SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended October 2, 2004
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Commission file number 1-12381
------------------------------
LINENS 'N THINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-3463939
----------------------------------- -----------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
6 Brighton Road, Clifton, New Jersey 07015
------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (973) 778-1300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [|X|] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [|X|] No[ ]
Number of shares outstanding as of November 3, 2004: 45,177,493
1
INDEX
PAGE NO.
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EXPLANATORY STATEMENT 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the
Thirteen and Thirty-Nine Weeks Ended October 2, 2004 (Restated)
and October 4, 2003 (Restated) 4
Condensed Consolidated Balance Sheets as of October 2, 2004 (Restated),
January 3, 2004 and October 4, 2003 (Restated) 5
Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended October 2, 2004 (Restated) and
October 4, 2003 (Restated) 6
Notes to Condensed Consolidated Financial Statements 7 - 22
Report of Independent Registered Public Accounting Firm 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24 - 30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31
ITEM 4. CONTROLS AND PROCEDURES 32
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS 33
SIGNATURES 34
2
EXPLANATORY STATEMENT
As previously disclosed in the Linens `n Things, Inc. (the "Company") Current
Report on Form 8-K dated March 11, 2005, following a review of its lease
accounting policies, the Company determined that it should restate its financial
statements for all fiscal years presented in its Annual Report on Form 10-K for
the period ended January 1, 2005, other than for the year ended January 1, 2005
("fiscal 2004"), and for the first three quarters of fiscal 2004 and the four
quarters of fiscal 2003. The Company filed its Annual Report on Form 10-K for
the period ended January 1, 2005 on April 1, 2005.
On February 7, 2005, the Office of the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a clarification regarding lease accounting
under generally accepted accounting principles in the United States of America
("GAAP"). As a result of this clarification, the Company reviewed its lease
accounting practices and determined that its former methods of accounting for
leases and landlord allowances were not consistent with the views expressed by
the SEC. As a result, the Company has corrected the way it accounts for its
leases and landlord allowances, specifically the accounting for straight-line
rent expense and landlord allowances. In addition, the Company has also made
other immaterial adjustments and reclassifications related to its trade payables
program with General Electric Capital Corporation ("GECC") and its deferred
compensation plan. The accompanying Condensed Consolidated Financial Statements
have been restated from amounts previously reported to incorporate the effects
of these corrections and reclassifications.
This Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to our Quarterly Report on
Form 10-Q for the quarterly period ended October 2, 2004, initially filed with
the SEC on November 12, 2004 (the "Original Filing"), is being filed to reflect
the restatement of the Company's Condensed Consolidated Financial Statements for
the thirteen week and thirty-nine week periods ended October 2, 2004 and October
4, 2003. For a more detailed description of this restatement, see Note 2,
"Restatement of Financial Statements and Other Immaterial Adjustments and
Reclassifications," to the accompanying Condensed Consolidated Financial
Statements.
For the convenience of the reader, this Form 10-Q/A sets forth the original
Filing in its entirety. However, this Form 10-Q/A only amends and restates
certain information in Items 1, 2 and 4 of Part I of the Original Filing, in
each case solely as a result of and to reflect the restatement, and no other
information in the Original Filing is amended hereby. The foregoing items have
not been updated to reflect other events occurring after the Original Filing or
to modify or update those disclosures affected by subsequent events. In
addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original
Filing has been amended to contain currently dated certifications from the
Company's Chief Executive Officer and Chief Financial Officer, as required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of
the Chief Executive Officer and Chief Financial Officer are attached to this
Form 10-Q/A as exhibits 31.1, 31.2 and 32, respectively.
Except for the foregoing amended information, this Form 10-Q/A continues to
describe conditions as of the date of the Original Filing, and the disclosures
contained herein have not been updated to reflect events, results or
developments that occurred at a later date. Among other things, forward looking
statements made in the Original Filing have not been revised to reflect events,
results or developments that occurred or facts that became known to the Company
after the date of the Original Filing (other than the restatement), and such
forward looking statements should be read in their historical context. The
Company has not amended and does not intend to amend its previously filed Annual
Reports on Form 10-K or its Quarterly Reports on Form 10-Q for the periods
affected by the restatement that ended prior to January 3, 2004. For this
reason, the consolidated financial statements, auditors reports and related
financial information for the affected periods contained in any other prior
reports should no longer be relied upon.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------- ---------------------------
OCTOBER 2, OCTOBER 4, OCTOBER 2, OCTOBER 4,
2004 2003 2004 2003
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
----------- ----------- ----------- -----------
NET SALES $ 654,196 $ 602,816 $ 1,785,745 $ 1,606,959
Cost of sales, including buying
and distribution costs 385,090 360,064 1,062,717 955,950
----------- ----------- ----------- -----------
GROSS PROFIT 269,106 242,752 723,028 651,009
Selling, general and administrative
expenses 240,664 208,666 694,427 605,038
----------- ----------- ----------- -----------
OPERATING PROFIT 28,442 34,086 28,601 45,971
Interest income (138) (20) (306) (90)
Interest expense 788 1,033 2,760 3,041
----------- ----------- ----------- -----------
Interest expense, net 650 1,013 2,454 2,951
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES 27,792 33,073 26,147 43,020
Provision for income taxes 10,617 12,635 9,987 16,436
----------- ----------- ----------- -----------
NET INCOME $ 17,175 $ 20,438 $ 16,160 $ 26,584
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.38 $ 0.46 $ 0.36 $ 0.60
=========== =========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE $ 0.38 $ 0.45 $ 0.35 $ 0.59
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OCTOBER 2, JANUARY 3, OCTOBER 4,
2004 2004 2003
----------- ----------- -----------
(RESTATED) (RESTATED)
(UNAUDITED) (AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 54,460 $ 136,129 $ 22,731
Accounts receivable 26,494 29,531 24,725
Inventories 794,169 700,406 744,373
Prepaid expenses and other current assets 34,615 33,253 32,507
Current deferred taxes 472 1,295 --
----------- ----------- -----------
TOTAL CURRENT ASSETS 910,210 900,614 824,336
Property and equipment, net of accumulated
depreciation of $361,689, $304,612 and
$289,388 at October 2, 2004, January 3, 2004
and October 4, 2003, respectively 568,606 542,191 543,425
Goodwill, net 18,126 18,126 18,126
Deferred charges and other noncurrent
assets, net 7,709 6,525 6,368
----------- ----------- -----------
TOTAL ASSETS $ 1,504,651 $ 1,467,456 $ 1,392,255
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 279,169 $ 250,142 $ 298,221
Accrued expenses and other current liabilities 140,038 176,194 132,185
Current deferred taxes 7,138 15,759 7,152
Short-term borrowings 560 -- 3,221
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 426,905 442,095 440,779
Deferred income taxes and other long-term liabilities 315,539 287,984 273,808
----------- ----------- -----------
TOTAL LIABILITIES 742,444 730,079 714,587
----------- ----------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value; 1,000,000
shares authorized; none issued and
outstanding -- -- --
Common stock, $0.01 par value;
135,000,000 shares authorized;
45,403,722 shares issued and 45,145,761
shares outstanding at October 2, 2004;
45,052,255 shares issued and 44,793,619
shares outstanding at January 3, 2004;
and 44,458,107 shares issued and
44,203,264 shares outstanding at
October 4, 2003 454 450 444
Additional paid-in capital 370,749 362,483 349,321
Retained earnings 396,553 380,393 334,218
Accumulated other comprehensive income 1,817 1,391 927
Treasury stock, at cost; 257,961 shares at
October 2, 2004, 258,636 shares at January 3,
2004 and 254,843 shares at October 4, 2003 (7,366) (7,340) (7,242)
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 762,207 737,377 677,668
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,504,651 $ 1,467,456 $ 1,392,255
=========== =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
-------------------------
OCTOBER 2, OCTOBER 4,
2004 2003
(RESTATED) (RESTATED)
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,160 $ 26,584
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 60,023 52,797
Deferred income taxes 3,423 21,590
Loss on disposal of assets 1,357 772
Federal tax benefit from common stock
issued under stock incentive plans 1,297 418
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 3,090 (130)
Increase in inventories (92,578) (127,472)
Increase in prepaid expenses
and other current assets (1,397) (8,203)
Increase in deferred charges and other
noncurrent assets (1,539) (348)
Increase in accounts payable 28,549 79,758
Decrease in accrued expenses and
other liabilities (20,462) (18,061)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,077) 27,705
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (86,916) (95,520)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued under stock incentive plans 6,974 2,651
Increase in short-term borrowings 532 1,070
Decrease in treasury stock (26) (33)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,480 3,688
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents (156) 253
--------- ---------
Net decrease in cash and cash equivalents (81,669) (63,874)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 136,129 86,605
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,460 $ 22,731
========= =========
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized) $ 2,813 $ 3,324
Income taxes $ 11,214 $ 11,036
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements are unaudited. In
the opinion of management, the accompanying Condensed Consolidated Financial
Statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Linens 'n
Things, Inc. and its subsidiaries (collectively the "Company") as of October 2,
2004 and October 4, 2003 and the results of operations for the respective
thirteen and thirty-nine weeks then ended and cash flows for the thirty-nine
weeks then ended. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Because of the seasonality of the specialty
retailing business, operating results of the Company on a quarterly basis may
not be indicative of operating results for the full year.
These Condensed Consolidated Financial Statements should be read in conjunction
with the Company's audited Consolidated Financial Statements for the fiscal year
ended January 3, 2004, included in the Company's 2004 Annual Report on Form 10-K
filed with the Securities and Exchange Commission (see Explanatory Statement and
Note 2, "Restatement of Financial Statements and Other Immaterial Adjustments
and Reclassifications," to the accompanying Condensed Consolidated Financial
Statements). All significant intercompany accounts and transactions have been
eliminated.
Certain prior period vendor accounts receivable balances have been reclassified
to accounts payable to conform with the current period presentation. These
reclassifications decreased accounts receivable and accounts payable by equal
amounts.
2. RESTATEMENT OF FINANCIAL STATEMENTS AND OTHER IMMATERIAL ADJUSTMENTS AND
RECLASSIFICATIONS
RESTATEMENT OF FINANCIAL STATEMENTS:
On February 7, 2005, the Office of the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a clarification regarding lease accounting
under generally accepted accounting principles in the United States of America
("GAAP"). As a result of this clarification, the Company reviewed its lease
accounting practices and determined that its former methods of accounting for
leases and landlord allowances were not consistent with the views expressed by
the SEC. As a result, the Company has restated its Consolidated Financial
Statements for each of the fiscal years ended January 3, 2004 ("fiscal 2003")
and January 4, 2003 ("fiscal 2002"), and the first three quarters of fiscal 2004
and the four quarters of fiscal 2003, set forth and contained in its fiscal 2004
Form 10-K. In addition, the Company restated its Condensed Consolidated
Financial Statements for the first and second quarters of fiscal years 2004 and
2003, set forth and contained in Forms 10-Q/A (Amendment No. 1) filed with the
SEC on April 19, 2005 and July 1, 2005 for the first quarter and second quarter,
respectively.
Historically, the Company had recognized rent expense commencing as of the store
opening date as opposed to when the Company took possession of the leased
property. The Company's landlords typically provide access to the leased
property free-of-charge for a period of time before the store opening so that
the Company can build out or fixture the store and stock it with merchandise.
Based on its evaluation, the Company now includes this period in calculating
straight-line rent expense and amortization of landlord allowances and lease
acquisition fees.
The Company has corrected its accounting to recognize rent and amortization
expense on a straight-line basis over the expected lease term, including
cancelable option periods in those instances where exercising such options is
reasonably assured. Previously, the Company did not include these cancelable
option periods in calculating straight-line rent expense and amortization
expense for lease acquisition fees.
7
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
For new stores, the Company generally receives allowances from landlords for the
construction of leasehold improvements. Historically, landlord allowances had
been classified on the Condensed Consolidated Balance Sheets as a reduction of
property and equipment and had been classified as a reduction in capital
expenditures on the Condensed Consolidated Statements of Cash Flows. The Company
now classifies landlord allowances as deferred rent credit reflected in
long-term liabilities on the Condensed Consolidated Balance Sheets and as an
operating activity on the Condensed Consolidated Statements of Cash Flows. This
adjustment increased both property and equipment and other long-term liabilities
on the Condensed Consolidated Balance Sheets by approximately $170.7 million as
of October 2, 2004.
As a result of the restatement pertaining to lease accounting, selling, general
and administrative expenses ("SG&A") increased approximately $0.5 million and
$0.9 million for the thirteen weeks ended October 2, 2004 and October 4, 2003,
respectively, and approximately $3.0 million and $3.7 million for the
thirty-nine weeks ended October 2, 2004 and October 4, 2003, respectively.
Earnings per share on a fully diluted basis decreased by approximately $0.01 and
$0.02 for the thirteen weeks ended October 2, 2004 and October 4, 2003,
respectively. Earnings per share on a fully diluted basis decreased by
approximately $0.04 and $0.05 for the thirty-nine weeks ending October 2, 2004
and October 4, 2003, respectively. The cumulative impact of the correction of
accounting for leases decreased retained earnings, net of tax, by approximately
$20.2 million as of January 4, 2003.
OTHER IMMATERIAL ADJUSTMENTS AND RECLASSIFICATIONS:
The Company maintains a trade payables arrangement with General Electric Capital
Corporation ("GECC") under which GECC purchases the Company's payables at a
discount directly from the Company's suppliers prior to the payables due date,
thereby permitting a supplier to receive payment prior to the due date of the
payable, with the Company sharing in part of the GECC discount. At October 2,
2004, January 3, 2004, and October 4, 2003, the Company owed approximately $67.4
million, $66.2 million, and $100.6 million, respectively, to GECC under this
program, which was included in accounts payable. Either party may terminate the
program for any reason upon 30 days prior written notice. The maximum amount
permitted under the program was $95 million as of October 2, 2004.
Certain prior period balances relating to this trade payables program with GECC
have been adjusted and reclassified. Pursuant to the agreement with GECC any
favorable economics realized by GECC for transactions under this program are
shared with the Company. As a result of these adjustments, the Company now
recognizes the gross discount earned as part of the program as a reduction of
the cost of inventory in the Condensed Consolidated Balance Sheets and records
the related portion of interest expense due GECC as interest expense in the
Condensed Consolidated Statements of Operations. Prior to the fourth quarter of
fiscal 2004, only the Company's share was reflected as a reduction of cost of
sales in the Condensed Consolidated Statements of Operations. As a result of the
adjustment and reclassification related to the GECC program, interest expense
increased approximately $0.7 million and $0.8 million for the thirteen weeks
ended October 2, 2004 and October 4, 2003, respectively, and approximately $2.3
million and $2.4 million for the thirty-nine weeks ended October 2, 2004 and
October 4, 2003, respectively. Cost of sales decreased approximately $1.1
million and $0.8 million for the thirteen weeks ended October 2, 2004 and
October 4, 2003, respectively, and approximately $2.1 million and $2.5 million
for the thirty-nine weeks ended October 2, 2004 and October 4, 2003,
respectively. Earnings per share on a fully diluted basis increased
approximately $0.01 and was not impacted for the thirteen weeks ended October 2,
2004 and October 4, 2003, respectively. Earnings per share on a fully diluted
basis was not impacted for each of the thirty-nine weeks ending October 2, 2004
and October 4, 2003, respectively. The cumulative impact of this adjustment
decreased retained earnings, net of tax, by approximately $1.3 million as of
January 4, 2003.
Certain prior period balances relating to the Company's deferred compensation
plan (the "Plan") have been reclassified. The related deferred compensation
obligation, totaling $2.7 million at October 2, 2004, was reclassified to
accrued expenses and other current liabilities from deferred income taxes and
other long-term liabilities. In addition, the Plan's investment in shares of the
Company's common stock totaling $0.7 million at October 2, 2004 was reclassified
to treasury stock from other current assets.
A summary of the effects of these changes on the Company's Condensed
Consolidated Balance Sheet at October 2, 2004 and October 4, 2003, the Condensed
Statements of Operations for the respective thirteen and thirty-nine weeks then
ended, and the Condensed Statements of Cash Flows for the thirty-nine weeks then
ended is as follows:
8
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Condensed Consolidated Statement of Operations
Thirteen Weeks Ended October 2, 2004 (In thousands, except per share amounts)
(Restated) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- ----------------------
Cost of sales $ 386,191 $(1,101)(B) $ 385,090
Gross profit 268,005 1,101 (B) 269,106
SG&A expenses 240,127 537 (A) 240,664
Operating profit 27,878 (537)(A) 28,442
1,101 (B)
-----------------------
564
-----------------------
Interest expense 136 652 (B) 788
Interest (income) expense, net (2) 652 (B) 650
Income before income taxes 27,880 (537)(A) 27,792
449 (B)
-----------------------
(88)
-----------------------
Provision for income taxes 10,650 (205)(A) 10,617
172 (B)
-----------------------
(33)
-----------------------
Net income 17,230 (332)(A) 17,175
277 (B)
-----------------------
(55)
-----------------------
Net income per share - basic $ 0.38 $(0.01)(A) $ 0.38
0.01 (B)
-----------------------
--
-----------------------
Net income per share - fully diluted $ 0.38 $(0.01)(A) $ 0.38
0.01 (B)
-----------------------
--
-----------------------
- --------------------------------------------------------------------------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
9
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Condensed Consolidated Statement of Operations
Thirteen Weeks Ended October 4, 2003 (In thousands, except per share amounts)
(Restated) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- -----------------------
Cost of sales $360,868 $ (804)(B) $360,064
Gross profit 241,948 804 (B) 242,752
SG&A expenses 207,764 902 (A) 208,666
Operating profit 34,184 (902)(A) 34,086
804 (B)
-----------------------
(98)
-----------------------
Interest expense 256 777 (B) 1,033
Interest expense, net 236 777 (B) 1,013
Income before income taxes 33,948 (902)(A) 33,073
27 (B)
-----------------------
(875)
-----------------------
Provision for income taxes 12,968 (343)(A) 12,635
10 (B)
-----------------------
(333)
-----------------------
Net income 20,980 (559)(A) 20,438
17 (B)
-----------------------
(542)
-----------------------
Net income per share - basic $ 0.47 $(0.01)(A) $ 0.46
-- (B)
-----------------------
(0.01)
-----------------------
Net income per share - fully diluted $ 0.47 $(0.02)(A) $ 0.45
-- (B)
-----------------------
(0.02)
-----------------------
- --------------------------------------------------------------------------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
10
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Thirty-Nine Weeks Ended Condensed Consolidated Statement of Operations
October 2, 2004 (In thousands, except per share amounts)
(Restated) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- -----------------------
Cost of sales $1,064,787 $(2,070) (B) $1,062,717
Gross profit 720,958 2,070 (B) 723,028
SG&A expenses 691,406 3,021 (A) 694,427
Operating profit 29,552 (3,021) (A) 28,601
2,070 (B)
-----------------------
(951)
-----------------------
Interest expense 508 2,252 (B) 2,760
Interest expense, net 202 2,252 (B) 2,454
Income before income taxes 29,350 (3,021) (A) 26,147
(182) (B)
-----------------------
(3,203)
-----------------------
Provision for income taxes 11,211 (1,155) (A) 9,987
(69) (B)
-----------------------
(1,224)
-----------------------
Net income 18,139 (1,866) (A) 16,160
(113) (B)
-----------------------
(1,979)
-----------------------
Net income per share - basic $ 0.40 $ (0.04) (A) $ 0.36
-- (B)
-----------------------
(0.04)
-----------------------
Net income per share - fully diluted $ 0.39 $ (0.04) (A) $ 0.35
-- (B)
-----------------------
(0.04)
-----------------------
- ---------------------------------------------------------------------------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
11
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Thirty-Nine Weeks Ended Condensed Consolidated Statement of Operations
October 4, 2003 (In thousands, except per share amounts)
(Restated) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- -----------------------
Cost of sales $958,472 $(2,522) (B) $955,950
Gross profit 648,487 2,522 (B) 651,009
SG&A expenses 601,345 3,693 (A) 605,038
Operating profit 47,142 (3,693) (A) 45,971
2,522 (B)
-----------------------
(1,171)
-----------------------
Interest expense 690 2,351 (B) 3,041
Interest expense, net 600 2,351 (B) 2,951
Income before income taxes 46,542 (3,693) (A) 43,020
171 (B)
-----------------------
(3,522)
-----------------------
Provision for income taxes 17,780 (1,409) (A) 16,436
65 (B)
-----------------------
(1,344)
-----------------------
Net income 28,762 (2,284) (A) 26,584
106 (B)
-----------------------
(2,178)
-----------------------
Net income per share - basic $ 0.65 $(0.05) (A) $ 0.60
-- (B)
-----------------------
(0.05)
-----------------------
Net income per share - fully diluted $ 0.64 $(0.05) (A) $ 0.59
-- (B)
-----------------------
(0.05)
-----------------------
- ---------------------------------------------------------------------------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
12
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Condensed Consolidated Balance Sheet
October 2, 2004 (In thousands)
(Restated) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- -----------------------
Inventories $ 795,873 $ (1,704) (B) $ 794,169
Prepaid expenses and other current assets 35,331 (716) (D) 34,615
Total current assets 912,630 (1,704) (B) 910,210
(716) (D)
-----------------------
(2,420)
-----------------------
Property & equipment, net 397,947 170,659 (C) 568,606
Deferred charges and other non-current
assets, net 12,318 (4,609) (A) 7,709
Total assets 1,341,021 (4,609) (A) 1,504,651
(1,704) (B)
170,659 (C)
(716) (D)
-----------------------
163,630
-----------------------
Accrued expenses and other current
liabilities 138,033 (650) (B) 140,038
2,655 (D)
-----------------------
2,005
-----------------------
Total current liabilities 424,900 (650) (B) 426,905
2,655 (D)
-----------------------
2,005
-----------------------
Deferred income taxes and other long-term
liabilities 127,606 190,588 (A)& 315,539
(C)
(2,655) (D)
-----------------------
187,933
-----------------------
Total liabilities 552,506 19,929 (A) 742,444
(650) (B)
170,659 (C)
-----------------------
189,938
-----------------------
- ---------------------------------------------------------------------------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification C - lease
accounting restatement (landlord allowance adjustment only) D - deferred
compensation plan reclassification
13
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Condensed Consolidated Balance Sheet
October 2, 2004 (In thousands)
(Restated) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- -----------------------
Retained earnings $422,145 $(24,538) (A) $396,553
(1,054) (B)
-----------------------
(25,592)
-----------------------
Treasury stock (6,650) (716) (D) (7,366)
Total shareholders' equity 788,515 (24,538) (A) 762,207
(1,054) (B)
(716) (D)
-----------------------
(26,308)
-----------------------
Total liabilities and shareholders' equity 1,341,021 (4,609) (A) 1,504,651
(1,704) (B)
170,659 (C)
(716) (D)
-----------------------
163,630
-----------------------
- ---------------------------------------------------------------------------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification C - lease
accounting restatement (landlord allowance adjustment only) D - deferred
compensation plan reclassification
14
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Condensed Consolidated Balance Sheet
October 4, 2003 (In thousands)
(Restated) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- -----------------------
Inventories $ 746,310 $ (1,937) (B) $ 744,373
Prepaid expenses and other current assets 33,236 (729) (D) 32,507
Total current assets 827,002 (1,937) (B) 824,336
(729) (D)
-----------------------
(2,666)
-----------------------
Property & equipment, net 380,415 163,010 (C) 543,425
Deferred charges and other non-current
assets, net 10,710 (4,342) (A) 6,368
Total assets 1,236,253 (4,342) (A) 1,392,255
(1,937) (B)
163,010 (C)
(729) (D)
-----------------------
156,002
-----------------------
Accrued expenses and other current
liabilities 130,053 (740) (B) 132,185
2,872 (D)
-----------------------
2,132
-----------------------
Total current liabilities 438,647 (740) (B) 440,779
2,872 (D)
-----------------------
2,132
-----------------------
Deferred income taxes and other long-term
liabilities 95,484 181,196 (A)& 273,808
(C)
(2,872) (D)
-----------------------
178,324
-----------------------
Total liabilities 534,131 18,186 (A) 714,587
(740) (B)
163,010 (C)
-----------------------
180,456
-----------------------
- ---------------------------------------------------------------------------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement (landlord allowance adjustment only)
D - deferred compensation plan reclassification
15
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Condensed Consolidated Balance Sheet
October 4, 2003 (In thousands)
(Restated) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- -----------------------
Retained earnings $357,943 $(22,528) (A) $334,218
(1,197) (B)
-----------------------
(23,725)
-----------------------
Treasury stock (6,513) (729) (D) (7,242)
Total shareholders' equity 702,122 (22,528) (A) 677,668
(1,197) (B)
(729) (D)
-----------------------
(24,454)
-----------------------
Total liabilities and shareholders' equity 1,236,253 (4,342) (A) 1,392,255
(1,937) (B)
163,010 (C)
(729) (D)
-----------------------
156,002
-----------------------
- ---------------------------------------------------------------------------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement (landlord allowance adjustment only)
D - deferred compensation plan reclassification
16
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Thirty-Nine Weeks Ended Condensed Consolidated Statement of Cash Flows
October 2, 2004 (In thousands)
(Restated) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- -----------------------
Net cash used in operating activities $(22,438) $20,374 (C) $(2,077)
(13) (D)
-----------------------
20,361
-----------------------
Additions to property and equipment (66,542) (20,374) (C) (86,916)
Net cash provided by financing activities 7,467 13 (D) 7,480
Cash paid for interest 561 2,252 (B) 2,813
- ---------------------------------------------------------------------------------------------------------------------------
Thirty-Nine Weeks Ended Condensed Consolidated Statement of Cash Flows
October 4, 2003 (In thousands)
(Restated) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
As Previously
Reported Adjustments* As Restated
------------------ ----------------------- -----------------------
Net cash provided by operating activities $ 2,203 $25,214 (C) $27,705
288 (D)
-----------------------
25,502
-----------------------
Additions to property and equipment (70,306) (25,214) (C) (95,520)
Net cash provided by financing activities 3,976 (288) (D) 3,688
Cash paid for interest 973 2,351 (B) 3,324
- ---------------------------------------------------------------------------------------------------------------------------
* A - lease accounting restatement
B - GECC inventory discount adjustment and reclassification
C - lease accounting restatement (landlord allowance adjustment only)
D - deferred compensation plan reclassification
The restatement also affects amounts disclosed in Notes 3, 5, and 7 to the accompanying Condensed Consolidated Financial
Statements.
17
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
3. EARNINGS PER SHARE
The calculation of basic and fully diluted earnings per share ("EPS") is as
follows:
PERIODS ENDED OCTOBER 2, 2004
(IN THOUSANDS, EXCEPT EPS)
(RESTATED)
-----------------------------------------------------------------------------------------
THIRTEEN WEEKS THIRTY-NINE WEEKS
----------------------------------------- -------------------------------------------
Net Net
Income Shares EPS Income Shares EPS
----------- ------------ ---------- ------------ ----------- ------------
BASIC $17,175 45,122 $0.38 $16,160 45,036 $0.36
Effect of outstanding
stock options and
deferred stock grants -- 459 -- -- 884 (0.01)
----------- ------------ ---------- ------------ ----------- ------------
FULLY DILUTED $17,175 45,581 $0.38 $16,160 45,920 $0.35
=========== ============ ========== ============ =========== ============
PERIODS ENDED OCTOBER 4, 2003
(IN THOUSANDS, EXCEPT EPS)
(RESTATED)
-----------------------------------------------------------------------------------------
THIRTEEN WEEKS THIRTY-NINE WEEKS
----------------------------------------- -------------------------------------------
Net Net
Income Shares EPS Income Shares EPS
----------- ------------ ---------- ------------ ----------- ------------
BASIC $20,438 44,185 $0.46 $26,584 44,121 $0.60
Effect of outstanding
stock options and
deferred stock grants -- 819 (0.01) -- 558 (0.01)
----------- ------------ ---------- ------------ ----------- ------------
FULLY DILUTED $20,438 45,004 $0.45 $26,584 44,679 $0.59
=========== ============ ========== ============ =========== ============
Options for which the exercise price was greater than the average market price
of common shares for the periods ended October 2, 2004 and October 4, 2003 were
not included in the computation of fully diluted earnings per share. These
consisted of options totaling approximately 2,640,000 shares and 1,486,000
shares for the thirteen weeks and approximately 1,088,000 shares and 1,486,000
shares for the thirty-nine weeks ended October 2, 2004 and October 4, 2003,
respectively.
18
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
4. SHORT-TERM BORROWING ARRANGEMENTS
In June 2002, the Company amended and extended its $150 million senior revolving
credit facility agreement (the "Credit Agreement") with third party
institutional lenders to expire April 20, 2005. The Credit Agreement allows for
up to $40 million of borrowings from additional lines of credit outside of the
Credit Agreement. As of October 2, 2004, the additional lines of credit include
committed facilities of approximately $16 million that expire on December 31,
2004 and $12 million that expire on June 15, 2005 and are subject to periodic
renewal arrangements. Interest on all borrowings is determined based upon
several alternative rates, including a fixed margin above LIBOR. The Credit
Agreement contains certain financial covenants, including those relating to the
maintenance of a minimum tangible net worth, a minimum fixed charge coverage
ratio, and a maximum leverage ratio. As of October 2, 2004, the Company was in
compliance with its covenants under the Credit Agreement. The Credit Agreement
limits, among other things, the amount of cash dividends the Company may pay.
Under the Credit Agreement, the amount of dividends that the Company may pay may
not exceed the sum of $25 million plus, on a cumulative basis, an amount equal
to 50% of the consolidated net income for each fiscal quarter, commencing with
the fiscal quarter ending March 30, 2002. The Company has never paid cash
dividends and does not currently anticipate paying cash dividends in the future.
The Company is required under the Credit Agreement to reduce the balance of
outstanding domestic borrowings to zero for 30 consecutive days during each
period beginning on December 1st of any fiscal year and ending on March 15th of
the following fiscal year. At various times throughout 2004 and 2003, the
Company borrowed against its Credit Agreement for seasonal working capital
needs. As of October 2, 2004, the Company had no borrowings under the Credit
Agreement and approximately $0.6 million in borrowings under the additional
lines of credit at an interest rate of 4.75%. The Company also had $100.5
million of letters of credit outstanding as of October 2, 2004, which included
standby letters of credit issued primarily under the Credit Agreement and import
letters of credit used for merchandise purchases. The Company is not obligated
under any formal or informal compensating balance requirements.
5. COMPREHENSIVE INCOME:
Comprehensive income for the thirteen and thirty-nine weeks ended October 2,
2004 and October 4, 2003 is as follows (in thousands):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------ -----------------------------------
OCTOBER 2, OCTOBER 4, OCTOBER 2, OCTOBER 4,
2004 2003 2004 2003
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
----------------- --------------- ----------------- ---------------
Net income $17,175 $20,438 $16,160 $26,584
Other comprehensive income - foreign
currency translation adjustment 728 8 426 1,313
----------------- --------------- --------------- ---------------
COMPREHENSIVE INCOME $17,903 $20,446 $16,586 $27,897
================= =============== =============== ===============
6. 2001 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
In fiscal 2001, the Company developed and committed to a strategic initiative
designed to improve store performance and profitability. This initiative called
for the closing of certain under-performing stores, which did not meet the
Company's profit objectives. In connection with this initiative, the Company
recorded a pre-tax restructuring and asset impairment charge of $37.8 million
($23.7 million after-tax) in the fourth quarter of fiscal 2001. A pre-tax
reserve of $20.5 million was established for estimated lease commitments for
stores to be closed. This reserve is included in accrued expenses. The reserve
considers estimated sublease income. Because all of the stores were leased the
Company is not responsible for the disposal of property other than fixtures. A
pre-tax writedown of $9.5 million was recorded as a reduction in property and
equipment for fixed asset impairments for these stores. The fixed asset
impairments represent fixtures and leasehold improvements. A pre-tax reserve of
$4.0 million was established for other estimated miscellaneous store closing
costs. Additionally, a pre-tax charge of $3.8 million was recorded in cost of
sales for estimated inventory markdowns below cost for the stores to be closed.
Certain components of the restructuring charge were based on estimates and may
be subject to change in the future. The Company has closed all of the initially
identified stores other than one store, which the Company decided to keep open
and whose reserve was reversed, and one other store which is expected to be
closed by early fiscal 2005.
19
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
The following table displays a roll forward of the activity and significant
components of the 2001 restructuring and asset impairment charge and the
reserves remaining as of October 2, 2004 ($ in millions):
REMAINING AT USAGE REMAINING AT
1/03/04 2004 10/02/04
(AUDITED) (UNAUDITED) (UNAUDITED)
----------------------- --------------------- -----------------------
CASH COMPONENTS:
Lease commitments $15.6 $(6.2) $9.4
----------------------- --------------------- -----------------------
TOTAL $15.6 $(6.2) $9.4
======================= ===================== =======================
The 2004 usage primarily consists of payments for lease commitments. The 2004
activity also includes the reversal of estimated lease commitment costs of
approximately $1.4 million as these reserves were not needed, offset by an
increase to lease commitment costs by approximately $1.6 million due to changes
in estimates based on current negotiations. The restructuring reserve balance is
included in accrued expenses and other current liabilities in the Condensed
Consolidated Balance Sheet.
7. STOCK INCENTIVE PLANS
In accordance with the provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS
No. 148"), the Company elected not to adopt the fair value based method of
accounting for its stock-based compensation plans, but continues to apply the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Accordingly, the Company does not recognize compensation
expense for stock option grants and amortizes restricted stock unit grants at
fair market value over specified vesting periods in the accompanying Condensed
Consolidated Financial Statements. The compensation cost that has been charged
against income for restricted stock unit grants was $0.1 million and $0.2
million for the thirteen weeks ended October 2, 2004 and October 4, 2003,
respectively, and $0.4 million and $0.7 million for the thirty-nine weeks ended
October 2, 2004 and October 4, 2003, respectively. The Company has complied with
the disclosure requirements of SFAS No. 148. 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. 148 for the thirteen and thirty-nine weeks ended October 2, 2004 and October
4, 2003:
20
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
THIRTEEN WEEKS ENDING THIRTY-NINE WEEKS ENDING
-------------------------------- ---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) OCTOBER 2, OCTOBER 4, OCTOBER 2, OCTOBER 4,
2004 2003 2004 2003
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME:
As presented $17,175 $20,438 $16,160 $26,584
Add: stock-based employee compensation expense
included in net income as presented, net of
related tax effects 33 144 231 410
-------------------------------- ---------------------------------
17,208 20,582 16,391 26,994
Deduct: total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax
effects 1,599 1,884 5,375 5,736
-------------------------------- ---------------------------------
Pro forma $15,609 $18,698 $11,016 $21,258
================================ =================================
NET INCOME PER SHARE OF COMMON STOCK:
BASIC:
As presented $ 0.38 $ 0.46 $ 0.36 $ 0.60
Pro forma 0.35 0.42 0.24 0.48
FULLY DILUTED:
As presented $ 0.38 $ 0.45 $ 0.35 $ 0.59
Pro forma 0.34 0.42 0.24 0.48
- ------------------------------------------------------------------------------------------------------------------------------
8. GUARANTEES
The Company has assigned property at a retail location in which the Company
guarantees the payment of rent over the specified lease term in the event of
non-performance. As of October 2, 2004, the maximum potential amount of future
payments the Company could be required to make under such guarantee is
approximately $0.9 million.
9. ACCOUNTS PAYABLE
Included in accounts payable are amounts for gift card liabilities of $23.8
million, $27.5 million and $20.5 million as of October 2, 2004, January 3, 2004
and October 4, 2003, respectively.
21
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
10. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor" ("EITF 02-16"), which states that cash consideration
received from a vendor is presumed to be a reduction of the prices of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of merchandise sold when recognized in the Company's Condensed
Consolidated Statement of Operations. That presumption may be overcome when the
consideration is either a reimbursement of specific, incremental and
identifiable costs incurred to sell the vendor's products, or a payment for
assets or services delivered to the vendor. EITF 02-16 was effective for
contracts entered into or modified after December 31, 2002. This issue did not
have a material impact on the Company's fiscal 2003 audited consolidated
financial statements as substantially all of the Company's vendor contracts in
effect during fiscal 2003 were entered into prior to December 31, 2002.
Beginning in the first quarter of fiscal 2004, as vendor agreements are
initiated or modified, the Company applies the method of accounting for vendor
allowances pursuant to EITF 02-16. In connection with the implementation of EITF
02-16, the Company treats certain funds received from vendors as a reduction in
the cost of inventory and, as a result, these funds are recognized as a
reduction to cost of merchandise sold when the inventory is sold. Accordingly,
certain funds received from vendors, which were historically reflected as a
reduction of advertising expense in SG&A or cost of sales, are now treated as a
reduction of cost of inventory.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS
No. 148"). This statement amends SFAS No. 123 and provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used. For the thirteen and
thirty-nine week periods ended October 2, 2004 and October 4, 2003, the Company
accounted for stock options using the intrinsic value method prescribed under
APB Opinion 25, and accordingly, the Company did not recognize compensation
expense for stock options. The Company continues to account for stock-based
compensation using APB Opinion No. 25 and has not adopted the recognition
provisions of SFAS No. 123, as amended by SFAS No. 148. However, the Company has
adopted the disclosure provisions and has included this information in Note 7 to
the Company's Condensed Consolidated Financial Statements.
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Linens 'n Things, Inc.:
We have reviewed the condensed consolidated balance sheets of Linens 'n Things,
Inc. and Subsidiaries as of October 2, 2004 and October 4, 2003, and the related
condensed consolidated statements of operations for the thirteen and thirty-nine
week periods then ended and the related condensed consolidated statements of
cash flows for the thirty-nine week periods ended October 2, 2004 and October 4,
2003. These condensed consolidated financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Linens 'n Things, Inc. and Subsidiaries as of January 3, 2004
(presented herein) and the related consolidated statements of operations,
shareholders' equity and comprehensive income, and cash flows for the year then
ended (not presented herein); and in our report dated March 31, 2005 we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of January 3, 2004 is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
As discussed in note 2 to the condensed consolidated financial statements, the
accompanying condensed consolidated balance sheets as of October 2, 2004 and
October 4, 2003, and the related condensed consolidated statements of operations
for the thirteen and thirty-nine week periods then ended and the related
condensed consolidated statements of cash flows for the thirty-nine week periods
ended October 2, 2004 and October 4, 2003, have been restated.
/s/ KPMG LLP
KPMG LLP
New York, New York
November 4, 2004, except as to Note 2, which is as of June 30, 2005
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTATEMENT
The following discussion and analysis gives effect to the restatement as well as
other immaterial adjustments and reclassifications discussed in Note 2 to the
Condensed Consolidated Financial Statements.
GENERAL
Linens `n Things, Inc. (the "Company") is one of the leading national format
specialty retailers. The Company's stores emphasize a broad assortment of home
textiles, housewares and home accessories, carrying both national brands and
private label goods. As of October 2, 2004, the Company operated 479 stores in
45 states and in five provinces across Canada.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts and timing of revenues and of expenses
during the reporting periods. The Company's management believes the following
critical accounting estimates involve significant estimates and judgments
inherent in the preparation of the Condensed Consolidated Financial Statements.
The Company bases these estimates on historical results and various other
assumptions believed to be reasonable at the time. These critical accounting
estimates are discussed in detail in our 2004 Annual Report on Form 10-K.
Valuation of Inventory: Merchandise inventory is a significant portion of the
Company's balance sheet, representing approximately 53% of total assets at
October 2, 2004. Inventories are valued using the lower of cost or market value,
determined by the retail inventory method ("RIM"). Under RIM, the valuation of
inventories at cost and the resulting gross margins are determined by applying a
calculated cost-to-retail ratio to the retail value of inventories. RIM is an
averaging method that is used in the retail industry due to its practicality.
The methodologies utilized by the Company in its application of RIM are
consistent for all periods presented. Such methodologies include the development
of the cost-to-retail ratios, the development of shrinkage reserves and the
accounting for price changes. At any one time, inventories include items that
have been written down to the Company's best estimate of their realizable value.
Factors considered in estimating realizable value include the age of merchandise
and anticipated demand. Actual realizable value could differ materially from
this estimate based upon future customer demand or economic conditions.
Sales Returns: The Company estimates future sales returns and records a
provision in the period that the related sales are recorded based on historical
return rates. Should actual returns differ from the Company's estimates, the
Company may be required to revise estimated sales returns. Although these
estimates have not varied materially from historical provisions, estimating
sales returns requires management judgment as to changes in preferences and
quality of products being sold, among other things; therefore, these estimates
may vary materially in the future. The sales returns calculations are regularly
compared with actual return experience. In preparing its financial statements as
of October 2, 2004, January 3, 2004 and October 4, 2003, the Company's sales
returns reserve was approximately $6.0 million, $6.2 million and $5.2 million,
respectively.
Impairment of Assets: With the adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets", the Company reviews goodwill for possible impairment at
least annually. Impairment losses are recognized when the implied fair value of
goodwill is less than its carrying value. The Company is also required to follow
the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"), which superceded an earlier pronouncement
on the same topic but retained many of its fundamental provisions. It also
expanded the scope of discontinued operations to include more disposal
transactions and impacted the presentation of future store closings, if any, by
the Company. Under SFAS No. 144 the Company periodically evaluates long-lived
assets other than goodwill for indicators of impairment. As of October 2, 2004,
January 3, 2004 and October 4, 2003, the Company's net value for property and
equipment was approximately $568.6 million, $542.2 million and $543.4 million,
respectively, and goodwill was approximately $18.1 million on each of these
dates.
24
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
Store Closure Costs: In fiscal 2001, the Company recorded a pre-tax
restructuring and asset impairment charge of $37.8 million ($23.7 million
after-tax) related to the closing of certain under-performing stores. As of
October 2, 2004, January 3, 2004 and October 4, 2003, the Company had $9.4
million, $15.6 million and $17.3 million, respectively, remaining related to
this reserve. The Company has closed all of the initially identified stores
other than one store, which the Company decided to keep open and whose reserve
was reversed, and one other store which is expected to be closed by early fiscal
2005. The Company has continued to negotiate and/or explore lease buyouts or
sublease agreements for these stores. The activity in the thirty-nine week
period ended October 2, 2004 includes the reversal of estimated lease commitment
costs of approximately $1.4 million as these reserves were not needed, offset by
an increase to lease commitment costs by approximately $1.6 million due to
changes in estimates based on current negotiations. Final settlement of these
reserves is predominantly a function of negotiations with unrelated third
parties, and, as such, these estimates may be subject to change in the future.
Self-Insurance: The Company purchases third party insurance for worker's
compensation, medical, auto and general liability costs that exceed certain
levels for each type of insurance program. However, the Company is responsible
for the payment of claims under these insured excess limits. The Company
establishes accruals for its insurance programs based on available claims data
and historical trend and experience, as well as loss development factors
prepared by third party actuaries. The accrued obligation for these
self-insurance programs was approximately $14.8 million as of October 2, 2004,
$13.5 million as of January 3, 2004 and $13.5 million as of October 4, 2003.
Litigation: The Company records an estimated liability related to various claims
and legal actions arising in the ordinary course of business, which is based on
available information and advice from outside counsel where applicable. As
additional information becomes available, the Company assesses the potential
liability related to its pending claims and may adjust its estimates
accordingly.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 2, 2004 COMPARED WITH THIRTEEN WEEKS ENDED OCTOBER
4, 2003
Results of operations for the thirteen weeks and thirty-nine weeks ended October
2, 2004 were impacted by an accounting change resulting from the implementation
of the provisions of EITF 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"),
which states that cash consideration received from a vendor is presumed to be a
reduction of the prices of the vendor's products or services and should,
therefore, be characterized as a reduction of cost of merchandise sold when
recognized in the Company's Condensed Consolidated Statement of Operations. EITF
02-16 was effective for contracts entered into or modified after December 31,
2002. This issue did not have a material impact on the Company's fiscal 2003
audited Consolidated Financial Statements as substantially all of the Company's
vendor contracts in effect during fiscal 2003 were entered into prior to
December 31, 2002. Beginning in the first quarter of fiscal 2004, as vendor
agreements were initiated or modified, the Company applied the method of
accounting for vendor allowances pursuant to EITF 02-16. In connection with the
implementation of EITF 02-16, the Company treats certain funds received from
vendors as a reduction in the cost of inventory and, as a result, these funds
are recognized as a reduction to cost of merchandise sold when the inventory is
sold. Accordingly, certain funds received from vendors, which were historically
reflected as a reduction of advertising expense in selling, general and
administrative expenses or cost of sales, are now treated as a reduction of cost
of inventory.
The provisions of EITF 02-16 impacted the Company's results of operations for
the thirteen weeks and thirty-nine weeks ended October 2, 2004 as follows (the
"As Restated" amounts include the impact of EITF 02-16):
25
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
THIRTEEN WEEKS THIRTY-NINE WEEKS
---------------------------------- --------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) AS EITF 02-16 EITF 02-16
AS ADJUSTMENT AS ADJUSTMENT
RESTATED IMPACT RESTATED IMPACT
----------------------------------------------------------------------------------------------------------------
Net sales $654,196 $ -- $1,785,745 $ --
Cost of sales 385,090 7,634 1,062,717 4,082
---------------------------------- --------------------------------
Gross profit 269,106 (7,634) 723,028 (4,082)
SG&A 240,664 (11,430) 694,427 (22,393)
---------------------------------- --------------------------------
Operating profit 28,442 3,796 28,601 18,311
Interest expense, net 650 -- 2,454 --
---------------------------------- --------------------------------
Income before provision for income taxes 27,792 3,796 26,147 18,311
Provision for income taxes 10,617 1,450 9,987 6,995
---------------------------------- --------------------------------
Net income $ 17,175 $ 2,346 $ 16,160 $ 11,316
================================== ================================
Earnings per share
Basic $ 0.38 $ 0.05 $ 0.36 $ 0.25
Fully diluted $ 0.38 $ 0.05 $ 0.35 $ 0.25
EITF 02-16 had no impact on the Company's cash flows. Following the initial
implementation impact, subsequent fiscal years will reflect vendor allowances on
a consistent basis other than for any net changes in vendor allowances.
The EITF 02-16 pre-tax adjustments of $3.8 million and $18.3 million for the
thirteen weeks and thirty-nine weeks ended October 2, 2004, respectively,
represent those allowances reflected as a reduction of the cost of inventory,
which historically would have been treated as a reduction of cost of sales or
SG&A. Beginning in fiscal 2004, due to the Company's changes to its vendor
agreements and the requirements of EITF 02-16, the Company no longer records
advertising allowances as a reduction to SG&A. The Company has allocated the
EITF 02-16 pre-tax adjustment to SG&A based on the previous year ratio of vendor
advertising allowances recorded within SG&A to sales. The remaining portion of
the total EITF 02-16 pre-tax adjustment was allocated to cost of sales.
Net sales for the thirteen weeks ended October 2, 2004 increased approximately
8.5% to $654.2 million, up from $602.8 million for the same period last year.
The increase in net sales is primarily the result of new store openings since
October 4, 2003. At October 2, 2004, the Company operated 479 stores, including
22 stores in Canada, as compared with 435 stores, including 17 stores in Canada,
at October 4, 2003. Store square footage increased approximately 9.0% to 16.3
million at October 2, 2004 compared with 14.9 million at October 4, 2003. During
the thirteen weeks ended October 2, 2004, the Company opened 8 stores and closed
two stores as compared with opening 21 stores and closing one store during the
same period last year.
26
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
Comparable net sales declined 0.5% for the thirteen weeks ended October 2, 2004
compared to an increase of 1.8% for the same period last year. Although the
third quarter began well, overall sales performance became softer as the quarter
progressed, primarily attributable to a decline in guest traffic. For the
quarter, average transaction size increased slightly compared to the prior year.
The Company estimates that the hurricanes that affected our stores in the
Southeast also negatively impacted comparable net sales performance by
approximately 0.5%.
In addition to the cost of inventory sold, the Company includes its buying and
distribution expenses in its cost of sales. Buying expenses include all direct
and indirect costs to procure merchandise. Distribution expenses include the
cost of operating the Company's distribution centers and freight expense related
to transporting merchandise. Gross profit for the thirteen weeks ended October
2, 2004 was $269.1 million, or 41.1% of net sales, compared with $242.8 million,
or 40.3% of net sales, for the same period last year. The EITF 02-16 adjustment
impact was to increase gross profit by $7.6 million, or 1.1% of net sales, for
the thirteen weeks ended October 2, 2004, accounting for most of the increase in
gross profit as a percentage of net sales compared to the prior year. The
increase in gross profit from the EITF 02-16 impact was offset by primarily
higher markdowns, most of which occurred during the September clearance event.
The Company's selling, general and administrative ("SG&A") expenses consist of
store selling expenses, occupancy costs, advertising expenses and corporate
office expenses. SG&A expenses for the thirteen weeks ended October 2, 2004 were
$240.7 million, or 36.8% of net sales, compared with $208.7 million, or 34.6% of
net sales, for the same period last year. The EITF 02-16 adjustment impact was
$11.4 million, or 1.7% of net sales, for the thirteen weeks ended October 2,
2004. In addition to the increase in SG&A from the EITF 02-16 impact, SG&A
increased as a percentage of net sales primarily due to higher occupancy cost as
a percentage of net sales. SG&A for the thirteen weeks ended October 4, 2003
also included advertising credits equaling 1.7% of net sales, which, as a part
of the EITF 02-16 implementation, are no longer classified as an offset to SG&A
in fiscal 2004.
Operating profit for the thirteen weeks ended October 2, 2004 was $28.4 million,
or 4.3% of net sales, compared with $34.1 million, or 5.7% of net sales, for the
same period last year. The EITF 02-16 adjustment impact was $3.8 million, or
0.6% of net sales, for the thirteen weeks ended October 2, 2004.
Net interest expense for the thirteen weeks ended October 2, 2004 was
approximately $0.6 million compared to $1.0 million during the same period last
year. The decrease in net interest expense is mainly due to lower average
borrowings as compared to the same period last year.
The Company's income tax expense was $10.6 million for the thirteen weeks ended
October 2, 2004, compared with $12.7 million for the same period last year. The
EITF 02-16 adjustment impact was $1.5 million for the thirteen weeks ended
October 2, 2004. The Company's effective tax rate was 38.2% for both the
thirteen weeks ended October 2, 2004 and October 4, 2003.
As a result of the factors described above, net income for the thirteen weeks
ended October 2, 2004 was $17.2 million, or $0.38 per share on a fully diluted
basis, compared with $20.4 million, or $0.45 per share on a fully diluted basis
for the same period last year. The EITF 02-16 adjustment impact to net income
was $2.3 million, or $0.05 per share on a fully diluted basis, for the thirteen
weeks ended October 2, 2004.
THIRTY-NINE WEEKS ENDED OCTOBER 2, 2004 COMPARED WITH THIRTY-NINE WEEKS ENDED
OCTOBER 4, 2003
Net sales increased 11.1% to $1,785.7 million for the thirty-nine weeks ended
October 2, 2004, up from $1,607.0 million for the same period last year,
primarily as a result of new store openings since October 4, 2003. During the
thirty-nine weeks ended October 2, 2004, the Company opened 41 stores and closed
two stores compared with opening 53 stores and closing nine stores during the
same period last year.
Comparable net sales for the thirty-nine weeks ended October 2, 2004 increased
1.3% as compared with a decline of 0.3% for the same period last year. The
increase in comparable net sales for the thirty-nine weeks ended October 2, 2004
is primarily due to an increase in guest traffic, primarily during the first
quarter of 2004, and a slight increase in average transaction size.
27
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
Gross profit for the thirty-nine weeks ended October 2, 2004 was $723.0 million,
or 40.5% of net sales, compared with $651.0 million, or 40.5% of net sales, for
the same period last year. The EITF 02-16 adjustment impact was to increase
gross profit by $4.1 million, or 0.2% of net sales, for the thirty-nine weeks
ended October 2, 2004. The increase in gross profit from the EITF 02-16 impact
was offset by a gross profit decline as a result of higher freight costs due, in
part, to rising fuel prices.
SG&A expenses for the thirty-nine weeks ended October 2, 2004 were $694.4
million, or 38.9% of net sales, compared with $605.0 million, or 37.6% of net
sales, for the same period last year. The EITF 02-16 adjustment impact was $22.4
million, or 1.2% of net sales, for the thirty-nine weeks ended October 2, 2004.
The increase in SG&A as a percentage of net sales is primarily attributable to
the impact of the EITF 02-16 adjustment. SG&A for the thirty-nine weeks ended
October 4, 2003 also included advertising credits equaling 1.3% of net sales,
which, as a part of the EITF 02-16 implementation, are no longer classified as
an offset to SG&A in fiscal 2004.
Operating profit for the thirty-nine weeks ended October 2, 2004 was $28.6
million, or 1.6% of net sales, compared with $46.0 million, or 2.9% of net
sales, for the same period last year. The EITF 02-16 adjustment impact was $18.3
million, or 1.0% of net sales, for the thirty-nine weeks ended October 2, 2004.
The Company incurred net interest expense of $2.4 million for the thirty-nine
weeks ended October 2, 2004, compared with $3.0 million for the same period last
year. The decrease in net interest expense is mainly due to lower average
borrowings as compared to the same period last year.
The Company's income tax expense for the thirty-nine weeks ended October 2, 2004
was $10.0 million compared with $16.4 million for the same period last year. The
EITF 02-16 adjustment impact was $7.0 million for the thirty-nine weeks ended
October 2, 2004. The Company's effective tax rate was 38.2% for both the
thirty-nine weeks ended October 2, 2004 and October 4, 2003.
As a result of the factors described above, net income for the thirty-nine weeks
ended October 2, 2004 was $16.2 million, or $0.35 per share on a fully diluted
basis, compared with $26.6 million, or $0.59 per share on a fully diluted basis
for the same period last year. The EITF 02-16 adjustment impact to net income
was $11.3 million, or $0.25 per share on a fully diluted basis, for the
thirty-nine weeks ended October 2, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily for new store expenditures, new
store inventory purchases and seasonal working capital. These requirements have
been funded through a combination of internally generated cash flows from
operations, credit extended by suppliers and short-term borrowings.
In June 2002, the Company amended and extended its $150 million senior revolving
credit facility agreement (the "Credit Agreement") with third party
institutional lenders to expire April 20, 2005. The Credit Agreement allows for
up to $40 million of borrowings from additional lines of credit outside of the
Credit Agreement. As of October 2, 2004, the additional lines of credit include
committed facilities of approximately $16 million that expire on December 31,
2004 and $12 million that expire on June 15, 2005 and are subject to periodic
renewal arrangements. As of October 2, 2004, the Company was in compliance with
its covenants under the Credit Agreement. As of October 2, 2004, the Company had
no borrowings under the Credit Agreement and approximately $0.6 million in
borrowings under the additional lines of credit at an interest rate of 4.75%. In
accordance with the seasonal nature of the Company's business, the Company may
from time to time borrow under its Credit Agreement and additional lines of
credit, including during the fourth quarter. These borrowings are not currently
expected to exceed $40 million in the aggregate for the fourth quarter, and are
intended to be used as working capital and similar general corporate needs in
the fourth quarter. The Company also had $100.5 million of letters of credit
outstanding as of October 2, 2004, which included standby letters of credit
issued primarily under the Credit Agreement and import letters of credit used
for merchandise purchases. The Company is not obligated under any formal or
informal compensating balance requirements. See Note 4 to the Condensed
Consolidated Financial Statements.
28
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
The Company maintains a trade payables arrangement with General Electric Capital
Corporation ("GECC") under which GECC purchases the Company's payables at a
discount directly from the Company's suppliers prior to the payables due date,
thereby permitting a supplier to receive payment prior to the due date of the
payable, with the Company sharing in part of the GECC discount. At October 2,
2004, January 3, 2004, and October 4, 2003, the Company owed approximately $67.4
million, $66.2 million, and $100.6 million, respectively, to GECC under this
program, which was included in accounts payable. Either party may terminate the
program for any reason upon 30 days prior written notice. The maximum amount
permitted under the program was $95 million as of October 2, 2004.
Net cash used in operating activities for the thirty-nine weeks ended October 2,
2004 was $2.1 million compared with $27.7 million provided by operating
activities for the same period last year. The increase in cash used between
periods is primarily due to the timing of vendor payments.
Net cash used in investing activities for the thirty-nine weeks ended October 2,
2004 was $86.9 million, compared with $95.5 million for the same period last
year. The Company currently estimates capital expenditures will be approximately
$114 million in fiscal 2004, primarily for an estimated 53 new stores for the
year, maintenance of existing stores, and system enhancements.
Net cash provided by financing activities for the thirty-nine weeks ended
October 2, 2004 was $7.5 million compared with $3.7 million for the same period
last year. The increase is due to greater proceeds from common stock issued
under stock incentive plans.
Management regularly reviews and evaluates its liquidity and capital needs. The
Company experiences peak periods for its cash needs generally during the second
quarter and fourth quarter of the fiscal year. As the Company's business
continues to grow and its store expansion plans are implemented, such peak
periods may require increases in the amounts available under its credit
facilities from those currently existing and/or other debt or equity funding.
Management currently believes that the Company's cash flows from operations,
credit extended by suppliers, its access to existing and increased credit
facilities and its uncommitted lines of credit will be sufficient to fund its
expected capital expenditures, working capital and non-acquisition business
expansion requirements for at least the next 12 to 18 months.
INFLATION
The Company does not believe that its operating results have been materially
affected by inflation during the preceding three years. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.
SEASONALITY
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and net income for the year during the third and fourth quarters. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of new store openings. The
Company believes this is the general pattern associated with its segment of the
retail industry and expects this pattern will continue in the future.
Consequently, comparisons between quarters are not necessarily meaningful and
the results for any quarter are not necessarily indicative of future results.
29
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
FORWARD-LOOKING STATEMENTS
The foregoing contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. The statements are made a
number of times and may be identified by such forward-looking terminology as
"expect," "believe," "may," "intend," "plan," "target," "outlook," "comfortable
with" and similar terms or variations of such terms. All of our information and
statements regarding our outlook for the future including future revenues,
comparable sales performance, earnings and other future financial condition,
impact, results and performance, constitutes forward-looking statements. All our
forward-looking statements are based on our current expectations, assumptions,
estimates and projections about our Company and involve certain significant
risks and uncertainties, including levels of sales, store traffic, the results
and success of our holiday selling season, acceptance of product offerings and
fashions and our ability to anticipate and successfully respond to changing
consumer tastes and preferences, our ability to anticipate and control our
operating and selling expenses, the success of our new business concepts,
seasonal concepts and new brands, the performance of our new stores, substantial
competitive pressures from other home furnishings retailers, the success of the
Canadian expansion, availability of suitable future store locations, schedule of
store expansion and of planned closings, the impact of the bankruptcies and
consolidations in our industry, unusual weather patterns, the impact on consumer
spending as a result of the slower consumer economy, a highly promotional retail
environment, any significant variations between actual amounts and the amounts
estimated for those matters identified as our critical accounting estimates as
well as other significant accounting estimates made in the preparation of our
financial statements, the actual impact in fiscal 2004 of EITF 02-16 as
discussed herein, any inability to timely satisfy, or any problems or issues
arising in connection with, management's required Section 404 internal controls
systems testing and evaluation or management's report thereon or our outside
auditor's required testing or report on the adequacy of our internal controls,
and our ability to successfully implement our strategic initiatives.
If these or other risks or uncertainties materialize, or if our estimates or
underlying assumptions prove inaccurate, actual results could differ materially
from any future results, express or implied by our forward-looking statements.
These and other important risk factors are included in the "Risk Factors"
section of the Company's Registration Statement on Form S-3 as filed with the
Securities and Exchange Commission on June 18, 2002 and are contained in our
reports filed with the Securities and Exchange Commission, including our Annual
Report on Form 10-K and our Quarterly Reports on Form 10-Q. You are urged to
consider all such factors. In light of the substantial uncertainty inherent in
such forward-looking statements, you should not consider their inclusion to be a
representation that such forward-looking matters will be achieved. The Company
assumes no obligation for updating any such forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements, even if such results or changes make
it clear that any projected results will not be realized.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company continuously evaluates the market risk associated with its financial
instruments. Market risks relating to the Company's operations result primarily
from changes in interest rates and foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
INTEREST RATE RISK
The Company's financial instruments include cash and cash equivalents and
short-term borrowings. The Company's obligations are short-term in nature and
generally have less than a 30-day commitment. The Company is exposed to interest
rate risks primarily through borrowings under the Credit Agreement and its
uncommitted credit facilities. Interest on all borrowings is based upon several
alternative rates as stipulated in the Credit Agreement, including a fixed
margin above LIBOR. As of October 2, 2004, the Company had no borrowings under
the Credit Agreement and approximately $0.6 million in borrowings under the
additional lines of credit at an interest rate of 4.75% (see Note 4 to the
Condensed Consolidated Financial Statements). The Company believes that its
interest rate risk is minimal as a hypothetical 10% increase or decrease in
interest rates in the associated debt's variable rate would not materially
affect the Company's results from operations or cash flows. The Company does not
use derivative financial instruments in its investment portfolio.
FOREIGN CURRENCY RISK
The Company enters into some purchase obligations outside of the United States,
which are predominately settled in U.S. dollars, and therefore, the Company has
only minimal exposure to foreign currency exchange risks. The Company does not
hedge against foreign currency risks and believes that foreign currency exchange
risk is immaterial.
In addition, the Company operated 22 stores in Canada as of October 2, 2004. The
Company believes its foreign currency translation risk is minimal, as a
hypothetical 10% strengthening or weakening of the U.S. dollar relative to the
Canadian dollar would not materially affect the Company's results from
operations or cash flow.
Since fiscal year end 2003, there have been no material changes in market risk
exposures.
31
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
On March 7, 2005, management and the Audit Committee discussed the issues
regarding the Company's method of accounting for leases and landlord allowances
with the Company's independent registered public accounting firm and determined
that the Company's accounting for these items was not consistent with the views
expressed by the SEC in a letter dated February 7, 2005. Accordingly, management
and the Audit Committee concluded that the Company should restate its annual
financial statements for fiscal years 2002 and 2003 presented in its fiscal 2004
Annual Report on Form 10-K, and its quarterly financial information for the four
quarters of fiscal year 2003 and the first three quarters of fiscal year 2004.
The restatement is further discussed in the "Explanatory Note" in the forepart
of this Form 10-Q/A (Amendment No. 1) and in Note 2, "Restatement of Financial
Statements and Other Immaterial Adjustments and Reclassifications," to the
accompanying Condensed Consolidated Financial Statements. Public Company
Accounting Oversight Board's Auditing Standard No. 2, AN AUDIT OF INTERNAL
CONTROL OVER FINANCIAL REPORTING PERFORMED IN CONJUNCTION WITH AN AUDIT OF
FINANCIAL STATEMENTS, provides that a restatement of previously issued financial
statements is a strong indicator of the existence of a "material weakness" in
the design or operation of internal control over financial reporting.
Accordingly, management concluded that the control deficiency that resulted in
the incorrect lease accounting represented a material weakness in internal
control over financial reporting.
In connection with the restatement referred to above, the Company's management,
including its Chief Executive Officer and Chief Financial Officer, re-evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this report (October 2, 2004). Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that as a result of the aforementioned material weakness related to
lease accounting, the Company's disclosure controls and procedures were not
effective, as of the end of the period covered by this Report (October 2, 2004),
in ensuring that material information relating to Linens 'n Things, Inc.,
including its consolidated subsidiaries, required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
The Company has remediated the material weakness in the Company's internal
control over financial reporting, subsequent to January 1, 2005, by implementing
additional review procedures over the selection and monitoring of appropriate
assumptions and factors affecting lease accounting practices.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fiscal quarter to which this report relates, there were no changes in
the Company's internal control over financial reporting that materially affected
or are reasonably likely to materially affect internal control over financial
reporting. During the fourth quarter of 2004, as part of the Section 404
internal control assessment process, management determined that there was a
material weakness in the design of controls over inventory existence due to the
timing of its physical inventories and the cycle counting procedures over
inventory that were in place. The Company remediated this control deficiency by
the end of fiscal 2004 by enhancing its inventory cycle count procedures within
the fourth quarter to confirm the existence of inventory.
32
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
15 Acknowledgment of Independent Registered Public Accounting Firm.
31.1 Certification of Norman Axelrod, Chairman and Chief Executive
Officer of the Company, Pursuant to Securities Exchange Act Rule
13a-14(a).
31.2 Certification of William T. Giles, Executive Vice President and
Chief Financial Officer of the Company, Pursuant to Securities
Exchange Act Rule 13a-14(a).
32 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002, by
Norman Axelrod, Chairman and Chief Executive Officer of the
Company, and William T. Giles, Executive Vice President and
Chief Financial Officer of the Company.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to this Quarterly Report on Form
10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.
LINENS 'N THINGS, INC.
DATED: July 1, 2005 BY: /s/ Norman Axelrod
-----------------------
NAME: Norman Axelrod
TITLE: Chairman and Chief
Executive Officer
DATED: July 1, 2005 BY: /s/ William T. Giles
-----------------------
NAME: William T. Giles
TITLE: Executive Vice President and
Chief Financial Officer
34