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 October 1, 2005
------------------------------------------
Commission File Number 1-12381
------------------------------
LINENS 'N THINGS, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3463939
---------------------------------- ----------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
6 Brighton Road, Clifton, New Jersey 07015
-----------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (973) 778-1300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No[ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No[X]
Number of shares outstanding as of November 3, 2005: 45,376,616
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations for the
Thirteen and Thirty-Nine Weeks Ended October 1, 2005 and
October 2, 2004 (Unaudited) 3
Condensed Consolidated Balance Sheets as of October 1, 2005,
January 1, 2005 and October 2, 2004 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended October 1, 2005 and October 2, 2004
(Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 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 - 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS 20
SIGNATURES 21
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 THIRTY-NINE WEEKS ENDED
----------------------------------- -----------------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
--------------- ---------------- --------------- ---------------
NET SALES $ 629,268 $ 654,196 $ 1,773,531 $ 1,785,745
Cost of sales, including buying and
distribution costs 370,953 385,090 1,041,880 1,062,717
--------------- ---------------- --------------- ---------------
GROSS PROFIT 258,315 269,106 731,651 723,028
Selling, general and administrative expenses 255,508 240,664 743,364 694,427
--------------- ---------------- --------------- ---------------
OPERATING INCOME (LOSS) 2,807 28,442 (11,713) 28,601
Interest income (54) (138) (678) (306)
Interest expense 1,216 788 3,301 2,760
--------------- ---------------- --------------- ---------------
Interest expense, net 1,162 650 2,623 2,454
--------------- ---------------- --------------- ---------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 1,645 27,792 (14,336) 26,147
Provision (benefit) for income taxes 621 10,617 (5,354) 9,987
--------------- ---------------- --------------- ---------------
NET INCOME (LOSS) $ 1,024 $ 17,175 $ (8,982) $ 16,160
=============== ================ =============== ===============
BASIC INCOME (LOSS) PER SHARE $ 0.02 $ 0.38 $ (0.20) $ 0.36
=============== ================ =============== ===============
FULLY DILUTED INCOME (LOSS) PER SHARE $ 0.02 $ 0.38 $ (0.20) $ 0.35
=============== ================ =============== ===============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OCTOBER 1, JANUARY 1, OCTOBER 2,
2005 2005 2004
(UNAUDITED) (AUDITED) (UNAUDITED)
----------------- ------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 37,608 $ 204,009 $ 54,460
Accounts receivable 50,369 25,766 26,494
Inventories 863,100 715,184 794,169
Prepaid expenses and other current assets 44,613 38,335 34,615
Current deferred taxes 834 685 472
----------------- ------------------ ----------------
TOTAL CURRENT ASSETS 996,524 983,979 910,210
Property and equipment, net of accumulated depreciation of
$446,362, $382,813 and $361,689 at October 1, 2005,
January 1, 2005 and October 2, 2004, respectively 598,235 578,816 568,606
Goodwill, net 18,126 18,126 18,126
Deferred charges and other noncurrent assets, net 13,151 10,963 7,709
----------------- ------------------ ----------------
TOTAL ASSETS $ 1,626,036 $ 1,591,884 $ 1,504,651
================= ================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 279,411 $ 245,635 $ 279,169
Accrued expenses and other current liabilities 167,625 212,644 140,038
Current deferred taxes 3,917 6,014 7,138
Short-term borrowings 30,000 -- 560
----------------- ------------------ ----------------
TOTAL CURRENT LIABILITIES 480,953 464,293 426,905
Deferred income taxes and other long-term liabilities 340,631 318,238 315,539
----------------- ------------------ ----------------
TOTAL LIABILITIES 821,584 782,531 742,444
----------------- ------------------ ----------------
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; 45,628,964 shares issued and
45,369,460 shares outstanding at October 1, 2005;
45,460,467 shares issued and 45,200,896 shares
outstanding at January 1, 2005; and 45,403,722 shares
issued and 45,145,761 shares outstanding at October 2,
2004 456 455 454
Additional paid-in capital 376,156 372,627 370,749
Retained earnings 431,932 440,914 396,553
Accumulated other comprehensive income 3,300 2,619 1,817
Treasury stock, at cost; 259,504 shares at
October 1, 2005; 259,571 shares at January 1, 2005;
and 257,961 shares at October 2, 2004 (7,392) (7,262) (7,366)
----------------- ------------------ ----------------
TOTAL SHAREHOLDERS' EQUITY 804,452 809,353 762,207
----------------- ------------------ ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,626,036 $ 1,591,884 $ 1,504,651
================= ================== ================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
------------------------------------
OCTOBER 1, OCTOBER 2,
2005 2004
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (8,982) $ 16,160
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization 66,216 60,023
Deferred income taxes 782 3,423
Loss on disposal of assets 625 1,357
Loss on fixed asset impairment writedown 1,452 --
Federal tax benefit from common stock issued
under stock incentive plans 447 1,297
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (24,476) 3,090
Increase in inventories (145,922) (92,578)
Increase in prepaid expenses and
other current assets (7,220) (1,397)
Increase in deferred charges and
other noncurrent assets (2,327) (1,539)
Increase in accounts payable 32,815 28,549
Decrease in accrued expenses and other liabilities (27,305) (20,462)
---------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (113,895) (2,077)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (85,978) (86,916)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued under stock incentive plans 3,081 6,974
Increase in borrowings 30,000 532
Increase in treasury stock (130) (26)
---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 32,951 7,480
---------------- -----------------
Effect of exchange rate changes on cash and cash
equivalents 521 (156)
Net decrease in cash and cash equivalents (166,401) (81,669)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 204,009 136,129
---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,608 $ 54,460
================ ================
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized) $ 3,249 $ 2,813
Income taxes $ 32,062 $ 11,214
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 October 1,
2005 and October 2, 2004 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
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 or interim 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 July 1, 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
October 2, 2004, initially filed with the SEC on November 12, 2004. Form 10-Q/A
was 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 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 (LOSS) PER SHARE
The calculation of basic and fully diluted earnings (loss) per share ("EPS") is
as follows:
PERIODS ENDED OCTOBER 1, 2005
(IN THOUSANDS, EXCEPT EPS)
---------------------------------------------------------------------------
THIRTEEN WEEKS THIRTY-NINE WEEKS
----------------------------------- -----------------------------------
Net Net
Income Shares EPS Loss Shares EPS
--------- ---------- ---------- --------- ---------- ----------
BASIC $ 1,024 45,309 $ 0.02 $ (8,982) 45,264 $ (0.20)
Effect of outstanding
stock options and
deferred stock grants -- 401 -- -- 404 --
--------- ---------- ---------- --------- ---------- ----------
FULLY DILUTED $ 1,024 45,710 $ 0.02 $ (8,982) 45,668 $ (0.20)
========= ========== ========== ========= ========== ==========
PERIODS ENDED OCTOBER 2, 2004
(IN THOUSANDS, EXCEPT EPS)
---------------------------------------------------------------------------
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
========= ========== ========== ========= ========== ==========
6
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
Options for which the exercise price was greater than the average market price
of common shares for the periods presented were not included in the computation
of fully diluted earnings (loss) per share. These consisted of options totaling
approximately 2,476,000 shares and 2,640,000 shares for the thirteen weeks ended
October 1, 2005 and October 2, 2004, respectively and approximately 2,821,000
shares and 1,088,000 shares for the thirty-nine weeks ended October 1, 2005 and
October 2, 2004, respectively.
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 which expires November 23, 2009. The Credit Agreement
allows for up to $50 million of additional unsecured indebtedness under lines of
credit outside of the Credit Agreement ("Additional Indebtedness"). Additional
Indebtedness includes a new unsecured credit facility in the amount of $34
million which the Company entered into in July 2005 covering its Canadian
operations. This credit facility expires July 29, 2008. 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 October 1, 2005, the Company was in
compliance with its covenants under the Credit Agreement. Under the Credit
Agreement, the amount of dividends that the Company may pay may not exceed the
sum of $50 million plus, on a cumulative basis, an amount equal to 25% of the
consolidated net income for each fiscal quarter, commencing with the fiscal
quarter ending April 3, 2004. The Company has never paid cash dividends and does
not currently anticipate paying cash dividends in the future. As of October 1,
2005, the Company had $30 million in borrowings under the Credit Agreement at an
average interest rate of 4.65% and no borrowings under the Additional
Indebtedness. Such borrowings have been classified as short-term as the Company
has the ability and intent to pay these borrowings from existing current assets
as of October 1, 2005. At various times during the thirty-nine weeks ended
October 1, 2005 and October 2, 2004, the Company borrowed against its Credit
Agreement and the 2002 Credit Agreement, respectively, for working capital
needs. The Company also had $132.5 million of letters of credit outstanding as
of October 1, 2005, which included standby letters of credit issued primarily
under the Credit Agreement and import letters of credit used for merchandise
purchases. The Company is not obligated under any formal or informal
compensating balance requirements.
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the thirteen and thirty-nine weeks ended October
1, 2005 and October 2, 2004 is as follows (in thousands):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------------- ---------------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Net income (loss) $ 1,024 $ 17,175 $ (8,982) $ 16,160
Other comprehensive income -
foreign currency translation
adjustment 1,253 728 681 426
--------------- --------------- --------------- ---------------
COMPREHENSIVE INCOME (LOSS) $ 2,277 $ 17,903 $ (8,301) $ 16,586
=============== =============== =============== ===============
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. 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
$3.8 million was recorded in cost of sales for estimated inventory markdowns
below cost for the stores to be closed. Certain components of the restructuring
charge were based on estimates and may be subject to change in the future. The
Company has closed all of the initially identified stores other than one store,
which the Company decided to keep open and whose reserve was reversed.
The following table displays a roll forward of the activity and significant
components of the 2001 restructuring and asset impairment charge and the
reserves remaining as of October 1, 2005 ($ in millions):
REMAINING AT USAGE REMAINING AT
JANUARY 1, 2005 2005 OCTOBER 1, 2005
(AUDITED) (UNAUDITED) (UNAUDITED)
----------------- ----------------- -----------------
CASH COMPONENTS:
Lease commitments $9.0 $(3.9) $5.1
----------------- ----------------- -----------------
TOTAL $9.0 $(3.9) $5.1
================= ================= =================
The restructuring reserve balance is included in accrued expenses and other
current liabilities in the Condensed Consolidated Balance Sheet. The 2005 usage
primarily consists of payments for lease commitments. The 2005 activity also
includes the reversal of estimated lease commitment costs of approximately $3.8
million which were not needed, offset by an increase to lease commitment costs
of approximately $3.4 million due to changes in estimates based on current
negotiations.
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 at the date of grant 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 $0.3
million and $0.1 million for the thirteen weeks ended October 1, 2005 and
October 2, 2004, respectively, and $0.8 million and $0.4 million for the
thirty-nine weeks ended October 1, 2005 and October 2, 2004, respectively. The
Company has complied with the disclosure requirements of SFAS No. 148. Set forth
below are the Company's net income (loss) and net earnings (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 and thirty-nine
weeks ended October 1, 2005 and October 2, 2004:
8
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
THIRTEEN WEEKS ENDING THIRTY-NINE WEEKS ENDING
----------------------------- ------------------------------
OCTOBER 1, OCTOBER 2, OCTOBER 1, OCTOBER 2,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2005 2004 2005 2004
---------------------------------------------------------------------------------------- ------------------------------
NET INCOME (LOSS):
As reported $ 1,024 $ 17,175 $ (8,982) $ 16,160
Add: stock-based employee compensation expense
included in net income (loss) as reported, net
of related tax effects 206 33 512 231
----------------------------- ------------------------------
1,230 17,208 (8,470) 16,391
Deduct: total stock-based employee compensation
expense determined under the fair value based
method of accounting for all awards, net of
related tax effects 1,999 1,599 5,247 5,375
----------------------------- ------------------------------
Pro forma $ (769) $ 15,609 $ (13,717) $ 11,016
============================= ==============================
NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
BASIC:
As reported $ 0.02 $ 0.38 $ (0.20) $ 0.36
Pro forma (0.02) 0.35 (0.30) 0.24
FULLY DILUTED:
As reported $ 0.02 $ 0.38 $ (0.20) $ 0.35
Pro forma (0.02) 0.34 (0.30) 0.24
------------------------------------------------------------------------------------------------------------------------
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 October 1, 2005, the maximum potential amount of future
payments the Company could be required to make under such guarantee is
approximately $0.7 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 October 1, 2005, January 1, 2005 and
October 2, 2004, the Company owed approximately $28.3 million, $65.0 million and
$67.4 million, respectively, to GECC under this program, which was included in
accounts payable.
GECC and the Company have determined to terminate the trade payables program
effective January 13, 2006. In connection with this termination, the maximum
amount under the program was reduced to $45 million as of September 30, 2005.
This amount will be further reduced to $15 million in December, 2005. All
amounts outstanding under the program are required to be remitted by the Company
by December 30, 2005. The Company, at its discretion, may continue to offer
early payment options to suppliers in exchange for discounted payments.
In addition, included in accounts payable are amounts for gift card liabilities
of $26.4 million, $30.5 million and $23.8 million as of October 1, 2005, January
1, 2005 and October 2, 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 Statements
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.
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 does 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.
11. SUBSEQUENT EVENT
On November 8, 2005, the Company announced that it entered into a definitive
agreement (the "Merger Agreement") to be acquired by a company newly formed and
controlled by Apollo Management, L.P., on behalf of itself and its managed
funds, together with certain investors NRDC Real Estate Advisors I, LLC and
Silver Point Capital Fund Investments LLC. Under the terms of the agreement,
Linens `n Things' stockholders are to receive $28.00 per share in cash. All
outstanding options to purchase shares of common stock, restricted shares and
deferred shares of common stock of the Company will be canceled and converted
into the right to receive $28.00 per restricted share, deferred share or share
of common stock underlying such option less, in the case of options, the
exercise price thereof, without interest. The Merger Agreement contains certain
termination rights and provides that, upon the termination of the Merger
Agreement under specified circumstances, the Company may be required to pay
Apollo a termination fee equal to $27 million and expenses up to $5 million. The
debt financing for the transaction is subject to various conditions, including
the Company achieving EBITDA of not less than $140 million for the full 2005
fiscal year and comparable net sales of not less than negative 6% for the 2005
fourth quarter, as well as other customary conditions for a leveraged
acquisition financing. The debt financing commitments define EBITDA as net
earnings before interest, taxes, depreciation and amortization, with other
specified adjustments.
The foregoing description of the Merger Agreement does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Merger Agreement and the debt financing commitment letters, which are each filed
as exhibits to the Company's Form 8-K filed on November 9, 2005.
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 October 1, 2005 and October 2, 2004, 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 1, 2005 and October 2,
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
November 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 October 1, 2005,
the Company operated 527 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 1, 2005. Inventories are valued using the lower of cost or market value,
determined by the retail inventory method ("RIM"). Under RIM, the valuation of
inventories at cost and the resulting gross margins are determined by applying a
calculated cost-to-retail ratio to the retail value of inventories. RIM is an
averaging method that is used in the retail industry due to its practicality.
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 1, 2005, January 1, 2005 and October 2, 2004, the Company's sales
returns reserve was approximately $5.3 million, $7.4 million and $6.0 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. During the third quarter of 2005, the Company
determined that the carrying value of certain assets exceeded their related
estimated future undiscounted cash flows. As a result, the Company reduced the
carrying value of these fixed assets by approximately $1.5 million with the
related impairment loss recognized in selling, general and administrative
expenses ("SG&A") on the Company's Condensed Consolidated Statement of
Operations for the 13-week and 39-week periods ended October 1, 2005. As of
October 1, 2005, January 1, 2005 and October 2, 2004, the Company's net value
for property and equipment was approximately $598.2 million, $578.8 million and
$568.6 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
October 1, 2005, January 1, 2005 and October 2, 2004, the Company had $5.1
million, $9.0 million and $9.4 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. The Company continues to negotiate and/or explore lease buyouts or
sublease agreements for certain of these stores. For the remaining three stores
for which an acceptable buyout or sublease agreement has not yet been negotiated
and entered into, the Company is considering other alternatives, including
reopening one or more of the stores. The activity in the thirty-nine week period
ended October 1, 2005 includes the reversal of estimated lease commitment costs
of approximately $3.8 million which were not needed, offset by an increase to
lease commitment costs of approximately $3.4 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
limits for each type of insurance program. 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 $12.3 million as of October 1, 2005, $14.5 million as of
January 1, 2005 and $14.8 million as of October 2, 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 OCTOBER 1, 2005 COMPARED WITH THIRTEEN WEEKS ENDED OCTOBER
2, 2004
Net sales for the thirteen weeks ended October 1, 2005 decreased approximately
3.8% to $629.3 million, down from $654.2 million for the same period last year.
The Company experienced a decline in guest traffic throughout the third quarter
as the initiatives it had undertaken to emphasize fashion and better price
points in its merchandise assortment resulted in a weaker value perception to
its guests. At October 1, 2005, the Company operated 527 stores, including 29
stores in Canada, as compared with 479 stores, including 22 stores in Canada, at
October 2, 2004. Store square footage increased approximately 8.4% to 17.6
million at October 1, 2005 compared with 16.3 million at October 2, 2004. During
the thirteen weeks ended October 1, 2005, the Company opened 14 stores and
closed three stores as compared with opening 8 stores and closing two stores
during the same period last year.
Comparable net sales decreased 10.2% for the thirteen weeks ended October 1,
2005 compared to a decline of 0.5% for the same period last year. The decrease
in comparable net sales for the quarter is primarily attributable to a
significant decline in guest traffic due to the narrow appeal of the Company's
Back to School assortments and lower than expected sales related to the
Company's marketing events.
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
1, 2005 was $258.3 million, or 41.1% of net sales, compared with $269.1 million,
or 41.1% of net sales, for the same period last year. During the third quarter,
increases in gross margin from improved markup through lower merchandise
acquisition costs were largely offset by an increase in markdowns associated
with the acceleration of the Company's transitions to newer assortments and
clearance activities. In addition, the impact of EITF 02-16, "Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor" in the same period last year was to decrease gross profit by
approximately 0.6%.
13
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
The Company's selling, general and administrative expenses consist of store
selling expenses, occupancy costs, advertising expenses and corporate office
expenses. SG&A for the thirteen weeks ended October 1, 2005 was $255.5 million,
or 40.6% of net sales, compared with $240.7 million, or 36.8% of net sales, for
the same period last year. The increase in SG&A as a percent of net sales is
primarily due to the impact of the Company's sales performance during the
quarter. Fixed costs, such as occupancy, increased as a percentage of net sales
as a result of the overall decline in the Company's net sales. In response to
its sales performance the Company reduced certain variable expenses, but
maintained overall marketing spend in order to support sales, keeping SG&A costs
on a per square foot basis generally consistent with the prior period.
Operating income for the thirteen weeks ended October 1, 2005 was approximately
$2.8 million or 0.5% of net sales, compared with $28.4 million, or 4.3% of net
sales, for the same period last year.
Net interest expense for the thirteen weeks ended October 1, 2005 increased to
approximately $1.2 million from $0.6 million during the same period last year
primarily due to lower average investment balances, higher average borrowings
required to fund working capital needs and an increase in average borrowing
interest rates.
The Company's income tax expense was approximately $0.6 million for the thirteen
weeks ended October 1, 2005, compared with $10.6 million for the same period
last year. Due to a decrease in effective foreign tax rates and a change in the
mix of earnings within jurisdictions, the Company's effective tax rate for the
thirteen weeks ended October 1, 2005 declined to 37.7% compared to 38.2% for the
same period last year.
As a result of the factors described above, net income for the thirteen weeks
ended October 1, 2005 was approximately $1.0 million or $0.02 per share on a
fully diluted basis, compared with $17.2 million, or $0.38 per share on a fully
diluted basis for the same period last year.
THIRTY-NINE WEEKS ENDED OCTOBER 1, 2005 COMPARED WITH THIRTY-NINE WEEKS ENDED
OCTOBER 2, 2004
Net sales decreased 0.7% to $1,773.5 million for the thirty-nine weeks ended
October 1, 2005, down from $1,785.7 million for the same period last year,
primarily as a result of weakness in guest traffic. During the thirty-nine weeks
ended October 1, 2005, the Company opened 39 stores and closed four stores
compared with opening 41 stores and closing two stores during the same period
last year.
Comparable net sales for the thirty-nine weeks ended October 1, 2005 decreased
approximately 7.7% as compared with an increase of 1.3% for the same period last
year. The decrease in comparable net sales for the thirty-nine weeks ended
October 1, 2005 is primarily due to a decline in guest traffic resulting from
the underestimated impact of internal merchandise transition processes
undertaken by the Company on guest traffic and lower than expected sales related
to the Company's marketing events.
Gross profit for the thirty-nine weeks ended October 1, 2005 was $731.7 million,
or 41.3% of net sales, compared with $723.0 million, or 40.5% of net sales, for
the same period last year. During the thirty-nine weeks ended October 1, 2005,
gross profit was impacted by improved markup through lower merchandise
acquisition costs largely offset by an increase in markdowns associated with the
acceleration of the Company's transition to newer assortments. In addition, the
impact of EITF 02-16, "Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor" in the same period last year was
to decrease gross profit by approximately 1.0%.
SG&A for the thirty-nine weeks ended October 1, 2005 was $743.4 million, or
42.0% of net sales, compared with $694.4 million, or 38.9% of net sales, for the
same period last year. The increase in SG&A as a percent of net sales is
primarily due to the impact of the Company's sales performance during the
period. Fixed costs, such as occupancy, increased as a percentage of net sales
as a result of the overall decline in the Company's net sales. While the Company
responded with reductions in certain variable expenses, such as store payroll
and corporate overhead, the Company maintained marketing spend to support net
sales.
Operating loss for the thirty-nine weeks ended October 1, 2005 was $11.7
million, or (0.7%) of net sales, compared with operating profit of $28.6
million, or 1.6% of net sales, for the same period last year.
14
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
The Company incurred net interest expense of $2.6 million for the thirty-nine
weeks ended October 1, 2005, compared with $2.4 million for the same period last
year. An increase in interest expense, due to higher average borrowings required
to fund working capital needs and an increase in average borrowing interest
rates, was partially offset by an increase in interest income from short-term
investments due to higher average interest rates.
The Company's income tax benefit was approximately $5.3 million for the
thirty-nine weeks ended October 1, 2005, compared with income tax expense of
$10.0 million for the same period last year. Due to a decrease in effective
foreign tax rates and a change in the mix of earnings within jurisdictions, the
Company's effective tax rate for the thirty-nine weeks ended October 1, 2005
declined to 37.3% compared to 38.2% for the same period last year.
As a result of the factors described above, net loss for the thirty-nine weeks
ended October 1, 2005 was $9.0 million, or $(0.20) per share on a fully diluted
basis, compared with net income of $16.2 million, or $0.35 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 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 which expires November 23, 2009. The Credit Agreement
allows for up to $50 million of additional unsecured indebtedness under lines of
credit outside of the Credit Agreement ("Additional Indebtedness"). Additional
Indebtedness includes a new unsecured credit facility in the amount of $34
million which the Company entered into in July 2005 covering its Canadian
operations. This credit facility expires July 29, 2008. As of October 1, 2005,
the Company was in compliance with its covenants under the Credit Agreement. As
of October 1, 2005, the Company had $30 million in borrowings under the Credit
Agreement at an average interest rate of 4.65% and no borrowings under the
Additional Indebtedness. 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 peak in excess of approximately $175
million for the fourth quarter, and are intended to be used for working capital
and similar general corporate needs. The Company also had $132.5 million of
letters of credit outstanding as of October 1, 2005, which included standby
letters of credit issued primarily under the Credit Agreement and import letters
of credit used for merchandise purchases. The Company is not obligated under any
formal or informal compensating balance requirements. 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 October 1,
2005, January 1, 2005 and October 2, 2004, the Company owed approximately $28.3
million, $65.0 million and $67.4 million, respectively, to GECC under this
program, which was included in accounts payable. GECC and the Company have
determined to terminate the trade payables arrangement effective January 13,
2006. In connection with this termination, the maximum amount under the program
was reduced to $45 million as of September 30, 2005. This amount will be further
reduced to $15 million in December, 2005. All amounts outstanding under the
program are required to be remitted by the Company by December 30, 2005. The
Company, at its discretion, may continue to offer early payment options to
suppliers in exchange for discounted payments. 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.
Net cash used in operating activities for the thirty-nine weeks ended October 1,
2005 was $113.9 million compared with $2.1 million used in operating activities
for the same period last year. The increase in cash used between periods is
primarily due to an increase in inventories due to new store openings, an
increase in income tax payments, the timing of receivable collections for
guest-related credit card and debit card transactions and for landlord
allowances, and the decrease in the Company's net sales and net profitability
compared to last year.
15
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
Net cash used in investing activities for the thirty-nine weeks ended October 1,
2005 was $86.0 million, compared with $86.9 million for the same period last
year. The Company currently estimates capital expenditures will be approximately
$125 million in fiscal 2005, primarily to open approximately 55 new stores, to
maintain existing stores, and for system enhancements.
Net cash provided by financing activities for the thirty-nine weeks ended
October 1, 2005 was $33.0 million compared with $7.5 million for the same period
last year. The increase is primarily due to higher borrowings in order to fund
working capital needs.
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 currently expected
capital expenditures, working capital and business expansion requirements.
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, 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 the levels of
sales, store traffic, the results and success of our holiday selling seasons,
acceptance of product offerings and fashions and our ability to anticipate and
successfully respond to changing consumer tastes and preferences, the impact on
consumer discretionary spending as a result of substantially higher gasoline and
home heating costs, higher interest rates, inflation fears and other negative
economic factors, a highly promotional retail environment, 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, 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.
16
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.
17
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 1, 2005, the Company had $30 million in
borrowings under the Credit Agreement at an average interest rate of 4.65% and
no borrowings under the Additional Indebtedness (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 does
not have a material exposure to foreign currency exchange risks. The Company
operated 29 stores in Canada as of October 1, 2005. The Company believes its
foreign currency translation risk is not material, 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.
As of October 1, 2005 and for the 39-week period then ended the Company did not
hedge against foreign currency risks.
Since fiscal year end 2004, there have been no material changes in market risk
exposures.
18
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
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.
19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 Form of Linens 'n Things, Inc. New Hire Authorization Stock
Option Agreement (performance)(1).
10.2 Form of Linens 'n Things, Inc. New Hire Authorization Restricted
Stock Units Agreement(1).
10.3 Form of Linens 'n Things, Inc. New Hire Authorization Stock
Option Agreement(1).
10.4 Credit Agreement, effective as of July 29, 2005, among Linens 'n
Things, Inc., as Guarantor, Linens 'n Things Canada, National
City Bank, Canada Branch, as lender and Administrative Agent,
and each other lender from time to time party thereto(2).
10.5 Guarantee, dated July 29, 2005, by Linens 'n Things, Inc. (2).
10.6 Employment Agreement, dated August 9, 2005, between Linens 'n
Things, Inc. and Jane Gilmartin(3).
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.
--------------------------------------------------------------------------------
(1) Incorporated by reference to Current Report on Form 8-K filed
July 26, 2005.
(2) Incorporated by reference to Current Report on Form 8-K filed
August 4, 2005.
(3) Incorporated by reference to Current Report on Form 8-K filed
August 12, 2005.
20
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: November 10, 2005 BY: /s/ Norman Axelrod
------------------
NAME: Norman Axelrod
TITLE: Chairman and Chief
Executive Officer
DATED: November 10, 2005 BY: /s/ William T. Giles
--------------------
NAME: William T. Giles
TITLE: Executive Vice President and
Chief Financial Officer
21