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 December 30, 2000
(No Fee Required)
Commission File Number 1-12381
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Linens 'n Things, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-3463939
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6 Brighton Road
Clifton, New Jersey 07015
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 778-1300
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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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. ______
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 15, 2001, based on the closing sale price on the New York
Stock Exchange on such date, was approximately $1,371 million. The number of
outstanding shares of the Registrant's common stock, $0.01 par value, as of
March 15, 2001 was 40,496,624.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 30, 2000 are incorporated by reference into Part II, and portions
of the Registrant's Proxy Statement for the 2001 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.................................................................................. 3
Item 2. Properties................................................................................ 11
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....................................................... 13
Item 6. Selected Financial Data................................................................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................................ 13
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk................................................................... 13
Item 8. Financial Statements and Supplementary
Data.................................................................................. 14
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................................................................ 14
PART III
Item 10. Directors and Executive Officers of
the Registrant........................................................................ 15
Item 11. Executive Compensation.................................................................... 15
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................................................. 15
Item 13. Certain Relationships and Related
Transactions.......................................................................... 15
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 16
PART I
ITEM 1. BUSINESS
General
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Linens 'n Things, Inc. 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 283 stores in 40 states and
three Canadian provinces as of fiscal year end 2000. The Company's current store
prototype ranges between 35,000 and 40,000 gross square feet in size and such
stores are located in strip centers and, to a lesser extent, in malls and as
stand-alone stores. The Company's business strategy is to offer a broad
selection of high quality, brand name home furnishings merchandise at
exceptional everyday values, provide superior guest service and maintain low
operating costs.
Linens 'n Things' extensive selection of over 28,000 stock keeping units
("SKUs") in its superstores is driven by the Company's commitment to offering a
broad and deep selection of high quality, brand name "linens" (e.g., bedding,
towels and pillows) and "things" (e.g., housewares and home accessories)
merchandise. Brand names sold by the Company include Wamsutta, Croscill,
Waverly, Laura Ashley, Royal Velvet, Braun, Krups, All-Clad, Cuisinart,
Calphalon and Henckels. The Company also sells an increasing amount of
merchandise under its own private label, LNT Home (approximately 10% of sales),
which is designed to supplement the Company's offering of brand name products by
offering high quality merchandise at value prices. The Company's merchandise
offering is coupled with a "won't be undersold" everyday low pricing strategy.
From its founding in 1975 through the late 1980's, the Company operated a
chain of traditional stores ranging between 7,500 and 10,000 gross square feet
in size. Beginning in 1990, the Company introduced its superstore format, which
has evolved from 20,000 gross square feet in size to its current size ranging
from 30,000 to 60,000 gross square feet. This superstore format offers a broad
merchandise selection in a more visually appealing, guest friendly format. The
Company's introduction of superstores has resulted in the closing or relocation
of most of the Company's traditional stores through fiscal year end 2000. As a
result of superstore openings and traditional store closings, the Company's
gross square footage has increased from 2.9 million to 9.8 million over the last
six years. Meanwhile, the Company's store base increased 95% from 145 to 283
during this period.
As part of this strategy, the Company instituted centralized management
and operating programs and invested significant capital in its distribution and
management information systems infrastructure in order to control operating
expenses as the Company grows. In addition, as part of its strategic initiative
to capitalize on customer demand for one-stop shopping destinations, the Company
has balanced its merchandise mix from being driven primarily by the "linens"
side of its business to a fuller selection of "linens" and "things." The Company
estimates that the "things" side of its business has increased from less than
10% of net sales in fiscal 1991 to approximately 40% in fiscal 2000.
The Company was a wholly owned subsidiary of CVS Corporation ("CVS"),
formerly Melville Corporation, until November 26, 1996, when CVS completed an
initial public offering ("IPO") of 13,000,000 shares of the Company's common
stock, on a pre-split basis. Immediately subsequent to the IPO, CVS owned
approximately 32.5% of the Company's common stock, having retained 6,267,758
shares, on a pre-split basis. During 1997, CVS sold substantially all of its
remaining shares of the Company's common stock in a public offering. At December
31, 1997, CVS held no shares of the Company's common stock. Unless otherwise
indicated, all share information is adjusted to reflect the Company's
two-for-one common stock split effected in May 1998.
Executive Officers and Certain Key Personnel
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The following table sets forth information regarding the executive
officers of the Company:
Name Age Position
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Norman Axelrod..................... 48 Chairman and Chief Executive Officer
Steven B. Silverstein.............. 41 President
William T. Giles................... 41 Senior Vice President, Chief Financial Officer
Hugh J. Scullin.................... 52 Senior Vice President, Store Operations, Real Estate and
Construction
Brian D. Silva .................... 44 Senior Vice President, Human Resources and
Corporate Secretary
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. Axelrod
earned his B.S. from Lehigh University and his M.B.A. from New York University.
Mr. Silverstein joined Linens 'n Things in 1992 as Vice President, General
Merchandise Manager, was promoted to Senior Vice President, General Merchandise
Manager in 1993, was promoted to Executive Vice President, Chief Merchandising
Officer in 1998 and most recently, was promoted to President in 2001. Prior to
joining Linens 'n Things, Mr. Silverstein held various management positions at
Bloomingdale's from 1985 to 1992 including Merchandise Vice President of Home
Textiles. He received his B.A. from Cornell University and his M.B.A. from
Wharton Business School.
Mr. Giles joined Linens 'n Things in 1991 as Assistant Controller, was
promoted to Vice President, Finance and Controller in 1994, was promoted to Vice
President, Chief Financial Officer in 1997 and most recently, was promoted to
Senior Vice President, Chief Financial Officer in 2000. From 1981 to 1990, Mr.
Giles was with PriceWaterhouse LLP. From 1990 to 1991, Mr. Giles held the
position of Director of Financial Reporting with Melville Corporation. Mr. Giles
is a certified public accountant and member of the American Institute of
Certified Public Accountants. He graduated from Alfred University with a B.A. in
Accounting and Management.
Mr. Scullin joined Linens 'n Things in 1989 as Vice President, Store
Operations. Mr. Scullin has been Senior Vice President, Store Operations, Real
Estate and Construction since 1994. From 1978 to 1987, Mr. Scullin held various
management positions with The Gap, Inc., including Zone Vice President at both
The Gap and Banana Republic from 1984 to 1987. From 1987 to 1989, Mr. Scullin
was Vice President of Stores with Alcott and Andrews. Mr. Scullin graduated from
St. Joseph's University with a B.S. in Marketing Management.
Mr. Silva joined Linens 'n Things in 1995 as Vice President, Human
Resources and was promoted to Senior Vice President, Human Resources and
Corporate Secretary in 1997. Mr. Silva was Assistant Vice President, Human
Resources at The Guardian, an insurance and financial services company, from
1986 to 1995. He holds an M.A. in Organizational Development from Columbia
University and an M.S. in Human Resources Management from New York Institute of
Technology. Mr. Silva received his B.A. from St. John's University.
The following table sets forth information regarding another key manager of the
Company:
Name Age Position
Matthew J. Meaney.................. 54 Chief Information Officer
Mr. Meaney joined Linens 'n Things in 1991 as Vice President, Management
Information Systems and was promoted to Chief Information Officer in 2000. From
1985 to 1991, Mr. Meaney was Vice President of Management Information Systems
for Laura Ashley, Inc. Mr. Meaney received a B.S. in Economics from St. Peter's
College and an M.B.A. in Finance from Seton Hall University.
Business Strategy
The Company's business strategy is to offer a broad and deep selection of
high quality, brand name merchandise at exceptional everyday values, provide
superior guest service and maintain low operating costs. Key elements of the
Company's business strategy are:
Offer a Broad Selection of Quality Name Brands at Exceptional Everyday
Values. Linens 'n Things' merchandising strategy is to offer the largest breadth
of selection in high quality, brand name fashion home textiles, housewares and
home accessories at exceptional everyday values. The Company offers over 28,000
SKUs across six departments, including bath, home accessories, housewares,
storage, top of the bed and window treatments. The Company is one of the largest
retailers of brand names, including Wamsutta, Laura Ashley, Royal Velvet,
Croscill, Braun, Krups, All-Clad, Cuisinart, Calphalon and Henckels. The Company
also sells an increasing amount of merchandise under its own private label, LNT
Home, which is designed to supplement the Company's offering of brand name
products by offering high quality merchandise at value prices.
Merchandise and sample brands offered in each major department are
highlighted below:
Department Items Sold Sample Brands
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Bath Towels, shower curtains, waste baskets, Fieldcrest, Wamsutta, Martex, Royal
hampers, bathroom rugs and wall hardware Velvet and Springmaid
Home Accessories Decorative pillows, napkins, tablecloths, Waverly, Laura Ashley and Umbra
placemats, lamps, gifts, picture frames and
framed art
Housewares Cookware, cutlery, kitchen gadgets, small All-Clad, Braun, Krups, Calphalon,
electric appliances (such as blenders and Cuisinart, Henckels, Circulon, Farberware,
coffee grinders), dinnerware, flatware, Black & Decker, Kitchen Aid and Copco
and glassware
Storage Closet-related items (such as hangers, Rubbermaid and Closetmaid
organizers and shoe racks)
Top of the Bed Sheets, comforters, comforter covers, Wamsutta, Laura Ashley, Revman,
bedspreads, bed pillows, blankets and Croscill, Fieldcrest, Springmaid,
mattress pads and Beautyrest
Window Treatment Curtains, valances and window hardware Croscill, Wamsutta, Waverly and Laura Ashley
Provide Superior Guest Service and Shopping Convenience. To enhance guest
satisfaction and loyalty, Linens 'n Things strives to provide prompt,
knowledgeable sales assistance and enthusiastic guest service. Linens 'n Things
emphasizes competitive wages, training and personnel development in order to
attract and retain well-qualified, highly motivated employees committed to
providing superior guest service. Linens 'n Things also endeavors to provide
more knowledgeable sales associates by providing training through various
programs which include management training, daily sales associate meetings and
in-store product seminars.
In addition, the Company has taken initiatives to enhance the speed of
its guest service, including enhancing credit card authorization and upgrading
its point-of-sale ("POS") system. The Company has also transferred the inventory
and receiving responsibilities from the stores to the distribution centers
thereby allowing associates to direct their focus to the selling floor, which
has enhanced the guest's shopping experience. The Company provides gift registry
services in its stores nationwide to further serve its guests. The Company also
offers the convenience of an electronic gift card to its guests.
The Company's superstore format is designed to save the guest time by
having merchandise visible and accessible on the selling floor for immediate
purchase. The Company believes its knowledgeable sales staff and efficient guest
service, together with the Company's liberal return policy, create a positive
shopping experience that engenders guest loyalty.
In response to growing consumer use of the Internet, the Company greatly
expanded its e-commerce capability located at its website, linensnthings.com in
fiscal 2000. The website features on-line access to the Company's gift registry
and allows our guests to purchase many of the Company's most popular items from
the convenience of their homes.
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 streamlining of the Company's centralized
merchandising structure, the use of integrated management information systems
and the utilization of the distribution centers.
Growth Strategy
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Superstore Expansion. The Company operates in a large, highly-fragmented
industry and has a market share of approximately two percent of the industry.
The Company's expansion strategy is to increase market share in existing markets
and to penetrate new markets in which the Company believes it can become a
leading operator of home furnishings superstores. Markets for new superstores
are selected on the basis of demographic factors, such as income, population and
number of households. The Company's stores are located predominantly in power
strip centers and, to a lesser extent, in malls and as stand-alone stores. The
Company generally seeks to operate stores in the United States and Canada in
geographic trading areas of 200,000 persons within a ten-mile radius and with
demographic characteristics that match the Company's target profile.
During 2000, the Company opened its first stores in Canada. By fiscal year
end 2000, the Company operated six stores in three Canadian provinces.
The following table sets forth information concerning the Company's
expansion program during the past five years:
Fiscal Square Footage (in 000's) Store Count
Year Openings Closings Begin Year End Year Begin Year End Year
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1996 36 22 3,691 4,727 155 169
1997 25 18 4,727 5,493 169 176
1998 32 12 5,493 6,487 176 196
1999 43 9 6,487 7,925 196 230
2000 57 4 7,925 9,836 230 283
Increase Productivity of Existing Store Base. The Company is
committed to increasing its net sales per square foot, inventory turnover
ratio and return on invested capital. The Company believes the following
initiatives will best position it to achieve these goals:
Enhance Merchandise Mix and Presentation. The Company continues
to explore opportunities to increase sales in its "things" merchandise
without sacrificing market share or guest image in the "linens" side of
the business. The Company expects these opportunities to positively impact
net sales per square foot, the average net sale per guest and inventory
turnover, since "things" merchandise tends to be more impulse driven
merchandise as compared to the "linens" portion of the business. The
Company is consistently introducing new products that it expects will
increase sales and generate additional guest traffic.
In addition, the Company intends to continue improving its
merchandising presentation techniques, space planning and store layout to
further improve the productivity of its existing and future superstore
locations. The Company periodically restyles its stores to incorporate new
offerings and realigns its store space with its growth segments. The
Company expects that the addition of in-store guest services, such as gift
registry, will further improve its store productivity.
Increase Operating Efficiencies. As part of its strategy to
increase operating efficiencies, the Company has invested significant
capital in building a centralized infrastructure, including two
distribution centers and a management information system, which it
believes will allow it to maintain low operating costs as it pursues its
superstore expansion strategy. In 1995, the Company began full operation
of its first distribution center in Greensboro, North Carolina. In June
1999, the Company began operation of its second distribution center in
southern New Jersey. Management believes that the increased utilization of
the distribution centers has resulted in lower average freight costs, more
efficient scheduling of inventory shipments to the stores, better in-stock
positions and improved information flow. The Company believes that the
transfer of inventory receiving responsibilities from the stores to the
distribution centers allows the store sales associates to direct their
focus to the sales floor, thereby increasing the level of guest service.
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 enhanced by a
centralized merchandising management team and its management information
systems which allow the Company to more accurately monitor and better
balance inventory levels and improve in-stock positions in its stores.
Industry
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According to Industry Reports, total industry sales of products sold in
the Company's stores, which primarily includes home textiles, housewares and
decorative furnishings categories, were estimated to be over $75 billion in
2000. The market for home furnishings is large, highly-fragmented and
competitive. Specialty superstores are one of the fastest growing channels of
distribution in this market. In fiscal 2000, the Company estimates that the
three largest specialty superstore retailers of fashion home textiles (which
includes the Company, Bed Bath & Beyond, Inc. and Home Place of America, Inc.)
had aggregate sales representing only approximately 6% of the industry's total
unit sales.
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., Dillard
Department Stores, Inc., and the department store chains operated by Federated
Department Stores, Inc. and The May Department Store Company. 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., the Target Stores division of Target Corporations and Kmart
Corporation. Fashion home furnishings generally represent only a small portion
of the total merchandise sales in these stores. 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 Place of America,
Inc., Home Goods, a division of TJX Companies, Inc. and smaller format retailers
such as Crate & Barrel, Lechters, Inc. 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 furnishings 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 are typically
smaller in size than the large format superstores and offer a narrow assortment
within a specific niche. The smaller format retailers generally range in size
from 2,000 to 20,000 gross square feet.
Other Retailers: This category includes mail order retailers, such as
Spiegel Inc. and Domestications, off-price retailers, such as Kohl's
Corporation, the T.J. Maxx and Marshall's divisions of the TJX Companies, Inc.
and local "mom and pop" retail stores. Both mail order retailers and smaller
local retailers generally offer a more limited selection of merchandise.
Off-price retailers typically offer close-out or out of season name brand
merchandise at competitive prices.
Merchandising
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The Company offers quality home textiles, housewares and home accessories
at exceptional everyday values. The Company's strategy consists of a commitment
to offer a breadth and depth of selection and to create a merchandise
presentation that makes it easy to shop in a visually pleasing environment. The
stores feature a "racetrack" layout, enabling the guest to visualize and
purchase fully coordinated and accessorized ensembles. Seasonal merchandise is
featured at the front of every store to create variety and excitement and to
capitalize on key selling seasons including spring, back-to-school and holiday
events.
The Company's extensive merchandise offering of over 28,000 SKUs 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. This
presentation of merchandise enhances the guest's impression of a dominant
selection of merchandise in an easy-to-shop environment. The Company's broad and
deep merchandise offering is coupled with everyday low prices that are generally
below regular department store prices and comparable with or slightly below
department store sale prices. The Company believes that the uniform application
of its everyday low price policy is essential to maintaining the integrity of
its strategy. This is an important factor in establishing its reputation as a
price leader and in helping to build guest loyalty. In addition, the Company
offers, on a regular basis, "special" merchandise which it obtains primarily
through opportunistic purchasing to enhance its high value perception among its
guests.
Customer Service
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Linens 'n Things treats every customer as a guest. The Company's
philosophy supports enhancing the guest's entire shopping experience and it
believes that all elements of service differentiate it from the competition. 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. This philosophy is designed to encourage guest loyalty as well as to
continually develop knowledgeable Company associates. The entire store team is
hired and trained to be highly visible in order to assist guests with their
selections. The ability to assist guests has been augmented by the transfer of
inventory receiving responsibilities from the stores, allowing sales associates
to focus on the sales floor. Sophisticated management systems that provide
efficient guest service and liberal return procedures are geared toward making
each guest's visit a convenient, efficient and pleasant experience.
Advertising
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Advertising programs are focused on building and strengthening the Linens
'n Things brand and image. Because of the Company's commitment to exceptional
everyday values, advertising vehicles are aggressively used in positioning the
Company among new and existing guests by communicating value, breadth and depth
of selection. The Company focuses its advertising programs during key selling
seasons such as back-to-school and holidays.
To reach its guests, the Company primarily uses full color flyers to best
represent the full range of offerings in the stores. These are supplemented by
on-going direct marketing initiatives. In addition, the Company utilizes its
proprietary marketing database to track the buying habits of its guests. Grand
opening promotional events are used to support new stores, with more emphasis
placed on those located in new markets.
Purchasing and Suppliers
------------------------
The merchandising mix for each store is generally selected by the central
buying staff. The Company purchases its merchandise from approximately 1,000
suppliers. Springs Industries, Inc., through its various operating companies,
supplied approximately 10% of the Company's total purchases in fiscal 2000. In
fiscal 2000, the Company purchased a significant number of products from other
key suppliers. Due to its breadth and depth of selection, the Company is often
one of the largest customers for certain of its vendors. The Company believes
that this buying power and its ability to make centralized purchases generally
allow it to acquire products at favorable terms.
Distribution
------------
The Company operates two distribution centers. The first is located in
Greensboro, North Carolina and began operation in 1995 and the second is located
in southern New Jersey and began operation in June 1999. The Company believes
the utilization of the centralized distribution centers has resulted in lower
average freight expense, more timely control of inventory shipments to stores,
better in-stock positions and improved information flow. In addition,
transferring inventory receiving responsibilities from the stores to the
distribution centers allows the sales associates to direct their focus to the
selling floor, thereby enhancing the guests' shopping experience. The Company
believes strong distribution support for its stores is a critical element to 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 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 leveraged. 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 delivery services to ship its merchandise from the distribution centers to
its stores.
Management Information Systems
------------------------------
Over the last several years, the Company has made significant
investments in technology to improve guest service, gain efficiencies and reduce
operating costs. Linens 'n Things has installed a customized IBM AS/400
management information system, which integrates all major aspects of the
Company's business, including sales, distribution, purchasing, inventory
control, merchandise planning and replenishment and financial systems. The
Company utilizes POS terminals with price look-up capabilities for both
inventory and sales transactions on a SKU basis, which the Company continually
upgrades. Information obtained daily by the system results in automatic
inventory replenishment in response to specific requirements of each store.
The Company believes its management information systems have fully
integrated the Company's stores, headquarters and distribution process. The
Company continually evaluates and upgrades its management information systems to
enhance the quantity, quality and timeliness of information available to
management.
Store Management and Operations
-------------------------------
The Company places a strong emphasis on its people, their development and
their opportunity for advancement, particularly at the store level. The
Company's commitment to maintaining a high internal promotion rate is best
exemplified through the practice of opening each new store with a seasoned
management team. As a result, the majority of General Managers opening a new
store have significant experience with the Company. Additionally, the 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,
complemented at the associate level through in-store product seminars and POS
register training materials. The Company believes that its policy of promoting
from within, as well as the opportunities for advancement generated by its
ongoing 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 9:00 p.m. Monday through Saturday and 11:00 a.m. to 6:00 p.m. on Sunday,
unless affected by local laws.
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 December 30, 2000, the Company employed approximately 12,200
individuals of whom approximately 5,600 were full-time employees and 6,600 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 Company believes that it will continue to face competition from
retailers in all four of the categories referred to in "Business--Industry." The
home textiles industry is becoming increasingly competitive and as the Company
expands into new markets, it faces new competitors. The visibility of the
Company may encourage additional competitors or existing competitors to imitate
the Company's format and methods.
The Company believes that the ability to compete successfully in its
markets is determined 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 the "Linens 'n Things" and "LNT" names as trade names and
as service marks in connection with retail services. The Company has registered
the "Linens 'n Things" and "LNT" logos as trademarks and service marks with the
United States Patent and Trademark Office. The Company has also filed for
registration with the Canada Patent and Trademark Office. Management believes
that the name "Linens 'n Things" is an important element of the Company's
business.
Forward-Looking Statements
--------------------------
This Form 10-K (including the information incorporated herein by
reference) contains forward-looking statements within the meaning of The Private
Securities Litigation Reform Act of 1995. The statements were made a number of
times and have been identified by such forward-looking terminology as "expect,"
"believe," "may," "will," "intend," "plan," "target" or similar statements or
variations of such terms. Such 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, the success
of our new business concepts and seasonal concepts, the success of our new store
openings, competitive pressures from other home furnishings retailers, the
success of the Canadian expansion, availability of suitable future store
locations and schedule of store expansion. These and other important factors
that may cause actual results to differ materially from such forward-looking
statements are included in the "Risk Factors" section of the Company's
Registration Statement on Form S-1 as filed with the Securities and Exchange
Commission on May 29, 1997, and may be contained in subsequent reports filed
with the Securities and Exchange Commission. You are urged to consider all such
factors. In light of the uncertainty inherent in such forward-looking
statements, you should not consider their inclusion to be a representation that
such forward-looking matters will be achieved. The Company assumes no obligation
for updating any such forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting such
forward-looking statements.
ITEM 2. PROPERTIES
As of December 30, 2000 the Company operated 283 retail stores in 40
states and three Canadian provinces. 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 certain of the leases provide for
renewal options that range from 5 to 15 years at increased rents. Certain of the
leases provide for scheduled rent increases and certain of the leases provide
for contingent rent (based upon store sales exceeding stipulated amounts). CVS
guarantees the leases of certain stores that were entered into prior to the
Company's 1996 IPO. Following the IPO, CVS no longer entered into commitments to
guarantee future leases on behalf of the Company.
The Company owns its distribution center in Greensboro, North Carolina.
The Company leases its corporate headquarters in Clifton, New Jersey and its
distribution center in southern New Jersey.
The table below sets forth the number of stores located in each state in
the United States as of December 30, 2000:
State Number of Stores State Number of Stores
----- ---------------- ----- ----------------
Alabama 1 Nebraska 2
Arizona 7 Nevada 2
Arkansas 1 New Hampshire 4
California 33 New Jersey 11
Colorado 5 New Mexico 3
Connecticut 9 New York 17
Florida 22 North Carolina 9
Georgia 11 Ohio 7
Idaho 1 Oklahoma 2
Illinois 17 Oregon 4
Indiana 3 Pennsylvania 7
Kansas 3 Rhode Island 1
Kentucky 1 South Carolina 1
Louisiana 2 Tennessee 3
Maine 3 Texas 27
Maryland 4 Utah 3
Massachusetts 9 Virginia 11
Michigan 9 Washington 9
Minnesota 6 West Virginia 1
Missouri 5 Wisconsin 1
The table below sets forth the number of stores located in each province
in Canada as of December 30, 2000:
Province Number of Stores
-------- ----------------
Alberta 3
British Columbia 2
Ontario 1
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 will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
The Company is a defendant in a California state court litigation
brought as a class action on behalf of certain managers of Company stores
located in California seeking overtime pay as well as a claim for accrued
vacation pay on behalf of certain former employees. In the event such claims for
vacation pay are determined adversely to the Company, management of the Company
does not believe such claims, if so adversely determined, would have a material
adverse effect on the Company's financial position, liquidity or results of
operations. At the present time, there has been no determination of the number
of any actual class. Nor has there been any determination of the extent to which
overtime pay may or may not be owed. Accordingly, the Company is not presently
in a position to estimate with any degree of certainty, the range of potential
exposure represented by this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Linens 'n Things' common stock is listed on the New York Stock Exchange.
Its trading symbol is LIN. At December 30, 2000 there were approximately 7,300
beneficial shareholders. The high and low trading price of the Company's common
stock for each quarter is as follows:
For Fiscal 2000 High Low
--------------- ---- ---
First Quarter.................... $34 3/8 $17 15/16
Second Quarter................... 35 15/16 23 3/16
Third Quarter.................... 36 3/8 23 7/8
Fourth Quarter................... 33 1/2 20
For Fiscal 1999 High Low
--------------- ---- ---
First Quarter.................... $48 1/4 $34 3/16
Second Quarter................... 52 1/16 37 5/8
Third Quarter.................... 49 1/2 30 5/8
Fourth Quarter................... 41 7/16 22 7/16
The Company paid no dividends on its common stock in fiscal 2000 and 1999.
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.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to
the Five-Year Financial Summary appearing on page 18 of the Company's Annual
Report to Shareholders for the fiscal year ended December 30, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference to
pages 19 through 22 of the Company's Annual Report to Shareholders for the
fiscal year ended December 30, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
In the normal course of operations, the Company is exposed to market risk
arising from adverse changes in interest rates. The Company is exposed to
interest rate risks primarily through borrowings under the $140 million senior
revolving credit facility agreement (the "Credit Agreement"). The Company does
not hedge these interest rate risks. As of December 30, 2000, the Company had no
borrowings under the Credit Agreement and had $3.9 million in borrowings against
the uncommitted lines of credit at a variable rate.
The Company enters into some purchase obligations outside of the United
States, which are predominately settled in U.S. dollars and, therefore, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial information required by this
Item are incorporated by reference to pages 23 through 34 of the Company's
Annual Report to Shareholders for the fiscal year ended December 30, 2000. These
financial statements are indexed under Item 14(a)(1). See also the financial
statement schedule that is included herein and is indexed under Item 14(a)(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements between the Company and its independent public
accountants on matters of accounting principles or practices for fiscal 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Company's directors
is incorporated by reference to the Company's Proxy Statement to be mailed to
shareholders for the Company's 2001 Annual Meeting of Shareholders.
The information required by this Item concerning the Company's executive
officers is contained in Part I, Item 1, "Business - Executive Officers and
Certain Key Personnel."
The information required by this Item with respect to Section 16
reporting is incorporated by reference to the Company's Proxy Statement for the
Company's 2001 Annual Meeting of Shareholders, under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders, under
the headings "Director Compensation - Attendance; Committees" and "Executive
Compensation", other than information included therein under the subcaptions
"Report on Compensation of Executive Officers" and "Performance Graph" which are
not incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 2001 Annual Meeting of Shareholders, under
the heading "Beneficial Ownership of Common Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report.
1. Financial Statements:
The following Financial Statements are incorporated by reference to the
Company's Annual Report to Shareholders for the fiscal year ended December 30,
2000:
Pages in Annual Report
to Shareholders
-----------------------
Consolidated Statements of Operations -
for the fiscal years ended December 30, 2000, January 1, 2000 and December 31, 1998...... 23
Consolidated Balance Sheets -
as of December 30, 2000 and January 1, 2000.............................................. 24
Consolidated Statements of Shareholders' Equity -
for the fiscal years ended December 30, 2000, January 1, 2000 and December 31, 1998...... 25
Consolidated Statements of Cash Flows -
for the fiscal years ended December 30, 2000, January 1, 2000 and December 31, 1998...... 26
Notes to Consolidated Financial Statements............................................... 27 through 33
Management's Responsibility for Financial Reporting...................................... 33
Independent Auditors' Report............................................................. 34
2. Schedules:
The supplementary income statement schedule is included in this Report.
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.
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation, as amended 1,3
3.2 By-Laws of the Registrant 1
4 Specimen Certificate of Common Stock 1
10.1 Transitional Services Agreement between the Registrant and CVS
Corporation 1
10.2 Stockholder Agreement between the Registrant and
CVS Corporation 1
10.3 Tax Disaffiliation Agreement between the Registrant and
CVS Corporation 1
10.4 Credit Agreement dated as of March 31, 1998 among the Registrant
Bank of New York and the lenders signatory thereto, as amended
1, 4
10.5 Employment Agreement with Norman Axelrod *6
10.6 Employment Agreement with Steven B. Silverstein *6
10.7 Employment Agreement with Hugh J. Scullin *6
10.8 Employment Agreement with Brian Silva *6
10.9 Employment Agreement with William Giles *6
10.10 1996 Incentive Compensation Plan *1
10.11 1996 Non-Employee Director Stock Plan *1
10.12 Supplemental Executive Retirement Plan *5
10.13 Split - Dollar Agreement between the Registrant and
Norman Axelrod *5
10.14 Split - Dollar Collateral Assignment between the Registrant
and Norman Axelrod *5
10.15 2000 Stock Award & Incentive Plan 8
10.16 Credit Agreement dated as of October 20, 2000 among the
Registrant, Fleet Bank and the lenders signatory thereto 7
11 Computation of Net Income Per Common Share 2
13 Annual Report to Shareholders for 2000 fiscal year**
21 List of Subsidiaries 2
23a Consent of KPMG LLP 2
--------------------------------------------------------------------------------
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.
2 Filed with this Form 10-K.
3 Incorporated by reference to a Current Report on Form 8-K dated May 6,
1999.
4 Incorporated by reference to a Current Report on Form 8-K dated March
31, 1998.
5 Incorporated by reference to a Current Report on Form 8-K dated March 27,
2000.
6 Incorporated by reference to a Current Report on Form 8-K dated March 29,
2001.
7 Incorporated by reference to a Current Report on Form 8-K dated November
6, 2000.
8 Incorporated by reference to a Registration Statement on Form S-8 dated
August 2, 2000.
--------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement.
** With the exception of the information incorporated by reference to the
Annual Report to Shareholders in Items 6, 7, and 8 of Part II and Item 14
of Part IV of this Form 10-K, the Annual Report to Shareholders is not
deemed filed as part of this Form 10-K.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated November 6, 2000,
concerning the Credit Agreement with Fleet Bank and the lenders party
thereto.
The Company filed a Current Report on Form 8-K dated November 6, 2000,
concerning the posting of significant corporate information on its
website.
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
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 29, 2001
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 29, 2001
------------------------------------------ Executive Officer
Norman Axelrod
/s/ Philip E. Beekman Director March 29, 2001
---------------------------------------------
Philip E. Beekman
/s/ Harold F. Compton Director March 29, 2001
---------------------------------------------
Harold F. Compton
/s/ Stanley P. Goldstein Director March 29, 2001
---------------------------------------------
Stanley P. Goldstein
/s/ Morton E. Handel Director March 29, 2001
---------------------------------------------
Morton E. Handel
/s/ William T. Giles Senior Vice President, March 29, 2001
--------------------------------------------- Chief Financial Officer
William T. Giles (Principal Financial Officer and
Principal Accounting Officer
Five-Year Financial Summary (in thousands, except per share and selected operating data)
Fiscal Year Ended December January December December 31, December 31,
30, 2000 1, 2000 31, 1998 1997 1996
----------------------------------------------------- ---------------- --------------- ----------------- --------------- -----------
Income statement data:
Net sales.......................................... $1,572,576 $1,300,632 $1,066,194 $874,224 $696,107
Operating profit................................... 107,092 84,552 61,988 45,507 30,683
Net income ........................................ 64,937 52,052 38,062 25,790 15,039
Net income per share - basic1...................... $ 1.63 $ 1.32 $ 0.98 $ 0.67 $ 0.39
Basic weighted average shares
outstanding1................................... 39,785 39,339 38,895 38,578 38,536
Net income per share - diluted1.................... $ 1.60 $ 1.27 $ 0.94 $ 0.65 $ 0.39
Diluted weighted average shares
outstanding1.................................. 40,712 40,907 40,407 39,537 38,558
Balance sheet data:
Total assets....................................... $ 821,557 $ 679,916 $ 560,844 $472,099 $423,957
Working capital.................................... 226,694 181,380 154,893 123,375 113,582
Total long-term debt............................... -- -- -- -- 13,500
Shareholders' equity............................... $ 458,994 $ 383,962 $ 323,576 $280,035 $249,727
Selected operating data:
Number of stores................................... 283 230 196 176 169
Total gross square footage (000's)................. 9,836 7,925 6,487 5,493 4,727
Increase in comparable store net sales............. 3.7% 5.4% 8.3% 6.6% 1.1%
1 Unless otherwise stated, all references to common shares outstanding and
income per share in the consolidated financial statements, notes to
consolidated financial statements, and management's discussion and analysis
of financial condition and results of operations are adjusted to reflect the
Company's two-for-one common stock split effected in May 1998.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following table sets forth the percentage of net sales for certain items
included in the Company's consolidated statements of operations for the periods
indicated:
Dec. 30, Jan. 1, Dec. 31,
Fiscal Year Ended 2000 2000 1998
------------------------------ --------- -- -------- -- ---------
Percentage of net sales
Net sales...................... 100.0% 100.0% 100.0%
Cost of sales, including
buying and distribution costs.. 59.1 59.4 60.0
--------- -------- ---------
Gross profit................... 40.9 40.6 40.0
Selling, general and
administrative expenses....... 34.1 34.1 34.2
--------- -------- ---------
Operating profit............... 6.8 6.5 5.8
Interest expense, net.......... 0.1 0.0 0.0
--------- -------- ---------
Income before income taxes..... 6.7 6.5 5.8
Provision for income taxes..... 2.6 2.5 2.2
--------- -------- ---------
Net income..................... 4.1% 4.0% 3.6%
Fiscal Year Ended December 30, 2000 Compared With Fiscal Year Ended January 1,
2000
Net Sales
Net sales for fiscal 2000 were $1,572.6 million, an increase of 20.9% over
fiscal 1999 sales of $1,300.6 million, primarily as a result of new store
openings as well as comparable store net sales increases. The Company opened 57
superstores and closed four stores in fiscal 2000, as compared with opening 43
superstores and closing nine stores in fiscal 1999. At fiscal year end 2000, the
Company operated 283 stores as compared with 230 stores at fiscal year end 1999.
Store square footage increased 24.1% to 9,836,000 at December 30, 2000 compared
with 7,925,000 at January 1, 2000. Comparable store net sales increased 3.7% in
fiscal 2000 compared with 5.4% in fiscal 1999. Comparable store net sales were
driven predominately by higher consumer traffic.
The Company's average net sales per store was $6.2 million in fiscal 2000 and
fiscal 1999. For the fiscal year ended 2000, net sales of "linens" merchandise
increased approximately 18% over the prior year, while net sales of "things"
merchandise increased approximately 25% over the prior year. The greater
increase in net sales for "things" merchandise primarily resulted from the
continued expansion in this product category.
Gross Profit
Gross profit for fiscal 2000 was $643.3 million, or 40.9% of net sales, as
compared with $528.2 million, or 40.6% of net sales, in fiscal 1999. This
increase as a percentage of net sales resulted from overall improved selling
mix, increased penetration of seasonal and proprietary product and improvements
in buying. In addition, the Company had lower freight and related distribution
costs, as a percentage of sales, from the leveraging of the Company's
centralized distribution network.
Expenses
Selling, general and administrative expenses ("S,G&A") for fiscal 2000 were
$536.2 million, or 34.1% of net sales, as compared with $443.6 million, or 34.1%
of net sales, in fiscal 1999. Corporate office and promotional expenses were
leveraged, which were offset by investments in store payroll in order to
continue to improve our guest service levels.
Operating profit for fiscal 2000 increased to $107.1 million, or 6.8% of net
sales, up from $84.6 million, or 6.5% of net sales, during fiscal 1999.
Net interest expense in fiscal 2000 increased to $1.9 million, up from $43,000
during fiscal 1999. This increase was due to higher net average loan balances
and higher interest rates during fiscal 2000.
The Company's income tax expense for fiscal 2000 was $40.2 million, as compared
with $32.5 million during fiscal 1999. The Company's effective tax rate was
38.2% in fiscal 2000 as compared with 38.4% in fiscal 1999.
Net Income
Net income for fiscal 2000 was $64.9 million, or 4.1% of net sales as compared
with $52.1 million, or 4.0% of net sales in fiscal 1999.
Fiscal Year Ended January 1, 2000 Compared With Fiscal Year Ended
December 31, 1998
Net Sales
Net sales for fiscal 1999 were $1,300.6 million, an increase of 22.0% over
fiscal 1998 sales of $1,066.2 million, primarily as a result of new store
openings as well as comparable store net sales increases. The Company opened 43
superstores and closed nine stores in fiscal 1999, as compared with opening 32
superstores and closing 12 stores in fiscal 1998. At fiscal year end 1999, the
Company operated 230 stores as compared with 196 stores at fiscal year end 1998.
Comparable store net sales increased 5.4% in fiscal 1999 compared with 8.3% in
fiscal 1998. Comparable store net sales were driven predominately by higher
consumer traffic.
The Company's average net sales per store increased to $6.2 million in fiscal
1999 up from $5.9 million in fiscal 1998. This increase was due to strong
comparable store net sales increases. For the fiscal year ended 1999, net sales
of "linens" merchandise increased approximately 20% over the prior year, while
net sales of "things" merchandise increased approximately 30% over the prior
year. The greater increase in net sales for "things" merchandise primarily
resulted from the continued expansion of product categories within the "things"
business.
Gross Profit
Gross profit for fiscal 1999 was $528.2 million, or 40.6% of net sales, as
compared with $427.1 million, or 40.0% of net sales, in fiscal 1998. This
increase as a percentage of net sales resulted from improved selling mix,
improvements in buying, and lower freight and related distribution costs from
the leveraging of the Company's distribution network.
Expenses
S,G&A expenses for fiscal 1999 were $443.6 million, or 34.1% of net sales, as
compared with $365.1 million, or 34.2% of net sales, in fiscal 1998. Occupancy
expenses continued to leverage as a result of a 5.4% comparable store net sales
increase, which was offset in part due to investments in store payroll in order
to provide better guest service.
Operating profit for fiscal 1999 increased to $84.6 million, or 6.5% of net
sales, up from $62.0 million, or 5.8% of net sales, during fiscal 1998.
Net interest expense in fiscal 1999 decreased to $43,000 from $83,000 during
fiscal 1998. This decrease was due to improved earnings as well as improved
working capital management.
The Company's income tax expense for fiscal 1999 was $32.5 million, as compared
with $23.8 million during fiscal 1998. The Company's effective tax rate was
38.4% in fiscal 1999 as compared with 38.5% in fiscal 1998.
Net Income
Net income for fiscal 1999 was $52.1 million, or 4.0% of net sales as compared
with $38.1 million, or 3.6% of net sales in fiscal 1998.
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 are
funded through a combination of internally generated cash from operations,
credit extended by suppliers and short-term borrowings.
On October 20, 2000, the Company entered into a $140 million senior revolving
credit facility agreement (the "Credit Agreement") with third party
institutional lenders, expiring October 20, 2003. The Credit Agreement also
allows for up to $40 million in borrowings from uncommitted lines of credit
outside of the Credit Agreement. The Credit Agreement replaced the 1998 $90
million revolving line of credit, which allowed for up to $25 million in
borrowings from uncommitted lines of credit (the "1998 Credit Agreement"). Under
the Credit Agreement, the amount of borrowings can be increased up to $150
million provided certain terms and conditions contained in the Credit Agreement
are met. Interest on all borrowings is determined based upon several alternative
rates as stipulated in the Credit Agreement, including a fixed rate plus LIBOR
rate. 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 2000,
the Company was in compliance with the terms of the Credit Agreement. At various
times throughout fiscal 2000 and 1999, the Company borrowed against the Credit
Agreement and the 1998 Credit Agreement for seasonal working capital needs. At
the end of fiscal 2000, the Company had no borrowings under the Credit Agreement
and had $3.9 million of borrowings against the uncommitted lines of credit. In
addition, as of December 30, 2000 and January 1, 2000, the Company had $10.7
million and $1.7 million, respectively, of letters of credit outstanding. The
letters of credit were used to guarantee payment of certain insurance
obligations and to secure a foreign line of credit. The Company is not obligated
under any formal or informal compensating balance requirements.
Net cash provided by operating activities for the fiscal year ended 2000 was
$27.5 million as compared with $41.4 million for the same period in fiscal 1999.
This change was primarily a result of an increase in inventory. The increase in
inventory levels over the prior year is a result of new store openings, as well
as the Company's decision to maintain and improve its in-stock position, which
is consistent with the Company's focus on continuing to improve guest service.
The increase in inventory was partially offset by an increase in accrued
expenses due to the timing and settlement of vendor payments. In addition, the
Company reported a smaller change in accounts payable than the prior year due to
the timing and settlement of vendor payments.
Net cash used in investing activities for the fiscal year ended 2000 was $70.5
million, as compared with $70.1 million for the same period in fiscal 1999.
Fiscal year 2000 included an increase in capital expenditures associated with
the opening of 14 more stores this year versus last year, which was offset by
capital expenditures incurred for the second distribution center in 1999.
Net cash provided by financing activities for the fiscal year ended 2000 was
$35.7 million compared with $31.9 million for the same period in fiscal 1999.
The increase was primarily attributable to an increase in short-term borrowings.
Management currently believes that the Company's cash flows from operations,
credit extended by suppliers, the Credit Agreement and the uncommitted lines of
credit will be sufficient to fund anticipated capital expenditures and working
capital requirements in the foreseeable future.
Market Risk Disclosure
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.
In the normal course of operations, the Company is exposed to market risk
arising from adverse changes in interest rates. The Company is exposed to
interest rate risks primarily through borrowings under the Credit Agreement. The
Company does not hedge these interest rate risks. As of December 30, 2000, the
Company had no borrowings under the Credit Agreement and had $3.9 million in
borrowings against the uncommitted lines of credit at a variable rate.
The Company enters into some purchase obligations outside of the United States,
which are predominately settled in U.S. dollars and, therefore, 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.
Inflation and Seasonality
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.
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and net income for the year during the third and fourth quarters. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of new store openings. The
Company believes this is the general pattern associated with its segment of the
retail industry and expects this pattern will continue in the future.
Consequently, comparisons between quarters are not necessarily meaningful and
the results for any quarter are not necessarily indicative of future results.
Recent Accounting Pronouncements
The Company is required to adopt Statement of Financial Standards ("SFAS") No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). This statement is effective with the first quarter of fiscal years
beginning after June 15, 2000. For the Company, implementation is required for
the first quarter of fiscal 2001. The Company has determined that the
implementation of SFAS No. 133 is not expected to have a significant effect on
its results of operations or financial position. This statement is not required
to be applied retroactively to financial statements of prior periods.
Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" ("FIN No. 44") provides
guidance for applying Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees". With certain exceptions, FIN No. 44
applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
on or after July 1, 2000. The Company has determined that the implementation of
FIN No. 44 did not have a significant effect on its results of operations or
financial position.
At a recent FASB Emerging Issues Task Force ("EITF") meeting, a consensus was
reached with respect to the issue of "Accounting for Certain Sales Incentives,"
including point of sale coupons, rebates and free merchandise. The consensus
included a conclusion that the value of such sales incentives that result in a
reduction of the price paid by the customer should be netted against sales and
not classified as a sales or marketing expense. The adoption of the EITF is
required in the second quarter of fiscal 2001. The Company already includes such
sales incentives against sales and records free merchandise in cost of goods
sold as required by the new EITF consensus.
Forward-Looking Statements
This Annual Report to Shareholders contains forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995. The
statements are made a number of times throughout the document and may be
identified by such forward-looking terminology as "expect," "believe," "may,"
"will," "intend," "plan," "target" or similar statements or variations of such
terms. Such 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, the success of our new business
concepts and seasonal concepts, competitive pressures from other home
furnishings retailers, the success of the Canadian expansion, availability of
suitable future store locations and schedule of store expansion plans. These and
other important factors that may cause actual results to differ materially from
such forward-looking statements are included in the "Risk Factors" section of
the Company's Registration Statement on Form S-1 as filed with the Securities
and Exchange Commission on May 29, 1997, and may be contained in subsequent
reports filed with the Securities and Exchange Commission. You are urged to
consider all such factors. In light of the uncertainty inherent in such
forward-looking statements, you should not consider their inclusion to be a
representation that such forward-looking matters will be achieved. The Company
assumes no obligation for updating any such forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.
Consolidated Statements of Operations (in thousands, except per share amounts)
-------------------------------------------------------------------------------------------------------------------
December 30, January 1, December 31,
Fiscal Year Ended 2000 2000 1998
-------------------------------------------------------------- ------------------- -- --------------- --- --------------------
Net sales................................................. $1,572,576 $1,300,632 $1,066,194
Cost of sales, including buying and
distribution costs..................................... 929,305 772,453 639,138
------------------- --------------- --------------------
Gross profit.............................................. 643,271 528,179 427,056
Selling, general and administrative expenses.............. 536,179 443,627 365,068
------------------- --------------- --------------------
Operating profit.......................................... 107,092 84,552 61,988
Interest expense, net of interest income and
capitalized interest.................................... 1,941 43 83
------------------- --------------- --------------------
Income before income taxes................................ 105,151 84,509 61,905
Provision for income taxes................................ 40,214 32,457 23,843
------------------- --------------- --------------------
Net income................................................ $ 64,937 $ 52,052 $ 38,062
=================== =============== ====================
Per share of common stock:
Basic
Net income................................................ $ 1.63 $ 1.32 $ 0.98
------------------- --------------- --------------------
Weighted average shares outstanding....................... 39,785 39,339 38,895
Diluted
Net income................................................ $ 1.60 $ 1.27 $ 0.94
------------------- --------------- --------------------
Weighted average shares outstanding....................... 40,712 40,907 40,407
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets (in thousands, except share amounts)
------------------------------------------------------------------------------------------------------------------------------
December 30, 2000 January 1, 2000
------------------------------------------------------------------------------------- ------------------- -- -----------------
Assets
Current assets:
Cash and cash equivalents................................................ $ 38,524 $ 45,751
Accounts receivable, net................................................. 31,508 20,836
Inventories.............................................................. 437,258 342,681
Prepaid expenses and other current assets................................ 25,360 21,410
------------------- -----------------
Total current assets....................................................... 532,650 430,678
Property and equipment, net.............................................. 262,409 223,725
Goodwill, net of accumulated amortization of $8,214
at December 30, 2000 and $7,364 at January 1, 2000.................... 18,977 19,826
Deferred charges and other noncurrent assets, net........................ 7,521 5,687
------------------- -----------------
Total assets................................................................... $ 821,557 $ 679,916
=================== =================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable......................................................... $ 183,473 $ 144,884
Accrued expenses and other current liabilities........................... 118,580 104,414
Short-term borrowings ................................................... 3,903 --
------------------- -----------------
Total current liabilities.................................................. 305,956 249,298
Deferred income taxes and other long-term liabilities.................... 56,607 46,656
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; 40,173,441
shares issued and 40,059,126 shares outstanding at December 30, 2000;
39,555,259 shares issued and 39,478,782 shares outstanding at
January 1, 2000....................................................... 402 396
Additional paid-in capital............................................... 231,547 220,751
Retained earnings........................................................ 230,186 165,249
Accumulated other comprehensive income .................................. 289 --
Treasury stock, at cost, 114,315 shares at December 30, 2000 and 76,477
shares at January 1, 2000............................................. (3,430) (2,434)
------------------- -----------------
Total shareholders' equity................................................. 458,994 383,962
------------------- -----------------
Total liabilities and shareholders' equity..................................... $ 821,557 $ 679,916
=================== =================
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Foreign
Common Stock Additional Currency
------------ Paid-in Retained Translation Treasury
Shares Amount Capital Earnings Adjustment Stock Total
----------------------------------------- ------------ ------- ----------- -------- ------------ -------- ----------
(in thousands, except number of shares)
Balance at December 31, 1997............ 38,633,840 $386 $204,514 $75,135 $ -- $ -- $ 280,035
Net income.............................. -- -- -- 38,062 -- -- 38,062
Common stock issued under stock
incentive plans...................... 457,441 5 6,864 -- -- -- 6,869
Purchase of treasury stock.............. (53,333) -- -- -- -- (1,390) (1,390)
------------ ------ ----------- --------- --------- --------- -----------
Balance at December 31, 1998............ 39,037,948 391 211,378 113,197 -- (1,390) 323,576
Net income.............................. -- -- -- 52,052 -- -- 52,052
Common stock issued under stock
incentive plans...................... 463,978 5 9,373 -- -- -- 9,378
Purchase of treasury stock.............. (23,144) -- -- -- -- (1,044) (1,044)
------------ ------ ----------- --------- --------- --------- -----------
Balance at January 1, 2000.............. 39,478,782 396 220,751 165,249 -- (2,434) 383,962
Net income.............................. -- -- -- 64,937 -- -- 64,937
Currency translation adjustment......... -- -- -- -- 289 -- 289
-----------
Comprehensive earnings............. 65,226
Common stock issued under stock
incentive plans..................... 618,182 6 10,796 -- -- -- 10,802
Purchase of treasury stock.............. (37,838) -- -- -- -- (996) (996)
------------ ------ ----------- --------- --------- --------- -----------
Balance at December 30, 2000............ 40,059,126 $402 $231,547 $230,186 $289 $(3,430) $458,994
============ ====== =========== ========= ========= ========= ===========
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (in thousands)
--------------------------------------------------------- -- -------------------- -- ----------------- -- --------------------
December 30, January 1, December 31,
Fiscal Year Ended 2000 2000 1998
--------------------------------------------------------- -- -------------------- -- ----------------- -- --------------------
Cash flows from operating activities:
Net income.......................................... $ 64,937 $ 52,052 $38,062
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization..................... 32,422 26,521 21,308
Deferred income taxes............................. 5,074 3,784 2,502
Loss on disposal of assets........................ 807 868 1,560
Federal tax benefit from common stock
issued under stock incentive plans........... 4,480 4,669 3,212
Changes in assets and liabilities:
(Increase) decrease in accounts receivable...... (10,672) 1,978 (9,050)
Increase in inventories......................... (94,577) (71,292) (48,201)
Increase in prepaid expenses and other
current assets.............................. (2,468) (1,551) (4,814)
(Increase) decrease in deferred charges
and other noncurrent assets.................. (2,425) (1,062) 175
Increase in accounts payable.................... 2,929 31,033 472
Increase (decrease) in accrued expenses
and other liabilities..................... 27,027 (5,618) 25,671
-------------------- ----------------- --------------------
Net cash provided by operating activities........... 27,534 41,382 30,897
-------------------- ----------------- --------------------
Cash flows from investing activities:
Additions to property and equipment................. (70,473) (70,129) (46,272)
-------------------- ----------------- --------------------
Cash flows from financing activities:
Proceeds from common stock issued under
stock incentive plans............................. 6,322 4,709 3,657
Purchase of treasury stock.......................... (996) (1,044) (1,390)
Increase in short-term borrowings................... 3,903 -- --
Increase in book overdrafts......................... 26,483 28,195 15,864
-------------------- ----------------- --------------------
Net cash provided by financing activities........... 35,712 31,860 18,131
-------------------- ----------------- --------------------
Net (decrease) increase in cash and cash equivalents
(7,227) 3,113 2,756
Cash and cash equivalents at beginning of
year........................................... 45,751 42,638 39,882
-------------------- ----------------- --------------------
Cash and cash equivalents at end of year............... $ 38,524 $ 45,751 $42,638
==================== ================= ====================
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized)............... $ 2,500 $ 747 $ 727
Income taxes........................................ $ 25,102 $ 20,889 $ 16,756
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. Business
Linens 'n Things, Inc. and subsidiaries (collectively the "Company") operates in
one segment, the retail industry, and had 283 stores in 40 states across the
United States and three Provinces in Canada as of the fiscal year ended 2000.
The Company's stores emphasize a broad assortment of home textiles, housewares
and home accessories, carrying both national brand 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 intercompany
balances and transactions have been eliminated.
Fiscal Periods
On December 15, 1999, the Board of Directors approved a change in the
Company's fiscal year from a calendar year to a 52/53-week calendar year.
Therefore, fiscal 2000 ended December 30, 2000 and fiscal 1999 ended
January 1, 2000. Both fiscal 2000 and 1999 were 52 week periods. Fiscal
1998 was based on a calendar year which ended December 31, 1998.
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 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 weighted average number of shares outstanding for basic earnings per
share were approximately 39,785,000 in fiscal 2000, 39,339,000 in fiscal
1999 and 38,895,000 in fiscal 1998. The weighted average number of shares
outstanding for diluted earnings per share including the dilutive effects
of stock options and deferred stock grants were approximately 40,712,000 in
fiscal 2000, 40,907,000 in fiscal 1999 and 40,407,000 in fiscal 1998.
Stock Based Compensation
The Company grants stock options and restricted stock for a fixed number of
shares to employees with stock option exercise prices equal to the fair
market value of the shares at the date of grant. The Company has adopted
the disclosure provisions of Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation". In
accordance with the provisions of SFAS No. 123, the Company accounts for
stock option grants and restricted stock grants in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees". Accordingly, the Company does not recognize
compensation expense for stock option grants but amortizes restricted stock
grants at fair market value, over specified vesting periods.
Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are reflected in the consolidated financial statements at
carrying value which approximates fair value due to the short-term nature
of these instruments. The carrying value of the Company's borrowings
approximates the fair value based on the current rates available to the
Company for similar instruments.
Cash and Cash Equivalents
The Company's cash management program utilizes controlled disbursement
accounts. Under this system, book overdrafts represent checks outstanding,
which have been issued and have not cleared the Company's bank accounts at
fiscal year end. Accordingly, all book overdraft balances have been
reclassified to current liabilities. Cash equivalents are considered, in
general, to be those securities with maturities of three months or less
when purchased.
Inventories
Inventories consist of finished goods merchandise purchased from domestic
and foreign vendors and are carried at the lower of cost or market, cost
being determined by the retail inventory method of accounting.
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 building 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 are amortized over the shorter of the
related lease term or the economic lives of the related assets.
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 beneficial leasehold costs, are amortized on
a straight-line basis, generally over the remaining life of the leasehold
acquired.
Goodwill
The excess of acquisition costs over the fair value of net assets acquired
is amortized on a straight-line basis not to exceed 40 years.
Deferred Rent
The Company accrues for scheduled rent increases contained in its leases on
a straight-line basis over the non-cancelable lease term.
Shareholders' Equity
In April of 1999, the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock (par value $0.01
per share) from 60,000,000 shares to 135,000,000 shares.
On April 14, 1998, the Board of Directors of the Company approved a
two-for-one split of its common stock to be effected in the form of a stock
dividend. The stock dividend was one additional share of common stock for
each outstanding share of common stock and was distributed on May 7, 1998
to shareholders of record on April 24, 1998. Unless otherwise stated, all
references to common shares outstanding and income per share in the
consolidated financial statements, notes to consolidated financial
statements, and management's discussion and analysis of financial condition
and results of operations are on a post-split basis.
Revenue Recognition
The Company recognizes revenue at the time of sale of merchandise to its
customers.
Store Opening and Closing Costs
New store opening costs are charged to expense as incurred. In the event a
store is closed before its lease has expired, the total lease obligation,
less anticipated sublease rental income and related improvements and
fixtures, is provided for in the year of closing.
Advertising Costs
The Company expenses the production costs of advertising at the
commencement date of the advertisement. Advertising costs were $39.6
million, $35.6 million and $28.9 million for fiscal years 2000, 1999 and
1998, respectively.
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 taxable income 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.
Use of Estimates in the Preparation of
Financial Statements
The preparation of financial statements in conformity with 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 of expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications were made to the fiscal 1999 and 1998
consolidated financial statements in order to conform to the fiscal 2000
presentation.
3. Accounts Receivable, Net
Fiscal Year Ended
Accounts receivable, net, consisted ------------------
of the following (in thousands): 2000 1999
-------------------------------------- ---------- -- ----------
Credit and charge card receivables... $9,489 $6,457
Due from landlords and vendors....... 20,934 13,172
Other, net of allowance............. 1,085 1,207
---------- ----------
$ 31,508 $ 20,836
4. Property and Equipment
Fiscal Year Ended
Property and equipment consisted
of the following (in thousands): 2000 1999
------------------------------------------------------------
Land $ 430 $ 430
Building........................... 4,760 4,760
Furniture, fixtures and equipment.. 283,608 226,810
Leasehold improvements............. 83,480 74,320
Computer software.................. 9,905 7,829
------------ ------------
382,183 314,149
Less accumulated depreciation
and amortization............... 119,774 90,424
------------ ------------
$ 262,409 $ 223,725
5. Accrued Expenses and Other Current Liabilities
Fiscal Year Ended
Accrued expenses and other current
liabilities consisted of the 2000 1999
following (in thousands):
-------------------------------------- ---------- -- ----------
Income taxes payable............. $ 22,403 $16,778
Other taxes payable.............. 18,383 16,508
Salaries and employee benefits... 16,834 15,565
Other............................ 60,960 55,563
---------- ----------
$118,580 $104,414
6. Short-Term Borrowing Arrangements
On October 20, 2000, the Company entered into a $140 million senior revolving
credit facility agreement (the "Credit Agreement") with third party
institutional lenders, expiring October 20, 2003. The Credit Agreement also
allows for up to $40 million in borrowings from uncommitted lines of credit
outside of the Credit Agreement. The Credit Agreement replaced the 1998 $90
million revolving line of credit which allowed for up to $25 million in
borrowings from uncommitted lines of credit (the "1998 Credit Agreement"). Under
the Credit Agreement, the amount of borrowings can be increased up to $150
million provided certain terms and conditions contained in the Credit Agreement
are met. Interest on all borrowings is determined based upon several alternative
rates as stipulated in the Credit Agreement including a fixed rate plus LIBOR
rate. 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 2000,
the Company was in compliance with the terms of the Credit Agreement. At various
times throughout fiscal 2000 and 1999, the Company borrowed against the Credit
Agreement and the 1998 Credit Agreement for seasonal working capital needs. At
the end of fiscal 2000, the Company had no borrowings under the Credit Agreement
and $3.9 million of borrowings against the uncommitted lines of credit. In
addition, as of December 30, 2000 and January 1, 2000, the Company had $10.7
million and $1.7 million, respectively, of letters of credit outstanding. The
letters of credit were used to guarantee payment of certain insurance
obligations and to secure a foreign line of credit. The Company is not obligated
under any formal or informal compensating balance requirements.
7. Deferred Income Taxes and Other Long-Term
Liabilities
Deferred income taxes and other long-term liabilities consisted of the following
(in thousands):
Fiscal Year Ended
-----------------
2000 1999
------------------------------------- -------- ---------
Deferred income taxes............ $30,198 $23,642
Deferred rent.................... 18,988 15,097
Other............................ 7,421 7,917
-------- ---------
$56,607 $46,656
8. Leases
The Company has non-cancelable operating leases, primarily for retail stores,
which expire through 2022. The leases generally contain renewal options for
periods ranging from 5 to 15 years 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 gross sales. Net rental expense for all operating leases was
as follows (in thousands):
Fiscal Year Ended
----------------------- --------------------------------------
2000 1999 1998
----------------------- ---------- ---------- ---------
Minimum rentals..... $125,172 $101,575 $83,881
Contingent rentals.. 151 212 139
---------- ---------- ---------
125,323 101,787 84,020
Less sublease rentals 503 577 563
---------- ---------- ---------
$124,820 $101,210 $83,457
At fiscal year end 2000, the future minimum rental payments required under
operating leases and the future minimum sublease rentals excluding lease
obligations for closed stores were as follows (in thousands):
Fiscal Year
--------------------------------------------- -------------
2001 $ 132,267
2002 132,898
2003 131,240
2004 128,572
2005 126,423
Thereafter................................ 1,065,730
-------------
$1,717,130
-------------
Total future minimum sublease rentals..... $ 8,257
-------------
In addition, as of January 31, 2001, the Company had fully executed leases for
47 stores planned to open in fiscal 2001.
9. Stock Incentive Plans
The Company has adopted the 2000 Stock Award and Incentive Plan (the "2000
Plan") and the Broad-Based Equity Plan (collectively, the "Plans"). The 2000
Plan provides for the granting of options, deferred stock grants and other
stock-based awards (collectively, "awards") to key employees and non-officer
directors. The 2000 Plan replaces 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 1996 Plan
and the Directors' Plan, although outstanding awards under the 1996 Plan and the
Directors' Plan will continue to be in effect. Under the 2000 Plan, an aggregate
of 2,000,000 shares (plus any shares under outstanding awards under the 1996
Plan and the Directors' Plan which become available for further grants) is
available for issuance of awards. Under the Broad-Based Equity Plan a total of
4,000,000 shares are available for issuance of awards to regular full time
employees (excluding any executive officers).
Stock options and grants under the Plans are awarded at the fair market value of
the shares at the date of grant. The right to exercise options generally
commences one to five years after, and generally expires ten years after, the
grant date, provided the optionee or eligible director continues to be employed
by, or remains in service as director to, the Company.
At fiscal year end 2000, 135,559 deferred stock grants were outstanding under
the 1996 Plan and the Directors' Plan. During fiscal 2000, 67,608 grants were
released, 15,601 grants were awarded and 400 grants were canceled under the 1996
Plan and the Directors' Plan.
At fiscal year end 2000, 97,127 deferred stock grants were outstanding under the
2000 Plan. During fiscal 2000, 11,860 grants were released, 108,987 grants were
awarded and no grants were canceled under the 2000 Plan.
At fiscal year end 2000, 2,661,907 stock options were outstanding under the 1996
Plan. During fiscal 2000, 9,850 stock options were granted, 525,899 stock
options were exercised, 62,676 stock options were canceled and 1,175,808 stock
options were exercisable at fiscal year end 2000 under the 1996 Plan. At fiscal
year end 2000, 54,800 stock options were outstanding under the Directors' Plan.
During fiscal 2000, 8,000 stock options were granted, 11,550 stock options were
exercised, 9,850 stock options were canceled and 36,600 stock options were
exercisable at fiscal year end 2000 under the Directors' Plan.
At fiscal year end 2000, 472,500 stock options were outstanding under the 2000
Plan. During fiscal 2000, 472,500 stock options were granted, no stock options
were exercised, no stock options were canceled and no stock options were
exercisable at fiscal year end 2000 under the 2000 Plan.
At fiscal year end 2000, 603,835 stock options were outstanding under the
Broad-Based Equity Plan. During fiscal 2000, 606,710 stock options were granted,
no stock options were exercised, 2,875 stock options were canceled and no stock
options were exercisable at fiscal year end 2000 under the Broad- Based Equity
Plan.
The following tables summarize information about stock option transactions for
the Plans, the 1996 Plan and the Directors' Plan:
Number Weighted-
of Average
Shares Exercise Price
---------------------------- ----------- ---------------
Balance at December 31, 1997 2,598,618 $10.47
Options granted 853,708 $30.31
Options exercised 378,611 $7.86
Options canceled 91,882 $12.56
----------- ---------------
Balance at December 31, 1998 2,981,833 $16.39
----------- ---------------
Options granted 785,450 $31.52
Options exercised 390,038 $10.10
Options canceled 68,413 $18.48
----------- ---------------
Balance at January 1, 2000 3,308,832 $20.71
----------- ---------------
Options granted 1,097,060 $21.77
Options exercised 537,449 $10.13
Options canceled 75,401 $27.18
----------- ---------------
Balance at December 30, 2000 3,793,042 $22.43
----------- ---------------
Options Exercisable as of:
--------------------------
December 31, 1998 720,616 $10.03
January 1, 2000 1,055,448 $12.25
December 30, 2000 1,212,408 $14.35
Options Outstanding
-----------------------------------------------
Weighted-Average
Outstanding Remaining Weighted-Average
Range of as of Contractual Exercise
Exercise Price December 30, 2000 Life Price
--------------------------------------------------------------
$7.75 -$9.75 660,329 5.9 years $ 7.78
$9.76 -$14.62 14,000 6.4 years $12.45
$14.63-$19.50 501,174 6.9 years $17.44
$19.51-$24.37 1,045,685 9.8 years $21.44
$24.38-$29.25 64,309 6.4 years $26.89
$29.26-$34.12 1,475,145 8.4 years $30.82
$34.13-$39.00 7,850 8.5 years $36.68
$39.01-$43.87 17,350 8.3 years $40.21
$43.88-$48.75 7,200 8.3 years $45.02
-----------------------------------------------
Total 3,793,042 8.1 years $22.43
===============================================
Options Exercisable
------------------------------------
Outstanding as
Range of Of December Weighted-Average
Exercise Price 30, 2000 Exercise Price
-------------------------------- ------------------
$7.75 -$9.75 658,379 $ 7.77
$9.76 -$14.62 9,650 $12.54
$14.63-$19.50 346,341 $17.44
$19.51-$24.37 100 $20.23
$24.38-$29.25 31,909 $26.13
$29.26-$34.12 156,328 $30.84
$34.13-$39.00 2,575 $36.65
$39.01-$43.87 4,750 $40.16
$43.88-$48.75 2,376 $45.05
----------------- ------------------
Total 1,212,408 $14.35
================= ==================
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option-pricing model using the following assumptions for
grants:
Fiscal Year Ended 2000 1999 1998
------------------------------------ --------- --------- ----------
Expected life (years).......... 6.0 4.5 4.5
Expected volatility............ 55.0% 45.0% 45.0%
Risk-free interest rate........ 5.1% 6.2% 4.7%
Expected dividend yield........ 0.0% 0.0% 0.0%
The Company applies APB No. 25 and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized in connection with these plans in the accompanying consolidated
financial statements. 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
------------------------------------------ -----------------------
(in millions, except per share data) 2000 1999 1998
------------------------------------------ ------- ------ --------
Net income:
As reported....................... $64.9 $52.1 $38.1
Pro forma......................... $59.8 $49.3 $36.2
Net income per share of common stock:
Basic:
As reported....................... $1.63 $1.32 $0.98
Pro forma......................... $1.50 $1.25 $0.93
Diluted:
As reported....................... $1.60 $1.27 $0.94
Pro forma......................... $1.47 $1.20 $0.89
------------------------------------------ ------- ------ --------
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
10. Employee Benefit Plans
On December 1, 1996, the Company adopted a 401(k) savings plan. Company
contributions to the plan amounted to approximately $2.2 million, $1.9 million
and $1.7 million for fiscal years 2000, 1999 and 1998, respectively.
Effective July 1, 1999, the Company adopted a defined benefit Supplemental
Executive Retirement Plan ("SERP"). The SERP, which is funded with the cash
surrender value of a life insurance policy, provides eligible executives with
supplemental pension benefits, in addition to amounts received under the
Company's other retirement plan. Under the terms of the SERP, upon termination
of employment with the Company, eligible participants will be entitled to the
benefit amount as defined under the SERP. The Company recorded expenses related
to the SERP of approximately $34,000 for fiscal 2000 and $34,000 for fiscal
1999.
11. 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):
Fiscal Year Ended 2000 1999
------------------------------------ --------- ----------
Deferred tax assets:
Employee benefits.......... $6,806 $6,150
Inventories................ 5,596 5,460
Other...................... 2,720 2,154
--------- ----------
Total deferred tax assets....... 15,122 13,764
Deferred tax liabilities:
Property and equipment..... 33,193 26,761
--------- ----------
Net deferred tax liability...... $18,071 $12,997
Based on the Company's historical and current pre-tax earnings, management
believes it is more likely than not that the Company will realize the deferred
tax assets.
The provision for income taxes comprised the following for:
Fiscal Year Ended
-------------------------- ------------------------------------
(in thousands): 2000 1999 1998
-------------------------- --------- ---------- ---------
Current:
U.S. Federal..... $30,401 $25,449 $19,032
U.S. State....... 3,868 3,224 2,399
Non-U.S. ........ 871 -- --
--------- ---------- ---------
35,140 28,673 21,431
--------- ---------- ---------
Deferred:
U.S. Federal..... 4,572 3,328 2,148
U.S. State....... 570 456 264
Non-U.S. ........ (68) -- --
--------- ---------- ---------
5,074 3,784 2,412
--------- ---------- ---------
Total $40,214 $32,457 $23,843
-------------------------- --------- -- ---------- -- ---------
The following is a reconciliation between the statutory Federal income tax rate
and the effective rate for:
Fiscal Year Ended
-------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------
Effective tax rate......... 38.2% 38.4% 38.5%
State income taxes, net of
Federal benefit.......... (2.7) (2.8) (2.8)
Goodwill................... (0.3) (0.4) (0.5)
Other...................... (0.2) (0.2) (0.2)
---------- ---------- ----------
Statutory Federal income
tax rate................. 35.0% 35.0% 35.0%
-------------------------------------------------------------
12. 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 will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
The Company is a defendant in a California state court litigation brought as a
class action on behalf of certain managers of Company stores located in
California seeking overtime pay as well as a claim for accrued vacation pay on
behalf of certain former employees. In the event such claims for vacation pay
are determined adversely to the Company, management of the Company does not
believe such claims, if so adversely determined, would have a material adverse
effect on the Company's financial position, liquidity or results of operations.
At the present time, there has been no determination of the number of any actual
class. Nor has there been any determination of the extent to which overtime pay
may or may not be owed. Accordingly, the Company is not presently in a position
to estimate with any degree of certainty, the range of potential exposure
represented by this litigation.
13. Summary of Quarterly Results (unaudited)
(in
thousands,
except per First Second Third Fourth Fiscal
share data) Quarter Quarter Quarter Quarter Year
---------------- --------- --------- -------- --------- ----------
Net sales
2000 .......... $326,976 $339,655 $410,371 $495,574 $1,572,576
1999 .......... 273,540 271,628 341,122 414,342 1,300,632
Gross profit
2000 .......... 128,301 139,683 166,086 209,201 643,271
1999 .......... 106,692 110,895 137,236 173,356 528,179
Net income
2000 .......... 5,055 6,947 18,406 34,529 64,937
1999 .......... 3,595 5,103 14,662 28,692 52,052
Net income per
share
Basic1
2000 .......... $ 0.13 $ 0.18 $ 0.46 $ 0.86 $ 1.63
1999 ..........
0.09 0.13 0.37 0.73 1.32
Diluted1
2000 .......... $ 0.13 $ 0.17 $ 0.45 $ 0.84 $ 1.60
1999 ..........
0.09 0.12 0.36 0.70 1.27
---------------- --------- --------- -------- --------- ----------
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.
14. Market Information (unaudited)
The Company's common stock is listed on the New York Stock Exchange. Its trading
symbol is LIN. The Company has not paid a dividend on its common stock. The high
and low trading price of the Company's common stock for each quarter is as
follows:
For Fiscal 2000
High Low
---- ---
First Quarter............................$34 3/8 $17 15/16
Second Quarter........................... 35 15/16 23 3/16
Third Quarter............................ 36 3/8 23 7/8
Fourth Quarter........................... 33 1/2 20
For Fiscal 1999
High Low
---- ---
First Quarter............................$48 1/4 $34 3/16
Second Quarter........................... 52 1/16 37 5/8
Third Quarter............................ 49 1/2 30 5/8
Fourth Quarter........................... 41 7/16 22 7/16
At fiscal year end 2000, there were approximately 7,300 beneficial shareholders.
Management's Responsibility for Financial Reporting
--------------------------------------------------------------------------------
The integrity and objectivity of the financial statements and related financial
information in this report are the responsibility of the management of the
Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, when necessary, the best
estimates and judgments of management.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization, and the
accounting records provide a reasonable basis for the preparation of the
financial statements. The system of internal accounting controls is continually
reviewed by management and improved and modified as necessary in response to
changing business conditions and recommendations of the Company's independent
auditors.
The Audit Committee of the Board of Directors, currently consisting solely of
outside non-management directors, meets periodically with management and the
independent auditors to review matters relating to the Company's financial
reporting, the adequacy of internal accounting controls and the scope and
results of audit work. The independent auditors have free access to the Audit
Committee.
KPMG LLP, certified public accountants, is engaged to audit the consolidated
financial statements of the Company. Its Independent Auditors' Report, which is
based on an audit made in conformity with generally accepted auditing standards,
expresses an opinion as to the fair presentation of these financial statements.
/s/ Norman Axelrod
____________________________________
Norman Axelrod
Chairman and Chief Executive Officer
/s/ William T. Giles
____________________________________
William T. Giles
Senior Vice President, Chief Financial Officer
January 31, 2001
Independent Auditors' Report
--------------------------------------------------------------------------------
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 December 30, 2000 and January 1, 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 30, 2000.
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 auditing standards generally accepted
in the United States of America. 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 December 30, 2000 and January 1, 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
________________________________
KPMG LLP
New York, New York
January 31, 2001