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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 October 2, 2004
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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
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(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 November 3, 2004: 45,177,493
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 Thirty-Nine Weeks Ended October 2, 2004 and October 4, 2003 3
Condensed Consolidated Balance Sheets as of October 2, 2004,
January 3, 2004 and October 4, 2003 4
Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended October 2, 2004 and October 4, 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 6. Exhibits 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 2, October 4, October 2, October 4,
2004 2003 2004 2003
------------- -------------- ---------------- ----------------
NET SALES $ 654,196 $ 602,816 $ 1,785,745 $ 1,606,959
Cost of sales, including buying and distribution costs 386,191 360,868 1,064,787 958,472
------------- -------------- ---------------- ----------------
GROSS PROFIT 268,005 241,948 720,958 648,487
Selling, general and administrative expenses 240,127 207,764 691,406 601,345
------------- -------------- ---------------- ----------------
OPERATING PROFIT 27,878 34,184 29,552 47,142
Interest income (138) (20) (306) (90)
Interest expense 136 256 508 690
------------- -------------- ---------------- ----------------
Interest (income) expense, net (2) 236 202 600
------------- -------------- ---------------- ----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 27,880 33,948 29,350 46,542
Provision for income taxes 10,650 12,968 11,211 17,780
------------- -------------- ---------------- ----------------
NET INCOME $ 17,230 $ 20,980 $ 18,139 $ 28,762
============= ============== ================ ================
BASIC EARNINGS PER SHARE $ 0.38 $ 0.47 $ 0.40 $ 0.65
============= ============== ================ ================
FULLY DILUTED EARNINGS PER SHARE $ 0.38 $ 0.47 $ 0.39 $ 0.64
============= ============== ================ ================
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 2, January 3, October 4,
2004 2004 2003
------------------- ------------------ -------------------
(Unaudited) (Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 54,460 $ 136,129 $ 22,731
Accounts receivable 26,494 29,531 24,725
Inventories 795,873 701,928 746,310
Prepaid expenses and other current assets 35,331 33,982 33,236
Current deferred taxes 472 1,295 --
------------------- ------------------ -------------------
Total current assets 912,630 902,865 827,002
Property and equipment, net of accumulated depreciation and
amortization of $280,441, $237,140 and $226,769 at
October 2, 2004, January 3, 2004 and October 4, 2003,
respectively 397,947 377,244 380,415
Goodwill, net 18,126 18,126 18,126
Deferred charges and other noncurrent assets, net 12,318 10,783 10,710
------------------- ------------------ -------------------
Total assets $ 1,341,021 $ 1,309,018 $ 1,236,253
=================== ================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 279,169 $ 250,142 $ 298,221
Accrued expenses and other current liabilities 138,033 174,002 130,053
Current deferred taxes 7,138 15,759 7,152
Short-term borrowings 560 -- 3,221
------------------- ------------------ -------------------
Total current liabilities 424,900 439,903 438,647
------------------- ------------------ -------------------
Deferred income taxes and other long-term liabilities 127,606 107,396 95,484
------------------- ------------------ -------------------
Total liabilities 552,506 547,299 534,131
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; 45,403,722 shares
issued and 45,169,173 shares outstanding at October 2,
2004; 45,052,255 shares issued and 44,818,916 shares
outstanding at January 3, 2004; and 44,458,107 shares
issued and 44,228,561 shares outstanding at October 4,
2003 454 450 444
Additional paid-in capital 370,749 362,483 349,321
Retained earnings 422,145 404,006 357,943
Accumulated other comprehensive income 1,817 1,391 927
Treasury stock, at cost; 234,549 shares at
October 2, 2004, 233,339 shares at January 3, 2004 and
229,546 shares at October 4, 2003 (6,650) (6,611) (6,513)
------------------- ------------------ -------------------
Total shareholders' equity 788,515 761,719 702,122
------------------- ------------------ -------------------
Total liabilities and shareholders' equity $ 1,341,021 $ 1,309,018 $ 1,236,253
=================== ================== ===================
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 2, October 4,
2004 2003
----------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,139 $ 28,762
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 45,589 40,421
Deferred income taxes 4,578 23,001
Loss on disposal of assets 1,357 772
Federal tax benefit from common stock issued under stock
incentive plans 1,297 418
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 3,090 (130)
Increase in inventories (92,760) (127,301)
Increase in prepaid expenses and other
current assets (1,384) (8,491)
Increase in deferred charges and other
noncurrent assets (2,118) (349)
Increase in accounts payable 28,549 79,758
Decrease in accrued expenses and other liabilities (28,775) (34,658)
----------------------- -------------------
Net cash (used in) provided by operating activities (22,438) 2,203
----------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (66,542) (70,306)
----------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued under stock incentive plans 6,974 2,651
Increase in short-term borrowings 532 1,070
(Purchase) issuance of treasury stock (39) 255
----------------------- -------------------
Net cash provided by financing activities 7,467 3,976
----------------------- -------------------
Effect of exchange rate changes on cash and cash
equivalents (156) 253
----------------------- -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (81,669) (63,874)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 136,129 86,605
----------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,460 $ 22,731
======================= ===================
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized) $ 561 $ 973
Income taxes $ 11,214 $ 11,036
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 October 2,
2004 and October 4, 2003 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 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 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 October 2, 2004
(in thousands, except EPS)
----------------------------------------------------------------------------------------------
Thirteen Week Period Thirty-Nine Week Period
------------------------------------------- ----------------------------------------------
Net Net
Income Shares EPS Income Shares EPS
------------ ------------ ----------- ------------ ------------ -----------
Basic $ 17,230 45,143 $ 0.38 $ 18,139 45,057 $ 0.40
Effect of outstanding stock
options and deferred stock
grants -- 459 -- -- 884 (0.01)
------------ ------------ ----------- ------------ ------------ -----------
Fully diluted $ 17,230 45,602 $ 0.38 $ 18,139 45,941 $ 0.39
============ ============ =========== ============ ============ ===========
Periods Ended October 4, 2003
(in thousands, except EPS)
----------------------------------------------------------------------------------------------
Thirteen Week Period Thirty-Nine Week Period
------------------------------------------- ----------------------------------------------
Net Net
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 -- -- 558 (0.01)
------------ ------------ ----------- ------------ ------------ -----------
Fully diluted $ 20,980 45,027 $ 0.47 $ 28,762 44,699 $ 0.64
============ ============ =========== ============ ============ ===========
6
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Options for which the exercise price was greater than the average market price
of common shares for the periods ended October 2, 2004 and October 4, 2003 were
not included in the computation of fully diluted earnings per share. These
consisted of options totaling approximately 2,640,000 shares and 1,486,000
shares for the thirteen weeks and approximately 1,088,000 shares and 1,486,000
shares for the thirty-nine weeks ended October 2, 2004 and October 4, 2003,
respectively.
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 2, 2004, the additional lines of credit include
committed facilities of approximately $16 million that expire on December 31,
2004 and $12 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 October 2, 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 October 2, 2004, the Company had no borrowings under the Credit
Agreement and approximately $0.6 million in borrowings under the additional
lines of credit at an interest rate of 4.75%. The Company also had $100.5
million of letters of credit outstanding as of October 2, 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 October 2, 2004,
January 3, 2004, and October 4, 2003, the Company owed approximately $67.4
million, $66.2 million, and $100.6 million, respectively, to GECC under this
program, which was included in accounts payable.
4. COMPREHENSIVE INCOME
Comprehensive income for the thirteen and thirty-nine weeks ended October 2,
2004 and October 4, 2003 is as follows (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------------- -----------------------------------
October 2, October 4, October 2, October 4,
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
COMPREHENSIVE INCOME:
Net income $ 17,230 $ 20,980 $ 18,139 $ 28,762
Other comprehensive income - foreign currency
translation adjustment 728 8 426 1,313
---------------- ---------------- ---------------- ----------------
Comprehensive income $ 17,958 $ 20,988 $ 18,565 $ 30,075
================ ================ ================ ================
7
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
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 $3.8 million was recorded in cost of
sales for estimated inventory markdowns below cost for the stores to be closed.
Certain components of the restructuring charge were based on estimates and may
be subject to change in the future. The Company has closed all of the initially
identified stores other than one store, which the Company decided to keep open
and whose reserve was reversed, and one other store which is expected to be
closed by early fiscal 2005.
The following table displays a roll forward of the activity and significant
components of the 2001 restructuring and asset impairment charge and the
reserves remaining as of October 2, 2004 ($ in millions):
Remaining at Usage Remaining at
1/03/04 2004 10/02/04
----------------------- --------------------- -----------------------
(Audited) (Unaudited) (Unaudited)
Cash components:
Lease commitments $ 15.6 $ (6.2) $ 9.4
----------------------- --------------------- -----------------------
Total $ 15.6 $ (6.2) $ 9.4
======================= ===================== =======================
The 2004 usage primarily consists of payments for lease commitments. The 2004
activity also includes the reversal of estimated lease commitment costs of
approximately $1.4 million as these reserves were not needed, offset by an
increase to lease commitment costs by approximately $1.6 million 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 $0.1
million and $0.2 million for the thirteen weeks ended October 2, 2004 and
October 4, 2003, respectively, and $0.4 million and $0.7 million for the
thirty-nine weeks ended October 2, 2004 and October 4, 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 thirty-nine
weeks ended October 2, 2004 and October 4, 2003:
8
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Thirteen Week Period Ending Thirty-Nine Week Period Ending
------------------------------ ----------------------------------
October 2, October 4, October 2, October 4,
(in thousands, except per share data) 2004 2003 2004 2003
- ---------------------------------------------------- ------------------------------ ----------------------------------
NET INCOME:
As reported $ 17,230 $ 20,980 $ 18,139 $ 28,762
Deduct: Total stock-based employee
compensation expense determined under the
fair-value-based method for all awards, net
of related tax effects (1,566) (1,740) (5,144) (5,326)
------------------------------ ----------------------------------
Pro forma $ 15,664 $ 19,240 $ 12,995 $ 23,436
============================== ==================================
NET INCOME PER SHARE OF COMMON STOCK:
Basic:
As reported $ 0.38 $ 0.47 $ 0.40 $ 0.65
Pro forma $ 0.35 $ 0.44 $ 0.29 $ 0.53
Fully diluted:
As reported $ 0.38 $ 0.47 $ 0.39 $ 0.64
Pro forma $ 0.34 $ 0.43 $ 0.28 $ 0.52
- ---------------------------------------------------- ------------------------------ ----------------------------------
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 October 2, 2004, the maximum potential amount of future
payments the Company could be required to make under such guarantee is
approximately $0.9 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 was 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.
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-based 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 2, 2004 and October 4,
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 October 2, 2004 and October 4, 2003, 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 2, 2004 and October 4,
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
November 4, 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 October 2, 2004, the Company operated 479 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 59% of total assets at
October 2, 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 October 2, 2004, January 3, 2004 and October 4, 2003, the Company's sales
returns reserve was approximately $6.0 million, $6.2 million and $5.2 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 October 2, 2004,
January 3, 2004 and October 4, 2003, the Company's net value for property and
equipment was approximately $397.9 million, $377.2 million and $380.4 million,
respectively, and goodwill was approximately $18.1 million on each of these
dates.
11
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
October 2, 2004, January 3, 2004 and October 4, 2003, the Company had $9.4
million, $15.6 million and $17.3 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 be closed by early fiscal
2005. The Company has continued to negotiate and/or explore lease buyouts or
sublease agreements for these stores. The activity in the thirty-nine week
period ended October 2, 2004 includes the reversal of estimated lease commitment
costs of approximately $1.4 million as these reserves were not needed, offset by
an increase to lease commitment costs by approximately $1.6 million 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 $14.8 million as of October 2, 2004,
$13.5 million as of January 3, 2004 and $13.5 million as of October 4, 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 OCTOBER 2, 2004 COMPARED WITH THIRTEEN WEEKS ENDED OCTOBER
4, 2003
Results of operations for the thirteen weeks and thirty-nine weeks ended October
2, 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 was 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 thirty-nine weeks ended October 2, 2004 as follows (the
"As Reported" amounts include the impact of EITF 02-16):
Thirteen Weeks Thirty-Nine Weeks
---------------------------------- ----------------------------------
In thousands, except per share data EITF 02-16 EITF 02-16
As Adjustment As Adjustment
Reported Impact Reported Impact
- ------------------------------------------ ---------------------------------- ----------------------------------
Net sales $ 654,196 $ -- $ 1,785,745 $ --
Cost of sales 386,191 7,634 1,064,787 4,082
---------------------------------- ----------------------------------
Gross profit (loss) 268,005 (7,634) 720,958 (4,082)
SG&A 240,127 (11,430) 691,406 (22,393)
---------------------------------- ----------------------------------
Operating profit 27,878 3,796 29,552 18,311
Interest (income) expense, net (2) -- 202 --
---------------------------------- ----------------------------------
Income before provision for income taxes 27,880 3,796 29,350 18,311
Provision for income taxes 10,650 1,450 11,211 6,995
---------------------------------- ----------------------------------
Net income $ 17,230 $ 2,346 $ 18,139 $ 11,316
================================== ==================================
Earnings per share
Basic $ 0.38 $ 0.05 $ 0.40 $ 0.25
Fully diluted $ 0.38 $ 0.05 $ 0.39 $ 0.25
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 such vendor allowances.
The EITF 02-16 pre-tax adjustments of $3.8 million and $18.3 million for the
thirteen weeks and thirty-nine weeks ended October 2, 2004, respectively,
represent 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.
Net sales for the thirteen weeks ended October 2, 2004 increased approximately
8.5% to $654.2 million, up from $602.8 million for the same period last year.
The increase in net sales is primarily the result of new store openings since
October 4, 2003. At October 2, 2004, the Company operated 479 stores, including
22 stores in Canada, as compared with 435 stores, including 17 stores in Canada,
at October 4, 2003. Store square footage increased approximately 9.0% to 16.3
million at October 2, 2004 compared with 14.9 million at October 4, 2003. During
the thirteen weeks ended October 2, 2004, the Company opened 8 stores and closed
two stores as compared with opening 21 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 declined 0.5% for the thirteen weeks ended October 2, 2004
compared to an increase of 1.8% for the same period last year. Although the
third quarter began well, overall sales performance became softer as the quarter
progressed, primarily attributable to a decline in guest traffic. For the
quarter, average transaction size increased slightly compared to the prior year.
The Company estimates that the hurricanes that affected our stores in the
Southeast also negatively impacted comparable net sales performance by
approximately 0.5%.
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
2, 2004 was $268.0 million, or 41.0% of net sales, compared with $241.9 million,
or 40.1% of net sales, for the same period last year. The EITF 02-16 adjustment
impact was to increase gross profit by $7.6 million, or 1.2% of net sales, for
the thirteen weeks ended October 2, 2004, accounting for most of the increase in
gross profit as a percentage of net sales compared to the prior year. The
increase in gross profit from the EITF 02-16 impact was offset by primarily
higher markdowns, most of which occurred during the September clearance event.
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 2, 2004 were
$240.1 million, or 36.7% of net sales, compared with $207.8 million, or 34.5% of
net sales, for the same period last year. The EITF 02-16 adjustment impact was
$11.4 million, or 1.7% of net sales, for the thirteen weeks ended October 2,
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 higher occupancy cost as
a percentage of net sales. SG&A for the thirteen weeks ended October 4, 2003
also included advertising credits equaling 1.7% 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 October 2, 2004 was $27.9 million,
or 4.3% of net sales, compared with $34.2 million, or 5.7% of net sales, for the
same period last year. The EITF 02-16 adjustment impact was $3.8 million, or
0.6% of net sales, for the thirteen weeks ended October 2, 2004.
Net interest income for the thirteen weeks ended October 2, 2004 was
approximately $2,000 compared to $0.2 million of net interest expense during the
same period last year. The decrease in net interest expense is mainly due to
lower average borrowings as compared to the same period last year.
The Company's income tax expense was $10.7 million for the thirteen weeks ended
October 2, 2004, compared with $13.0 million for the same period last year. The
EITF 02-16 adjustment impact was $1.5 million for the thirteen weeks ended
October 2, 2004. The Company's effective tax rate was 38.2% for both the
thirteen weeks ended October 2, 2004 and October 4, 2003.
As a result of the factors described above, net income for the thirteen weeks
ended October 2, 2004 was $17.2 million, or $0.38 per share on a fully diluted
basis, compared with $21.0 million, or $0.47 per share on a fully diluted basis
for the same period last year. The EITF 02-16 adjustment impact to net income
was $2.3 million, or $0.05 per share on a fully diluted basis, for the thirteen
weeks ended October 2, 2004.
THIRTY-NINE WEEKS ENDED OCTOBER 2, 2004 COMPARED WITH THIRTY-NINE WEEKS ENDED
OCTOBER 4, 2003
Net sales increased 11.1% to $1,785.7 million for the thirty-nine weeks ended
October 2, 2004, up from $1,607.0 million for the same period last year,
primarily as a result of new store openings since October 4, 2003. During the
thirty-nine weeks ended October 2, 2004, the Company opened 41 stores and closed
two stores compared with opening 53 stores and closing nine stores during the
same period last year.
Comparable net sales for the thirty-nine weeks ended October 2, 2004 increased
1.3% as compared with a decline of 0.3% for the same period last year. The
increase in comparable net sales for the thirty-nine weeks ended October 2, 2004
is primarily due to an increase in guest traffic, primarily during the first
quarter of 2004, and a slight increase in average transaction size.
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 thirty-nine weeks ended October 2, 2004 was $721.0 million,
or 40.4% of net sales, compared with $648.5 million, or 40.4% of net sales, for
the same period last year. The EITF 02-16 adjustment impact was to increase
gross profit by $4.1 million, or 0.3% of net sales, for the thirty-nine weeks
ended October 2, 2004. The increase in gross profit from the EITF 02-16 impact
was offset by a gross profit decline as a result of higher freight costs due, in
part, to rising fuel prices.
SG&A expenses for the thirty-nine weeks ended October 2, 2004 were $691.4
million, or 38.7% of net sales, compared with $601.3 million, or 37.4% of net
sales, for the same period last year. The EITF 02-16 adjustment impact was $22.4
million, or 1.3% of net sales, for the thirty-nine weeks ended October 2, 2004.
The increase in SG&A as a percentage of net sales is primarily attributable to
the impact of the EITF 02-16 adjustment. SG&A for the thirty-nine weeks ended
October 4, 2003 also included advertising credits equaling 1.3% 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 thirty-nine weeks ended October 2, 2004 was $29.6
million, or 1.7% of net sales, compared with $47.1 million, or 2.9% of net
sales, for the same period last year. The EITF 02-16 adjustment impact was $18.3
million, or 1.0% of net sales, for the thirty-nine weeks ended October 2, 2004.
The Company incurred net interest expense of $0.2 million for the thirty-nine
weeks ended October 2, 2004, compared with $0.6 million for the same period last
year. The decrease in net interest expense is mainly due to lower average
borrowings as compared to the same period last year.
The Company's income tax expense for the thirty-nine weeks ended October 2, 2004
was $11.2 million compared with $17.8 million for the same period last year. The
EITF 02-16 adjustment impact was $7.0 million for the thirty-nine weeks ended
October 2, 2004. The Company's effective tax rate was 38.2% for both the
thirty-nine weeks ended October 2, 2004 and October 4, 2003.
As a result of the factors described above, net income for the thirty-nine weeks
ended October 2, 2004 was $18.1 million, or $0.39 per share on a fully diluted
basis, compared with $28.8 million, or $0.64 per share on a fully diluted basis
for the same period last year. The EITF 02-16 adjustment impact to net income
was $11.3 million, or $0.25 per share on a fully diluted basis, for the
thirty-nine weeks ended October 2, 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 October 2, 2004, the additional lines of credit include
committed facilities of approximately $16 million that expire on December 31,
2004 and $12 million that expire on June 15, 2005 and are subject to periodic
renewal arrangements. As of October 2, 2004, the Company was in compliance with
its covenants under the Credit Agreement. As of October 2, 2004, the Company had
no borrowings under the Credit Agreement and approximately $0.6 million in
borrowings under the additional lines of credit at an interest rate of 4.75%. In
accordance with the seasonal nature of the Company's business, the Company may
from time to time borrow under its Credit Agreement and additional lines of
credit, including during the fourth quarter. These borrowings are not currently
expected to exceed $40 million in the aggregate for the fourth quarter, and are
intended to be used as working capital and similar general corporate needs in
the fourth quarter. The Company also had $100.5 million of letters of credit
outstanding as of October 2, 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 October 2, 2004, January 3, 2004, and October
4, 2003, the Company owed approximately $67.4 million, $66.2 million, and $100.6
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 thirty-nine weeks ended October 2,
2004 was $22.4 million compared with $2.2 million provided by 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 thirty-nine weeks ended October 2,
2004 was $66.5 million, compared with $70.3 million for the same period last
year. The Company currently estimates capital expenditures will be approximately
$85 million in fiscal 2004, primarily for an estimated 53 new stores for the
year, maintenance of existing stores, and system enhancements.
Net cash provided by financing activities for the thirty-nine weeks ended
October 2, 2004 was $7.5 million compared with $4.0 million for the same period
last year. The increase is due to 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 store expansion plans are 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 existing and increased 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.
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 condition,
impact, results and 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, the results
and success of our holiday selling season, acceptance of product offerings and
fashions and our ability to anticipate and successfully respond to changing
consumer tastes and preferences, our ability to anticipate and control our
operating and selling expenses, 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, 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, the actual impact in fiscal 2004 of EITF 02-16 as
discussed herein, any inability to timely satisfy, or any problems or issues
arising in connection with, management's required Section 404 internal controls
systems testing and evaluation or management's report thereon or our outside
auditor's required testing or report on the adequacy of our internal controls,
and our ability to successfully implement our strategic initiatives.
16
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
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 substantial 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, even if such results or changes make
it clear that any projected results will not be realized.
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 October 2, 2004, the Company had no borrowings under
the Credit Agreement and approximately $0.6 million in borrowings under the
additional lines of credit at an interest rate of 4.75% (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 October 2, 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 October 2, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
We have been in the process of evaluating our internal controls systems in order
to allow management to report on, and our registered independent public
accounting firm to report on, our internal controls, as required by Section 404
of the Sarbanes-Oxley Act. We are continuing to perform the system and process
evaluation and testing required by Section 404, as well as evaluating and
undertaking various remediation actions for deficiencies identified to date, in
an effort to comply with the management certification and auditor attestation
requirements of Section 404. This is a new evaluation, testing and report
process for both the Company and our registered independent public accounting
firm. We cannot be certain as to the results of or the timing of completion of
the evaluation, testing and remediation actions or the impact of the same on the
required report on our internal controls by us or the required report thereon by
our registered independent public accounting firm to be provided in connection
with our financial statements for the 2004 fiscal year.
18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
(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, Signed 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.
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: November 12, 2004 BY: /s/ Norman Axelrod
------------------
NAME: Norman Axelrod
TITLE: Chairman and Chief
Executive Officer
DATED: November 12, 2004 BY: /s/ William T. Giles
--------------------
NAME: William T. Giles
TITLE: Executive Vice President and
Chief Financial Officer
20