SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended April 3, 2004
----------------------------------------
Commission file number 1-12381
------------------------------
LINENS 'N THINGS, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3463939
------------------------------------------ ---------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
6 Brighton Road, Clifton, New Jersey 07015
------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (973) 778-1300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No[ ]
Number of shares outstanding as of May 4, 2004: 45,094,564
INDEX
Page No.
--------
Explanatory Statement 3
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended April 3, 2004 (Restated) and
April 5, 2003 (Restated) 4
Condensed Consolidated Balance Sheets as of April 3, 2004
(Restated), January 3, 2004 and April 5, 2003 (Restated) 5
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended April 3, 2004 (Restated) and
April 5, 2003 (Restated) 6
Notes to Condensed Consolidated Financial Statements 7-20
Report of Independent Registered Public Accounting Firm 21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22-28
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 29
Item 4. Controls and Procedures 30
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
2
EXPLANATORY STATEMENT
As previously disclosed in the Linens `n Things, Inc. (the "Company")
Current Report on Form 8-K dated March 10, 2005, following a review of its lease
accounting policies, the Company determined that it should restate its financial
statements for all fiscal years presented in its Annual Report on Form 10-K for
the period ended January 1, 2005, other than fiscal year 2004, and for the first
three quarters of fiscal 2004 and the four quarters of fiscal 2003. The Company
filed its Annual Report on Form 10-K for the period ended January 1, 2005 on
April 1, 2005.
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 corrected the way it
accounts for its leases and landlord allowances, specifically the accounting for
straight-line rent expense and landlord allowances. In addition, the Company has
also made other immaterial adjustments and reclassifications related to the
trade payables program with General Electric Capital Corporation ("GECC") and
its deferred compensation plan. The accompanying Condensed Consolidated
Financial Statements have been restated from amounts previously reported to
incorporate the effects of these corrections and reclassifications.
This Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to our Quarterly
Report on Form 10-Q for the quarterly period ended April 3, 2004, initially
filed with the SEC on May 7, 2004 (the "Original Filing") is being filed to
reflect the restatement of the Company's Condensed Consolidated Financial
Statements for the thirteen week period ended April 3, 2004 and April 5, 2003.
For a more detailed description of this restatement, see Note 2, "Restatement of
Financial Statements," to the accompanying Condensed Consolidated Financial
Statements.
For the convenience of the reader, this Form 10-Q/A sets forth the
original Filing in its entirety. However, this Form 10-Q/A only amends and
restates certain information in Items 1, 2 and 4 of Part I of the Original
Filing, in each case solely as a result of and to reflect the restatement, and
no other information in the Original Filing is amended hereby. The foregoing
items have not been updated to reflect other events occurring after the Original
Filing or to modify or update those disclosures affected by subsequent events.
In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original
Filing has been amended to contain currently dated certifications from the
Company's Chief Executive Officer and Chief Financial Officer, as required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of
the Chief Executive Officer and Chief Financial Officer are attached to this
Form 10-Q/A as exhibits 31.1, 31.2 and 32, respectively.
Except for the foregoing amended information, this Form 10-Q/A continues
to describe conditions as of the date of the Original Filing, and the
disclosures contained herein have not been updated to reflect events, results or
developments that occurred at a later date. Among other things, forward looking
statements made in the Original Filing have not been revised to reflect events,
results or developments that occurred or facts that became known to the Company
after the date of the Original Filing (other than the restatement), and such
forward looking statements should be read in their historical context. The
Company has not amended and does not intend to amend its previously filed
3
Annual Reports on Form 10-K or its Quarterly Reports on Form 10-Q for the
periods affected by the restatement that ended prior to January 3, 2004. For
this reason, the consolidated financial statements, auditors reports and related
financial information for the affected periods contained in any other prior
reports should no longer be relied upon.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------------------
APRIL 3, APRIL 5,
2004 2003
(RESTATED) (RESTATED)
---------------- --------------
Net sales $ 552,800 $ 480,471
Cost of sales, including buying and
distribution costs 331,554 286,218
---------------- --------------
Gross profit 221,246 194,253
Selling, general and administrative expenses 222,288 191,196
---------------- --------------
Operating profit (loss) (1,042) 3,057
Interest income (138) (56)
Interest expense 897 916
---------------- --------------
Interest expense, net 759 860
---------------- --------------
Income (loss) before provision for income (1,801) 2,197
taxes
Provision for income taxes (689) 841
---------------- --------------
Net income (loss) $ ($1,112) $ 1,356
================ ==============
Basic earnings (loss) per share $ (0.02) $ 0.03
================ ==============
Fully diluted earnings (loss) per share $ (0.02) $ 0.03
================ ==============
See accompanying notes to Condensed Consolidated Financial Statements.
4
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
APRIL 3, JANUARY 3, APRIL 5,
2004 2004 2003
------------------- ------------------ -------------------
RESTATED RESTATED
(UNAUDITED) (AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 67,754 $ 136,129 $ 58,445
Accounts receivable 20,818 29,531 24,299
Inventories 760,548 700,406 684,431
Prepaid expenses and other current assets 34,178 33,253 28,233
Current deferred taxes 292 1,295 --
------------------- ------------------ -------------------
Total current assets 883,590 900,614 795,408
Property and equipment, net 553,302 542,191 516,760
Goodwill, net 18,126 18,126 18,126
Deferred charges and other noncurrent assets, net 7,733 6,525 6,184
------------------- ------------------ -------------------
Total assets $ 1,462,751 $ 1,467,456 $ 1,336,478
=================== ================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 284,013 $ 250,142 $ 295,139
Accrued expenses and other current liabilities 123,015 176,194 130,131
Current deferred taxes 11,073 15,759 6,850
Short-term borrowings 3,544 -- 2,244
------------------- ------------------ -------------------
Total current liabilities 421,645 442,095 434,364
------------------- ------------------ -------------------
Deferred income taxes and other long-term liabilities 298,316 287,984 253,337
------------------- ------------------ -------------------
Total liabilities 719,961 730,079 687,701
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; 45,309,835
shares issued and 45,056,325 shares
outstanding at April 3, 2004; 45,052,255 shares
issued and 44,793,619 shares outstanding at
January 3, 2004; and 44,341,745 shares issued
and 44,086,699 shares outstanding at April 5,
2003 453 450 444
Additional paid-in capital 369,079 362,483 346,583
Retained earnings 379,281 380,393 308,990
Accumulated other comprehensive income 1,178 1,391 94
Treasury stock, at cost; 253,510 shares at
April 3, 2004, 258,636 shares at January 3, 2004,
and 255,046 shares at April 5, 2003 (7,201) (7,340) (7,334)
------------------- ------------------ -------------------
Total shareholders' equity 742,790 737,377 648,777
------------------- ------------------ -------------------
Total liabilities and shareholders' equity $ 1,462,751 $ 1,467,456 $ 1,336,478
=================== ================== ===================
See accompanying notes to Condensed Consolidated Financial Statements.
5
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
----------------------------------------------
APRIL 3, APRIL 5,
2004 2003
(RESTATED) (RESTATED)
----------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,112) $ 1,356
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 18,960 16,783
Deferred income taxes 23 11,876
Loss on disposal of assets 6 --
Federal tax benefit from common stock issued under
stock incentive plans 1,067 50
Changes in assets and liabilities:
Decrease in accounts receivable 8,702 246
Increase in inventories (60,734) (69,923)
Increase in prepaid expenses and other
current assets (810) (2,133)
(Increase) decrease in deferred charges and other
noncurrent assets (1,344) 49
Increase in accounts payable 34,103 77,489
Decrease in accrued expenses and other liabilities (46,088) (30,873)
----------------------- -------------------
Net cash provided by (used in) operating activities (47,227) 4,920
----------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (30,259) (33,693)
----------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued under stock
incentive plans 5,542 282
Increase in short-term borrowings 3,546 303
Purchase of treasury stock 139 (124)
----------------------- -------------------
Net cash provided by financing activities 9,227 461
----------------------- -------------------
Effect of exchange rate changes on cash and cash
equivalents (116) 152
Net decrease in cash and cash equivalents (68,375) (28,160)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 136,129 86,605
----------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,754 $ 58,445
======================= ===================
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized) $ 900 $ 969
Income taxes $ 10,101 $ 9,396
See accompanying notes to Condensed Consolidated Financial Statements.
6
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying Condensed Consolidated Financial Statements are unaudited. In
the opinion of management, the accompanying Condensed Consolidated Financial
Statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Linens 'n
Things, Inc. and its subsidiaries (collectively "the Company") as of April 3,
2004 and April 5, 2003 and the results of operations for the respective thirteen
weeks then ended and cash flows for the thirteen weeks then ended. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Because of the seasonality of the specialty retailing business,
operating results of the Company on a quarterly basis may not be indicative of
operating results for the full year.
These Condensed Consolidated Financial Statements should be read in conjunction
with the Company's audited Consolidated Financial Statements for the fiscal year
ended January 3, 2004, included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission. All significant intercompany
accounts and transactions have been eliminated.
Certain prior period expense items, which include inventory shrinkage, have been
reclassified between cost of sales and selling, general and administrative
expenses to conform with the current period presentation. These
reclassifications increased cost of sales and decreased selling, general and
administrative expenses by equal amounts with no impact on operating profit for
any of the periods presented.
Certain prior period vendor accounts receivable balances have been reclassified
to accounts payable to conform with the current period presentation. These
reclassifications decreased accounts receivable and accounts payable by equal
amounts.
2. Restatement of Financial Statements
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 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"), and the first three quarters of fiscal 2004
and the four quarters of fiscal 2003, contained in its fiscal 2004 10-K. This
restatement is set forth in the fiscal 2004 10-K.
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 had 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 $166.8 million as of April 3, 2004.
7
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont'd
As a result of the restatement pertaining to lease accounting, selling, general
and administrative expenses ("SG&A") for the first quarters ended April 3, 2004
and April 5, 2003 increased approximately $1.9 million and $1.8 million,
respectively. Earnings per share on a fully diluted basis decreased by
approximately $0.02 for both the first quarters ended April 3, 2004 and April 5,
2003, respectively. The cumulative impact of the correction of accounting for
leases decreased retained earnings, net of tax, by approximately $20.2 million
as of January 4, 2003.
OTHER IMMATERIAL ADJUSTMENTS AND RECLASSIFICATIONS:
The Company maintains a trade payables arrangement with General Electric Capital
Corporation ("GECC") under which GECC purchases the Company's payables at a
discount directly from the Company's suppliers prior to the payables due date,
thereby permitting a supplier to receive payment prior to the due date of the
payable, with the Company sharing in part of the GECC discount. At April 3,
2004, January 3, 2004, and April 5, 2003, the Company owed approximately $69.0
million, $66.2 million, and $56.3 million, respectively, to GECC under this
program, which was included in accounts payable.
Certain prior period balances relating to this trade payables program with GECC
have been adjusted and reclassified. 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 adjustment and reclassification related to the
GECC program, interest expense increased approximately $0.7 million and $0.8
million for the first quarter ended April 3, 2004 and April 5, 2003,
respectively. Cost of sales decreased approximately $0.8 million and $1.4
million for the first quarter ended April 3, 2004 and April 5, 2003,
respectively. There was no impact to earnings per share on a fully diluted basis
for the first quarter ended April 3,2004 and April 5, 2003. The cumulative
impact of this adjustment as of January 4, 2003 to retained earnings, net of
tax, was a decrease of approximately $1.3 million.
Certain prior period balances relating to the Company's deferred compensation
plan have been reclassified. The related deferred compensation obligation,
totaling $2.7 million for the first quarter ended April 3, 2004, 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 shares of the Company's common stock included in the deferred compensation
plan totaling $0.6 million for the first quarter ended April 3, 2004 was
reclassified to treasury stock from other current assets.
A summary of the effects of these changes on the Company's Condensed
Consolidated Statement of Operations for the first quarters ended April 3, 2004
and April 5, 2003, the Company's Condensed Consolidated Balance Sheet at April
3, 2004 and April 5, 2003, and the Company's Condensed Consolidated Statement of
Cash flows at April 3,2004 and April 5, 2003 follows:
8
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FIRST QUARTER ENDED APRIL 3, 2004
(Unaudited)
(in thousands, except per share amounts)
As Previously
Reported Adjustments* As Restated
--------------------------------------------
Cost of sales $ 332,346 $ (792)(B) $ 331,554
Gross profit 220,454 792 (B) 221,246
SG&A expenses 220,390 1,898 (A) 222,288
Operating profit (loss) 64 (1,898)(A) (1,042)
792 (B)
--------------
(1,106)
--------------
Interest expense 154 743 (B) 897
Interest expense, net 16 743 (B) 759
Income (loss) before income taxes 48 (1,898)(A) (1,801)
49 (B)
--------------
(1,849)
--------------
Provision for income taxes 18 (726)(A) (689)
19 (B)
--------------
(707)
--------------
Net income (loss) $ 30 $ (1,172)(A) $ (1,112)
30 (B)
--------------
(1,142)
--------------
Net income per share - basic $ 0.00 $ (0.02)(A) $ (0.02)
Net income per share - fully diluted $ 0.00 $ (0.02)(A) $ (0.02)
*A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement (Landlord allowance adjustment only)
9
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FIRST QUARTER ENDED APRIL 5, 2003
(Unaudited)
(in thousands, except per share amounts)
As Previously
Reported Adjustments* As Restated
-----------------------------------------------
Cost of sales $ 287,630 $ (1,412)(B) $ 286,218
Gross profit 192,841 1,412 (B) 194,253
SG&A expenses 189,401 1,795 (A) 191,196
Operating profit 3,440 (1,795)(A) 3,057
1,412 (B)
-------------
(383)
-------------
Interest expense 132 784 (B) 916
Interest expense, net 76 784 (B) 860
Income before income taxes 3,364 (1,795)(A) 2,197
628 (B)
-------------
(1,167)
-------------
Provision for income taxes 1,286 (685)(A) 841
240 (B)
-------------
(445)
-------------
Net income $ 2,078 $ (1,110)(A) $ 1,356
388 (B)
-------------
(722)
-------------
Net income per share - basic $ 0.05 $ (0.03)(A) $ 0.03
0.01 (B)
-------------
$ (0.02)
-------------
Net income per share - fully diluted $ 0.05 $ (0.02)(A) $ 0.03
*A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement (Landlord allowance adjustment only)
10
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF APRIL 3, 2004
(Unaudited)
(in thousands)
As Previously
Reported Adjustments* As Restated
------------------- ------------------ -------------------
ASSETS
Inventories $ 762,021 $ (1,473)(B) $ 760,548
Prepaid expenses and other current assets 34,768 (590)(D) 34,178
Total current assets 885,653 (1,473)(B) 883,590
(590)(D)
------------------
(2,063)
------------------
Property & equipment, net 386,502 166,800 (C) 553,302
Deferred charges and other non-current assets, net 12,108 (4,375)(A) 7,733
Total assets 1,302,389 (4,375)(A) 1,462,751
(1,473)(B)
166,800 (C)
(590)(D)
------------------
160,362
------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities 120,837 (562)(B) 123,015
2,740 (D)
------------------
2,178
------------------
Total Current liabilities 419,467 (562)(B) 421,645
2,740 (D)
------------------
2,178
------------------
Deferred income taxes and other long-term
liabilities 114,787 (2,505)(A) 298,316
188,774 (A)(C)
(2,740)(D)
------------------
183,529
------------------
Total liabilities 534,254 19,469 (A) 719,961
(562)(B)
166,800 (C)
------------------
185,707
------------------
Retained earnings 404,036 (911)(B) 379,281
(23,844)(A)
------------------
(24,755)
------------------
Treasury stock (6,611) (590)(D) (7,201)
Total shareholders' equity 768,135 (23,844)(A) 742,790
(911)(B)
(590)(D)
------------------
(25,345)
------------------
Total liabilities and shareholders' equity 1,302,389 (4,375)(A) 1,462,751
(1,473)(B)
166,800 (C)
(590)(D)
------------------
160,362
------------------
*A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement (Landlord allowance adjustment only)
D - deferred compensation plan reclassification
11
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF APRIL 5, 2003
(Unaudited)
(in thousands)
As Previously
Reported Adjustments* As Restated
------------------- ------------------ -------------------
ASSETS
Inventories $ 685,911 $ (1,480)(B) $ 684,431
Prepaid expenses and other current assets 28,782 (549)(D) 28,233
Total current assets 797,437 (1,480)(B) 795,408
(549)(D)
------------------
(2,029)
------------------
Property & equipment, net 362,332 154,428 (C) 516,760
Deferred charges and other non-current assets, net 10,695 (4,511)(A) 6,184
Total assets 1,188,590 (4,511)(A) 1,336,478
(1,480)(B)
154,428 (C)
(549)(D)
------------------
147,888
------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities 128,525 (565)(B) 130,131
2,171 (D)
------------------
1,606
------------------
Total Current liabilities 432,758 (565)(B) 434,364
2,171 (D)
------------------
1,606
------------------
Deferred income taxes and other long-term
liabilities 84,237 (2,420)(A) 253,337
173,691 (A)(C)
(2,171)(D)
------------------
169,100
------------------
Total liabilities 516,995 16,843 (A) 687,701
(565)(B)
154,428 (C)
------------------
170,706
------------------
Retained earnings 331,259 (21,354)(A) 308,990
(915)(B)
------------------
(22,269)
------------------
Treasury stock (6,785) (549)(D) (7,334)
Total shareholders' equity 671,595 (21,354)(A) 648,777
(915)(B)
(549)(D)
------------------
(22,818)
------------------
Total liabilities and shareholders' equity 1,188,590 (4,511)(A) 1,336,478
(1,480)(B)
154,428 (C)
(549)(D)
------------------
147,888
------------------
*A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement(Landlord allowance adjustment only)
D - deferred compensation plan reclassification
12
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
AS OF APRIL 3, 2004
(Unaudited)
(in thousands)
As previously
reported Adjustment* As Restated
------------- ----------- -----------
Net cash used in operating activities (53,634) 6,407 (C) (47,227)
Additions to property and equipment (23,713) (6,546)(C) (30,259)
Net cash provided by financing activities 9,088 139 (D) 9,227
Cash paid for interest 157 743 (B) 900
--------------------------------------------------------------------------------
*A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement(Landlord allowance adjustment only)
D - deferred compensation plan reclassification
13
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
AS OF APRIL 5, 2003
(Unaudited)
(in thousands)
As previously
reported Adjustment* As Restated
------------- ----------- -----------
Net cash provided by (used in) operating
activities (3,215) 8,135 (C) 4,920
Additions to property and equipment (25,666) (8,027)(C) (33,693)
Net cash provided by financing activities 569 (108)(D) 461
Cash paid for interest 185 784 (B) 969
--------------------------------------------------------------------------------
*A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement(Landlord allowance adjustment only)
D - deferred compensation plan reclassification
14
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
3. Earnings Per Share
The calculation of basic and fully diluted earnings (loss) per share ("EPS") is
as follows:
Thirteen Weeks
Ended April 3, 2004 (Restated)
(in thousands, except EPS)
--------------------------------------------
Net
Loss Shares EPS
------------- ------------ ------------
Basic $ (1,112) 44,897 $ (0.02)
Effect of outstanding stock options
and deferred stock grants -- 1,211 --
------------- ------------ ------------
Fully diluted $ (1,112) 46,108 $ (0.02)
============= ============ ============
Thirteen Weeks
Ended April 5, 2003 (Restated)
(in thousands, except EPS)
--------------------------------------------
Net
Income Shares EPS
------------- ------------- -----------
Basic $ 1,356 44,079 $ 0.03
Effect of outstanding stock options
and deferred stock grants -- 426 --
------------- ------------- -----------
Fully diluted $ 1,356 44,505 $ 0.03
============= ============= ===========
Options for which the exercise price was greater than the average market price
of common shares for the periods ended April 3, 2004 and April 5, 2003 were not
included in the computation of fully diluted earnings per share. These consisted
of options totaling 18,000 shares and 2,589,000 shares for the thirteen weeks
ended April 3, 2004 and April 5, 2003, respectively.
4. Short-Term Borrowing Arrangements
In June 2002, the Company amended and extended its $150 million senior revolving
credit facility agreement (the "Credit Agreement") with third party
institutional lenders to expire April 20, 2005. The Credit Agreement allows for
up to $40 million of borrowings from additional lines of credit outside of the
Credit Agreement. As of April 3, 2004, the additional lines of credit include
committed facilities of approximately $26 million that expire on June 16, 2004
and are subject to annual renewal arrangements. Interest on all borrowings is
determined based upon several alternative rates, including a fixed margin above
LIBOR. The Credit Agreement contains certain financial covenants, including
those relating to the maintenance of a minimum tangible net worth, a minimum
fixed charge coverage ratio, and a maximum leverage ratio. As of April 3, 2004,
the Company was in compliance with the terms of the Credit Agreement. The Credit
Agreement limits, among other things, the amount of cash dividends the Company
may pay. Under the Credit Agreement, the amount of dividends that the Company
may pay may not exceed the sum of $25 million plus, on a cumulative basis, an
amount equal to 50% of the consolidated net income for each fiscal quarter,
commencing with the fiscal quarter ending March 30, 2002. The Company has never
paid cash dividends and does not currently anticipate paying cash dividends in
the future. The Company is required under the Credit Agreement to reduce the
balance of outstanding domestic borrowings to zero for 30 consecutive days
during each period beginning on December 1st of any fiscal year and ending on
March 15th of the following fiscal year. At various times throughout 2003, the
Company borrowed against its credit facility for seasonal working capital needs.
As of April 3, 2004, the Company had no borrowings under the Credit Agreement
and $3.5 million in borrowings under the additional lines of credit at an
interest rate of 4.25%. The Company also had $62.2 million of letters of credit
outstanding as of April 3, 2004, which
15
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
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.
5. Comprehensive Income (Loss)
Comprehensive income (loss) for the thirteen weeks ended April 3, 2004 and April
5, 2003 is as follows (in thousands):
Thirteen Weeks Ended
-------------------------------------------
April 3, 2004 April 5,2003
(Restated) (Restated)
-------------------------------------------
COMPREHENSIVE INCOME (LOSS):
Net income (loss) $ (1,112) $ 1,356
Other comprehensive income (loss) -
foreign currency translation
adjustment (213) 480
------------------- -------------------
Comprehensive income (loss) $ (1,325) $ 1,836
=================== ===================
6. 2001 Restructuring and Asset Impairment Charge
In fiscal 2001, the Company developed and committed to a strategic initiative
designed to improve store performance and profitability. This initiative called
for the closing of certain under-performing stores, which did not meet the
Company's profit objectives. In connection with this initiative, the Company
recorded a pre-tax restructuring and asset impairment charge of $37.8 million
($23.7 million after-tax) in the fourth quarter of fiscal 2001. A pre-tax
reserve of $20.5 million was established for estimated lease commitments for
stores to be closed. This reserve is included in accrued expenses. The reserve
considers estimated sublease income. Because all of the stores were leased the
Company is not responsible for the disposal of property other than fixtures. A
pre-tax write down 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 $3.8 million was recorded in cost of
sales for estimated inventory markdowns below cost for the stores to be closed.
Certain components of the restructuring charge were based on estimates and may
be subject to change in the future. As of April 3, 2004, the Company has closed
all of the initially identified store closures other than one store, whose
reserve was reversed, and one store, which is expected to be closed during
fiscal 2004.
The following table displays a roll forward of the activity and significant
components of the 2001 restructuring and asset impairment charge and the
reserves remaining as of April 3, 2004 ($ in millions):
Remaining at Usage Remaining at
1/03/04 2004 4/03/04
---------------- --------------- -----------------
(Audited) (Unaudited) (Unaudited)
Cash components:
Lease commitments $ 15.6 $ (1.6) $ 14.0
---------------- --------------- -----------------
Total $ 15.6 $ (1.6) $ 14.0
================ =============== =================
The 2004 usage primarily consists of payments for lease commitments and
miscellaneous store closing costs. The 2004 activity also includes the reversal
of estimated lease commitment and other store closing costs of approximately
$0.7 million as these reserves were not needed, offset by an increase to lease
commitment costs by a like amount due to changes in estimates based on current
negotiations.
16
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
7. Stock Incentive Plans
In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), the Company accounts for its stock-based
compensation plans under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Accordingly, no compensation cost has
been recognized in connection with stock options under these plans in the
accompanying Condensed Consolidated Financial Statements. The compensation cost
that has been charged against income for restricted stock unit grants was
$157,000 and $99,000 for the thirteen weeks ended April 3, 2004 and April 5,
2003, respectively. The following table illustrates the effect on net income and
net income per share presented "as reported" and as if compensation cost had
been recognized in accordance with the provisions of SFAS No. 123, for the
thirteen weeks ended April 3, 2004 and April 5, 2003:
Thirteen week period ending
-------------------------------------
April 3, 2004 April 5, 2003
(in thousands, except per share data) (Restated) (Restated)
----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS):
As reported $ (1,112) $ 1,356
Add: Stock-based employee compensation expense included in 97 61
Net income as presented, net of tax
-------------------------------------
(1,015) 1,417
-------------------------------------
Deduct: Total stock-based employee compensation expense determined
under the fair value based method for all awards, net of related
tax effects 1,850 1,589
-------------------------------------
Pro forma $ (2,865) $ (172)
=====================================
NET INCOME PER SHARE OF COMMON STOCK:
Basic:
As reported $ (0.02) $ 0.03
Pro forma (0.06) 0.00
Fully diluted:
As reported $ (0.02) $ 0.03
Pro forma (0.06) 0.00
----------------------------------------------------------------------------------------------------------------
8. Guarantees
The Company has assigned property at a retail location in which the Company
guarantees the payment of rent over the specified lease term in the event of
non-performance. As of April 3, 2004, the maximum potential amount of future
payments the Company could be required to make under such guarantee is
approximately $1.0 million.
9. Recent Accounting Pronouncements
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor" ("EITF 02-16"), which states that cash consideration
received from a vendor is presumed to be a reduction of the prices of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of merchandise sold when recognized in the Company's Condensed
Consolidated Statement of Operations. That presumption may be overcome when the
consideration is either a reimbursement of specific, incremental and
identifiable costs incurred to sell the vendor's products, or a payment for
assets or services delivered to the
17
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
vendor. EITF 02-16 is effective for contracts entered into or modified after
December 31, 2002. This issue did not have a material impact on the Company's
fiscal 2003 audited Consolidated Financial Statements as substantially all of
the Company's vendor contracts in effect during fiscal 2003 were entered into
prior to December 31, 2002. Beginning in the first quarter of fiscal 2004, as
vendor agreements are initiated or modified, the Company applies the method of
accounting for vendor allowances pursuant to EITF 02-16. In connection with the
implementation of EITF 02-16, the Company treats certain funds received from
vendors as a reduction in the cost of inventory and, as a result, these funds
are recognized as a reduction to cost of merchandise sold when the inventory is
sold. Accordingly, certain funds received from vendors, which were historically
reflected as a reduction of advertising expense in SG&A or cost of sales, are
now treated as a reduction of cost of inventory.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS
No. 148"). This statement amends SFAS No. 123 and provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used. For the
thirteen-week periods ended April 3, 2004 and April 5, 2003, the Company
accounted for stock options using the intrinsic value method prescribed under
APB Opinion 25, and accordingly, the Company did not recognize compensation
expense for stock options. The Company continues to account for stock-based
compensation using APB Opinion No. 25 and has not adopted the recognition
provisions of SFAS No. 123, as amended by SFAS No. 148. However, the Company has
adopted the disclosure provisions and has included this information in Note 7 to
the Company's Condensed Consolidated Financial Statements.
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Linens 'n Things, Inc.:
We have reviewed the condensed consolidated balance sheets of Linens 'n Things,
Inc. and Subsidiaries as of April 3, 2004 and April 5, 2003, and the related
condensed consolidated statements of operations for the thirteen week periods
then ended and the related condensed consolidated statements of cash flows for
the thirteen week periods ended April 3, 2004 and April 5, 2003. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Linens 'n Things, Inc. and Subsidiaries as of January 3, 2004
(presented herein) and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated March 31, 2005 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
January 3, 2004 is fairly presented, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
KPMG LLP
New York, New York
May 3, 2004, except as to Note 2, which is as of April 19, 2005
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTATEMENT:
The following discussion and analysis gives effect to the restatement as well as
other immaterial adjustments and reclassifications discussed in Note 2 to the
Condensed Consolidated Financial Statements.
GENERAL
Linens `n Things, Inc. (the "Company") is one of the leading national format
specialty retailers. The Company's stores emphasize a broad assortment of home
textiles, housewares and home accessories, carrying both national brands and
private label goods. As of April 3, 2004, the Company operated 461 stores in 45
states and in five provinces across Canada.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts and timing of revenues and of
expenses during the reporting periods. The Company's management believes the
following critical accounting estimates involve significant estimates and
judgments inherent in the preparation of the Condensed Consolidated Financial
Statements. The Company bases these estimates on historical results and various
other assumptions believed to be reasonable at the time.
VALUATION OF INVENTORY: Merchandise inventory is a significant portion of the
Company's balance sheet, representing approximately 52% of total assets at April
3, 2004. Inventories are valued using the lower of cost or market value,
determined by the retail inventory method ("RIM"). Under RIM, the valuation of
inventories at cost and the resulting gross margins are determined by applying a
calculated cost-to-retail ratio to the retail value of inventories. RIM is an
averaging method that is used in the retail industry due to its practicality.
The methodologies utilized by the Company in its application of RIM are
consistent for all periods presented. Such methodologies include the development
of the cost-to-retail ratios, the development of shrinkage reserves and the
accounting for price changes.
SALES RETURNS: The Company estimates future sales returns and records a
provision in the period that the related sales are recorded based on historical
return rates. Should actual returns differ from the Company's estimates, the
Company may be required to revise estimated sales returns. Although these
estimates have not varied materially from historical provisions, estimating
sales returns requires management judgment as to changes in preferences and
quality of products being sold, among other things; therefore, these estimates
may vary materially in the future. The sales returns calculations are regularly
compared with actual return experience. In preparing its financial statements as
of April 3, 2004, January 3, 2004 and April 5, 2003, the Company's sales returns
reserve was approximately $5.2 million, $6.2 million and $4.6 million,
respectively.
IMPAIRMENT OF ASSETS: With the adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets", the Company reviews goodwill for possible impairment at
least annually. Impairment losses are recognized when the implied fair value of
goodwill is less than its carrying value. The Company is also required to follow
the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"), which superceded an earlier pronouncement
on the same topic but retained many of its fundamental provisions. It also
expanded the scope of discontinued operations to include more disposal
transactions and impacted the presentation of future store closings, if any, by
the Company. Under SFAS No. 144 the Company periodically evaluates long-lived
assets other than goodwill for indicators of impairment. As of April 3, 2004,
January 3, 2004 and April 5, 2003, the Company's net value for property and
equipment as restated was approximately $553.3 million, $542.2 million and
$516.8 million, respectively, and goodwill was approximately $18.1 million on
each of the aforementioned dates.
20
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
STORE CLOSURE COSTS: In fiscal 2001, the Company recorded a pre-tax
restructuring and asset impairment charge of $37.8 million ($23.7 million
after-tax) related to the closing of certain under-performing stores. As of
April 3, 2004, January 3, 2004 and April 5, 2003, the Company had $14.0 million,
$15.6 million and $21.4 million, respectively, remaining related to this
reserve. As of April 3, 2004, the Company has closed all of the initially
identified stores other than one store, which the Company decided to keep open
and whose reserve was reversed, and one other store, which is expected to close
during fiscal 2004. The Company has continued to negotiate lease buyouts or
sublease agreements for these stores. The activity in the first quarter of
fiscal 2004 includes the reversal of estimated lease commitment and other store
closing costs of approximately $0.7 million as these reserves were not needed,
offset by an increase to lease commitment costs by a like amount due to changes
in estimates based on current negotiations. Final settlement of these reserves
is predominantly a function of negotiations with unrelated third parties, and,
as such, these estimates may be subject to change in the future.
SELF-INSURANCE: The Company purchases third party insurance for worker's
compensation, medical, auto and general liability costs that exceed certain
levels for each type of insurance program. However, the Company is responsible
for the payment of claims under these insured excess limits. The Company
establishes accruals for its insurance programs based on available claims data
and historical trend and experience, as well as loss development factors
prepared by third party actuaries. The accrued obligation for these
self-insurance programs was approximately $13.2 million as of April 3, 2004,
$13.5 million as of January 3, 2004 and $8.9 million as of April 5, 2003.
LITIGATION: The Company records an estimated liability related to various claims
and legal actions arising in the ordinary course of business, which is based on
available information and advice from outside counsel where applicable. As
additional information becomes available, the Company assesses the potential
liability related to its pending claims and may adjust its estimates
accordingly.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 3, 2004 COMPARED WITH THIRTEEN WEEKS ENDED APRIL 5,
2003
Results of operations for the thirteen weeks ended April 3, 2004 were impacted
by an accounting change resulting from the implementation of the provisions of
EITF 02-16 "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" (EITF 02-16), which states that cash
consideration received from a vendor is presumed to be a reduction of the prices
of the vendor's products or services and should, therefore, be characterized as
a reduction of cost of merchandise sold when recognized in the Company's
Condensed Consolidated Statement of Operations. EITF 02-16 was effective for
contracts entered into or modified after December 31, 2002. This issue did not
have a material impact on the Company's fiscal 2003 audited Consolidated
Financial Statements as substantially all of the Company's vendor contracts in
effect during fiscal 2003 were entered into prior to December 31, 2002.
Beginning in the first quarter of fiscal 2004, as vendor agreements are
initiated or modified, the Company applies the method of accounting for vendor
allowances pursuant to EITF 02-16. In connection with the implementation of EITF
02-16, the Company treats certain funds received from vendors as a reduction in
the cost of inventory and, as a result, these funds are recognized as a
reduction to cost of merchandise sold when the inventory is sold. Accordingly,
certain funds received from vendors, which were historically reflected as a
reduction of advertising expense in SG&A or cost of sales, are now treated as a
reduction of cost of inventory.
21
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
The provisions of EITF 02-16 impacted the Company's first quarter 2004 results
of operations as follows (the "As Restated" amounts include the impact of EITF
02-16):
EITF 02-16
In thousands, except per share data As Adjustment
Restated Impact
------------------------------------
Net sales $ 552,800 $ --
Cost of sales 331,554 (141)
------------------------------------
Gross profit 221,246 141
SG&A 222,288 (7,780)
------------------------------------
Operating profit (1,042) 7,921
Interest expense, net 759 --
------------------------------------
Income before provision for income taxes (1,801) 7,921
Provision for income taxes (689) 3,026
------------------------------------
Net income $ (1,112) $ 4,895
====================================
Earnings per share
Basic $ (0.02) $ 0.11
Fully diluted $ (0.02) $ 0.11
EITF 02-16 had no impact on the Company's cash flows. Following the initial
implementation impact, subsequent fiscal years will reflect vendor allowances on
a consistent basis other than for any net changes in vendor allowances.
The EITF 02-16 pre-tax adjustment of $7.9 million 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 selling, general and
administrative expenses ("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. For
presentation purposes in the above table reflecting the impact of EITF 02-16 on
the statement of operations, 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.
22
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
Net sales for the thirteen weeks ended April 3, 2004 increased approximately
15.0% to $552.8 million, up from $480.5 million for the same period last year.
The increase in net sales is primarily the result of new store openings since
April 5, 2003. At April 3, 2004, the Company operated 461 stores, including 20
stores in Canada, as compared with 400 stores, including 15 stores in Canada, at
April 5, 2003. Store square footage increased approximately 13% to 15.8 million
at April 3, 2004 compared with 13.9 million at April 5, 2003. During the
thirteen weeks ended April 3, 2004, the Company opened 21 stores and closed no
stores as compared with opening 16 stores and closing seven stores during the
same period last year.
Comparable store net sales increased 4.7% for the thirteen weeks ended April 3,
2004 compared to a decline of 3.2% for the same period last year. The increase
in comparable net sales for the thirteen weeks ended April 3, 2004 is due
primarily to an increase in customer traffic as well as average transaction,
with traffic representing more than 80% of the increase. The Company believes
these improved sales results reflect the steady progress being made on its
strategic operating initiatives, which include improvements of in-stock
inventory positions, particularly on key items and advertised merchandise,
expansion of the store inventory ownership program, improvements to its
merchandise assortment planning process, and enhancements to the guest shopping
experience.
In addition to the cost of inventory sold, the Company includes its buying and
distribution expenses in its cost of sales. Buying expenses include all direct
and indirect costs to procure merchandise. Distribution expenses include the
cost of operating the Company's distribution centers and freight expense related
to transporting merchandise. Gross profit for the thirteen weeks ended April 3,
2004 was $221.2 million, or 40.0% of net sales, compared with $194.3 million, or
40.4% of net sales, for the same period last year. The EITF 02-16 adjustment
impact was to decrease gross profit by $141,000, or 0.0% of net sales for the
thirteen-week period ended April 3, 2004. The decline in gross profit as a
percentage of net sales is due to an increase in both markdowns and freight
costs, which was partially offset by a higher initial mark-on rate. The markdown
rate increased slightly due to selected SKU reductions in connection with the
Company's assortment planning initiative as well as more focused clearance
activities, which have contributed to the Company's improved inventory
complexion. Rising fuel prices is the primary reason for the increase in freight
costs.
The Company's selling, general and administrative ("SG&A") expenses consist of
store selling expenses, occupancy costs, advertising expenses and corporate
office expenses. SG&A expenses for the thirteen weeks ended April 3, 2004 were
$222.3 million, or 40.2% of net sales, compared with $191.2 million, or 39.8% of
net sales, for the same period last year. The EITF 02-16 adjustment impact was
$7.8 million or 1.4% of net sales for the thirteen weeks ended April 3, 2004.
The Company's fixed costs as well as its core operating costs including store
payroll grew at a slower rate than sales. Included in SG&A for the thirteen
weeks ended April 5, 2003 were advertising credits equaling 1.4% of net sales
which, as a part of the EITF 02-16 accounting change, are no longer classified
as an offset to SG&A in fiscal 2004.
Operating loss for the thirteen weeks ended April 3, 2004 was approximately $1.0
million or 0.2% of net sales, compared with operating profit $3.1 million, or
0.6% of net sales, for the same period last year. The EITF 02-16 adjustment
impact was $7.9 million or 1.4% of net sales for the thirteen weeks ended April
3, 2004
Net interest expense for the thirteen weeks ended April 3, 2004 decreased to
approximately $0.8 million from $0.9 million during the same period last year.
The decrease in net interest expense is mainly due to lower average borrowings.
The Company's income tax benefit was approximately $0.7 million for the thirteen
weeks ended April 3, 2004, compared with income tax expense $0.8 million for the
same period last year. The EITF 02-16 adjustment impact was $3.0 million for the
thirteen weeks ended April 3, 2004. The Company's effective tax rate was 38.2%
for both the thirteen weeks ended April 3, 2004 and April 5, 2003.
23
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
As a result of the factors described above, net loss for the thirteen weeks
ended April 3, 2004 was approximately $1.1 million or $0.02 per share on a fully
diluted basis, compared with net income of $1.4 million, or $0.03 per share on a
fully diluted basis for the same period last year. The EITF 02-16 adjustment
impact to net income was $4.9 million, or $0.11 per share on a fully diluted
basis, for the thirteen weeks ended April 3, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily for new store expenditures, new
store inventory purchases and seasonal working capital. These requirements have
been funded through a combination of internally generated cash flows from
operations, credit extended by suppliers and short-term borrowings.
In June 2002, the Company amended and extended its $150 million senior revolving
credit facility agreement (the "Credit Agreement") with third party
institutional lenders to expire April 20, 2005. As of April 3, 2004, the Credit
Agreement allows for up to $40 million of borrowings from additional lines of
credit outside of the Credit Agreement. As of April 3, 2004, the additional
lines of credit include committed facilities of approximately $26 million that
expire on June 16, 2004 and are subject to annual renewal arrangements. As of
April 3, 2004, the Company was in compliance with the terms of the Credit
Agreement. As of April 3, 2004, the Company had no borrowings under the Credit
Agreement and $3.5 million in borrowings under the additional lines of credit at
an interest rate of 4.25%. The Company also had $62.2 million of letters of
credit outstanding as of April 3, 2004, which included standby letters of credit
issued primarily under the Credit Agreement and import letters of credit used
for merchandise purchases. The Company is not obligated under any formal or
informal compensating balance requirements. See Note 4 to the Condensed
Consolidated Financial Statements. The Company maintains a trade payables
arrangement with General Electric Capital Corporation ("GECC") under which GECC
purchases the Company's payables at a discount directly from the Company's
suppliers prior to the payables due date, thereby permitting a supplier to
receive payment prior to the due date of the payable, with the Company sharing
in part of the GECC discount. At April 3, 2004, January 3, 2004, and April 5,
2003, the Company owed approximately $69.0 million, $66.2 million, and $56.3
million, respectively, to GECC under this program, which was included in
accounts payable.
Net cash used in operating activities for the thirteen weeks ended April 3, 2004
was $47.2 million compared with net cash provided by operating activities of
$4.9 million used in operating activities for the same period last year. The
increase in cash used between periods is primarily due to the timing of vendor
payments.
Net cash used in investing activities for the thirteen weeks ended April 3, 2004
was $30.3 million, compared with $33.7 million for the same period last year. As
of April 3, 2004, the Company estimates capital expenditures will be
approximately $107 million in fiscal 2004, primarily for an estimated 45 to 50
new stores, maintenance of existing stores, and system enhancements.
Net cash provided by financing activities for the thirteen weeks ended April 3,
2004 was $9.2 million compared with $0.5 million for the same period last year.
The increase is due to greater proceeds from common stock issued under stock
incentive plans.
Management regularly reviews and evaluates its liquidity and capital needs. The
Company experiences peak periods for its cash needs generally during the second
quarter and fourth quarter of the fiscal year. As the Company's business
continues to grow and its 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. As
of April 3. 2004, management 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.
24
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor" ("EITF 02-16"), which states that cash consideration
received from a vendor is presumed to be a reduction of the prices of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of merchandise sold when recognized in the Company's Condensed
Consolidated Statement of Operations. That presumption may be overcome when the
consideration is either a reimbursement of specific, incremental and
identifiable costs incurred to sell the vendor's products, or a payment for
assets or services delivered to the vendor. EITF 02-16 is effective for
contracts entered into or modified after December 31, 2002. This issue did not
have a material impact on the Company's fiscal 2003 audited Consolidated
Financial Statements as substantially all of the Company's vendor contracts in
effect during fiscal 2003 were entered into prior to December 31, 2002.
Beginning in the first quarter of fiscal 2004, as vendor agreements are
initiated or modified, the Company applies the method of accounting for vendor
allowances pursuant to EITF 02-16. In connection with the implementation of EITF
02-16, the Company treats certain funds received from vendors as a reduction in
the cost of inventory and, as a result, these funds are recognized as a
reduction to cost of merchandise sold when the inventory is sold. Accordingly,
certain funds received from vendors, which were historically reflected as a
reduction of advertising expense in SG&A or cost of sales, are now treated as a
reduction of cost of inventory. Based on the Company's evaluation as of April 3,
2004, the estimated impact from the implementation of EITF 02-16 is expected to
reduce fully diluted earnings per share on a non-cash basis by approximately
$0.24 for fiscal 2004, as a result of delaying the recognition of vendor
allowances until the related inventory is sold. The provisions of EITF 02-16
impacted the Company's first quarter 2004 results by approximately $4.9 million,
net of tax, or $0.11 per fully diluted share, and the majority of this non-cash
reduction in earnings per share is expected to occur in the first two quarters
of fiscal 2004. As of April 3, 2004, the Company expects SG&A on an annualized
basis to increase by approximately 1.1% as a percent of sales as a result of
this accounting change. This accounting change will have no impact on the
Company's cash flows or the expected amount of funds to be received from
vendors. In addition, following the initial implementation impact of EITF 02-16
in fiscal 2004, subsequent fiscal years will reflect vendor allowances on a
consistent basis other than for future net changes in such vendor allowances.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS
No. 148"). This statement amends SFAS Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No.123"), and provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used. For the thirteen
week period ended April 3, 2004, the Company accounted for stock options using
the intrinsic value method prescribed under APB Opinion 25, and accordingly, the
Company did not recognize compensation expense for stock options. The Company
continues to account for stock-based compensation using APB Opinion No. 25 and
has not adopted the recognition provisions of SFAS No. 123, as amended by SFAS
No. 148. However, the Company has adopted the disclosure provisions and has
included this information in Note 6 to the Company's Condensed Consolidated
Financial Statements.
INFLATION
The Company does not believe that its operating results have been materially
affected by inflation during the preceding three years. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.
SEASONALITY
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and net income for the year during the third and fourth quarters. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of new store openings. The
Company believes this is the general pattern associated with its segment of the
retail industry and expects this pattern
25
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
will continue in the future. Consequently, comparisons between quarters are not
necessarily meaningful and the results for any quarter are not necessarily
indicative of future results.
FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis as well as other portions of
this Quarterly Report on Form 10-Q/A, 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, acceptance of product offerings and fashions and our
ability to anticipate and successfully respond to changing consumer tastes and
preferences, the success of our new business concepts, seasonal concepts and new
brands, the performance of our new stores, substantial competitive pressures
from other home furnishings retailers, the success of the Canadian expansion,
availability of suitable future store locations, schedule of store expansion and
of planned closings, the impact of the bankruptcies and consolidations in our
industry, unusual weather patterns, the impact on consumer spending as a result
of the slower consumer economy, a highly promotional retail environment, any
significant variations between actual amounts and the amounts estimated for
those matters identified as our critical accounting estimates as well as other
significant accounting estimates made in the preparation of our financial
statements, the actual impact in fiscal 2004 of EITF 02-16 as discussed in this
report, and our ability to successfully implement our strategic initiatives. If
these or other risks or uncertainties materialize, or if our estimates or
underlying assumptions prove inaccurate, actual results could differ materially
from any future results, express or implied by our forward-looking statements.
These and other important risk factors are included in the "Risk Factors"
section of the Company's Registration Statement on Form S-3 as filed with the
Securities and Exchange Commission on June 18, 2002 and may be contained in
subsequent reports filed with the Securities and Exchange Commission, including
our Quarterly Reports on Form 10-Q. You are urged to consider all such factors.
In light of the uncertainty inherent in such forward-looking statements, you
should not consider their inclusion to be a representation that such
forward-looking matters will be achieved. The Company assumes no obligation for
updating any such forward-looking statements to reflect actual results, changes
in assumptions or changes in other factors affecting such forward-looking
statements.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company continuously evaluates the market risk associated with its financial
instruments. Market risks relating to the Company's operations result primarily
from changes in interest rates and foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
INTEREST RATE RISK:
The Company's financial instruments include cash and cash equivalents and
short-term borrowings. The Company's obligations are short-term in nature and
generally have less than a 30-day commitment. As of April 3, 2004, 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
April 3, 2004, the Company had no borrowings under the Credit Agreement and $3.5
million in borrowings under the additional lines of credit at an interest rate
of 4.25% (see Note 3 to the Condensed Consolidated Financial Statements). As of
April 3, 2004, 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. As of April 3, 2004, the Company did 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. As of April 3, 2004,
the Company did not hedge against foreign currency risks and believes that
foreign currency exchange risk is immaterial.
In addition, the Company operated 20 stores in Canada as of April 3, 2004. The
Company believes its foreign currency translation risk is minimal, as a
hypothetical 10% strengthening or weakening of the U.S. dollar relative to the
Canadian dollar would not materially affect the Company's results from
operations or cash flow.
Between fiscal year end 2003 and April 3, 2004, there have been no material
changes in market risk exposures.
27
Item 4. 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 was 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 its fiscal 2004
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.
The restatement is further discussed in the "Explanatory Note" in the forepart
of this 10-Q/A and in Note 2, "Restatement of Financial Statements." 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.
In connection with the restatement referred to above, the Company's management,
including its Chief Executive Officer and Chief Financial Officer, re-evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report (April 3, 2004). 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 (April 3,
2004), 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.
The Company has remediated the material weakness in the Company's internal
control over financial reporting, subsequent to January 1, 2005 by implementing
additional review procedures over the selection and monitoring of appropriate
assumptions and factors affecting lease accounting practices.
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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. During the fiscal quarter
to which this report relates, 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. 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.
28
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
15 Acknowledgment of Independent Registered Public Accounting Firm
31.1 Certification of Norman Axelrod, Chairman and Chief Executive
Officer of the Company, Pursuant to Securities Exchange Act Rule
13a-14(a).
31.2 Certification of William T. Giles, Executive Vice President and
Chief Financial Officer of the Company, Pursuant to Securities
Exchange Act Rule 13a-14(a).
32 Certifications Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002,
signed by Norman Axelrod, Chairman and Chief Executive Officer
of the Company, and William T. Giles, Executive Vice President
and Chief Financial Officer of the Company.
(b) REPORTS ON FORM 8-K:
The Company furnished the following reports on Form 8-K during the
quarter for which this report on Form 10-Q is filed:
The Company furnished a Current Report on Form 8-K dated February 4,
2004 in reference to a press release dated February 4, 2004 reporting
the Company's sales and earnings results for its fourth quarter and
fiscal year ended January 3, 2004.
The Company furnished a Current Report on Form 8-K dated February 27,
2004 in reference to an employment agreement entered into between the
Company and F. David Coder, Senior Vice President, Store Operations.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to this Quarterly Report on Form
10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.
LINENS 'N THINGS, INC.
Dated: April 19, 2005 By: /s/ Norman Axelrod
-------------------
Name: Norman Axelrod
Title: Chairman and Chief
Executive Officer
Dated: April 19, 2005 By: /s/ William T. Giles
---------------------
Name: William T. Giles
Title: Executive Vice President and
Chief Financial Officer
30