SECURITIES AND EXCHANGE COMMISION
WASHINGTON DC 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended October 28, 2000
OR
| | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-17870
LECHTERS, INC.
(Exact Name Of Registrant As Specified In Its Charter)
New Jersey No. 13-2821526
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer
Identification No.)
1 Cape May Street, Harrison, New Jersey 07029-2404
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (973) 481 - 1100
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 8, 2000: 15,334,986
<PAGE>
LECHTERS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR QUARTER ENDED OCTOBER 28, 2000
INDEX
PART I. Financial Information Page No.
--------------------- --------
Item 1. Financial Statements
Consolidated Balance Sheets at
October 28, 2000 and January 29, 2000 1
Consolidated Statements of Operations
for the Thirteen and Thirty-Nine Weeks Ended
October 28, 2000 and October 30, 1999 2
Consolidated Statements of Cash Flows
for the Thirteen and Thirty-Nine Weeks Ended
October 28, 2000 October 30, 1999 3
Consolidated Statement of Shareholders'
Equity for the Thirty-Nine Weeks Ended
October 28, 2000 4
Notes to Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
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SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 ("Reform Act"), the Company is hereby filing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company in this quarterly report on Form 10-Q, in
presentations, in response to questions or otherwise. Any statements that
express, or involve discussions as to expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, through the
use of words or phrases such as "anticipates", "believes", "estimates",
"expects", "intends", "plans", "predicts", "projects", "will likely result",
"will continue", or similar expressions) are not statements of historical facts
and may be forward-looking.
Forward-looking statements involve estimates, assumptions, and uncertainties and
are qualified in their entirety by reference to, and are accompanied by , the
following important factors, which are difficult to predict, contain
uncertainties, are beyond the control of the Company and may cause actual
results to differ materially from those contained in forward-looking statements:
- economics and geographic factors including political and economic risks;
- changes in and compliance with environmental and safety laws and policies;
- weather conditions;
- population growth rates and demographic patterns;
- competition for retail customers;
- market demand, including structural market changes;
- changes in tax rates or policies or in rates of inflation;
- changes in project costs;
- unanticipated changes in operating expenses and capital expenditures;
- capital market conditions;
- legal and administrative proceedings (whether civil or criminal) and
settlements that influence the business and profitability of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statements is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of any such factor on
the business of the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statem
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<PAGE>
Part. I Financial Information
Item 1. Financial Statements LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
October 28, 2000 January 29, 2000
(unaudited)
A S S E T S
<TABLE>
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,709 $ 9,917
Marketable securities - - 65,301
Accounts receivable 3,821 2,881
Merchandise inventories 130,384 103,100
Prepaid expenses and other current assets 8,020 2,043
---------- ----------
Total Current Assets 144,934 183,242
Property and equipment:
Fixtures and equipment 60,000 56,194
Leasehold improvements 94,183 92,368
---------- ----------
154,183 148,562
Less accumulated depreciation and
amortization 100,403 93,780
---------- ----------
Net property and equipment 53,780 54,782
Other Assets 14,330 11,497
---------- ----------
Total Assets $ 213,044 $ 249,521
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under revolving credit
facility $ 18,765 $ - -
5% Convertible subordinated debentures due
September 27, 2001 (net of unamortized
discount of $780) 36,130 - -
Accounts payable 25,323 16,305
Dividends payable-preferred stock - - 1,010
Salaries, wages and other accrued
expenses 14,984 15,662
Taxes, other than income taxes 2,155 2,041
---------- ----------
Total Current Liabilities 97,357 35,018
Long-Term Debt
5% Convertible subordinated debentures due
September 27, 2001 (net of unamortized
discount of $2,251) - - 57,804
---------- ----------
Total long-term debt - - 57,804
Deferred income taxes and other deferred
credits 10,580 12,538
Shareholders' Equity:
Convertible preferred stock, $100 par value
authorized 1,000,000 shares issued and
outstanding Series A- 149,999
shares and Series B-50,001 shares 20,000 20,000
Common stock, no par value, authorized-
50,000,000 shares, issued, 17,176,286
shares and 17,176,286 shares, respectively 58 58
Accumulated other comprehensive loss - - (65)
Additional paid-in-capital 62,380 62,380
Retained earnings 25,771 63,129
---------- ----------
108,209 145,502
Less: Treasury stock at cost
Common Stock: 1,841,300 shares
and 684,000 shares, respectively (3,102) (1,341)
---------- ----------
Total Shareholders' Equity 105,107 144,161
---------- ----------
Total Liabilities And Shareholders' Equity $ 213,044 $ 249,521
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
<TABLE>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 85,743 $ 94,837 $ 253,679 $ 269,157
Cost of goods sold
(including occupancy and indirect
costs)
67,221 71,511 195,839 203,977
---------- ---------- ---------- ----------
Gross profit 18,522 23,326 57,840 65,180
Selling, general and administrative
expenses 35,473 31,943 98,876 90,535
---------- ---------- ---------- ----------
Operating loss (16,951) (8,617) (41,036) (25,355)
Other expenses (income):
Interest expense 917 1,145 2,851 3,417
Interest income (1) (581) (856) (2,033)
Net investment gain/income (36) (91) (125) (425)
---------- ---------- ---------- ----------
Total other expenses (income) 880 473 1,870 959
---------- ---------- ---------- ----------
Loss before tax expense (benefit) and
extraordinary item (17,831) (9,090) (42,906) (26,314)
Income tax expense (benefit) 5,052 (3,726) (3,725) (10,788)
---------- ---------- ---------- ----------
Net loss before extraordinary item (22,883) (5,364) (39,181) (15,526)
Extraordinary item - gain on early extinguishment
of debentures (net of income tax
of ($301) and $173 respectively) 944 - - 1,823 - -
---------- ---------- ---------- ----------
Net loss (21,939) (5,364) (37,358) (15,526)
Preferred stock dividend requirement 253 253 758 758
---------- ---------- ---------- ----------
Net loss available to common
shareholders ($ 22,192) ($ 5,617) ($ 38,116) ($ 16,284)
========== ========== ========== ==========
Net loss per common share
Basic and diluted
Loss before extraordinary item ($ 1.51) ($ 0.33) ($ 2.53) ($ 0.95)
Extraordinary item .07 - - 0.12 - -
---------- -------- --------- ----------
Net loss ($ 1.44) ($ 0.33) ($ 2.41) ($ 0.95)
========== ======== ========= ==========
Weighted average common shares
Outstanding
Basic and diluted 15,363,000 17,048,000 15,794,000 17,107,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
Thirty-Nine Weeks Ended
October 28, 2000 October 30, 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ( 37,358) ($15,526)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 12,061 12,375
Gain on repurchase of debentures (1,996) - -
Deferred income tax (2,556) - -
Loss on disposal of property & equipment 181 1,498
Deferred rent 509 609
Other (65) 504
Changes in operating assets and liabilities:
Increase in accounts receivable (940) (15,633)
Increase in merchandise inventories (27,284) (41,888)
Increase in prepaid expenses (5,977) (5,586)
Increase in accounts payable,
accrued salaries, wages and other accrued
expenses and taxes, other than income taxes 8,454 19,412
Increase in other assets (5,097) (3,699)
---------- -------
Net cash used in operating activities (60,068) (47,934)
Cash flows from investing activities:
Capital expenditures (8,207) (5,761)
Decrease in available for sale securities 65,412 28,218
---------- -------
Net cash provided by investing activities 57,205 22,457
Cash flows from financing activities:
Payment of preferred stock dividend (1,010) (1,010)
Borrowings under Revolving Credit Facility 18,765 - -
Purchase of treasury stock (1,761) (731)
Repurchase of debentures (20,339) - -
---------- -------
Net cash used in financing activities (4,345) (1,741)
---------- -------
Net decrease in cash and cash equivalents (7,208) (27,218)
Cash and cash equivalents, beginning of period 9,917 35,503
---------- -------
Cash and cash equivalents, end of period $ 2,709 $ 8,285
========== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,180 $ 3,252
=========== ========
Income taxes $ 74 $ 99
=========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
LECHTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
Accumulated
Convertible Additional Other
Common Preferred Paid-In Retained Comprehensive Compre-
Stock Stock Capital Earnings Loss Treasury Total hensive
-------- -------- -------- -------- ------- Stock ------- Loss
--------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 29, 2000 $ 58 $ 20,000 $ 62,380 $ 63,129 ($ 65) ($ 1,341) $144,161
Net loss - thirty-nine weeks
ended October 28, 2000 - - - - - - (37,358) - - - - (37,358) (37,358)
Other comprehensive income
net of tax:
Realized loss on available-for-sale
securities - - - - - - - - 65 - - 65 65
Purchase of treasury stock - - - - - - - - - - (1,761) (1,761) - -
--------- --------- ------- -------- -------- ------- ----- ------
Balance,
October 28, 2000 (unaudited) $ 58 $ 20,000 $ 62,380 $ 25,771 - - ($ 3,102) $105,107 ($37,293)
======= ======== ========= ======== ======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
LECHTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share amounts)
(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.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the audited financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
January 29, 2000.
The Company's results of operations for the thirteen and thirty-nine
weeks ended October 28, 2000 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 2000.
2. NET LOSS PER SHARE
"Basic" net loss per share data were computed by dividing net loss,
reduced by the Convertible Preferred Stock Dividend requirement, by the
weighted average number of common shares outstanding during the thirteen
and thirty-nine weeks ended October 28, 2000 and October 30, 1999. With
respect to "diluted" net loss per share, stock options, which are
potential common shares, were excluded from the weighted average of
outstanding shares because inclusion would reduce the loss per share.
With respect to the Company's 5% Convertible Subordinated Debentures and
the Company's Convertible Preferred Stock, for the purpose of computing
diluted net loss per share, the assumed conversion of such debentures
and such preferred stock would each have an anti-dilutive effect on
diluted loss per share for the thirteen and thirty-nine weeks ended
October 28, 2000 and October 30, 1999.
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<PAGE>
3. SEGMENT INFORMATION
The Company defines its principal business into two segments, the
Specialty Housewares segment, which operates as Lechters Housewares(R)
and Lechters Kitchen Place(R), and the Off-Price Home Business segment,
which operates as Famous Brands Housewares Outlet(R) and Cost Less Home
Store(SM). The contribution of these segments, as well as "corporate and
other" for the thirteen and thirty-nine weeks ended October 28, 2000 and
October 30, 1999 are summarized below. "Corporate and other" includes
general corporate expenses, principally service office expense and
distribution centers, as well as interest income and expense.
The Company's segment disclosures are as follows:
<TABLE>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $ 63,589 $ 71,060 $190,876 $204,660
Specialty Housewares
Off-Price Home Business 22,154 23,777 62,803 64,497
--------- -------- -------- --------
Total sales $ 85,743 $ 94,837 $253,679 $269,157
========= ======== ======== ========
(LOSS) INCOME BEFORE INCOME TAX
EXPENSE (BENEFIT) AND EXTRAORDINARY ITEM
Specialty Housewares ($ 4,356) ($ 1,570) ($ 7,484) ($ 4,355)
Off-Price Home Business ( 166) 1,138 ( 876) 1,917
Corporate and other ( 12,429) ( 8,185) ( 32,676) ( 22,917)
---------- --------- --------- ---------
Operating loss ( 16,951) ( 8,617) ( 41,036) ( 25,355)
Other expenses 880 473 1,870 959
---------- --------- --------- ---------
Total loss before income tax expense
(benefit) and extraordinary item ($ 17,831) ($ 9,090) ($ 42,906) ($ 26,314)
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION EXPENSE
Specialty Housewares $ 2,016 $ 2,476 $ 6,026 $ 6,929
Off-Price Home Business 403 376 1,209 1,117
Corporate and other 1,856 1,619 4,826 4,329
--------- --------- --------- ---------
Total depreciation and amortization
expense $ 4,275 $ 4,471 $ 12,061 $ 12,375
CAPITAL ADDITIONS
Specialty Housewares $ 1,168 $ 1,453 $ 2,052 $ 3,963
Off-Price Home Business 1,549 192 2,801 659
Corporate and other 1,560 170 3,354 1,139
--------- --------- --------- ---------
Total capital additions $ 4,277 $ 1,815 $ 8,207 $ 5,761
========= ========= ========= =========
</TABLE>
October 28, October 30,
2000 1999
---- ----
<TABLE>
<S> <C> <C>
TOTAL ASSETS
Specialty Housewares $100,337 $108,607
Off-Price Home Business 27,051 25,860
Corporate and other 85,656 136,970
--------- ---------
Total assets $213,044 $271,437
========= =========
</TABLE>
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<PAGE>
4. COMPREHENSIVE LOSS
The following is a summary of the Company's comprehensive loss:
<TABLE>
Thirty-Nine Weeks Ended
-----------------------
October 28, 2000 October 30, 1999
---------------- ----------------
<S> <C> <C>
Net Loss ($37,358) ($15,526)
Components of comprehensive loss:
Adjustment to unrealized gain/(loss) on available-
for-sale securities, net of applicable income
tax provision/benefit 65 (192)
-------- --------
Comprehensive loss ($37,293) ($15,718)
======== ========
</TABLE>
5. STOCK REPURCHASE PLAN
In May 1999, the Board of Directors authorized the Company to repurchase up to
one million shares of the Company's common stock from time to time when
warranted by market conditions. In March 2000, the Board of Directors authorized
an additional repurchase of up to three million shares of the Company's common
stock. During Fiscal 1999, the Company purchased 684,000 shares at an average
cost of $1.96 per share. As of October 28, 2000 an additional 1,157,300 shares
have been purchased at an average cost of $1.52 per share. The total amount of
treasury stock as of December 8, 2000 was 1,841,300 shares at an average cost of
$1.68 per share.
6. INCOME TAXES
Due to the significantly lower than anticipated operating performance for the
year-to-date period and based on the Company's expected results for the balance
of Fiscal 2000, the Company has adjusted its tax provision for the year. The
adjustment was reflected in Third Quarter 2000 as expense of $5,052 which
reduced the year-to-date tax benefit to $3,725. The adjustment was the result of
an increase in the valuation allowance against the available deferred tax assets
currently recorded on the Company's financial statements. As a result of the
adjustment, the Company expects that the tax rate for Fiscal 2000 will be
approximately 8.7%. For future fiscal years, due to the need for a 100%
valuation allowance against any deferred tax asset created by net operating
losses, the tax rate will be 0%.
7. SUBSEQUENT EVENT - AMENDED AND RESTATED LOAN AGREEMENT
On November 14, 2000, the Company entered into an amended and restated loan and
security agreement (the "Amended Credit Facility") with Fleet Retail Financial
Inc. (formerly, BankBoston Retail Finance Inc.) ("Fleet") and certain other
financial institutions amending and restating its existing $120 million senior
secured revolving credit facility with Fleet. In addition to amending certain
provisions of the credit facility, the Amended Credit Facility gives the Company
the right, exercisable prior to May 14, 2001, subject to certain excess
Borrowing Base (as defined below) availability conditions, to borrow a term loan
in a single drawing in an amount not less than $7 million and not exceeding $10
million from Back Bay Capital Funding, LLC, as a Junior Secured Tranche B
Lender. The Amended Credit Facility is scheduled to mature on December 1, 2003.
The proceeds of the Amended Credit Facility may be used for: (i) on-going
working capital requirements, (ii) the replacement, refinancing or retirement of
certain of the Company's securities, and (iii) other general corporate purposes.
The Amended Credit Facility is secured by a security interest in substantially
all of the Company's assets.
The Company's maximum borrowing (the "Borrowing Base") under the Amended Credit
Facility may not exceed the lesser of: (a)
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<PAGE>
$120 million ($130 million if the Tranche B Loan is drawn down); and (b) the
total of (i) 72% (78% for September 1 through December 31 of each year) (which
advance rates are increased if the Tranche B Loan is drawn down to: 79% for
December 16 - March 31; 82% for April 1 - August 31; and 85% for September 1 -
December 15 of each year) of the cost value of the Company's acceptable
inventory, including eligible letter of credit inventory; plus (ii) 80% of the
Company's cash and acceptable investments held in a Fleet custody account; minus
(iii) applicable reserves. As of October 28, 2000, there were $18,765 direct
borrowings under the credit facility exclusive of letters of credit and the
remaining availability which has been reduced by outstanding letters of credit
was $74,214.
The Amended Credit Facility contains certain covenants, including limitations on
capital expenditures, indebtedness and transactions with affiliates and a
prohibition on the payment of dividends, other than scheduled payments of
preferred dividends by the Company and dividends paid to the Company by its
subsidiaries.
Advances under the Amended Credit Facility will bear interest per annum at the
Fleet base rate plus the applicable margin (0% to 0.50%) or the Eurodollar rate
plus the applicable margin (1.75% to 2.25%), at the Company's option. The
applicable margins are determined based upon the Company's excess availability
under the Amended Credit Facility. As of October 28, 2000 the base rate
applicable margin was 0% and the Eurodollar rate applicable margin was 1.75%.
The Company will pay an unused line fee of 0.40% per annum on the unused portion
of the Amended Credit Facility, a standby letter of credit fee equal to the
applicable Eurodollar margin less 25 basis points per annum of the total face
amount of each outstanding letter of credit, a documentary letter of credit fee
equal to 1.25% per annum of the total face amount of each outstanding letter of
credit and certain other fees. The Tranche B Loan, if drawn down, bears interest
at 13% per annum, with payment in kind interest accruing at 2.25% per annum
payable upon maturity, and annual fees of 3% payable on April 28, 2001 and 2%
payable on April 28, 2002.
The Amended Credit Facility permits the Company to repurchase its 5% convertible
subordinated debentures provided that the Company can show excess availability
(less aggregate repurchases and debt prepayments since closing) under the
Amended Credit Facility of not less than $40 million for 90 days prior to
repurchase and $10 million upon giving effect to the repurchases and, on a pro
forma basis, for 12 months thereafter.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)
THIRTEEN WEEKS ENDED OCTOBER 28, 2000 IN COMPARISON WITH THIRTEEN WEEKS ENDED
OCTOBER 30, 1999.
For the thirteen weeks ended October 28, 2000 ("Third Quarter 2000") the
Company's total comparable store sales decreased 6.8%. Comparable store sales
for the Specialty Housewares segment, which is comprised of Lechters
Housewares(R) and Lechters Kitchen Place(R), decreased 6.0% while comparable
store sales for the Off-Price Home Business segment, comprised of Famous Brands
Housewares Outlet(R) and Cost Less Home Store(SM), decreased 9.3%. On an overall
basis, net sales for Third Quarter 2000 decreased $9,094 to $85,743, a 9.6%
decrease from $94,837 reported for the comparable thirteen week period of the
prior fiscal year ("Third Quarter 1999"). The decrease was attributable to the
previously mentioned decrease in comparable store sales, and was also due to the
reduction in the number of stores in operation, which averaged 45 fewer
locations for Third Quarter 2000 compared to Third Quarter 1999. For Third
Quarter 2000, sales for the Specialty Housewares segment, which averaged 36
fewer locations or 8.2%, decreased 10.5% to $63,589, while sales for the
Off-Price Home Business segment, which on the average had 9 fewer locations,
decreased 6.8% to $22,154. During Third Quarter 2000, the Company opened five
stores and closed one store, increasing the stores in operation at October 28,
2000 to 515 from the 511 open as July 29, 2000. At the end of Third Quarter 1999
there were 526 stores in operation.
Gross profit for the Third Quarter 2000 was $18,522, a decrease of $4,804 from
$23,326 for Third Quarter 1999. The gross profit rate was 21.6% of net sales
compared with 24.6% in the prior year. By operating segment, gross profit for
Specialty Housewares decreased $3,337 to $12,668 or 19.9% of net sales, while
the Off-Price Home Business gross profit decreased $1,467 to $5,854 or 26.4% of
net sales. The reduction in gross profit amount was due to reduced sales. The
increased level of price reductions eroded the gross profit rate. The reduction
in gross profit rate was further impacted by the decline in comparable store
sales, which directly increased the cost of sales rate of occupancy expenses.
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<PAGE>
Selling, general and administrative expenses increased $3,530 to $35,473, which
constituted 41.4% of sales, an increase of 7.7% in the expense rate from Third
Quarter 1999. The Company's developing e-commerce strategy, Lechters.com,
constituted $2,183 of the expense increase. The increase in expenses was also
due to the amortization of new systems and the Company's new distribution center
and continuing systems development, which are expected to provide operating
efficiencies in the future.
Other expenses for the third quarter increased $407 to an expense of $880, 1.0%
of sales compared to $473, 0.5% of sales, for Third Quarter 1999. The increase
was due to the reduction in the interest income and investment income reflecting
the lower balances of cash and marketable securities, partially offset by a
reduction in interest expense due to the cumulative repurchases of $28,090 face
value of Convertible Subordinated Debentures prior to their due date of
September 27, 2001.
Due to the significantly lower-than-expected operating performance for the third
quarter of Fiscal 2000 and the Company's expected operating results for the
remainder of Fiscal 2000, the Company has increased the valuation allowance
against the deferred tax assets and in the future expects to record a 100%
valuation allowance against any additional deferred tax assets until the
Company's operations return to profitability. The Company anticipates an
effective tax benefit rate of 8.7% for Fiscal 2000 and 0%, for the future. As a
result of the increase in the valuation allowance, income tax expense during the
Third Quarter 2000 was $5,052.
By operating segment for Third Quarter 2000, Specialty Housewares incurred a
loss before tax provision of $4,356 compared to a loss before tax provision of
$1,570 for Third Quarter 1999. For the same period, the Off-Price Home Business
incurred a loss before income tax benefit of $166 compared to income of $1,138
for Third Quarter 1999. Corporate and other expenses including Lechters.com
costs increased the loss before tax benefit by $12,429 for Third Quarter 2000 as
compared to $8,185 for Third Quarter Fiscal 1999.
The Company recognized an extraordinary gain of $944, net of tax, from the
repurchase of $6,395 of Convertible Subordinated Debentures prior to their due
date of September 27, 2001.
The net loss for Third Quarter Fiscal 2000 was $21,939 compared to a net loss
for the comparable period of Fiscal 1999 of $5,364. The increased loss was the
result of decreased sales which reduced gross profit and the net effect of other
contributing expense factors noted above.
THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 IN COMPARISON WITH THIRTY-NINE WEEKS
ENDED OCTOBER 30, 1999.
For the thirty-nine weeks ended October 28, 2000, the Company's total comparable
store sales decreased 2.3%. Comparable store sales for the Specialty Housewares
segment, which is comprised of Lechters Housewares(R) and Lechters Kitchen
Place(R), decreased 1.9% while comparable store sales for the Off-Price Home
Business segment, comprised of Famous Brands Housewares Outlet(R) and Cost Less
Home Store(SM), decreased 3.5%. The sales decrease was due to the reduced number
of stores in operation during Fiscal 2000, which averaged 54 fewer store
locations than in 1999. Year-to-date the Company's total net sales decreased
$15,478 to $253,679, a 5.8% decrease from $269,157 reported for the comparable
period of the prior fiscal year. Total sales for the Specialty Housewares
segment decreased 6.7% to $190,876 while sales for the Off-Price Home Business
decreased 2.6% to $62,803. For the year-to-date period, the Company has opened
seven stores and closed fifteen stores. As of October 28, 2000 the Company
operated a total of 515 stores (comprised of 392 Specialty Housewares stores and
123 Off-Price Home Business stores) in 41 states and the District of Columbia
compared with 526 stores on October 30, 1999, a decrease of 2.1%.
Gross profit for the thirty-nine week period ended October 28, 2000 decreased
11.3% to $57,840. At 22.8% of sales, the gross margin rate decreased 1.4% from
the rate for the comparable period of Fiscal 1999. By operating segment, gross
profit for Specialty Housewares decreased $5,468 to $40,618 or 21.3% of net
sales, while the Off-Price Home Business gross profit decreased $1,872 to
$17,222 or 27.4% of net sales. The reduction in gross profit amount was due to
lower sales over the prior year. The gross profit rate was adversely impacted by
the increase in price reductions and the decline in comparable store sales which
directly increased the cost of sales rate of occupancy expense.
Selling, general and administrative expenses increased $8,341 to $98,876, and at
39.0% of sales, were 5.4 percentage
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points higher as a rate compared to the comparable period of fiscal 1999. As
noted, the increase in expenses was due to the amortization of new systems, the
Company's new distribution center, and initial development expenses of the
Company's e-commerce strategy, Lechters.com, which incurred $3,891 in expense
for the year-to-date period.
Other expenses for the thirty-nine weeks ended October 28, 2000, increased $911
to $1,870, 0.7% of sales, compared to $959, 0.4% of sales, for the comparable
period of the prior fiscal year. While interest expense was reduced due to the
early retirement of a portion of the Company's Convertible Subordinated
Debentures, expense increased due to the reduction in the interest and
investment income, which resulted from reduced invested balances.
Due to the significantly lower than anticipated operating performance for the
year-to-date period and based on the Company's expected results for the balance
of Fiscal 2000, the Company has adjusted its tax provision for the year. The
adjustment was reflected in Third Quarter 2000 as expense of $5,052 which
reduced the year-to-date tax benefit to $3,725. The adjustment was the result of
an increase in valuation allowances against the available deferred tax assets
currently recorded on the Company's financial statements. As a result of the
adjustment, the Company expects that the tax rate for Fiscal 2000 will be
approximately 8.7%. For future fiscal years, due to the need for 100% valuation
allowance against any deferred tax asset created by net operating losses, the
tax rate will be 0%.
By operating segment for Fiscal 2000 to date, Specialty Housewares incurred a
loss before tax provision of $7,484 compared to a loss before tax benefit of
$4,355 for the comparable period last year. For the same period, the Off-Price
Home Business incurred a loss before tax provision of $876 compared to income of
$1,917 for Fiscal 1999 year-to-date. Corporate and other expenses including
Lechters.com, increased the loss before tax benefit by $32,676 as compared to
$22,917 for the comparable period of the prior fiscal year.
For the year-to-date period, the Company recognized an extraordinary gain of
$1,823, net of tax, from the repurchase of $23,145 of Convertible Subordinated
Debentures prior to their due date of September 27, 2001.
The year-to-date net loss for Fiscal 2000 was $37,358 or ($2.41) per share
compared to a loss of $15,526 or ($0.95) per share for the comparable period of
Fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow during the thirty-nine weeks ended October 28, 2000 as reflected on
the Consolidated Statements of Cash Flows, was a net decrease in cash and cash
equivalents of $7,208. Operating activities, comprised of the operating loss of
$37,358 adjusted for non-cash expenses such as depreciation and amortization and
by changes in operating assets, utilized $60,068 of cash during the thirty-nine
weeks ended October 28, 2000. Significant components of operating activities
included depreciation and amortization which was a non-cash expense of $12,061
and merchandise inventories which increased cash use by $27,284. Accounts
receivable and prepaid expenses increased cash use by $940 and $5,977,
respectively. Accounts payable, accrued expenses and taxes other than income
taxes increased cash by $8,454.
Investing activities provided net cash of $57,205 compared to $22,457 for
year-to-date Fiscal 1999, due to the decrease in Marketable Securities of
$65,412. Capital expenditures were primarily for construction of and fixtures of
new stores, renovations and remodels of existing stores, and a new distribution
center. Capital expenditures were $8,207 for Fiscal 2000 compared to $5,761 for
the comparable period last year.
Cash flows from financing activities utilized $4,345 of cash. The repurchase of
$23,145 face value of the Company's Convertible Subordinated Debentures utilized
$20,339 of cash. The Company paid $1,010 in dividends on the Convertible
Preferred Stock and purchased 1,157,300 shares of treasury stock at a cost of
$1,761.
On November 30, 1999, the Company entered into a new $120 million senior secured
revolving credit facility with BankBoston Retail Finance Inc. and other
financial institutions, replacing the Company's credit agreement which would
have expired on March 26, 2001. The proceeds of the credit facility may be used
for: (i) on-going working capital requirements, (ii) the replacements,
refinancing or retirement of certain of the Company's securities, and/or (iii)
other general corporate purposes. The credit facility is scheduled to mature on
December 1, 2003.
On November 14, 2000, the Company entered into an amended and restated
loan and security agreement (the "Amended Credit Facility") with Fleet Retail
Financial Inc. (formerly, BankBoston Retail Finance Inc.) ("Fleet") and certain
other
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financial institutions amending and restating its existing $120 million senior
secured revolving credit facility with Fleet. In addition to amending certain
provisions of the credit facility, the Amended Credit Facility gives the Company
the right, exercisable prior to May 14, 2001, subject to certain excess
Borrowing Base (as defined below) availability conditions, to borrow a term loan
in a single drawing in an amount not less than $7 million and not exceeding $10
million from Back Bay Capital Funding, LLC, as a Junior Secured Tranche B
Lender. The Amended Credit Facility is scheduled to mature on December 1, 2003.
The proceeds of the Amended Credit Facility may be used for: (1) on-going
working capital requirements, (ii) the replacement, refinancing or retirement of
certain of the Company's securities, and (iii) other general corporate purposes.
The Amended Credit Facility is secured by a security interest in substantially
all of the Company's assets.
The Company's maximum borrowing (the "Borrowing Base") under the Amended Credit
Facility may not exceed the lesser of: (a) $120 million ($130 million if the
Tranche B Loan is drawn down); and (b) the total of (i) 72% (78% for September 1
through December 31 of each year) (which advance rates are increased if the
Tranche B Loan is drawn down to: 79% for December 16 - March 31; 82% for April 1
- August 31; and 85% for September 1 - December 15 of each year) of the cost
value of the Company's acceptable inventory, including eligible letter of credit
inventory; plus (ii) 80% of the Company's cash and acceptable investments held
in a Fleet custody account; minus (iii) applicable reserves. As of October 28,
2000, there were $18,765 direct borrowings under the credit facility exclusive
of letters credit and the remaining availability which has been reduced by
outstanding letters of credit was $74,214.
The Amended Credit Facility contains certain covenants, including limitations on
capital expenditures, indebtedness and transactions with affiliates and a
prohibition on the payment of dividends, other than scheduled payments of
preferred dividends by the Company and dividends paid to the Company by its
subsidiaries.
Advances under the Amended Credit Facility will bear interest per annum at the
Fleet base rate plus the applicable margin (0% to 0.50%) or the Eurodollar rate
plus the applicable margin (1.75% to 2.25%), at the Company's option. The
applicable margins are determined based upon the Company's excess availability
under the Amended Credit Facility. As of October 28, 2000 the base rate
applicable margin was 0% and the Eurodollar rate applicable margin was 1.75%.
The Company will pay an unused line fee of 0.40% per annum on the unused portion
of the Amended Credit Facility, a standby letter of credit fee equal to the
applicable Eurodollar margin less 25 basis points per annum of the total face
amount of each outstanding letter of credit, a documentary letter of credit fee
equal to 1.25% per annum of the total face amount of each outstanding letter of
credit and certain other fees. The Tranche B Loan, if drawn down, bears interest
at 13% per annum, with payment in kind interest accruing at 2.25% per annum
payable upon maturity, and annual fees of 3% payable on April 28, 2001 and 2%
payable on April 28, 2002.
The Amended Credit Facility permits the Company to repurchase its 5% convertible
subordinated debentures provided that the Company can show excess availability
(less aggregate repurchases and debt prepayments since closing) under the
Amended Credit Facility of not less than $40 million for 90 days prior to
repurchase and $10 million upon giving effect to the repurchases and, on a pro
forma basis, for 12 months thereafter.
The Company is considering what alternatives it may have to refinance the 5%
Convertible Subordinated Debentures.
A copy of the amended and restated loan agreement is filed as an exhibit to the
Form 10-Q.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In July 1999, the FASB delayed the
effective date to fiscal years beginning after June 15, 2000. The Company has
not actively utilized derivative instruments to hedge its market risks.
Accordingly, the adoption of this statement is not expected to materially impact
the Company's financial statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK
The Company imports about 20% of its merchandise from Far East, which subjects
it to the market risk of currency fluctuations. However, the Company uniformly
utilizes purchase contracts and letters of credit denominated in US dollars to
mitigate this risk. Additionally, there are multiple suppliers, both foreign and
domestic, for its products.
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Item 6. Exhibits and Reports on Form 8-K
a. 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*
4.1 Preferred Stock Purchase Agreement dated April 5, 1996
(Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended February 1, 1997).
4.2 Indenture, dated as of September 27, 1991, between the Company and
Chemical Bank, as Trustee (Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended January 25,
1992).
10.1.1 Amended and Restated Loan Agreement dated November 14, 2000 among the
Company, Fleet Retail Financial Inc. and Back Bay Capital Funding, LLC.*
27 Financial Data Schedule*
b. Reports on Form 8-K
1. No reports on Form 8-K were filed for the quarter for which this report
is filed.
*Filed herewith.
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/ Daniel L. Anderton
Chief Financial Officer
Date: December 12, 2000
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