SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended April 2, 2005
----------------------------------------
Commission File Number 1-12381
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LINENS 'N THINGS, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3463939
---------------------------------- ----------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
6 Brighton Road, Clifton, New Jersey 07015
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (973) 778-1300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No[ ]
Number of shares outstanding as of May 6, 2005: 45,254,735
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended April 2, 2005 and April 3, 2004 3
Condensed Consolidated Balance Sheets as of April 2, 2005,
January 1, 2005 and April 3, 2004 4
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended April 2, 2005 and April 3, 2004 5
Notes to Condensed Consolidated Financial Statements 6-10
Report of Independent Registered Public Accounting Firm 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12-16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS 19
SIGNATURES 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
---------------------------
APRIL 2, APRIL 3,
2005 2004
------------ ------------
NET SALES $ 570,946 $ 552,800
Cost of sales, including buying and distribution
costs 334,553 331,554
------------ ------------
GROSS PROFIT 236,393 221,246
Selling, general and administrative expenses 242,154 222,288
------------ ------------
OPERATING LOSS (5,761) (1,042)
Interest income (495) (138)
Interest expense 1,218 897
------------ ------------
Interest expense, net 723 759
------------ ------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (6,484) (1,801)
Benefit for income taxes (2,410) (689)
------------ ------------
NET LOSS $ (4,074) $ (1,112)
============ ============
BASIC LOSS PER SHARE $ (0.09) $ (0.02)
============ ============
FULLY DILUTED LOSS PER SHARE $ (0.09) $ (0.02)
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
APRIL 2, 2005 JANUARY 1, 2005 APRIL 3, 2004
(UNAUDITED) (AUDITED) (UNAUDITED)
---------------- ------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 75,271 $ 204,009 $ 67,754
Accounts receivable 30,186 25,766 20,818
Inventories 765,929 715,184 760,548
Prepaid expenses and other current assets 39,364 38,335 34,178
Current deferred taxes 800 685 292
---------------- ------------------ ----------------
TOTAL CURRENT ASSETS 911,550 983,979 883,590
Property and equipment, net of accumulated depreciation of
$403,286, $382,813 and $322,986 at April 2, 2005, January
1, 2005 and April 3, 2004, respectively 569,329 578,816 553,302
Goodwill, net 18,126 18,126 18,126
Deferred charges and other noncurrent assets, net 10,851 10,963 7,733
---------------- ------------------ ----------------
TOTAL ASSETS $ 1,509,856 $ 1,591,884 $ 1,462,751
================ ================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 238,598 $ 245,635 $ 284,013
Accrued expenses and other current liabilities 133,200 212,644 123,015
Current deferred taxes 5,722 6,014 11,073
Short-term borrowings -- -- 3,544
---------------- ------------------ ----------------
TOTAL CURRENT LIABILITIES 377,520 464,293 421,645
Deferred income taxes and other long-term liabilities 326,324 318,238 298,316
---------------- ------------------ ----------------
TOTAL LIABILITIES 703,844 782,531 719,961
---------------- ------------------ ----------------
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; 45,505,967 shares issued and
45,245,626 shares outstanding at April 2, 2005;
45,460,467 shares issued and 45,200,896 shares
outstanding at January 1, 2005; and 45,309,835 shares
issued and 45,056,325 shares outstanding at April 3,
2004 455 455 453
Additional paid-in capital 373,665 372,627 369,079
Retained earnings 436,840 440,914 379,281
Accumulated other comprehensive income 2,436 2,619 1,178
Treasury stock, at cost; 260,341 shares at
April 2, 2005; 259,571 shares at January 1, 2005; and
253,510 shares at April 3, 2004 (7,384) (7,262) (7,201)
---------------- ------------------ ----------------
TOTAL SHAREHOLDERS' EQUITY 806,012 809,353 742,790
---------------- ------------------ ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,509,856 $ 1,591,884 $ 1,462,751
================ ================== ================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
------------------------------
APRIL 2, APRIL 3,
2005 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,074) $ (1,112)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 21,176 18,960
Deferred income taxes 2,296 23
Loss on disposal of assets 86 6
Federal tax benefit from common stock issued
under stock incentive plans 135 1,067
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (4,425) 8,702
Increase in inventories (51,128) (60,734)
Increase in prepaid expenses and other
current assets (880) (810)
Decrease (increase) in deferred charges and
other noncurrent assets 61 (1,344)
(Decrease) increase in accounts payable (6,930) 34,103
Decrease in accrued expenses and other liabilities (73,604) (46,088)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (117,287) (47,227)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (12,027) (30,259)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued under stock
incentive plans 904 5,542
Increase in short-term borrowings -- 3,546
(Increase) decrease in treasury stock (122) 139
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 782 9,227
-------------- --------------
Effect of exchange rate changes on cash and cash
equivalents (206) (116)
Net decrease in cash and cash equivalents (128,738) (68,375)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 204,009 136,129
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 75,271 $ 67,754
============== ==============
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized) $ 1,288 $ 900
Income taxes $ 27,981 $ 10,101
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements are unaudited. In
the opinion of management, the accompanying Condensed Consolidated Financial
Statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Linens 'n
Things, Inc. and its subsidiaries (collectively the "Company") as of April 2,
2005 and April 3, 2004 and the results of operations for the respective thirteen
weeks then ended and cash flows for the thirteen weeks then ended. The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles 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 1, 2005 (collectively, the "Audited Statements"), included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission ("SEC"). All significant intercompany accounts and transactions have
been eliminated.
On April 19, 2005, the Company filed Amendment No. 1 on Form 10-Q/A ("Form
10-Q/A") to its Quarterly Report on Form 10-Q for the quarterly period ended
April 3, 2004, initially filed with the SEC on May 7, 2004. Form 10-Q/A was
filed to reflect the restatement of the Company's Condensed Consolidated
Financial Statements for the thirteen-week periods ended April 3, 2004 and April
5, 2003 related to its correction for the accounting for leases and other
immaterial adjustments and reclassifications - see the Explanatory Statement and
Note 2 in Form 10-Q/A. All prior period disclosures included herein give effect
to the correction and other immaterial adjustments and reclassifications.
2. EARNINGS PER SHARE
The calculation of basic and fully diluted earnings per share ("EPS") is as
follows:
THIRTEEN WEEKS
ENDED APRIL 2, 2005
(IN THOUSANDS, EXCEPT EPS)
-----------------------------------------
Net
Loss Shares EPS
------------ ----------- -----------
BASIC $(4,074) 45,194 $(0.09)
Effect of outstanding stock options
and deferred stock grants -- 491 --
------------ ----------- -----------
FULLY DILUTED $(4,074) 45,685 $(0.09)
============ =========== ===========
THIRTEEN WEEKS
ENDED APRIL 3, 2004
(IN THOUSANDS, EXCEPT EPS)
-----------------------------------------
Net
Loss Shares EPS
------------ ----------- -----------
BASIC $(1,112) 44,897 $(0.02)
Effect of outstanding stock options
and deferred stock grants -- 1,211 --
------------ ----------- -----------
FULLY DILUTED $(1,112) 46,108 $(0.02)
============ =========== ===========
Options for which the exercise price was greater than the average market price
of common shares for the thirteen week periods ended April 2, 2005 and April 3,
2004 were not included in the computation of fully diluted earnings per share.
These consisted of options totaling approximately 2,456,000 shares and 18,000
shares, respectively.
6
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
3. SHORT-TERM BORROWING ARRANGEMENTS
In November 2004, the Company entered into a $250 million senior revolving
credit facility agreement (the "Credit Agreement") with third party
institutional lenders to expire November 23, 2009. The Credit Agreement allows
for up to $50 million of borrowings from additional lines of credit outside of
the Credit Agreement. As of April 2, 2005, the additional lines of credit
include committed facilities of approximately $16 million that expire on May 31,
2005 and $12 million that expire on June 15, 2005 and are subject to periodic
renewal arrangements. The Credit Agreement replaced the $150 million senior
revolving credit facility amended June 2002, which allowed for up to $40 million
in borrowings from additional lines of credit outside the agreement (the "2002
Credit Agreement").
Under the Credit Agreement, interest on all borrowings is determined based upon
several alternative rates, including a fixed margin above LIBOR. The Credit
Agreement contains certain financial covenants, including those relating to the
maintenance of a minimum tangible net worth, a minimum fixed charge coverage
ratio and a maximum leverage ratio. As of April 2, 2005, the Company was in
compliance with its covenants under the Credit Agreement. Under the Credit
Agreement, the amount of dividends that the Company may pay may not exceed the
sum of $50 million plus, on a cumulative basis, an amount equal to 25% of the
consolidated net income for each fiscal quarter, commencing with the fiscal
quarter ending April 3, 2004. The Company has never paid cash dividends and does
not currently anticipate paying cash dividends in the future. As of April 2,
2005, the Company had no borrowings under the Credit Agreement and no borrowings
under the additional lines of credit. For the thirteen weeks ended April 2, 2005
and April 3, 2004, the Company did not borrow against the Credit Agreement and
the 2002 Credit Agreement, respectively. The Company also had $70.8 million of
letters of credit outstanding as of April 2, 2005, which included standby
letters of credit issued primarily under the Credit Agreement and import letters
of credit used for merchandise purchases. The Company is not obligated under any
formal or informal compensating balance requirements.
4. COMPREHENSIVE LOSS
Comprehensive loss for the thirteen weeks ended April 2, 2005 and April 3, 2004
is as follows (in thousands):
THIRTEEN WEEKS ENDED
----------------------------------
APRIL 2, 2005 APRIL 3, 2004
---------------- ----------------
Net loss $(4,074) $(1,112)
Other comprehensive loss - foreign
currency translation adjustment
(183) (213)
---------------- ----------------
COMPREHENSIVE LOSS $(4,257) $(1,325)
================ ================
7
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
5. 2001 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
In fiscal 2001, the Company developed and committed to a strategic initiative
designed to improve store performance and profitability. This initiative called
for the closing of certain under-performing stores, which did not meet the
Company's profit objectives. In connection with this initiative, the Company
recorded a pre-tax restructuring and asset impairment charge of $37.8 million
($23.7 million after-tax) in the fourth quarter of fiscal 2001. A pre-tax
reserve of $20.5 million was established for estimated lease commitments for
stores to be closed. This reserve is included in accrued expenses. The reserve
considers estimated sublease income. Because all of the stores were leased, the
Company is not responsible for the disposal of property other than fixtures. A
pre-tax writedown of $9.5 million was recorded as a reduction in property and
equipment for fixed asset impairments for these stores. The fixed asset
impairments represent fixtures and leasehold improvements. A pre-tax reserve of
$4.0 million was established for other estimated miscellaneous store closing
costs. Additionally, a pre-tax charge of $3.8 million was recorded in cost of
sales for estimated inventory markdowns below cost for the stores to be closed.
Certain components of the restructuring charge were based on estimates and may
be subject to change in the future. The Company has closed all of the initially
identified stores other than one store, which the Company decided to keep open
and whose reserve was reversed, and one other store which is expected to be
closed during fiscal 2005.
The following table displays a roll forward of the activity and significant
components of the 2001 restructuring and asset impairment charge and the
reserves remaining as of April 2, 2005 ($ in millions):
REMAINING AT USAGE REMAINING AT
1/01/05 2005 4/02/05
(AUDITED) (UNAUDITED) (UNAUDITED)
------------------- ------------------- -------------------
CASH COMPONENTS:
Lease commitments $9.0 $(0.7) $8.3
------------------- ------------------- -------------------
TOTAL $9.0 $(0.7) $8.3
=================== =================== ===================
The 2005 usage primarily consists of payments for lease commitments, offset by
an increase to lease commitment costs by $0.3 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.
6. 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 $233,000 and $157,000 for
the thirteen weeks ended April 2, 2005 and April 3, 2004, respectively. The
Company has complied with the disclosure requirements of SFAS No. 148. Set forth
below are the Company's net loss and net loss 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 weeks ended April 2, 2005 and April
3, 2004:
8
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
THIRTEEN WEEKS ENDING
------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) APRIL 2, 2005 APRIL 3, 2004
------------------------------------------------------------------------------------------------
NET LOSS:
As reported $(4,074) $(1,112)
Add: stock-based employee compensation expense
included in net income as presented, net of
related tax effects 146 97
------------------------------------
(3,928) (1,015)
Deduct: total stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects 1,611 1,850
------------------------------------
Pro forma $(5,539) $(2,865)
====================================
NET LOSS PER SHARE OF COMMON STOCK:
BASIC:
As reported $ (0.09) $ (0.02)
Pro forma (0.12) (0.06)
FULLY DILUTED:
As reported $ (0.09) $ (0.02)
Pro forma (0.12) (0.06)
------------------------------------------------------------------------------------------------
7. GUARANTEES
The Company has assigned property at a retail location in which the Company
guarantees the payment of rent over the specified lease term in the event of
non-performance. As of April 2, 2005, the maximum potential amount of future
payments the Company could be required to make under such guarantee is
approximately $0.8 million.
8. ACCOUNTS PAYABLE
The Company maintains a trade payables program with General Electric Capital
Corporation ("GECC") under which GECC pays participating Company suppliers the
amount due from the Company in advance of the original due date. In exchange for
the earlier payment, these suppliers accept a discounted payment. On the
original due date of the payables, the Company pays GECC the full amount.
Pursuant to the agreement, any favorable economics realized by GECC for
transactions under this program are shared with the Company. The Company
recognizes the total vendor discount realized by GECC as a reduction of the cost
of inventory in the Condensed Consolidated Balance Sheets and records the share
of the vendor discount due GECC as interest expense in the Condensed
Consolidated Statements of Operations. At April 2, 2005, January 1, 2005 and
April 3, 2004, the Company owed approximately $50.8 million, $65.0 million and
$69.0 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 April 2, 2005.
In addition, included in accounts payable are amounts for gift card liabilities
of $25.6 million, $30.5 million and $26.4 million as of April 2, 2005, January
1, 2005 and April 3, 2004, respectively.
9
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
9. INCOME TAXES
On October 22, 2004 the American Job Creation Act of 2004 (the "Act") was signed
into law. The Act contains numerous amendments and additions to the U.S.
corporate income tax rules. None of these changes, either individually or in the
aggregate, is expected to have a significant effect on the Company's income tax
liability. The Company does not expect to take advantage of the Act's
repatriation provisions.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised 2004),
"Share-Based Payment" ("SFAS No. 123 (Revised 2004)"). SFAS No. 123 (Revised
2004) requires the Company to recognize the grant-date fair value of stock
option grants as compensation expense in the Condensed Consolidated Statement of
Operations but expresses no preference for a type of valuation method to use in
determining the fair value of options. Under SFAS No. 123 (Revised 2004), the
Company would have been required to implement the standard as of the beginning
of the first interim period that begins after June 15, 2005 (the Company's
fiscal year 2005 third quarter). On April 14, 2005, the SEC adopted a new rule
that allows the Company to implement SFAS No. 123 (Revised 2004) at the
beginning of its next fiscal year, instead of the next interim reporting period,
that begins after June 15, 2005. Accordingly, the Company will implement SFAS
No. 123 (Revised 2004) as of the beginning of its first fiscal quarter of 2006.
Currently, the Company discloses the effect on net income and earnings per share
related to the expensing of options as a note to its Condensed Consolidated
Financial Statements (see Note 6). The Company is currently evaluating the
effect of this change in accounting treatment and expects to provide an
estimated impact on fiscal 2006 earnings per share by the end of the current
fiscal year.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." This Statement requires that
exchanges should be recorded and measured at the fair value of the assets
exchanged, with certain exceptions. The Statement is effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. The
adoption of this Statement will not have a material effect on the Company's
financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." This Statement amends the guidance to clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current period charges. In
addition, this Statement requires that allocation of fixed production overheads
to the costs of conversions be based on the normal capacity of the production
facilities. The Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of this Statement will
not have a material effect on the Company's financial position or results of
operations.
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Linens 'n Things, Inc.:
We have reviewed the condensed consolidated balance sheets of Linens 'n Things,
Inc. and Subsidiaries as of April 2, 2005 and April 3, 2004, and the related
condensed consolidated statements of operations for the thirteen week periods
then ended and the related condensed consolidated statements of cash flows for
the thirteen week periods ended April 2, 2005 and April 3, 2004. 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 1, 2005
(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 1, 2005 is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived. .
/S/ KPMG LLP
KPMG LLP
New York, New York
May 10, 2005
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements of the Company and the notes thereto
appearing elsewhere in this document.
GENERAL
Linens 'n Things, Inc. (the "Company") is one of the leading national large
format specialty retailers of home textiles, housewares and home accessories,
carrying both national brands and private label goods. As of April 2, 2005, the
Company operated 499 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 51% of total assets at April
2, 2005. Inventories are valued using the lower of cost or market value,
determined by the retail inventory method ("RIM"). Under RIM, the valuation of
inventories at cost and the resulting gross margins are determined by applying a
calculated cost-to-retail ratio to the retail value of inventories. RIM is an
averaging method that is used in the retail industry due to its practicality.
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 April 2, 2005, January 1, 2005 and April 3, 2004, the Company's sales returns
reserve was approximately $5.2 million, $7.4 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. In accordance with the provisions of
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
the Company periodically evaluates long-lived assets other than goodwill for
indicators of impairment. As of April 2, 2005, January 1, 2005 and April 3,
2004, the Company's net value for property and equipment was approximately
$569.3 million, $578.8 million and $553.3 million, respectively, and goodwill
was approximately $18.1 million on each of these dates.
12
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
STORE CLOSURE COSTS: In fiscal 2001, the Company recorded a pre-tax
restructuring and asset impairment charge of $37.8 million ($23.7 million
after-tax) related to the closing of certain under-performing stores. As of
April 2, 2005, January 1, 2005 and April 3, 2004, the Company had $8.3 million,
$9.0 million and $14.0 million, respectively, remaining related to this reserve.
The Company has closed all of the initially identified stores other than one
store, which the Company decided to keep open and whose reserve was reversed,
and one other store which is expected to be closed during fiscal 2005. The
Company continues to negotiate and/or explore lease buyouts or sublease
agreements for these stores. The activity in the thirteen week period ended
April 2, 2005 primarily consists of payments for lease commitments, offset by an
increase to lease commitment costs by $0.3 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 $13.1 million as of April 2, 2005,
$14.5 million as of January 1, 2005 and $13.2 million as of April 3, 2004.
LITIGATION: The Company records an estimated liability related to various claims
and legal actions arising in the ordinary course of business, which is based on
available information and advice from outside counsel where applicable. As
additional information becomes available, the Company assesses the potential
liability related to its pending claims and may adjust its estimates
accordingly.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 2, 2005 COMPARED WITH THIRTEEN WEEKS ENDED APRIL 3,
2004
Net sales for the thirteen weeks ended April 2, 2005 increased approximately
3.3% to $570.9 million, up from $552.8 million for the same period last year.
The increase in net sales is primarily the result of new store openings since
April 3, 2004. At April 2, 2005, the Company operated 499 stores, including 24
stores in Canada, as compared with 461 stores, including 20 stores in Canada, at
April 3, 2004. Store square footage increased approximately 7.1% to 16.9 million
at April 2, 2005 compared with 15.8 million at April 3, 2004. During the
thirteen weeks ended April 2, 2005, the Company opened eight stores and closed
one store as compared with opening 21 stores and closing no stores during the
same period last year.
Comparable store net sales decreased 5.4% for the thirteen weeks ended April 2,
2005 compared to an increase of 4.7% for the same period last year. The decrease
in comparable net sales for the thirteen weeks ended April 2, 2005 is due
primarily to a decline in guest traffic, as well as a slight decline in average
transaction. In addition, the Company's fashion textiles business was
particularly challenging as it continues to transition its assortments.
In addition to the cost of inventory sold, the Company includes its buying and
distribution expenses in its cost of sales. Buying expenses include all direct
and indirect costs to procure merchandise. Distribution expenses include the
cost of operating the Company's distribution centers and freight expense related
to transporting merchandise. Gross profit for the thirteen weeks ended April 2,
2005 was $236.4 million, or 41.4% of net sales, compared with $221.2 million, or
40.0% of net sales, for the same period last year. During the first quarter of
fiscal 2005, gross profit was impacted by improved merchandise acquisition costs
and lower distribution costs offset by an increase in markdowns associated with
the acceleration of the Company's transition to newer assortments. In addition,
the implementation of EITF 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor" had a greater impact
on gross profit in the prior period.
The Company's selling, general and administrative expenses ("SG&A") consist of
store selling expenses, occupancy costs, advertising expenses and corporate
office expenses. SG&A expenses for the thirteen weeks ended April 2, 2005 were
$242.2 million, or 42.4% of net sales, compared with $222.3 million, or 40.2% of
net sales, for the same period last year. The increase in SG&A is primarily due
to higher store selling expenses and occupancy costs as a result of new store
additions since April 3, 2004, and higher promotional expense. In addition, as
the Company's first quarter of the fiscal year typically represents a seasonally
low volume sales quarter, and the percentage increase in sales for the period
was lower compared to last year, fixed costs such as occupancy and corporate
office expenses as a percentage of net sales were greater.
13
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
Operating loss for the thirteen weeks ended April 2, 2005 was approximately $5.8
million or 1.0% of net sales, compared with an operating loss of $1.0 million,
or 0.2% of net sales, for the same period last year.
Net interest expense for the thirteen weeks ended April 2, 2005 decreased to
approximately $0.7 million from $0.8 million during the same period last year
primarily due to higher interest income on short-term investments.
The Company's income tax benefit was approximately $2.4 million for the thirteen
weeks ended April 2, 2005, compared with an income tax benefit of $0.7 million
for the same period last year. Due to a decrease in effective foreign tax rates,
a change in the mix of earnings within jurisdictions and a reduction in
nondeductible expenses, the Company's effective tax rate for the thirteen weeks
ended April 2, 2005 declined to 37.2% compared to 38.2% for the same period last
year.
As a result of the factors described above, net loss for the thirteen weeks
ended April 2, 2005 was approximately $4.1 million or $0.09 per share on a fully
diluted basis, compared with a net loss of $1.1 million, or $0.02 per share on a
fully diluted basis for the same period last year.
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 November 2004, the Company entered into a $250 million senior revolving
credit facility agreement (the "Credit Agreement") with third party
institutional lenders to expire November 23, 2009. The Credit Agreement allows
for up to $50 million of borrowings from additional lines of credit outside of
the Credit Agreement. As of April 2, 2005, the additional lines of credit
include committed facilities of approximately $16 million that expire on May 31,
2005 and $12 million that expire on June 15, 2005 and are subject to periodic
renewal arrangements. The Company intends to renew the May 31, 2005 facility
prior to its expiration. As of April 2, 2005, the Company was in compliance with
its covenants under the Credit Agreement. As of April 2, 2005, the Company had
no borrowings under the Credit Agreement and no borrowings under the additional
lines of credit. In accordance with the seasonal nature of the Company's
business, the Company may from time to time borrow under its Credit Agreement
and additional lines of credit, including during the second quarter. These
borrowings are not currently expected to peak in excess of approximately $75
million for the second quarter, and are intended to be used for working capital
and similar general corporate needs. The Company also had $70.8 million of
letters of credit outstanding as of April 2, 2005, which included standby
letters of credit issued primarily under the Credit Agreement and import letters
of credit used for merchandise purchases. The Company is not obligated under any
formal or informal compensating balance requirements. See Note 3 to the
Condensed Consolidated Financial Statements.
The Company maintains a trade payables arrangement with General Electric Capital
Corporation ("GECC") under which GECC purchases the Company's payables at a
discount directly from the Company's suppliers prior to the payables due date,
thereby permitting a supplier to receive payment prior to the due date of the
payable, with the Company sharing in part of the GECC discount. At April 2,
2005, January 1, 2005 and April 3, 2004, the Company owed approximately $50.8
million, $65.0 million and $69.0 million, respectively, to GECC under this
program, which was included in accounts payable. Either party may terminate the
program for any reason upon 30 days prior written notice. The Company does not
anticipate that discontinuance of the availability of the GECC program would
result in a material disruption to the supply of merchandise to the Company, nor
would it have a material adverse effect on the Company's financial position,
results of operations or cash flows. The maximum amount permitted under the
program was $95 million as of April 2, 2005.
Net cash used in operating activities for the thirteen weeks ended April 2, 2005
was $117.3 million compared with net cash of $47.2 million used in operating
activities for the same period last year. The increase in cash used between
periods is primarily due to the timing of vendor payments and tax payments.
Net cash used in investing activities for the thirteen weeks ended April 2, 2005
was $12.0 million, compared with $30.3 million for the same period last year.
The decrease in cash used between periods is primarily due to the timing of new
store openings. The Company currently estimates capital expenditures will be
approximately $125 million in fiscal 2005, primarily to open approximately 50
new stores, maintenance of existing stores, and system enhancements.
14
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
Net cash provided by financing activities for the thirteen weeks ended April 2,
2005 was $0.8 million compared with $9.2 million for the same period last year.
The decrease is due to lower proceeds from common stock issued under stock
incentive plans. Additionally, the Company had no borrowings as of April 2, 2005
compared to $3.5 million as of April 3, 2004.
Management regularly reviews and evaluates its liquidity and capital needs. The
Company experiences peak periods for its cash needs generally during the second
quarter and fourth quarter of the fiscal year. As the Company's business
continues to grow and its current store expansion plan is implemented, such peak
periods may require increases in the amounts available under its credit
facilities from those currently existing and/or other debt or equity funding.
Management currently believes that the Company's cash flows from operations,
credit extended by suppliers, its access to credit facilities and its
uncommitted lines of credit will be sufficient to fund its expected capital
expenditures, working capital and non-acquisition business expansion
requirements for at least the next 12 to 18 months.
INFLATION
The Company does not believe that its operating results have been materially
affected by inflation during the preceding three years. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.
SEASONALITY
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and net income for the year during the third and fourth quarters. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of new store openings. The
Company believes this is the general pattern associated with its segment of the
retail industry and expects this pattern will continue in the future.
Consequently, comparisons between quarters are not necessarily meaningful and
the results for any quarter are not necessarily indicative of future results.
FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis as well as other portions of
this Quarterly Report on Form 10-Q, contain 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, constitute
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 the levels of
sales, store traffic, the results and success of our back-to-school and holiday
selling seasons, 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 and our ability to successfully implement our strategic initiatives.
15
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
If these or other risks or uncertainties materialize, or if our estimates or
underlying assumptions prove inaccurate, actual results could differ materially
from any future results, express or implied by our forward-looking statements.
These and other important risk factors are included in the "Risk Factors"
section of the Company's Registration Statement on Form S-3 as filed with the
Securities and Exchange Commission on June 18, 2002 and are contained in our
reports filed with the Securities and Exchange Commission, including our Annual
Report on Form 10-K and our Quarterly Reports on Form 10-Q. You are urged to
consider all such factors. In light of the substantial uncertainty inherent in
such forward-looking statements, you should not consider their inclusion to be a
representation that such forward-looking matters will be achieved. The Company
assumes no obligation for updating any such forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements, even if such results or changes make
it clear that any projected results will not be realized.
Our forward-looking statements are as of the date of this filing only.
16
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 April 2, 2005, the Company had no borrowings under the
Credit Agreement and no borrowings under the additional lines of credit (see
Note 3 to the Condensed Consolidated Financial Statements). The Company believes
that its interest rate risk is minimal as a hypothetical 10% increase or
decrease in interest rates in the associated debt's variable rate would not
materially affect the Company's results from operations or cash flows. The
Company does not use derivative financial instruments in its investment
portfolio.
FOREIGN CURRENCY RISK:
The Company enters into some purchase obligations outside of the United States,
which are predominately settled in U.S. dollars, and therefore, the Company has
only minimal exposure to foreign currency exchange risks. The Company does not
hedge against foreign currency risks and believes that foreign currency exchange
risk is immaterial.
The Company operated 24 stores in Canada as of April 2, 2005. The Company
believes its foreign currency translation risk is minimal, as a hypothetical 10%
strengthening or weakening of the U.S. dollar relative to the Canadian dollar
would not materially affect the Company's results from operations or cash flow.
Since fiscal year end 2004, there have been no material changes in market risk
exposures.
17
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the design and operation
of the Company's 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
Quarterly Report on Form 10-Q. Based upon that evaluation, the Company's Chief
Executive Officer and the Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective, as of the end of the
period covered by this Quarterly Report on Form 10-Q.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
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 Note 3 to the Audited Statements
included in the Company's Annual Report on Form 10-K for fiscal 2004. Public
Company Accounting Oversight Board's Auditing Standard No. 2, AN AUDIT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING PERFORMED IN CONJUNCTION WITH AN AUDIT
OF FINANCIAL STATEMENTS, provides that a restatement of previously issued
financial statements is a strong indicator of the existence of a "material
weakness" in the design or operation of internal control over financial
reporting. Accordingly, management concluded that the control deficiency that
resulted in the incorrect lease accounting represented a material weakness in
internal control over financial reporting.
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.
Other than as described above, there have been no significant changes to the
Company's internal control over financial reporting during the most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
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.
18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
EXHIBIT DESCRIPTION
NUMBER
15 Acknowledgment of Independent Registered Public Accounting
Firm.
31.1 Certification of Norman Axelrod, Chairman and Chief
Executive Officer of the Company, Pursuant to Securities
Exchange Act Rule 13a-14(a).
31.2 Certification of William T. Giles, Executive Vice President
and Chief Financial Officer of the Company, Pursuant to
Securities Exchange Act Rule 13a-14(a).
32 Certifications Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
Of 2002, signed by Norman Axelrod, Chairman and Chief
Executive Officer of the Company, and William T. Giles,
Executive Vice President and Chief Financial Officer of the
Company.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
LINENS 'N THINGS, INC.
DATED: May 12, 2005 BY: /s/ Norman Axelrod
------------------
NAME: Norman Axelrod
TITLE: Chairman and Chief
Executive Officer
DATED: May 12, 2005 BY: /s/ William T. Giles
--------------------
NAME: William T. Giles
TITLE: Executive Vice President and
Chief Financial Officer
20