SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended November 2, 1996 COMMISSION FILE NO. 0-17870
LECHTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY No. 13-2821526
STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION IDENTIFICATION NO.)
1 Cape May Street, Harrison, NEW JERSEY 07029
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (201) 481-1100
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, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The number of shares of the Registrant's common stock, without par value,
outstanding at December 16, 1996: 17,155,086:
LECHTERS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR QUARTER ENDED NOVEMBER 2, 1996
INDEX
PAGE NO.
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
November 2, 1996 and February 3, 1996 1
Consolidated Statements of Income
for the Thirteen and Thirty-Nine Weeks Ended
November 2, 1996 and October 28, 1995 2
Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended
November 2, 1996 and October 28, 1995 3
Consolidated Statement of Shareholders'
Equity for the Thirty-Nine Weeks Ended
November 2, 1996 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8-10
PART II. Other Information
Item 6. Exhibits and Reports 11
<PAGE> 3
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
November 2, February 3,
1996 1996
<S> <C> <C>
A S S E T S (unaudited)
Current Assets:
Cash and Cash Equivalents $ 7,514 $4,234
Available for Sales Securities 11,626 37,606
Accounts Receivable 11,205 5,573
Merchandise Inventories 145,845 109,898
Prepaid Expenses 12,068 5,519
Total Current Assets 188,258 162,830
Property and Equipment:
Fixtures and Equipment 66,533 64,688
Leasehold Improvements 102,201 100,840
168,734 165,528
Less Accumulated Depreciation
& Amortization 70,852 60,446
97,882 105,082
Other Assets 4,416 4,400
Total Assets $290,556 $272,312
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Accounts Payable $ 32,785 $ 7,827
Salaries, Wages and Other
Accrued Expenses 14,197 13,546
Taxes, Other Than Income Taxes 2,091 1,591
Federal and State Income Taxes 367 753
Current Portion Long-Term Debt - 3,000
Total Current Liabilities 49,440 26,717
Long-term Debt
Senior Notes Payable - 17,250
5% Convertible Subordinated
Debentures due September 27,
2001 (Net of Unamortized
Discount of $6,421 and
$7,212, respectively) 58,579 57,788
Total Long-Term Debt 58,579 75,038
Deferred Income Taxes and 22,399 21,915
Other Deferred Credits
Shareholders' Equity:
Convertible Preferred Stock,
$100 Par Value
Authorized 1,000,000
Shares, Issued and
Outstanding - Series A -
149,999 Shares; Series B -
50,001 Shares 20,000 --
Common Stock, Without Par
Value, Authorized 50,000,000
Shares, Issued and Outstanding
17,155,086 and 17,155,086
Shares, Respectively 58 58
Unrealized Holding (Loss) Gain
on Available for Sales
Securities (47) 38
Additional Paid-in Capital 62,273 62,773
Retained Earnings 77,854 85,773
Total Shareholders' Equity 160,138 148,642
Total Liabilities and $290,556 $272,312
Shareholders' Equity
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Sales $98,495 $95,148 $276,214 $264,135
Cost of Goods Sold
(including occupancy
and indirect costs) 73,178 70,298 208,405 196,300
Gross Profit 25,317 24,850 67,809 67,835
Selling, General and
Administrative 27,085 25,142 78,446 73,056
Expenses
Operating Loss (1,768) (292) (10,637) (5,221)
Other Expenses
(Income):
Interest Expense 1,177 1,603 3,919 5,059
Interest Income (307) (313) (1,152) (1,532)
Loss (Gain) on Sale of
Government Securities 15 (23) 19 (53)
Total Other Expenses
(Income) 885 1,267 2,786 3,474
Loss Before Income
Taxes (2,653) (1,559) (13,423) (8,695)
Income Tax Benefit (1,088) (638) (5,504) (3,564)
Net Loss ($1,565) ($921) ($7,919) ($5,131)
Net Loss Per Share ($0.09) ($0.05) ($0.46) ($0.30)
Weighted Average Common
Shares Outstanding 17,156,000 17,238,000 17,247,000 17,322,000
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
November 2, October 28,
1996 1995
(unaudited)
<S> <C> <C>
Cash Flows From Operating
Activities:
Net Loss ($7,919) ($5,131)
Adjustments to Reconcile Net
Loss to Net
Cash (Used In) Provided By
Operating Activities:
Depreciation and Amortization 12,609 11,876
Straight Line Rent 625 648
Other 1,256 367
Changes in Assets and
Liabilities:
Increase in Accounts Receivable (5,632) (1,487)
Increase in Merchandise
Inventories (35,947) (50,535)
Increase in Prepaid Expenses (6,074) (7,188)
Increase in Accounts Payable,
Accrued Expenses and Taxes
Other Than Income Taxes 26,109 19,219
Decrease in Income Taxes
Payable (861) (266)
Decrease (Increase) in Other
Assets 152 (21)
Net Cash Used In Operating
Activities (15,682) (32,518)
Cash Flows From Investing
Activities:
Capital Expenditures (6,624) (16,530)
Decrease in Available for Sale
Securities 25,836 38,432
Net Cash Provided by
Investing Activities 19,212 21,902
Cash Flows From Financing
Activities:
Issuance of Preferred Stock 20,000 --
Payment of Senior Notes Payable (20,250) (3,750)
Exercise of Stock Options -- 350
Net Cash Used In Financing
Activities (250) (3,400)
Net Increase (Decrease) in Cash
and Cash Equivalents 3,280 (14,016)
Cash and Cash Equivalents,
Beginning of Period 4,234 14,774
Cash and Cash Equivalents, End
of Period $7,514 $ 758
Supplemental Disclosure of Cash
Flows Information:
Non Cash Investing Activities:
Unrealized Holding (Loss) Gain
Adjustment ($ 144) $ 41
on Available for Sale
Securities
Cash Paid During the Period
for:
Interest $ 4,546 $ 4,931
Income Taxes Paid/(Refunded) $ 847 ($1,001)
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Preferred Additional Unrealized
Stock Stock Paid-In Retained Holding
Issued Issued Capital Earnings Gain (Loss) Total
<S> <C> <C> <C> <C> <C> <C>
Balance,
February 3, 1996 $58 $ -- $62,773 $85,773 $ 38 $148,642
Issuance of
Preferred Stock
Net of Issuance
Expenses -- 20,000 (500) -- -- 19,500
Net Loss Thirty-
Nine Weeks Ended
November 2, 1996 -- -- -- (7,919) -- (7,919)
Unrealized
Holding Loss
Adjustment -- -- -- -- (85) (85)
Balance,
November 2, 1996
(unaudited) $58 $20,000 $62,273 $77,854 ($47) $160,138
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
LECHTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with the instructions for Form 10-Q and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation for interim periods have been
included.
The Company's results of operations for the thirteen and thirty-nine weeks
ended November 2, 1996 are not necessarily indicative of the operating
results for the full year.
Certain reclassifications have been made to the financial statements of the
prior year to conform with the classifications used for Fiscal 1996.
2. NET LOSS PER SHARE
Net loss per share data were computed by dividing net loss by the weighted
average number of common shares and common share equivalents outstanding
during the thirteen and thirty-nine weeks ended November 2, 1996 and
October 28, 1995. Common stock 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 were not included in the calculation of primary net loss per
share for the periods ended November 2, 1996 and October 28, 1995. The
Company's Convertible Preferred Stock issued on April 5, 1996 also did not
qualify as a Common Stock equivalent at the time of issue. For the purpose
of computing fully diluted net loss per share, the assumed conversion of
such debentures would have an anti-dilutive effect on fully diluted loss
per share for the thirteen and thirty-nine weeks ended November 2, 1996 and
October 28, 1995. With respect to the Convertible Preferred Stock,
conversion of such preferred stock would have an anti-dilutive effect on
the calculation of fully diluted loss per share for the thirteen and
thirty-nine weeks ended November 2, 1996.
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<PAGE> 8
3. CONVERTIBLE PREFERRED STOCK
On April 5, 1996, the Company issued 149,999 shares of Series A Convertible
Preferred Stock, $100 par value ("Series A Preferred Stock") and 50,001
shares of Series B Convertible Preferred Stock, $100 par value ("Series B
Preferred Stock") at par value. Said shares of Convertible Preferred Stock
were sold to Prudential Private Equity Investors III, L.P. for $20,000,000.
The proceeds from the sale of the Series A and Series B Preferred Stock
were used to prepay $2,625,000 of the 10.5% Senior Notes due 1998 and
$15,000,000 of the 9.53% Senior Notes due 2001. The balance of the
proceeds are being used for general corporate purposes. Expenses of the
private placement were charged to Additional Paid-in Capital. Series A
Preferred Stock and Series B Preferred Stock are convertible to Common
Stock at a conversion price of $6.25 per share. Series A Preferred Stock is
convertible to 2,399,984 shares of common stock and has voting rights
equivalent to the same number of common shares. Series B Preferred stock is
convertible to 800,016 shares of common stock but has no voting rights.
Both Series A Preferred Stock and Series B Preferred Stock receive a
dividend of 5.05% payable annually. Series A Preferred Stock and Series B
Preferred stock did not qualify as common stock equivalents at the time of
issue.
Robert Knox, a Director of the Company, is a limited partner in Prudential
Private Equity Investors III, L.P.
4. AMENDMENT AND EXTENSION OF THE CREDIT AGREEMENT
On May 23, 1996, the Company amended and extended its $40,000,000 unsecured
credit agreement by entering into an Amended and Restated Credit Agreement
("Credit Agreement") with a group of banks. The Credit Agreement includes
a sub-allocation of $30,000,000 for letters of credit. Borrowings under
the Credit Agreement bear a base rate interest of either (1) higher of the
prime rate or Federal Funds Rate plus 1/2% or (2) an Adjusted Eurodollar
Rate based on LIBOR. The amended Credit Agreement requires maintenance of
certain earnings and fixed charge coverage ratios. The interest rate is
adjusted by from 1.4% to 2.5% depending on the ratio of consolidated
indebtedness to pre-tax cash earnings. The Credit Agreement terminates on
May 22, 1998.
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<PAGE> 9
5. 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 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 adopted this new Statement in
the first quarter of Fiscal 1996.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," that establishes a fair
value method of accounting and reporting for stock-based employee
compensation plans. Under the fair value method, compensation cost is
recognized over the service period, which is usually the vesting period.
The statement encourages but does not require adoption of the fair value
method. As provided for in the Statement, the Company will continue to
apply the accounting provisions of Accounting Principles Board Opinion No.
25. "Accounting for Stock Issued to Employees," and make the appropriate
disclosures in its fiscal 1996 annual report footnotes.
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<PAGE> 10
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED NOVEMBER 2, 1996 IN COMPARISON WITH THIRTEEN WEEKS ENDED
OCTOBER 28, 1995.
Net Sales for the thirteen weeks ended November 2, 1996 increased
$3,347,000 (+3.5%) to $98,495,000 versus sales of $95,148,000 for the comparable
period last year which ended on October 28, 1995. On a comparable store basis,
sales for the third quarter of Fiscal 1996 were flat compared to last year. The
increase in total sales was attributable to new stores opened in Fiscal 1996
compared to the prior year. On November 2, 1996, the Company operated 647
permanent stores compared to 635 stores in operation at October 28, 1995, an
increase of 12 stores (+1.9%). The Company also had 6 temporary "Holiday
Express" stores in operation for a portion of the third quarter of Fiscal 1996.
During the thirteen weeks ended November 2, 1996, the Company opened 4 stores.
Gross profit for the thirteen weeks ended November 2, 1996 increased
$467,000 to $25,317,000. The corresponding gross margin of 25.7% was 0.4 of a
percentage point below that of the third quarter a year ago. Initial margins
produced by sales were flat year over year as the additional mark-on resulting
from the Company's import program and a favorable mix in products sold were
offset by an increase in merchandise markdowns. The increase in markdown
activity reflected the competitive nature of the marketplace and the impact of
the Company's new advertising programs which was initiated in August.
Consequently, the quarter versus quarter decline in margin was attributable to
Rent, Occupancy, and Indirect Costs which included the expense of 12 additional
stores over the third quarter of last year and the impact of scheduled increases
in existing leases.
Selling, General and Administrative Expense for the thirteen weeks ended
November 2, 1996 increased $1,943,000 (+7.7%) to $27,085,000. At 27.5% of
sales, they were 1.1% point above that of the third quarter a year ago. The
dollar increase is primarily attributable to the operating expenses of the
aforementioned 12 additional stores, an increase in advertising expenditures and
a reduction in vendor support associated with the Company's import program.
Additionally, during the third quarter the Company identified certain long-term
store operating assets which fall under the provisions of Statement of Financial
Accounting Standards (SFAS) 121-Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. (See Note 5). A provision
in the amount of $370,000 was recorded in the third quarter to reflect this
potential impairment. The Company will re-evaluate these assets and adjust the
provision accordingly. As required by SFAS 121, the final impairment
adjustments, if material, will be disclosed in the footnotes to the annual
report.
Other Expense decreased by $382,000 to $885,000, primarily due to the
reduction in Interest Expense. Since the third quarter a year ago, the Company
has repaid or prepaid the entire $20,250,000 principal balance of its Senior
Notes Payable including $2,625,000 paid in the third quarter this year.
- 8 -
<PAGE> 11
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996 IN COMPARISON WITH THIRTY-NINE WEEKS
ENDED OCTOBER 28, 1995
Sales for the thirty-nine weeks ended November 2, 1996 were $276,214,000, a
4.6% increase over the thirty-nine week period ended October 28, 1995. Year to
date, chain comparable store sales have declined 0.5%. The increase in sales
was primarily attributable to the increase in stores open during the current
fiscal year compared to the number of stores open for the same period of the
prior year. As of November 2, 1996 there were 647 permanent stores compared to
635 stores for the prior year, an increase of 12 stores (+1.9%). During Fiscal
Year 1996, the Company has opened nine stores and closed four stores for a net
increase of 5 stores over 642 stores open at February 3, 1996, the end of Fiscal
Year 1995. The Company also opened 6 "Holiday Express" temporary locations
during the third quarter of Fiscal 1996.
Gross Profit for the thirty-nine weeks ended November 2, 1996 decreased
$26,000 to $67,809,000 from the $67,835,000 for the comparable year to date for
the prior year. As a percent of Net Sales, Gross Profit declined 1.2% point to
24.5% compared to 25.7% for the prior year. Initial margins produced by sales
were eroded by additional price reductions required by the highly competitive
retail marketplace and by the promotional strategies implemented by the Company
to stimulate sales. Gross Profit was further eroded as fixed occupancy costs
grew due to the net addition of stores and scheduled rent increases. The latter
cost increase was under absorbed given the experienced decline in the year to
date comparable store sales.
Selling, General, and Administrative Expenses for the thirty-weeks ended
November 2, 1996 increased $5,390,000 to $78,446,000 from $73,056,000. Selling,
General and Administrative Expenses totaled 28.4% of Net Sales which was 0.7%
point higher than the prior year. Expense increases were caused by the
additional stores, increased advertising expenditures and a reduction in vendor
expense support due to the increased proportion of direct import merchandise.
As previously disclosed, the provision for impaired assets also increased
expense over the prior year.
For the thirty-nine weeks ended November 2, 1996, Other Expenses (Income)
declined $688,000 to $2,786,000 from $3,474,000 for the comparable period for
the prior year. As a percent of sales, Other Expenses (Income) was 1.0% for the
year to date, a 0.3% point decline from the prior year. Interest Expense for
the year to date decreased $1,140,000 from last year due to the prepayment and
repayment of $20,250,000 in Senior Notes Payable which were outstanding at
October 28, 1995. The prepayment of $17,625,000 occurred in the first quarter
of Fiscal Year 1996 and the remaining Senior Notes Payable were retired during
the third quarter of Fiscal 1996. The reduction in interest expense was
partially offset by a $380,000 decline in interest income which was due to the
reduction in the year to year balance of Available for Sale Securities.
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<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Analysis of the Consolidated Statement of Cash Flow indicates that for the
thirty-nine weeks ended November 2, 1996 the Company's cash increased by
$3,280,000 from the balance at the beginning of Fiscal 1996. For the comparable
period of Fiscal 1995 cash decreased by $14,016,000 from the beginning of the
year. On an incremental basis during the thirty-nine weeks ended November 2,
1996, the Company's cash flow was $17,296,000 higher than the prior year. The
increased cash flow was produced by a reduction in the Net Cash Used in
Operating Activities of $16,836,000 from the prior year. While the Net Loss
required $2,788,000 of additional cash over the prior year's Net Loss and the
Accounts Receivable increase required $4,145,000 of additional cash over last
year, inventory growth was $14,588,000 less than last year. Additionally, the
inventory growth was primarily financed by normal trade payables whose increase
was $6,890,000 higher than last year. Investing activities provided $2,690,000
less cash than the prior year. Capital Expenditures utilized $9,906,000 less
cash than last year while the decrease in Available for Sales Securities which
provides cash was $12,596,000 less than the prior year. Financing Activities
required $3,150,000 less cash than the prior year. As shown, the issuance of
Convertible Preferred Stock generated $20,000,000 in cash while the prepayment
and repayment of Senior Notes Payable used $20,250,000, a net use of $250,000.
Last year there was a net use of $3,400,000 from financing activities primarily
due to the scheduled repayment of $3,750,000 of Senior Notes Payable.
Capital Expenditures of $6,624,000 for the thirty-nine weeks ended November
2, 1996 primarily consisted of the construction of and fixtures for nine stores
opened and five stores which are to be opened during the month of November 1996.
As disclosed in Note 4 to the Consolidated Financial Statements, on May 23,
1996, the Company entered into an Amended and Restated Credit Agreement which
provided for borrowings up to $40,000,000. The unsecured credit agreement
established a sub-allocation of $30,000,000 for letters of credit. The term of
the agreement was extended from November 1996, to May 22, 1998. As of November
2, 1996 there have been no borrowings under the Amended and Restated Credit
Agreement.
- 10 -
<PAGE> 13
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.
None
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/ John W. Smolak
John W. Smolak
Senior Vice President and
Chief Financial Officer
Date: December 16, 1996
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS
<FISCAL-YEAR-END> FEB-01-1997 FEB-01-1997
<PERIOD-START> FEB-04-1996 FEB-04-1996
<PERIOD-END> NOV-02-1996 NOV-02-1996
<CASH> 7,514 0
<SECURITIES> 11,626 0
<RECEIVABLES> 11,205 0
<ALLOWANCES> 0 0
<INVENTORY> 145,845 0
<CURRENT-ASSETS> 188,258 0
<PP&E> 168,734 0
<DEPRECIATION> 70,852 0
<TOTAL-ASSETS> 290,556 0
<CURRENT-LIABILITIES> 49,440 0
<BONDS> 58,579 0
0 0
20,000 0
<COMMON> 58 0
<OTHER-SE> 140,080 0
<TOTAL-LIABILITY-AND-EQUITY> 290,556 0
<SALES> 98,495 276,214
<TOTAL-REVENUES> 98,495 276,214
<CGS> 73,178 208,405
<TOTAL-COSTS> 27,085 78,446
<OTHER-EXPENSES> 885 2,786
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,177 3,919
<INCOME-PRETAX> (2,653) (13,423)
<INCOME-TAX> (1,088) (5,504)
<INCOME-CONTINUING> (1,565) (7,919)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,565) (7,919)
<EPS-PRIMARY> ($0.09) ($0.46)
<EPS-DILUTED> ($0.09) ($0.46)
</TABLE>
