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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended July 3, 2004
---------------------------------------
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 (IRS 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
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve 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 as of August 3, 2004: 45,138,711
1
INDEX
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Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Thirteen and Twenty-Six Weeks Ended July 3, 2004 and July 5, 2003 3
Condensed Consolidated Balance Sheets as of July 3, 2004,
January 3, 2004 and July 5, 2003 4
Condensed Consolidated Statements of Cash Flows for the
Twenty-Six Weeks Ended July 3, 2004 and July 5, 2003 5
Notes to Condensed Consolidated Financial Statements 6-9
Report of Independent Registered Public Accounting Firm 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 19
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 Twenty-Six Weeks Ended
------------------------------ --------------------------------
July 3, July 5, July 3, July 5,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 578,749 $ 523,672 $ 1,131,549 $ 1,004,143
Cost of sales, including buying and distribution costs 346,250 309,974 678,596 597,604
------------ ------------ ------------ ------------
Gross profit 232,499 213,698 452,953 406,539
Selling, general and administrative expenses 230,889 204,180 451,279 393,581
------------ ------------ ------------ ------------
Operating profit 1,610 9,518 1,674 12,958
Interest income (30) (14) (168) (70)
Interest expense 218 302 372 434
------------ ------------ ------------ ------------
Interest expense, net 188 288 204 364
------------ ------------ ------------ ------------
Income before provision for income taxes 1,422 9,230 1,470 12,594
Provision for income taxes 543 3,526 561 4,812
------------ ------------ ------------ ------------
Net income $ 879 $ 5,704 $ 909 $ 7,782
============ ============ ============ ============
Basic earnings per share $ 0.02 $ 0.13 $ 0.02 $ 0.18
============ ============ ============ ============
Fully diluted earnings per share $ 0.02 $ 0.13 $ 0.02 $ 0.17
============ ============ ============ ============
See accompanying notes to Condensed Consolidated Financial Statements.
3
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
July 3, January 3, July 5,
2004 2004 2003
------------------- ------------------ -------------------
(Unaudited) (Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 18,990 $ 136,129 $ 9,446
Accounts receivable 27,490 29,531 28,013
Inventories 765,667 701,928 715,644
Prepaid expenses and other current assets 33,734 33,982 29,940
Current deferred taxes 404 1,295 --
------------------- ------------------ -------------------
Total current assets 846,285 902,865 783,043
Property and equipment, net 390,892 377,244 376,006
Goodwill, net 18,126 18,126 18,126
Deferred charges and other noncurrent assets, net 12,408 10,783 10,765
------------------- ------------------ -------------------
Total assets $ 1,267,711 $ 1,309,018 $ 1,187,940
=================== ================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 238,142 $ 250,142 $ 268,593
Accrued expenses and other current liabilities 121,017 174,002 125,303
Current deferred taxes 11,282 15,759 8,676
Short-term borrowings 6,045 -- 16,874
------------------- ------------------ -------------------
Total current liabilities 376,486 439,903 419,446
------------------- ------------------ -------------------
Deferred income taxes and other long-term liabilities 120,897 107,396 89,144
------------------- ------------------ -------------------
Total liabilities 497,383 547,299 508,590
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; 45,371,540 shares
issued and 45,136,991 shares outstanding at July 3,
2004; 45,052,255 shares issued and 44,818,916 shares
outstanding at January 3, 2004; and 44,361,771 shares
issued and 44,132,225 shares outstanding at July 5,
2003 454 450 444
Additional paid-in capital 370,520 362,483 347,538
Retained earnings 404,915 404,006 336,963
Accumulated other comprehensive income 1,089 1,391 919
Treasury stock, at cost; 234,549 shares at
July 3, 2004, 233,339 shares at January 3, 2004 and
229,546 shares at July 5, 2003 (6,650) (6,611) (6,514)
------------------- ------------------ -------------------
Total shareholders' equity 770,328 761,719 679,350
------------------- ------------------ -------------------
Total liabilities and shareholders' equity $ 1,267,711 $ 1,309,018 $ 1,187,940
=================== ================== ===================
See accompanying notes to Condensed Consolidated Financial Statements.
4
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Twenty-Six Weeks Ended
----------------------------------------------
July 3, July 5,
2004 2003
----------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 909 $ 7,782
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 29,526 26,346
Deferred income taxes 5,342 17,969
Loss on disposal of assets 776 741
Federal tax benefit from common stock issued under stock
incentive plans 1,279 (18)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 2,029 (3,411)
Increase in inventories (64,556) (96,637)
Decrease (increase) in prepaid expenses
and other current assets 413 (4,392)
Increase in deferred charges and other
noncurrent assets (2,048) (201)
(Decrease) increase in accounts payable (11,667) 50,164
Decrease in accrued expenses and other liabilities (47,726) (40,031)
----------------------- -------------------
Net cash used in operating activities (85,723) (41,688)
----------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (43,985) (51,965)
----------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued under stock incentive plans 6,762 1,305
Increase in short-term borrowings 6,011 14,690
(Purchase) issuance of treasury stock (39) 255
----------------------- -------------------
Net cash provided by financing activities 12,734 16,250
----------------------- -------------------
Effect of exchange rate changes on cash and cash
equivalents (165) 244
Net decrease in cash and cash equivalents (117,139) (77,159)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 136,129 86,605
----------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,990 $ 9,446
======================= ===================
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized) $ 435 $ 533
Income taxes $ 10,726 $ 11,038
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 Linens 'n
Things, Inc. and its subsidiaries (collectively the "Company") as of July 3,
2004 and July 5, 2003 and the results of operations for the respective thirteen
and twenty-six weeks then ended and cash flows for the twenty-six 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 3, 2004, 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 prior period expense items, which include inventory shrinkage, have been
reclassified between cost of sales and selling, general and administrative
expenses to conform with the current period presentation. These
reclassifications increased cost of sales and decreased selling, general and
administrative expenses by equal amounts with no impact on operating profit for
any of the periods presented.
Certain prior period vendor accounts receivable balances have been reclassified
to accounts payable to conform with the current period presentation. These
reclassifications decreased accounts receivable and accounts payable by equal
amounts.
2. Earnings Per Share
The calculation of basic and fully diluted earnings per share ("EPS") is as
follows:
Periods Ended July 3, 2004
(in thousands, except EPS)
Thirteen Week Period Twenty-Six Week Period
------------------------------------------- ----------------------------------------------
Net Net
Income Shares EPS Income Shares EPS
----------- ------------ ---------- ------------- ------------ ----------
Basic $ 879 45,108 $ 0.02 $ 909 45,014 $ 0.02
Effect of outstanding stock
options and deferred stock
grants -- 982 -- -- 1,096 --
----------- ------------ ---------- ------------- ------------ ----------
Fully diluted $ 879 46,090 $ 0.02 $ 909 46,110 $ 0.02
=========== ============ ========== ============= ============ ==========
Periods Ended July 5, 2003
(in thousands, except EPS)
Thirteen Week Period Twenty-Six Week Period
------------------------------------------- ----------------------------------------------
Net Net
Income Shares EPS Income Shares EPS
----------- ------------ ---------- ------------- ------------ ----------
Basic $ 5,704 44,118 $ 0.13 $ 7,782 44,108 $ 0.18
Effect of outstanding stock
options and deferred stock
grants -- 427 -- -- 426 (0.01)
----------- ------------ ---------- ------------- ------------ ----------
Fully diluted $ 5,704 44,545 $ 0.13 $ 7,782 44,534 $ 0.17
=========== ============ ========== ============= ============ ==========
Options for which the exercise price was greater than the average market price
of common shares for the periods ended July 3, 2004 and July 5, 2003 were not
included in the computation of fully diluted earnings per share. These consisted
of options totaling approximately 606,000 shares and 2,555,000 shares for the
thirteen weeks and approximately 312,000 shares and 2,555,000 shares for the
twenty-six weeks ended July 3, 2004 and July 5, 2003, 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 July 3, 2004, the additional lines of credit include
committed facilities of approximately $15 million that expire on December 31,
2004 and $11 million that expire on June 15, 2005 and are subject to periodic
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 July 3, 2004, the Company was in
compliance with its covenants under 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 2004 and 2003, the
Company borrowed against its Credit Agreement for seasonal working capital
needs. As of July 3, 2004, the Company had no borrowings under the Credit
Agreement and approximately $6.0 million in borrowings under the additional
lines of credit at a weighted average interest rate of 3.6%. The Company also
had $71.2 million of letters of credit outstanding as of July 3, 2004, 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. The
Company also 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. At July 3,
2004, January 3, 2004, and July 5, 2003, the Company owed approximately $76.4
million, $66.2 million, and $91.3 million, respectively, to GECC under this
program, which was included in accounts payable.
4. Comprehensive Income
Comprehensive income for the thirteen and twenty-six weeks ended July 3, 2004
and July 5, 2003 is as follows (in thousands):
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------------- --------------------------------
July 3, July 5, July 3, July 5,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS):
Net income $ 879 $ 5,704 $ 909 $ 7,782
Other comprehensive income (loss) - foreign currency
translation adjustment (89) 825 (302) 1,305
-------------- -------------- -------------- --------------
Comprehensive income (loss) $ 790 $ 6,529 $ 607 $ 9,087
============== ============== ============== ==============
5. 2001 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 writedown 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 charge of $3.8 million was recorded in cost of
sales for estimated inventory markdowns below cost for the stores to be closed.
Certain components of the restructuring charge were based on estimates and may
be subject to change in the future. The Company has closed all of the initially
identified store closures other than one store, whose reserve was reversed, and
one store which is expected to be closed during fiscal 2004.
7
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
The following table displays a roll forward of the activity and significant
components of the 2001 restructuring and asset impairment charge and the
reserves remaining as of July 3, 2004 ($ in millions):
Remaining at Usage Remaining at
1/03/04 2004 7/03/04
----------------------- --------------------- -----------------------
(Audited) (Unaudited) (Unaudited)
Cash components:
Lease commitments $ 15.6 $ (3.0) $ 12.6
----------------------- --------------------- -----------------------
Total $ 15.6 $ (3.0) $ 12.6
======================= ===================== =======================
The 2004 usage primarily consists of payments for lease commitments and
miscellaneous store closing costs. The 2004 activity also includes the reversal
of estimated lease commitment and other store closing costs of approximately
$1.4 million as these reserves were not needed, offset by an increase to lease
commitment costs by a like amount due to changes in estimates based on current
negotiations.
6. Stock Incentive Plans
In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 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 unit grants was $0.2
million and $0.3 million for the thirteen weeks ended July 3, 2004 and July 5,
2003, respectively, and $0.3 million and $0.4 million for the twenty-six weeks
ended July 3, 2004 and July 5, 2003, 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, for the thirteen and twenty-six weeks ended July 3,
2004 and July 5, 2003:
Thirteen Week Period Ending Twenty-six Week Period Ending
------------------------------ ----------------------------------
July 3, July 5, July 3, July 5,
(in thousands, except per share data) 2004 2003 2004 2003
- ---------------------------------------------------- ------------------------------ ----------------------------------
NET INCOME:
As reported $ 879 $ 5,704 $ 909 $ 7,782
Deduct: Total stock-based employee
compensation expense determined under the
fair value based method for all awards, net
of related tax effects (1,825) (2,058) (3,578) (3,586)
------------------------------ ----------------------------------
Pro forma $ (946) $ 3,646 $(2,669) $ 4,196
============================== ==================================
NET INCOME PER SHARE OF COMMON STOCK:
Basic:
As reported $ 0.02 $ 0.13 $ 0.02 $ 0.18
Pro forma $ (0.02) $ 0.08 $ (0.06) $ 0.10
Fully diluted:
As reported $ 0.02 $ 0.13 $ 0.02 $ 0.17
Pro forma $ (0.02) $ 0.08 $ (0.06) $ 0.09
- ----------------------------------------------------------------------------------------
8
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
7. Guarantees
The Company has assigned property at a retail location in which the Company
guarantees the payment of rent over the specified lease term in the event of
non-performance. As of July 3, 2004, the maximum potential amount of future
payments the Company could be required to make under such guarantee is
approximately $1.0 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" ("EITF 02-16"), 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 Condensed
Consolidated Statement of Operations. 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. This issue did not
have a material impact on the Company's fiscal 2003 audited consolidated
financial statements as substantially all of the Company's vendor contracts in
effect during fiscal 2003 were entered into prior to December 31, 2002.
Beginning in the first quarter of fiscal 2004, as vendor agreements are
initiated or modified, the Company applies the method of accounting for vendor
allowances pursuant to EITF 02-16. In connection with the implementation of EITF
02-16, the Company treats certain funds received from vendors as a reduction in
the cost of inventory and, as a result, these funds are 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 or cost of sales, are now treated as a
reduction of cost of inventory.
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 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
twenty-six week periods ended July 3, 2004 and July 5, 2003, 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
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
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 July 3, 2004 and July 5, 2003, and the related
condensed consolidated statements of operations for the thirteen and twenty-six
week periods then ended and the related condensed consolidated statements of
cash flows for the twenty-six week periods ended July 3, 2004 and July 5, 2003.
These condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board
(United States), 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 U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Linens 'n Things, Inc. and Subsidiaries as of January 3, 2004
(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, 2004 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 3, 2004 is fairly presented, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/S/ KPMG LLP
KPMG LLP
New York, New York
July 29, 2004
10
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
specialty retailers. The Company's stores emphasize a broad assortment of home
textiles, housewares and home accessories, carrying both national brands and
private label goods. As of July 3, 2004, the Company operated 473 stores in 45
states and in five provinces across Canada.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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. These critical accounting
estimates are discussed in detail in our 2003 Annual Report on Form 10-K.
VALUATION OF INVENTORY: Merchandise inventory is a significant portion of the
Company's balance sheet, representing approximately 60% of total assets at July
3, 2004. 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.
The methodologies utilized by the Company in its application of 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 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. Although these
estimates have not varied materially from historical provisions, estimating
sales returns requires management judgment as to changes in preferences and
quality of products being sold, among other things; therefore, these estimates
may vary materially in the future. The sales returns calculations are regularly
compared with actual return experience. In preparing its financial statements as
of July 3, 2004, January 3, 2004 and July 5, 2003, the Company's sales returns
reserve was approximately $5.8 million, $6.2 million and $4.7 million,
respectively.
IMPAIRMENT OF ASSETS: With the adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets", 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 is also required to follow
the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"), which superceded an earlier pronouncement
on the same topic but retained many of its fundamental provisions. It also
expanded the scope of discontinued operations to include more disposal
transactions and impacted the presentation of future store closings, if any, by
the Company. Under SFAS No. 144 the Company periodically evaluates long-lived
assets other than goodwill for indicators of impairment. As of July 3, 2004,
January 3, 2004 and July 5, 2003, the Company's net value for property and
equipment was approximately $390.9 million, $377.2 million and $376.0 million,
respectively, and goodwill was approximately $18.1 million on each of the
aforementioned dates.
11
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
-------------------------------------------------------
STORE CLOSURE COSTS: In fiscal 2001, the Company recorded a pre-tax
restructuring and asset impairment charge of $37.8 million ($23.7 million
after-tax) related to the closing of certain under-performing stores. As of July
3, 2004, January 3, 2004 and July 5, 2003, the Company had $12.6 million, $15.6
million and $20.2 million, respectively, remaining related to this reserve. The
Company has closed all of the initially identified stores other than one store,
which the Company decided to keep open and whose reserve was reversed, and one
other store which is expected to close during fiscal year 2004. The Company has
continued to negotiate and / or explore lease buyouts or sublease agreements for
these stores. The activity in the twenty-six week period ended July 3, 2004
includes the reversal of estimated lease commitment and other store closing
costs of approximately $1.4 million as these reserves were not needed, offset by
an increase to lease commitment costs by a like amount due to changes in
estimates based on current negotiations. Final settlement of these reserves is
predominantly a function of negotiations with unrelated third parties, and, as
such, these estimates may be subject to change in the future.
SELF-INSURANCE: The Company purchases third party insurance for worker's
compensation, medical, auto and general liability costs that exceed 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. The accrued obligation for these
self-insurance programs was approximately $13.1 million as of July 3, 2004,
$13.5 million as of January 3, 2004 and $9.4 million as of July 5, 2003.
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 JULY 3, 2004 COMPARED WITH THIRTEEN WEEKS ENDED JULY 5,
2003
Results of operations for the thirteen weeks and twenty-six weeks ended July 3,
2004 were impacted by an accounting change resulting from the implementation of
the provisions of EITF 02-16, "Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor" ("EITF 02-16"), 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 Condensed Consolidated Statement of Operations. EITF 02-16 is
effective for contracts entered into or modified after December 31, 2002. This
issue did not have a material impact on the Company's fiscal 2003 audited
Consolidated Financial Statements as substantially all of the Company's vendor
contracts in effect during fiscal 2003 were entered into prior to December 31,
2002. Beginning in the first quarter of fiscal 2004, as vendor agreements are
initiated or modified, the Company applies the method of accounting for vendor
allowances pursuant to EITF 02-16. In connection with the implementation of EITF
02-16, the Company treats certain funds received from vendors as a reduction in
the cost of inventory and, as a result, these funds are 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 selling, general and administrative expenses
("SG&A") or cost of sales, are now treated as a reduction of cost of inventory.
12
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
-------------------------------------------------------
The provisions of EITF 02-16 impacted the Company's results of operations for
the thirteen weeks and twenty-six weeks ended July 3, 2004 as follows (the "As
Reported" amounts include the impact of EITF 02-16):
Thirteen Weeks Twenty-six Weeks
---------------------------------- --------------------------------
EITF 02-16 EITF 02-16
As Adjustment As Adjustment
In thousands, except per share data Reported Impact Reported Impact
------------------------------------- ---------------------------------- --------------------------------
Net sales $ 578,749 $ -- $ 1,131,549 $ --
Cost of sales 346,250 (3,411) 678,596 (3,552)
---------------------------------- --------------------------------
Gross profit 232,499 3,411 452,953 3,552
SG&A 230,889 (3,183) 451,279 (10,963)
---------------------------------- --------------------------------
Operating profit 1,610 6,594 1,674 14,515
Interest expense, net 188 -- 204 --
---------------------------------- --------------------------------
Income before provision for income taxes 1,422 6,594 1,470 14,515
Provision for income taxes 543 2,519 561 5,544
---------------------------------- --------------------------------
Net income $ 879 $ 4,075 $ 909 $ 8,971
================================== ================================
Earnings per share
Basic $ 0.02 $ 0.09 $ 0.02 $ 0.20
Fully diluted $ 0.02 $ 0.09 $ 0.02 $ 0.19
EITF 02-16 had no impact on the Company's cash flows. Following the initial
implementation impact, subsequent fiscal years will reflect vendor allowances on
a consistent basis other than for any net changes in vendor allowances.
The EITF 02-16 pre-tax adjustments of $6.6 million and $14.5 million for the
thirteen weeks and twenty-six weeks ended July 3, 2004, respectively, represents
those allowances reflected as a reduction of the cost of inventory, which
historically would have been treated as a reduction of cost of sales or SG&A.
Beginning in fiscal 2004, due to the Company's changes to its vendor agreements
and the requirements of EITF 02-16, the Company no longer records advertising
allowances as a reduction to SG&A. The Company has allocated the EITF 02-16
pre-tax adjustment to SG&A based on the previous year ratio of vendor
advertising allowances recorded within SG&A to sales. The remaining portion of
the total EITF 02-16 pre-tax adjustment was allocated to cost of sales. The
Company provides this information in order to allow investors to have better
insight into the Company's comparative period-to-period operating performance,
and it is intended to supplement, not replace GAAP presentation.
Net sales for the thirteen weeks ended July 3, 2004 increased approximately
10.5% to $578.7 million, up from $523.7 million for the same period last year.
The increase in net sales is primarily the result of new store openings since
July 5, 2003. At July 3, 2004, the Company operated 473 stores, including 22
stores in Canada, as compared with 415 stores, including 16 stores in Canada, at
July 5, 2003. Store square footage increased approximately 12% to 16.1 million
at July 3, 2004 compared with 14.3 million at July 5, 2003. During the thirteen
weeks ended July 3, 2004, the Company opened 12 stores and closed no stores as
compared with opening 16 stores and closing one store during the same period
last year.
13
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
-------------------------------------------------------
Comparable net sales increased slightly compared to the same quarter last year.
Comparable net sales increased 0.2% for the thirteen weeks ended July 3, 2004
compared to an increase of 0.1% for the same period last year. Overall,
comparable net sales performance this quarter showed more variability than usual
with positive comparable net sales in April and June offset by a softening in
comparable net sales in May due to a decline in guest traffic. Overall average
transaction size increased slightly which was offset by a decline in guest
traffic.
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 July 3,
2004 was $232.5 million, or 40.2% of net sales, compared with $213.7 million, or
40.8% of net sales, for the same period last year. The EITF 02-16 adjustment
impact was $3.4 million, or 0.6% of net sales, for the thirteen weeks ended July
3, 2004, accounting for the overall decline in gross profit as a percentage of
net sales compared to the prior year. In addition to the decline in gross profit
from the EITF 02-16 impact, gross profit improved due to better markdown
management as well as slightly less promotional activity, offset by higher
freight costs due in part to rising fuel prices.
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 July 3, 2004 were
$230.9 million, or 39.9% of net sales, compared with $204.2 million, or 39.0% of
net sales, for the same period last year. The EITF 02-16 adjustment impact was
$3.2 million, or 0.5% of net sales, for the thirteen weeks ended July 3, 2004.
In addition to the increase in SG&A from the EITF 02-16 impact, SG&A increased
as a percentage of net sales primarily due to an increase in occupancy cost
which grew at a faster rate than sales, partially offset by store payroll and
certain operating costs which grew at a slower rate than sales. SG&A for the
thirteen weeks ended July 5, 2003 also included advertising credits equaling
0.5% of net sales which, as a part of the EITF 02-16 implementation, are no
longer classified as an offset to SG&A in fiscal 2004.
Operating profit for the thirteen weeks ended July 3, 2004 was $1.6 million, or
0.3% of net sales, compared with $9.5 million, or 1.8% of net sales, for the
same period last year. The EITF 02-16 adjustment impact was $6.6 million, or
1.1% of net sales, for the thirteen weeks ended July 3, 2004.
Net interest expense for the thirteen weeks ended July 3, 2004 decreased to $0.2
million from $0.3 million during the same period last year. The decrease in net
interest expense is mainly due to lower average borrowings based on the
Company's positive cash flows since July 5, 2003.
The Company's income tax expense was $0.5 million for the thirteen weeks ended
July 3, 2004, compared with $3.5 million for the same period last year. The EITF
02-16 adjustment impact was $2.5 million for the thirteen weeks ended July 3,
2004. The Company's effective tax rate was 38.2% for both the thirteen weeks
ended July 3, 2004 and July 5, 2003.
As a result of the factors described above, net income for the thirteen weeks
ended July 3, 2004 was $0.9 million, or $0.02 per share on a fully diluted
basis, compared with $5.7 million, or $0.13 per share on a fully diluted basis
for the same period last year. The EITF 02-16 adjustment impact was $4.1
million, or $0.09 per share on a fully diluted basis, for the thirteen weeks
ended July 3, 2004.
TWENTY-SIX WEEKS ENDED JULY 3, 2004 COMPARED WITH TWENTY-SIX WEEKS ENDED JULY 5,
2003
Net sales increased 12.7% to $1,131.5 million for the twenty-six weeks ended
July 3, 2004, up from $1,004.1 million for the same period last year, primarily
as a result of new store openings since July 5, 2003. During the twenty-six
weeks ended July 3, 2004, the Company opened 33 stores and closed no stores
compared with opening 32 stores and closing eight stores during the same period
last year.
Comparable net sales for the twenty-six weeks ended July 3, 2004 increased 2.3%
as compared with a decline of 1.5% for the same period last year. The increase
in comparable net sales for the twenty-six weeks ended July 3, 2004 is primarily
due to an increase in guest traffic and average transaction size, primarily
during the first quarter of 2004.
14
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
-------------------------------------------------------
Gross profit for the twenty-six weeks ended July 3, 2004 was $453.0 million, or
40.0% of net sales, compared with $406.5 million, or 40.5% of net sales, for the
same period last year. The EITF 02-16 adjustment impact was $3.6 million, or
0.3% of net sales, for the twenty-six weeks ended July 3, 2004. In addition to
the decline in gross profit from the EITF 02-16 impact, gross profit declined as
a result of higher freight costs due in part to rising fuel prices partially
offset by an improvement in the management of markdowns.
SG&A expenses for the twenty-six weeks ended July 3, 2004 were $451.3 million,
or 39.9% of net sales, compared with $393.6 million, or 39.2% of net sales, for
the same period last year. The EITF 02-16 adjustment impact was $11.0 million,
or 1.0% of net sales, for the twenty-six weeks ended July 3, 2004. The increase
in SG&A as a percentage of net sales is primarily attributable to the impact of
the EITF 02-16 adjustment and occupancy costs which grew at a faster rate than
sales, offset by increases in store payroll and certain other operating costs
which grew at a slower rate than sales.
Operating profit for the twenty-six weeks ended July 3, 2004 was $1.7 million,
or 0.1% of net sales, compared with $13.0 million, or 1.3% of net sales, for the
same period last year. The EITF 02-16 adjustment impact was $14.5 million, or
1.3% of net sales, for the twenty-six weeks ended July 3, 2004.
The Company incurred net interest expense of $0.2 million for the twenty-six
weeks ended July 3, 2004, compared with $0.4 million for the same period last
year. The decrease in net interest expense is mainly due to lower average
borrowings based on the Company's positive cash flows since July 5, 2003.
The Company's income tax expense for the twenty-six weeks ended July 3, 2004 was
$0.6 million compared with $4.8 million for the same period last year. The EITF
02-16 adjustment impact was $5.5 million for the twenty-six weeks ended July 3,
2004. The Company's effective tax rate was 38.2% for both the twenty-six weeks
ended July 3, 2004 and July 5, 2003.
As a result of the factors described above, net income for the twenty-six weeks
ended July 3, 2004 was $0.9 million, or $0.02 per share on a fully diluted
basis, compared with $7.8 million, or $0.17 per share on a fully diluted basis
for the same period last year. The EITF 02-16 adjustment impact was $9.0
million, or $0.19 per share on a fully diluted basis, for the twenty-six weeks
ended July 3, 2004.
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 July 3, 2004, the additional lines of credit include
committed facilities of approximately $15 million that expire on December 31,
2004 and $11 million that expire on June 15, 2005 and are subject to periodic
renewal arrangements. As of July 3, 2004, the Company was in compliance with its
covenants under the Credit Agreement. As of July 3, 2004, the Company had no
borrowings under the Credit Agreement and approximately $6.0 million in
borrowings under the additional lines of credit at a weighted average interest
rate of 3.6%. The Company also had $71.2 million of letters of credit
outstanding as of July 3, 2004, 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. At July 3, 2004, January 3, 2004, and July 5, 2003, the Company owed
approximately $76.4 million, $66.2 million, and $91.3 million, respectively, to
GECC under this program, which was included in accounts payable.
15
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
Net cash used in operating activities for the twenty-six weeks ended July 3,
2004 was $85.7 million compared with $41.7 million used in operating activities
for the same period last year. The increase in cash used between periods is
primarily due to the timing of vendor payments.
Net cash used in investing activities for the twenty-six weeks ended July 3,
2004 was $44.0 million, compared with $52.0 million for the same period last
year. The Company currently estimates capital expenditures will be approximately
$80 to $85 million in fiscal 2004, primarily for an estimated 50 new stores for
the year, maintenance of existing stores, and system enhancements.
Net cash provided by financing activities for the twenty-six weeks ended July 3,
2004 was $12.7 million compared with $16.3 million for the same period last
year. The decrease is due to lower short-term borrowings partially offset by
greater proceeds from common stock issued under stock incentive plans.
Management regularly reviews and evaluates its liquidity and capital needs. The
Company experiences peak periods for its cash needs generally 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 access to 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" ("EITF 02-16"), 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 condensed
consolidated statement of operations. 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. This issue did not
have a material impact on the Company's fiscal 2003 audited consolidated
financial statements as substantially all of the Company's vendor contracts in
effect during fiscal 2003 were entered into prior to December 31, 2002.
Beginning in the first quarter of fiscal 2004, as vendor agreements are
initiated or modified, the Company applies the method of accounting for vendor
allowances pursuant to EITF 02-16. In connection with the implementation of EITF
02-16, the Company treats certain funds received from vendors as a reduction in
the cost of inventory and, as a result, these funds are 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 or cost of sales, are now treated as a
reduction of cost of inventory. With the adoption of EITF 02-16 all allowances
are netted against cost of sales. Based on the Company's current evaluation, the
estimated impact from the implementation of EITF 02-16 is expected to reduce
fully diluted earnings per share on a non-cash basis by approximately $0.27 to
$0.28 for fiscal 2004, as a result of delaying the recognition of vendor
allowances until the related inventory is sold. The provisions of EITF 02-16
impacted the Company's results of operations by approximately $9.0 million, net
of tax, or $0.19 per fully diluted share for the twenty-six weeks ended July 3,
2004. The Company currently expects SG&A on an annualized basis to increase by
approximately 1.1% as a percent of net sales as a result of the implementation
of EITF 02-16. EITF 02-16 had no impact on the Company's cash flows. Following
the initial implementation impact, subsequent fiscal years will reflect vendor
allowances on a consistent basis other than for any net changes in vendor
allowances.
16
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
-------------------------------------------------------
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
twenty-six week period ended July 3, 2004, 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.
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, EITF 02-16 impact, and other future
financial condition, impact, results and performance, constitutes
forward-looking statements. All of 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 our Canadian operations,
availability of suitable future store locations, schedule of store expansion and
of planned closings, the impact of the bankruptcies and consolidations in our
industry, 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, timing and actual amount of vendor allowances and the actual impact
in fiscal 2004 of EITF 02-16, and our ability to successfully implement and
achieve the expected productivity from our strategic and other store
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
are contained in our reports filed with the Securities and Exchange Commission,
including our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q.
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.
17
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 and its
uncommitted credit facilities. Interest on all borrowings is based upon several
alternative rates as stipulated in the Credit Agreement, including a fixed
margin above LIBOR. As of July 3, 2004, the Company had no borrowings under the
Credit Agreement and $6.0 million in borrowings under the additional lines of
credit at a weighted average interest rate of 3.6% (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 22 stores in Canada as of July 3, 2004. 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 2003, 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.
The Company's Chief Executive Officer and Chief Financial Officer have also
concluded that there have been no changes in the Company's internal control over
financial reporting during the quarter ended July 3, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The shareholders of the company voted on two items at the Annual Meeting of
Shareholders held on May 6, 2004:
1. To elect two directors for a three-year term
2. To consider and act upon a proposal to approve the adoption of
the 2004 Stock Award and Incentive Plan
The nominees for directors were elected based upon the following votes:
Nominee Votes For Votes Withheld
--------------------------------------------------------------
Stanley P. Goldstein 42,124,839 859,467
Robert Kamerschen 41,748,850 1,235,456
The proposal to approve the 2004 Stock Award and Incentive Plan received the
following votes:
Votes for approval 26,459,583
Votes against 13,067,366
Abstentions 598,256
Broker non-votes 2,859,101
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 Norman Axelrod, Chairman and Chief Executive
Officer of the Company, pursuant to Securities Exchange Act Rule
13a-14(a).
31.2 Certification of William T. Giles, Executive Vice President and
Chief Financial Officer of the Company, pursuant to Securities
Exchange Act Rule 13a-14(a).
32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002, by
Norman Axelrod, Chairman and Chief Executive Officer of the
Company, and William T. Giles, Executive Vice President and
Chief Financial Officer of the Company.
(b) REPORTS ON FORM 8-K:
The Company furnished the following reports on Form 8-K during the
quarter for which this report on Form 10-Q is filed:
The Company furnished a Current Report on Form 8-K dated April 20, 2004
in reference to a press release dated April 20, 2004 reporting the
Company's sales and earnings results for the thirteen weeks ended April
3, 2004.
The Company furnished a Current Report on Form 8-K dated June 25, 2004
regarding a change in certifying accountant for the Company's 401(k)
Plan.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LINENS 'N THINGS, INC.
Dated: August 6, 2004 By: /s/ Norman Axelrod
------------------
Name: Norman Axelrod
Title: Chairman and Chief
Executive Officer
Dated: August 6, 2004 By: /s/ William T. Giles
--------------------
Name: William T. Giles
Title: Executive Vice President and
Chief Financial Officer
20