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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended January 4, 2003
(No Fee Required)
Commission File Number 1-12381
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Linens 'n Things, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3463939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6 Brighton Road
Clifton, New Jersey 07015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 778-1300
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
by Rule 12b-2 of the Securities Exchange Act).
Yes |X| No |_|
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of June 29, 2002, based on the closing sale price on the New York
Stock Exchange on such date, was approximately $1,433 million. The number of
outstanding shares of the Registrant's common stock, $0.01 par value, as of
March 10, 2003 was 44,102,098.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended January 4, 2003 are incorporated by reference into Part II, and portions
of the Registrant's Proxy Statement for the 2003 Annual Meeting of Shareholders
are incorporated by reference into Part III.
Table of Contents
Form 10-K
Item No. Name of Item Page
- -------- ------------ ----
PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 9
Item 3. Legal Proceedings............................................. 11
Item 4. Submission of Matters to a Vote of
Security Holders.......................................... 11
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters........................... 12
Item 6. Selected Financial Data....................................... 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................ 12
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk....................................... 12
Item 8. Financial Statements and Supplementary
Data...................................................... 12
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................................ 12
PART III
Item 10. Directors and Executive Officers of
the Registrant............................................ 13
Item 11. Executive Compensation........................................ 13
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters..... 13
Item 13. Certain Relationships and Related
Transactions.............................................. 13
Item 14. Controls and Procedures....................................... 13
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 14
2
PART I
Item 1. Business
General
Linens 'n Things, Inc., a Delaware corporation, and its subsidiaries
("Linens 'n Things" or the "Company") is one of the leading, national large
format retailers of home textiles, housewares and home accessories operating 391
stores in 45 states and four Canadian provinces as of fiscal year end 2002. The
Company's business strategy is to offer a broad selection of high quality, brand
name home furnishings merchandise at exceptional everyday values, provide
knowledgeable and friendly service and maintain low operating costs. The
Company's target customer, or guest, is a woman between the ages of 25 and 55
who is fashion and brand conscious, has good to better income, and focuses on
the home as a reflection of her individuality.
The Company is committed to providing its guests with a one-stop shopping
destination for their home furnishing needs by offering a broad and deep
selection of high quality, brand name "linens" (e.g., bedding, towels, window
treatments and table linens) and "things" (e.g., housewares, home and decorative
accessories) merchandise with a "won't be undersold" everyday low pricing
strategy. As part of its strategic initiative to capitalize on customer demand
for one-stop shopping destinations, the Company has balanced its merchandise mix
from being driven primarily by the "linens" side of its business to a fuller
selection of both "linens" and "things." The Company carries over 25,000 stock
keeping units (skus). Nationally recognized brand names the Company offers
include All-Clad, Braun, Calphalon, Croscill, Cuisinart, Henckels, Krups, Laura
Ashley, Nautica Home, OXO, Royal Velvet, Wamsutta, Waverly and Yankee Candle.
The Company also sells merchandise under its own private label, LNT Home, which
is designed to supplement the Company's offering of brand name products by
combining quality and value in a range of product offerings.
From its founding in 1975 through the late 1980's, the Company operated a
chain of traditional stores ranging between 7,500 and 10,000 gross square feet
in size. Beginning in 1990, the Company introduced its superstore format, which
features an efficient racetrack layout and currently averages approximately
35,000 gross square feet. This superstore format offers a broad merchandise
selection in a more visually appealing, guest friendly format. The Company has
developed various store size formats, generally ranging from 25,000 to 50,000
gross square feet, which allow the Company to match the size of its stores with
the market potential of each location. From 1990 through 1998, the Company
closed most of its traditional format stores and implemented the superstore
format in its stores. As a result of superstore openings and traditional store
closings, the Company's gross square footage has increased to 13.6 million as of
fiscal year end 2002. The Company's stores are located predominately in power
strip centers adjacent to complementary broad-based retail chains.
As part of its business strategy, the Company instituted centralized
management and operating programs and invested significant capital in its
distribution and management information systems infrastructure in order to
control operating expenses as the Company grows.
The Company was a wholly owned subsidiary of CVS Corporation ("CVS"),
formerly Melville Corporation, until November 26, 1996, when CVS completed an
initial public offering ("IPO") of 13 million shares of the Company's common
stock, on a pre-split basis. Immediately subsequent to the IPO, CVS owned
approximately 32.5% of the Company's common stock. During 1997, CVS sold
substantially all of its remaining shares of the Company's common stock in a
public offering. At December 31, 1997, CVS held no shares of the Company's
common stock. Unless otherwise indicated, all share information is adjusted to
reflect the Company's two-for-one common stock split effected in May 1998.
3
Executive Officers
The following table sets forth information regarding the current executive
officers of the Company:
Name Age Position
---- --- --------
Norman Axelrod.................. 50 Chairman and Chief Executive Officer
Audrey Schlaepfer............... 48 Executive Vice President, Chief Merchandising Officer
William T. Giles................ 43 Senior Vice President, Chief Financial Officer
Brian D. Silva.................. 46 Senior Vice President, Human Resources, Administration and Corporate Secretary
Mr. Axelrod has been Chief Executive Officer of the Company since 1988 and
was elected to the additional position of Chairman of the Board of Directors of
the Company effective as of January 1997. Prior to joining Linens 'n Things, Mr.
Axelrod held various management positions at Bloomingdale's from 1976 to 1988
including: Buyer, Divisional Merchandise Manager, Vice President/Merchandise
Manager and Senior Vice President/General Merchandise Manager. Mr. Axelrod
earned his B.S. from Lehigh University and his M.B.A. from New York University.
Ms. Schlaepfer joined Linens 'n Things in 2001 as Executive Vice President
and Chief Merchandising Officer. Prior to joining Linens 'n Things, Ms.
Schlaepfer held various management positions at Warner Bros. from 1994 to 2001
including: Vice President of Home, Accessories and Gallery; Senior Vice
President of Hard Goods and Executive Vice President of Merchandising. Prior to
joining Warner Bros. in 1994, Ms. Schlaepfer held several positions at Macy's
including Vice President of Merchandising in Private Label Home Furnishings. Ms.
Schlaepfer earned her B.A. from Queens College C.U.N.Y. and her M.B.A. from New
York University.
Mr. Giles joined Linens 'n Things in 1991 as Assistant Controller, was
promoted to Vice President, Finance and Controller in 1994, was promoted to Vice
President, Chief Financial Officer in 1997 and was promoted to Senior Vice
President, Chief Financial Officer in 2000. From 1981 to 1990, Mr. Giles was
with PriceWaterhouse LLP. From 1990 to 1991, Mr. Giles held the position of
Director of Financial Reporting with Melville Corporation. Mr. Giles is a
certified public accountant and member of the American Institute of Certified
Public Accountants. He graduated from Alfred University with a B.A. in
Accounting and Management.
Mr. Silva joined Linens 'n Things in 1995 as Vice President, Human
Resources, was promoted to Senior Vice President, Human Resources and Corporate
Secretary in 1997 and assumed the role of Senior Vice President, Human Resources
and Administration and Corporate Secretary in 2002. Mr. Silva was Assistant Vice
President, Human Resources at The Guardian, an insurance and financial services
company, from 1986 to 1995. He holds an M.A. in Organizational Development from
Columbia University and an M.S. in Human Resources Management from New York
Institute of Technology. Mr. Silva received his B.A. from St. John's University.
Business Strategy
The Company's business strategy is to offer a broad and deep selection of
high quality, brand name merchandise at exceptional everyday values, provide
knowledgeable and guest-friendly service and maintain low operating costs. Key
elements of the Company's business strategy are:
Offer a Broad Selection of Quality Name Brands at Exceptional Everyday
Values. Linens 'n Things' merchandising strategy is to offer the largest breadth
of selection in high quality, brand name fashion home textiles, housewares and
home accessories at exceptional everyday values. The Company's superstore format
enables it to offer broader product and brand selection than traditional
retailers that sell home furnishings. The Company offers virtually all of the
national home furnishings brand names carried by major department stores, as
well as many other products and brands. Many national brands offered by the
Company are not available at mass merchandisers or off-price retailers. The
Company's everyday low price strategy is to set its prices below department
store sales prices. The Company believes these strategies enhance its reputation
as a value leader and build guest loyalty, while providing a one-stop shopping
destination for the guests' home furnishing needs.
4
Merchandise and sample brands offered in each major department are highlighted
below:
Department Items Sold Sample Brands
---------- ---------- -------------
Bath Towels, shower curtains, waste baskets, Fieldcrest, Martex, Royal Velvet
hampers, bathroom rugs and wall hardware Springmaid and Wamsutta
Home Accessories Decorative pillows, napkins, tablecloths, Laura Ashley, Umbra
placemats, lamps, gifts, picture frames, Waverly and Yankee Candle
candles and framed art
Housewares Cookware, cutlery, kitchen gadgets, small All-Clad, Black & Decker,
electric appliances (such as blenders and Calphalon, Circulon, Cuisinart,
coffee grinders), dinnerware, flatware Farberware, Henckels, Braun
and glassware KitchenAid, Krups and OXO
Storage and Cleaning Closet-related items (such as hangers, Euro-Pro, Hoover, Rowenta and
organizers and shoe racks), cleaning and Rubbermaid
laundry care products
Top of the Bed Sheets, comforters, comforter covers, Croscill, Fieldcrest, Laura
bedspreads, bed pillows, blankets and Ashley, Nautica, Springmaid,
mattress pads Wamsutta and Waverly
Window Treatment Curtains, valances and window hardware Croscill, Laura Ashley, Wamsutta and Waverly
Provide Superior Guest Service and Shopping Convenience. The Company's
mission is to exceed the guests' expectations in every store, every day. To
enhance guest satisfaction and loyalty, Linens 'n Things strives to provide
knowledgeable sales assistance and enthusiastic guest service. Linens 'n Things
offers competitive wages and on-going training and personnel development in
order to attract and retain qualified, motivated employees committed to
providing superior guest service.
The Company's stores feature a racetrack layout, enabling the guest to
visualize and purchase fully coordinated and accessorized ensembles. The
Company's superstore format is designed to save the guest time by having
merchandise visible and accessible on the selling floor.
The Company has a toll-free guest service line and maintains a website at
http://www. lnt.com. These venues enable the Company's guests to purchase
currently advertised products, access information about store locations, or
review gift registries. In 2001, the Company expanded its e-commerce capability
to feature over 10,000 skus through the Company's website. In 2002, the Company
introduced its private label LNT credit card, which offers cardholders advance
notice of promotions, exclusive discounts, and the benefit of a purchase-based
rewards program.
Maintain Low Operating Costs. A cornerstone of the Company's business
strategy is its commitment to maintain low operating costs. In addition to
savings realized through sales volume efficiencies, operational efficiencies are
expected to be achieved through the streamlining of the Company's centralized
merchandising structure, the use of integrated management information systems
and the utilization of the distribution centers.
Strategy
The Company's strategy is to continue to expand it's store base, while
enhancing operating performance.
Store base. The Company currently plans to seek to increase market share
in existing geographic markets and to penetrate new geographic markets where the
Company believes it can become a leading operator of specialty home furnishing
stores. From the end of 1997 to the end of 2002, the Company increased its gross
square footage to 13.6 million square feet by growing its store base from 176 to
391 stores. During 2003, the Company expects to open between 55 to 60 new
stores. The Company selects markets for new stores based on demographic factors
such as income levels, population and number of households. The Company
generally seeks to operate stores in geographic trading areas with approximately
200,000 people within a ten-mile radius and with demographic characteristics
that match its target profile. Because of its flexible store size format, the
Company is also able to enter into and operate in smaller markets where
specialty home furnishing retailers are often under-represented.
5
Comparable store sales. The Company continues to seek to favorably impact
comparable store sales by attracting more first-time guests to its stores, and
by increasing the frequency of visits per guest and the dollar amount of each
guest transaction. The Company believes that the best method to accomplish these
goals is to improve upon and emphasize our reputation as a superior one-stop
shopping destination for home furnishings. The Company continually introduces
new merchandise categories to create a varied product portfolio that it believes
will attract new guests and increase guest visits. For example, in 2001, the
Company introduced specialty foods, casual furniture and seasonal outdoor
furniture and improved and expanded its selection of wall decor and decorative
accessories. Also, the Company added Yankee Candle and Nautica Home in 2001 and
a new and exclusive collection of Waverly designs and fabrics in 2002 to its
already powerful brand name line-up. The Company periodically re-styles its
stores to incorporate new merchandise offerings and to emphasize its fastest
growing product categories.
In addition to offering a wide selection of brand name merchandise, the
Company has been increasing its sales of proprietary merchandise that is
manufactured exclusively for the Company, most of which is sold under the LNT
Home label. The Company believes the LNT Home name promotes brand awareness and
guest loyalty.
Operating margin and efficiency. The Company believes there continues to
be opportunities to improve gross margin by continuing to use its purchasing
power, increasing the penetration of its proprietary merchandise and using its
centralized distribution network and management information systems. The Company
anticipates that these improvements to gross margin will be partially offset by
initiatives to increase comparable store sales. The Company's investments in its
centralized distribution and in-store technology have resulted in more efficient
inventory procedures at the store level, enabling its sales associates to better
service its guests.
Increase Productivity of Existing Store Base. The Company believes the
following initiatives impact its net sales per square foot and inventory
turnover ratios:
Merchandise Mix and Presentation. The Company has developed a number of
strategic initiatives to stimulate growth of textiles including new product
offerings, improving quality assortments and increasing the strength of value
offerings. Further, the Company continues to increase sales in its "things"
merchandise. The Company believes these initiatives have positively impacted net
sales per square foot, the average net sales per guest and inventory turnover.
In addition, the Company intends to continue improving its merchandising
presentation techniques, space planning and store layout in order to seek to
further improve the productivity of its existing and future superstore
locations. The Company periodically restyles its stores to incorporate new
offerings and realigns its store space with its growth segments. The Company
expects that the addition of in-store guest services, such as gift registry,
will position it further to improve its store productivity.
Operating Efficiencies. As part of its strategy to increase operating
efficiencies, the Company has invested significant capital in building a
centralized infrastructure, including its three current distribution centers and
a management information system, which it believes will allow it to endeavor to
maintain low operating costs as it pursues its superstore expansion strategy.
The warehouse portion of the distribution centers provides the Company
flexibility to manage safety stock and inventory flow. The Company's ability to
effectively manage its inventory is also impacted by a centralized merchandising
management team and its management information systems which allow the Company
to monitor and balance inventory levels.
Industry
The market for home furnishings is highly fragmented and under-penetrated
by the fast-growing specialty retail segment of which the Company is a part. The
Company believes that this affords it the opportunity to grow market share by
further penetrating those geographic markets in which the Company currently
operates and by expanding into additional geographic markets where it has little
or no presence.
The Company competes with many different types of retailers that sell many
or most of the items sold by the Company, including department stores, mass
merchandisers, specialty retail stores and other retailers. Linens 'n Things
generally classifies its competition as follows:
Department Stores: This category includes national and regional department
stores such as J.C. Penney Company Inc., Sears, Roebuck and Co., Dillard
Department Stores, Inc., and the department store chains operated by Federated
Department Stores, Inc. and The May Department Store Company. These retailers
offer name brand merchandise as well as their own private label furnishings.
Department stores also offer certain designer merchandise, such as Ralph Lauren,
which is not generally distributed through the specialty and mass merchandise
distribution channels. In general, the department stores offer a more limited
selection of merchandise than the Company. The prices offered by department
stores during off-sale
6
periods generally are significantly higher than those of the Company and during
on-sale periods are comparable to or slightly higher than those of the Company.
Mass Merchandisers: This category includes companies such as Wal-Mart
Stores, Inc., the Target Stores division of Target Corporation and Kmart
Corporation. Fashion home furnishings generally represent only a small portion
of the total merchandise sales in these stores. The Company's competitive
advantage is that these stores generally offer a more limited merchandise
selection with fewer high quality name brands and lower quality merchandise at
lower price points. In addition, these mass merchandisers typically have more
limited customer service staffing than the Company.
Specialty Stores/Retailers: This category includes large format home
furnishings retailers including Bed Bath & Beyond, Inc. and Home Goods, a
division of TJX Companies, Inc. and smaller format retailers such as Crate &
Barrel and Williams-Sonoma, Inc. The Company estimates that the large format
stores range in size from approximately 25,000 to 70,000 gross square feet and
offer a home furnishings merchandise selection of approximately 15,000 to 40,000
skus. These retailers attempt to develop loyal customers and increase customer
traffic by providing a single outlet to satisfy the customer's household needs.
The smaller format retailers offer a narrow assortment within a specific niche
and generally range in size from 2,000 to 20,000 gross square feet.
Other Retailers: This category includes mail order retailers, such as
Domestications, off-price retailers, such as Kohl's Corporation, the T.J. Maxx
and Marshall's divisions of the TJX Companies, Inc. and local "mom and pop"
retail stores. Both mail order retailers and smaller local retailers generally
offer a more limited selection of merchandise. Off-price retailers typically
offer closeout or out of season name brand merchandise at competitive prices.
Products and Merchandising
The Company offers quality home textiles, housewares and home accessories
at exceptional everyday values. The Company's extensive merchandise offering of
over 25,000 skus enables its guests to select from a wide assortment of styles,
brands, colors and designs within each of the Company's major product lines. The
Company is committed to maintaining a consistent in-stock inventory position.
This presentation of merchandise enhances the guest's impression of a dominant
selection of merchandise in an easy-to-shop environment. The Company's broad and
deep merchandise offering is coupled with everyday low prices that are generally
below regular department store prices and comparable with or slightly below
department store sale prices. The Company believes that the uniform application
of its everyday low price policy is essential to maintaining the integrity of
its pricing strategy. This is an important factor in establishing its reputation
as a value leader and in helping to build guest loyalty.
Customer Service
Linens 'n Things treats every customer as a guest. The Company's
philosophy is to enhance the guest's entire shopping experience in order to
encourage guest loyalty. To facilitate the ease of shopping, the assisted
self-service culture is complemented by trained department specialists, zoned
floor coverage, product information displays and videos, self-demonstrations and
in-store product seminars. The entire store team is trained to be highly visible
in order to assist guests with their selections. The ability to assist guests
has been enhanced by the transfer of inventory receiving functions from the
stores to the distribution centers, allowing sales associates to direct their
focus to the selling floor. Sophisticated management systems that provide
efficient guest service and fair return policies are geared toward making each
guest's visit a convenient, efficient and pleasant experience.
Marketing and Advertising
The Company's advertising programs communicate, build and strengthen the
Linens 'n Things brand and image. Because of the Company's commitment to
exceptional everyday values, advertising vehicles are aggressively used to
highlight value, breadth and depth of selection. The Company focuses its
advertising programs during key selling seasons such as back-to-school and
holidays.
To reach its guests, the Company primarily uses full color flyers to best
represent the full range of offerings in the stores. These are supplemented by
other on-going direct marketing initiatives. In addition, the Company utilizes
its proprietary marketing database to track the buying habits of its guests.
Grand opening promotional events are designed to support new stores,
particularly those located in new markets.
Purchasing and Suppliers
The Company purchases its merchandise from approximately 1,000 suppliers.
Springs Industries, Inc., through its various operating companies, supplied
approximately 10% of the Company's total purchases in fiscal 2002. In fiscal
2002, the Company purchased a significant number of products from other key
suppliers. The Company is often one of the largest customers for certain of its
vendors. The Company believes that this buying power and its ability to make
centralized purchases generally allow it to acquire products at favorable terms.
7
Company Operations
Distribution. The Company currently operates three distribution centers.
The Greensboro, North Carolina facility began operation in 1995; the Swedesboro,
New Jersey facility began operation in 1999 and the Shepardsville, Kentucky
facility began operation in Spring 2002. The Company believes the utilization of
the centralized distribution centers has resulted in lower average freight
expense, more timely control of inventory shipments to stores, and improved
information flow. The Company believes strong distribution support for its
stores is a critical element to its growth strategy and is central to its
ability to maintain a low cost operating structure.
The Company manages the distribution process centrally from its corporate
headquarters. Purchase orders issued by Linens 'n Things are electronically
transmitted to nearly all of its suppliers. The Company plans to continue its
efforts to ship as much merchandise through the distribution centers as possible
to ensure all benefits of the Company's logistics strategy are fully leveraged.
Continued growth will also facilitate new uses of electronic data interchange
technologies between Linens 'n Things and its suppliers to exploit the most
productive and beneficial use of its assets and resources. In order to realize
greater efficiency, the Company also uses third party delivery services to ship
its merchandise from the distribution centers to its stores.
Management Information Systems. Over the last several years, the Company
has made significant investments in technology to improve guest service, gain
efficiencies and reduce operating costs. Linens 'n Things has installed a
customized IBM AS/400 management information system, which integrates all major
aspects of the Company's business, including sales, distribution, purchasing,
inventory control, merchandise planning and replenishment and financial systems.
The Company also utilizes hand-held scanners with inventory status and price
look-up capabilities, which allow the Company's sales associates to remain
accessible to guests on the selling floor. Information obtained from management
information systems results in automatic inventory replenishment in response to
specific requirements of each store, thereby improving in-stock positions and
enhancing guest service.
The Company believes its management information systems have fully
integrated the Company's stores, headquarters and distribution process. The
Company continually evaluates and upgrades its management information systems to
enhance the quantity, quality and timeliness of information available to
management.
Store Management and Operations. The Company places a strong emphasis on its
people, their development and their opportunity for advancement, and is
committed to maintaining a high internal promotion rate. The Company's practice
is to open each new store with a seasoned management team, which usually
includes managers who have significant experience with the Company.
Additionally, the Company's structured management training program requires that
each new manager learn all facets of the business within the framework of a
fully operational store. This program includes, among other things, product
knowledge, merchandise presentation, business and sales perspective, employee
relations and manpower planning. This is complemented at the sales associate
level with in-store product seminars and store systems training. The Company
believes that its policy of promoting from within, as well as the opportunities
for advancement from its store expansion program, serve as incentives to attract
and retain quality individuals.
Linens 'n Things' stores are open seven days a week, generally from 9:30
a.m. to 9:30 p.m. Monday through Saturday and 11:00 a.m. to 6:00 p.m. on Sunday,
unless affected by local laws.
Private Label Charge Card. In April 2002, the Company launched its private label
charge card program. The intent of this program is to build guest loyalty.
Through a points program, guests receive enhanced value by using the card. The
program also allows the Company to provide consistent and effective
communication with its guests, while increasing its information base of its
guests' purchasing patterns. Subject to customary exceptions, credit risk is
borne by GE Card Services, a top issuer of private label credit cards.
Inflation and Seasonality
The Company does not believe that its operating results have been
materially affected by inflation during the past year. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and substantially all of its net income for the year during the third and fourth
quarters. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including the timing of
new store openings. The Company believes this is the general pattern associated
with its segment of the retail industry and expects this pattern will continue
in the future. Consequently, comparisons between quarters are not necessarily
meaningful and the results for any quarter are not necessarily indicative of
future results.
8
Employees
As of January 4, 2003, the Company employed approximately 16,900
individuals, of whom approximately 7,100 were full-time employees and 9,800 were
part-time employees. None of the Company's employees is represented by a union,
and the Company believes that it has a good relationship with its employees.
Competition
The segment of the U.S. home furnishings market in which the Company
operates generated approximately $70 billion in sales. This market is highly
fragmented and intensely competitive. The Company competes with many different
types of retailers, including department stores, mass merchandisers and
discounters, specialty retail stores, mail order and other retailers. Some of
the Company's competitors sell many of the same items and brands that the
Company sells. The Company believes that its ability to compete successfully in
its market is influenced by several factors, including price, breadth and
quality of product selection, in-stock availability of merchandise, effective
merchandise presentation, guest service and superior store locations. The
Company believes that it is well positioned to compete on the basis of these
factors. Nevertheless, there can be no assurance that any or all of the factors
that enable the Company to compete favorably will not be adopted by companies
having greater financial and other resources than the Company.
Trade Names and Service Marks
The Company uses the "Linens 'n Things" and "LNT Home" names as trademarks
and as service marks in connection with retail services. The Company has
registered the "Linens 'n Things" and "LNT" marks with the United States Patent
and Trademark Office and the "Linens 'n Things" mark with the Canadian
Intellectual Property Office. The Company believes that the name "Linens 'n
Things" is an important element of its business.
Available Information
The Company makes available free of charge through its website,
http://www.lnt.com, all materials that it files electronically with the SEC,
including the Company's annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as soon as reasonably practicable after electronically filing such
materials with, or furnishing them to, the SEC. During the period covered by
this Form 10-K, the Company made all such materials available through its
website as soon as reasonably practicable after filing or furnishing such
materials with the SEC.
You may also read and copy any materials filed by the Company with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
website, www.sec.gov, that contains reports, proxy and information statements
and other information which the Company files electronically with the SEC.
Item 2. Properties
The Company's corporate headquarters is located at 6 Brighton Road,
Clifton, New Jersey. As of January 4, 2003 the Company operated 391 retail
stores in 45 states and four Canadian provinces. The Company's superstores
generally range in size from 25,000 to 50,000 gross square feet and currently
average 34,800 square feet. The Company's stores are predominately located in
power strip centers containing other complementary broad-based retail chains.
The Company currently leases all of its existing stores and expects that its
policy of leasing rather than owning will continue as it expands. The Company's
leases provide for original lease terms that generally range from 10 to 20 years
and most of the leases provide for one or more renewal options ranging from 5 to
15 years at increased rents. Some of the leases provide for scheduled rent
increases and some of the leases provide for contingent rent (based upon store
sales exceeding stipulated amounts). CVS Corporation, formerly the Company's
parent company, guarantees certain stores' leases that were entered into prior
to the Company's 1996 initial public offering (IPO). Following the IPO, CVS no
longer entered into commitments to guarantee future leases on behalf of the
Company.
The Company owns its distribution center in Greensboro, North Carolina,
and leases its distribution centers in Swedesboro, New Jersey, and
Shepardsville, Kentucky. Combined total square footage for these three
distribution centers is approximately 1.2 million. Both the New Jersey and
Kentucky distribution centers can be expanded. The Company leases its
headquarters in Clifton, New Jersey.
9
The table below sets forth the number and location of stores in the United
States as of January 4, 2003:
State Number of Stores State Number of Stores
----- ---------------- ----- ----------------
Alabama 4 Nebraska 2
Arizona 11 Nevada 3
Arkansas 3 New Hampshire 5
California 44 New Jersey 14
Colorado 8 New Mexico 3
Connecticut 12 New York 23
Delaware 1 North Carolina 10
Florida 28 North Dakota 1
Georgia 14 Ohio 10
Idaho 1 Oklahoma 2
Illinois 21 Oregon 6
Indiana 6 Pennsylvania 11
Kansas 3 Rhode Island 2
Kentucky 3 South Carolina 3
Louisiana 5 Tennessee 6
Maine 3 Texas 35
Maryland 4 Utah 3
Massachusetts 14 Vermont 1
Michigan 11 Virginia 12
Minnesota 5 Washington 11
Mississippi 1 West Virginia 1
Missouri 5 Wisconsin 4
Montana 2
The table below sets forth the number and location of stores in Canada as of
January 4, 2003:
Province Number of Stores
-------- ----------------
Alberta 5
British Columbia 5
Ontario 3
Manitoba 1
The following table sets forth information concerning our expansion program
during the past five years:
Total Square Footage
(In thousands) Store Count
--------------------------------------------------------------------
Fiscal Store Store
Year Openings Closings Begin Year End Year Begin Year End Year
---- -------- -------- ---------- -------- ---------- --------
1998 32 12 5,493 6,487 176 196
1999 43 9 6,487 7,925 196 230
2000 57 4 7,925 9,836 230 283
2001 63 3 9,836 11,980 283 343
2002 55 7 11,980 13,607 343 391
10
Item 3. Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter ended January 4, 2003.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Linens 'n Things' common stock is listed on the New York Stock Exchange.
Its trading symbol is LIN. At January 4, 2003 there were approximately 7,686
beneficial shareholders. The high and low trading price of the Company's common
stock for each quarter is as follows:
For Fiscal 2002 High Low
--------------- ---- ---
First Quarter.............................. $32.55 $24.17
Second Quarter............................. $37.55 $28.60
Third Quarter.............................. $32.70 $18.09
Fourth Quarter............................. $25.44 $15.05
For Fiscal 2001 High Low
--------------- ---- ---
First Quarter.............................. $37.88 $24.81
Second Quarter............................. $32.76 $24.00
Third Quarter.............................. $28.16 $17.37
Fourth Quarter............................. $25.91 $17.72
The Company paid no dividends on its common stock in fiscal 2002 and 2001.
Management of the Company currently intends to retain its earnings to finance
the growth and development of its business and does not currently anticipate
paying cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the future earnings, operations, capital
requirements and financial condition of the Company, satisfying all requirements
under its bank financing agreement and such other factors as the Company's Board
of Directors may consider relevant. In addition, the Company's credit facility
currently limits the amount of cash dividends. See "Management's Discussion and
Analysis--Liquidity and Capital Resources" under Item 7.
Item 6. Selected Financial Data
The information required by this Item is incorporated by reference to the
Five-Year Financial Summary appearing on page 12 of the Company's Annual Report
to Shareholders for the fiscal year ended January 4, 2003
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this Item is incorporated by reference to
pages 13 through 21 of the Company's Annual Report to Shareholders for the
fiscal year ended January 4, 2003
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this Item is incorporated by reference to page
17 of the Company's Annual Report to Shareholders for the fiscal year ended
January 4, 2003 under the heading "Management's Discussion and Analysis - Market
Risk Disclosure".
Item 8. Financial Statements and Supplementary Data
The financial statements and financial information required by this Item
are incorporated by reference to pages 22 through 36 of the Company's Annual
Report to Shareholders for the fiscal year ended January 4, 2003. These
financial statements are indexed under Item 15(a)(1).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or reportable disagreements between the Company
and its independent public accountants on matters of accounting principles or
practices for fiscal 2002.
12
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item concerning the Company's directors
is incorporated by reference to the Company's Proxy Statement, under the heading
"Election of Directors," for the Company's 2003 Annual Meeting of Shareholders.
The information required by this Item concerning the Company's executive
officers is contained in Part I, Item 1, "Business - Executive Officers."
The information required by this Item with respect to Section 16 reporting
is incorporated by reference to the Company's Proxy Statement for the Company's
2003 Annual Meeting of Shareholders, under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance."
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 2003 Annual Meeting of Shareholders, under the
headings "Director Compensation; Attendance;" "Committees of the Board of
Directors" and "Executive Compensation," other than information included therein
under the sub captions "Report on Compensation of Executive Officers" and
"Performance Graph" which are not incorporated herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 2003 Annual Meeting of Shareholders, under the
heading "Beneficial Ownership of Common Stock" and "Equity Compensation Plan
Information."
Item 13. Certain Relationships and Related Transactions
The information required by this Item will, if applicable, be included in
the Company's Proxy Statement for the 2003 Annual Meeting of Shareholders, and,
if so included, is incorporated by reference in this Item.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
The Company's Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO") have, in connection with management's periodic
review thereof, evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as
defined in Securities Exchange Act Rules 240.13a-14c and 15d-14c) as
of a date within ninety days before the filing of this annual
report. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's current
disclosure controls and procedures were effective, providing them
with material information relating to the Company as required to be
disclosed in the reports the Company files or submits under the
Exchange Act on a timely basis.
(b) Changes in internal controls
There have been no significant changes in the Company's internal
controls or in other factors that the Company believes could
significantly affect those internal controls subsequent to the
evaluation date.
13
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report.
1. Financial Statements:
The following Financial Statements are incorporated by reference to the
Company's Annual Report to Shareholders for the fiscal year ended January 4,
2003:
Pages in Annual Report
to Shareholders
---------------
Consolidated Statements of Operations -
for the fiscal years ended, January 4, 2003, December 29, 2001 and December 30, 2000............. 22
Consolidated Balance Sheets -
as of January 4, 2003 and December 29, 2001...................................................... 23
Consolidated Statements of Shareholders' Equity -
for the fiscal years ended January 4, 2003, December 29, 2001 and December 30, 2000.............. 24
Consolidated Statements of Cash Flows -
for the fiscal years ended January 4, 2003, December 29, 2001 and December 30, 2000.............. 25
Notes to Consolidated Financial Statements....................................................... 26 through 35
Management's Responsibility for Financial Reporting.............................................. 36
Independent Auditors' Report...................................................................... 36
2. Schedules:
None
3. Exhibits:
The Exhibits on the accompanying Exhibit Index are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K.
14
EXHIBIT INDEX
Exhibit
Number Description
3.1 Amended and Restated Certificate of Incorporation, as amended (1),(3)
3.2 By-Laws of the Registrant(1)
4 Specimen Certificate of Common Stock(1)
10.1 Transitional Services Agreement between the Registrant and CVS
Corporation1
10.2 Stockholder Agreement between the Registrant and CVS Corporation1
10.3 Tax Disaffiliation Agreement between the Registrant and CVS
Corporation(1)
10.4 Employment Agreement with Norman Axelrod*(5)
10.5 Employment Agreement with Steven B. Silverstein*(5)
10.6 Employment Agreement with Brian Silva*(5)
10.7 Employment Agreement with William T. Giles *(5)
10.8 Employment Agreement with Audrey Schlaepfer*(8)
10.9 Split Dollar Agreement and Collateral Assignment between the
Registrant and Norman Axelrod*(4)
10.10 Split Dollar Agreement and Collateral Assignment between the
Registrant and Steven B. Silverstein*(8)
10.11 1996 Incentive Compensation Plan*(1)
10.12 1996 Non-Employee Director Stock Plan*(1)
10.13 Supplemental Executive Retirement Plan*(4),(8)
10.14 2000 Stock Award and Incentive Plan (7)
10.15 Deferred Compensation Plan*(11)
10.16 LNT Broad-Based Equity Plan*(10)
10.17 Credit Agreement dated as of October 20, 2000, as amended on June 21,
2002 among the Registrant, Fleet Bank and the lenders signatory
thereto (6),(9),(12)
13 Annual Report to Shareholders for 2002 fiscal year**
21 List of Subsidiaries(2)
23a Consent of KPMG LLP(2)
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 (No. 333-12267), which Registration
Statement became effective on November 26, 1996.
(2) Filed with this Form 10-K.
(3) Incorporated by reference to Current Report on Form 8-K filed on May 6,
1999.
(4) Incorporated by reference to Current Report on Form 8-K filed on March 27,
2000.
(5) Incorporated by reference to Current Report on Form 8-K filed on March 29,
2001.
(6) Incorporated by reference to Current Report on Form 8-K filed on November
6, 2000.
(7) Incorporated by reference to Registration Statement on Form S-8 filed on
August 2, 2000 (File No. 333-42874).
(8) Incorporated by reference to a Current Report on Form 8-K filed on March
26, 2002.
(9) Incorporated by reference to a Quarterly Report on Form 10-Q filed on
November 13, 2001.
(10) Incorporated by reference to a Registration Statement on Form S-8 filed on
June 14, 2001 (File No. 333- 62984).
(11) Incorporated by reference to a Registration Statement on Form S-8 filed on
June 2, 1998 (File No. 333-55803).
(12) Incorporated by reference to a Current Report on Form 8-K filed September
18, 2002.
- --------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement.
** With the exception of the information incorporated by reference to the
Annual Report to Shareholders in Items 6, 7, 7A, and 8 of Part II and Item
14 of Part IV of this Form 10-K, the Annual Report to Shareholders is not
deemed filed as part of this Form 10-K.
(b) Reports on Form 8-K:
Not Applicable
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
Linens 'n Things, Inc.
(Registrant)
By: /s/ Norman Axelrod
------------------
Norman Axelrod
Chairman and Chief Executive Officer
Dated: April 4, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on its behalf of the Registrant in the capacities
and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Norman Axelrod Chairman and Chief April 4, 2003
- -------------------------------------------- Executive Officer
Norman Axelrod
/s/ Philip E. Beekman Director April 4, 2003
- --------------------------------------------
Philip E. Beekman
/s/ Harold F. Compton Director April 4, 2003
- --------------------------------------------
Harold F. Compton
/s/ Stanley P. Goldstein Director April 4, 2003
- --------------------------------------------
Stanley P. Goldstein
/s/ Morton E. Handel Director April 4, 2003
- --------------------------------------------
Morton E. Handel
/s/ Robert Kamerscham Director April 4, 2003
- --------------------------------------------
Robert Kamerscham
/s/ William T. Giles Senior Vice President, April 4, 2003
- -------------------------------------------- Chief Financial Officer
William T. Giles (Principal Financial Officer and
Principal Accounting Officer)
16
CERTIFICATION
I, Norman Axelrod, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Linens 'n Things, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 4, 2003 /s/ Norman Axelrod
------------------------------------
Norman Axelrod
Chairman and Chief Executive Officer
17
CERTIFICATION
I, William T. Giles, Principal Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Linens 'n Things, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 4, 2003 /s/ William T. Giles
--------------------
William T. Giles
Senior Vice President, Chief Financial Officer
18
Five-Year Financial Summary (in thousands, except per share and selected
operating data)
Fiscal Year Ended(1) January 4, December 29, December 30, January 1, December 31,
2003 2001(3) 2000 2000 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Income statement data:
Net sales .................................... $ 2,184,716 $ 1,823,803 $ 1,572,576 $ 1,300,632 $ 1,066,194
Operating profit ............................. 114,269 52,480 107,092 84,552 61,988
Net income ................................... 69,246 29,749 64,937 52,052 38,062
Net income per share - basic(2) .............. $ 1.63 $ 0.73 $ 1.63 $ 1.32 $ 0.98
Basic weighted-average shares
outstanding(2) ........................... 42,428 40,508 39,785 39,339 38,895
Net income per share - diluted(2) ............ $ 1.60 $ 0.72 $ 1.60 $ 1.27 $ 0.94
Diluted weighted-average shares
outstanding(2) .......................... 43,314 41,193 40,712 40,907 40,407
Balance sheet data:
Total assets ................................. $ 1,150,481 $ 927,439 $ 821,557 $ 679,916 $ 560,844
Working capital .............................. 373,488 228,078 226,694 181,380 154,893
Shareholders' equity ......................... $ 668,721 $ 498,215 $ 458,994 $ 383,962 $ 323,576
Selected operating data:
Number of stores ............................. 391 343 283 230 196
Total gross square footage (000's) ........... 13,607 11,980 9,836 7,925 6,487
Increase (decrease) in comparable
store net sales ........................... 3.1% (2.4%) 3.7% 5.4% 8.3%
(1) Fiscal year 2002 was a 53-week period. Fiscal years 1999 through 2001 were
52-week periods. Fiscal year 1998 was a calendar year period.
(2) Unless otherwise stated, all references to common shares outstanding and
income per share in the consolidated financial statements, notes to
consolidated financial statements, and management's discussion and
analysis of financial condition and results of operations are adjusted to
reflect the Company's two-for-one common stock split effected in May 1998.
(3) Fiscal 2001 operating results include non-comparable restructuring and
litigation charges of $41.8 million pre-tax ($26.2 million, after-tax), or
$0.64 per share on a fully diluted basis. Excluding the effects of such
non-comparable items, fiscal year 2001 net income would have been $55.9
million or $1.36 per share on a fully diluted basis. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-2001 Non-Comparable Items."
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Linens 'n Things, Inc. (the "Company") is one of the leading national format
specialty retailers of home textiles, housewares and home accessories. As of
January 4, 2003, the Company operated 391 stores in 45 states and in four
provinces across Canada. The Company's stores emphasize a broad assortment of
home textiles, housewares and home accessories, carrying both national brand and
private label goods. The following discussion and analysis of financial
condition, results of operations, liquidity and capital resources should be read
in conjunction with the accompanying audited consolidated financial statements
and notes thereto.
Consolidated Results of Operations
The following table sets forth the percentage of net sales for certain items
included in the Company's consolidated statements of operations for the 53 weeks
ended January 4, 2003 ("fiscal 2002") and each of the 52 weeks ended December
29, 2001 ("fiscal 2001") and December 30, 2000 ("fiscal 2000"):
Jan. 4, Dec. 29, Dec. 30,
Fiscal Year Ended 2003 2001 2000
- --------------------------------------------------------------------------------
Percentage of net sales
Net sales ............................... 100.0% 100.0% 100.0%
Cost of sales, including buying
and distribution costs .............. 59.0 59.3 59.1
----- ----- -----
Gross profit ............................ 41.0 40.7 40.9
Selling, general and
administrative expenses ............. 35.8 35.7 34.1
Restructuring and asset
impairment charge ................... -- 1.9 --
Litigation charge ....................... -- 0.2 --
----- ----- -----
Operating profit ........................ 5.2 2.9 6.8
Interest expense, net ................... 0.1 0.2 0.1
----- ----- -----
Income before income taxes .............. 5.1 2.7 6.7
Provision for income taxes .............. 1.9 1.1 2.6
----- ----- -----
Net income .............................. 3.2% 1.6% 4.1%
2001 Non-Comparable Items
The Company's 2001 results were impacted by non-comparable items totaling $41.8
million, pre-tax, as follows:
Restructuring and Asset Impairment Charge
During the fourth quarter of fiscal 2001, the Company formulated a strategic
initiative designed to improve store performance and profitability. This
initiative called for the closing of 17 stores which did not meet the Company's
performance objectives. These 17 stores generated approximately 4% of total net
sales in 2001 and are geographically dispersed.
In connection with this initiative, the Company recorded a pre-tax restructuring
and asset impairment charge of $37.8 million ($23.7 million after-tax) in the
fourth quarter of fiscal 2001. Certain components of the restructuring and asset
impairment charge are based upon estimates and may be subject to change in
future periods. Of the $37.8 million, $34.0 million was included in
restructuring and asset impairment charge and $3.8 million was recorded in cost
of sales. The estimated after-tax cash portion of the charge is approximately
$15.2 million and the after-tax non-cash portion of the charge is approximately
$8.5 million.
A pre-tax reserve of $20.5 million was established for estimated lease
commitments for stores to be closed. This reserve was included in accrued
expenses at December 29, 2001. The reserve considers estimated sublease income.
All of the stores were leased and as such, the Company will not be responsible
for the disposal of property other than fixtures. A pre-tax charge of $9.5
million was recorded as a reduction in property and equipment for fixed asset
impairments for these stores. The fixed asset impairments represent fixtures and
leasehold improvements. Additionally, a pre-tax reserve of $4.0 million was
established for other estimated miscellaneous store closing costs. A pre-tax
charge of $3.8 million was recorded in cost of sales for estimated inventory
markdowns below cost for the stores to be closed.
During fiscal 2002, the Company determined to keep one of the 17 stores open. As
a result, the Company reversed $1.4 million of the lease commitment and
miscellaneous store closing costs reserve established in fiscal 2001. In
addition, the Company evaluated the reserve balance associated
20
with the remaining store closings and recorded an additional reserve of $1.4
million based on current estimates of lease settlement obligations. This
activity has been presented within the fiscal 2002 usage activity in the below
table.
As of January 4, 2003, seven stores have closed and the Company expects the
majority of the remaining stores to be closed by the end of the first quarter of
2003.
As of January 4, 2003, the Company has $22.2 million remaining in the 2001
restructuring and asset impairment charge. The following table displays a roll
forward of the activity and the significant components of the fiscal 2001
restructuring and asset impairment charge and the reserves remaining as of
January 4, 2003 ($ in millions):
Initial Usage Remaining at Usage Remaining
Charge 2001 12/29/01 2002 at 1/04/03
Non-Cash
Components:
Asset
impairment ........... $ 9.5 $(9.5) -- -- --
Inventory
markdown ............. 3.8 (3.8) -- -- --
----------------------------------------------------------------
Subtotal ............... 13.3 (13.3) -- -- --
Cash
Components:
Lease
commitments ............ 20.5 -- 20.5 (1.1) 19.4
Other ................ 4.0 -- 4.0 (1.2) 2.8
----------------------------------------------------------------
Subtotal ............... 24.5 -- 24.5 (2.3) 22.2
----------------------------------------------------------------
Total .................. $37.8 $(13.3) $24.5 $(2.3) $22.2
================================================================
The 2002 usage primarily consists of the settlements for lease obligations and
other miscellaneous closing costs. The deductions to the reserve balance during
2001 included fixed asset write-offs totaling $9.5 million and store inventory
markdowns taken totaling $3.8 million.
Litigation Charge
In fiscal 2001, the Company was named as a defendant in California litigation in
which the court certified the case as a class action on behalf of certain
managers of Company stores located in California seeking overtime pay, together
with class action claims on behalf of certain former employees seeking accrued
vacation pay. In the second quarter of fiscal 2001, the Company recorded a
pre-tax charge of $4.0 million ($2.5 million after-tax) related to the
settlement payments, attorneys' fees, and estimated expenses of administering
the settlement. An order granting final approval of class action settlement was
signed on December 19, 2001. The Company admitted no liability in connection
with this settlement. Payment of these amounts was made in early fiscal 2002.
The following table shows the effect of non-comparable items on the year ended
December 29, 2001.
(in millions, except per share data)
Excluding
As Non- Non-
Reported Comparable Comparable
Items Items
- --------------------------------------------------------------------------------
Net sales ........................ $ 1,823.8 -- $ 1,823.8
Gross profit ..................... 742.5 (3.8) 746.3
Selling, general and
administrative expenses ........ 652.0 -- 652.0
Restructuring and asset
impairment charge .............. 34.0 34.0 --
Litigation charge ................ 4.0 4.0 --
--------- --------- ---------
Operating profit ................. 52.5 (41.8) 94.3
Interest expense, net ............ 3.9 -- 3.9
--------- --------- ---------
Income before income taxes ....... 48.6 (41.8) 90.4
Provision for income taxes ....... 18.9 (15.6) 34.5
--------- --------- ---------
Net income ....................... $ 29.7 ($26.2) $ 55.9
========= ========= =========
Basic earnings per share ......... $ 0.73 ($0.65) $ 1.38
========= ========= =========
Diluted earnings per share ....... $ 0.72 ($0.64) $ 1.36
========= ========= =========
The following discussion on the Consolidated Results of Operations includes as
well as excludes the impact of the 2001 non-comparable items.
In discussing its period to period results, the Company believes it is useful,
for investors and management, in reviewing financial performance to understand
the impact on operating results and financial condition of actions, events and
items which the Company believes are not generally part of its operations or are
unusual events, and is useful in understanding the Company's operating results
and financial condition on a comparative basis. It supplements, and is not
intended to represent, GAAP presentation.
Fiscal Year Ended January 4, 2003 Compared With Fiscal Year Ended December 29,
2001
Net Sales
Net sales for fiscal 2002 (53 weeks) were $2,184.7 million, an increase of 19.8%
over fiscal 2001 (52
21
weeks) sales of $1,823.8 million, primarily as a result of new store openings as
well as comparable store net sales increases. The Company opened 55 superstores
and closed seven stores in fiscal 2002, compared with opening 63 superstores and
closing three stores in fiscal 2001. Store square footage increased 13.6% to
13.6 million at January 4, 2003 compared with 12.0 million at December 29, 2001.
Comparable store net sales for fiscal 2002 (53 weeks vs. 53 weeks) increased
3.1% compared with a decline of 2.4% in fiscal 2001. Comparable store
percentages are based on net sales, and stores are considered comparable
beginning on the first day of the month following the 13th full month of sales.
The Company's average net sales per store was $5.9 million in fiscal 2002 and
$5.8 million in fiscal 2001. The increase in comparable store net sales and
average net sales per store in fiscal 2002 were driven primarily by higher
consumer traffic. The Company believes its sales results also reflect the steady
progress being made on its strategic operating initiatives, which include
improvements of in-stock inventory positions, improvements in the Company's
textile business and customer or "guest" shopping experience. Sales also
benefited from good overall performance of the Company's functional housewares
business.
Net sales consist of gross sales to customers net of returns, discounts and
incentives. Provisions for estimated future sales returns when material are
recorded in the period that the related sales are recorded. The Company
determines the amount of provision based on historical information. Sales
discounts, coupons and other similar incentives are recorded as a reduction of
sales revenue in the period when the related sales are recorded.
The Company's core business strategy is to offer a broad and deep selection of
high quality brand name "linens" (e.g., bedding, towels and table linens) and
"things" (e.g., housewares and home accessories) merchandise. For fiscal 2002,
net sales of "linens" merchandise increased approximately 17% over the prior
year, while net sales of "things" increased approximately 24% over the prior
year. The greater increase in net sales for "things" merchandise primarily
resulted from the continued expansion of product categories within the "things"
business.
Gross Profit
Gross profit for fiscal 2002 was $896.0 million, or 41.0% of net sales, compared
with $742.5 million, or 40.7% of net sales, in fiscal 2001. Excluding the effect
of the non-comparable item recorded in fiscal 2001, gross profit was $746.3
million, or 40.9% of net sales in fiscal 2001. This increase as a percentage of
net sales resulted from overall improved selling mix, increased penetration of
proprietary product and leveraging of the Company's buying power.
Expenses
The Company's selling, general and administrative ("SG&A") expenses consist of
store selling expenses, occupancy costs, advertising expenses and corporate
office expenses. SG&A expenses for fiscal 2002 were $781.8 million, or 35.8% of
net sales, compared with $652.0 million, or 35.7% of net sales, in fiscal 2001.
Corporate office and occupancy expenses were leveraged, which were offset by
investments in store payroll as a result of the Company's initiative to improve
overall guest service levels.
Operating profit for fiscal 2002 increased to $114.3 million, or 5.2% of net
sales, up from $52.5 million, or 2.9% of net sales during fiscal 2001. Excluding
the effect of non-comparable items recorded in fiscal 2001, operating profit was
$94.3 million or 5.2% of net sales during fiscal 2001.
Net interest expense in fiscal 2002 was $2.2 million compared to $3.9 million
during fiscal 2001. The decrease in net interest expense is mainly due to lower
average borrowings, as well as lower interest rates.
The Company's income tax expense for fiscal 2002 was $42.8 million, compared
with $18.9 million during fiscal 2001. The Company's effective tax rate was
38.2% in fiscal 2002 and 38.8% in fiscal 2001. Excluding the impact of
non-comparable items recorded in fiscal 2001, the Company's
22
income tax expense for fiscal 2001 was $34.5 million and the effective tax rate
was 38.2%.
Net Income
As a result of the factors described above, net income for fiscal 2002 was $69.2
million, or $1.60 per share on a fully diluted basis compared with $29.7
million, or $0.72 per share on a fully diluted basis in fiscal 2001. Excluding
the effect of non-comparable items recorded in fiscal 2001, net income was $55.9
million or $1.36 per share on a fully diluted basis in fiscal 2001.
Fiscal Year Ended December 29, 2001 Compared With Fiscal Year Ended December 30,
2000
Net Sales
Net sales for fiscal 2001 were $1,823.8 million, an increase of 16.0% over
fiscal 2000 sales of $1,572.6 million, primarily as a result of new store
openings. The Company opened 63 superstores and closed three stores in fiscal
2001, as compared with opening 57 superstores and closing four stores in fiscal
2000. At fiscal year end 2001, the Company operated 343 stores, including 11
stores in Canada, as compared with 283 stores at fiscal year end 2000. Store
square footage increased 21.8% to 12.0 million at December 29, 2001 compared
with 9.8 million at December 30, 2000.
Comparable store net sales declined 2.4% in fiscal 2001 compared with an
increase of 3.7% in fiscal 2000. The Company's average net sales per store was
$5.8 million in fiscal 2001 compared to $6.2 million in fiscal 2000. The decline
in comparable store net sales and average net sales per store in fiscal 2001 was
primarily attributed to a decline in consumer traffic due to the slowing economy
as well as the productivity of our newer comparable stores opened in 2000, which
performed below the Company's sales targets.
Gross Profit
Gross profit for fiscal 2001 was $742.5 million, or 40.7% of net sales, compared
with $643.3 million, or 40.9% of net sales, in fiscal 2000. Excluding the effect
of a non-comparable item recorded in fiscal 2001, gross profit was $746.3
million or 40.9% of net sales in fiscal 2001. Gross margin as a percentage of
net sales in fiscal 2001 was impacted by an increase in markdowns primarily as a
result of an increase in promotional activity and a pre-tax charge of $3.8
million related to the estimated inventory markdowns below cost for the closing
of certain under-performing stores. This was offset by improved mark-on as a
result of product mix and the increased penetration of the Company's proprietary
products, as well as lower freight expenses.
Expenses
SG&A expenses for fiscal 2001 were $652.0 million, or 35.7% of net sales, as
compared with $536.2 million, or 34.1% of net sales, in fiscal 2000. The
increase as a percentage of net sales is attributable to the de-leveraging in
the Company's operating expenses, primarily occupancy costs, reflecting lower
sales productivity. However, the increase was partially offset by the leverage
of corporate office expenses.
Operating profit for fiscal 2001 was $52.5 million, or 2.9% of net sales, down
from $107.1 million, or 6.8% of net sales during fiscal 2000. Excluding the
effect of non-comparable items recorded in fiscal 2001, operating profit was
$94.3 million or 5.2% of net sales during fiscal 2001.
Net interest expense in fiscal 2001 increased to $3.9 million from $1.9 million
during fiscal 2000. This increase was due to a higher net average loan balance
than in fiscal 2000 in order to fund the Company's operations.
The Company's income tax expense for fiscal 2001 was $18.9 million, compared
with $40.2 million during fiscal 2000. The Company's effective tax rate was
38.8% and 38.2%, in fiscal 2001 and fiscal 2000, respectively. Excluding the
impact of non-comparable items recorded in fiscal 2001, the Company's income tax
expense for fiscal 2001 was $34.5 million and the effective tax rate was 38.2%.
23
Net Income
As a result of the factors described above, net income for fiscal 2001 was $29.7
million or $0.72 per share on a fully diluted basis compared with $64.9 million,
or $1.60 per share on a fully diluted basis in fiscal 2000. Excluding the effect
of non-comparable items recorded in fiscal 2001, net income was $55.9 million,
or $1.36 per share on a fully diluted basis for fiscal 2001.
Liquidity and Capital Resources
The Company's capital requirements are primarily for new store expenditures, new
store inventory purchases and seasonal working capital. These requirements have
been funded through a combination of internally generated cash flow from
operations, credit extended by suppliers and short-term borrowings.
In June 2002, the Company amended and extended its 2000 $150 million senior
revolving credit facility agreement (the "Credit Agreement") with third party
institutional lenders, to expire April 20, 2005. The Credit Agreement allows for
up to $40 million in borrowings from additional lines of credit outside of the
Credit Agreement. As of January 4, 2003, the additional lines of credit include
approximately $23 million in committed facilities that expire on June 18, 2003
and are subject to annual renewal arrangements. The Credit Agreement replaced
the 1998 $90 million revolving line of credit, which allowed for up to $25
million in borrowings from additional lines of credit. Interest on all
borrowings is determined based upon several alternative rates as stipulated in
the Credit Agreement, including a fixed margin above LIBOR. The Credit Agreement
contains certain financial covenants, including those relating to the
maintenance of a minimum tangible net worth, a minimum fixed charge coverage
ratio, and a maximum leverage ratio. At the end of fiscal 2002, the Company was
in compliance with the terms of the Credit Agreement. The Credit Agreement
limits, among other things, the amount of cash dividends, pursuant to which the
amount of cash dividends may not exceed the sum of $25 million plus on a
cumulative basis an amount equal to 50% of the consolidated net income for each
fiscal quarter commencing with the fiscal quarter ended March 30, 2002. The
Company has never paid cash dividends and does not anticipate paying cash
dividends in the future. The Company is required under the Credit Agreement to
reduce the balance of outstanding domestic borrowings to zero for 30 consecutive
days during each period beginning on December 1st of any fiscal year and ending
on March 15th of the following year. Accordingly, the Company reduced the
balance of domestic borrowings to zero for 30 consecutive days during the period
beginning on December 1, 2002 and ending on March 15, 2003. At various times
throughout fiscal 2002 and 2001, the Company borrowed against the Credit
Agreement for seasonal working capital needs. At the end of fiscal 2002, the
Company had $1.8 million of borrowings under the additional lines of credit at a
weighted average interest rate of 4.5%. In addition, as of January 4, 2003 and
December 29, 2001, the Company had $26.0 million and $21.6 million,
respectively, of letters of credit outstanding, which were primarily used for
merchandise purchases. The Company is not obligated under any formal or informal
compensating balance arrangements. (See Note 8 to the Consolidated Financial
Statements). The Company maintains a trade payables arrangement with General
Electric Capital Corporation ("GECC") pursuant to a Trade Payables Agreement
wherein GECC will purchase the Company's payables at a discount directly from
the Company's suppliers prior to the due date of those payables and pays on
behalf of the Company the amount due on those payables prior to their due date.
Any discounts resulting from such purchases are subject to a sharing arrangement
as agreed between the Company and GECC.
Net cash provided by operating activities for the fiscal year ended 2002 was
$80.7 million compared with $44.3 million for the fiscal year ended 2001. The
change in net cash used in operating activities was primarily attributed to an
improvement in net income and the timing of vendor payments, impacted by a
slight improvement in inventory turn. Inventory increased approximately $122.6
million in fiscal 2002. The increase in inventory resulted from new store
additions since fiscal 2001 as well as additional investments in inventory as a
result of the Company's in-stock initiative. Net cash provided
24
by operating activities is our principal source of liquidity and, therefore, a
decline in demand for the Company's product offerings could impact the
availability of funds for store expansion.
Net cash used in investing activities for the fiscal year ended 2002 was $82.2
million, compared with $100.0 million for the fiscal year ended 2001. Fiscal
year 2002 included capital expenditures associated with the opening of 55 new
stores compared with 63 new stores in fiscal 2001. Capital expenditures related
to the Company's third distribution center, which opened in the Spring of 2002,
were primarily paid in fiscal 2001. The Company currently estimates capital
expenditures will be approximately $80 million to $85 million in fiscal 2003,
primarily for an estimated 55 to 60 new stores, store remodels, and system
enhancements.
Net cash provided by financing activities for the fiscal year ended 2002 was
$72.7 million compared with $32.7 million for the fiscal year ended 2001. The
increase was primarily due to a common stock offering of 3.3 million shares that
raised a net $95.8 million. The proceeds were used to pay down borrowings under
the Credit Agreement.
As discussed in Note 10 to the Consolidated Financial Statements, the Company is
committed for future minimum rental payments primarily for its retail stores for
amounts which aggregate approximately $2.2 billion. In addition, as of January
31, 2003, the Company had fully executed leases for 70 stores planned to open in
fiscal 2003 and fiscal 2004.
Management regularly reviews and evaluates its liquidity and capital needs. The
Company experiences peak periods for its cash needs during the course of its
fiscal year, with peak periods generally expected during the second quarter and
fourth quarter of the fiscal year. As the Company's business continues to grow
and its current store expansion plan is implemented, such peak periods may
require increases in the amounts available under its credit facilities from
those currently existing and/or other debt or equity funding. Management
currently believes that the Company's cash flows from operations, credit
extended by suppliers, its existing credit facilities, and its uncommitted lines
of credit will be sufficient to fund its expected capital expenditure, working
capital and non-acquisition business expansion requirements for at least the
next 12 to 18 months.
Market Risk Disclosure
The Company regularly evaluates the market risk associated with its financial
instruments. Market risks relating to the Company's operations result primarily
from changes in interest rates and foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
Interest Rate Risk
The Company's financial instruments include cash and cash equivalents and
short-term borrowings. The Company's obligations are short-term in nature and
generally have less than a 30-day commitment. The Company is exposed to interest
rate risks primarily through borrowings under the Credit Agreement. Interest on
all borrowings is based upon several alternative rates, including a fixed margin
above LIBOR. At January 4, 2003, the Company had $1.8 million of borrowings
under the additional lines of credit at a weighted-average interest rate of 4.5%
(see Note 8 to the Consolidated Financial Statements). The Company believes that
its interest rate risk is minimal as a hypothetical 10% increase or decrease in
interest rates in the associated debt's variable rate would not materially
affect the Company's results of operations or cash flows. The Company does not
use derivative financial instruments in its investment portfolio.
Foreign Currency Risk
The Company enters into some purchase obligations outside of the United States,
which are predominately settled in U.S. dollars and, therefore, the Company has
only minimal exposure to foreign currency exchange risks. The Company does not
hedge against foreign currency risks and believes that foreign currency exchange
risk is immaterial.
In addition, the Company operated 14 stores in Canada as of January 4, 2003. The
Company
25
believes its foreign currency translation risk is minimal, as a hypothetical 10%
strengthening or weakening of the U.S. dollar relative to the Canadian dollar
would not materially affect the Company's results of operations or cash flows.
Inflation and Seasonality
The Company does not believe that its operating results have been materially
affected by inflation during the preceding three years. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.
The Company's business is subject to substantial seasonal variation.
Historically, the Company has realized a significant portion of its net sales
and net income for the year during the third and fourth quarters. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of new store openings. The
Company believes this is the general pattern associated with its segment of the
retail industry and expects this pattern will continue in the future.
Consequently, comparisons between quarters are not necessarily meaningful and
the results for any quarter are not necessarily indicative of future results.
Recent Accounting Pronouncements
At a 2001 meeting of the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force ("EITF"), a consensus was reached with respect to the issue of
"Accounting for Certain Sales Incentives," including point of sale coupons,
rebates and free merchandise. The consensus included a conclusion that the value
of such sales incentives that result in a reduction of the price paid by the
customer should be netted against sales and not classified as a sales or
marketing expense. In April 2001, the EITF delayed the effective date for this
consensus to 2002. The Company has always included such sales incentives as a
reduction of sales and records free merchandise in cost of goods sold as
required by the EITF consensus.
The FASB's EITF Issue 02-16, "Accounting By A Customer (Including A Reseller)
For Cash Consideration Received From A Vendor" addressed the accounting
treatment for vendor allowances. The Company is in the process of evaluating the
impact of EITF Issue 02-16. However, the application of EITF Issue 02-16 is not
expected to have a material impact on the Company's consolidated financial
statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. This statement is effective for the Company in fiscal 2003. The Company
has evaluated SFAS No. 143 and does not anticipate that the impact of the new
pronouncement would have a material impact on the Company's consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"), but retains many of its fundamental
provisions. SFAS No. 144 also expands the scope of discontinued operations to
include more disposal transactions, and will impact the presentation of future
store closings, if any. SFAS No. 144 was effective for the Company for the first
quarter of fiscal 2002. The implementation of SFAS No. 144 did not have a
significant impact on the Company's financial statements, as the impairment
assessment under SFAS No. 144 is predominately unchanged from SFAS No. 121 and
the stores closed during the fifty-three weeks ended January 4, 2003 did not
meet the requirements to be reported as discontinued operations.
During April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). Among other items, SFAS No. 145 updates and
26
clarifies existing accounting pronouncements related to reporting gains and
losses from the extinguishment of debt and certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of SFAS
No. 145 are generally effective for fiscal years beginning after May 15, 2002,
with earlier adoption of certain provisions encouraged. The application of SFAS
No. 145 did not have and is not expected to have a material impact on the
Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). This Statement requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The Company is required to adopt the provisions of SFAS No. 146 for exit
or disposal activities, if any, initiated after December 31, 2002. Although the
Company believes the adoption of SFAS No. 146 will not impact the consolidated
financial position or results of operations, it can be expected to impact the
timing of liability recognition associated with future exit activities, if any.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"), was issued in
December 2002 and the transition guidance and annual disclosure provisions are
effective for the Company for the year ended January 4, 2003. SFAS No. 148
amends SFAS Statement No. 123 ("SFAS No.123"), "Accounting for Stock-Based
Compensation" and provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, the statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect of the method used. For the fiscal year ended 2002, 2001 and
2000, the Company accounted for stock options using the intrinsic value method
prescribed under Accounting Principles Board ("APB") Opinion 25, and
accordingly, the Company did not recognize compensation expense for stock
options. The Company continues to account for stock-based compensation using APB
Opinion No. 25 and has not adopted the recognition provisions of SFAS No. 123,
as amended by SFAS No. 148. However, the Company has adopted the disclosure
provisions for the current fiscal year and has included this information in Note
11 to the Company's Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others" ("FIN No. 45"). FIN No. 45 elaborates on the disclosures
for interim and annual reports regarding obligations under certain guarantees
issued by a guarantor. Under FIN No. 45, the guarantor is required to recognize
a liability for the fair value of the obligation undertaken in issuing the
guarantee at the inception of a guarantee. The recognition and measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements for FIN
No. 45 are effective for interim and annual financial statements issued after
December 15, 2002. The Company has evaluated FIN No. 45 and does not anticipate
that the impact of the new pronouncement would have a material impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46 explains how to identify
variable interest entities and how an enterprise assesses its interests in a
variable interest entity to decide whether to consolidate that entity. FIN No.
46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. The provisions of FIN No. 46 are
effective immediately for all entities with variable interests in variable
interest entities created after January 31, 2003. The provisions of FIN No. 46
are effective for public entities with a variable interest in a variable
interest entity created prior to February 1, 2003 no later than the end of the
first annual
27
reporting period beginning after June 15, 2003. The Company has evaluated FIN
No. 46 and does not anticipate that this interpretation will have a material
impact on the Company's consolidated financial statements as the Company has no
variable interest entities.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts and timing of revenues and of
expenses during the reporting periods. The Company's management believes the
following critical accounting estimates involve significant estimates and
judgments inherent in the preparation of the Consolidated Financial Statements.
Management of the Company has discussed the development and selection of these
critical accounting estimates with the Audit Committee of the Company's Board of
Directors and the Audit Committee has reviewed the Company's disclosures in this
MD&A relating to these critical accounting estimates.
Valuation of Inventory: Inventories are valued using the lower of cost or market
value, determined by the retail inventory method ("RIM"). Under RIM, the
valuation of inventories at cost and the resulting gross margins are determined
by applying a calculated cost-to-retail ratio to the retail value of
inventories. RIM is an averaging method that is used in the retail industry due
to its practicality. Inherent in the RIM calculation are certain significant
management judgments and estimates including, among others, merchandise mark-on,
mark-up, markdowns and shrinkage based on historical experience between the
dates of physical inventories, all of which significantly impact the ending
inventory valuation at cost. The methodologies utilized by the Company in its
application of the RIM are consistent for all periods presented. Such
methodologies include the development of the cost-to-retail ratios, the
development of shrinkage reserves and the accounting for price changes.
Sales Returns: The Company estimates future sales returns and, when material,
records a provision in the period that the related sales are recorded based on
historical return rates. Should actual returns differ from the Company's
estimates, the Company may be required to revise estimated sales returns. As
such, estimating sales returns requires management judgment. In preparing our
financial statements for the years ended January 4, 2003 and December 29, 2001,
the Company's sales returns reserve was approximately $5.5 million and $4.8
million, respectively.
Impairment of Assets: With the adoption of SFAS No. 142, the Company will review
goodwill for possible impairment at least annually. Impairment losses are
recognized when the implied fair value of goodwill is less than its carrying
value. The Company periodically evaluates long-lived assets other than goodwill
for indicators of impairment. The Company's judgments regarding the existence of
impairment indicators are based on market conditions and operational
performance. Future events could cause the Company to conclude that impairment
indicators exist and that the value of long-lived assets and goodwill is
impaired. At the end of fiscal 2002 and fiscal 2001, the Company's net value for
property and equipment was approximately $348.4 million and $312.4 million,
respectively, and goodwill was $18.1 million for fiscal years ended 2002 and
2001.
Store Closure Costs: Prior to the adoption of SFAS No. 146, the Company records
estimated store closure costs, such as fixed asset write-offs, estimated lease
commitment costs net of estimated sublease income, markdowns for inventory that
will be sold below cost, and other miscellaneous store closing costs, in the
period in which management determines to close a store. Such estimates may be
subject to change should actual costs differ. In fiscal 2001, the Company
recorded a reserve of $37.8 million ($23.7 million after-tax) related to the
closing of certain under-performing stores. As of January 4, 2003 and December
29, 2001, the Company had $22.2 million and $24.5 million, respectively,
remaining related to this reserve. The
28
Company is negotiating the lease buyouts or sub-lease agreements for these
stores and based upon final resolution of such negotiations, such estimates may
be subject to change.
The Company is required to adopt the provisions of SFAS No. 146 for exit or
disposal activities, if any, initiated after December 31, 2002. Although the
Company believes the adoption of SFAS No. 146 will not impact the consolidated
financial position or results of operations, it can be expected to impact the
timing of liability recognition associated with future exit activities, if any.
Self Insurance: The Company purchases third party insurance for worker's
compensation, medical, auto and general liability that exceeds certain levels
for each type of insurance program. However, the Company is responsible for the
payment of claims under these insured excess limits. The Company establishes
accruals for its insurance programs based on available claims data and
historical trend and experience, as well as loss development factors prepared by
third party actuaries. In preparing the estimates, the Company also considers
the nature and severity of the claims, analysis provided by third party claims
administrators, as well as current legal, economic and regulatory factors.
The Company evaluates the accrual and the underlying assumptions periodically
and makes adjustments as needed. The ultimate cost of these claims may be
greater than or less than the established accrual. While the Company believes
that the recorded amounts are adequate, there can be no assurances that changes
to management's estimates will not occur due to limitations inherent in the
estimate process. In the event the Company determines the accruals should be
increased or reduced, the Company would record such adjustments in the period in
which such determination is made.
The accrued obligation for these self-insurance programs was approximately $9.5
million for fiscal year 2002 and $6.0 million for fiscal year 2001.
Litigation: The Company records an estimated liability related to various claims
and legal actions arising in the ordinary course of business, which is based on
available information and advice from outside counsel where applicable. As
additional information becomes available, the Company assesses the potential
liability related to its pending claims and may adjust its estimates
accordingly.
Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. The statements are made a
number of times and may be identified by such forward-looking terminology as
"expect," "believe," "may," "will," "could", "intend," "plan," "target" and
terms or variations of such terms. All of our information and statements
regarding our outlook for the future constitutes forward-looking statements. All
our forward-looking statements are based on our current expectations,
assumptions, estimates and projections about our Company and involve certain
significant risks and uncertainties, including levels of sales, store traffic,
acceptance of product offerings and fashions, the success of our new business
concepts and seasonal concepts, the success of our new store openings,
competitive pressures from other home furnishings retailers, the success of the
Canadian expansion, availability of suitable future store locations, schedule of
store expansion and of planned closings, the impact of the bankruptcies and
consolidations in our industry, the impact on consumer spending as a result of
the slower consumer economy, a highly promotional retail environment, any
significant variations between actual amounts and the amounts estimated for
those matters identified as our critical accounting estimates as well as other
significant accounting estimates made in the preparation of our financial
statements, and the impact of the hostilities in the Middle East and the
possibility of hostilities in other geographic areas as well as other
geopolitical concerns. Actual results may differ materially from such
forward-looking statements. These and other important risk factors are included
in the "Risk Factors" section of the Company's Registration Statement on Form
S-3 as filed with the Securities and Exchange Commission on June 18, 2002, and
may be contained in subsequent reports filed with the Securities and Exchange
Commission. You are urged to consider all such factors. In light of the
uncertainty inherent in such forward-looking statements, you should not consider
their inclusion to be a representation that such forward-looking matters will be
achieved. The Company assumes no obligation for updating any such
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements.
29
Consolidated Statements of Operations (in thousands, except per share amounts)
- --------------------------------------------------------------------------------
January 4, December 29, December 30,
Fiscal Year Ended 2003 2001 2000
- --------------------------------------------------------------------------------------------
Net sales .................................... $ 2,184,716 $ 1,823,803 $ 1,572,576
Cost of sales, including buying and
distribution costs ........................ 1,288,690 1,081,259 929,305
----------- ----------- -----------
Gross profit ................................. 896,026 742,544 643,271
Selling, general and administrative expenses . 781,757 652,058 536,179
Restructuring and asset impairment charge .... -- 34,006 --
Litigation charge ............................ -- 4,000 --
----------- ----------- -----------
Operating profit ............................. 114,269 52,480 107,092
Interest income ........................... (79) (27) (198)
Interest expense .......................... 2,329 3,897 2,139
----------- ----------- -----------
Interest expense, net ........................ 2,250 3,870 1,941
----------- ----------- -----------
Income before income taxes ................... 112,019 48,610 105,151
Provision for income taxes ................... 42,773 18,861 40,214
----------- ----------- -----------
Net income ................................... $ 69,246 $ 29,749 $ 64,937
=========== =========== ===========
Per share of common stock:
Basic
Net income ................................... $ 1.63 $ 0.73 $ 1.63
Weighted-average shares outstanding .......... 42,428 40,508 39,785
Diluted
Net income ................................... $ 1.60 $ 0.72 $ 1.60
Weighted-average shares outstanding .......... 43,314 41,193 40,712
See accompanying notes to consolidated financial statements.
30
Consolidated Balance Sheets (in thousands, except share amounts)
- --------------------------------------------------------------------------------
January 4, December 29,
2003 2001
- ---------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents ..................................... $ 86,605 $ 15,437
Accounts receivable ........................................... 41,168 40,835
Inventories ................................................... 615,256 492,307
Prepaid expenses and other current assets ..................... 27,279 15,691
Current deferred taxes ........................................ 2,671 23,524
----------- -----------
Total current assets ................................................ 772,979 587,794
Property and equipment, net ................................... 348,445 312,403
Goodwill, net of accumulated amortization of $9,064
at January 4, 2003 and December 29, 2001 ................... 18,126 18,126
Deferred charges and other non-current assets, net ............ 10,931 9,116
----------- -----------
Total assets .............................................................. $ 1,150,481 $ 927,439
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .............................................. $ 233,877 $ 180,840
Accrued expenses and other current liabilities ................ 163,783 149,201
Short-term borrowings ......................................... 1,831 29,675
----------- -----------
Total current liabilities ........................................... 399,491 359,716
Deferred income taxes and other long-term liabilities ......... 82,269 69,508
Shareholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; -- --
none issued and outstanding
Common stock, $0.01 par value; 135,000,000 shares
authorized; 44,362,507 shares issued and 44,085,470 shares
outstanding at January 4, 2003; 40,872,008 shares issued
and 40,624,374 shares outstanding at December 29, 2001 ..... 444 409
Additional paid-in capital .................................... 346,251 245,234
Retained earnings ............................................. 329,181 259,935
Accumulated other comprehensive loss .......................... (386) (417)
Treasury stock, at cost; 277,037 shares at January 4, 2003 and
247,634 shares at December 29, 2001 ........................ (6,769) (6,946)
----------- -----------
Total shareholders' equity .......................................... 668,721 498,215
----------- -----------
Total liabilities and shareholders' equity ................................ $ 1,150,481 $ 927,439
=========== ===========
See accompanying notes to consolidated financial statements.
31
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
Common Stock Additional Foreign Currency
------------ Paid-in Retained Translation
Shares Amount Capital Earnings Adjustment
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
Balance at January 1, 2000 ................ 39,478,782 $ 396 $ 220,751 $ 165,249 $ --
Net income ................................ -- -- -- 64,937 --
Currency translation adjustment ........... -- -- -- -- 289
Comprehensive earnings ....................
Common stock issued under stock
incentive plans and related tax benefits 618,182 6 10,796 -- --
Purchase of treasury stock ................ (37,838) -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 30, 2000 .............. 40,059,126 402 231,547 230,186 289
Net income ................................ -- -- -- 29,749 --
Currency translation adjustment ........... -- -- -- -- (706)
Comprehensive earnings ....................
Common stock issued under stock
incentive plans and related tax benefits 698,567 7 13,687 -- --
Purchase of treasury stock ................ (133,319) -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 29, 2001 .............. 40,624,374 409 245,234 259,935 (417)
Net income ................................ -- -- -- 69,246 --
Currency translation adjustment ........... -- -- -- -- 31
Comprehensive earnings ....................
Common stock issued under stock
incentive plans and related tax benefits 190,499 2 5,217 -- --
Proceeds from issuance of common stock,
net of underwriting discounts and
offering expenses ...................... 3,300,000 33 95,800 -- --
Purchase of treasury stock ................ (29,403) -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at January 4, 2003 ................ 44,085,470 $ 444 $ 346,251 $ 329,181 $ (386)
=========== =========== =========== =========== ===========
Treasury
Stock Total
- --------------------------------------------------------------------------
(in thousands, except number of shares)
Balance at January 1, 2000 ................ $ (2,434) $ 383,962
Net income ................................ -- 64,937
Currency translation adjustment ........... -- 289
-----------
Comprehensive earnings .................... 65,226
Common stock issued under stock
incentive plans and related tax benefits -- 10,802
Purchase of treasury stock ................ (996) (996)
----------- -----------
Balance at December 30, 2000 .............. (3,430) 458,994
Net income ................................ -- 29,749
Currency translation adjustment ........... -- (706)
-----------
Comprehensive earnings .................... 29,043
Common stock issued under stock
incentive plans and related tax benefits -- 13,694
Purchase of treasury stock ................ (3,516) (3,516)
----------- -----------
Balance at December 29, 2001 .............. (6,946) 498,215
Net income ................................ -- 69,246
Currency translation adjustment ........... -- 31
-----------
Comprehensive earnings .................... 69,277
Common stock issued under stock
incentive plans and related tax benefits -- 5,219
Proceeds from issuance of common stock,
net of underwriting discounts and
offering expenses ...................... -- 95,833
Purchase of treasury stock ................ 177 177
----------- -----------
Balance at January 4, 2003 ................ $ (6,769) $ 668,721
=========== ===========
See accompanying notes to consolidated financial statements.
32
Consolidated Statements of Cash Flows (in thousands)
January 4, December 29, December 30,
Fiscal Year Ended 2003 2001 2000
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income ..................................... $ 69,246 $ 29,749 $ 64,937
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............. 45,914 40,113 32,432
Deferred income taxes ..................... 32,516 (6,025) 5,075
Loss on disposal of assets ................ 1,264 1,335 807
Federal tax benefit from common stock
issued under stock incentive plans ...... 625 3,671 4,480
Restructuring and asset impairment charge . -- 37,837 --
Changes in assets and liabilities:
Increase in accounts receivable ......... (324) (9,364) (10,663)
Increase in inventories ................. (122,584) (59,720) (94,450)
Increase in prepaid expenses and other .. (12,425) (1,532) (2,470)
current assets
Increase in deferred charges
and other non-current assets .......... (2,603) (2,060) (2,489)
Increase (decrease) in accounts payable . 52,948 (2,510) 38,556
Increase in accrued expenses
and other liabilities ................. 16,182 12,764 17,904
--------- --------- ---------
Net cash provided by operating activities ...... 80,759 44,258 54,119
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment ............ (82,187) (100,028) (70,405)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from common stock issuance ........ 95,833 -- --
Proceeds from common stock issued under
stock incentive plans ........................ 4,594 10,023 6,322
Issuance (purchase) of treasury stock .......... 177 (3,516) (996)
(Decrease) increase in short-term borrowings ... (27,930) 26,182 3,857
--------- --------- ---------
Net cash provided by financing activities ...... 72,674 32,689 9,183
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents .................................. (78) (6) (124)
Net increase (decrease) in cash and cash
equivalents .................................. 71,168 (23,087) (7,227)
Cash and cash equivalents at beginning of
year ........................................ 15,437 38,524 45,751
--------- --------- ---------
Cash and cash equivalents at end of year ................ $ 86,605 $ 15,437 $ 38,524
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) .......... $ 2,686 $ 4,059 $ 2,500
Income taxes ................................... $ 5,735 $ 23,514 $ 25,102
See accompanying notes to consolidated financial statements.
33
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Business
Linens 'n Things, Inc. and its subsidiaries (collectively the "Company")
operate in one segment, the retail industry, and had 391 stores in 45
states across the United States and four Provinces in Canada as of the
fiscal year ended January 4, 2003. The Company's stores offer a broad
assortment of home textiles, housewares and home accessories, carrying
both national brand and private label goods.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include those of Linens 'n Things,
Inc. and its wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated.
Fiscal Periods
The Company utilizes a 52/53-week period ending on the Saturday nearest
the last day of December. Accordingly, fiscal 2002 was a 53-week period,
which ended January 4, 2003 and fiscal years 2001 and 2000 were 52-week
periods, which ended on December 29, 2001 and December 30, 2000,
respectively.
Revenue Recognition
The Company recognizes revenue at the time the merchandise is delivered or
shipped to its customers. Shipping and handling fees billed to customers
in a sale transaction are included in sales. Revenue from gift cards, gift
certificates and merchandise credits are recognized when redeemed.
Provisions for estimated future sales returns when material are recorded
in the period that the related sales are recorded. The Company determines
the amount of provision based on historical information. Sales discounts,
coupons and other similar incentives are recorded as a reduction of sales
revenue in the period when the related sales are recorded.
Inventories
Inventories consist of finished goods merchandise purchased from domestic
and foreign vendors and are carried at the lower of cost or market; cost
is determined by the retail inventory method of accounting. Amounts are
removed from inventory at the average cost method.
Deferred Rent
The Company accrues for scheduled rent increases contained in its leases
on a straight-line basis over the non-cancelable lease term.
Store Opening and Closing Costs
New store opening costs are charged to expense as incurred. Store opening
costs primarily include store payroll, and general operating costs
incurred prior to the store opening. Prior to the adoption of Statement of
Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for
Costs Associated with Exit or Disposal Activities," in the event a store
is closed before its lease has expired, the remaining lease obligation,
less anticipated sublease rental income, and asset impairment charges
related to improvements and fixtures and other miscellaneous closing
costs, is provided for in the period in which management determines to
close a store.
In fiscal 2001, the Company recorded a pre-tax restructuring and asset
impairment charge of $37.8 million related to the accelerated closing of
certain under-performing stores (see Note 3).
The Company is required to adopt the provisions of SFAS No. 146 for exit
or disposal activities, if any, initiated after December 31, 2002.
Although the Company believes the adoption of SFAS No. 146 will not impact
the consolidated financial position or results of operations, it can be
expected to impact the timing of liability recognition associated with
future exit activities, if any.
Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are reflected in the consolidated financial statements at
carrying values which approximate fair value due to the short-term nature
of these instruments. The carrying value of the Company's borrowings
approximates the fair value based on the current rates available to the
Company for similar instruments.
Cash and Cash Equivalents
Cash equivalents are considered, in general, to be those securities with
maturities of three months or less when purchased.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets (40
years for buildings and 5 to 15 years for furniture, fixtures and
equipment). Capitalized software costs are amortized on a straight-line
basis over their estimated useful lives of 3 to 5 years, beginning in the
year placed in service. Leasehold improvements are amortized over the
shorter of the related lease term or the economic lives of the related
assets.
34
Maintenance and repairs are charged directly to expense as incurred. Major
renewals or replacements are capitalized after making the necessary
adjustments to the asset and accumulated depreciation accounts of the
items renewed or replaced.
Impairment of Long-Lived Assets
Long-lived assets, including fixed assets and goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, the Company estimates the undiscounted future cash flows to
result from the use of the asset and its ultimate disposition. If the sum
of the undiscounted cash flows is less than the carrying value, the
Company recognizes an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset. Fair value would
generally be determined by market value. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
Deferred Charges
Deferred charges, principally beneficial leasehold costs, are amortized on
a straight-line basis, generally over the remaining life of the leasehold
acquired.
Goodwill
Prior to fiscal 2002, the excess of acquisition costs over the fair value
of net assets acquired was amortized on a straight-line basis over 32
years. In fiscal 2002, the Company adopted SFAS No. 142, "Goodwill and
Intangible Assets" which no longer permits the amortization of goodwill
(See Note 6).
Costs of Sales
In addition to the cost of inventory sold, the Company includes its buying
and distribution expenses in its cost of sales. Buying expenses include
all direct and indirect costs to procure merchandise. Distribution
expenses include the cost of operating the Company's distribution centers
and freight expense related to transporting merchandise.
Advertising Costs
The Company expenses the production costs of advertising at the
commencement date of the advertisement. Advertising costs, net of vendor
credits, are recorded as a component of selling, general and
administrative expenses and were $59.8 million, $49.7 million and $39.6
million for fiscal years 2002, 2001 and 2000, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to estimated taxable income to be realized in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a change in statutory tax rates is recognized in income in the period that
includes the enactment date.
Stock Based Compensation
The Company grants stock options and restricted stock for a fixed number
of shares to employees and directors. The exercise prices of the stock
options are equal to the fair market value of the underlying shares at the
date of grant. The Company has adopted the disclosure provisions of
Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123"). In accordance with the provisions of SFAS No. 123, the Company
accounts for stock option grants and restricted stock grants in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, the Company does not recognize
compensation expense for stock option grants and amortizes restricted
stock grants at fair market value over specified vesting periods. For the
fiscal years ended 2002, 2001 and 2000, the Company accounted for stock
options using the intrinsic value method prescribed under APB Opinion No.
25, and accordingly, the Company did not recognize compensation expense
for stock options. In December 2002, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123"
("SFAS No. 148"). This statement amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company continues to account for stock-based compensation using APB
Opinion No. 25 and has not adopted the recognition provisions of SFAS No.
123, as amended by SFAS No. 148. However, the Company has adopted the
disclosure provisions for the current fiscal year and has included this
information in Note 11.
Earnings Per Share
The Company presents earnings per share on a "basic" and "diluted" basis.
Basic earnings per share is
35
computed by dividing net income by the weighted-average number of shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income by the weighted-average number of shares outstanding
adjusted for dilutive common stock equivalents.
The calculation of basic and diluted earnings per share ("EPS") for fiscal
2002, 2001 and 2000 is as follows (in thousands, except per share
amounts):
Fiscal Year Ended
--------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------
Net income ..................... $69,246 $29,749 $64,937
======= ======= =======
Average shares
outstanding:
Basic .......................... 42,428 40,508 39,785
Effect of outstanding
stock options and
restricted stock grants ....... 886 685 927
------- ------- -------
Diluted ........................ 43,314 41,193 40,712
======= ======= =======
Earnings per share
Basic ......................... $ 1.63 $ 0.73 $ 1.63
======= ======= =======
Diluted ....................... $ 1.60 $ 0.72 $ 1.60
======= ======= =======
Options for which the exercise price was greater than the average market
price of common shares as of the fiscal years ended 2002, 2001 and 2000
were not included in the computation of diluted earnings per share as the
effect would be antidilutive. These consisted of options totaling
1,560,000 shares, 1,495,000 shares and 1,543,000 shares, respectively.
Restricted stock grants excluded from the computation of diluted earnings
per share due to the application of the treasury stock method were 3,000
shares, 13,000 shares and 20,000 shares for fiscal years ended 2002, 2001
and 2000, respectively.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts and timing of revenues and of expenses during the reporting
period. The Company's management believes the following critical
accounting estimates involve significant estimates and judgments inherent
in the preparation of the Consolidated Financial Statements.
Valuation of Inventory: Inventories are valued using the lower of cost or
market value, determined by the retail inventory method ("RIM"). Under
RIM, the valuation of inventories at cost and the resulting gross margins
are calculated by applying a calculated cost-to-retail ratio to the retail
value of inventories. RIM is an averaging method that is used in the
retail industry due to its practicality. Inherent in the RIM calculation
are certain significant management judgments and estimates including,
among others, merchandise mark-on, mark-up, markdowns and shrinkage based
on historical experience between the dates of physical inventories, all of
which significantly impact the ending inventory valuation at cost. The
methodologies utilized by the Company in its application of the RIM are
consistent for all periods presented. Such methodologies include the
development of the cost-to-retail ratios, the development of shrinkage
reserves and the accounting for price changes.
Sales Returns: The Company estimates future sales returns and, when
material, records a provision in the period that the related sales are
recorded based on historical return rates. Should actual returns differ
from the Company's estimates, the Company may be required to revise
estimated sales returns. As such, estimating sales returns requires
management judgment. In preparing our financial statement for the years
ended January 4, 2003 and December 29, 2001, the Company's sales returns
reserve was approximately $5.5 million and $4.8 million, respectively.
Impairment of Assets: With the adoption of SFAS No. 142, the Company
reviews goodwill for possible impairment at least annually. Impairment
losses are recognized when the implied fair value of goodwill is less than
its carrying value. The Company periodically evaluates long-lived assets
other than goodwill for indicators of impairment. The Company's judgments
regarding the existence of impairment indicators are based on market
conditions and operational performance. Future events could cause the
Company to conclude that impairment indicators exist and that the value of
long-lived assets and goodwill is impaired. At the end of fiscal 2002 and
fiscal 2001, the Company's net value for property and equipment was
approximately $348.4 million and $312.4 million, respectively and goodwill
was $18.1 million for fiscal years ended 2002 and 2001.
Store Closure Costs: Prior to the adoption of SFAS No. 146, the Company
records estimated store closure costs, such as fixed asset write-offs,
estimated lease commitment costs net of estimated sublease income,
markdowns for inventory that will be sold below cost, and other
miscellaneous store closing costs, in the period in which management
determines to close a store. Such estimates may be subject to change
should actual costs differ. In fiscal 2001, the Company recorded a reserve
of $37.8 million ($23.7 million after-tax) related to the closing of
certain under-performing stores. As of January 4, 2003 and December 29,
2001, the Company had $22.2 million and $24.5 million, respectively
remaining related to this reserve. The Company continues to negotiate the
lease buyouts or sub-lease agreements for these stores and based upon
final resolution of such negotiations, such estimates may be subject to
change.
36
The Company is required to adopt the provisions of SFAS No. 146 for exit
or disposal activities, if any, initiated after December 31, 2002.
Although the Company believes the adoption of SFAS No. 146 will not impact
the consolidated financial position or results of operations, it can be
expected to impact the timing of liability recognition associated with
future exit activities, if any.
Self-Insurance: The Company purchases third party insurance for worker's
compensation, medical, auto and general liability that exceeds certain
levels for each type of insurance program. However, the Company is
responsible for the payment of claims under these insured excess limits.
The Company establishes accruals for its insurance programs based on
available claims data and historical trend and experience, as well as loss
development factors prepared by third party actuaries. In preparing the
estimates, the Company also considers the nature and severity of the
claims, analysis provided by third party claims administrators, as well as
current legal, economic and regulatory factors.
The Company evaluates the accrual and the underlying assumptions
periodically and makes adjustments as needed. The ultimate cost of these
claims may be greater than or less than the established accrual. While the
Company believes that the recorded amounts are adequate, there can be no
assurances that changes to management's estimates will not occur due to
limitations inherent in the estimate process. In the event the Company
determines the accruals should be increased or reduced, the Company would
record such adjustments in the period in which such determination is made.
The accrued obligation for these self-insurance programs was approximately
$9.5 million for fiscal year 2002 and $6.0 million for fiscal year 2001.
Litigation: The Company records an estimated liability related to various
claims and legal actions arising in the ordinary course of business, which
is based on available information and advice from outside counsel where
applicable. As additional information becomes available, the Company
assesses the potential liability related to its pending claims and may
adjust its estimates accordingly.
3. Restructuring and Asset Impairment Charge
During the fourth quarter of fiscal 2001, the Company formulated a
strategic initiative designed to improve store performance and
profitability. This initiative called for the closing of 17 stores which
did not meet the Company's performance objectives. These 17 stores
generated approximately 4% of total net sales in 2001 and are
geographically dispersed.
In connection with this initiative, the Company recorded a pre-tax
restructuring and asset impairment charge of $37.8 million ($23.7 million
after-tax) in the fourth quarter of fiscal 2001. Certain components of the
restructuring and asset impairment charge are based upon estimates and may
be subject to change in future periods. Of the $37.8 million, $34.0
million was included in restructuring and asset impairment charge and $3.8
million was recorded in cost of sales. The estimated after-tax cash
portion of the charge is approximately $15.2 million and the after-tax
non-cash portion of the charge is approximately $8.5 million.
A pre-tax reserve of $20.5 million was established for estimated lease
commitments for stores to be closed. This reserve was included in accrued
expenses at December 29, 2001. The reserve considers estimated sublease
income. All of the stores were leased and as such, the Company will not be
responsible for the disposal of property other than fixtures. A pre-tax
charge of $9.5 million was recorded as a reduction of property and
equipment for fixed asset impairments for these stores. The fixed asset
impairments represent fixtures and leasehold improvements. Additionally, a
pre-tax reserve of $4.0 million was established for other estimated
miscellaneous store closing costs. A pre-tax charge of $3.8 million was
recorded in cost of sales for estimated inventory markdowns below cost for
the stores to be closed.
During fiscal 2002, the Company determined to keep one of the 17 stores
open. As a result, the Company reversed $1.4 million of the lease
commitment and miscellaneous store closing costs reserve established in
fiscal 2001. In addition, the Company evaluated the reserve balance
associated with the remaining store closings and recorded an additional
reserve of $1.4 million based on current estimates of lease settlement
obligations. This activity has been presented within the fiscal 2002 usage
activity in the below table. As of January 4, 2003, seven stores have
closed.
The following table displays a roll-forward of the activity and
significant components of the fiscal 2001 restructuring and asset
impairments charge and the reserves remaining as of January 4, 2003 ($ in
millions):
Initial Usage Remaining Usage Remaining
Charge 2001 at 12/29/01 2002 at 1/04/03
Non-Cash
Components:
Asset
impairment .......... $ 9.5 $(9.5) -- -- --
Inventory
markdown ............ 3.8 (3.8) -- -- --
--------------------------------------------------------
Subtotal ............. 13.3 (13.3) -- -- --
Cash
Components:
Lease
commitments .......... 20.5 -- 20.5 (1.1) 19.4
Other .............. 4.0 -- 4.0 (1.2) 2.8
--------------------------------------------------------
Subtotal ............. 24.5 -- 24.5 (2.3) 22.2
--------------------------------------------------------
Total ................ $37.8 $(13.3) $24.5 $(2.3) $22.2
========================================================
37
The 2002 usage primarily consists of the settlements for lease obligations
and other miscellaneous closing costs. The deductions to the reserve
balance during 2001 included fixed asset write-offs totaling $9.5 million
and store inventory markdowns taken totaling $3.8 million.
4. Accounts Receivable
Fiscal Year Ended
Accounts receivable, consisted of
the following (in thousands): 2002 2001
--------------------------------------------------------------------
Credit card settlements due ............ $19,019 $16,839
Due from landlords and vendors ......... 18,468 17,161
Other .................................. 3,681 6,835
------- -------
$41,168 $40,835
--------------------------------------------------------------------
Due to the short-term nature and probability of collection, no allowance
for doubtful accounts was deemed necessary as of January 4, 2003 and
December 29, 2001.
5. Property and Equipment
Fiscal Year Ended
Property and equipment consisted
of the following (in thousands): ....... 2002 2001
--------------------------------------------------------------------
Land ................................... $ 430 $ 430
Building ............................... 4,760 4,760
Furniture, fixtures and equipment ...... 404,833 345,917
Leasehold improvements ................. 113,464 96,154
Computer software ...................... 14,889 11,317
-------- --------
538,376 458,578
Less:
Accumulated depreciation
and amortization ................. 189,931 146,175
-------- --------
$348,445 $312,403
--------------------------------------------------------------------
6. Goodwill and Other Intangible Assets - Adoption of SFAS No. 142
In fiscal 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). As a result, the Company no longer amortizes its
goodwill. SFAS No. 142 requires an initial goodwill impairment assessment upon
adoption and annual impairment tests thereafter. The Company completed the
initial impairment test of goodwill and has concluded that there was no
impairment of goodwill.
Set forth below are the Company's net income and net income per share "as
reported" and as if amortization expense related to goodwill had not been
expensed in accordance with the provisions of SFAS No. 142 ($ in thousands,
except EPS):
Fiscal Year Ended
--------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------
Reported net income ...... $ 69,246 $ 29,749 $ 64,937
Add back: goodwill
amortization ............ -- 520 525
---------- ---------- ----------
Adjusted net income ... $ 69,246 $ 30,269 $ 65,462
========== ========== ==========
Basic earnings per
share:
Reported net income ... $ 1.63 $ 0.73 $ 1.63
Goodwill amortization -- 0.01 0.01
---------- ---------- ----------
Adjusted net income ... $ 1.63 $ 0.74 $ 1.64
========== ========== ==========
Diluted earnings per
share:
Reported net income ... $ 1.60 $ 0.72 $ 1.60
Goodwill amortization ... -- 0.01 0.01
---------- ---------- ----------
Adjusted net income ... $ 1.60 $ 0.73 $ 1.61
========== ========== ==========
7. Accrued Expenses and Other Current Liabilities
Fiscal Year Ended
Accrued expenses and other current
liabilities consisted of the following (in 2002 2001
thousands):
--------------------------------------------------------------------
Other taxes payable .................... $ 31,359 $ 24,296
Income taxes payable ................... 22,894 19,029
Restructuring reserve .................. 22,208 24,501
Salaries and employee benefits ......... 19,474 15,522
Other .................................. 67,848 65,853
-------- --------
$163,783 $149,201
--------------------------------------------------------------------
Included in "other" are miscellaneous store operating and corporate office
accrued expenses.
8. Short-Term Borrowing Arrangements
In June 2002, the Company amended and extended its 2000 $150 million senior
revolving credit facility agreement (the "Credit Agreement") with third party
institutional lenders, to expire April 20, 2005. The Credit Agreement allows for
up to $40 million in borrowings from additional lines of credit outside of the
Credit Agreement. As of January 4, 2003, the additional lines of credit include
approximately $23 million in committed facilities that expire on June 18, 2003
and are subject to annual renewal arrangements. The Credit Agreement replaced
the 1998 $90 million revolving line of credit, which allowed for up to $25
million in borrowings from additional lines of credit. Interest on all
borrowings is determined based upon several alternative rates as stipulated in
the Credit Agreement, including a fixed margin above LIBOR. The Credit Agreement
contains certain financial covenants, including those relating to the
maintenance of a minimum tangible net worth, a minimum fixed charge coverage
ratio, and a maximum leverage ratio. At the end of fiscal 2002, the Company was
in compliance with the terms of the Credit Agreement. The Credit Agreement
limits, among other things, the amount of cash dividends, pursuant
38
to which the amount of cash dividends may not exceed the sum of $25 million plus
on a cumulative basis an amount equal to 50% of the consolidated net income for
each fiscal quarter commencing with the fiscal quarter ended March 30, 2002. The
Company has never paid cash dividends and does not anticipate paying cash
dividends in the future. The Company is required under the Credit Agreement to
reduce the balance of outstanding domestic borrowings to zero for 30 consecutive
days during each period beginning on December 1st of any fiscal year and ending
on March 15th of the following year. Accordingly, the Company reduced the
balance of domestic borrowings to zero for 30 consecutive days during the period
beginning on December 1, 2002 and ending on March 15, 2003. At various times
throughout fiscal 2002 and 2001, the Company borrowed against the Credit
Agreement for seasonal working capital needs. At the end of fiscal 2002, the
Company had $1.8 million of borrowings under the additional lines of credit at a
weighted average interest rate of 4.5%. In addition, as of January 4, 2003 and
December 29, 2001, the Company had $26.0 million and $21.6 million,
respectively, of letters of credit outstanding, which were primarily used for
merchandise purchases. The Company is not obligated under any formal or informal
compensating balance arrangements.
9. Deferred Income Taxes and Other Long-Term Liabilities
- --------------------------------------------------------------------------------
Deferred income taxes and other Fiscal Year Ended
long-term liabilities consisted of the following
(in thousands):
2002 2001
- --------------------------------------------------------------------------------
Deferred income taxes .............. $47,218 $35,555
Deferred rent ...................... 28,111 23,336
Other .............................. 6,940 10,617
------- -------
$82,269 $69,508
- --------------------------------------------------------------------------------
10. Leases
The Company has non-cancelable operating leases, primarily for retail stores,
which expire through 2023. The leases generally contain renewal options for
periods ranging from 5 to 15 years and require the Company to pay costs such as
real estate taxes and common area maintenance. Contingent rentals are paid based
on a percentage of gross sales. Net rental expense for all operating leases was
as follows (in thousands):
Fiscal Year Ended
- --------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------
Minimum rentals ............. $193,363 $158,614 $126,286
Contingent rentals .......... 128 184 151
-------- -------- --------
193,491 158,798 126,437
Less: sublease rentals ...... 3,128 2,032 1,617
-------- -------- --------
$190,363 $156,766 $124,820
- --------------------------------------------------------------------------
At fiscal year end 2002, the future minimum rental payments required under
operating leases and the future minimum sublease rentals excluding lease
obligations for closed stores and stores planned to be closed were as follows
(in thousands):
Fiscal Year
- --------------------------------------------------------------------------
2003 ................................................... $ 194,353
2004 ................................................... 191,751
2005 ................................................... 188,760
2006 ................................................... 184,501
2007 ................................................... 185,521
Thereafter ............................................. 1,279,624
----------
$2,224,510
----------
Total future minimum sublease rentals .................. $ 32,045
----------
- --------------------------------------------------------------------------
In addition, as of January 31, 2003, the Company had fully executed leases for
70 stores planned to open in fiscal years 2003 and 2004.
The Company has assigned property at one of its retail locations. Under such
assignment, the Company guarantees the payment of rent over the specified lease
term in the event of non-performance. As of January 4, 2003, the maximum
potential amount of future payments the Company could be required to make under
such guarantee is approximately $1.2 million.
11. Stock Incentive Plans
The Company has in effect the 2000 Stock Award and Incentive Plan (the "2000
Plan") and the Broad-Based Equity Plan (collectively, the "Plans"). The 2000
Plan provides for the granting of options, restricted stock grants and other
stock-based awards (collectively, "awards") to key employees and non-officer
directors. The 2000 Plan replaces both the Company's 1996 Incentive Compensation
Plan (the "1996 Plan") and the 1996 Non-Employee Directors' Stock Plan (the
"Directors' Plan"). Therefore, no future awards will be made under the 1996 Plan
and the Directors' Plan, although outstanding awards under the 1996 Plan and the
Directors' Plan will continue to be in effect. Under the 2000 Plan, an aggregate
of 2,000,000 shares (plus any shares under outstanding awards under the 1996
Plan and the Directors' Plan which become available for further grants) is
available for issuance of awards. Under the Broad-Based Equity Plan, a total of
4,000,000 shares are currently available for issuance of awards to regular full
time employees (excluding all executive officers).
Stock options under the Plans are granted with exercise prices at the fair
market value of the underlying shares at the date of grant. The right to
exercise options generally commences one to five years after the grant date, and
the options expire between seven to ten years after the grant date. Restrictions
on restricted stock grants lapse over vesting periods of up to five years.
Restricted stock grants are considered outstanding as of the grant date for
purposes of computing diluted EPS and are considered outstanding upon vesting
for purposes of computing basic EPS.
39
At fiscal year end 2002, 3,995 restricted stock grants were outstanding under
the 1996 Plan and the Directors' Plan. During fiscal 2002, 6,662 restricted
stock grants were released, no restricted stock grants were awarded and 3,333
restricted stock grants were canceled under the 1996 Plan and the Directors'
Plan.
At fiscal year end 2002, 39,884 restricted stock grants were outstanding under
the 2000 Plan. During fiscal 2002, 71,840 restricted stock grants were released,
4,000 restricted stock grants were awarded and no restricted stock grants were
canceled.
At fiscal year end 2002, 35,500 restricted stock grants were outstanding under
the Broad-Based Equity Plan. During 2002, no restricted stock grants were
released, 35,500 grants were awarded and 509 restricted stock grants were
canceled.
At fiscal year end 2002, 1,980,222 stock options were outstanding under the 1996
Plan. During fiscal 2002, no stock options were granted, 82,714 stock options
were exercised, 85,540 stock options were canceled, and 1,442,424 stock options
were exercisable at fiscal year end 2002 under the 1996 Plan.
At fiscal year end 2002, 48,800 stock options were outstanding under the
Directors' Plan. During fiscal 2002, no stock options were granted, no stock
options were exercised, no stock options were canceled, and 48,800 stock options
were exercisable at fiscal year end 2002 under the Directors' Plan.
At fiscal year end 2002, 1,541,096 stock options were outstanding under the 2000
Plan. During fiscal 2002, 411,445 stock options were granted, 50 stock options
were exercised, 12,389 stock options were canceled, and 351,367 stock options
were exercisable at fiscal year end 2002 under the 2000 Plan.
At fiscal year end 2002, 1,777,130 stock options were outstanding under the
Broad-Based Equity Plan. During fiscal 2002, 879,950 stock options were granted,
46,708 stock options were exercised, 139,379 stock options were canceled, and
430,639 stock options were exercisable at fiscal year end 2002 under the Broad-
Based Equity Plan.
The following tables summarize information about stock option transactions for
the Plans, the 1996 Plan and the Directors' Plan:
Weighted-
Number of Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Balance at January 1, 2000 3,308,832 $20.71
Options granted 1,097,060 $21.77
Options exercised 537,449 $10.13
Options canceled 75,401 $27.18
--------- ------
Balance at December 30, 2000 3,793,042 $22.43
--------- ------
Options granted 1,211,579 $18.83
Options exercised 474,174 $ 9.17
Options canceled 107,814 $25.22
--------- ------
Balance at December 29, 2001 4,422,633 $22.91
--------- ------
Options granted 1,291,395 $24.03
Options exercised 129,472 $18.89
Options canceled 237,308 $24.57
--------- ------
Balance at January 4, 2003 5,347,248 $23.21
--------- ------
- --------------------------------------------------------------------------------
Options Exercisable as of:
December 30, 2000 1,212,408 $14.35
December 29, 2001 1,480,783 $21.08
January 4, 2003 2,273,230 $22.62
- --------------------------------------------------------------------------------
Options Outstanding
------------------------------------------------------
Weighted-Average
Remaining
Outstanding Contractual Weighted-Average
Range of as of Life Exercise
Exercise Price January 4, 2003 (in years) Price
- --------------------------------------------------------------------------------
$7.75 -$9.75 225,028 3.9 $7.84
$9.76 -$14.62 9,150 4.3 $12.13
$14.63-$19.50 1,446,755 7.7 $18.43
$19.51-$24.37 2,098,190 7.3 $22.62
$24.38-$29.25 129,782 7.1 $26.28
$29.26-$34.12 1,382,793 6.5 $30.83
$34.13-$39.00 45,400 8.8 $35.55
$39.01-$43.87 3,850 6.2 $40.88
$43.88-$48.75 6,300 6.3 $44.76
------------------------------------------------------
Total 5,347,248 7.1 $23.21
======================================================
Options Exercisable
Outstanding as
Range of Of January 4, Weighted-Average
Exercise Price 2003 Exercise Price
- ------------------- ---------------- ------------------
$7.75 -$9.75 225,028 $7.84
$9.76 -$14.62 9,150 $12.13
$14.63-$19.50 663,530 $17.96
$19.51-$24.37 501,678 $21.50
$24.38-$29.25 49,600 $26.68
$29.26-$34.12 808,269 $30.78
$34.13-$39.00 6,550 $36.63
$39.01-$43.87 3,175 $40.76
$43.88-$48.75 6,250 $44.75
Total 2,273,230 $22.62
40
The fair value of each stock option grant and restricted stock grant is
estimated on the date of grant using the Black-Scholes option-pricing model
using the following assumptions for grants:
Fiscal Year Ended 2002 2001 2000
- --------------------------------------------------------------------------------
Expected life (years) ................ 6.9 8.0 6.0
Expected volatility .................. 47.4% 49.9% 55.0%
Risk-free interest rate .............. 2.2% 3.5% 5.1%
Expected dividend yield .............. 0.0% 0.0% 0.0%
The weighted-average fair value of options granted as of January 4, 2003,
December 29, 2001 and December 30, 2000 was $11.98, $13.85 and $14.39,
respectively. The weighted-average fair value of restricted stock granted as of
January 4, 2003, December 29, 2001 and December 30, 2000 was $13.53, $15.04 and
$14.47, respectively.
The Company applies APB No. 25 and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized in connection with stock options under these plans in the
accompanying Consolidated Financial Statements. The compensation cost that has
been charged against income for its restricted stock grants was $1.9 million,
$3.6 million and $3.4 million for fiscal years 2002, 2001 and 2000,
respectively. Set forth below are the Company's net income and net income per
share presented "as reported" and as if compensation cost had been recognized in
accordance with the provisions of SFAS No. 123:
Fiscal Year Ended
- --------------------------------------------------------------------------------
(in millions, except per share data) 2002 2001 2000
- --------------------------------------------------------------------------------
Net income:
As reported ............................. $ 69.2 $ 29.7 $ 64.9
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of related tax
effects ................................ 6.8 6.4 5.1
----------------------------
Proforma ............................. $ 62.4 $ 23.3 $ 59.8
Net income per share of common stock:
Basic:
As reported .......................... $ 1.63 $ 0.73 $ 1.63
Pro forma ............................ $ 1.47 $ 0.58 $ 1.50
Diluted:
As reported .......................... $ 1.60 $ 0.72 $ 1.60
Pro forma ............................ $ 1.44 $ 0.57 $ 1.47
- --------------------------------------------------------------------------------
The effects of applying SFAS No. 123 in this disclosure are not necessarily
indicative of future amounts.
12. Employee Benefit Plans
The Company has a 401(k) savings plan. Company contributions to the plan
amounted to approximately $1.2 million, $2.4 million and $2.2 million for fiscal
years 2002, 2001 and 2000, respectively.
Effective July 1, 1999, the Company established a defined benefit Supplemental
Executive Retirement Plan ("SERP"). The SERP, which in part is funded with the
cash surrender values of certain life insurance policies, provides eligible
executives with supplemental pension benefits, in addition to amounts received
under the Company's other retirement plan. Under the terms of the SERP, upon
termination of employment with the Company, eligible participants will be
entitled to the benefit amount as defined under the SERP beginning at or after
age 55. The Company recorded expenses related to the SERP of approximately
$3,000, $20,000 and $34,000 for fiscal years 2002, 2001 and 2000.
13. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities were as follows (in
thousands):
Fiscal Year Ended 2002 2001
- --------------------------------------------------------------------------------
Deferred tax assets:
Employee benefits .......................... $ 3,596 $ 6,955
Inventories ................................ -- 4,525
Lease termination costs .................... 7,012 7,744
Other ...................................... 5,382 4,612
------- -------
Total deferred tax assets ...................... 15,990 23,836
Deferred tax liabilities:
Inventories ................................ $11,727 $ --
Property and equipment ..................... 48,810 35,867
------- -------
Total deferred tax liabilities ............. 60,537 35,867
------- -------
Net deferred tax liability ..................... $44,547 $12,031
======= =======
At January 4, 2003 and December 29, 2001, the net deferred tax liability was
included in the Company's consolidated balance sheet as follows (in thousands):
2002 2001
- -------------------------------------------------------------------------------
Current deferred taxes ................... $ 2,671 $ 23,524
Deferred income taxes .................... (47,218) (35,555)
-------- --------
Net deferred tax liability ............... $ 44,547 $ 12,031
======== ========
Based on the anticipated reversal of deferred tax liabilities and the Company's
historical and current taxable income, management believes it is more likely
than not that the Company will realize the deferred tax assets. Accordingly, no
valuation allowance against deferred tax assets is considered necessary.
41
The provision for income taxes comprised the following for:
Fiscal Year Ended
- -------------------------------------------------------------------------------
(in thousands): 2002 2001 2000
- -------------------------------------------------------------------------------
Current:
U.S. Federal .......... $ 9,140 $ 21,726 $ 30,401
U.S. State ............ 1,117 2,728 3,868
Non-U.S ............... -- 432 871
-------- -------- --------
10,257 24,886 35,140
-------- -------- --------
Deferred:
U.S. Federal .......... 29,524 (5,917) 4,572
U.S. State ............ 3,790 (759) 570
Non-U.S ............... (798) 651 (68)
-------- -------- --------
32,516 (6,025) 5,074
-------- -------- --------
Total .......................... $ 42,773 $ 18,861 $ 40,214
======== ======== ========
- --------------------------------------------------------------------------------
The Company has not provided for Federal income tax on the undistributed income
of its foreign subsidiaries because the Company intends to permanently reinvest
such income.
The following is a reconciliation between the statutory Federal income tax rate
and the effective rate for:
Fiscal Year Ended
- ------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------
Effective tax rate ................... 38.2% 38.8% 38.2%
State income taxes, net of
Federal benefit .................... (2.8) (2.6) (2.7)
Goodwill ............................. -- (0.6) (0.3)
Other ................................ (0.4) (0.6) (0.2)
---- ---- ----
Statutory Federal income
tax rate ........................... 35.0% 35.0% 35.0%
- ------------------------------------------------------------------------------
14. Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, with the exception of
the matter discussed in the next paragraph which was settled in fiscal year
2001, the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
In fiscal 2001, the Company had been named as a defendant in California
litigation in which the court certified the case as a class action on behalf of
certain managers of Company stores located in California seeking overtime pay,
together with class action claims on behalf of certain former employees seeking
accrued vacation pay. In the second quarter of fiscal 2001, the Company recorded
a pre-tax charge of $4.0 million related to the settlement payments, attorneys'
fees and estimated expenses of administering the settlement. An order granting
final approval of class action settlement was signed on December 19, 2001. The
Company admitted no liability in connection with this settlement. Payment of
these amounts was made in early fiscal 2002.
15. Summary of Quarterly Results (unaudited)
(in thousands, First Second Third Fourth Fiscal
except per Quarter Quarter Quarter Quarter Year
share data)
- --------------------------------------------------------------------------------
Net sales
2002 ................ $456,911 $461,918 $542,565 $723,322 $2,184,716
2001 ................ $379,245 $387,715 $468,944 $587,899 $1,823,803
Gross profit
2002 ................ 181,199 192,866 222,691 299,270 896,026
2001 ................ 150,702 162,161 190,234 239,447(3) 742,544
Net income
2002 ................ 5,140 5,586 18,280 40,240 69,246
2001 ................ 4,693 2,109(2) 14,705 8,242(4) 29,749
Net income per
share
Basic(1)
2002 ................ $ 0.13 $ 0.14 $ 0.42 $ 0.91 $ 1.63
2001 ................ $ 0.12 $ 0.05(2) $ 0.36 $ 0.20(4) $ 0.73
Diluted(1)
2002 ................ $ 0.12 $ 0.13 $ 0.41 $ 0.90 $ 1.60
2001 ................ $ 0.11 $ 0.05(2) $ 0.36 $ 0.20(4) $ 0.72
- ----------
(1) Net income per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the fiscal year.
(2) Includes after-tax litigation charge of $2.5 million or $0.06 per share on
a fully diluted basis.
(3) Includes pre-tax restructuring charge of $3.8 million related to estimated
inventory markdowns below cost associated with the accelerated closing of
17 stores.
(4) Includes pre-tax restructuring and asset impairment charge of $37.8
million ($23.7 million after-tax) or $0.58 per share on a fully diluted
basis associated with the accelerated closing of 17 stores.
16. Market Information (unaudited)
The Company's common stock is listed on the New York Stock Exchange. Its trading
symbol is LIN. At fiscal year end 2002, there were 7,686 beneficial
shareholders. The high and low trading price of the Company's common stock for
each quarter is as follows:
For Fiscal 2002
- ---------------
High Low
---- ---
First Quarter .......................... $32.55 $24.17
Second Quarter ......................... $37.35 $28.60
Third Quarter .......................... $32.70 $18.09
Fourth Quarter ......................... $25.44 $15.05
For Fiscal 2001
- ---------------
High Low
---- ---
First Quarter .......................... $37.88 $24.81
Second Quarter ......................... $32.76 $24.00
Third Quarter .......................... $28.16 $17.37
Fourth Quarter ......................... $25.91 $17.72
42
The Company paid no dividends on its common stock in fiscal 2002 and 2001.
Management of the Company currently intends to retain its earnings to finance
the growth and development of its business and does not currently anticipate
paying cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the future earnings, operations, capital
requirements and financial condition of the Company, satisfying all requirements
under its bank financing agreement and such other factors as the Company's Board
of Directors may consider relevant. In addition, the Company's credit facility
currently limits the amount of cash dividends (See Note 8).
43
Management's Responsibility for Financial Reporting
- --------------------------------------------------------------------------------
The integrity and objectivity of the financial statements and related financial
information in this report are the responsibility of the management of the
Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, when necessary, the best
estimates and judgments of management.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization, and the
accounting records provide a reasonable basis for the preparation of the
financial statements. The system of internal accounting controls is continually
reviewed with management and improved and modified as necessary in response to
changing business conditions and recommendations of the Company's independent
auditors.
The Audit Committee of the Board of Directors, consisting solely of outside
non-management directors, meets periodically with management and the independent
auditors to review matters relating to the Company's financial reporting, the
adequacy of internal accounting controls and the scope and results of audit
work. Deloitte & Touche LLP, which assists the Company with its internal audit
function, and KPMG LLP, the Company's independent auditors, have free access to
the Audit Committee.
KPMG LLP, certified public accountants, is engaged to audit the consolidated
financial statements of the Company. Its Independent Auditors' Report, which is
based on an audit made in accordance with auditing standards generally accepted
in the United States of America, expresses an opinion as to the fair
presentation of these financial statements.
/s/ Norman Axelrod
- --------------------------------
Norman Axelrod
Chairman and Chief Executive Officer
/s/ William T. Giles
- --------------------------------
William T. Giles
Senior Vice President, Chief Financial Officer
February 4, 2003
44
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders
Linens 'n Things, Inc.
We have audited the accompanying consolidated balance sheets of Linens 'n
Things, Inc. and Subsidiaries as of January 4, 2003 and December 29, 2001, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended January 4, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Linens 'n Things,
Inc. and Subsidiaries as of January 4, 2003 and December 29, 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 4, 2003 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 6 to the Consolidated Financial Statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective December 30, 2001.
/s/ KPMG LLP
- ------------
KPMG LLP
New York, New York
February 4, 2003
45