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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 2003
Commission File Number 1-12381
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 Identification Number)
incorporation or organization)
6 Brighton Road, Clifton, New Jersey 07015
(Address of principal executive offices) (Zip Code)
(973) 778-1300
(Registrant's telephone number, including area code)
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes |X| No |_|
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at November 14, 2003
----- --------------------------------
Common Stock, $0.01 par value 44,764,947
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Thirteen and Thirty-Nine Weeks Ended October 4, 2003
and September 28, 2002 3
Condensed Consolidated Balance Sheets as of October 4, 2003,
January 4, 2003 and September 28, 2002
4
Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended October 4, 2003
and September 28, 2002 5
Notes to Condensed Consolidated Financial Statements 6-10
Independent Auditors' Review Report 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------------- ---------------------------------
October 4, September 28, October 4, September 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales $ 602,816 $ 542,565 $ 1,606,959 $ 1,461,394
Cost of sales, including buying and
distribution costs 360,868 325,426 958,472 878,407
------------- ------------- ------------- -------------
Gross profit 241,948 217,139 648,487 582,987
Selling, general and administrative expenses 207,764 187,158 601,345 534,221
------------- ------------- ------------- -------------
Operating profit 34,184 29,981 47,142 48,766
Interest income (20) (21) (90) (28)
Interest expense 256 435 690 1,870
------------- ------------- ------------- -------------
Interest expense, net 236 414 600 1,842
------------- ------------- ------------- -------------
Income before provision for income taxes 33,948 29,567 46,542 46,924
Provision for income taxes 12,968 11,287 17,780 17,918
------------- ------------- ------------- -------------
Net income $ 20,980 $ 18,280 $ 28,762 $ 29,006
============= ============= ============= =============
Basic earnings per share $ 0.47 $ 0.42 $ 0.65 $ 0.69
============= ============= ============= =============
Diluted earnings per share $ 0.47 $ 0.41 $ 0.64 $ 0.68
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
3
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
October 4, January 4, September 28,
2003 2003 2002
------------- ------------- -------------
(Unaudited) (Audited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 22,731 $ 86,605 $ 22,580
Accounts receivable 46,522 41,168 33,703
Inventories 746,310 615,256 679,056
Prepaid expenses and other current assets 33,236 27,279 15,095
Current deferred taxes -- 2,671 22,118
------------- ------------- -------------
Total current assets 848,799 772,979 772,552
Property and equipment, net 380,415 348,445 345,429
Goodwill, net 18,126 18,126 18,126
Deferred charges and other noncurrent assets, net 10,710 10,931 11,580
------------- ------------- -------------
Total assets $ 1,258,050 $ 1,150,481 $ 1,147,687
============= ============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 320,018 $ 233,877 $ 297,283
Accrued expenses and other current liabilities 130,053 163,783 132,533
Current deferred taxes 7,152 -- --
Short-term borrowings 3,221 1,831 16,080
------------- ------------- -------------
Total current liabilities 460,444 399,491 445,896
------------- ------------- -------------
Deferred income taxes and other long-term liabilities 95,484 82,269 74,066
------------- ------------- -------------
Total liabilities 555,928 481,760 519,962
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; 44,458,107 shares
issued and 44,228,561 shares outstanding at October 4,
2003; 44,322,351 shares issued and 44,085,470 shares
outstanding at January 4, 2003; and 44,251,869 shares
issued and 43,978,739 shares outstanding at September
28, 2002
444 444 442
Additional paid-in capital 349,321 346,251 345,413
Retained earnings 357,943 329,181 288,941
Accumulated other comprehensive income (loss) 927 (386) (373)
Treasury stock, at cost; 229,546 shares at
October 4, 2003, 236,881 shares at January 4, 2003,
and 273,130 shares at September 28, 2002 (6,513) (6,769) (6,698)
------------- ------------- -------------
Total shareholders' equity 702,122 668,721 627,725
------------- ------------- -------------
Total liabilities and shareholders' equity $ 1,258,050 $ 1,150,481 $ 1,147,687
============= ============= =============
See accompanying notes to condensed consolidated financial statements.
4
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Thirty-Nine Weeks Ended
---------------------------------
October 4, September 28,
2003 2002
------------- -------------
Cash flows from operating activities:
Net income $ 28,762 $ 29,006
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities:
Depreciation and amortization 40,421 32,967
Deferred income taxes 23,001 7,895
Loss on disposal of assets 772 592
Federal tax benefit from common stock issued under stock
incentive plans 418 405
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (5,282) 7,128
Increase in inventories (127,301) (186,401)
Increase in prepaid expenses and other current assets
(8,491) (143)
Increase in deferred charges and other
noncurrent assets (349) (3,039)
Increase in accounts payable 84,910 116,344
Decrease in accrued expenses and other liabilities (34,658) (17,984)
------------- -------------
Net cash provided by/(used in) operating activities 2,203 (13,230)
------------- -------------
Cash flows from investing activities:
Additions to property and equipment (70,306) (65,830)
------------- -------------
Cash flows from financing activities:
Net proceeds from common stock issuance -- 95,833
Proceeds from common stock issued under stock incentive plans 2,651 3,970
Increase (decrease) in short-term borrowings 1,070 (13,840)
Issuance of treasury stock 255 248
------------- -------------
Net cash provided by financing activities 3,976 86,211
------------- -------------
Effect of exchange rate changes on cash and cash
equivalents 253 (8)
Net (decrease) increase in cash and cash equivalents (63,874) 7,143
Cash and cash equivalents at beginning of period 86,605 15,437
------------- -------------
Cash and cash equivalents at end of period $ 22,731 $ 22,580
============= =============
Cash paid during the year for:
Interest (net of amounts capitalized) $ 973 $ 1,790
Income taxes $ 11,036 $ 14,650
See accompanying notes to condensed consolidated financial statements.
5
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited. In
the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of October 4, 2003 and September 28, 2002 and the results of operations for the
respective thirteen and thirty-nine weeks then ended and cash flows for the
thirty-nine weeks then ended. 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 revenues and expenses during the reporting period. Actual
results could differ from those estimates. Because of the seasonality of the
specialty retailing business, operating results of the Company on a quarterly
basis may not be indicative of operating results for the full year.
These condensed consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the fiscal year
ended January 4, 2003, included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission. All significant intercompany
accounts and transactions have been eliminated.
Certain expense items, which include inventory shrinkage, have been reclassified
between Selling, General and Administrative expenses and Cost of Sales for all
periods presented. These reclassifications increased Cost of Sales and decreased
Selling, General and Administrative expenses by equal amounts with no impact on
operating profit for any period presented.
2. Earnings Per Share
The calculation of basic and diluted earnings per share ("EPS") is as follows:
Periods ended October 4, 2003
(in thousands, except EPS)
Thirteen Week Period Thirty-Nine Week Period
--------------------------------- ---------------------------------
Income Shares EPS Income Shares EPS
------- ------- ------- ------- ------- -------
Basic $20,980 44,208 $ 0.47 $28,762 44,141 $ 0.65
Effect of outstanding stock options
and deferred stock grants -- 819 0.00 -- 558 0.01
------- ------- ------- ------- ------- -------
Diluted $20,980 45,027 $ 0.47 $28,762 44,699 $ 0.64
======= ======= ======= ======= ======= =======
Periods ended September 28, 2002
(in thousands, except EPS)
Thirteen Week Period Thirty-Nine Week Period
--------------------------------- ---------------------------------
Income Shares EPS Income Shares EPS
------- ------- ------- ------- ------- -------
Basic $18,280 44,047 $ 0.42 $29,006 41,877 $ 0.69
Effect of outstanding stock options and
deferred stock grants -- 644 0.01 -- 1,027 0.01
------- ------- ------- ------- ------- -------
Diluted $18,280 44,691 $ 0.41 $29,006 42,904 $ 0.68
======= ======= ======= ======= ======= =======
Options for which the exercise price was greater than the average market price
of common shares for the period ended October 4, 2003 and September 28, 2002
were not included in the computation of diluted earnings per share. These
consisted of options totaling 1,486,000 shares and 1,591,000 shares for the
thirteen weeks and 1,486,000 shares and 1,360,000 shares for the thirty-nine
weeks ended October 4, 2003 and September 28, 2002, respectively.
6
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont'd
3. Short-Term Borrowing Arrangements
In June 2002, the Company amended and extended its $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 of borrowings from additional lines of credit outside of the
Credit Agreement. As of October 4, 2003, the additional lines of credit include
committed facilities of approximately $26 million that expire on June 16, 2004
and are subject to annual renewal arrangements. Interest on all borrowings is
determined based upon several alternative rates, 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. As of October 4,
2003, the Company was in compliance with the terms of the Credit Agreement. The
Credit Agreement limits, among other things, the amount of cash dividends the
Company may pay. Under the Credit Agreement, the amount of dividends that the
Company may pay 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 ending March 30, 2002. The Company has never
paid cash dividends and does not currently 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 fiscal year. At various times throughout 2003 and
2002, the Company borrowed against its credit facility for seasonal working
capital needs. As of October 4, 2003, the Company had no borrowings under the
Credit Agreement and $3.2 million in borrowings under the additional lines of
credit at a weighted-average interest rate of 4.5%. The Company also had $71.6
million of letters of credit outstanding as of October 4, 2003, which included
standby letters of credit issued primarily under the Credit Agreement and import
letters of credit used for merchandise purchases. The Company is not obligated
under any formal or informal compensating balance requirements.
4. Comprehensive Income
Comprehensive income for the thirteen and thirty-nine weeks ended October 4,
2003 and September 28, 2002 is as follows: (In thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 4, September 28, October 4, September 28,
2003 2002 2003 2002
------------------------------------------------------------------------
Comprehensive Income:
Net Income $ 20,980 $ 18,280 $ 28,762 $ 29,006
Other comprehensive
income/(loss) -- Foreign currency
translation adjustment 8 (192) 1,313 44
------------- ------------- ------------- -------------
Comprehensive income $ 20,988 $ 18,088 $ 30,075 $ 29,050
============= ============= ============= =============
5. Restructuring and Asset Impairment Charge
In fiscal 2001, the Company developed and committed to a strategic initiative
designed to improve store performance and profitability. This initiative called
for the closing of certain under-performing stores, which did not meet the
Company's profit objectives. 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. A pre-tax
reserve of $20.5 million was established for estimated lease commitments for
stores to be closed. This reserve is included in accrued expenses. The reserve
considers estimated sublease income. Because all of the stores were leased the
Company is not responsible for the disposal of property other than fixtures. A
pre-tax reserve 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. A pre-tax reserve of
$4.0 million was established for other estimated miscellaneous store closing
costs. Additionally, a pre-tax reserve of $3.8 million was recorded in cost of
sales for estimated inventory markdowns below cost for the stores to be closed.
Certain components of the restructuring charge were based on estimates and may
be subject to change in the future. The Company has closed all of the initially
identified store closures other than one store, whose reserve was reversed, and
one store, which is expected to be closed during fiscal 2003.
7
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont'd
The following table displays a roll forward of the activity and significant
components of the restructuring and asset impairments charge and the reserves
remaining as of October 4, 2003 ($ in millions):
Remaining at Usage Remaining at
1/04/03 2003 10/04/03
----------------------- --------------------- -----------------------
(Audited) (Unaudited) (Unaudited)
Cash components:
Lease commitments $ 19.4 $(2.2) $17.2
Other 2.8 $(2.7) 0.1
----------------------- --------------------- -----------------------
Total $ 22.2 $(4.9) $17.3
======================= ===================== =======================
The 2003 activity primarily consists of payments for lease commitments and
miscellaneous store closing costs. The 2003 activity also includes the reversal
of estimated lease commitment and other store closing costs of $1.1 million as
these reserves were not needed. In addition, changes in estimates to lease
commitment costs based on current negotiations has resulted in the increase to
lease commitment costs of $1.3 million during the nine month period ended
October 4, 2003.
6. Stock Incentive Plans
In accordance with the provisions of Financial Accounting Standards No. 123, the
Company accounts for its stock-based compensation plans under the recognition
and measurement principles of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation cost has been recognized in connection with stock
options under these plans in the accompanying condensed consolidated financial
statements. The compensation cost that has been charged against income for
restricted stock grants was $0.2 million and $0.3 million for the thirteen weeks
ended October 4, 2003 and September 28, 2002, respectively, and $0.7 million and
$1.5 million for the thirty-nine weeks ended October 4, 2003 and September 28,
2002, respectively. The following table illustrates the effect on 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, "Accounting
for Stock-Based Compensation" for the thirteen and thirty-nine weeks ended
October 4, 2003 and September 28, 2002:
Thirteen week period ending Thirty-nine week period ending
October 4, September 28, October 4, September 28,
(in thousands, except per share data) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Net income:
As reported ........................ $20,980 $18,280 $28,762 $29,006
Deduct: Total stock-based
employee compensation expense
determined under the fair value
based method for all awards, net
of related tax effects ........... (1,740) (2,156) (5,326) (5,229)
------------------------------------------------------------------
Pro forma .......................... $19,240 $16,124 $23,436 $23,777
Net income per share of common stock:
Basic:
As reported ...................... $ 0.47 $ 0.42 $ 0.65 $ 0.69
Pro forma ........................ $ 0.44 $ 0.37 $ 0.53 $ 0.57
Diluted:
As reported ...................... $ 0.47 $ 0.41 $ 0.64 $ 0.68
Pro forma ........................ $ 0.43 $ 0.36 $ 0.52 $ 0.55
- ------------------------------------------------------------------------------------------------------------
8
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont'd
7. Guarantees
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 October 4, 2003, the maximum
potential amount of future payments the Company could be required to make under
such guarantee is approximately $1.1 million.
8. Recent Accounting Pronouncements
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor," which states that cash consideration
received from a vendor is presumed to be a reduction of the prices of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of merchandise sold when recognized in the Company's
consolidated statement of earnings. That presumption may be overcome when the
consideration is either a reimbursement of specific, incremental and
identifiable costs incurred to sell the vendor's products, or a payment for
assets or services delivered to the vendor. EITF 02-16 is effective for
contracts entered into or modified after December 31, 2002. Since the Company
has entered into substantially all of its current vendor contracts prior to
December 31, 2002, this issue will not have a material impact on the Company's
fiscal 2003 consolidated financial statements. As vendor agreements are
initiated or modified for fiscal 2004, the Company will apply the method of
accounting for vendor allowances pursuant to EITF 02-16. In connection with the
implementation of EITF 02-16, the Company expects to treat certain funds
received from vendors as a reduction in the cost of inventory and, as a result,
these funds will be recognized as a reduction to cost of merchandise sold when
the inventory is sold. Accordingly, certain funds received from vendors, which
were historically reflected as a reduction of advertising expense in SG&A, will
be treated as a reduction of cost of inventory.
In June 2001, the Financial Accounting Standards Board ("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 adoption of SFAS No. 143 did not 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 was required to adopt the provisions of SFAS No. 146 for exit
or disposal activities, if any, initiated after December 31, 2002. The adoption
of SFAS No. 146 did not impact the consolidated financial position or results of
operations, although it can be expected to impact the timing of liability
recognition associated with future exit activities, if any.
In December 2002, the 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 Statement No. 123 , "Accounting for
Stock-Based Compensation"("SFAS No. 123"), 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 thirteen and
thirty-nine week periods ended October 4, 2003 and September 28, 2002, the
Company accounted for stock options using the intrinsic value method prescribed
under 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 and has included this information
in Note 6 to the Company's Condensed Consolidated Financial Statements.
9
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont'd
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. The
Company has evaluated FIN No. 46 and determined that this interpretation did not
have a material impact on the Company's Condensed Consolidated Financial
Statements as the Company has no variable interest entities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 clarifies the accounting for certain financial instruments
with characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on the
Company's condensed consolidated financial statements.
10
Independent Auditors' Review Report
The Board of Directors and Shareholders
Linens 'n Things, Inc.:
We have reviewed the condensed consolidated balance sheets of Linens 'n Things,
Inc. and Subsidiaries as of October 4, 2003 and September 28, 2002, and the
related condensed consolidated statements of operations for the thirteen and
thirty-nine week periods then ended and the related condensed consolidated
statements of cash flows for the thirty-nine week periods ended October 4, 2003
and September 28, 2002. These condensed consolidated financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Linens 'n Things, Inc. and Subsidiaries as of January 4, 2003 (presented herein)
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated February 4, 2003 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of January 4, 2003 is fairly
presented, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
KPMG LLP
New York, New York
October 21, 2003
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements of the Company and the notes thereto
appearing elsewhere in this document.
General
Linens 'n Things, Inc. (the "Company") is one of the leading national format
retailers of home textiles, housewares and home accessories, carrying both
national brand and private label goods. As of October 4, 2003, the Company
operated 435 stores in 45 states and in four provinces across Canada.
Critical Accounting Policies
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 Condensed Consolidated Financial
Statements. The Company bases these estimates on historical results and various
other assumptions believed to be reasonable at the time.
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 and aged inventory 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 the sales returns reserve was approximately $5.2 million,
$5.5 million and $4.8 million as of October 4, 2003, January 4, 2003 and
September 28, 2002, respectively.
Impairment of Assets: With the adoption of SFAS No. 142, the Company now 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. As of October 4, 2003, January 4, 2003 and September 28, 2002, the
Company's net value for property and equipment was approximately $380.4 million,
$348.4 million and $345.4 million, respectively, and goodwill was $18.1 million,
as of October 4, 2003, January 4, 2003 and September 28, 2002.
12
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, con't
Store Closure Costs: For periods prior to the adoption of SFAS No. 146, the
Company recorded estimated store closure costs, such as fixed asset write-offs,
estimated lease commitment costs net of estimated sublease income, markdowns for
inventory that would be sold below cost, and other miscellaneous store closing
costs, in the period in which management determined to close a store. Such
estimates may be subject to change should actual costs differ. In the fourth
quarter of 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 October 4, 2003, January 4, 2003, and September 28, 2002 the Company had
$17.3 million, $22.2 million and $23.0 million, respectively, remaining related
to this reserve. The Company has continued to negotiate lease buyouts or
sublease 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 materially 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 workers'
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 $13.5
million, $9.5 million and $6.7 million as of October 4, 2003, January 4, 2003
and September 28, 2002, respectively.
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.
Results of Operations
Thirteen Weeks Ended October 4, 2003 Compared with Thirteen Weeks Ended
September 28, 2002
Net sales for the thirteen weeks ended October 4, 2003 increased 11.1% to $602.8
million, up from $542.6 million for the same period last year. The increase in
net sales is primarily the result of new store openings since September 28,
2002. At October 4, 2003, the Company operated 435 stores, including 17 stores
in Canada, as compared with 380 stores, including 14 stores in Canada, at
September 28, 2002. Store square footage increased 12.6% to 14.9 million at
October 4, 2003 compared with 13.3 million at September 28, 2002. During the
thirteen weeks ended October 4, 2003, the Company opened 21 stores and closed
one store as compared with opening 14 stores and closing one store during the
same period last year.
Comparable net sales increased 1.8% for the thirteen weeks ended October 4, 2003
compared with 1.8% for the same period last year. The increase in comparable net
sales for the thirteen weeks ended October 4, 2003 is due primarily to an
increase in customer traffic, but also reflects an increase in average
transaction. The Company believes these improved sales results reflect the
steady progress being made on its strategic operating initiatives, which include
improvements of in-stock inventory positions, expansion of the store inventory
ownership program and the Company's focus on improving the customer shopping
experience.
13
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, con't
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. Gross profit for the thirteen weeks ended October
4, 2003 was $241.9 million, or 40.1% of net sales, compared with $217.1 million,
or 40.0% of net sales, for the same period last year, with the improvement in
gross profit as a percent of net sales primarily due to an improvement in the
management of markdowns. Gross profit for the 2003 first and second quarters was
40.1% and 40.8% of net sales, respectively, and gross profit for the 2002 first
and second quarters was 38.7% and 40.9%, respectively. Gross profit in each
period reflects the reclassification of certain expenses between SG&A and cost
of sales. See Note 1 to the condensed consolidated financial statements.
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 the thirteen weeks ended October 4, 2003 were
$207.8 million, or 34.5%% of net sales, compared with $187.2 million, or 34.5%
of net sales, for the same period last year. Store payroll costs increased in
line with plan to support the Company's guest service initiatives while
occupancy costs were de-leveraged reflecting net comparable sales performance,
offset by leverage in corporate office expenses. SG&A expenses for the 2003
first and second quarters were 39.4% and 39.0% of net sales, respectively and
SG&A for the 2002 first and second quarters was 36.7% and 38.8% of net sales,
respectively. SG&A in each period reflects the reclassification of certain
expenses between SG&A and cost of sales. See Note 1 to the condensed
consolidated financial statements.
Operating profit for the thirteen weeks ended October 4, 2003 was $34.2 million,
or 5.7% of net sales, compared with $30.0 million, or 5.5% of net sales, for the
same period last year.
Net interest expense for the thirteen weeks ended October 4, 2003 decreased to
$0.2 million from $0.4 million during the same period last year. 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 was $13.0 million for the thirteen weeks ended
October 4, 2003, compared with $11.3 million for the same period last year. The
Company's effective tax rate was 38.2% for both the thirteen weeks ended October
4, 2003 and September 28, 2002.
As a result of the factors described above, net income for the thirteen weeks
ended October 4, 2003 was $21.0 million, or $0.47 per share on a diluted basis,
compared with $18.3 million, or $0.41 per share on a diluted basis for the same
period last year.
Thirty-Nine Weeks Ended October 4, 2003 Compared With Thirty-Nine Weeks Ended
September 28, 2002
Net sales increased 10.0% to $1,607.0 million for the thirty-nine weeks ended
October 4, 2003, up from $1,461.4 million for the same period last year,
primarily as a result of new store openings since September 28, 2002. During the
thirty-nine weeks ended October 4, 2003, the Company opened 53 stores and closed
nine stores compared with opening 42 stores and closing five stores during the
same period last year.
Comparable net sales for the thirty-nine weeks ended October 4, 2003 decreased
0.3% as compared with an increase of 2.6% for the same period last year. The
decline in comparable net sales can be primarily attributed to a decline in
consumer traffic as a result of the slowing economy in the first six months of
fiscal 2003. Declines in comparable net sales for the textile business were
partially offset by consistently good overall performance of the Company's
functional housewares business.
Gross profit for the thirty-nine weeks ended October 4, 2003 was $648.5 million,
or 40.4% of net sales, compared with $583.0 million, or 39.9% of net sales, for
the same period last year. The increase in gross profit as a percent of net
sales was primarily due to an improvement in the management of markdowns and the
continued leverage for supply chain costs. See Note 1 to the condensed
consolidated financial statements concerning reclassification of certain
expenses between SG&A and cost of sales.
SG&A expenses for the thirty-nine weeks ended October 4, 2003 were $601.3
million, or 37.4% of net sales, compared with $534.2 million, or 36.6% of net
sales, for the same period last year. The increase as a percentage of net sales
is primarily
14
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, con't
attributable to the de-leveraging of occupancy costs reflecting the decline in
comparable store net sales performance. In addition, the Company recorded a
charge of approximately $2.4 million in connection with the departure of the
Company's president during the first quarter of 2003. See Note 1 to the
condensed consolidated financial statements concerning reclassification of
certain expenses between SG&A and cost of sales.
Operating profit for the thirty-nine weeks ended October 4, 2003 was $47.1
million, or 2.9% of net sales, compared with $48.8 million, or 3.3% of net
sales, for the same period last year.
The Company incurred net interest expense of $0.6 million for the thirty-nine
weeks ended October 4, 2003, compared with $1.8 million for the same period in
2002. 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 the thirty-nine weeks ended October 4, 2003
was $17.8 million compared with $17.9 million for the same period last year. The
Company's effective tax rate was 38.2% for both the thirty-nine weeks ended
October 4, 2003 and September 28, 2002.
Net income for the thirty-nine weeks ended October 4, 2003 was $28.8 million, or
$0.64 per share on a diluted basis, compared with $29.0 million, or $0.68 per
share on a diluted basis, for the same period last year.
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 flows from
operations, credit extended by suppliers and short-term borrowings.
In June 2002, the Company amended and extended its $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 of borrowings from additional lines of credit outside of the
Credit Agreement. As of October 4, 2003, the additional lines of credit included
committed facilities of approximately $26 million that expire on June 16, 2004
and are subject to annual renewal arrangements. The Company was in compliance
with its covenants under the Credit Agreement as of October 4, 2003. The Company
had no borrowings under the Credit Agreement and $3.2 million in borrowings
under the additional lines of credit at a weighted-average interest rate of 4.5%
as of October 4, 2003. The Company also had $71.6 million of letters of credit
outstanding as of October 4, 2003, which included standby letters of credit
issued primarily under the Credit Agreement and import letters of credit used
for merchandise purchases. The Company is not obligated under any formal or
informal compensating balance requirements. See Note 3 to the Condensed
Consolidated Financial Statements. The Company maintains a trade payables
arrangement with General Electric Capital Corporation ("GECC") under which GECC
purchases the Company's payables at a discount directly from the Company's
suppliers prior to the payables due date, thereby permitting a supplier to
receive payment prior to the due date of the payable, with the Company sharing
in part of the GECC discount.
Net cash provided by operating activities for the thirty-nine weeks ended
October 4, 2003 was $2.2 million compared with $13.2 million used in operating
activities for the same period last year. The change was primarily attributed to
a slower growth in inventory net of accounts payable, and an increase in
deferred taxes due to the difference in the timing of recognizing certain
inventory components for tax purposes, offset in part by the timing of accrued
expense payments.
Net cash used in investing activities for the thirty-nine weeks ended October 4,
2003 was $70.3 million, compared with $65.8 million for the same period last
year. The Company opened 53 new stores for the thirty-nine weeks ended October
4, 2003 compared with 42 new stores for the same period of last year. The
Company currently estimates capital expenditures will be approximately $80
million to $85 million in fiscal 2003, primarily for an estimated 58 new stores,
maintenance of existing stores, and system enhancements.
Net cash provided by financing activities for the thirty-nine weeks ended
October 4, 2003 was $4.0 million compared with $86.2 million for the same period
last year. Short-term borrowing increased approximately $1.1 million and
proceeds from common stock issued under stock incentive plans were $2.7 million
for the thirty-nine weeks ended October 4, 2003. In
15
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, con't
addition, the Company had a common stock offering of 3.3 million shares in the
second quarter of fiscal 2002 that raised a net $95.8 million.
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 expenditures, working
capital and non-acquisition business expansion requirements for at least the
next 12 to 18 months.
Recent Accounting Pronouncements
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor," which states that cash consideration received from a
vendor is presumed to be a reduction of the prices of the vendor's products or
services and should, therefore, be characterized as a reduction of cost of
merchandise cold when recognized in the Company's Consolidated Statements of
Earnings. That presumption may be overcome when the consideration is either a
reimbursement of specific, incremental and identifiable costs incurred to sell
the vendor's products, or a payment for assets or services delivered to the
vendor. EITF 02-16 is effective for contracts entered into or modified after
December 31, 2002. Since the Company has entered into substantially all of its
current vendor contracts prior to December 31, 2002, this issue will not have a
material impact on the Company's fiscal 2003 consolidated financial statements.
As vendor agreements are initiated or modified for fiscal 2004, the Company will
apply the method of accounting for vendor allowances pursuant to EITF 02-16. In
connection with the implementation of EITF 02-16, the Company expects to treat
certain funds received from vendors as a reduction in the cost of inventory and,
as a result, these funds will be recognized as a reduction to cost of
merchandise sold when the inventory is sold. Accordingly, certain funds received
from vendors, which were historically reflected as a reduction of advertising
expense in SG&A, will be treated as a reduction of cost of inventory. Based on
the Company's current evaluation, the estimated impact from the implementation
of EITF 02-16 is expected to reduce diluted earnings per share on a non-cash
basis by approximately $0.25 for fiscal 2004, which covers the period January 4,
2004 to January 1, 2005 as a result of delaying the recognition of vendor
allowances until the related inventory is sold. The majority of this non-cash
reduction in earnings per share will occur in the first two quarters of fiscal
2004. The Company currently expects SG&A on an annualized basis to increase by
approximately 1.1% as a percent of sales as a result of this accounting change.
This accounting change will have no impact on the Company's cash flows or the
expected amount of funds to be received from vendors. In addition, following
implementation of EITF 02-16, there will be no earnings impact in subsequent
fiscal years other than for future net changes in such vendor allowances.
In June 2001, the Financial Accounting Standards Board ("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 adoption of SFAS No. 143 did not 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. The adoption of SFAS No. 146 did not impact the consolidated financial
position or results of operations, although it can be expected to impact the
timing of liability recognition associated with future exit activities, if any.
In December 2002, the 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 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 thirteen and
thirty-nine week
16
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont'd
periods ended October 4, 2003 and September 28, 2002, the Company accounted for
stock options using the intrinsic value method prescribed under 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 and has included this information in Note 6 to the Company's
Condensed 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. The
Company has evaluated FIN No. 46 and determined that this interpretation did not
have a material impact on the Company's consolidated financial statements as the
Company has no variable interest entities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 clarifies the accounting for certain financial instruments
with characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on the
Company's condensed consolidated financial statements.
Inflation
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.
Seasonality
The Company's business is subject to substantial seasonal variations.
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.
Forward-Looking Statements
The foregoing 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," "intend," "plan," "target", "outlook", "comfortable
with" and similar terms or variations of such terms. All of our information and
statements regarding our outlook for the future including future revenues,
comparable sales performance, earnings and other future financial and stores'
performance, 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 and our ability to anticipate and successfully respond to
changing consumer tastes and preferences, the success of our new business
concepts, seasonal concepts and new brands, the performance of our new stores,
substantial 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,
17
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, con't
unusual weather patterns, 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 our ability to successfully implement our strategic initiatives.
If these or other risks or uncertainties materialize, or if our estimates or
underlying assumptions prove inaccurate, actual results could differ materially
from any future results, express or implied by our 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 in our most recent
Annual Report on Form 10-K and 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company continuously 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 as stipulated in the
Credit Agreement, including a fixed margin above LIBOR. As of October 4, 2003,
the Company had no borrowings under the Credit Agreement and $3.2 million in
borrowings under the additional lines of credit at a weighted-average interest
rate of 4.5% (see Note 3 to the Condensed 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 from 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 17 stores in Canada as of October 4, 2003. The
Company 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 from
operations or cash flow.
Since fiscal year end 2002, there have been no material changes in market risk
exposures.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Company's management, have evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective.
18
The Company's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Company's internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
Exhibit
Number Description
------ -----------
15 Letter re unaudited interim financial information
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K:
The Company furnished a Current Report on Form 8-K dated July 23, 2003 in
reference to a press release dated July 23, 2003 reporting the Company's
sales and earnings results for its second quarter ended July 5, 2003.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LINENS 'N THINGS, INC.
(Registrant)
By: /s/ William T. Giles
----------------------------
William T. Giles
Executive Vice President, Chief Financial Officer
(Duly authorized officer and
principal financial officer)
Date: November 18, 2003
20