994
Statutory Federal income tax rate 34.0% 34.0% 35.0%
State income taxes, net of Federal
benefit 7.0 8.4 6.2
Other 0.1 (1.4) (0.4)
Effective income tax rate 41.1% 41.0% 40.8%
===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes.
The components of the non-current deferred tax liability (asset)
are as follows:
February 3, 1996 January 28, 1995
Accelerated tax
depreciation $18,085,000 $15,343,000
Reserve not currently
deductible (737,000) (1,394,000)
$17,348,000 $13,949,000
=========== ===========
The Company and its subsidiaries file consolidated Federal and
state income tax returns. Deferred income tax expense during
Fiscal 1995, 1994 and 1993 principally resulted from the use of
accelerated methods of depreciation for tax purposes over the
straight-line method used for financial reporting purposes.
F-16
<PAGE>
7. LEASES
At February 3, 1996, the Company leased all of its stores and two
facilities for its corporate office, warehouse and distribution
operations. These operating leases expire on varying dates to
2008.
At February 3, 1996, aggregate minimum rentals in future periods
are as follows:
Minimum
Fiscal Rental
Year Commitment
1996 $ 49,501,000
1997 $ 47,461,000
1998 $ 44,654,000
1999 $ 39,608,000
2000 $ 34,898,000
Thereafter $120,794,000
The preceding does not include contingent rentals which may be
payable under certain leases on the basis of percentage of sales
in excess of stipulated amounts. The amounts of such additional
rentals incurred were as follows:
Fiscal
Year Amount
1995 $ 1,913,000
1994 $ 1,708,000
1993 $ 1,765,000
Total rent expense was as follows:
Fiscal
Year Amount
1995 $ 50,712,000
1994 $ 45,014,000
1993 $ 39,172,000
F-17
<PAGE>
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 $1,070,000, $1,037,000
and $954,000 in Fiscal 1995, Fiscal 1994 and Fiscal 1993,
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 $181,000 and $176,000 were charged to expense in
Fiscal 1995 and Fiscal 1994, respectively.
The Company has a Deferred Compensation Plan covering certain key
executives which provides that, at retirement, these associates
will receive for a 10-year period an annual predetermined
benefit, the amount of which is dependent upon their retirement
age. The maximum amount that the associate may receive is being
accrued for financial reporting purposes over the employment
period. Approximately $134,000, $71,000 and $174,000 were
charged to expense in Fiscal 1995, Fiscal 1994 and Fiscal 1993,
respectively.
The Company has entered into consulting agreements with certain
senior executives whereby, at retirement, these associates will
provide consulting and advisory services for a 10-year period.
The maximum aggregate amount payable under these agreements is
$400,000 per year.
9. AVAILABLE FOR SALE SECURITIES
The following is a summary of the available for sale securities
which comprise the balance in "marketable securities" at
February 3, 1996 and January 28, 1995 (Amounts in thousands
except realized loss and gain information):
F-18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross
Unrealized Unrealized Estimated
1995 Cost Gains Losses Fair Value
Government Bonds $35,489 $60 $ (2) $35,547
Municipal Bonds 2,053 6 - 2,059
Total available for
sale securities $37,542 $66 $ (2) $37,606
======= === ====== =======
Gross Gross
Unrealized Unrealized Estimated
1994 Cost Gains Losses Fair Value
Government Bonds $43,695 $15 $(371) $43,339
======= === ====== =======
</TABLE>
The cost and estimated fair value of debt securities at February
3, 1996 by contractual maturity are as follows:
Estimated
Cost Fair Value
1996 $20,150 $20,155
1997 10,763 10,794
1998 6,629 6,657
Total available for
sale securities $37,542 $37,606
======= =======
Net gains from the sales of available for sale securities is
reported on the consolidated statement of income as "Loss (Gain)
on Sale of Government Securities". For Fiscal 1995,
the net gain reported of $26,000 was the result of gross
realized gains of $114,000 net of gross realized losses of
$88,000. For Fiscal 1994, the reported loss of $121,000 was the
result of gross realized losses of $137,000 net of gross realized
gains of $16,000.
F-19
<PAGE>
10. SUBSEQUENT EVENT (UNAUDITED)
Issuance of Convertible Preferred Stock - On April 5, 1996 the
Company issued $20,000,000 in Convertible Preferred Stock to
Prudential Equity Investors Inc., a private equity investment
firm. The net proceeds of the issuance are being used to pay
down debt and for general corporate purposes. The preferred
stock is convertible into one share of common stock at a
conversion price of $6.25 per share and carry voting rights. The
Convertible Preferred Stock will pay an annual dividend of 5.05%.
The Convertible Preferred Stock is senior in liquidation to the
Common Stock of the Company. The terms associated with the
issuance of the Convertible Preferred Stock include registration
rights and anti-dilution protection. The Convertible Preferred
Stock did not qualify as a common stock equivalent at the time of
issue and will not be included in the calculation of primary net
income per share.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal Quarter Ended
April 29, July 29, October 28, February 3,
1995 1995 1995 1996
(Amounts in thousands except share and per share
amounts)
Net sales $ 80,316 $ 88,671 $ 95,148 $167,913
Gross profit 20,240 22,745 24,850 54,050
Restructuring expense -- -- -- (217)
Income (loss) before
income tax provision (3,973) (3,163) (1,559) 16,344
Net income (loss) (2,344) (1,866) (921) 9,634
Net income (loss) per
share (a) (b) $(0.13) $(0.11) $(0.05) $0.56
Number of shares used
in computing net
income per share 17,416,000 17,333,000 17,238,000 17,183,000
F-20
<PAGE>
Fiscal Quarter Ended
April 30, July 30, October 29, January 28,
1994 1994 1994 1995
(Amounts in thousands except share and per share
amounts)
Net sales $ 73,692 $ 81,582 $ 91,077 $152,913
Gross profit 19,785 22,604 25,543 48,457
Restructuring expense -- 11,000 -- --
Income (loss) before
income tax provision (2,153) (11,790) 2,072 17,569
Net income (loss) (1,270) (6,956) 1,222 10,366
Net income (loss) per
share (a) (b) $(0.07) $(0.41) $0.07 $0.60
Number of shares used
in computing net
income per share 17,072,000 17,053,000 17,171,000 17,352,000
</TABLE>
(a) Fully diluted net income per share, assuming conversion of the
Company's 5% Convertible Subordinated Debentures and elimination
of the related interest costs less applicable income taxes was
$0.53 per share for the fourteen weeks ended February 3, 1996 and
$0.56 per share for the thirteen weeks ended January 28, 1995, on
weighted average shares outstanding of 19,314,000 and 19,524,000,
respectively.
(b) Difference of $0.01 between full year income per share and the
resulting income per share from the sum of each of the quarters
in Fiscal 1995 and Fiscal 1994 is due to the weighted average
share calculation and the seasonality of the business.
F-21
<PAGE>
EXHIBIT 10.7
AMENDMENT TO NO. 4
TO
DEFERRED COMPENSATION AGREEMENT
Amendment No. 4, dated April 8 , 1996, between LECHTERS,
INC. a New Jersey Corporation (the "Corporation") and Donald Jonas
("Employee") to Deferred Compensation Agreement dated December 9, 1987
as amended June 16, 1989, August 15, 1989 and June 15, 1995 (the
"Agreement").
WHEREAS, Amendment No. 3 dated June 15, 1995, made part of the
Agreement provides in paragraph 4 that the Corporation shall pay the
insurance premiums on split-dollar life insurance policy #79713191
issued by Prudential Life Insurance Company providing for a death
benefit of $4,000,000, and whereas Donald Jonas and the Corporation
have been advised to terminate said Prudential policy, and place in
substitution therefore two (2) new policies having a death benefit of
$2,000,000 each to be issued by Metropolitan Life.
NOW, THEREFORE, it is agreed as follows:
1. Paragraph No. 4 of said Amendment No. 3 is hereby amended to
delete reference to policy #79713191 issued by Prudential Life
Insurance Co.
<PAGE>
2. Paragraph No. 4 of said Amendment No. 3 is hereby amended to
add that the Corporation agrees for the lives Barbara and Donald Jonas
to pay the insurance premiums on the split-dollar life insurance
policies issued, or to be issued, by Metropolitan Life on the lives of
Donald Jonas and Barbara Jonas as aforesaid, provided that the
Corporation has the right to receive from the benefits payable
pursuant to such policies an amount equal to the aggregate premium
costs incurred by the Corporation for the maintenance of said
policies.
3. Except as hereby amended, the Agreement shall continue in
full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 4
to be executed as of the date first written above.
LECHTERS, INC.
BY: /s/ Ira Rosenberg
Vice President
/s/ Donald Jonas
Donald Jonas
<PAGE>
EXHIBIT 10.8
MEMORANDUM OF AGREEMENT
WHEREAS, Local 99, UNITE ("Union") and Lechters, Inc.
("Employer") are parties to a collective bargaining agreement
("Agreement') dated March 16, 1993 covering warehouse employees; and
WHEREAS, the Union and the Employer have engaged in good
faith negotiations to renew and extend the Agreement for a new term
effective March 16, 1996 through March 15, 1999; and
WHEREAS, as a result of such negotiations, the Union and the
Employer have arrived at terms to be effective for such renewal term;
and
WHEREAS, the parties desire to memorialize the terms of such
renewal in this Memorandum pending completion and execution of a
revised collective bargaining agreement containing the terms herein
provided for.
NOW THEREFORE IT IS AGREED:
1. The terms and conditions contained in the Agreement
are renewed and extended through March 15, 1999 except as modified
herein.
2. The vacation provision of the Agreement shall be
amended to provide that employees achieving 15 years of service, 20
years of service and 25 years of service shall receive an additional
$50 per anniversary for such 15, 20 and 25 years of service.
3. The vacation period provision shall be amended as set
forth in Exhibit A.
4. The overtime provision shall be amended as set forth
in Exhibit B.
5. Current employees covered under the Agreement and
trained for use of PDT and RF guns shall receive a bonus as provided
for in Exhibit C. This provision shall be a sideletter to the
Agreement.
1
<PAGE>
6. The Employer will provide to the Union, at least
weekly a list of temporary and lumper employees who worked with a
daily recap. Lumpers will perform work only as provided for in
Exhibit D. No lumper shall be used both as a Lumper and as temporary
employee in the same work day, or vice versa. Lumpers may not be used
until all employees in the receiving department who have been
involuntarily laid off shall have been rehired or given the
opportunity to return to work unless there is insufficient time to
give notice to such laid off employees so that they may return to
work. Receiving department employees shall be exempt from plant wide
seniority with respect to layoffs while the Employer is participating
in the 'lumper" program. Layoffs within the receiving department
shall be based on plant wide seniority with in the department.
7. The contracting out provision of the Agreement will be
amended to provide that the Employer may continue renting temporary
warehouse space, including landlord services, for purposes of
temporary storage only, for products that will be delivered, handled
and processed by the Harrison warehouse associates.
8. Transportation considerations will be as set forth in
Exhibit E, which shall be a sideletter to the Agreement.
9. The Labor Management and Labor & Safety meeting will
be held on the third Thursday of every month.
10. The Company will conduct fire drills 2 times per year.
11. The Union Committee will meet once per month for a
period of one hour. The Employer will not unreasonably withhold
consent for special requests for additional time.
12. During any counseling of a union employee, a Shop
Steward or a Shop Committee person must be present.
13. Counseling records of employees will be considered
stale and of no effect and will be cleared from an employees personnel
records after a two year rolling period with respect to non-attendance
matters and after a one year rolling period with respect to attendance
matters.
2
<PAGE>
14. The Employer will reassign associates from position to
position based on seniority, provided the most junior person has the
qualifications and skills to perform the temporary assignment.
15. When any working conditions may adversely affect a
worker's health or create unnecessary burden in the performance of the
work, the Employer must correct and alleviate such situation with due
diligence.
16. A change in permanent shift times shall occur on April
29, 1996 as follows:
7:00am-to 3:15pm Mezzanine and Replenishers
8:00am to 4:15pm All other employees, however the
Employer may reassign 25% of the work force in shipping
and 25% of full case for the 7:00am shift. In making
such assignment, the Employer will first use
volunteers, and if insufficient volunteers are
obtained, the Employer will reassign employees based
upon reverse shop seniority, with the least senior
employee being reassigned. The Employer will provide
to the Union a list identifying those employees who are
in the Replenishing Department.
17. With respect to any shift commencing on or after
2:00pm, shift differentials shall be amended to provide that employees
hired after the date of this memorandum shall receive a differential
of .50 per hour. Current employees shall receive a differential of
$1.50 per hour in lieu of the 20% differential provided for in the old
agreement. The Company shall first offer currentemployees the right
to change to 50% of the available positions on the other shift before
hiring new employees.
18. The provision for pay for appearance shall be amended
to provide that the Employer shall post notice on its phone call-in
system no less than 90 minutes before an employees shift start time
advising employees that the facility is closed and they should not
appear for work. Employees shall use reasonable efforts when
conditions indicate that the facility may be closed to call in. In
the event notice fails despite reasonable efforts by the employee, an
employee appearing at the facility for work when the facility is
3
<PAGE>
closed shall be paid four hours pay. In the event employees are told
to leave before the conclusion of their shift because of such
conditions, shall receive a full days pay. Employees may c-)ntinue to
choose to use personal or accrued vacation time to receive payment for
any day in which the facility is closed and they would otherwise not
receive payment.
19. A Management Rights clause shall be added to read as
follows:
subject only to the provisions of this agreement and
applicable law, management of the Employer's operations
and direction of its working force including, but not
limited to the right to schedule and assign work to be
performed; hire or rehire employees; promote; layoff or
recall employees who are laid off; suspend; discipline
or discharge for proper cause; and transfer employees
because of lack of work or other legitimate reasons
shall be vested exclusively with the Employer.
20. Supper money will be paid to any employee who works
three or more hours of overtime.
21. The monetary payment for refreshment allowance shall
be eliminated.
22. The trial period shall be increased to 60 calendar
days. The period in which a temporary may work is increased to 60
calendar days.
23. The list of covered workers is amended to include the
following positions:
Hi-lift drivers, janitors, lead persons, cycle
counters, replenishers. The following positions which
are not presently used shall be deleted: ticketers,
charge clerks, distributors, paper & physical, machine
ticketers, manual ticketers, floor clerks and
merchandise clerks. The Employer agrees to employ at
least 2 truck drivers who will perform switching of
trailers and local delivery duties as assigned by the
Employer. In addition, after 'order pickers" insert
4
<PAGE>
"including full case pickers" and after "shipping
clerks" insert "including sorters."
24. The Employer will institute a Holiday bonus for
warehouse union workers, subject to the institution of a Holiday bonus
for non-union associates. The Employer reserves the right to
determine the criteria for eligibility and amount of any such bonus
plans.
25. In accordance with current OSHA requirements, the
Employer agrees to train and license operators initially starting in
the position, and will conduct an annual audit to ensure adherence to
safety and operating procedures in accordance with Exhibit F.
26. Wage adjustments shall be made as follows:
Employees in the bargaining unit will receive wage
adjustments as follows
(prorata for part-time employees):
March 16, 1996 15.00/week
March 16, 1997 8.00/week
September 16, 1997 7.00/week
March 16, 1998 8.00/week
September 16, 1998 7.00/week
27. In all other respects, the Agreement dated March 15,
1993 shall remain in full force and effect through March 15, 1999.
28. The parties agree to incorporate the terms hereof into
a full collective bargaining agreement, but pending execution of such
agreement, this Memorandum and the Agreement shall be the collective
bargaining agreement between the parties,.enforceable by its terms.
29. This terms of this Memorandum and the renewal of the
Agreement has been ratified by the Union's membership at the facility.
Dated: April 1, 1996
5
<PAGE>
LOCAL 99, UNITE (-Union-)
BY:
Manager
BY: Committee Members
LECHTERS, INC. ("Employer")
BY(
President
Vice President
6
<PAGE>
EXHIBIT 22
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 Florida, Inc. Florida
Lechters Georgia, Inc. Georgia
Lechters Hawaii, Inc. Hawaii
Lechters Idaho, Inc. Idaho
Lechters Illinois, Inc. Illinois
Lechters Indiana, Inc. Indiana
Lechters Iowa, Inc. Iowa
Lechters Kansas, Inc. Kansas
Lechters Kentucky, Inc. Kentucky
Lechters Louisiana, Inc. Louisiana
Lechters Maine, Inc. Maine
Lechters Baltimore, Inc. Maryland
Lechters Holyoke, Inc. Massachusetts
<PAGE>
Page 2
Subsidiaries of the Company
NAME OF SUBSIDIARY STATE OF INCORPORATION
Lechters Michigan, Inc. Michigan
Lechters Minnesota, Inc. Minnesota
Lechters Mississippi, Inc. Mississippi
Lechters Missouri, Inc. Missouri
Lechters Nebraska, Inc. Nebraska
Lechters Nevada, Inc. Nevada
Lechters New Hampshire, Inc. New Hampshire
Lechters New Jersey, Inc. New Jersey
Lechters New Mexico, Inc. New Mexico
Lechters New York, Inc. New York
Lechters N.Y.C., Inc. New York
Lechters North Carolina, Inc. North Carolina
Lechters Ohio, Inc. Ohio
Lechters Oklahoma, Inc. Oklahoma
Lechters Oregon, Inc. Oregon
Lechters Pennsylvania, Inc. Pennsylvania
Lechters Rhode Island, Inc. Rhode Island
Lechters South Carolina, Inc. South Carolina
Lechters Tennessee, Inc. Tennessee
Lechters Texas, Inc. Texas
<PAGE>
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
Lechter Investment Corp. Delaware
Dissolved 11/10/95
Harrison Investment, Inc. Delaware
<PAGE>
EXHIBIT 24
INDEPENDENT AUDITORS' REPORT
We consent to the incorporation by reference in Registration Statement
Number 33-48560 on Form S-8 and in Registration Statement Number 33-46993
on Form S-8 of our report dated March 21, 1996, appearing in this Annual
Report on Form 10-K of Lechters, Inc. and subsidiaries for the year ended
February 3, 1996.
New York, New York
May 1, 1996
<PAGE>
EXHIBIT 25
LECHTERS, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned does hereby
make, constitute and appoint Ira S. Rosenberg and John W. Smolak, or
either of them, the true and lawful attorneys-in-fact of the undersigned,
with full power of substitution and revocation, for and in the name,
place and stead of the undersigned, to execute and deliver the Annual
Report on Form 10-K, and any and all amendments thereto; such Form 10-K
and each such amendment to be in such form and to contain such terms and
provisions as said attorneys or substitute shall deem necessary or
desirable; giving and granting unto said attorneys, or to such person or
persons as in any case may be appointed pursuant to the power of
substitution herein given, full power and authority to do and perform any
and every act and thing whatsoever requisite, necessary or, in the
opinion of said attorneys or substitute, able to be done in and about the
premises as fully and to all intents and purposes as the undersigned
might or could do if personally present, hereby ratifying and confirming
all that said attorneys or such substitute shall lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the following persons have duly executed these
presents in the capacities indicated this 5th day of March, 1996:
Signature Title
/S/ Donald L. Jonas Chairman, President and
Donald L. Jonas Chief Executive Officer
/S/ John W. Smolak Senior Vice President and
John W. Smolak Chief Financial Officer
/S/ Albert Lechter Director
Albert Lechter
/S/ Leonard Pfeffer Director
Leonard Pfeffer
/S/ Martin S. Begun Director
Martin S. Begun
<PAGE>
SIGNATURES - (Continued)
/S/ Charles A. Davis Director
Charles A. Davis
/S/ Bernard D. Fischman Director
Bernard D. Fischman
/S/ Robert Knox Director
Robert Knox
/S/ Anthony E. Malkin Director
Anthony E. Malkin
/S/ Roberta S. Maneker Director
Roberta S. Maneker
/S/ Norman Matthews Director
Norman Matthews
/S/ John Wolff Director
John Wolff
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-K and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> FEB-03-1996 FEB-03-1996
<PERIOD-END> FEB-03-1996 FEB-03-1996
<CASH> 0 4,234
<SECURITIES> 0 37,606
<RECEIVABLES> 0 5,573
<ALLOWANCES> 0 0
<INVENTORY> 0 109,898
<CURRENT-ASSETS> 0 162,830
<PP&E> 0 105,082
<DEPRECIATION> 4,180 16,056
<TOTAL-ASSETS> 0 272,312
<CURRENT-LIABILITIES> 0 26,717
<BONDS> 0 57,788
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0 0
0 0
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<TOTAL-LIABILITY-AND-EQUITY> 0 272,312
<SALES> 167,913 432,048
<TOTAL-REVENUES> 167,913 432,048
<CGS> 113,863 310,163
<TOTAL-COSTS> 36,358 109,414
<OTHER-EXPENSES> 1,565 5,039
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<INTEREST-EXPENSE> 1,861 6,920
<INCOME-PRETAX> 16,344 7,649
<INCOME-TAX> 6,710 3,146
<INCOME-CONTINUING> 9,634 4,503
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 9,634 4,503
<EPS-PRIMARY> .56 .26
<EPS-DILUTED> 0 0
</TABLE>
