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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 1, 2005
(NO FEE REQUIRED)
COMMISSION FILE NUMBER 1-12381
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LINENS 'N THINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3463939
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6 BRIGHTON ROAD
CLIFTON, NEW JERSEY 07015
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 778-1300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
by Rule 12b-2 of the Securities Exchange Act).
YES X NO
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The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 3, 2004, based on the closing sale price on the New York
Stock Exchange on such date, was approximately $1,299 million. The number of
outstanding shares of the Registrant's common stock, $0.01 par value, as of
March 29, 2005 was 45,243,675.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2005 Annual Meeting of
Shareholders are incorporated by reference into Part III.
TABLE OF CONTENTS
FORM 10-K
ITEM NO. NAME OF ITEM PAGE
- ------- ------------ ----
PART I
Item 1. Business........................................................ 4
Item 2. Properties...................................................... 10
Item 3. Legal Proceedings............................................... 12
Item 4. Submission of Matters to a Vote of
Security Holders............................................ 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities........... 13
Item 6. Selected Financial Data......................................... 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 15
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk........................................... 26
Item 8. Financial Statements and Supplementary
Data........................................................ 26
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.................................................. 50
Item 9A. Controls and Procedures......................................... 50
Item 9B. Other Information............................................... 54
PART III
Item 10. Directors and Executive Officers of
the Registrant.............................................. 55
Item 11. Executive Compensation.......................................... 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters....... 55
Item 13. Certain Relationships and Related
Transactions................................................ 57
Item 14. Principal Accountant Fees and Services.......................... 57
PART IV
Item 15. Exhibits and Financial Statement Schedules...................... 58
3
PART I
ITEM 1. BUSINESS
GENERAL
Linens 'n Things, Inc., a Delaware corporation, and its subsidiaries
("Linens 'n Things" or the "Company") is one of the leading, national large
format retailers of home textiles, housewares and home accessories operating 492
stores in 45 states and five provinces in Canada as of fiscal year end 2004. The
Company was a wholly owned subsidiary of CVS Corporation, formerly Melville
Corporation, until 1996.
The Company's business strategy is to offer a broad selection of high
quality brand-name as well as private label home furnishings merchandise at
everyday values, to provide knowledgeable sales assistance and attentive guest
service and to maintain low operating costs. The Company's target customer, or
guest, is a woman between the ages of 25 and 55 who is fashion and brand
conscious, has good-to-better income, and focuses on the home as a reflection of
her individuality - the home enthusiast.
The Company is committed to providing its guests with a one-stop
shopping destination for their home furnishing needs by offering a broad and
deep selection of high quality, brand name "linens" (E.G., bedding, towels,
window treatments and table linens) and "things" (E.G., housewares, home and
decorative accessories) merchandise with an everyday low pricing strategy. The
Company's extensive merchandise offering of over 25,000 SKUs in an average store
enables its guests to select from a wide assortment of styles, brands, colors
and designs within each of the Company's major product lines. Nationally trusted
brand names the Company offers include All-Clad, Braun, Calphalon, Conair,
Croscill, Cuisinart, Henckels, Krups, KitchenAid, Nautica, OXO, Wamsutta and
Yankee Candle. The Company also carries a number of exclusive products,
including several high-fashion home textile patterns from Waverly. In addition,
the Company sells merchandise under its own private label, LNT Home, which is
designed to compliment the Company's roster of brand name products by offering
its guests quality merchandise at value prices.
The Company's store format features an efficient racetrack layout that
offers a broad merchandise selection in a visually appealing, guest-friendly
format. The Company operates various store size formats, generally ranging from
22,000 to 50,000 gross square feet, which allows the Company to match the size
of its stores with the market potential of each location. The Company's stores
are located predominately in power strip centers adjacent to complementary
broad-based retail chains. The Company opened 54 new stores and closed two
stores in fiscal 2004, increasing its square footage to approximately 16.7
million.
As part of its business strategy, the Company instituted centralized
management and operating programs and continues to invest in its distribution
and management information systems infrastructure in order to control operating
expenses as the Company grows.
EXECUTIVES OFFICERS
The following table sets forth information regarding the current
executive officers of the Company:
NAME AGE POSITION
---- --- --------
Norman Axelrod.......... 52 Chairman and Chief Executive Officer
Jack E. Moore, Jr....... 50 President and Chief Operating Officer
William T. Giles........ 45 Executive Vice President, Chief Financial Officer
Brian D. Silva.......... 48 Senior Vice President, Human Resources,
Administration and Corporate Secretary
F. David Coder.......... 46 Senior Vice President, Store Operations
Mr. Axelrod has been Chief Executive Officer of the Company since 1988
and was elected to the additional position of Chairman of the Board of Directors
of the Company effective as of January 1997. Prior to joining Linens 'n Things,
Mr. Axelrod held various management positions at Bloomingdale's from 1976 to
1988 including: Buyer, Divisional Merchandise Manager, Vice
President/Merchandise Manager and Senior Vice President/General Merchandise
Manager.
Mr. Moore joined Linens 'n Things in 2004 as President and Chief
Operating Officer. Prior to joining Linens 'n Things, Mr. Moore held various
management positions at Kohl's Corporation from 1997 to 2004 including: Vice
President/Divisional Merchandise Manager, Senior Vice President of Merchandise
Planning and Allocation and Executive Vice President/General
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Merchandise Manager. Prior to his seven years at Kohl's Mr. Moore spent 20 years
at Dayton-Hudson Department Stores where he held significant merchandising and
store management positions.
Mr. Giles joined Linens 'n Things in 1991 as Assistant Controller. He
was promoted to Vice President, Finance and Controller in 1994; was promoted to
Vice President, Chief Financial Officer in 1997; was promoted to Senior Vice
President, Chief Financial Officer in 2000 and was promoted to Executive Vice
President, Chief Financial Officer in 2003. From 1990 to 1991, Mr. Giles held
the position of Director of Financial Reporting with Melville Corporation. From
1981 to 1990, Mr. Giles was with PriceWaterhouse LLP. Mr. Giles is a certified
public accountant and member of the American Institute of Certified Public
Accountants.
Mr. Silva joined Linens 'n Things in 1995 as Vice President, Human
Resources, was promoted to Senior Vice President, Human Resources and Corporate
Secretary in 1997 and assumed the role of Senior Vice President, Human Resources
and Administration and Corporate Secretary in 2002. Prior to joining Linens `n
Things, Mr. Silva was Assistant Vice President, Human Resources at The Guardian,
an insurance and financial services company, from 1986 to 1995.
Mr. Coder joined Linens 'n Things in 1989 as Regional Manager -
Mid-Atlantic region. He was promoted to Vice President in 1994, was promoted to
Vice President of Stores - Eastern Zone in 1995, and was promoted to Senior Vice
President - Store Operations in 2001. Prior to joining Linens 'n Things, Mr.
Coder held various store management positions including Market Manager at
Branden's, a Division of Dayton-Hudson, and Regional Merchandise Manager at
Montgomery Wards.
BUSINESS STRATEGY
The Company's business strategy is to offer a broad selection of high
quality brand-name as well as private label home furnishings merchandise at
everyday values, to provide knowledgeable sales assistance and attentive guest
service and to maintain low operating costs. Key elements of the Company's
business strategy are:
OFFER A BROAD AND DEEP SELECTION OF QUALITY HOME FURNISHINGS AT EVERYDAY
VALUES. Linens 'n Things' merchandising strategy is to offer a breadth of
selection in high quality, brand name fashion home textiles, housewares and home
accessories at everyday values. The Company's store format enables it to offer
broader product and brand selection than traditional retailers that sell home
furnishings. The Company offers virtually all of the national home furnishings
brand names carried by major department stores, as well as many other products
and brands. Some national brands offered by the Company are not available at
mass merchandisers or off-price retailers. The Company believes that these
strategies enhance its reputation as a value leader and build guest loyalty,
while providing a one-stop shopping destination for the guests' home furnishing
needs.
Merchandise and sample brands offered in each major department are
highlighted below:
DEPARTMENT ITEMS SOLD SAMPLE BRANDS
---------- ---------- -------------
Bath Towels, shower curtains, waste baskets, Nautica, Wamsutta
hampers, bathroom rugs and wall hardware and Croscill
Home Accessories Decorative pillows, napkins, tablecloths, Colonial Candle, Waverly and
placemats, lamps, gifts, picture frames, Yankee Candle
candles and framed art
Housewares Cookware, cutlery, kitchen gadgets, small All-Clad, Black & Decker,
electric appliances (such as blenders and Braun, Calphalon, Circulon,
coffee makers), dinnerware, flatware Cuisinart, Farberware,
and glassware Henckels, KitchenAid, Krups
and OXO
Storage and Cleaning Closet-related items (such as hangers, Dyson, Euro-Pro, Hoover,
organizers and shoe racks), cleaning and Rowenta and Rubbermaid
laundry care products
Top of the Bed Sheets, comforters, comforter covers, Croscill, Liz Claiborne, Nautica,
bedspreads, bed pillows, blankets and Wamsutta and Waverly
mattress pads
Window Treatment Curtains, valances and window hardware Croscill, Nautica, Wamsutta and Waverly
5
PROVIDE SUPERIOR GUEST SERVICE AND SHOPPING CONVENIENCE. The Company's
mission is to exceed the guests' expectations in every store, every day. To
enhance guest satisfaction and loyalty, Linens 'n Things strives to provide
knowledgeable sales assistance and attentive guest service. Linens 'n Things
offers competitive wages and on-going training and personnel development in
order to attract and retain qualified, motivated associates committed to
providing superior guest service.
The Company's stores feature a racetrack layout, enabling the guest to
visualize and purchase fully coordinated and accessorized ensembles. The
Company's store format is designed to save the guest time by having merchandise
visible and accessible on the selling floor.
The Company offers amenities that encourage guest loyalty, including its
private label credit card, which gives cardholders advance notice of promotions,
exclusive discounts, and the benefit of a purchase-based rewards program. The
Company delivers shop-at-home convenience through its toll-free number and its
WWW.LNT.COM e-commerce site. In fiscal 2004, the Company enhanced WWW.LNT.COM by
expanding its product selection and adding new capabilities, including the
ability for a guest to make an on-line purchase and pick up her merchandise at a
store location of her choice.
MAINTAIN LOW OPERATING COSTS. A cornerstone of the Company's business
strategy is its commitment to maintain low operating costs. In addition to
savings realized through sales volume efficiencies, operational efficiencies are
expected to be achieved through the use of integrated management information
systems and the utilization of the Company's distribution centers.
STRATEGY
The Company's strategy is to continue to expand its store base, while
enhancing operating performance.
STORE BASE. The Company currently plans to seek to increase market share
in existing geographic markets and to penetrate new geographic markets where the
Company believes it can become a leading operator of specialty home furnishing
stores. From the end of 1999 to the end of 2004, the Company increased its gross
square footage to 16.7 million square feet by growing its store base from 230 to
492 stores. During 2005, the Company expects to open approximately 50 new
stores. For fiscal 2005, the Company expects to slow down its square footage
growth to approximately 7% to 9% versus growth in prior years of approximately
11% as the Company continues to refine its store design in order to enhance the
guest shopping experience and improve the stores' productivity. The Company
selects markets for new stores based on demographic factors such as income
levels, population and number of households. The Company generally seeks to
operate stores in geographic trading areas with at least 150,000 people within a
5-10 mile radius and with demographic characteristics that match its target
profile. Because of its flexible store size format, the Company is also able to
enter into and operate in smaller markets where specialty home furnishing
retailers are often under-represented.
COMPARABLE NET SALES. The Company continues to seek to favorably impact
comparable net sales by attracting more first-time guests to its stores, and by
increasing the frequency of visits per guest and the dollar amount of each guest
transaction. The Company believes that the best method to accomplish these goals
is to improve upon and emphasize its reputation as a superior one-stop shopping
destination for home furnishings. The Company continually introduces new and
expanded merchandise categories to create a varied product portfolio that it
believes will attract new guests and increase guest visits. Additionally, the
Company re-allocated space on the selling floors of its stores to accommodate
new and expanded categories such as furniture, area rugs, home environment and
comfort/sleep. At the same time, the Company expanded its private label LNT Home
product line, increasing its offering of existing items.
OPERATING MARGIN AND EFFICIENCY. The Company believes there are
opportunities to improve gross margin by continuing to use its purchasing power,
increasing the penetration of its proprietary merchandise and using its
centralized distribution network and management information systems. The Company
anticipates that these improvements to gross margin will be partially offset by
initiatives to increase comparable net sales. The Company's investments in its
centralized distribution and in-store technology have resulted in more efficient
inventory procedures at the store level, enabling its sales associates to better
service its guests.
INCREASE PRODUCTIVITY OF EXISTING STORE BASE. The Company believes the
following initiatives impact its net sales per square foot and inventory
turnover ratios:
MERCHANDISE MIX AND PRESENTATION. The Company has developed a number of
strategic initiatives to stimulate growth of textiles, including offering new
products, improving quality assortments and increasing the strength of value
offerings.
In addition, the Company intends to continue improving its merchandising
presentation techniques, space management, assortment planning and store layout
in order to seek to further improve the productivity of its existing and future
store locations. The Company periodically restyles its stores to incorporate new
offerings and realigns its store space with its
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growth segments. The Company expects that the addition of in-store guest
services, such as functionality improvements in bridal and gift registry, and
web access, will position it further to improve its store productivity.
OPERATING EFFICIENCIES. The Company believes that its distribution
centers and its management information systems will allow it to endeavor to
maintain low operating costs as it pursues its growth and productivity
strategies. The warehouse portion of the distribution centers provides the
Company flexibility to manage safety stock and inventory flow. The Company's
ability to effectively manage its inventory is also positively impacted by a
centralized merchandising management team and its sophisticated management
information systems, which allow the Company to monitor and balance inventory
levels.
STORE OWNERSHIP INITIATIVE. With the Company's focus on improving its
inventory management capabilities over the long term, the Company expanded its
store inventory ownership program to approximately three-fourths of its stores
during fiscal 2004. This program gives specially trained store managers
discretion over their core assortment. The Company remains committed to this
program and has instituted a more efficient structure coupled with increased
training in an effort to enhance the store managements' ability to improve sales
productivity for the stores on this program.
INDUSTRY
The market for home furnishings is highly fragmented and
under-penetrated by the fast-growing specialty retail segment of which the
Company is a part. The Company believes that this affords it the opportunity to
grow market share by further penetrating those geographic markets in which the
Company currently operates and by expanding into additional geographic markets
where it has little or no presence. The Company competes with many different
types of retailers that sell many or most of the items sold by the Company,
including department stores, mass merchandisers, specialty retail stores and
other retailers. Linens 'n Things generally classifies its competition as
follows:
DEPARTMENT STORES: This category includes national and regional
department stores such as J.C. Penney Company Inc., Sears, Roebuck and Co. and
the department store chains operated by Federated Department Stores, Inc. These
retailers offer name brand merchandise as well as their own private label
furnishings. Department stores also offer certain designer merchandise, such as
Ralph Lauren, which is not generally distributed through the specialty and mass
merchandise distribution channels. In general, the department stores offer a
more limited selection of merchandise than the Company. The prices offered by
department stores during off-sale periods generally are significantly higher
than those of the Company and during on-sale periods are comparable to or
slightly higher than those of the Company.
MASS MERCHANDISERS: This category includes companies such as Wal-Mart
Stores, Inc. and Target Corporation. Fashion home furnishings generally
represent only a small portion of the total merchandise sales in these stores;
however, this channel of distribution consumes the largest portion of home
furnishings sales. The Company's competitive advantage is that these stores
generally offer a more limited merchandise selection with fewer high quality
name brands and lower quality merchandise at lower price points. In addition,
these mass merchandisers typically have more limited customer service staffing
than the Company.
SPECIALTY STORES/RETAILERS: This category includes large format home
furnishings retailers including Bed Bath & Beyond, Inc.; Home Goods, a division
of TJX Companies, Inc. and smaller format retailers such as Crate & Barrel and
Williams-Sonoma, Inc. The Company estimates that the large format stores range
in size from approximately 25,000 to 70,000 gross square feet and offer a home
furnishing merchandise selection of approximately 15,000 to 40,000 SKUs. These
retailers attempt to develop loyal customers and increase customer traffic by
providing a single outlet to satisfy the customer's household needs. The smaller
format retailers offer a narrower assortment within a specific niche and
generally range in size from 2,000 to 20,000 gross square feet.
OTHER RETAILERS: This category includes mail order retailers, such as
Domestications, off-price retailers, such as Kohl's Corporation, the T.J. Maxx
and Marshall's divisions of the TJX Companies, Inc. and smaller local retail
stores. Both mail order retailers and smaller local retailers generally offer a
more limited selection of merchandise. Off-price retailers typically offer
closeout or out of season name brand merchandise at competitive prices.
PRODUCTS AND MERCHANDISING
The Company offers quality home textiles, housewares and home
accessories at everyday values. The Company's extensive merchandise offering of
over 25,000 SKUs in an average store enables its guests to select from a wide
assortment of styles, brands, colors and designs within each of the Company's
major product lines. The Company is committed to maintaining a consistent
in-stock inventory position, and ensuring that its stores carry a broad and deep
merchandise selection. This presentation of merchandise enhances the guest's
impression of a dominant selection of merchandise in an easy-to-shop
environment. The Company believes that the uniform application of its everyday
low price policy is essential to maintaining
7
the integrity of its pricing strategy. This is an important factor in
establishing its reputation as a value leader and in helping to build guest
loyalty. The Company will also continue to implement its assortment planning and
space management initiatives to maximize productivity. By increasing the use of
analytics in its merchandise assortment planning process, the Company will be in
a stronger position to make more informative, trend-based purchasing decisions
well in advance of consumer demand and is more able to streamline its
merchandise selection, reduce product duplication and develop a more balanced
overall assortment. The Company also re-allocated space in its stores to
merchandise categories that better reflect consumer demand. This effort allows
the Company the opportunity to maximize productivity by expanding high-growth
categories such as rugs, furniture, specialty foam and home environment.
Furthermore, the Company continues to implement its regional merchandising
initiatives, thereby positioning its stores to better reflect local geographic
tastes and needs. As a result, the Company's stores now carry a deeper, more
balanced selection of merchandise that more closely corresponds with the
preferences of its guests. For fiscal 2005, the Company will focus on adding
more newness in its assortment by offering greater trend-right merchandise and
building brands both within a category and across categories. In addition, the
Company will also focus on improving the in-store experience with enhanced
merchandise presentation and clearer signage.
CUSTOMER SERVICE
Linens 'n Things treats every customer as a guest. The Company's
philosophy is to enhance the guest's entire shopping experience so that the
Company will become the store of first choice for our guests' home furnishing
needs. To facilitate the ease of shopping, the assisted self-service culture is
complemented by trained department specialists, zoned floor coverage, product
information displays and videos, self-demonstrations and in-store product
seminars. The entire store team is trained to be highly visible in order to
assist guests with their selections. The use of cutting-edge technologies
reduces the need for our associates to manage "back office" activities so that
the majority of their time can be focused on greeting and assisting guests and
delivering attentive service. Other sophisticated management systems that
provide efficient guest service and fair return policies are geared toward
making each guest's visit a convenient, efficient and pleasant experience.
MARKETING AND ADVERTISING
The Company's advertising programs communicate, build and strengthen the
Linens 'n Things brand and image. Because of the Company's commitment to
everyday values, advertising vehicles are aggressively used to highlight value,
breadth and depth of selection. The Company focuses its advertising programs
during key selling seasons such as spring/summer, back-to-school and holidays.
To reach its guests, the Company primarily uses full color preprints to
best represent the full range of offerings in the stores. These are supplemented
by other on-going direct marketing initiatives targeted to our guests. In
addition, the Company utilizes its proprietary marketing database to track the
buying habits of its guests.
PURCHASING AND SUPPLIERS
The Company purchases its merchandise from approximately 1,200
suppliers. In fiscal 2004, the Company purchased a significant number of
products from key suppliers, none of which represented 10% of the Company's
purchase volume. The Company believes that this buying power and its ability to
make centralized purchases generally allow it to acquire products at favorable
terms.
COMPANY OPERATIONS
DISTRIBUTION. The Company currently operates distribution centers in
Greensboro, North Carolina; Swedesboro, New Jersey and Shepherdsville, Kentucky.
The Company also uses third-party logistics companies to supplement its
distribution centers. The Company believes that the utilization of the
centralized distribution centers has resulted in lower average freight expense,
more timely control of inventory shipments to stores, and improved information
flow. The Company believes strong distribution support for its stores is a
critical element in its growth strategy and is central to its ability to
maintain a low cost operating structure.
The Company manages the distribution process centrally from its
corporate headquarters. Purchase orders issued by Linens 'n Things are
electronically transmitted to nearly all of its suppliers. The Company plans to
continue its efforts to ship as much merchandise through the distribution
centers as possible to ensure all benefits of the Company's logistics strategy
are fully taken advantage of. Continued growth will also facilitate new uses of
electronic data interchange technologies between Linens 'n Things and its
suppliers to exploit the most productive and beneficial use of its assets and
resources. In order to realize greater efficiency, the Company also uses
third-party freight carriers to ship its merchandise from the distribution
centers to its stores.
MANAGEMENT INFORMATION SYSTEMS. The Company continually evaluates and
upgrades its management information systems to enhance the quantity, quality and
timeliness of information available to management. The Company believes its
management information systems have fully integrated the Company's stores,
headquarters and distribution process. Over the last several years, the Company
has made significant investments in technology to improve guest service such as
Internet and
8
online bridal and gift registry tools. Linens 'n Things operates an IBM AS/400
management information system that integrates all major aspects of the Company's
business, including sales, distribution, purchasing, inventory control,
merchandise planning and replenishment and financial systems. Information
obtained from management information systems results in automatic inventory
replenishment in response to specific requirements of each store, thereby
improving in-stock positions and enhancing guest service. The Company also
utilizes hand-held scanners with inventory status and price look-up
capabilities, which allow the Company's sales associates to remain accessible to
guests on the selling floor.
STORE MANAGEMENT AND OPERATIONS. The Company places a strong emphasis on
its people, their development and their opportunity for advancement, and is
committed to maintaining a high internal promotion rate. The Company's practice
is to open each new store with a seasoned management team, which usually
includes managers who have significant experience with the Company.
Additionally, the Company's structured management training program requires that
each new manager learn all facets of the business within the framework of a
fully operational store. This program includes, among other things, product
knowledge, merchandise presentation, business and sales perspective, employee
relations and manpower planning. At the sales associate level, the Company
focuses its training on guest interaction, product knowledge and store systems
usage. The Company believes that its policy of promoting from within, as well as
the opportunities for advancement from its store expansion program, serve as
incentives to attract and retain quality individuals.
Linens 'n Things' stores are open seven days a week, generally from 9:30
a.m. to 9:30 p.m. Monday through Saturday and 11:00 a.m. to 6:00 p.m. on Sunday,
unless affected by local laws.
PRIVATE LABEL CHARGE CARD. In April 2002, the Company launched its
private label charge card program. The intent of this program is to build guest
loyalty. Through a points program, guests receive enhanced value by using the
card. The program also allows the Company to provide consistent and effective
communication with its guests, while increasing its information base of its
guests' purchasing patterns. Subject to customary exceptions, credit risk is
borne by GE Consumer Finance, a top issuer of private label credit cards.
INFLATION AND SEASONALITY
The Company does not believe that its operating results have been
materially affected by inflation during the past year. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and substantially all of its net income for the year during the third and fourth
quarters. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including the timing of
new store openings. The Company believes this is the general pattern associated
with its segment of the retail industry and expects this pattern will continue
in the future. Consequently, comparisons between quarters are not necessarily
meaningful and the results for any quarter are not necessarily indicative of
future results.
EMPLOYEES
As of January 1, 2005, the Company employed approximately 18,300
individuals, of whom approximately 8,000 were full-time employees and 10,300
were part-time employees. None of the Company's employees is represented by a
union, and the Company believes that it has a good relationship with its
employees.
COMPETITION
The home furnishings market, in which the Company operates, is highly
fragmented and intensely competitive. The Company competes with many different
types of retailers, including department stores, mass merchandisers and
discounters, specialty retail stores, mail order and other retailers. Some of
the Company's competitors sell many of the same items and brands that the
Company sells. The Company believes that its ability to compete successfully in
its market is influenced by several factors, including price, breadth and
quality of product selection, in-stock availability of merchandise, effective
merchandise presentation, guest service and superior store locations. The
Company believes that it is well positioned to compete on the basis of these
factors. Nevertheless, there can be no assurance that any or all of the factors
that enable the Company to compete favorably will not be adopted by companies
having greater financial and other resources than the Company.
TRADE NAMES AND SERVICE MARKS
The Company uses "Linens 'n Things" and "LNT" as trademarks and as
service marks in connection with retail services. The Company has registered the
"Linens 'n Things" and "LNT" marks with both the United States Patent and
Trademark Office and the Canadian Intellectual Property Office. The Company
believes that the name "Linens 'n Things" and its related marks are important
elements of its business.
9
FOREIGN SALES
The Company's current international business is in Canada. The following
table represents a summary of net sales and long-lived assets:
(IN THOUSANDS) Fiscal Year 2004 Fiscal Year 2003 Fiscal Year 2002
---------------------------------------------------------------------------
Net sales from stores
located within:
United States $2,537.5 95.3% $2,310.9 96.5% $2,120.5 97.1%
Canada 124.0 4.7% 84.4 3.5% 64.2 2.9%
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Total $2,661.5 100.0% $2,395.3 100.0% $2,184.7 100.0%
===========================================================================
Long-lived assets (1):
United States $573.9 94.4% $542.1 95.6% $504.4 96.4%
Canada 34.0 5.6% 24.7 4.4% 18.9 3.6%
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Total $607.9 100.0% $566.8 100.0% $523.3 100.0%
===========================================================================
1 Includes property and equipment, goodwill and deferred charges and other
non-current assets.
AVAILABLE INFORMATION
The Company makes available free of charge through its website,
WWW.LNT.COM, all materials that it files electronically with the SEC, including
the Company's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
soon as reasonably practicable after electronically filing such materials with,
or furnishing them to, the SEC. During the period covered by this Form 10-K, the
Company made all such materials available through its website as soon as
reasonably practicable after filing or furnishing such materials with the SEC.
You may also read and copy any materials filed by the Company with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, DC
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
website, WWW.SEC.GOV, that contains reports, proxy and information statements
and other information which the Company files electronically with the SEC.
A copy of the Company's Corporate Governance Guidelines, its Code of
Business Conduct and Ethics, and the charters of the Audit Committee,
Compensation Committee, and Corporate Governance and Nominating Committee is
posted on the Company's website, WWW.LNT.COM, under "Investor
Relations-Corporate Governance," and is available in print to any shareholder
who requests copies by contacting Brian D. Silva, Senior Vice President, Human
Resources, Administration and Corporate Secretary at the Company's principal
executive offices set forth above.
ITEM 2. PROPERTIES
The Company operates in one segment, the retail industry. The Company
leases its corporate headquarters, which is located at 6 Brighton Road, Clifton,
New Jersey. As of January 1, 2005 the Company operated 492 retail stores in 45
states and five provinces in Canada. The Company's stores generally range in
size from 22,000 to 50,000 gross square feet. The Company's stores are
predominately located in power strip centers containing other complementary
broad-based retail chains. The Company currently leases all of its existing
stores and expects that its policy of leasing rather than owning will continue
as it expands. The Company's leases provide for original lease terms that
generally range from 10 to 20 years and most of the leases provide for one or
more renewal options ranging from a total of 5 to 15 years. Generally leases
provide for scheduled rent increases and many of the leases provide for
contingent rent (based upon store sales exceeding stipulated amounts). CVS
Corporation, formerly the Company's parent company, guarantees certain stores'
leases that were entered into prior to the Company's 1996 initial public
offering.
The Company owns its Greensboro, North Carolina distribution center, and
leases its Swedesboro, New Jersey and Shepherdsville, Kentucky distribution
centers. Combined total square footage for these Company-operated facilities is
approximately 1.2 million. Both the New Jersey and Kentucky distribution centers
can be expanded.
10
The table below sets forth the number and location of stores in the
United States as of January 1, 2005:
STATE NUMBER OF STORES STATE NUMBER OF STORES
- ----- ---------------- ----- ----------------
Alabama 6 Nebraska 2
Arizona 13 Nevada 3
Arkansas 3 New Hampshire 5
California 56 New Jersey 20
Colorado 12 New Mexico 3
Connecticut 13 New York 29
Delaware 1 North Carolina 16
Florida 35 North Dakota 1
Georgia 17 Ohio 14
Idaho 1 Oklahoma 2
Illinois 22 Oregon 7
Indiana 8 Pennsylvania 14
Kansas 3 Rhode Island 4
Kentucky 4 South Carolina 5
Louisiana 5 Tennessee 8
Maine 3 Texas 47
Maryland 6 Utah 1
Massachusetts 19 Vermont 1
Michigan 12 Virginia 13
Minnesota 5 Washington 11
Mississippi 1 West Virginia 1
Missouri 7 Wisconsin 7
Montana 2
The table below sets forth the number and location of stores in Canada
as of January 1, 2005:
PROVINCE NUMBER OF STORES
- -------- ----------------
Alberta 5
British Columbia 6
Manitoba 1
Ontario 11
Saskatchewan 1
The following table sets forth information concerning our store
expansion program during the past five years:
TOTAL SQUARE FOOTAGE
(IN THOUSANDS) STORE COUNT
------------------------- ---------------------
FISCAL STORE STORE BEGINNING END OF BEGINNING END OF
YEAR OPENINGS CLOSINGS OF YEAR YEAR OF YEAR YEAR
---- -------- -------- ------- ---- ------- ----
2000 57 4 7,925 9,836 230 283
2001 63 3 9,836 11,980 283 343
2002 55 7 11,980 13,607 343 391
2003 58 9 13,607 15,106 391 440
2004 54 2 15,106 16,702 440 492
11
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders during the
fourth quarter of the fiscal year ended January 1, 2005.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Linens 'n Things' common stock is listed on the New York Stock Exchange.
Its trading symbol is LIN. At January 1, 2005 there were 17,723 beneficial
shareholders. The high and low trading price of the Company's common stock for
each quarter is as follows:
FOR FISCAL 2004 HIGH LOW
--------------- ---- ---
First Quarter............................ $36.15 $27.70
Second Quarter........................... $36.12 $27.01
Third Quarter............................ $28.93 $23.17
Fourth Quarter........................... $26.44 $21.70
FOR FISCAL 2003 HIGH LOW
--------------- ---- ---
First Quarter............................ $23.98 $19.49
Second Quarter..................... $24.93 $19.27
Third Quarter............................ $29.31 $23.78
Fourth Quarter........................... $30.45 $24.64
The Company paid no dividends on its common stock in fiscal 2004 and
2003. Management of the Company currently intends to retain its earnings to
finance the growth and development of its business and does not currently
anticipate paying cash dividends in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, the future earnings, operations,
capital requirements and financial condition of the Company, satisfying all
requirements under its bank financing agreement and such other factors as the
Company's Board of Directors may consider relevant. In addition, the Company's
revolving credit facility currently limits the amount of cash dividends. See
"Management's Discussion and Analysis--Liquidity and Capital Resources" under
Item 7.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth select consolidated historical financial
information. This information should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein.
FIVE-YEAR FINANCIAL SUMMARY (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
JANUARY 1, JANUARY 3, JANUARY 4, DECEMBER 29, DECEMBER 30,
FISCAL YEAR ENDED (1) 2005(2) 2004 (4,5) 2003 (4,5) 2001 (3,5) 2000 (5)
RESTATED RESTATED RESTATED RESTATED
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net sales................................... $2,661,469 $2,395,272 $2,184,716 $1,823,803 $1,572,576
Operating profit............................ 101,290 121,566 111,602 46,262 103,978
Net income ................................. 60,521 72,759 65,585 24,699 62,316
Net income per share - basic................ $ 1.34 $ 1.65 $ 1.55 $ 0.61 $ 1.57
Basic weighted-average shares
outstanding............................. 45,055 44,225 42,409 40,492 39,775
Net income per share - diluted.............. $ 1.32 $ 1.62 $ 1.51 $ 0.60 $ 1.53
Diluted weighted-average shares
outstanding............................ 45,804 44,847 43,295 41,177 40,702
BALANCE SHEET DATA:
Total assets................................ $1,591,884 $1,467,456 $1,277,123 $1,046,305 $ 919,504
Working capital 6........................... 519,686 458,519 369,221 218,163 219,571
Shareholders' equity........................ $ 809,353 $ 737,377 $ 646,733 $ 479,858 $ 445,790
SELECTED OPERATING DATA:
Number of stores............................ 492 440 391 343 283
Total gross square footage (000's).......... 16,702 15,106 13,607 11,980 9,836
Increase (decrease) in comparable
net sales................................. 1.8% 1.3% 3.1% (2.4)% 3.7%
1 FISCAL YEARS 2004 AND 2003 WERE 52-WEEK PERIODS. FISCAL YEAR 2002 WAS A
53-WEEK PERIOD. FISCAL YEARS 2001 AND 2000 WERE 52-WEEK PERIODS.
2 FISCAL YEAR 2004 RESULTS INCLUDE 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 IMPACTED THE
COMPANY'S NET INCOME BY $13.3 MILLION NET OF TAX OR $0.29 PER SHARE ON A FULLY
DILUTED BASIS. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS"--"OVERVIEW OF BUSINESS".
3 FISCAL 2001 OPERATING RESULTS INCLUDE RESTRUCTURING AND ASSET IMPAIRMENT AND
LITIGATION CHARGES OF $41.8 MILLION PRE-TAX ($26.2 MILLION AFTER-TAX), OR
$0.64 PER SHARE ON A FULLY DILUTED BASIS.
4 FISCAL YEARS 2003 AND 2002 FINANCIAL STATEMENTS HAVE BEEN RESTATED AS A RESULT
OF THE COMPANY'S CORRECTION FOR THE ACCOUNTING FOR LEASES AND LANDLORD
ALLOWANCES AND OTHER IMMATERIAL ADJUSTMENTS AND RECLASSIFICATIONS. SEE
"MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" -"RESTATEMENT OF FINANCIAL STATEMENTS PERTAINING TO LEASE
ACCOUNTING" AND "OTHER IMMATERIAL ADJUSTMENTS AND RECLASSIFICATIONS" AND NOTE
3 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
5 THE RESTATED FINANCIAL INFORMATION FOR FISCAL YEARS 2001 AND 2000, WHILE
UNAUDITED, HAS BEEN RESTATED ON A BASIS THAT IS CONSISTENT WITH THE
RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEARS 2003
AND 2002. A COMPARISON OF THE FISCAL YEAR 2003 CONSOLIDATED BALANCE SHEET AND
THE 2003 AND 2002 CONSOLIDATED STATEMENT OF OPERATIONS AS PREVIOUSLY REPORTED
AND AS RESTATED IS PRESENTED IN NOTE 3 TO THE CONSOLIDATED FINANCIAL
STATEMENTS.
6 WORKING CAPITAL REPRESENTS CURRENT ASSETS LESS CURRENT LIABILITIES.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto
appearing elsewhere herein.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
INTRODUCTION
- --------------------------------------------------------------------------------
Linens 'n Things, Inc. (the "Company") is one of the leading national
large format specialty retailers of home textiles, housewares and home
accessories, carrying both national brands and private label goods. During its
fiscal year ended January 1, 2005 ("fiscal 2004"), the Company opened 54 new
stores and closed two stores, increasing its total net square footage by 10.6%
to approximately 16.7 million. As of January 1, 2005, the Company operated 492
stores in 45 states and in five provinces across Canada.
The following discussion and analysis of financial condition, results of
operations, liquidity and capital resources should be read in conjunction with
the accompanying audited Consolidated Financial Statements and notes thereto.
Net sales consist of gross sales to customers net of returns, discounts
and incentives. Provisions for estimated future sales returns are recorded in
the period that the related sales are recorded. The Company determines the
amount of provision based on historical information. Sales discounts, coupons
and other similar incentives are recorded as a reduction of sales revenue in the
period when the related sales are recorded.
RESTATEMENT OF FINANCIAL STATEMENTS PERTAINING TO LEASE ACCOUNTING
On February 7, 2005, the Office of the Chief Accountant of the
Securities and Exchange Commission ("SEC") issued a clarification regarding
lease accounting under generally accepted accounting principles in the United
States of America ("GAAP"). As a result of this clarification, the Company
reviewed its lease accounting practices and determined that its former methods
of accounting for leases and landlord allowances were not consistent with the
views expressed by the SEC. As a result, the Company has restated its
Consolidated Financial Statements for each of the fiscal years ended January 3,
2004 ("fiscal 2003") and January 4, 2003 ("fiscal 2002"), contained in this
Annual Report (see Note 3 to the Consolidated Financial Statements included in
this Annual Report).
Historically, the Company had recognized rent expense commencing as of
the store opening date as opposed to when the Company took possession of the
leased property. The Company's landlords typically provide access to the leased
property free-of-charge for a period of time before the store opening so that
the Company can build out or fixture the store and stock it with merchandise.
Based on its evaluation, the Company now includes this period in calculating
straight-line rent expense and amortization of landlord allowances and lease
acquisition fees.
The Company has corrected its accounting to recognize rent and
amortization expense on a straight-line basis over the expected lease term,
including cancelable option periods in those instances where exercising such
options is reasonably assured. Previously, the Company did not include these
cancelable option periods in calculating straight-line rent expense and
amortization expense for lease acquisition fees.
For new stores, the Company generally receives allowances from landlords
for the construction of leasehold improvements. Historically, landlord
allowances have been classified on the Consolidated Balance Sheets as a
reduction of property and equipment and have been classified as a reduction in
capital expenditures on the Consolidated Statements of Cash Flows. The Company
now classifies landlord allowances as deferred rent credit reflected in
long-term liabilities on the Consolidated Balance Sheets and as an operating
activity on the Consolidated Statements of Cash Flows. This adjustment increased
both property and equipment and other long-term liabilities on the Consolidated
Balance Sheets by approximately $165 million as of the end of fiscal 2003. This
determination will not impact historical or future net cash flows.
As a result of the restatement pertaining to lease accounting, selling,
general and administrative expenses ("SG&A") in fiscal years 2003 and 2002
increased approximately $3.9 million and $5.5 million, respectively. Earnings
per share on a fully diluted basis decreased by approximately $0.06 and $0.08
for the fiscal years 2003 and 2002, respectively. The cumulative impact of the
correction of accounting for leases decreased fiscal 2002's opening retained
earnings, net of tax, by $16.9 million. Including the 2002 and 2003 restatement
adjustments described above, as of the end of fiscal 2003, the cumulative impact
of the correction of accounting for leases decreased ending retained earnings,
net of tax, by approximately $22.7 million.
The adjustments described above did not have any impact on the Company's
previously reported comparable net sales, total net sales, net cash flow and
actual lease payments.
OTHER IMMATERIAL ADJUSTMENTS AND RECLASSIFICATIONS
Certain prior period balances relating to the Company's trade payables
program with General Electric Capital Corporation ("GECC") have been
reclassified and adjusted (see Note 7 to Consolidated Financial
16
Statements). Pursuant to the agreement with GECC any favorable economics
realized by GECC for transactions under this program are shared with the
Company. As a result of these adjustments, the Company now recognizes the gross
discount earned as part of the program as a reduction of the cost of inventory
in the Consolidated Balance Sheets and records the related portion of interest
expense due GECC as interest expense in the Consolidated Statements of
Operations. Prior to fiscal 2004, only the Company's share was reflected as a
reduction of cost of sales in the Consolidated Statements of Operations. As a
result of the reclassification and adjustment related to the GECC program,
interest expense increased approximately $3.0 million and $3.3 million in fiscal
2003 and 2002, respectively. Cost of sales decreased approximately $3.5 million
and $2.8 million in fiscal 2003 and 2002, respectively. Earnings per share on a
fully diluted basis increased by approximately $0.01 and decreased by
approximately $0.01 for fiscal years 2003 and 2002, respectively. The cumulative
impact of this adjustment on fiscal 2002's opening retained earnings, net of
tax, was a decrease of approximately $1.0 million. Including the 2002 and 2003
restatement adjustments described above, as of the end of fiscal 2003, the
cumulative impact of this adjustment on retained earnings, net of tax, was a
decrease of approximately $0.9 million.
Certain prior period balances relating to the Company's deferred
compensation plan have been reclassified. The related deferred compensation
obligation totaling $2.8 million for fiscal 2003 decreased deferred income taxes
and other long-term liabilities and increased accrued expenses and other current
liabilities. In addition, the investment in shares of the Company's common stock
included in the deferred compensation plan totaling $0.7 million for fiscal 2003
decreased other current assets and increased treasury stock.
See Note 3 to the Consolidated Financial Statements for a summary of the
effects of these changes on the Company's Consolidated Balance Sheet as of
January 3, 2004, as well as on the Company's Consolidated Statements of
Operations and Cash Flows for fiscal years 2003 and 2002 and Consolidated
Statement of Shareholders' Equity and Comprehensive Income as of December 29,
2001. The accompanying Management's Discussion and Analysis gives effect to
these corrections and adjustments.
OVERVIEW OF BUSINESS
Net sales increased 11.1% to $2.7 billion in fiscal 2004 compared to
$2.4 billion in fiscal 2003. For fiscal year 2004, comparable net sales
increased 1.8% versus 1.3% in fiscal 2003. For fiscal year 2004, the Company's
earnings per share on a fully diluted basis were $1.32. Results of operations
for fiscal year 2004 include 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 impacted the Company's fiscal 2004
net income by $13.3 million, net of tax, or $0.29 per fully diluted share. For
the same period last year, which was not impacted by EITF 02-16, the Company's
fiscal earnings per share on a fully diluted basis were $1.62.
EITF 02-16 states that cash consideration received from a vendor is
presumed to be a reduction of the prices of the vendor's products or services
and should therefore, be characterized as a reduction of cost of merchandise
sold when recognized in the Company's Consolidated Statement of 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
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 were
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. Vendor
allowances, which are reflected as a reduction of inventory, and vendor purchase
discounts are amortized to reduce cost of sales on an inventory turn basis.
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 as the advertising allowances
received are presumed to be reductions in the cost of inventory under EITF 02-16
when the costs cannot be determined as incremental and specifically
identifiable. The provisions of EITF 02-16 impacted the Company's results of
operations for the fifty-two weeks ended January 1, 2005 as follows (the "As
Reported" amounts include the impact of EITF 02-16). The following is a non-GAAP
presentation:
- ------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 1, 2005
- ------------------------------------------------------------------
EITF 02-16
(in thousands, except per As Reported Adjustment
share data) Impact
- ------------------------------------------------------------------
Net Sales.................. $ 2,661,469 $ --
Cost of sales.............. 1,589,700 5,927
----------------- ------------------
Gross profit (loss)........ 1,071,769 (5,927)
SG&A....................... 970,479 (27,395)
----------------- ------------------
Operating profit........... 101,290 21,468
Interest expense, net...... 3,361 --
----------------- ------------------
Income before provision
for income taxes........ 97,929 21,468
Provision for income taxes. 37,408 8,201
----------------- ------------------
Net income................. $ 60,521 $ 13,267
================= ==================
Earnings per share:
Basic...................... $ 1.34 $ 0.29
Fully diluted.............. $ 1.32 $ 0.29
17
The EITF 02-16 pre-tax adjustment of $21.5 million for the fifty-two
weeks ended January 1, 2005, 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 non-GAAP information in
order to allow investors better insight into the Company's comparative
period-to-period operating performance, and is intended to supplement, not
replace, GAAP.
EITF 02-16 had no impact on the Company's net 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 Company currently estimates that the EITF 02-16 adjustment will
reduce fiscal 2005 earnings per share on a fully diluted basis by approximately
three to four cents. In addition, there will be no impact to SG&A in future
periods and gross margin is expected to be favorably impacted by approximately
50 to 60 basis points in fiscal 2005.
On the balance sheet side, the Company improved its financial position,
increasing its year-end cash position by approximately $68 million. In addition,
inventory per square foot declined approximately 7.7% to $42.82 compared with
$46.37 in fiscal 2003 while the Company continued to place an emphasis on
maintaining its in-stock position. The capitalization of vendor allowances of
approximately $21.5 million under EITF 02-16 resulted in a decline in inventory
per square foot of approximately 2.9% in fiscal 2004.
In reviewing the Company's sales performance by category, the Company's
"things" business (e.g., housewares and home accessories) had strong sales
growth throughout the year. Strength in the "things" business during fiscal 2004
was led by the functional housewares business, which benefited from new product
introductions. Although the Company's textile business continued to be
challenging in fiscal 2004, the Company is undergoing significant assortment
changes in its textile business to inject more newness in its overall
assortment.
The Company uses a number of key indicators of financial condition and
operating performance to evaluate the performance of its business, including the
following:
FISCAL YEAR ENDED(1)
----------------------------------
2004
2004 EITF
AS 02-16
KEY PERFORMANCE INDICATORS REPORTED IMPACT 2003 2002
- --------------------------------------------------------------------------
Net sales growth.................. 11.1% -- 9.6% 19.8%
Comparable net sales growth....... 1.8% -- 1.3% 3.1%
Net sales per average square
foot............................ $166 -- $167 $171
Average net sales per store
(in millions)................... $5.6 -- $5.7 $5.9
Gross profit as a % of net
sales........................... 40.3% +30 bps 40.4% 40.1%
SG&A as a % of net sales.......... 36.5% +110 bps 35.3% 35.0%
SG&A per average square foot...... $60.70 +$1.70 $58.90 $59.80
Operating profit as a % of
net sales....................... 3.8% -80 bps 5.1% 5.1%
Net income as a % of sales........ 2.3% -50 bps 3.0% 3.0%
Diluted earnings per share........ $1.32 -$0.29 $1.62 $1.51
Inventory turnover................ 2.1 -- 2.1 2.2
Inventory per square foot......... $42.82 -$1.29 $46.37 $45.06
Net square footage growth......... 11% -- 11% 14%
- --------------------------------------------------------------------------
1 FISCAL YEARS 2004 AND 2003 WERE 52-WEEK PERIODS. FISCAL YEAR 2002 WAS A
53-WEEK PERIOD.
During fiscal 2004, the Company implemented several initiatives, which
were geared to improve sales productivity and enhance the guest shopping
experience. These strategic initiatives impacted several areas throughout the
Company, from its buying, assortment planning and inventory management
functions, to its sales floor activities. In fiscal 2004, the Company maximized
the efficiencies of its buying team by realigning the roles and responsibilities
within its merchandising organization to correlate with the growing demands of
its buying function, as well as by adding new supervisory and staff positions.
In conjunction with this, the Company devoted significant resources to its
merchandise assortment planning initiative to complement its buying process with
increased use of analytics. This initiative is designed to streamline
merchandise selection, reduce product offering duplication and develop a more
balanced assortment. The Company also re-allocated space on the selling floors
of its stores to accommodate new and expanded businesses such as furniture, area
rugs, home environment and comfort/sleep. Although the Company made significant
progress in implementing these initiatives in 2004, there is still more to
accomplish. In the coming year, the Company
18
plans to leverage its expanded buying team and its improved capabilities to
introduce new brands and accelerate new businesses that will distinguish its
product selection with a sense of "freshness."
Also, during fiscal 2004, the Company improved its inventory management
by maintaining a strong in stock position throughout the year while improving
the overall flow of inventory to its stores. The Company also intensified its
focus on up-front planning and continued to refine its forecasting methods to
anticipate the needs of each store on a regular basis, as opposed to merely
measuring total stock levels across the entire chain. Going forward, the Company
believes it has sustainable processes in place to improve the overall
productivity of inventory. In addition, during fiscal 2004, the Company expanded
its store inventory ownership program to approximately three-fourths of its
stores. This program gives specially trained store managers discretion over
their basic product inventory. The Company remains committed to this program and
has instituted a more efficient structure coupled with increased training in an
effort to further enhance the store management's ability to improve sales
productivity for the stores on this program.
Since service is crucial to guest satisfaction, the Company solicits
guest feedback from all of its locations on a monthly basis. Overall, the
Company believes it is providing a better shopping experience for its guests as
evidenced by the Company's overall guest service score improvement over the
prior year. The Company's guest service initiative extended to its lnt.com web
site, which was improved during fiscal 2004 to provide guests who shop on-line
the option of picking up their merchandise at the store location of their
choice.
For fiscal 2005, the Company will emphasize several initiatives to
improve productivity and profitability as well as to enhance the guest shopping
experience. For example, the Company will focus on adding more newness in its
assortment by offering greater trend-right merchandise and building brands both
within categories and across categories. Additionally, the Company will focus on
improving the overall productivity of its stores through continued
implementation of its assortment planning and space management initiatives.
These initiatives are designed to enable the Company to offer a more balanced
product assortment and to allocate space on the selling floors of its stores to
more productive categories. In conjunction with these initiatives, the Company
will focus on improving the in-store experience with enhanced merchandise
presentation and clearer signage.
The Company expects to slow its square footage growth in fiscal 2005 to
approximately 7% to 9%, versus growth in fiscal years 2004 and 2003 of
approximately 11%, as the Company continues to refine its store design in order
to improve the guest shopping experience and improve the stores' productivity.
Additionally, real estate typically has a 12 to 18 month lead-time, and although
the Company believes that there are ample real estate opportunities, the Company
will continue to be selective in executing its real estate strategy.
The Company will be required to begin expensing stock options as
compensation cost in the second half of fiscal 2005. Currently, the Company
discloses the effect on net income and earnings per share related to the
expensing of options as a note to its Consolidated Financial Statements (see
Note 2). The Company expects to provide an estimated impact of this change in
accounting treatment on earnings per share by the end of the second quarter of
fiscal 2005.
CONSOLIDATED RESULTS OF OPERATIONS
The following discusses the Consolidated Results of Operations for the
52 weeks ended January 1, 2005 ("fiscal 2004"), the 52 weeks ended January 3,
2004 ("fiscal 2003") and the 53 weeks ended January 4, 2003 ("fiscal 2002")
FISCAL 2004 COMPARED WITH FISCAL 2003
NET SALES
Net sales for fiscal 2004 were $2,661.5 million, an increase of 11.1%
over fiscal 2003 net sales of $2,395.3 million, primarily as a result of new
store openings as well as comparable net sales increases. The Company opened 54
stores and closed two stores in fiscal 2004, compared with opening 58 stores and
closing nine stores in fiscal 2003. Net square footage increased 10.6% to 16.7
million at January 1, 2005 compared with 15.1 million at January 3, 2004.
Comparable net sales, which include the Company's Internet sales,
increased 1.8% for fiscal 2004 compared with an increase of 1.3% in fiscal 2003.
Comparable net sales percentages are based on total net sales. Stores are
considered comparable beginning with the first day of the month following the
13th full month of sales.
The Company's average net sales per store were $5.6 million in fiscal
2004 and $5.7 million in fiscal 2003. Although the Company's comparable net
sales performance got off to a healthy start in the first quarter of fiscal
2004, comparable net sales softened in the second and third quarters as guest
traffic declined. As the year progressed, the retail environment, particularly
in the home furnishings industry, also became challenging. However, comparable
net sales strengthened by the fourth quarter primarily due to an increase in
guest traffic, as the Company added more
19
freshness to its assortment through expanded categories and intensified its key
item focus.
The Company's core business strategy is to offer a broad and deep
selection of high quality brand name "linens" (e.g., bedding, towels and table
linens) and "things" (e.g., housewares and home accessories) merchandise. For
fiscal 2004, net sales of "linens" merchandise increased approximately 9% over
the prior year, while net sales of "things" increased approximately 13% over the
prior year. The increase in net sales for "things" merchandise resulted
primarily from the continued expansion of product categories within the "things"
business and its continued strength in its functional housewares business.
Although the Company's textile business was challenging in fiscal 2004, the
Company is undergoing significant assortment changes in its textile business to
inject more newness in its overall assortment.
The Company's proprietary merchandise accounted for approximately 15% of
fiscal 2004 sales. The Company's proprietary product is an important point of
differentiation from its competitors, providing its guest with high value
merchandise in categories that the Company believes are underserved by national
brand names.
GROSS PROFIT
Gross profit for fiscal 2004 was $1,071.8 million, or 40.3% of net
sales, compared with $968.4 million, or 40.4% of net sales, for fiscal 2003. The
EITF 02-16 adjustment impact was to increase gross profit by $5.9 million, or
0.3% of net sales, for fiscal 2004. The increase in gross profit from the EITF
02-16 impact was offset primarily by higher markdowns, as well as higher fuel
costs.
EXPENSES
SG&A expenses consist of store selling expenses, occupancy costs,
advertising expenses and corporate office expenses. SG&A expenses for fiscal
2004 were $970.5 million, or 36.5% of net sales, compared with $846.8 million,
or 35.3% of net sales, for fiscal 2003. The EITF 02-16 adjustment impact was
$27.4 million, or 1.1% of net sales, for the fifty-two weeks ended January 1,
2005. SG&A for fiscal 2003 also included advertising allowances equaling 1.0% of
net sales, which, as a part of the EITF 02-16 implementation, were no longer
classified as an offset to SG&A in fiscal 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 costs as a percentage of net sales, partially
offset by store payroll. SG&A per average square foot was $60.70 in fiscal 2004
compared to $58.90 in fiscal 2003. The EITF 02-16 adjustment impact to SG&A per
square foot in fiscal 2004 was $1.70.
Operating profit for fiscal 2004 was $101.3 million, or 3.8% of net
sales, compared with $121.6 million, or 5.1% of net sales for fiscal 2003. The
EITF 02-16 adjustment impact was $21.5 million, or 0.8% of net sales, for fiscal
2004.
Net interest expense in fiscal 2004 was $3.4 million compared to $3.8
million in fiscal 2003. The decrease in net interest expense was mainly due to
lower average borrowings compared to the same period last year.
The Company's income tax expense for fiscal 2004 was $37.4 million,
compared with $45.0 million for fiscal 2003. The EITF 02-16 impact was a
decrease of $8.2 million for fiscal 2004. The Company's effective tax rate was
38.2% for fiscal years 2004 and 2003.
NET INCOME
As a result of the factors described above, net income for fiscal 2004
was $60.5 million, or $1.32 per share on a fully diluted basis, compared with
$72.8 million, or $1.62 per share on a fully diluted basis, for fiscal 2003. The
EITF 02-16 adjustment negatively impacted net income by $13.3 million, or $0.29
per share on a fully diluted basis for fiscal 2004.
FISCAL 2003 COMPARED WITH FISCAL 2002
NET SALES
Net sales for fiscal 2003 (52 weeks) were $2,395.3 million, an increase
of 9.6% over fiscal 2002 (53 weeks) net sales of $2,184.7 million, primarily as
a result of new store openings as well as comparable net sales increases. The
Company opened 58 stores and closed nine stores in fiscal 2003, compared with
opening 55 stores and closing seven stores in fiscal 2002. Net square footage
increased 11.0% to 15.1 million at January 3, 2004 compared with 13.6 million at
January 4, 2003.
Comparable net sales, which include Internet sales, increased 1.3% for
fiscal 2003 (52 weeks/52 weeks) compared with an increase of 3.1% in fiscal
2002.
The Company's average net sales per store were $5.7 million in fiscal
2003 (52 weeks) and $5.9 million in fiscal 2002 (53 weeks). Week 53 in fiscal
2002 represented approximately $43.6 million in net sales, so on a comparable
52-week basis, average net sales per store was $5.8 million in fiscal 2002.
During the first half of the fiscal year, sales were impacted by inclement
weather conditions in the East and Northeast, especially during key holiday
selling seasons, weak consumer confidence, and
20
uncertainty over the conflict in Iraq. However, the Company believes its sales
results for the year continued to reflect the steady progress made on its
strategic operating initiatives, which included improvements of in-stock
inventory positions, particularly on key items and advertised merchandise,
expansion of its store inventory ownership program, and improvements to its
merchandise assortment planning process and to the guest shopping experience.
Information concerning average net sales per store on a 52-week basis
for fiscal 2002 is intended to provide comparative sales information on a
52-week/52-week basis, permitting management and shareholders to more fully
analyze period-to-period store operating performance. It is intended to
supplement GAAP presentation.
For fiscal 2003, net sales of "linens" merchandise increased
approximately 6% over the prior year, while net sales of "things" increased
approximately 13% over the prior year. The increase in net sales for "things"
merchandise resulted primarily from the continued expansion of product
categories within the "things" business and its continued strength in its
functional housewares business. During fiscal 2003, the Company made
improvements to its textile business by introducing new brands and upgraded
assortments.
The Company continued to leverage its supply chain costs as well as
increase the penetration of its proprietary merchandise, which accounted for
approximately 17% of fiscal 2003 sales.
GROSS PROFIT
Gross profit for fiscal 2003 was $968.4 million, or 40.4% of net sales,
compared with $876.2 million, or 40.1% of net sales, for fiscal 2002. The
increase in gross profit as a percentage of net sales is primarily due to
increased penetration of proprietary product, as well as improved markdown
management.
EXPENSES
SG&A expenses for fiscal 2003 were $846.8 million, or 35.3% of net
sales, compared with $764.6 million, or 35.0% of net sales, for fiscal 2002. The
increase is primarily due to higher occupancy costs as a percentage of net sales
due to comparable net sales performance, offset in part by lower corporate
office expenses as a percentage of net sales.
SG&A per average square foot was $58.90 in fiscal 2003 compared to
$59.80 in fiscal 2002, a decline of 1.5% from the prior year, as the Company
continued to reduce the dollar amount of, and lower, as a percentage of net
sales, select operating expenses that were not associated with its initiatives
to drive long-term sales growth.
Operating profit for fiscal 2003 increased to $121.6 million, or 5.1% of
net sales, from $111.6 million, or 5.1% of net sales, for fiscal 2002.
Net interest expense in fiscal 2003 was $3.8 million compared to $5.5
million in fiscal 2002. The decrease in net interest expense was mainly due to
lower average borrowings, as well as lower interest rates.
The Company's income tax expense for fiscal 2003 was $45.0 million,
compared with $40.5 million during fiscal 2002. The Company's effective tax rate
was 38.2% for fiscal years 2003 and 2002.
NET INCOME
As a result of the factors described above, net income for fiscal 2003
was $72.8 million, or $1.62 per share on a fully diluted basis, compared with
$65.6 million, or $1.51 per share on a fully diluted basis, for fiscal 2002.
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.
The following table summarizes existing contractual obligations
requiring the use of cash, as of January 1, 2005:
PAYMENTS DUE BY PERIOD (IN MILLIONS)
------------------------------------------------
Less More
CONTRACTUAL Than 2 - 3 4 - 5 Than
OBLIGATIONS Total 1 Year Years Years 5 Years
- ----------------------------------------------------------------------------
Operating leases (1)..... $2,726.9 $257.6 $526.1 $516.9 $1,426.3
Inventory purchases...... 119.5 119.5 -- -- --
New store capital
additions.............. 4.7 4.7 -- -- --
Other long-term
liabilities (2)........ 3.4 0.2 0.5 0.5 2.2
------------------------------------------------
Total $2,854.5 382.0 526.6 517.4 1,428.5
================================================
1 Operating leases consist of future minimum rental payments required under
non-cancelable operating leases and does not consider future minimum sublease
rentals, and excludes lease obligations for closed stores and stores planned to
be closed.
As of March 17, 2005, the Company had fully executed leases for 60 stores
planned to open in fiscal years 2005 and 2006, for which aggregate minimum
rental payments over the term of the leases is
21
approximately $264.8 million. The table above includes payments for stores that
had fully executed leases as of January 1, 2005.
The Company also 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 January 1, 2005, the maximum potential amount of future
payments the Company could be required to make under such guarantee is
approximately $0.9 million.
2 Other long-term liabilities include monthly payments of principal and
interest for a mortgage on the land and building of one of the Company's closed
stores.
Not included in the above table are amounts related to the Company's
Corporate-owned life insurance policies that the Company has established in
connection with its supplemental executive retirement plan obligations (see Note
12 to the Consolidated Financial Statements). The projected annual premium
payments for these policies are approximately $2.6 million through fiscal 2009.
In November 2004, the Company entered into a $250 million senior
revolving credit facility agreement (the "Credit Agreement") with third party
institutional lenders to expire November 23, 2009. The Credit Agreement allows
for up to $50 million of borrowings from additional lines of credit outside of
the Credit Agreement. As of January 1, 2005, the additional lines of credit
included committed facilities of approximately $17 million that expire on May
31, 2005 and $12 million that expire on June 15, 2005 and are subject to
periodic renewal arrangements. The Credit Agreement replaced the $150 million
senior revolving credit facility amended June 2002, which allowed for up to $40
million in borrowings from additional lines of credit outside the agreement
("2002 Credit Agreement").
Under the Credit Agreement, 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. At the end of fiscal 2004, the
Company was in compliance with its covenants under the Credit Agreement. Under
the Credit Agreement, the amount of dividends that the Company may pay may not
exceed the sum of $50 million plus, on a cumulative basis, an amount equal to
25% of the consolidated net income for each fiscal quarter, commencing with the
fiscal quarter ending April 3, 2004. The Company has never paid cash dividends
and does not currently anticipate paying cash dividends in the foreseeable
future. At various times throughout 2004 and 2003, the Company borrowed against
the Credit Agreement and the 2002 Credit Agreement for seasonal working capital
needs. At the end of fiscal 2004 and fiscal 2003, the Company had no borrowings
under the Credit Agreement and the 2002 Credit Agreement, respectively, and no
borrowings under the additional lines of credit. 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. These borrowings are not
currently expected to peak in excess of $80 to $100 million for the first and
second quarters of fiscal 2005, and are intended to be used for working capital
and similar general corporate needs. In addition, as of January 1, 2005 and
January 3, 2004, the Company had $76.2 million and $47.2 million, respectively,
of letters of credit outstanding, which included standby letters of credit
issued primarily under the Credit Agreement and the 2002 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 8 to the 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. See Notes 3
and 7 to the Consolidated Financial Statements. At January 1, 2005 and January
3, 2004, the Company owed approximately $65.0 million and $66.2 million,
respectively, to GECC under this program, which was included in accounts
payable. Either party may terminate the program for any reason upon 30 days
prior written notice. The Company does not anticipate that discontinuance of the
availability of the GECC program would result in a material disruption to the
supply of merchandise to the Company, nor would it have a material adverse
effect on the Company's financial position, results of operations or cash flows.
The maximum amount permitted under the program was $95 million as of January 1,
2005.
Net cash provided by operating activities for fiscal 2004 was $177.3
million compared with $150.9 million for fiscal 2003. The change was primarily
attributed to slower growth in inventory, as well as the timing of vendor
payments and a decline in deferred income taxes.
Net cash used in investing activities for fiscal 2004 was $119.1
million, primarily for 54 new stores, maintenance of existing stores and system
enhancements, compared with $113.3 million for fiscal 2003. The Company
currently estimates capital expenditures will be approximately $126 million in
fiscal 2005, primarily for an estimated 50 new stores, maintenance of existing
stores, and system enhancements.
Net cash provided by financing activities for fiscal 2004 was $8.7
million, compared with $11.4 million
22
for fiscal 2003. The decrease is primarily attributable to a decline in proceeds
from common stock issued under stock incentive plans. In addition, the Company
had no short-term borrowings at the end of fiscal years 2004 and 2003, other
than amounts due GECC which are included in accounts payable.
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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123
(Revised 2004)"). SFAS No. 123 (Revised 2004) requires the Company to recognize
the grant-date fair value of stock option grants as compensation expense in the
Consolidated Statement of Income but expresses no preference for a type of
valuation method to use in determining the fair value of options. SFAS No. 123
(Revised 2004) is effective for most public companies' interim or annual periods
beginning after June 15, 2005 (the Company's fiscal year 2005 third quarter).
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets-Accounting Principles Board Opinion No. 29, Accounting for
Nonmonetary Transactions." This Statement requires that exchanges should be
recorded and measured at the fair value of the assets exchanged, with certain
exceptions. The Statement is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The adoption of this Statement
will not have a material effect on the Company's financial position or results
of operations.
In November 2004, the FASB issued SFAS No.151-"Inventory Costs -An
Amendment of ARB 43, Chapter 4." This Statement amends the guidance to clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current period charges. In
addition, this Statement requires that allocation of fixed production overheads
to the costs of conversions be based on the normal capacity of the production
facilities. The Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of this Statement will
not have a material effect on the Company's financial position or results of
operations.
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, "Accounting for
Stock-Based Compensation" ("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 fiscal year
ended January 1, 2005, the Company accounted for stock options using the
intrinsic value method prescribed under Accounting Principles Board Opinion No.
25 ("APB Opinion No. 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 2 to the Company's Consolidated Financial Statements.
CRITICAL ACCOUNTING ESTIMATES
23
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 Consolidated Financial Statements. The
Company bases these estimates on historical results and various other
assumptions believed to be reasonable at the time. Management has discussed the
development and selection of these critical accounting estimates with the Audit
Committee of the Board of Directors.
VALUATION OF INVENTORY: Merchandise inventory is a significant portion
of the Company's balance sheet, representing approximately 45% of total assets
at January 1, 2005. Inventories are valued using the lower of cost or market
value, determined by the retail inventory method ("RIM"). Under RIM, the
valuation of inventories at cost and the resulting gross margins are determined
by applying a calculated cost-to-retail ratio to the retail value of
inventories. RIM is an averaging method that is used in the retail industry due
to its practicality. Inherent in the RIM calculation are certain significant
management judgments and estimates including, among others, merchandise mark-on,
mark-up, markdowns and shrinkage based on historical experience between the
dates of physical inventories, all of which significantly impact the ending
inventory valuation at cost. At the end of each reporting period reductions in
gross margin and inventory are recorded for estimated future markdowns necessary
to liquidate remaining markdown inventory and represents the Company's best
estimate of fair market value of that inventory. These calculations use
information related to markdown inventory levels, historical markdown trends and
forecasted sales and markdowns. These percentages are reviewed regularly by
comparing actual markdowns taken against previous estimates. Changes in customer
preference or future economic conditions may cause the Company's inventory
markdown estimates to be significantly revised favorably or unfavorably. 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
for fiscal 2004 and fiscal 2003, the Company's sales returns reserve was
approximately $7.4 million and $6.2 million, respectively.
IMPAIRMENT OF ASSETS: In accordance with 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. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
periodically evaluates long-lived assets other than goodwill for indicators of
impairment. The Company's judgments regarding the existence of impairment
indicators are based on market conditions and operational performance. Future
events could cause the Company to conclude that impairment indicators exist and
that the value of long-lived assets and goodwill is impaired. At the end of
fiscal 2004 and fiscal 2003, the Company's net value for property and equipment
was approximately $578.8 million and $542.2 million, respectively, and goodwill
was $18.1 million for fiscal years ended 2004 and 2003.
STORE CLOSURE COSTS: For periods prior to the adoption of SFAS No. 146,
"Accounting for Costs Associated With Exit or Disposal Activities" ("SFAS No.
146"), the Company recorded estimated store closure costs, such as fixed asset
write-offs, estimated lease commitment costs net of estimated sublease income,
markdowns for inventory that would be sold below cost, and other miscellaneous
store closing costs, in the period in which management determined to close a
store. Such estimates may be subject to change should actual costs differ. In
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 January 1, 2005 and January 3, 2004, the
Company had $9.0 million and $15.6 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 during fiscal
2005. The Company continues to negotiate the lease buyouts or sublease
agreements for some of these stores. The fiscal 2004 activity includes the
reversal of estimated lease commitment and other store closing costs of
approximately $1.1 million as these reserves were not needed, offset by an
increase to lease commitment costs
24
by approximately $1.8 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.
Under SFAS No. 146 future exit or disposal activities, if any, can be
expected to impact the timing of liability recognition.
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 for amounts 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. Workers compensation and general
liabilities are then recorded at their net present value. In preparing the
estimates, the Company also considers the nature and severity of the claims,
analysis provided by third party claims administrators, as well as current
legal, economic and regulatory factors.
The Company evaluates the accrual and the underlying assumptions
periodically and makes adjustments as needed. The ultimate cost of these claims
may be greater than or less than the established accrual. While the Company
believes that the recorded amounts are adequate, there can be no assurances that
changes to management's estimates will not occur due to limitations inherent in
the estimate process. In the event the Company determines the accruals should be
increased or reduced, the Company would record such adjustments in the period in
which such determination is made.
The accrued obligation for these self-insurance programs was
approximately $14.5 million as of January 1, 2005 and $13.5 million as of
January 3, 2004. The increase in this obligation relates to new claims incurred
in fiscal 2004 as well as rising claim costs based on the factors referred to
above.
LITIGATION: The Company records an estimated liability related to
various claims and legal actions arising in the ordinary course of business,
which is based on available information and advice from outside counsel where
applicable. As additional information becomes available, the Company assesses
the potential liability related to its pending claims and may adjust its
estimates accordingly.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the
meaning of The Private Securities Litigation Reform Act of 1995. The statements
are made a number of times and may be identified by such forward-looking
terminology as "expect," "believe," "may," "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 and
productive 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 and our ability to successfully implement our strategic initiatives.
If these or other risks or uncertainties materialize, or if our
estimates or underlying assumptions prove inaccurate, actual results could
differ materially from any future results, express or implied by our
forward-looking statements. 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. 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.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURE
The Company continuously evaluates the market risk associated with its
financial instruments. Market risks relating to the Company's operations result
primarily from changes in interest rates and foreign exchange rates. The Company
does not engage in financial transactions for trading or speculative purposes.
INTEREST RATE RISK
The Company's financial instruments include cash and cash equivalents
and short-term borrowings. The Company's obligations are short-term in nature
and generally have less than a 30-day commitment. The Company is exposed to
interest rate risks primarily through borrowings under the Credit Agreement.
Interest on all borrowings is based upon several alternative rates as stipulated
in the Credit Agreement, including a fixed margin above LIBOR. As of January 1,
2005, the Company had no borrowings under the Credit Agreement and no borrowings
under the additional lines of credit (see Note 8 to the Consolidated Financial
Statements). The Company believes that its interest rate risk is minimal as a
hypothetical 10% increase or decrease in interest rates in the associated debt's
variable rate would not materially affect the Company's results 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.
The Company operated 24 stores in Canada as of January 1, 2005. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial information required by this Item
are included below. These financial statements are indexed under Item 15(a)(1).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders
Linens 'n Things, Inc.
We have audited the accompanying consolidated balance sheets of Linens `n
Things, Inc. and Subsidiaries as of January 1, 2005 and January 3, 2004, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended January 1, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Linens `n Things,
Inc. and Subsidiaries as of January 1, 2005 and January 3, 2004, and the results
of their
26
operations and their cash flows for each of the years in the three-year period
ended January 1, 2005, in conformity with U.S. generally accepted accounting
principles.
As discussed in note 2 to the consolidated financial statements, in fiscal 2004,
the Company changed its method of accounting for vendor allowance arrangements
to conform to the requirements of Emerging Issues Task Force Issue No. 02-16.
As discussed in note 3 to the consolidated financial statements, the
accompanying consolidated balance sheet as of January 3, 2004 and the related
consolidated statements of operations, shareholders' equity and comprehensive
income and cash flows for the years ended January 3, 2004 and January 4, 2003,
have been restated.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Linens n'
Things, Inc.'s and Subsidiaries' internal control over financial reporting as of
January 1, 2005, based on criteria established in INTERNAL CONTROL--INTEGRATED
FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 31, 2005 expressed an unqualified
opinion on management's assessment of, and an adverse opinion on the effective
operation of, internal control over financial reporting.
/s/ KPMG LLP
- ------------
KPMG LLP
New York, New York
March 31, 2005
27
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------
JANUARY 1, JANUARY 3, JANUARY 4,
2005 2004 2003
FISCAL YEAR ENDED RESTATED RESTATED
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES................................................. $2,661,469 $2,395,272 $2,184,716
Cost of sales, including buying and
distribution costs..................................... 1,589,700 1,426,880 1,308,524
------------------ ------------------ -------------------
GROSS PROFIT.............................................. 1,071,769 968,392 876,192
Selling, general and administrative expenses.............. 970,479 846,826 764,590
------------------ ------------------ -------------------
OPERATING PROFIT.......................................... 101,290 121,566 111,602
Interest income.................................... (542) (169) (79)
Interest expense................................... 3,903 4,001 5,588
------------------ ------------------ -------------------
Interest expense, net..................................... 3,361 3,832 5,509
------------------ ------------------ -------------------
Income before income taxes................................ 97,929 117,734 106,093
Provision for income taxes................................ 37,408 44,975 40,508
------------------ ------------------ -------------------
NET INCOME................................................ $ 60,521 $ 72,759 $ 65,585
================== ================== ===================
Per share of common stock:
Basic
- -----
Net income................................................ $ 1.34 $ 1.65 $ 1.55
Weighted-average shares outstanding....................... 45,055 44,225 42,409
Diluted
- -------
Net income................................................ $ 1.32 $ 1.62 $ 1.51
Weighted-average shares outstanding....................... 45,804 44,847 43,295
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JANUARY 1, JANUARY 3,
2005 2004
RESTATED
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 204,009 $ 136,129
Accounts receivable...................................................... 25,766 29,531
Inventories.............................................................. 715,184 700,406
Prepaid expenses and other current assets................................ 38,335 33,253
Current deferred taxes................................................... 685 1,295
--------------------- ---------------------
TOTAL CURRENT ASSETS....................................................... 983,979 900,614
Property and equipment, net.............................................. 578,816 542,191
Goodwill 18,126 18,126
Deferred charges and other non-current assets, net....................... 10,963 6,525
--------------------- ---------------------
TOTAL ASSETS................................................................... $1,591,884 $1,467,456
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................................... $ 245,635 $ 250,142
Accrued expenses and other current liabilities........................... 212,644 176,194
Current deferred taxes................................................... 6,014 15,759
--------------------- ---------------------
TOTAL CURRENT LIABILITIES.................................................. 464,293 442,095
Deferred income taxes and other long-term liabilities.................... 318,238 287,984
--------------------- ---------------------
TOTAL LIABILITIES.......................................................... 782,531 730,079
--------------------- ---------------------
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;
45,460,467 shares issued and 45,200,896 shares outstanding at
January 1, 2005; 45,052,255 shares issued and 44,793,619 shares
outstanding at January 3, 2004........................................ 455 450
Additional paid-in capital............................................... 372,627 362,483
Retained earnings........................................................ 440,914 380,393
Accumulated other comprehensive gain .................................... 2,619 1,391
Treasury stock, at cost; 259,571 shares at January 1, 2005 and 258,636
shares at January 3, 2004............................................. (7,262) (7,340)
--------------------- ---------------------
TOTAL SHAREHOLDERS' EQUITY................................................. 809,353 737,377
--------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................... $1,591,884 $1,467,456
===================== =====================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
BALANCE AT DECEMBER 29, 2001 (AS PREVIOUSLY REPORTED)...... 40,624,374 $409 $245,234 $259,935
Prior periods adjustment, net of tax (see Note 3).......... (18,465) (17,886)
------------ ----------- ------------- ------------
BALANCE AT DECEMBER 29, 2001 (AS RESTATED - SEE NOTE 3)... 40,605,909 409 245,234 242,049
Net income (as restated - see Note 3)...................... -- -- -- 65,585
Currency translation adjustment............................ -- -- -- --
Comprehensive income (as restated - see Note 3)............
Common stock issued under stock incentive plans and
related tax benefits..................................... 190,499 2 5,217 --
Proceeds from issuance of common stock, net of
underwriting discounts and offering expenses............. 3,300,000 33 95,800 --
Increase in treasury stock (as restated - see Note 3)...... (30,448) -- -- --
------------ ----------- ------------- ------------
BALANCE AT JANUARY 4, 2003 (AS RESTATED - SEE NOTE 3)...... 44,065,960 444 346,251 307,634
Net income (as restated - see Note 3)...................... -- -- -- 72,759
Currency translation adjustment............................ -- -- -- --
Comprehensive income (as restated - see Note 3)............
Common stock issued under stock incentive plans and
related tax benefits..................................... 729,904 6 16,232 --
Increase in treasury stock (as restated - see Note 3)...... (2,245) -- -- --
------------ ----------- ------------- ------------
BALANCE AT JANUARY 3, 2004 (AS RESTATED - SEE NOTE 3)...... 44,793,619 450 362,483 380,393
Net income................................................. -- -- -- 60,521
Currency translation adjustment............................ -- -- -- --
Comprehensive income.......................................
Common stock issued under stock incentive plans and
related tax benefits..................................... 408,212 5 10,144 --
Increase in treasury stock, net............................ (935) -- -- --
------------ ----------- ------------- ------------
BALANCE AT JANUARY 1, 2005................................. 45,200,896 $455 $372,627 $440,914
------------ ----------- ------------- ------------
============ =========== ============= ============
- -----------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY
TRANSLATION TREASURY
ADJUSTMENT STOCK TOTAL
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
BALANCE AT DECEMBER 29, 2001 (AS PREVIOUSLY REPORTED)...... $(417) $(6,946) $498,215
Prior periods adjustment, net of tax (see Note 3).......... (471) (18,357)
------------------ ------------ ---------------
BALANCE AT DECEMBER 29, 2001 (AS RESTATED - SEE NOTE 3)... (417) (7,417) 479,858
Net income (as restated - see Note 3)...................... -- -- 65,585
Currency translation adjustment............................ 31 -- 31
---------------
Comprehensive income (as restated - see Note 3)............ 65,616
Common stock issued under stock incentive plans and
related tax benefits..................................... -- -- 5,219
Proceeds from issuance of common stock, net of
underwriting discounts and offering expenses............. -- -- 95,833
Increase in treasury stock (as restated - see Note 3)...... -- 207 207
------------------ ------------ ---------------
BALANCE AT JANUARY 4, 2003 (AS RESTATED - SEE NOTE 3)...... (386) (7,210) 646,733
Net income (as restated - see Note 3)...................... -- -- 72,759
Currency translation adjustment............................ 1,777 -- 1,777
---------------
Comprehensive income (as restated - see Note 3)............ 74,536
Common stock issued under stock incentive plans and
related tax benefits..................................... -- -- 16,238
Increase in treasury stock (as restated - see Note 3)...... -- (130) (130)
------------------ ------------ ---------------
BALANCE AT JANUARY 3, 2004 (AS RESTATED - SEE NOTE 3)...... 1,391 (7,340) 737,377
Net income................................................. -- -- 60,521
Currency translation adjustment............................ 1,228 -- 1,228
---------------
Comprehensive income....................................... 61,749
Common stock issued under stock incentive plans and
related tax benefits..................................... -- -- 10,149
Increase in treasury stock, net............................ -- 78 78
------------------ ------------ ---------------
BALANCE AT JANUARY 1, 2005................................. $2,619 $(7,262) $809,353
------------------ ------------ ---------------
================== ============ ===============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
----------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
JANUARY 1, JANUARY 3, JANUARY 4,
FISCAL YEAR ENDED 2005 2004 2003
RESTATED RESTATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $60,521 $72,759 $ 65,585
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization..................... 81,318 71,348 60,124
Deferred income taxes............................. (1,112) 37,126 30,409
Loss on disposal of assets........................ 3,109 2,025 1,264
Federal tax benefit from common stock
issued under stock incentive plans........... 1,500 2,614 625
Changes in assets and liabilities:
(Increase) decrease in accounts receivable...... 3,851 (4,914) 4,801
Increase in inventories......................... (11,997) (82,266) (122,171)
Increase in prepaid expenses and other
current assets.............................. (6,033) (8,429) (12,455)
Increase in deferred charges
and other non-current assets................. (4,899) (622) (1,465)
Increase (decrease) in accounts payable......... (5,431) 31,194 47,823
Increase in accrued expenses
and other liabilities..................... 56,514 30,057 34,822
----------------- ---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 177,341 150,892 109,362
----------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................. (119,052) (113,296) (110,820)
----------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock issuance............. -- -- 95,833
Proceeds from common stock issued under
stock incentive plans............................. 8,649 13,624 4,594
Issuance (purchase) of treasury stock............... 78 (130) 207
Decrease in short-term borrowings................... -- (2,119) (27,930)
----------------- ---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 8,727 11,375 72,704
----------------- ---------------- ----------------
Effect of exchange rate changes on cash
and cash equivalents.............................. 864 553 (78)
Net increase in cash and cash equivalents........... 67,880 49,524 71,168
Cash and cash equivalents at beginning of
year........................................... 136,129 86,605 15,437
----------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR............... $204,009 $136,129 $ 86,605
================= ================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized)............... $ 4,018 $ 3,888 $ 5,945
Income taxes........................................ $ 20,407 $11,545 $ 5,735
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Linens 'n Things, Inc. and its subsidiaries (collectively the "Company") operate
in one segment, the retail industry, and had 492 stores in 45 states across the
United States and in five provinces in Canada as of the fiscal year ended
January 1, 2005. The Company's stores offer a broad assortment of home textiles,
housewares and home accessories, carrying both national brands and private label
goods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include those of Linens 'n Things, Inc.
and its wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
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.
FISCAL PERIODS
The Company utilizes a 52/53-week period ending on the Saturday nearest the last
day of December. Accordingly, fiscal 2004 was a 52-week period that ended
January 1, 2005 ("fiscal 2004"), fiscal 2003 was a 52-week period that ended
January 3, 2004 ("fiscal 2003") and fiscal 2002 was a 53-week period that ended
January 4, 2003 ("fiscal 2002").
REVENUE RECOGNITION
The Company recognizes revenue at the time merchandise is purchased by customers
at its retail stores or when shipped for merchandise purchased from its website
or ordered by telephone. Shipping terms for merchandise purchased from its
website or ordered by telephone are FOB shipping point and title passes to the
customer upon delivery of the merchandise to the carrier. Shipping and handling
fees billed to customers in a sale transaction are included in sales.
Revenue from gift cards, gift certificates and merchandise credits are
recognized when redeemed. As part of the Company's private-label credit card
("PLCC") program, when customers purchase merchandise using their PLCC they earn
points that enable them to receive future free or discounted merchandise once
they reach certain purchase thresholds. The value of these points is accrued for
on each PLCC purchase, net of an estimate for points never to be redeemed. The
value of these points is reflected as a reduction of net sales and the estimate
of the points never to be redeemed is reflected as a reduction of cost of sales
in the Consolidated Statements of Operations.
Provisions for estimated future sales returns are recorded in the period that
the related sales are recorded. The Company determines the amount of provision
based on historical information. Sales discounts, coupons and other similar
incentives are recorded as a reduction of sales revenue in the period when the
related sales are recorded.
INVENTORIES
Inventories consist of finished goods merchandise purchased from domestic and
foreign vendors and are carried at the lower of cost or market; cost is
determined by the retail inventory method of accounting. Amounts are removed
from inventory at the average cost method.
DEFERRED RENT
The Company accrues for scheduled rent increases contained in its leases on a
straight-line basis over the expected lease term, beginning when the Company
first obtains possession of the premises, including cancelable option periods in
those instances where exercising such options is reasonably assured.
STORE OPENING AND CLOSING COSTS
New store opening costs are charged to expense as incurred. Store opening costs
primarily include rent, store payroll and general operating costs incurred prior
to the store opening.
32
Prior to the adoption of Statement of Financial Accounting Standards No. 146
("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal
Activities," in the event a store was closed before its lease expired, the
remaining lease obligation, less anticipated sublease rental income, and asset
impairment charges related to improvements and fixtures, inventory writedowns,
and other miscellaneous closing costs, were provided for in the period in which
management determined to close the store. In fiscal 2001, the Company recorded a
pre-tax restructuring and asset impairment charge of $37.8 million related to
the closing of certain under-performing stores (see Note 4). As of January 1,
2005 and January 3, 2004, the Company had $9.0 million and $15.6 million,
respectively, remaining related to this reserve related primarily to lease
obligations.
The Company has adopted the provisions of SFAS No. 146 for exit or disposal
activities, if any, initiated after December 31, 2002. SFAS No. 146 requires the
Company to recognize costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. Although the Company believes the adoption of SFAS No. 146 will not impact
the consolidated financial position or results of operations, it can be expected
to impact the timing of liability recognition associated with future exit
activities, if any.
FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses are reflected in the Consolidated Financial Statements at carrying
values which approximate fair value due to the short-term nature of these
instruments.
CASH AND CASH EQUIVALENTS
Cash equivalents are considered to be those securities with maturities of three
months or less when purchased.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets (40 years for
buildings and 5 to 15 years for furniture, fixtures and equipment). Capitalized
software costs are amortized on a straight-line basis over their estimated
useful lives of 3 to 5 years, beginning in the year placed in service. Leasehold
improvements, including amounts reimbursed by landlords, are amortized over the
expected lease term, including cancelable option periods in those instances
where exercising such options is reasonably assured.
Maintenance and repairs are charged directly to expense as incurred. Major
renewals or replacements are capitalized after making the necessary adjustments
to the asset and accumulated depreciation accounts of the items renewed or
replaced.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including fixed assets and goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the Company estimates the undiscounted future cash flows to result
from the use of the asset and its ultimate disposition. If the sum of the
undiscounted cash flows is less than the carrying value, the Company recognizes
an impairment loss, measured as the amount by which the carrying value exceeds
the fair value of the asset. Fair value would generally be determined by market
value. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
DEFERRED CHARGES
Deferred charges, principally lease acquisition fees, are amortized on a
straight-line basis, generally over the expected lease term, beginning when the
Company first obtains possession of the premises, including cancelable option
periods in those instances where exercising such option is reasonably assured.
GOODWILL
Prior to fiscal 2002, the excess of acquisition costs over the fair value of net
assets acquired was amortized on a straight-line basis over 32 years. In fiscal
2002, the Company adopted SFAS No. 142, "Goodwill and Intangible Assets," which
no longer permits the amortization of goodwill.
33
COSTS OF SALES
In addition to the cost of inventory sold, the Company includes its buying and
distribution expenses in its cost of sales. Buying expenses include all direct
and indirect costs to procure merchandise. Distribution expenses include the
cost of operating the Company's distribution centers and freight expense related
to transporting merchandise.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") in the Consolidated
Statements of Operations include store payroll and selling expenses, store
occupancy costs, advertising and other corporate expenses.
VENDOR ALLOWANCES
The Company receives various types of allowances from its merchandise vendors,
which are based on negotiated terms, to cover costs such as freight expense,
damages and markdowns and advertising. These allowances are recorded as an
offset to the expense as incurred or when the merchandise is sold, as
applicable, and is reflected as a reduction of cost of sales in accordance with
the provisions of the Emerging Issues Task Force Issue No. 02-16, "Accounting by
a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor" ("EITF 02-16"), issued by the Financial Accounting Standards Board
("FASB") in January 2003.
EITF 02-16 states that cash consideration received from a vendor is presumed to
be a reduction of the prices of the vendor's products or services and should,
therefore, be characterized as a reduction of cost of merchandise sold when
recognized in the Company's Consolidated Statement of 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
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. Vendor
allowances, which are reflected as a reduction of inventory, and vendor purchase
discounts are amortized to reduce cost of sales on an inventory turn basis.
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 as the advertising allowances
received are presumed to be reductions in the cost of inventory under EITF 02-16
when the costs cannot be determined as incremental and specifically
identifiable.
ADVERTISING COSTS
The Company expenses the production costs of advertising at the commencement
date of the advertisement. Gross advertising costs were $103.5 million, $95.0
million and $78.6 million for fiscal years 2004, 2003 and 2002, respectively.
Prior to the implementation of EITF 02-16 in fiscal 2004, advertising costs, net
of vendor credits totaling $24.7 million and $18.8 million for fiscal years 2003
and 2002, respectively, were recorded as a component of selling, general and
administrative expenses.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to estimated taxable income to be realized in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in statutory tax rates
is recognized in income in the period that includes the enactment date.
STOCK-BASED COMPENSATION
The Company grants stock options and restricted stock units for a fixed number
of shares to employees and directors. The exercise prices of the stock options
are equal to the fair market value of the underlying shares at the date of
grant. The Company has adopted the disclosure provisions of Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). In accordance with
the provisions of SFAS No. 123, the Company accounts for stock option grants and
restricted stock unit grants in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for
34
Stock Issued to Employees". Accordingly, the Company does not recognize
compensation expense for stock option grants and amortizes restricted stock unit
grants at fair market value over specified vesting periods. In December 2002,
the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123" ("SFAS No. 148"). This statement amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company continues to account for stock-based
compensation using APB Opinion No. 25 and has not adopted the recognition
provisions of SFAS No. 123, as amended by SFAS No. 148.
For fiscal years ended 2004, 2003 and 2002, the Company accounted for stock
options using the intrinsic value method prescribed under APB No. 25, and
accordingly, no compensation cost has been recognized in connection with stock
option grants in the accompanying Consolidated Financial Statements.
The compensation cost that was charged against income for its restricted stock
unit grants is $0.5 million, $0.8 million and $1.9 million for fiscal years
2004, 2003 and 2002, respectively.
In December 2004 the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS No. 123 (Revised 2004)"). Effective for the third quarter of
fiscal 2005, SFAS No. 123 (Revised 2004) will require the Company to recognize
the grant-date fair value of stock options grants as compensation expense in the
Consolidated Statements of Income.
Set forth below are the Company's net income and net income per share presented
"as reported" and as if compensation cost had been recognized in accordance with
the provisions of SFAS No. 123:
FISCAL YEAR ENDED
- ----------------------------------------------------------------------
2003 2002
(IN MILLIONS, EXCEPT PER SHARES DATA) 2004 RESTATED RESTATED
- ----------------------------------------------------------------------
NET INCOME:
As presented................... $60.5 $72.8 $65.6
Add: Stock-based employee
compensation expense included
in net income as presented,
net of tax 0.3 0.5 1.2
---------------------------------
60.8 73.3 66.8
Deduct: Total stock-based
employee compensation expense
determined under the fair value
based method for all awards, net
of related tax effects........... 8.6 11.4 8.1
---------------------------------
Pro forma................... $52.2 $61.9 $58.7
---------------------------------
NET INCOME PER SHARE OF COMMON
STOCK:
Basic:
As presented................ $1.34 $1.65 $1.55
Pro forma................... $1.16 $1.40 $1.38
Diluted:
As presented................ $1.32 $1.62 $1.51
Pro forma................... $1.16 $1.40 $1.38
---------------------------------
The effects of applying SFAS No. 123 in this disclosure are not necessarily
indicative of future amounts.
The fair value of each stock option grant and restricted stock unit grant is
estimated on the date of grant using the Black-Scholes option-pricing model
using the following assumptions for grants:
FISCAL YEAR ENDED 2004 2003 2002
------------------------------------------------------
Expected life (years)....... 5.0 5.7 6.9
Expected volatility......... 43.5% 40.7% 47.4%
Risk-free interest rate..... 3.6% 1.5% 2.2%
Expected dividend yield..... 0.0% 0.0% 0.0%
35
The weighted-average fair value of options granted as of January 1, 2005,
January 3, 2004 and January 4, 2003 was $10.48, $12.19 and $11.98, respectively.
The weighted-average fair value of restricted stock units granted as of January
1, 2005, January 3, 2004 and January 4, 2003 was $12.81, $13.48 and $13.53,
respectively.
EARNINGS PER SHARE
The Company presents earnings per share on a "basic" and "diluted" basis. Basic
earnings per share is computed by dividing net income by the weighted-average
number of shares outstanding during the period. Diluted earnings per share is
computed by dividing net income by the weighted-average number of shares
outstanding adjusted for dilutive common stock equivalents.
The calculation of basic and diluted earnings per share ("EPS") for fiscal 2004,
2003 and 2002 is as follows (in thousands, except per share amounts):
FISCAL YEAR ENDED
------------------------------------------------------------
---------------------------------- 2003 2002
2004 RESTATED RESTATED
------------------------------------------------------------
Net income............ $ 60,521 $ 72,759 $ 65,585
======== ========== ==========
Average shares
outstanding:
Basic 45,055 44,225 42,409
Effect of
outstanding stock
options and
restricted stock
unit grants.......... 749 622 886
-------- ---------- ----------
Diluted............... 45,804 44,847 43,295
======== ========== ==========
Earnings per share
Basic................ $ 1.34 $ 1.65 $ 1.55
======== ========== ==========
Diluted.............. $ 1.32 $ 1.62 $ 1.51
======== ========== ==========
Options for which the exercise price was greater than the average market price
of common shares as of the fiscal years ended 2004, 2003 and 2002 were not
included in the computation of diluted earnings per share as the effect would be
antidilutive. These consisted of options totaling 1,638,000 shares, 2,430,000
shares and 1,560,000 shares, respectively.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts and timing of revenues and of
expenses during the reporting period. The Company's management believes the
following critical accounting estimates involve significant estimates and
judgments inherent in the preparation of the Consolidated Financial Statements.
VALUATION OF INVENTORY: Inventories are valued using the lower of cost or market
value, determined by the retail inventory method ("RIM"). Under RIM, the
valuation of inventories at cost and the resulting gross margins are calculated
by applying a calculated cost-to-retail ratio to the retail value of
inventories. RIM is an averaging method that is used in the retail industry due
to its practicality. Inherent in RIM calculation are certain significant
management judgments and estimates including, among others, merchandise mark-on,
mark-up, markdowns and shrinkage based on historical experience between the
dates of physical inventories, all of which significantly impact the ending
inventory valuation at cost. The methodologies utilized by the Company in its
application of 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 the recorded provision for future sales
returns. As such, 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
36
preparing our financial statements for fiscal 2004 and fiscal 2003, the
Company's sales returns reserve was approximately $7.4 million and $6.2 million,
respectively.
IMPAIRMENT OF ASSETS: In accordance with SFAS No. 142, the Company reviews
goodwill for possible impairment at least annually. Impairment losses are
recognized when the implied fair value of goodwill is less than its carrying
value. The Company periodically evaluates long-lived assets other than goodwill
for indicators of impairment. The Company's judgments regarding the existence of
impairment indicators are based on market conditions and operational
performance. Future events could cause the Company to conclude that impairment
indicators exist and that the value of long-lived assets and goodwill is
impaired. At the end of fiscal 2004 and fiscal 2003, the Company's net value for
property and equipment was approximately $578.8 million and $542.2 million,
respectively, and goodwill was $18.1 million for fiscal years 2004 and 2003.
STORE CLOSURE COSTS: Prior to the adoption of SFAS No. 146, the Company recorded
estimated store closure costs, such as fixed asset write-offs, estimated lease
commitment costs net of estimated sublease income, markdowns for inventory that
will be sold below cost, and other miscellaneous store closing costs, in the
period in which management determined to close a store. Such estimates may be
subject to change should actual costs differ. In 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 January 1, 2005 and January 3, 2004, the Company had $9.0 million
and $15.6 million, respectively, remaining related to this reserve. The Company
continues to negotiate the lease buyouts or sublease agreements for these stores
and based upon final resolution of such negotiations, such estimates may be
subject to change.
The Company has adopted the provisions of SFAS No. 146 for exit or disposal
activities, if any, initiated after December 31, 2002. Although the Company
believes the adoption of SFAS No. 146 does not impact the consolidated financial
position or results of operations, it can be expected to impact the timing of
liability recognition associated with future exit activities, if any.
SELF-INSURANCE: The Company purchases third party insurance for worker's
compensation, medical, auto and general liability costs that exceed certain
levels for each type of insurance program. However, the Company is responsible
for the payment of claims for amounts under these insured excess limits. The
Company establishes accruals for its insurance programs based on available
claims data and historical trend and experience, as well as loss development
factors prepared by third party actuaries. In preparing the estimates, the
Company also considers the nature and severity of the claims, analysis provided
by third party claims administrators, as well as current legal, economic and
regulatory factors.
The Company evaluates the accrual and the underlying assumptions periodically
and makes adjustments as needed. The ultimate cost of these claims may be
greater than or less than the established accrual. While the Company believes
that the recorded amounts are adequate, there can be no assurance that changes
to management's estimates will not occur due to limitations inherent in the
estimate process. In the event the Company determines the accruals should be
increased or reduced, the Company would record such adjustments in the period in
which such determination is made.
The accrued obligation for these self-insurance programs was approximately $14.5
million for fiscal year 2004 and $13.5 million for fiscal year 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.
3. RESTATEMENT OF FINANCIAL STATEMENTS
On February 7, 2005, the Office of the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a clarification regarding accounting for
leases under generally accepted accounting principles in the United States of
America. As a result of this clarification, the Company reviewed its lease
accounting practices and determined that its former methods of accounting for
leases and landlord allowances were not consistent with the views expressed by
the SEC. As a result, the Company has restated its Consolidated Financial
Statements for fiscal 2003 and 2002, contained in this Annual Report.
Historically, the Company had recognized rent expense commencing as of the store
opening date as opposed to when the Company took possession of the leased
property. The Company's landlords typically provide access to the leased
property free-of-charge for a period of time before the store opening so that
the Company can build out or fixture the store and stock
37
it with merchandise. Based on its evaluation, the Company now includes this
period in calculating straight-line rent expense and amortization of landlord
allowances and lease acquisition fees.
The Company has corrected its accounting to recognize rent and amortization
expense on a straight-line basis over the expected lease term, including
cancelable option periods in those instances where exercising such options is
reasonably assured. Previously, the Company did not include these cancelable
option periods in calculating straight-line rent expense and amortization
expense for lease acquisition fees.
For new stores, the Company generally receives allowances from landlords for the
construction of leasehold improvements. Historically, landlord allowances have
been classified on the Consolidated Balance Sheets as a reduction of property
and equipment, and have been classified as a reduction in capital expenditures
on the Consolidated Statements of Cash Flows. The Company now classifies
landlord allowances as deferred rent credit reflected in long-term liabilities
on the Consolidated Balance Sheets and as an operating activity on the
Consolidated Statements of Cash Flows. This adjustment increased both property
and equipment and other long-term liabilities on the Consolidated Balance Sheets
by approximately $165 million in fiscal 2003 (see item C in the following
summary tables for adjustments by year).
The adjustments presented in the following tables include the lease accounting
restatement adjustments and other immaterial adjustments and reclassifications
described below.
As a result of the lease accounting restatement, SG&A in fiscal 2003 and fiscal
2002 increased approximately $3.9 million and $5.5 million, respectively.
Earnings per share on a fully diluted basis decreased by approximately $0.06 and
$0.08 for the fiscal years 2003 and 2002, respectively. The cumulative impact of
the correction of accounting for leases decreased retained earnings, net of tax,
by $16.9 million as of December 29, 2001, with a corresponding increase to
deferred income taxes and other long-term liabilities of $13.3 million and a
decrease to deferred charges and other non-current assets of $3.5 million (see
item A in the following summary tables for adjustments by year).
Certain prior period balances relating to the Company's trade payables program
with General Electric Capital Corporation ("GECC") have been adjusted and
reclassified (see Note 7). Pursuant to the agreement with GECC any favorable
economics realized by GECC for transactions under this program are shared with
the Company. The Company now recognizes the gross discount earned as part of the
program as a reduction of the cost of inventory in the Consolidated Balance
Sheets and records the related portion of interest expense due GECC as interest
expense in the Consolidated Statements of Operations. Prior to fiscal 2004, only
the Company's share was reflected as a reduction of cost of sales in the
Consolidated Statements of Operations. As a result of the adjustment and
reclassification, interest expense increased approximately $3.0 million and $3.3
million in fiscal 2003 and 2002, respectively. Cost of sales decreased
approximately $3.5 million and $2.8 million in fiscal 2003 and 2002,
respectively. Earnings per share on a fully diluted basis increased by
approximately $0.01 and decreased by approximately $0.01 for the fiscal years
ended 2003 and 2002, respectively. Retained earnings, net of tax, decreased by
approximately $1.0 million as of December 29, 2001, with a corresponding
decrease to inventories of $1.7 million and a decrease to accrued expenses and
other current assets of $0.7 million (see item B in the following summary tables
for adjustments by year).
38
Following is a summary of the effects of these changes on the Company's
Consolidated Balance Sheet as of January 3, 2004, as well as the effects of
these changes on the Company's Consolidated Statements of Operations, Cash Flows
and Shareholders' Equity for each of the two fiscal years ended January 3, 2004:
Consolidated Statements of
Operations
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
-------------------------------------
Fiscal Year Ended As
January 3, 2004 Previously As
Restated Reported Adjustments* Restated
- ---------------------------------------------------------
Cost of sales ..... $1,430,422 $ (3,542)(B) $1,426,880
Gross profit ...... 964,850 3,542 (B) 968,392
Selling, general
and
administrative
expenses......... 842,897 3,929 (A) 846,826
------------
Operating profit .. 121,953 (3,929)(A) 121,566
3,542 (B)
------------
(387)
------------
Interest expense .. 1,045 2,956 (B) 4,001
Interest expense,
net ............. 876 2,956 (B) 3,832
Income before
income taxes..... 121,077 (3,929)(A) 117,734
586 (B)
------------
(3,343)
------------
Provision for 46,252 (1,501)(A) 44,975
income taxes..... 224 (B)
------------
(1,277)
------------
Net income ........ 74,825 (2,428)(A) 72,759
362 (B)
------------
(2,066)
------------
Net income per
share - basic ... $ 1.69 $ (0.05)(A) $ 1.65
0.01 (B)
------------
(0.04)
------------
Net income per
share - fully
diluted ......... $ 1.67 $ (0.06)(A) $ 1.62
0.01 (B)
------------
(0.05)
- ---------------------------------------------------------
Fiscal Year Ended As
January 4, 2003 Previously As
Restated Reported Adjustments* Restated
- ---------------------------------------------------------
Cost of sales ..... $1,311,370 $ (2,846)(B) $1,308,524
Gross profit ...... 873,346 2,846 (B) 876,192
Selling, general
and
administrative
expenses......... 759,077 5,513 (A) 764,590
------------
Operating profit .. 114,269 (5,513)(A) 111,602
2,846 (B)
------------
(2,667)
------------
Interest expense .. 2,329 3,259 (B) 5,588
Interest expense,
net ............. 2,250 3,259 (B) 5,509
Income before 112,019 (5,513)(A) 106,093
income taxes..... (413)(B)
------------
(5,926)
------------
Provision for
income taxes..... 42,773 (2,107)(A) 40,508
(158)(B)
------------
(2,265)
------------
Net income ........ 69,246 (3,406)(A) 65,585
(255)(B)
------------
(3,661)
------------
Net income per
share - basic ... $ 1.63 $ (0.08)(A) $ 1.55
Net income per
share - fully
diluted ......... $ 1.60 $ (0.08)(A) $ 1.51
(0.01)(B)
------------
(0.09)
------------
39
- ---------------------------------------------------------
Consolidated Balance Sheet
(IN THOUSANDS)
------------------------------------
Fiscal Year Ended As
January 3, 2004 Previously As
Restated Reported Adjustments* Restated
- --------------------------------------------------------
Inventories ....... $ 701,928 $ (1,522)(B) $ 700,406
Total current
assets .......... 902,136 (1,522)(B) 900,614
Property and
equipment, net .. 377,244 164,947 (C) 542,191
Deferred charges
and other
non-current
assets, net ..... 10,783 (4,258)(A) 6,525
Total assets ...... 1,308,289 (4,258)(A) 1,467,456
(1,522)(B)
164,947 (C)
-------------
159,167
-------------
Accrued expenses
and other current
liabilities ..... 176,775 (581)(B) 176,194
Total current
liabilities ..... 442,676 (581)(B) 442,095
Deferred income
taxes and other
long-term
liabilities ..... 104,623 183,361 (A)(C) 287,984
Total liabilities . 547,299 18,414 (A) 730,079
(581)(B)
164,947 (C)
-------------
182,780
-------------
Retained earnings . 404,006 (22,672)(A) 380,393
(941)(B)
-------------
(23,613)
-------------
Total
shareholders'
equity .......... 760,990 (22,672)(A) 737,377
(941)(B)
-------------
(23,613)
-------------
Total liabilities
and shareholders'
equity .......... 1,308,289 (4,258)(A) 1,467,456
(1,522)(B)
164,947 (C)
-------------
159,167
40
- --------------------------------------------------------
Consolidated Statements of Cash
Flows
(IN THOUSANDS)
------------------------------------
Fiscal Year Ended As
January 3, 2004 Previously As
Restated Reported Adjustments* Restated
- --------------------------------------------------------
Net cash provided
by operating
activities ..... $ 119,090 $ 31,802 (C) $ 150,892
Additions to
property and
equipment ...... (81,494) (31,802)(C) (113,296)
Cash paid for
interest........ 932 2,956 (B) 3,888
- --------------------------------------------------------
Fiscal Year Ended As
January 4, 2003 Previously As
Restated Reported Adjustments* Restated
- --------------------------------------------------------
Net cash provided
by operating
activities ..... $ 80,729 $ 28,633 (C) $ 109,362
Additions to
property and
equipment ...... (82,187) (28,633)(C) (110,820)
Cash paid for
interest........ 2,686 3,259 (B) 5,945
- --------------------------------------------------------
Consolidated Statements of
Shareholders' Equity and
Comprehensive Income
(IN THOUSANDS)
------------------------------------
At December 29, 2001 As
Restated Previously As
Retained Earnings Reported Adjustments* Restated
- --------------------------------------------------------
Retained earnings $ 259,935 $(16,838)(A) $242,049
(1,048)(B)
-------------
(17,886)
- --------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement (landlord allowance adjustment only)
Certain prior period balances relating to the Company's deferred compensation
plan have been reclassified. The Company's total liability amounting to $2.8
million for fiscal 2003 was reclassified to accrued expenses and other current
liabilities from deferred income taxes and other long-term liabilities. In
addition, the plan's investment in the Company's common stock totaling $0.7
million for fiscal 2003 was reclassified to treasury stock from prepaid expenses
and other current assets. These amounts are included in the "As Previously
Reported" column in the preceding summary tables.
41
4. 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 in fiscal 2005.
As of January 1, 2005 the Company has $9.0 million remaining in the 2001
restructuring and asset impairment charge. The following table displays a roll
forward of the activity for fiscal years 2004 and 2003, and the reserves
remaining as of January 1, 2005 ($ in millions):
REMAINING FISCAL REMAINING FISCAL REMAINING
AT 2003 AT 2004 AT
1/04/03 USAGE 1/03/04 USAGE 1/01/05
Lease commitments $19.4 $(3.8) $15.6 $(6.6) $9.0
Other 2.8 (2.8) -- -- --
------------------------------------------------------
$22.2 $(6.6) $15.6 $(6.6) $9.0
======================================================
The 2004 usage primarily consists of payments for lease commitments. The 2004
activity also includes the reversal of estimated lease commitment costs of
approximately $1.1 million as these reserves were not needed, offset by an
increase to lease commitment costs by approximately $1.8 million due to changes
in estimates based on current negotiations. The 2003 activity primarily consists
of payments for lease commitments and miscellaneous store closing costs. The
2003 activity also includes the reversal of estimated lease commitment and other
store closing costs of $2.3 million as these reserves were not needed. In
addition, changes in estimates to lease commitment costs based on negotiations
resulted in the increase to lease commitment costs of $2.5 million during fiscal
2003. The net changes in the restructuring reserve have been reflected within
SG&A on the Consolidated Statements of Operations. The restructuring reserve
balance is included in accrued expenses and other current liabilities in the
Consolidated Balance Sheets.
5. ACCOUNTS RECEIVABLE
FISCAL YEAR ENDED
ACCOUNTS RECEIVABLE CONSISTED OF
THE FOLLOWING (IN THOUSANDS): 2004 2003
- -------------------------------------------------------------
Credit card settlements due...... $16,538 $24,070
Due from landlords............... 5,431 2,510
Other............................ 3,797 2,951
---------- ----------
$25,766 $29,531
- -------------------------------------------------------------
Amounts due from landlords are allowances provided by landlords to cover certain
new store capital costs.
The Company has typically not provided an allowance for doubtful accounts for
these receivables, as its bad debt experience has been insignificant.
6. PROPERTY AND EQUIPMENT
FISCAL YEAR ENDED
PROPERTY AND EQUIPMENT CONSISTED 2003
OF THE FOLLOWING (IN THOUSANDS): 2004 RESTATED
Land............................... $ 1,480 $ 400
Building........................... 6,080 4,760
Furniture, fixtures and equipment.. 556,822 496,955
Leasehold improvements............. 371,095 323,192
Computer software.................. 26,152 21,496
------------ ------------
961,629 846,803
Less:
Accumulated depreciation
and amortization .............. 382,813 304,612
------------ ------------
$ 578,816 $ 542,191
- --------------------------------------------------------------
42
7. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
ACCOUNTS PAYABLE
The Company maintains a trade payables program with General Electric Capital
Corporation ("GECC") under which GECC pays participating Company suppliers the
amount due from the Company in advance of the original due date. In exchange for
the earlier payment, these suppliers accept a discounted payment. On the
original due date of the payables, the Company pays GECC the full amount.
Pursuant to the agreement any favorable economics realized by GECC for
transactions under this program are shared with the Company. The Company
recognizes the total vendor discount realized by GECC as a reduction of the cost
of inventory in the Consolidated Balance Sheets and records the share of the
vendor discount due GECC as interest expense in the Consolidated Statements of
Operations. At January 1, 2005 and January 3, 2004, the Company owed
approximately $65.0 million and $66.2 million, respectively, to GECC under this
program. These balances are included in the Company's accounts payable. Either
party may terminate the program for any reason after giving 30 days of prior
written notice. The maximum amount permitted under the program was $95 million
as of January 1, 2005.
In addition, included in accounts payable are amounts for gift card liabilities
of $30.5 million and $27.5 million as of January 1, 2005 and January 3, 2004,
respectively. Gift cards that are not expected to be redeemed are recorded as a
reduction to selling, general and administrative expense in the Consolidated
Statements of Operations. Such amounts recognized for fiscal 2004, 2003 and 2002
amounted to $5.3 million, $2.5 million and $1.0 million, respectively.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
FISCAL YEAR ENDED
ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES CONSISTED OF THE 2003
FOLLOWING (IN THOUSANDS): 2004 RESTATED
- ---------------------------------------------------------------
Other taxes payable.............. $33,123 $27,513
Income taxes payable............. 31,381 15,247
Salaries and employee benefits... 22,376 24,320
Other............................ 125,764 109,114
------------ ------------
$212,644 $176,194
- ---------------------------------------------------------------
Included in "other" is miscellaneous store operating and corporate office
accrued expenses.
8. SHORT-TERM BORROWING ARRANGEMENTS
In November 2004, the Company entered into a $250 million senior
revolving credit facility agreement (the "Credit Agreement") with third party
institutional lenders to expire November 23, 2009. The Credit Agreement allows
for up to $50 million of borrowings from additional lines of credit outside of
the Credit Agreement. As of January 1, 2005, the additional lines of credit
include committed facilities of approximately $17 million that expire on May 31,
2005 and $12 million that expire on June 15, 2005 and are subject to periodic
renewal arrangements. The Credit Agreement replaced the $150 million senior
revolving credit facility amended June 2002, which allowed for up to $40 million
in borrowings from additional lines of credit outside the agreement ("2002
Credit Agreement").
Under the Credit Agreement, 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 January 1, 2005, the Company
was in compliance with its covenants under the Credit Agreement. Under the
Credit Agreement, the amount of dividends that the Company may pay may not
exceed the sum of $50 million plus, on a cumulative basis, an amount equal to
25% of the consolidated net income for each fiscal quarter, commencing with the
fiscal quarter ending April 3, 2004. The Company has never paid cash dividends
and does not currently anticipate paying cash dividends in the future. At
various times throughout 2004 and 2003, the Company borrowed against the Credit
Agreement and the 2002 Credit Agreement for seasonal working capital needs. As
of January 1, 2005, the Company had
43
no borrowings under the Credit Agreement and no borrowings under the additional
lines of credit. The Company also had $76.2 million of letters of credit
outstanding as of January 1, 2005, 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.
9. DEFERRED INCOME TAXES AND OTHER LONG-TERM LIABILITIES
- ------------------------------------------------------------
FISCAL YEAR ENDED
DEFERRED INCOME TAXES AND
OTHER LONG-TERM LIABILITIES
CONSISTED OF THE FOLLOWING (IN 2003
THOUSANDS): 2004 RESTATED
- ------------------------------------------------------------
Deferred income taxes............ $62,720 $54,697
Deferred rent.................... 69,390 62,410
Deferred rent credit............. 176,975 165,677
Other............................ 9,153 5,200
----------- ------------
$318,238 $287,984
- ------------------------------------------------------------
Deferred rent represents the unamortized accrual for scheduled rent increases
contained in its leases and deferred rent credits represent the unamortized
portion of landlord allowances.
10. LEASES
The Company has non-cancelable operating leases, primarily for retail stores,
which expire through 2029. The leases generally contain renewal options for
periods ranging from 5 to 20 years in total and require the Company to pay costs
such as real estate taxes and common area maintenance. Contingent rentals are
paid based on a percentage of net sales as defined by lease agreements. Net
rental expense for all operating leases was as follows (in thousands):
FISCAL YEAR ENDED
- ---------------------------------------------------------------
2003 2002
2004 RESTATED RESTATED
- ---------------------------------------------------------------
Minimum rentals..... $248,543 $221,424 $199,280
Contingent rentals.. 17 34 128
----------------------------------
248,560 221,458 199,408
Less:
Sublease rentals.... 3,599 2,903 3,128
----------------------------------
$244,961 $218,555 $196,280
- ---------------------------------------------------------------
At fiscal year end 2004, the future minimum rental payments required under
operating leases and the future minimum sublease rentals excluding lease
obligations for closed stores and the one remaining store planned to be closed
resulting from the 2001 restructuring and asset impairment charge were as
follows (in thousands):
FISCAL YEAR
- -----------------------------------------------------------
2005 $ 257,622
2006 263,469
2007 262,630
2008 259,830
2009 257,041
Thereafter................................ 1,426,275
-------------
$2,726,867
-------------
Total future minimum sublease rentals..... $ 38,771
-------------
- -----------------------------------------------------------
As of March 17, 2005, the Company had fully executed leases for 60 stores
planned to open in fiscal years 2005 and 2006, for which aggregate minimum
rental payments over the term of the leases is approximately $264.8 million. The
table above includes payments for stores that had fully executed leases as of
January 1, 2005.
The Company also 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 January 1, 2005, the maximum potential amount of future
payments the Company could be required to make under such guarantee is
approximately $0.9 million.
44
11. STOCK INCENTIVE PLANS
The Company has adopted the 2004 Stock Award and Incentive Plan (the "2004
Plan"). The 2004 Plan provides for the granting of options, restricted stock
unit grants and other stock-based awards (collectively, "awards") to key
employees and non-employee directors. The 2004 Plan replaced both the Company's
2000 Stock Award and Incentive Plan (the "2000 Plan") and the Broad-Based Equity
Plan. The 2000 Plan replaced both the Company's 1996 Incentive Compensation Plan
(the "1996 Plan") and the 1996 Non-Employee Directors' Stock Plan (the
"Directors' Plan"). Therefore, no future awards will be made under the 2000
Plan, the Broad-Based Equity Plan, the 1996 Plan or the Directors' Plan
(collectively, the "Prior Plans"), although outstanding awards under the Prior
Plans will continue to be in effect. The Company has also adopted the New Hire
Authorization. The New Hire Authorization provides for the granting of awards as
an inducement to a person being retained for employment by the Company.
Under the 2004 Plan, an aggregate of 4,000,000 shares (plus any shares under
outstanding awards under the Prior Plans which become available for further
grants) was authorized for issuance of awards. Under the New Hire Authorization,
an aggregate of 500,000 shares was authorized.
Stock options under the 2004 Plan and the New Hire Authorization are granted
with exercise prices at the fair market value of the underlying shares at the
date of grant. The right to exercise options generally commences one to five
years after the grant date, and the options expire between five to ten years
after the grant date. Restrictions on restricted stock unit grants lapse over
vesting periods of up to five years. Restricted stock unit grants are considered
outstanding as of the grant date for purposes of computing diluted EPS and are
considered outstanding upon vesting for purposes of computing basic EPS.
At fiscal year end 2004, 11,250 restricted stock unit grants were outstanding
under the 2000 Plan. During fiscal 2004, 6,750 restricted stock unit grants were
released, no restricted stock unit grants were awarded and no restricted stock
unit grants were canceled.
At fiscal year end 2004, 15,815 restricted stock unit grants were outstanding
under the Broad-Based Equity Plan. During 2004, 9,300 restricted stock unit
grants were released, 1,557 restricted stock unit grants were awarded and 8,267
restricted stock unit grants were canceled.
At fiscal year end 2004, 62,500 restricted stock unit grants were outstanding
under the 2004 Plan. During 2004, 2,500 restricted stock unit grants were
released, 65,000 restricted stock unit grants were awarded and no restricted
stock unit grants were canceled.
At fiscal year end 2004, 25,000 restricted stock unit grants were outstanding
under the New Hire Authorization. During 2004, no restricted stock unit grants
were released, 25,000 restricted stock unit grants were awarded and no
restricted stock unit grants were canceled.
At fiscal year end 2004, 1,239,018 stock options were outstanding under the 1996
Plan. During fiscal 2004, no stock options were granted, 65,625 stock options
were exercised, 210,977 stock options were canceled, and 1,239,018 stock options
were exercisable at fiscal year end 2004 under the 1996 Plan.
At fiscal year end 2004, 48,800 stock options were outstanding under the
Directors' Plan. During fiscal 2004, no stock options were granted, no stock
options were exercised, no stock options were canceled, and 48,800 stock options
were exercisable at fiscal year end 2004 under the Directors' Plan.
At fiscal year end 2004, 1,474,759 stock options were outstanding under the 2000
Plan. During fiscal 2004, no stock options were granted, 71,673 stock options
were exercised, 13,339 stock options were canceled, and 1,141,268 stock options
were exercisable at fiscal year end 2004 under the 2000 Plan.
At fiscal year end 2004, 1,786,915 stock options were outstanding under the
Broad-Based Equity Plan. During fiscal 2004, 11,600 stock options were granted,
244,648 stock options were exercised, 174,170 stock options were canceled, and
982,663 stock options were exercisable at fiscal year end 2004 under the Broad-
Based Equity Plan.
At fiscal year end 2004, 1,219,595 stock options were outstanding under the 2004
Plan. During fiscal 2004, 1,223,095 stock options were granted, no stock options
were exercised, 1,000 stock options were canceled, and 290 stock options were
exercisable at fiscal year end 2004 under the 2004 Plan.
45
At fiscal year end 2004, 300,000 stock options were outstanding under the New
Hire Authorization. During fiscal 2004, 300,000 stock options were granted, no
stock options were exercised, no stock options were canceled, and no stock
options were exercisable at fiscal year end 2004 under the New Hire
Authorization.
The following tables summarize information about stock option transactions for
the 2004 Plan, the New Hire Authorization, and the Prior Plans:
WEIGHTED
NUMBER -AVERAGE
OF SHARES EXERCISE PRICE
- ------------------------------------------------------------------
Balance at December 29, 2001 4,422,633 $22.91
Options granted 1,291,395 $24.03
Options exercised 129,472 $18.89
Options canceled 237,308 $24.57
- ------------------------------------------------------------------
Balance at January 4, 2003 5,347,248 $23.21
- ------------------------------------------------------------------
Options granted 1,056,625 $27.13
Options exercised 717,652 $17.70
Options canceled 370,397 $23.19
- ------------------------------------------------------------------
Balance at January 3, 2004 5,315,824 $24.72
- ------------------------------------------------------------------
Options granted 1,534,695 $25.56
Options exercised 381,946 $20.46
Options canceled 399,486 $27.54
- ------------------------------------------------------------------
Balance at January 1, 2005 6,069,087 $25.02
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Options Exercisable as of:
January 4, 2003 2,273,230 $22.62
January 3, 2004 3,102,033 $25.06
January 1, 2005 3,412,039 $24.76
- ------------------------------------------------------------------
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED-
AVERAGE
REMAINING
OUTSTANDING CONTRACTUAL WEIGHTED-AVERAGE
RANGE OF AS OF LIFE EXERCISE
EXERCISE PRICE JANUARY 1, 2005 (IN YEARS) PRICE
- ----------------- ----------------- ----------- -----------------
$ 7.75-$11.50 107,150 1.9 $ 7.94
$11.51-$17.25 4,300 2.5 $13.76
$17.26-$21.50 1,320,225 6.0 $19.85
$21.51-$25.75 2,214,929 5.5 $24.36
$25.76-$32.50 2,367,583 5.3 $29.04
$32.51-$48.75 54,900 6.2 $36.68
----------------- ----------- -----------------
TOTAL 6,069,087 5.5 $25.02
================= =========== =================
OPTIONS EXERCISABLE
OUTSTANDING
RANGE OF AS OF WEIGHTED-AVERAGE
EXERCISE PRICE JANUARY 1, 2005 EXERCISE PRICE
- ---------------- ----------------- ------------------
$ 7.75-$11.50 107,150 $ 7.94
$11.51-$17.25 4,300 $13.76
$17.26-$21.50 1,111,338 $19.99
$21.51-$25.75 723,891 $23.59
$25.76-$32.50 1,428,117 $30.03
$32.51-$48.75 37,243 $37.48
----------------- ------------------
TOTAL 3,412,039 $24.76
================= ==================
46
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) savings plan. Company contributions to the plan
amounted to approximately $1.4 million, $1.2 million and $1.2 million for fiscal
years 2004, 2003 and 2002, respectively.
Effective July 1, 1999, the Company established a Supplemental Executive
Retirement Program ("SERP"). The SERP, which in part is funded with the cash
surrender values of certain life insurance policies owned by the Company,
provides eligible executives with supplemental pension benefits, in addition to
amounts received under the Company's 401(k) benefit plan. Under the terms of the
SERP, upon termination of employment with the Company, eligible participants
will be entitled to benefits determined under the SERP beginning at or after age
55. The SERP has three components: (i) a defined benefit component, (ii) a split
dollar insurance component, which is frozen due to limitations imposed by the
Sarbanes-Oxley Act prohibiting the Company from paying premiums into the policy
beginning with the 2003 premium payment and (iii) a new defined contribution
component, which was established in 2004 because of the restrictions on further
premium payments under the split dollar insurance arrangement. This new
component is designed to provide, together with the defined benefit component
and the frozen split dollar policy, total projected benefits similar to what
would have been provided if the split dollar insurance arrangement had not been
frozen. Currently, only the Company's Chairman and Chief Executive Officer is a
participant under the SERP, although additional participants could be added in
the future. The Company recorded expenses related to the SERP of approximately
$170,000, $875,000 and $3,000 for fiscal years 2004, 2003 and 2002,
respectively. Included in fiscal 2003 SERP expense is $784,000 related to the
departure of a former executive.
13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities were as follows (in
thousands):
- ------------------------------------------------------------
2003
Fiscal Year Ended 2004 RESTATED
- ------------------------------------------------------------
DEFERRED TAX ASSETS:
Employee benefits.......... $4,917 $5,020
Lease termination costs. 3,393 5,905
State NOL.................. 3,183 3,023
Other...................... 1,372 1,893
------------ ----------
TOTAL DEFERRED TAX ASSETS....... 12,865 15,841
DEFERRED TAX LIABILITIES:
Inventories................ $11,921 $26,260
Property and equipment..... 68,993 58,742
------------ ----------
TOTAL DEFERRED TAX LIABILITIES.. 80,914 85,002
------------ ----------
NET DEFERRED TAX LIABILITY...... $68,049 $69,161
============ ==========
Deferred tax assets at January 1, 2005 include state net operating loss
carryforward ("NOL") of approximately $64.4 million, expiring at various dates
between 2006 and 2021. Based on the Company's analysis, a valuation allowance is
not required since it is more likely than not that the NOL will be utilized and
deferred tax assets will be realized.
At January 1, 2005 and January 3, 2004, the net deferred tax liability was
included in the Consolidated Balance Sheets as follows (in thousands):
2003
2004 RESTATED
Current deferred taxes.......... $ (5,329) $ (14,464)
Deferred income taxes........... (62,720) (54,697)
------------ -----------
NET DEFERRED TAX LIABILITY...... $ 68,049 $ 69,161
============ ===========
47
The components of income before income taxes comprised the following:
FISCAL YEAR ENDED
- ------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------
(IN THOUSANDS): 2004 RESTATED RESTATED
- ------------------------------------------------------------------
Domestic......... $91,989 $113,102 $108,187
Foreign.......... 5,940 4,632 (2,094)
--------- ------------ ----------
Total $97,929 $117,734 $106,093
--------- ------------ ----------
The provision for income taxes comprised the following for:
FISCAL YEAR ENDED
- ------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------
(IN THOUSANDS): 2004 RESTATED RESTATED
- ------------------------------------------------------------------
CURRENT:
U.S. Federal..... $28,212 $ 5,835 $ 9,000
U.S. State....... 8,932 612 1,099
Non-U.S. ........ 1,376 1,402 --
--------- ------------ ----------
38,520 7,849 10,099
--------- ------------ ----------
DEFERRED:
U.S. Federal..... 2,971 32,600 27,654
U.S. State....... (4,977) 4,264 3,553
Non-U.S. ........ 894 262 (798)
--------- ------------ ----------
(1,112) 37,126 30,409
--------- ------------ ----------
TOTAL $37,408 $44,975 $40,508
========= ============ ==========
- ------------------------------------------------------------------
The Company has not recognized any United States tax expense on its
undistributed international earnings since it has an intention to reinvest the
earnings outside the United States for the foreseeable future. These
undistributed earnings total approximately $11.7 million at January 1, 2005.
The American Job Creation Act of 2004 ("the Act") was signed into law on October
22, 2004. The Act contains numerous amendments and additions to the U.S.
corporate income tax rules. None of these changes, either individually or in the
aggregate, is expected to have a significant effect on the Company's income tax
liability. The Company does not expect to take advantage of the Act's
repatriation provisions.
The following is reconciliation between the statutory Federal income tax rate
and the effective rate for:
FISCAL YEAR ENDED
- ------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------
2004 RESTATED RESTATED
- ------------------------------------------------------------------
Effective tax rate.... 38.2% 38.2% 38.2%
State income taxes,
net of Federal
benefit............. (2.6) (2.7) (2.8)
Foreign taxes......... (0.3) (0.1) 0.1
Other................. (0.3) (0.4) (0.5)
-------------------------------------
Statutory Federal income
tax rate................. 35.0% 35.0% 35.0%
=====================================
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management the ultimate
disposition of these matters is not expected to have a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial information in fiscal 2004 and 2003, restated for
the Company's adjustments to its methods of accounting for leases and leasehold
improvements as well as its trade payable program with GECC (see Note 3), is as
follows:
48
RESTATED FOR ALL FISCAL YEAR 2003 QUARTERS AND FIRST THREE FISCAL 2004 QUARTERS
- -----------------------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT PER FIRST SECOND THIRD FOURTH FISCAL
SHARE DATA) QUARTER QUARTER QUARTER QUARTER YEAR
- -----------------------------------------------------------------------------------
NET SALES
2004 (REPORTED)...... $552,800 $578,749 $654,196 $875,724 $2,661,469
------------------------------------------------------------
2003 (Reported)...... $480,471 $523,672 $602,816 $788,313 $2,395,272
------------------------------------------------------------
GROSS PROFIT2
2004
(REPORTED)........... 220,454 232,499 268,005 348,741 1,069,699
ADJUSTMENTS.......... 792 177 1,101 -- 2,070
------------------------------------------------------------
2004
(RESTATED)........... 221,246 232,676 269,106 348,741 1,071,769
------------------------------------------------------------
2003
(Reported)........... 192,841 213,698 241,948 316,363 964,850
Adjustments.......... 1,412 306 804 1,020 3,542
------------------------------------------------------------
2003
(Restated)........... 194,253 214,004 242,752 317,383 968,392
------------------------------------------------------------
OPERATING
PROFIT2
2004
(REPORTED)........... 64 1,610 27,878 72,689 102,241
ADJUSTMENTS.......... (1,106) (409) 564 -- (951)
------------------------------------------------------------
2004
(RESTATED)........... (1,042) 1,201 28,442 72,689 101,290
------------------------------------------------------------
2003
(Reported)........... 3,440 9,518 34,184 74,811 121,953
Adjustments.......... (383) (690) (98) 784 (387)
------------------------------------------------------------
2003
(Restated)........... 3,057 8,828 34,086 75,595 121,566
------------------------------------------------------------
NET INCOME2
2004
(REPORTED)........... 30 879 17,230 44,361 62,500
ADJUSTMENTS.......... (1,142) (782) (55) -- (1,979)
------------------------------------------------------------
2004
(RESTATED)........... (1,112) 97 17,175 44,361 60,521
------------------------------------------------------------
2003
(Reported)........... 2,078 5,704 20,980 46,063 74,825
Adjustments.......... (722) (914) (542) 112 (2,066)
------------------------------------------------------------
2003
(Restated)........... 1,356 4,790 20,438 46,175 72,759
------------------------------------------------------------
NET INCOME
PER SHARE2
BASIC1
2004
(REPORTED)........... $ - $ 0.02 $ 0.38 $ 0.98 $ 1.39
ADJUSTMENTS.......... (0.02) (0.02) -- -- (0.05)
------------------------------------------------------------
2004
(RESTATED)........... $ (0.02) $ -- $ 0.38 $ 0.98 $ 1.34
------------------------------------------------------------
2003
(Reported)........... $ 0.05 $ 0.13 $ 0.47 $ 1.04 $ 1.69
Adjustments.......... (0.02) (0.02) (0.01) -- (0.04)
------------------------------------------------------------
2003
(Restated)........... $ 0.03 $ 0.11 $ 0.46 $ 1.04 $ 1.65
------------------------------------------------------------
DILUTED1
2004
(REPORTED)........... $ -- $ 0.02 $ 0.38 $ 0.97 $ 1.36
ADJUSTMENTS.......... (0.02) (0.02) -- -- (0.04)
------------------------------------------------------------
2004
(RESTATED)........... $ (0.02) $ -- $ 0.38 $ 0.97 $ 1.32
------------------------------------------------------------
49
2003
(Reported)........... $ 0.05 $ 0.13 $ 0.47 $ 1.02 $ 1.67
Adjustments.......... (0.02) (0.02) (0.02) -- (0.05)
------------------------------------------------------------
2003
(Restated)........... $ 0.03 $ 0.11 $ 0.45 $ 1.02 $ 1.62
------------------------------------------------------------
- --------------------------------------------------------------------------------
1 NET INCOME PER SHARE AMOUNTS FOR EACH QUARTER ARE REQUIRED TO BE
COMPUTED INDEPENDENTLY AND MAY NOT EQUAL THE AMOUNT COMPUTED FOR
THE FISCAL YEAR.
2 AS RESTATED - SEE NOTE 3 FOR FURTHER DISCUSSION.
16. MARKET INFORMATION (UNAUDITED)
The Company's common stock is listed on the New York Stock Exchange. Its trading
symbol is LIN. At the end of fiscal 2004, there were 17,723 beneficial
shareholders. The high and low trading price of the Company's common stock for
each quarter is as follows:
FOR FISCAL 2004
HIGH LOW
------ ------
First Quarter............................ $36.15 $27.70
Second Quarter........................... $36.12 $27.01
Third Quarter............................ $28.93 $23.17
Fourth Quarter........................... $26.44 $21.70
FOR FISCAL 2003
HIGH LOW
------ ------
First Quarter............................ $23.98 $19.49
Second Quarter........................... $24.93 $19.27
Third Quarter............................ $29.31 $23.78
Fourth Quarter........................... $30.45 $24.64
The Company paid no dividends on its common stock in fiscal 2004 and 2003.
Management of the Company currently intends to retain its earnings to finance
the growth and development of its business and does not currently anticipate
paying cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the future earnings, operations, capital
requirements and financial condition of the Company, satisfying all requirements
under its bank financing agreement and such other factors as the Company's Board
of Directors may consider relevant. In addition, the Company's credit facility
currently limits the amount of cash dividends (see Note 8).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
On March 7, 2005, management and the Audit Committee discussed the
issues regarding the Company's method of accounting for leases and landlord
allowances with the Company's independent registered public accounting firm and
determined that the Company's accounting for these items is not consistent with
the views expressed by the SEC in a letter dated February 7, 2005. Accordingly,
management and the Audit Committee concluded that the Company should restate its
annual financial statements for fiscal years 2002 and 2003 presented in this
Annual Report on Form 10-K, and its quarterly financial information for the four
quarters of fiscal year 2003 and the first three quarters of fiscal year 2004.
Public Company Accounting Oversight Board's Auditing Standard No. 2, AN AUDIT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING PERFORMED IN CONJUNCTION WITH AN AUDIT
OF FINANCIAL STATEMENTS, provides that a restatement of previously issued
financial statements is a strong indicator of the existence of a "material
weakness" in the design or operation of internal control over financial
reporting. Accordingly, management concluded that the control deficiency that
resulted in the incorrect lease accounting represented a material weakness in
internal control over financial reporting as of January 1, 2005.
REMEDIATION OF MATERIAL WEAKNESS. To remediate the material weakness in
the Company's internal control over financial reporting, subsequent to January
1, 2005, the Company has implemented additional review procedures over the
selection and monitoring of appropriate assumptions and factors affecting lease
accounting practices.
50
(a) DISCLOSURE CONTROLS AND PROCEDURES. The Company also carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
that evaluation, the Company's Chief Executive Officer and the Chief Financial
Officer concluded that as a result of the aforementioned material weakness
related to lease accounting, the Company's disclosure controls and procedures
were not effective, as of the end of the period covered by this Report (January
1, 2005), in ensuring that material information relating to Linens 'n Things,
Inc., including its consolidated subsidiaries, required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
(b) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING. Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The
Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of January 1, 2005. Management based this assessment
on criteria for effective internal control over financial reporting described in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations ("COSO") of the Treadway Commission. Management's assessment
included an evaluation of the design of the Company's internal control over
financial reporting and testing of the operating effectiveness of its internal
control over financial reporting.
In performing its assessment, management evaluated the Company's
processes and practices in place to ensure the propriety of the Company's
accounting for leases and landlord allowances. As a result of this evaluation,
management concluded that the Company's internal control over the selection and
monitoring of appropriate assumptions and factors affecting accounting for
leases and landlord allowances were not effective as of January 1, 2005. These
internal control deficiencies resulted in errors in the Company's accounting for
leasehold improvements funded by landlord incentives and allowances under
operating leases and accordingly, the Audit Committee of the Board of Directors
(the "Committee") and Company senior management determined to restate certain of
the Company's previously issued financial statements to correct its accounting
for leases and landlord allowances. The restatement of the financial statements
is described in Note 3 to the Consolidated Financial Statements.
A material weakness in internal control over financial reporting is a
control deficiency (within the meaning of the Public Company Accounting
Oversight Board ("PCAOB") Auditing Standard No. 2), or combination of control
deficiencies, that results in there being more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. PCAOB Auditing Standard No. 2 identifies a number of
circumstances that are to be regarded as at least significant deficiencies as
well as strong indicators that a material weakness exists because of their
likely significant negative effect on internal control over financial reporting.
The restatement of previously issued financial statements is one of these
circumstances. Management evaluated the impact of the aforementioned restatement
of previously issued financial statements on the Company's assessment of its
system of internal control and has concluded that the control deficiency that
resulted in the incorrect accounting for leases and landlord allowances
represented a material weakness in the Company's internal control over financial
reporting as of January 1, 2005.
As a result of the aforementioned material weakness in the Company's
internal control over financial reporting, management has concluded that, as of
January 1, 2005, the Company's internal control over financial reporting was not
effective to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of
51
financial statements for external purposes in accordance with generally accepted
accounting principles based on the criteria set forth by the COSO of the
Treadway Commission in "Internal Control--Integrated Framework".
KPMG LLP, our independent registered public accounting firm, has issued
an attestation report on management's assessment of internal control over
financial reporting. This report appears below.
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. During the
fourth quarter of fiscal 2004, there were no changes in the Company's internal
control over financial reporting that materially affected or are reasonably
likely to materially affect internal control over financial reporting, other
than the following matter. During the fourth quarter of 2004, as part of the
Section 404 internal control assessment process, management determined that
there was a material weakness in the design of controls over inventory existence
due to the timing of its physical inventories and the cycle counting procedures
over inventory that were in place. The Company remediated this control
deficiency by the end of fiscal 2004 by enhancing its inventory cycle count
procedures within the fourth quarter to confirm the existence of inventory.
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROLS
OVER FINANCIAL REPORTING
The Board of Directors and Shareholders
Linens 'n Things, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting (Item 9A(b)),
that Linens `n Things, Inc. and Subsidiaries did not maintain effective internal
control over financial reporting as of January 1, 2005, because of the effect of
the Company's ineffective controls over the selection and monitoring of the
appropriate assumptions and factors affecting accounting for leases and landlord
allowances, based on criteria established in INTERNAL CONTROL--INTEGRATED
FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Linens `n Things, Inc.'s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment: As of January 1, 2005, the Company's internal control
over the selection and monitoring of assumptions and factors affecting the
accounting for leases and landlord allowances were not effective in providing
reasonable assurance regarding the reliability of the related financial
reporting in accordance with generally accepted accounting principles. As a
result of these deficiencies in the Company's internal control, accounting
errors in certain current and prior period financial statements were identified
and such financial statements were restated to reflect correction to the
accounting errors.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Linens `n Things, Inc. and Subsidiaries as of January 1, 2005 and January 3,
2004, and the related consolidated statements of operations, shareholders'
equity and comprehensive income and cash flows for each of the years in the
three-year period ended January 1, 2005. The aforementioned material weakness
was considered in determining the nature, timing, and extent of audit tests
applied in our audit of the 2004
53
consolidated financial statements, and this report does not affect our report
dated March 31, 2005, which expressed an unqualified opinion on those
consolidated financial statements.
In our opinion, management's assessment that Linens `n Things, Inc. did not
maintain effective internal control over financial reporting as of January 1,
2005, is fairly stated, in all material respects, based on criteria established
in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, because
of the effect of the material weakness described above on the achievement of the
objectives of the control criteria, Linens `n Things, Inc. has not maintained
effective internal control over financial reporting as of January 1, 2005, based
on criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/S/ KPMG LLP
- ------------
KPMG LLP
New York, New York
March 31, 2005
ITEM 9B. OTHER INFORMATION
None
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors and nominees of the Company is set
forth under the caption "Election of Directors" in the Company's 2005 Proxy
Statement and is incorporated by reference herein. The information under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance," in the
Company's 2005 Proxy Statement is also incorporated by reference herein. See
Part I, Item 1 of this Form 10-K for information regarding the Company's
executive officers.
The Company has adopted a Code of Business Conduct and Ethics (the "Code
of Ethics") that applies to the Company's chief executive officer, principal
financial officer, principal accounting officer, and to all other Company
directors, officers and employees. The Code of Ethics is available on the
Company's website, WWW.LNT.COM, under "Investor Relations-Corporate Governance."
A waiver from any provision of the Code of Ethics for executive officers and
directors may only be granted by the Board of Directors and any such waiver in
favor of a director or executive officer will be publicly disclosed. The Company
will disclose any future substantive amendments to the Code of Ethics, and any
such waiver from the Code of Ethics granted to the Company's chief executive
officer, principal financial officer and principal accounting officer as well as
any other executive officers or directors, on the Company's website,
www.lnt.com, under "Investor Relations-Corporate Governance."
The information regarding the Company's Audit Committee and its
designated audit committee financial expert is set forth under the caption
"Information Regarding Board Committees" in the Company's 2005 Proxy Statement
and such information is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 2005 Annual Meeting of Shareholders, under
the headings "Director Compensation" and "Executive Compensation," other than
information included therein under the subcaptions "Report on Compensation of
Executive Officers" and "Performance Graph" which are not incorporated by
reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth under the caption "Beneficial Ownership of
Common Stock" in the Company's Proxy Statement for the 2005 Annual Meeting of
Shareholders is incorporated herein by reference.
The Equity Compensation Plan Information required by this Item is
presented in the following table:
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, (excluding securities
Plan Category Warrants and Rights Warrants and Rights reflected in Column (a))
-------------- -------------------- -------------------- ------------------------
Equity compensation plans
approved by security
holders(1) 4,055,922 $25.06 2,981,565
Equity compensation plans not
approved by security 2,127,730 $24.99 175,000
holders(2)
Total 6,183,652 $25.03 3,156,565
55
(1) 2004 Stock Award and Incentive Plan ("2004 Equity Plan") which provides
for grants of stock options and other equity based awards; 2000 Stock
Award and Incentive Plan ("2000 Equity Plan"); 1996 Incentive
Compensation Plan; and the 1996 Non-Employee Director Stock Plan. The
2004 Equity Plan superceded the 2000 Equity Plan as well as the LNT
Broad Based Equity Plan referenced in (2) below. The 2000 Equity Plan
had superceded the 1996 Incentive Compensation Plan and the 1996
Non-Employee Director Stock Plan. No future awards may be made under the
2000 Equity Plan, the LNT Broad Based Equity Plan, the 1996 Incentive
Compensation Plan and the 1996 Non-Employee Director Stock Plan
(collectively, the "Prior Plans") except that outstanding awards under
the Prior Plans continue in effect in accordance with their terms and
the termination or forfeiture of outstanding awards under the Prior
Plans become available for awards under the 2004 Equity Plan.
(2) New Hire Authorization and the LNT Broad Based Equity Plan. The New Hire
Authorization ("Authorization") was adopted by the Board of Directors
effective June 11, 2004. Pursuant to and in accordance with the
requirements of Rule 303A.08 of the New York Stock Exchange Rules, new
hires may be granted non-qualified stock options, restricted stock and
restricted stock units, and other equity awards (collectively "awards")
under the Authorization by the Compensation Committee of the Board of
Directors, which is comprised solely of independent directors. For stock
option grants, the option exercise price may not be less than the fair
market value per share of the Company's common stock on the grant date.
Awards are subject to vesting terms and forfeiture and other
restrictions, if any, that the Compensation Committee may impose. All
other terms and conditions for awards are generally the same as for
similar awards granted under the 2004 Equity Plan referenced in (1)
above, including an option term of no longer than ten years from the
grant date. The 2004 Equity Plan in (1) above superceded the LNT Broad
Based Equity Plan except for outstanding awards, the termination or
forfeiture of which become available for awards under the 2004 Equity
Plan.
For further information concerning Stock Incentive Plans, see Note 11 to
the Company's Consolidated Financial Statements included in the 2004
Annual Report on Form 10-K.
56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will, if applicable, be included
in the Company's Proxy Statement for the 2005 Annual Meeting of Shareholders,
and, if so included, is incorporated by reference in this Item.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information regarding principal accountant fees and services and the
Company's pre-approval policies and procedures for audit and non-audit services
provided by the Company's independent accountants is set forth under the caption
"Independent Auditors" in the Company's 2005 Proxy Statement and such
information is incorporated by reference herein.
57
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report.
1. FINANCIAL STATEMENTS:
The following Financial Statements for the fiscal year ended January 1,
2005 are included in this Form 10-K as follows:
PAGES
Consolidated Statements of Operations -
for the fiscal years ended January 1, 2005, January 3, 2004
(restated) and January 4, 2003 (restated) .............................. 28
Consolidated Balance Sheets -
as of January 1, 2005 and January 3, 2004 (restated).................... 29
Consolidated Statements of Shareholders' Equity and Comprehensive
Income - for the fiscal years ended January 1, 2005, January 3, 2004
(restated) and January 4, 2003 (restated)............................... 30
Consolidated Statements of Cash Flows -
for the fiscal years ended January 1, 2005, January 3, 2004 (restated)
and January 4, 2003 (restated).......................................... 31
Notes to Consolidated Financial Statements.............................. 32 - 50
Management's Report on Internal Control over Financial Reporting........ 51 - 52
Report of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements....................................... 26 - 27
Report of Independent Registered Public Accounting Firm on Internal
Controls Over Financial Reporting....................................... 53 - 54
2. SCHEDULES:
None
3. EXHIBITS:
The Exhibits on the accompanying Exhibit Index are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K.
58
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation, as amended
1,3
3.2 By-Laws of the Registrant1
4 Specimen Certificate of Common Stock1
10.1 Transitional Services Agreement between the Registrant and CVS
Corporation1
10.2 Stockholder Agreement between the Registrant and CVS
Corporation1
10.3 Tax Disaffiliation Agreement between the Registrant and CVS
Corporation1
10.4 Employment Agreement with Norman Axelrod*4
10.5 Employment Agreement with Jack E. Moore, Jr.*4
10.6 Employment Agreement with Brian Silva*4
10.7 Employment Agreement with William T. Giles *4
10.8 Employment Agreement with F. David Coder*5
10.9 Split Dollar Agreement and Collateral Assignment between the
Registrant and Norman Axelrod*6
10.10 1996 Incentive Compensation Plan*1
10.11 1996 Non-Employee Director Stock Plan*1
10.12 Supplemental Executive Retirement Plan*6
10.13 2000 Stock Award and Incentive Plan*7
10.14 Deferred Compensation Plan*8
10.15 LNT Broad-Based Equity Plan*9
10.16 2004 Stock Award and Incentive Plan*10
10.17 New Hire Authorization*11
10.18 Defined Contribution Supplemental Executive Retirement Plan*12
10.19 Credit Agreement dated as of November 23, 2004 among the
Registrant, Bank of America, N.A., as administrative agent,
swing line lender and an L/C issuer and the lenders signatory
thereto13
10.20 Form of Stock Option Agreement (performance)*14
10.21 Form of Stock Option Agreement (as modified)*14
10.22 Form of Restricted Stock Units Agreement*14
10.23 Form of Stock Option Agreement*14
10.24 Restricted Stock Unit Agreement and Stock Option Agreements with
Jack E. Moore, Jr.*15
10.25 Annual Incentive Program Performance Criteria*16
10.26 Non-Employee Director Compensation Program*16
21 List of Subsidiaries2
23a Consent of Independent Registered Public Accounting Firm2
31.1 Certification by Norman Axelrod, Chairman and Chief Executive
Officer2
31.2 Certification by William T. Giles, Executive Vice President and
Chief Financial Officer2
32 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
20022
- --------------------------------------------------------------------------------
1. Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 (No. 333-12267), which Registration
Statement became effective on November 26, 1996.
59
2. Filed with this Form 10-K.
3. Incorporated by reference to Current Report on Form 8-K filed on May 6,
1999.
4. Incorporated by reference to Current Report on Form 8-K filed on
December 3, 2004.
5. Incorporated by reference to Current Report on Form 8-K filed on
February 27, 2004.
6. Incorporated by reference to Current Report on Form 8-K filed on March
27, 2000, as amended by Current Report on Form 8-K filed on December 29,
2004.
7. Incorporated by reference to Registration Statement on Form S-8 filed on
August 2, 2000 (File No. 333-42874).
8. Incorporated by reference to Registration Statement on Form S-8 filed on
June 2, 1998 (File No. 333-55803).
9. Incorporated by reference to Registration Statement on Form S-8 filed on
June 14, 2001 (File No. 333-62984).
10. Incorporated by reference to Registration Statement on Form S-8 filed on
June 22, 2004 (File No. 333-116719).
11. Incorporated by reference to Registration Statement on Form S-8 filed on
June 22, 2004 (File No. 333-116720).
12. Incorporated by reference to Current Report on Form 8-K filed on
December 29, 2004.
13. Incorporated by reference to Current Report on Form 8-K filed on
November 30, 2004.
14. Incorporated by reference to Current Report on Form 8-K filed on
November 24, 2004.
15. Incorporated by reference to Current Report on Form 8-K filed on August
6, 2004.
16. Incorporated by reference to Current Report on Form 8-K filed on
February 2, 2005.
- --------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
Linens 'n Things, Inc.
(Registrant)
By: /s/ Norman Axelrod
------------------------------------
Norman Axelrod
Chairman and Chief Executive Officer
Dated: March 31, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below on behalf of the Registrant in the capacities
and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Norman Axelrod Chairman and Chief March 31, 2005
------------------------
Norman Axelrod Executive Officer
/s/ Philip E. Beekman Director March 31, 2005
------------------------
Philip E. Beekman
/s/ Harold F. Compton Director March 31, 2005
-----------------------
Harold F. Compton
/s/ Stanley P. Goldstein Director March 31, 2005
------------------------
Stanley P. Goldstein
/s/ Morton E. Handel Director March 31, 2005
------------------------
Morton E. Handel
/s/ Robert Kamerschem Director March 31, 2005
----------------------
Robert Kamerschem
/s/ William T. Giles Executive Vice President, March 31, 2005
-------------------------- Chief Financial Officer
William T. Giles (Principal Financial Officer and
Principal Accounting Officer)
61