10-K 1 g10k-27355a.txt 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------------------------------------------------------- FORM 10-K -------------------------------------------------------------------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001 (NO FEE REQUIRED) 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 (I.R.S. 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ---------------- ---------------------------------------- COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of voting stock held by non-affiliates of the Registrant on March 11, 2002, based on the closing sale price on the New York Stock Exchange on such date, was approximately $1,247 million. The number of outstanding shares of the Registrant's common stock, $0.01 par value, as of March 11, 2002 was 40,659,655. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 29, 2001 are incorporated by reference into Part II, and portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated by reference into Part III.
TABLE OF CONTENTS FORM 10-K ITEM NO. NAME OF ITEM PAGE ------- ------------ ---- PART I Item 1. Business.................................................................................. 3 Item 2. Properties................................................................................ 12 Item 3. Legal Proceedings......................................................................... 14 Item 4. Submission of Matters to a Vote of Security Holders...................................................................... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................................... 15 Item 6. Selected Financial Data................................................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................ 15 Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................................................... 15 Item 8. Financial Statements and Supplementary Data.................................................................................. 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................................ 16 PART III Item 10. Directors and Executive Officers of the Registrant........................................................................ 17 Item 11. Executive Compensation.................................................................... 17 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................................. 17 Item 13. Certain Relationships and Related Transactions.......................................................................... 17 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 18
2 PART I ITEM 1. BUSINESS GENERAL Linens 'n Things, Inc., a Delaware corporation, and its subsidiaries ("Linens 'n Things" or the "Company") is one of the leading, national large format retailers of home textiles, housewares and home accessories operating 343 stores in 43 states and four Canadian provinces as of fiscal year end 2001. The Company's current store prototype is approximately 35,000 gross square feet in size and such stores are located in power strip centers and, to a lesser extent, in malls and as stand-alone stores. The Company's purpose is to make people's lives more enjoyable by making their homes more beautiful, comfortable, organized and efficient. The Company's business strategy is to offer a broad selection of high quality, brand name home furnishings merchandise at exceptional everyday values, provide superior guest service and maintain low operating costs. Linens 'n Things' extensive selection of over 25,000 stock keeping units ("SKUs") in its superstores is driven by the Company's commitment to offering a broad and deep selection of high quality, brand name "linens" (E.G., bedding, towels and table linens) and "things" (E.G., housewares and home accessories) merchandise. Brand names sold by the Company include Wamsutta, Croscill, Nautica, Waverly, Laura Ashley, Royal Velvet, Braun, Krups, All-Clad, Cuisinart, Calphalon and Henckels. The Company also sells an increasing amount of merchandise under its own private label, LNT Home (over 10% of sales), which is designed to supplement the Company's offering of brand name products by offering better quality merchandise at compelling prices. The Company's merchandise offering is coupled with a "won't be undersold" everyday low pricing strategy. From its founding in 1975 through the late 1980's, the Company operated a chain of traditional stores ranging between 7,500 and 10,000 gross square feet in size. Beginning in 1990, the Company introduced its superstore format, which has evolved from 20,000 gross square feet in size to its current size ranging from 25,000 to 50,000 gross square feet. This superstore format offers a broad merchandise selection in a more visually appealing, guest friendly format. The Company's introduction of superstores has resulted in the closing or relocation of most of the Company's traditional stores through fiscal year end 2001. As a result of superstore openings and traditional store closings, the Company's gross square footage has increased from 2.9 million to 12.0 million over the last seven years. Meanwhile, the Company's store base increased from 145 to 343 during this period. As part of this strategy, the Company instituted centralized management and operating programs and invested significant capital in its distribution and management information systems infrastructure in order to control operating expenses as the Company grows. In addition, as part of its strategic initiative to capitalize on customer demand for one-stop shopping destinations, the Company has balanced its merchandise mix from being driven primarily by the "linens" side of its business to a fuller selection of both "linens" and "things." The Company estimates that the "things" side of its business has increased from less than 10% of net sales in fiscal 1991 to over 40% in fiscal 2001. The Company was a wholly owned subsidiary of CVS Corporation ("CVS"), formerly Melville Corporation, until November 26, 1996, when CVS completed an initial public offering ("IPO") of 13,000,000 shares of the Company's common stock, on a pre-split basis. Immediately subsequent to the IPO, CVS owned approximately 32.5% of the Company's common stock. During 1997, CVS sold substantially all of its remaining shares of the Company's common stock in a public offering. At December 31, 1997, CVS held no shares of the Company's common stock. Unless otherwise indicated, all share information is adjusted to reflect the Company's two-for-one common stock split effected in May 1998. 3 EXECUTIVES The following table sets forth information regarding the executive officers of the Company:
NAME AGE POSITION ---- --- -------- Norman Axelrod..................... 49 Chairman and Chief Executive Officer Steven B. Silverstein.............. 42 President Audrey Schlaepfer.................. 47 Executive Vice President, Chief Merchandising Officer William T. Giles................... 42 Senior Vice President, Chief Financial Officer Brian D. Silva..................... 45 Senior Vice President, Human Resources, Administration and Corporate Secretary
Mr. Axelrod has been Chief Executive Officer of the Company since 1988 and was elected to the additional position of Chairman of the Board of Directors of the Company effective as of January 1997. Prior to joining Linens 'n Things, Mr. Axelrod held various management positions at Bloomingdale's from 1976 to 1988 including: Buyer, Divisional Merchandise Manager, Vice President/Merchandise Manager and Senior Vice President/General Merchandise Manager. Mr. Axelrod earned his B.S. from Lehigh University and his M.B.A. from New York University. Mr. Silverstein joined Linens 'n Things in 1992 as Vice President, General Merchandise Manager, was promoted to Senior Vice President, General Merchandise Manager in 1993, was promoted to Executive Vice President, Chief Merchandising Officer in 1998 and was promoted to President in 2001. Prior to joining Linens 'n Things, Mr. Silverstein held various management positions at Bloomingdale's from 1985 to 1992 including Merchandise Vice President of Home Textiles. He received his B.A. from Cornell University and his M.B.A. from Wharton Business School. Ms. Schlaepfer joined Linens 'n Things in 2001 as Executive Vice President and Chief Merchandising Officer. Prior to joining Linens 'n Things, Ms. Schlaepfer held various management positions at Warner Bros. from 1994 to 2001 including: Vice President of Home, Accessories and Gallery; Senior Vice President of Hard Goods and Executive Vice President of Merchandising. Prior to joining Warner Bros. in 1994, Ms. Schlaepfer held several positions at Macy's including Vice President of Merchandising in Private Label Home Furnishings. Ms. Schlaepfer earned her B.A. from Queens College C.U.N.Y. and her M.B.A. from New York University. Mr. Giles joined Linens 'n Things in 1991 as Assistant Controller, was promoted to Vice President, Finance and Controller in 1994, was promoted to Vice President, Chief Financial Officer in 1997 and was promoted to Senior Vice President, Chief Financial Officer in 2000. From 1981 to 1990, Mr. Giles was with PriceWaterhouse LLP. From 1990 to 1991, Mr. Giles held the position of Director of Financial Reporting with Melville Corporation. Mr. Giles is a certified public accountant and member of the American Institute of Certified Public Accountants. He graduated from Alfred University with a B.A. in Accounting and Management. Mr. Silva joined Linens 'n Things in 1995 as Vice President, Human Resources, was promoted to Senior Vice President, Human Resources and Corporate Secretary in 1997 and most recently, assumed the role of Senior Vice President, Human Resources and Administration and Corporate Secretary in 2002. Mr. Silva was Assistant Vice President, Human Resources at The Guardian, an insurance and financial services company, from 1986 to 1995. He holds an M.A. in Organizational Development from Columbia University and an M.S. in Human Resources Management from New York Institute of Technology. Mr. Silva received his B.A. from St. John's University. 4 BUSINESS STRATEGY The Company's business strategy is to offer a broad and deep selection of high quality, brand name merchandise at exceptional everyday values, provide superior guest service and maintain low operating costs. Key elements of the Company's business strategy are: OFFER A BROAD SELECTION OF QUALITY NAME BRANDS AT EXCEPTIONAL EVERYDAY VALUES. Linens 'n Things' merchandising strategy is to offer the largest breadth of selection in high quality, brand name fashion home textiles, housewares and home accessories at exceptional everyday value. The Company offers over 25,000 SKUs across six departments, including bath, home accessories, housewares, storage, top of the bed and window treatments. The Company is one of the largest retailers of branded home furnishings including Wamsutta, Laura Ashley, Royal Velvet, Croscill, Nautica, Braun, Krups, All-Clad, Cuisinart, Calphalon and Henckels. The Company also sells an increasing amount of merchandise under its own private label, LNT Home, which is designed to supplement the Company's offering of brand name products. Merchandise and sample brands offered in each major department are highlighted below:
DEPARTMENT ITEMS SOLD SAMPLE BRANDS ---------- ---------- ------------- Bath Towels, shower curtains, waste baskets, Fieldcrest, Wamsutta, Martex, hampers, bathroom rugs and wall hardware Royal Velvet and Springmaid Home Accessories Decorative pillows, napkins, Waverly, Laura Ashley, tablecloths, placemats, lamps, gifts, picture Umbra and Yankee Candle frames, candles and framed art Housewares Cookware, cutlery, kitchen gadgets, small All-Clad, Braun, Krups, Calphalon, electric appliances (such as blenders and Cuisinart, Henckels, Circulon, Farberware, coffee grinders), dinnerware, flatware and Black & Decker, KitchenAid and OXO glassware Storage Closet-related items (such as hangers, Rubbermaid and Closetmaid organizers and shoe racks) Top of the Bed Sheets, comforters, comforter covers, Wamsutta, Laura Ashley, bedspreads, bed pillows, blankets and Revman, Croscill, Fieldcrest, mattress pads Springmaid, Beautyrest and Nautica Window Treatment Curtains, valances and window hardware Croscill, Wamsutta, Waverly and Laura Ashley
PROVIDE SUPERIOR GUEST SERVICE AND SHOPPING CONVENIENCE. The Company's target customer, or guest, is a 35 to 55 year old female with good to better income level, who is fashion and brand conscious and focused on the home as a reflection of her own individuality. The Company's mission is to exceed the guests' expectations in every store, every day. To enhance guest satisfaction and loyalty, Linens 'n Things strives to provide prompt, knowledgeable sales assistance and enthusiastic guest service. Linens 'n Things offers competitive wages, on-going training and personnel development in order to attract and retain well-qualified, highly motivated employees committed to providing superior guest service. Linens 'n Things endeavors to provide more knowledgeable sales associates by providing training through various programs, which include management training, daily sales associate meetings and in-store product seminars. The Company's superstore format is designed to save the guest time by having merchandise visible and accessible on the selling floor for immediate purchase. The Company believes its knowledgeable sales staff and efficient guest service, create a positive shopping experience that engenders guest loyalty. In response to growing consumer use of the Internet, the Company greatly expanded its e-commerce capability through its website at www.linensnthings.com, in fiscal 2001. The website features on-line access to the Company's nationwide 5 gift registry and allows the guests to purchase many of the Company's most popular items from the convenience of their homes. MAINTAIN LOW OPERATING COSTS.A cornerstone of the Company's business strategy is its commitment to maintain low operating costs. In addition to savings realized through sales volume efficiencies, operational efficiencies are expected to be achieved through the streamlining of the Company's centralized merchandising structure, the use of integrated management information systems and the utilization of the distribution centers. GROWTH STRATEGY SUPERSTORE EXPANSION. The Company operates in a large, highly fragmented industry and has a market share of approximately three percent of the industry. The Company's expansion strategy is to increase market share in existing markets and to penetrate new markets in which the Company believes it can become a leading operator of home furnishings superstores. Markets for new superstores are selected on the basis of demographic factors, such as income, population and number of households. The Company's stores are located predominantly in power strip centers and, to a lesser extent, in malls and as stand-alone stores. The Company generally seeks to operate stores in the United States and Canada in geographic trading areas of 200,000 persons within a ten-mile radius and with demographic characteristics that match the Company's target profile. At fiscal year end 2001, the Company operated 332 stores in 43 states in the United States and 11 stores in four Canadian provinces. The following table sets forth information concerning the Company's expansion program during the past five years:
SQUARE FOOTAGE (IN 000'S) STORE COUNT FISCAL ------------------------- ----------------------- YEAR OPENINGS CLOSINGS BEGIN YEAR END YEAR BEGIN YEAR END YEAR ---- -------- -------- ---------- -------- ---------- -------- 1997 25 18 4,727 5,493 169 176 1998 32 12 5,493 6,487 176 196 1999 43 9 6,487 7,925 196 230 2000 57 4 7,925 9,836 230 283 2001 63 3 9,836 11,980 283 343
INCREASE PRODUCTIVITY OF EXISTING STORE BASE. The Company is committed to increasing its net sales per square foot, inventory turnover ratio and return on invested capital. The Company believes the following initiatives will best position it to achieve these goals: ENHANCE MERCHANDISE MIX AND PRESENTATION. The Company has developed a number of strategic initiatives to stimulate growth of textiles including new product offerings, improving quality assortments and increasing the strength of value offerings. Further, the Company continues to increase sales in its "things" merchandise. The Company expects these opportunities to positively impact net sales per square foot, the average net sales per guest and inventory turnover. The Company is consistently introducing new products that it expects will increase sales and generate additional guest traffic. In addition, the Company intends to continue improving its merchandising presentation techniques, space planning and store layout to further improve the productivity of its existing and future superstore locations. The Company periodically restyles its stores to incorporate new offerings and realigns its store space with its growth segments. The Company expects that the addition of in-store guest services, such as gift registry, will further improve its store productivity. INCREASE OPERATING EFFICIENCIES. As part of its strategy to increase operating efficiencies, the Company has invested significant capital in building a centralized infrastructure, including its two current distribution centers and a management information system, which it believes will allow it to maintain low operating costs as it pursues its superstore expansion strategy. In 1995, the Company began full operation of its first distribution center in Greensboro, North Carolina. In June 1999, the Company began operation of its second 6 distribution center in southern New Jersey. The Company's third distribution center, located in Louisville, Kentucky, is expected to be operational in spring 2002. Management believes that the increased utilization of the distribution centers has resulted in lower average freight costs, more efficient scheduling of inventory shipments to the stores, better in-stock positions and improved information flow. The Company believes that the transfer of inventory receiving responsibilities from the stores to the distribution centers allows the store sales associates to direct their focus to the sales floor, thereby increasing the level of guest service. The warehouse portion of the distribution centers provides the Company flexibility to manage safety stock and inventory flow. The Company's ability to effectively manage its inventory is also enhanced by a centralized merchandising management team and its management information systems which allow the Company to more accurately monitor and better balance inventory levels and improve in-stock positions in its stores. INDUSTRY According to Industry Reports, total industry sales of products sold in the Company's stores, which primarily include home textiles, housewares and decorative furnishings categories, were estimated to be over $75 billion. The market for home furnishings is large, highly-fragmented and competitive. Specialty superstores are one of the fastest growing channels of distribution in this market. In fiscal 2001, the Company estimates that the two largest specialty superstore retailers of fashion home textiles (which includes the Company and Bed Bath & Beyond, Inc.) had aggregate sales representing only approximately 6% of the industry's total sales. The Company competes with many different types of retailers that sell many or most of the items sold by the Company, including department stores, mass merchandisers, specialty retail stores and other retailers. Linens 'n Things generally classifies its competition as follows: DEPARTMENT STORES: This category includes national and regional department stores such as J.C. Penney Company Inc., Sears, Roebuck and Co., Dillard Department Stores, Inc., and the department store chains operated by Federated Department Stores, Inc. and The May Department Store Company. These retailers offer name brand merchandise as well as their own private label furnishings. Department stores also offer certain designer merchandise, such as Ralph Lauren, which is not generally distributed through the specialty and mass merchandise distribution channels. In general, the department stores offer a more limited selection of merchandise than the Company. The prices offered by department stores during off-sale periods generally are significantly higher than those of the Company and during on-sale periods are comparable to or slightly higher than those of the Company. MASS MERCHANDISERS: This category includes companies such as Wal-Mart Stores, Inc., the Target Stores division of Target Corporation and Kmart Corporation. Fashion home furnishings generally represent only a small portion of the total merchandise sales in these stores. The Company's competitive advantage is that these stores generally offer a more limited merchandise selection with fewer high quality name brands and lower quality merchandise at lower price points. In addition, these mass merchandisers typically have more limited customer service staffing than the Company. SPECIALTY STORES/RETAILERS: This category includes large format home furnishings retailers including Bed Bath & Beyond, Inc. and Home Goods, a division of TJX Companies, Inc. and smaller format retailers such as Crate & Barrel and Williams-Sonoma, Inc. The Company estimates that the large format stores range in size from approximately 25,000 to 70,000 gross square feet and offer a home furnishings merchandise selection of approximately 15,000 to 40,000 SKUs. These retailers attempt to develop loyal customers and increase customer traffic by providing a single outlet to satisfy the customer's household needs. The smaller format retailers are typically smaller in size and offer a narrow assortment within a specific niche. The smaller format retailers generally range in size from 2,000 to 20,000 gross square feet. OTHER RETAILERS: This category includes mail order retailers, such as Spiegel Inc. and Domestications, off-price retailers, such as Kohl's Corporation, the T.J. Maxx and Marshall's divisions of the TJX Companies, Inc. and local "mom and pop" retail stores. Both mail order retailers and smaller 7 local retailers generally offer a more limited selection of merchandise. Off-price retailers typically offer close-out or out of season name brand merchandise at competitive prices. MERCHANDISING The Company offers quality home textiles, housewares and home accessories at exceptional everyday values. The Company's strategy consists of a commitment to offer a breadth and depth of selection and to create a merchandise presentation that makes it easy to shop in a visually pleasing environment. The stores feature a "racetrack" layout, enabling the guest to visualize and purchase fully coordinated and accessorized ensembles. Seasonal merchandise is featured at the front of every store to create variety and excitement and to capitalize on key selling seasons including spring, back-to-school and holiday events. The Company's extensive merchandise offering of over 25,000 SKUs enables our guests to select from a wide assortment of styles, brands, colors and designs within each of the Company's major product lines. The Company is committed to maintaining a consistent in-stock inventory position. This presentation of merchandise enhances the guest's impression of a dominant selection of merchandise in an easy-to-shop environment. The Company's broad and deep merchandise offering is coupled with everyday low prices that are generally below regular department store prices and comparable with or slightly below department store sale prices. The Company believes that the uniform application of its everyday low price policy is essential to maintaining the integrity of its strategy. This is an important factor in establishing its reputation as a price leader and in helping to build guest loyalty. In addition, the Company offers, on a regular basis, "special" merchandise which it obtains primarily through opportunistic purchasing to enhance its high value perception among its guests. CUSTOMER SERVICE Linens 'n Things treats every customer as a guest. The Company's philosophy supports enhancing the guest's entire shopping experience and it believes that all elements of service differentiate it from the competition. To facilitate the ease of shopping, the assisted self-service culture is complemented by trained department specialists, zoned floor coverage, product information displays and videos, self-demonstrations and in-store product seminars. This philosophy is designed to encourage guest loyalty as well as to continually develop knowledgeable Company associates. The entire store team is hired and trained to be highly visible in order to assist guests with their selections. The ability to assist guests has been augmented by the transfer of inventory receiving responsibilities from the stores to the distribution centers, allowing sales associates to focus on the sales floor, thereby increasing the level of guest service. Sophisticated management systems that provide efficient guest service and fair return policies are geared toward making each guest's visit a convenient, efficient and pleasant experience. ADVERTISING Advertising programs are focused on building and strengthening the Linens 'n Things brand and image. Because of the Company's commitment to exceptional everyday values, advertising vehicles are aggressively used in positioning the Company among new and existing guests by communicating value, breadth and depth of selection. The Company focuses its advertising programs during key selling seasons such as back-to-school and holidays. To reach its guests, the Company primarily uses full color flyers to best represent the full range of offerings in the stores. These are supplemented by on-going direct marketing initiatives. In addition, the Company utilizes its proprietary marketing database to track the buying habits of its guests. Grand opening promotional events are used to support new stores, with more emphasis placed on those located in new markets. PURCHASING AND SUPPLIERS The merchandising mix for each store is generally selected by the central buying staff. The Company purchases its merchandise from approximately 1,000 suppliers. Springs Industries, Inc., through its various operating companies, 8 supplied approximately 10% of the Company's total purchases in fiscal 2001. In fiscal 2001, the Company purchased a significant number of products from other key suppliers. Due to its breadth and depth of selection, the Company is often one of the largest customers for certain of its vendors. The Company believes that this buying power and its ability to make centralized purchases generally allow it to acquire products at favorable terms. DISTRIBUTION The Company currently operates two distribution centers. The first is located in Greensboro, North Carolina and began operation in 1995 and the second is located in southern New Jersey and began operation in 1999. A third distribution center located in Louisville, Kentucky is expected to be operational in spring 2002. The Company believes the utilization of the centralized distribution centers has resulted in lower average freight expense, more timely control of inventory shipments to stores, better in-stock positions and improved information flow. In addition, transferring inventory receiving responsibilities from the stores to the distribution centers allows the sales associates to direct their focus to the selling floor, thereby enhancing the guests' shopping experience. The Company believes strong distribution support for its stores is a critical element to its growth strategy and is central to its ability to maintain a low cost operating structure. The Company manages the distribution process centrally from its corporate headquarters. Purchase orders issued by Linens 'n Things are electronically transmitted to nearly all of its suppliers. The Company plans to continue its efforts to ship as much merchandise through the distribution centers as possible to ensure all benefits of the Company's logistics strategy are fully leveraged. Continued growth will also facilitate new uses of Electronic Data Interchange technologies between Linens 'n Things and its suppliers to exploit the most productive and beneficial use of its assets and resources. In order to realize greater efficiency, the Company also uses third party delivery services to ship its merchandise from the distribution centers to its stores. MANAGEMENT INFORMATION SYSTEMS Over the last several years, the Company has made significant investments in technology to improve guest service, gain efficiencies and reduce operating costs. Linens 'n Things has installed a customized IBM AS/400 management information system, which integrates all major aspects of the Company's business, including sales, distribution, purchasing, inventory control, merchandise planning and replenishment and financial systems. The Company utilizes POS terminals with price look-up capabilities for both inventory and sales transactions on a SKU basis, which the Company continually upgrades. Information obtained daily by the system results in automatic inventory replenishment in response to specific requirements of each store. The Company believes its management information systems have fully integrated the Company's stores, headquarters and distribution process. The Company continually evaluates and upgrades its management information systems to enhance the quantity, quality and timeliness of information available to management. STORE MANAGEMENT AND OPERATIONS The Company places a strong emphasis on its people, their development and their opportunity for advancement, particularly at the store level. The Company's commitment to maintaining a high internal promotion rate is best exemplified through the practice of opening each new store with a seasoned management team. As a result, the majority of General Managers opening a new store have significant experience with the Company. Additionally, the structured management training program requires that each new manager learn all facets of the business within the framework of a fully operational store. This program includes, among other things, product knowledge, merchandise presentation, business and sales perspective, employee relations and manpower planning, complemented at the associate level through in-store product seminars and POS register training materials. The Company believes that its policy of promoting from within, as well as the opportunities for advancement generated by its ongoing store expansion program, serve as incentives to attract and retain quality individuals. 9 Linens 'n Things' stores are open seven days a week, generally from 9:30 a.m. to 9:30 p.m. Monday through Saturday and 11:00 a.m. to 6:00 p.m. on Sunday, unless affected by local laws. INFLATION AND SEASONALITY The Company does not believe that its operating results have been materially affected by inflation during the past year. There can be no assurance, however, that the Company's operating results will not be affected by inflation in the future. The Company's business is subject to substantial seasonal variations. Historically, the Company has realized a significant portion of its net sales and substantially all of its net income for the year during the third and fourth quarters. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings. The Company believes this is the general pattern associated with its segment of the retail industry and expects this pattern will continue in the future. Consequently, comparisons between quarters are not necessarily meaningful and the results for any quarter are not necessarily indicative of future results. EMPLOYEES As of December 29, 2001, the Company employed approximately 14,700 individuals of whom approximately 6,500 were full-time employees and 8,200 were part-time employees. None of the Company's employees is represented by a union, and the Company believes that it has a good relationship with its employees. COMPETITION The Company believes that it will continue to face competition from retailers in all four of the categories referred to in "Business--Industry." The home textiles industry is becoming increasingly competitive and as the Company expands into new markets, it faces new competitors. The visibility of the Company may encourage additional competitors or existing competitors to imitate the Company's format and methods. The Company believes that the ability to compete successfully in its markets is determined by several factors, including price, breadth and quality of product selection, in-stock availability of merchandise, effective merchandise presentation, guest service and superior store locations. The Company believes that it is well positioned to compete on the basis of these factors. Nevertheless, there can be no assurance that any or all of the factors that enable the Company to compete favorably will not be adopted by companies having greater financial and other resources than the Company. TRADE NAMES AND SERVICE MARKS The Company uses the "Linens 'n Things" and "LNT Home" names as trade names and as service marks in connection with retail services. The Company has registered the "Linens 'n Things" and "LNT" logos as trademarks and service marks with the United States Patent and Trademark Office and the Canada Patent and Trademark Office. Management believes that the name "Linens 'n Things" is an important element of the Company's business. FORWARD-LOOKING STATEMENTS This Form 10-K (including the information incorporated herein by reference) contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. The statements are made a number of times and may be identified by such forward-looking terminology as "expect," "believe," "may," "will," "could," "intend," "plan," "target" and similar statements or variations of such terms. All of our "outlook" information constitutes forward-looking information. All such forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company and involve certain significant risks and uncertainties, including levels of sales, store traffic, acceptance of product offerings and fashions, the success of our new business concepts and seasonal concepts, the success of our new store openings, competitive pressures from other home furnishings retailers, the success of the Canadian expansion, availability of suitable future store locations, schedule of store expansion, the impact of the bankruptcies and consolidations in our industry, the impact on consumer spending as a result of a slowing consumer economy and a highly promotional retail environment. Actual 10 results may differ materially from such 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-1 as filed with the Securities and Exchange Commission on May 29, 1997, and may be contained in subsequent reports filed with the Securities and Exchange Commission. You are urged to consider all such factors. In light of the uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a representation that such forward-looking matters will be achieved. The Company assumes no obligation for updating any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. 11 ITEM 2. PROPERTIES The Company's corporate headquarters are located at 6 Brighton Road in Clifton, New Jersey. As of December 29, 2001 the Company operated 343 retail stores in 43 states and four Canadian provinces. The Company's superstores range in size from 25,000 to 50,000 gross square feet but are predominately between 30,000 and 40,000 gross square feet. The Company has two smaller formatted stores which are less than 20,000 gross square feet. The Company currently leases all of its existing stores and expects that its policy of leasing rather than owning will continue as it expands. The Company's leases provide for original lease terms that generally range from 10 to 20 years and certain of the leases provide for renewal options that range from 5 to 15 years at increased rents. Certain of the leases provide for scheduled rent increases and certain of the leases provide for contingent rent (based upon store sales exceeding stipulated amounts). CVS guarantees the leases of certain stores that were entered into prior to the Company's 1996 IPO. Following the IPO, CVS no longer entered into commitments to guarantee future leases on behalf of the Company. The Company owns its distribution center in Greensboro, North Carolina, which is approximately 330,000 square feet. The Company leases its distribution centers in southern New Jersey, which is approximately 260,000 square feet, and Louisville, Kentucky, which is approximately 600,000 square feet. Both the New Jersey and Kentucky distribution centers can be expanded. The table below sets forth the number and location of stores in the United States as of December 29, 2001:
STATE NUMBER OF STORES STATE NUMBER OF STORES ----- ---------------- ----- ---------------- Alabama 4 Nevada 2 Arizona 8 New Hampshire 5 Arkansas 1 New Jersey 12 California 43 New Mexico 3 Colorado 6 New York 20 Connecticut 12 North Carolina 9 Florida 27 North Dakota 1 Georgia 13 Ohio 10 Idaho 1 Oklahoma 2 Illinois 17 Oregon 4 Indiana 5 Pennsylvania 9 Kansas 3 Rhode Island 1 Kentucky 2 South Carolina 2 Louisiana 3 Tennessee 4 Maine 3 Texas 32 Maryland 3 Utah 3 Massachusetts 11 Vermont 1 Michigan 10 Virginia 12 Minnesota 6 Washington 10 Missouri 5 West Virginia 1 Montana 1 Wisconsin 3 Nebraska 2 12 The table below sets forth the number and location of stores in Canada as of December 29, 2001: PROVINCE NUMBER OF STORES -------- ---------------- Alberta 3 British Columbia 4 Ontario 3 Manitoba 1
13 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, with the exception of the matter discussed in the next paragraph, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company had been named as a defendant in California litigation in which the court certified the case as a class action on behalf of certain managers of Company stores located in California seeking overtime pay, together with class action claims on behalf of certain former employees seeking accrued vacation pay. In the second quarter of fiscal 2001, the Company recorded a pre-tax charge of $4.0 million ($2.5 million after-tax) related to the settlement payments, attorneys' fees and estimated expenses of administering the settlement. On October 24, 2001, the court gave preliminary approval to a settlement reached in the case. An order granting final approval of class action settlement was signed on December 19, 2001. The Company admitted no liability in connection with this settlement. Payment of these amounts has been made in early 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended December 29, 2001. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Linens `n Things' common stock is listed on the New York Stock Exchange. Its trading symbol is LIN. At December 29, 2001 there were approximately 8,994 beneficial shareholders. The high and low trading price of the Company's common stock for each quarter is as follows: FOR FISCAL 2001 HIGH LOW --------------- ---- --- First Quarter.................................. $37.88 $24.81 Second Quarter................................. $32.76 $24.00 Third Quarter.................................. $28.16 $17.37 Fourth Quarter................................. $25.91 $17.72 FOR FISCAL 2000 HIGH LOW --------------- ---- --- First Quarter.................................. $34.38 $17.94 Second Quarter................................ $35.94 $23.19 Third Quarter.................................. $36.38 $23.88 Fourth Quarter................................. $33.50 $20.00 The Company paid no dividends on its common stock in fiscal 2001 and 2000. Management of the Company currently intends to retain its earnings to finance the growth and development of its business and does not currently anticipate paying cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the future earnings, operations, capital requirements and financial condition of the Company, satisfying all requirements under its bank financing agreement and such other factors as the Company's Board of Directors may consider relevant. In addition, the Company's revolving credit facility currently limits the amount of cash dividends. See "Management's Discussion and Analysis--Liquidity and Capital Resources" under Item 7. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated by reference to the Five-Year Financial Summary appearing on page 14 of the Company's Annual Report to Shareholders for the fiscal year ended December 29, 2001. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference to pages 15 through 21 of the Company's Annual Report to Shareholders for the fiscal year ended December 29, 2001. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is incorporated by reference to page 19 of the Company's Annual Report to Shareholders for the fiscal year ended December 29, 2001 under the heading "Management's Discussion and Analysis - Market Risk Disclosure". 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and financial information required by this Item are incorporated by reference to pages 22 through 36 of the Company's Annual Report to Shareholders for the fiscal year ended December 29, 2001. These financial statements are indexed under Item 14(a)(1). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or reportable disagreements between the Company and its independent public accountants on matters of accounting principles or practices for fiscal 2001. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item concerning the Company's directors is incorporated by reference to the Company's Proxy Statement, under the heading "Election of Directors," to be mailed to shareholders for the Company's 2002 Annual Meeting of Shareholders. The information required by this Item concerning the Company's executive officers is contained in Part I, Item 1, "Business - Executives." The information required by this Item with respect to Section 16 reporting is incorporated by reference to the Company's Proxy Statement for the Company's 2002 Annual Meeting of Shareholders, under the heading "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders, under the headings "Director Compensation; Attendance;" Committees of the Board of Directors" and "Executive Compensation," other than information included therein under the sub captions "Report on Compensation of Executive Officers" and "Performance Graph" which are not incorporated herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders, under the heading "Beneficial Ownership of Common Stock." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will, if applicable, be included in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders, and, if so included, is incorporated by reference in this Item. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report. 1. FINANCIAL STATEMENTS: The following Financial Statements are incorporated by reference to the Company's Annual Report to Shareholders for the fiscal year ended December 29, 2001:
PAGES IN ANNUAL REPORT TO SHAREHOLDERS ---------------------- Consolidated Statements of Operations - for the fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000 22 Consolidated Balance Sheets - as of December 29, 2001 and December 30, 2000...................................... 23 Consolidated Statements of Shareholders' Equity - for the fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000 24 Consolidated Statements of Cash Flows - for the fiscal years ended December 29, 2001, December 30, 2000 and January 1, 2000 25 Notes to Consolidated Financial Statements......................................... 26 through 34 Management's Responsibility for Financial Reporting................................ 35 Independent Auditors' Report....................................................... 36
2. SCHEDULES: None 3. EXHIBITS: The Exhibits on the accompanying Exhibit Index are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K. 18
EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 Amended and Restated Certificate of Incorporation, as amended 1,3 3.2 By-Laws of the Registrant1 4 Specimen Certificate of Common Stock1 10.1 Transitional Services Agreement between the Registrant and CVS Corporation1 10.2 Stockholder Agreement between the Registrant and CVS Corporation1 10.3 Tax Disaffiliation Agreement between the Registrant and CVS Corporation1 10.4 Employment Agreement with Norman Axelrod*5 10.5 Employment Agreement with Steven B. Silverstein*5 10.6 Employment Agreement with Hugh J. Scullin**5 10.7 Employment Agreement with Brian Silva*5 10.8 Employment Agreement with William T. Giles *5 10.9 Employment Agreement with Audrey Schlaepfer*8 10.10 Split Dollar Agreement and Collateral Assignment between the Registrant and Norman Axelrod*4 10.11 Split Dollar Agreement and Collateral Assignment between the Registrant and Steven B. Silverstein*8 10.12 1996 Incentive Compensation Plan*1 10.13 1996 Non-Employee Director Stock Plan*1 10.14 Supplemental Executive Retirement Plan*4,8 10.15 2000 Stock Award and Incentive Plan 7 10.16 Deferred Compensation Plan*11 10.17 LNT Broad-Based Equity Plan*10 10.18 Credit Agreement dated as of October 20, 2000 among the Registrant, Fleet Bank and the lenders signatory thereto 6,9 13 Annual Report to Shareholders for 2002 fiscal year*** 21 List of Subsidiaries2 23a Consent of KPMG LLP2
-------------------------------------------------------------------------------- 1 Incorporated by reference to the Exhibits filed with the Company's Registration Statement on Form S-1 (No. 333-12267), which Registration Statement became effective on November 26, 1996. 2 Filed with this Form 10-K. 3 Incorporated by reference to Current Report on Form 8-K dated May 5, 1999. 4 Incorporated by reference to Current Report on Form 8-K dated March 27, 2000. 5 Incorporated by reference to Current Report on Form 8-K dated March 29, 2001. 6 Incorporated by reference to Current Report on Form 8-K dated November 6, 2000. 7 Incorporated by reference to Registration Statement on Form S-8 dated July 31, 2000 (File No. 333-42874). 8 Incorporated by reference to a Current Report on Form 8-K dated March 26, 2002. 9 Incorporated by reference to a Quarterly Report on Form 10-Q dated November 13, 2001. 10 Incorporated by reference to a Registration Statement on Form S-8 dated June 13, 2001 (File No. 333-62984). 11 Incorporated by reference to a Registration Statement on Form S-8 dated June 2, 1998 (File No. 333-55803). -------------------------------------------------------------------------------- * Management contract or compensatory plan or arrangement. ** Based on changes in the structure of management's responsibilities, this position is no longer deemed an "executive officer" position for fiscal 2002 and thereafter. 19 *** With the exception of the information incorporated by reference to the Annual Report to Shareholders in Items 6, 7, 7A, and 8 of Part II and Item 14 of Part IV of this Form 10-K, the Annual Report to Shareholders is not deemed filed as part of this Form 10-K. (b) Reports on Form 8-K: Not Applicable 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. LINENS 'N THINGS, INC. (Registrant) By: /s/ Norman Axelrod --------------------- NORMAN AXELROD CHAIRMAN AND CHIEF EXECUTIVE OFFICER Dated: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on its behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Norman Axelrod Chairman and Chief March 28, 2002 ------------------------------------------- Executive Officer Norman Axelrod /s/ Philip E. Beekman Director March 28, 2002 ------------------------------------------- Philip E. Beekman /s/ Harold F. Compton Director March 28, 2002 ------------------------------------------- Harold F. Compton /s/ Stanley P. Goldstein Director March 28, 2002 ------------------------------------------- Stanley P. Goldstein /s/ Morton E. Handel Director March 28, 2002 ------------------------------------------- Morton E. Handel /s/ William T. Giles Senior Vice President, March 28, 2002 ------------------------------------------- Chief Financial Officer William T. Giles (Principal Financial Officer and Principal Accounting Officer)
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FIVE-YEAR FINANCIAL SUMMARY (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA) FISCAL YEAR ENDED DECEMBER 29, DECEMBER 30, JANUARY 1, DECEMBER 31, DECEMBER 31, 20012 2000 2000 1998 1997 ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA: Net sales.......................................... $1,823,803 $1,572,576 $1,300,632 $1,066,194 $874,224 Operating profit................................... 52,480 107,092 84,552 61,988 45,507 Net income ........................................ 29,749 64,937 52,052 38,062 25,790 Net income per share - basic1...................... $ 0.73 $ 1.63 $ 1.32 $ 0.98 $ 0.67 Basic weighted-average shares outstanding1................................... 40,508 39,785 39,339 38,895 38,578 Net income per share - diluted1.................... $ 0.72 $ 1.60 $ 1.27 $ 0.94 $ 0.65 Diluted weighted-average shares outstanding1.................................. 41,193 40,712 40,907 40,407 39,537 BALANCE SHEET DATA: Total assets....................................... $ 927,439 $ 821,557 $ 679,916 $ 560,844 $472,099 Working capital.................................... 228,078 226,694 181,380 154,893 123,375 Shareholders' equity............................... $ 498,215 $ 458,994 $ 383,962 $ 323,576 $280,035 SELECTED OPERATING DATA: Number of stores................................... 343 283 230 196 176 Total gross square footage (000's)................. 11,980 9,836 7,925 6,487 5,493 (Decrease) increase in comparable store net sales.................................. (2.4%) 3.7% 5.4% 8.3% 6.6%
1 UNLESS OTHERWISE STATED, ALL REFERENCES TO COMMON SHARES OUTSTANDING AND INCOME PER SHARE IN THE CONSOLIDATED FINANCIAL STATEMENTS, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE ADJUSTED TO REFLECT THE COMPANY'S TWO-FOR-ONE COMMON STOCK SPLIT EFFECTED IN MAY 1998. 2 FISCAL 2001 OPERATING RESULTS INCLUDE NON-COMPARABLE ITEMS OF $26.2 MILLION, AFTER-TAX, OR $0.64 PER SHARE ON A FULLY DILUTED BASIS. 22
Management's Discussion and Analysis of the $37.8 million, $34.0 million is included in Financial Condition and Results of Operations restructuring and asset impairment charge and $3.8 million ---------------------------------------------------- is recorded in cost of sales. The estimated after-tax cash portion, which will be paid in cash, is approximately $15.2 CONSOLIDATED RESULTS OF OPERATIONS million and the after-tax non-cash portion of the charge is approximately $8.5 million. The following table sets forth the percentage of net sales for certain items included in the Company's consolidated A pre-tax reserve of $20.5 million was established for statements of operations for the periods indicated: estimated lease commitments for stores to be closed. This reserve is included in accrued expenses. The reserve DEC. 29, DEC. 30, JAN. 1, considers estimated sublease income. All of the stores were Fiscal Year Ended 2001 2000 2000 leased and as such, the Company will not be responsible for ================================================================ the disposal of property other than fixtures. A pre-tax reserve of $9.5 million has been recorded for fixed asset PERCENTAGE OF NET SALES impairments for these stores. The fixed asset impairments Net sales.................... 100.0% 100.0% 100.0% represent fixtures and leasehold improvements. This charge Cost of sales, including was recorded as a reduction of property and equipment. buying and distribution Additionally, a pre-tax reserve of $4.0 million has been costs.................... 59.3 59.1 59.4 established for other estimated miscellaneous store closing --------- --------- -------- costs. A pre-tax reserve of $3.8 million was recorded in Gross profit................. 40.7 40.9 40.6 cost of sales for estimated inventory markdowns below cost Selling, general and for the stores to be closed. administrative expenses.. 35.7 34.1 34.1 Restructuring and asset Certain components of the restructuring and asset impairment impairment charge 1.9 -- -- charge are based upon estimates and may be subject to change Litigation charge............ 0.2 -- -- in future periods. These stores are scheduled to begin --------- --------- -------- closing in February 2002. Operating profit............. 2.9 6.8 6.5 Interest expense, net........ 0.2 0.1 0.0 The closing of these 17 stores is currently expected to --------- --------- -------- increase future diluted earnings per share by approximately $0.07 on an annualized basis, of which approximately $0.02 Income before income taxes... 2.7 6.7 6.5 to $0.03 per share is currently expected to be realized in Provision for income taxes... 1.1 2.6 2.5 fiscal 2002. --------- --------- -------- Net income................... 1.6% 4.1% 4.0% LITIGATION CHARGE NON-COMPARABLE ITEMS The Company had been named as a defendant in California litigation in which the court certified the case as a class The Company's 2001 results were impacted by non-comparable action on behalf of certain managers of Company stores items totaling $41.8 million, pre-tax, as follows: located in California seeking overtime pay, together with class action claims on behalf of certain former employees RESTRUCTURING AND ASSET IMPAIRMENT CHARGE seeking accrued vacation pay. In the second quarter of fiscal 2001, the Company recorded a pre-tax charge of $4.0 During the fourth quarter of fiscal 2001, the Company million ($2.5 million after-tax) related to the settlement developed and committed to a strategic initiative designed payments, attorneys' fees, and estimated to improve store performance and profitability. This initiative calls for the closing of 17 under-performing stores which did not meet the Company's profit objectives. These 17 stores generated sales of approximately $70 million in fiscal 2001, or less than 4% of total sales. These stores are geographically dispersed and there are no concentrated market closings. The closing of these stores will enable the Company to redeploy its financial, human and infrastructure resources to more productive stores. 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. Of
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expenses of administering the settlement. On October 24, year end 2000. Store square footage increased 21.8% to 2001, the court gave preliminary approval to a settlement 11,980,000 at December 29, 2001 compared with 9,836,000 at reached in the case. An order granting final approval of December 30, 2000. class action settlement was signed on December 19, 2001. The Company admitted no liability in connection with this Comparable store net sales declined 2.4% in fiscal 2001 settlement. Payment of these amounts has been made in early compared with an increase of 3.7% in fiscal 2000. The fiscal 2002. Company's average net sales per store was $5.8 million in fiscal 2001 compared to $6.2 million in fiscal 2000. The The following table shows the proforma effect of decline in comparable store net sales and average net sales non-comparable items on the year ended December 29, 2001. per store in fiscal 2001 was primarily attributed to a decline in consumer traffic due to the slowing economy as well as the productivity of our newer comparable stores (in millions, except per share data) opened in 2000, which performed below the Company's sales EXCLUDING targets. NON- AS NON-COMPARABLE COMPARABLE Net sales consist of gross sales to customers net of REPORTED ITEMS ITEMS returns, discounts and incentives. Provisions for estimated ---------------------------------------------------------------- future sales returns when material are recorded in the period that the related sales are recorded. The Company Net sales.............. $1,823.8 -- $1,823.8 determines the amount of provision based on historical Gross profit........... 742.5 (3.8) 746.3 information. Sales discounts, coupons and other similar Selling, general and incentives are recorded as a reduction of sales revenue in administrative the period when the related sales are recorded. expenses.............. 652.0 -- 652.0 Restructuring and asset The Company's core business strategy is to offer a broad and impairment charge..... 34.0 34.0 -- deep selection of high quality brand name "linens" (e.g., Litigation charge...... 4.0 4.0 -- bedding, towels and table linens) and "things" (e.g., ---------- ----------- ----------- housewares and home accessories) merchandise. The Company Operating profit....... 52.5 (41.8) 94.3 has balanced its merchandise mix from being driven primarily Interest expense, net.. 3.9 -- 3.9 by the "linens" side of its business to a fuller selection ---------- ----------- ----------- of "linens" and "things." The Company estimates that the Income before income "things" side of its business has increased from less than taxes................. 48.6 (41.8) 90.4 10% of net sales in fiscal 1991 to over 40% in fiscal 2001. Provision for income For the fiscal year ended 2001, net sales of "linens" taxes................. 18.9 (15.6) 34.5 merchandise increased approximately 10% over the prior year, ---------- ----------- ----------- while net sales of "things" merchandise increased Net income............. $29.7 ($26.2) $55.9 approximately 20% over the prior year. The greater increase ========== =========== =========== in net sales for "things" merchandise primarily resulted Basic earnings per from the continued expansion of product categories within share.................. $0.73 ($0.65) $1.38 the "things" business. ========== =========== =========== Diluted earnings per GROSS PROFIT share................. $0.72 ($0.64) $1.36 ========== =========== =========== Gross profit for fiscal 2001 was $746.3 million, or 40.9% of net sales, compared with $643.3 million, or 40.9% of net To provide a more meaningful comparison of operating sales, in fiscal 2000. Gross margin performance between fiscal years, the remaining Consolidated Results of Operations discussion excludes the impact of non-comparable items. FISCAL YEAR ENDED DECEMBER 29, 2001 COMPARED WITH FISCAL YEAR ENDED DECEMBER 30, 2000 NET SALES Net sales for fiscal 2001 were $1,823.8 million, an increase of 16.0% over fiscal 2000 sales of $1,572.6 million, primarily as a result of new store openings. The Company opened 63 superstores and closed three stores in fiscal 2001, as compared with opening 57 superstores and closing four stores in fiscal 2000. At fiscal year end 2001, the Company operated 343 stores, including 11 stores in Canada, as compared with 283 stores at fiscal
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as a percentage of net sales remained the same principally FISCAL YEAR ENDED DECEMBER 30, 2000 COMPARED WITH FISCAL due to improved mark-on as a result of product mix and the YEAR ENDED JANUARY 1, 2000 increased penetration of the Company's proprietary products, which represented over 10% of total net sales in fiscal NET SALES 2001, as well as lower freight expenses. This was offset by an increase in markdowns primarily as a result of an Net sales for fiscal 2000 were $1,572.6 million, an increase increase in promotional activity. of 20.9% over fiscal 1999 sales of $1,300.6 million, primarily as a result of new store openings as well as EXPENSES comparable store net sales increases. The Company opened 57 superstores and closed four stores in fiscal 2000, compared The Company's selling, general and administrative ("SG&A") with opening 43 superstores and closing nine stores in expenses consist of store selling expenses, occupancy costs, fiscal 1999. At fiscal year end 2000, the Company operated advertising expenses and corporate office expenses. SG&A 283 stores compared with 230 stores at fiscal year end 1999. expenses for fiscal 2001 were $652.0 million, or 35.7% of Store square footage increased 24.1% to 9,836,000 at net sales, as compared with $536.2 million, or 34.1% of net December 30, 2000 compared with 7,925,000 at January 1, sales, in fiscal 2000. The increase as a percentage of net 2000. Comparable store net sales increased 3.7% in fiscal sales is attributable to the de-leveraging in the Company's 2000 compared with 5.4% in fiscal 1999. Comparable store net operating expenses, primarily occupancy costs, reflecting sales were driven predominately by higher consumer traffic. lower sales productivity. However, the increase was partially offset by the leverage of corporate office The Company's average net sales per store was $6.2 million expenses. in fiscal 2000 and fiscal 1999. For the fiscal year ended 2000, net sales of "linens" merchandise increased Operating profit for fiscal 2001 was $94.3 million, or 5.2% approximately 18% over the prior year, while net sales of of net sales, down from $107.1 million, or 6.8% of net sales "things" merchandise increased approximately 25% over the during fiscal 2000. prior year. The greater increase in net sales for "things" merchandise primarily resulted from the continued expansion Net interest expense in fiscal 2001 increased to $3.9 in this product category. million from $1.9 million during fiscal 2000. This increase was due to a higher net average loan balance than in fiscal GROSS PROFIT 2000 in order to fund the Company's operations. Gross profit for fiscal 2000 was $643.3 million, or 40.9% of The Company's income tax expense for fiscal 2001 was $34.5 net sales, compared with $528.2 million, or 40.6% of net million, compared with $40.2 million during fiscal 2000. The sales, in fiscal 1999. This increase as a percentage of net Company's effective tax rate was 38.2% in fiscal 2001 and in sales resulted from overall improved selling mix, increased fiscal 2000. penetration of seasonal and proprietary product and improvements in buying. In addition, the Company had lower freight and related distribution costs as a percentage of NET INCOME net sales as a result of the leveraging of the Company's centralized distribution network. As a result of the factors described above, net income for fiscal 2001 excluding non-comparable items was $55.9 EXPENSES million, or $1.36 per share on a fully diluted basis, compared with $64.9 million, or $1.60 per share on a fully SG&A expenses for fiscal 2000 were $536.2 million, or 34.1% diluted basis in fiscal 2000. of net sales, compared with
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$443.6 million, or 34.1% of net sales, in fiscal 1999. stipulated in the Credit Agreement, including a fixed rate Corporate office and promotional expenses were leveraged, plus LIBOR based rate. The Credit Agreement contains certain which were offset by investments in store payroll in order financial covenants, including those relating to the to continue to improve our guest service levels. maintenance of a minimum tangible net worth, a minimum fixed charge coverage ratio, and a maximum leverage ratio. At the Operating profit for fiscal 2000 increased to $107.1 end of fiscal 2001, the Company was in compliance with the million, or 6.8% of net sales, up from $84.6 million, or terms of the Credit Agreement. The Credit Agreement also 6.5% of net sales during fiscal 1999. contains a covenant that limits the amount of cash dividends, pursuant to which the amount of dividends may not Net interest expense in fiscal 2000 increased to $1.9 exceed the sum of $50 million plus on a cumulative basis an million, up from $43,000 during fiscal 1999. This increase amount equal to 50% of the consolidated net income for each was due to higher net average loan balances and higher fiscal quarter, commencing with the fiscal quarter ending interest rates during fiscal 2000. September 30, 2000. The Company has never paid cash dividends. At various times throughout fiscal 2001 and 2000, The Company's income tax expense for fiscal 2000 was $40.2 the Company borrowed against the Credit Agreement and the million, compared with $32.5 million during fiscal 1999. The 1998 Credit Agreement for seasonal working capital needs. At Company's effective tax rate was 38.2% in fiscal 2000 the end of fiscal 2001, the Company had $29.7 million of compared with 38.4% in fiscal 1999. borrowings at a weighted average interest rate of 3.1%. At the end of fiscal 2000, the Company had $3.9 million of NET INCOME borrowings at a weighted average interest rate of 7.5%. In addition, as of December 29, 2001 and December 30, 2000, the Net income for fiscal 2000 was $64.9 million, or 4.1% of net Company had $21.6 million and $22.3 million, respectively, sales, compared with $52.1 million, or 4.0% of net sales in of letters of credit outstanding, which were primarily used fiscal 1999. for merchandise purchases. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the fiscal year ended 2001 was $44.3 million compared with $54.1 The Company's capital requirements are primarily for new million for the same period in fiscal 2000. The change in store expenditures, new store inventory purchases and net cash used in operating activities was primarily seasonal working capital. These requirements have been attributed to the timing of vendor payments impacted by a funded through a combination of internally generated cash decline in inventory turn. Net cash provided by operating flow from operations, credit extended by suppliers and activities is our principal source of liquidity and short-term borrowings. therefore, a decline in demand for the Company's product offerings could impact the availability of funds for store The Company has available a $150 million senior revolving expansion. credit facility agreement (the "Credit Agreement") with third party institutional lenders, expiring October 20, Net cash used in investing activities for the fiscal year 2003. The Credit Agreement also allows for up to $40 million ended 2001 was $100.0 million, compared with $70.4 million in borrowings from uncommitted lines of credit outside of for the same period in fiscal 2000. Fiscal year 2001 the Credit Agreement. The Credit Agreement replaced the 1998 included an increase in capital expenditures associated with $90 million revolving line of credit which allowed for up to the opening of 63 new stores compared with 57 new stores in $25 million in borrowings from uncommitted lines of credit fiscal 2000, capital expenditures related to the Company's (the "1998 Credit Agreement"). Interest on all borrowings is third distribution center which is scheduled to open determined based upon several alternative rates as
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in the Spring 2002 and an increase in the number of store remodels in fiscal 2001 compared with fiscal 2000. The MARKET RISK DISCLOSURE Company currently estimates capital expenditures will be approximately $75 million to $80 million in fiscal 2002, The Company continuously evaluates the market risk primarily for an estimated 50 new stores, store remodels, associated with its financial instruments. Market risks the third distribution center and system enhancements. relating to the Company's operations result primarily from changes in interest rates and foreign exchange rates. The Net cash provided by financing activities for the fiscal Company does not engage in financial transactions for year ended 2001 was $32.7 million compared with $9.2 million trading or speculative purposes. for the same period in fiscal 2000. The increase was principally due to an increase in short-term borrowings to INTEREST RATE RISK fund the Company's operations. The Company's financial instruments include cash and cash equivalents and short-term borrowings. The Company's As discussed in Note 9 to the Consolidated Financial obligations are short-term in nature and generally have less Statements, the Company is committed for future minimum than a 30-day commitment. The Company is exposed to interest rental payments primarily for its retail stores for amounts, rate risks primarily through borrowings under the Credit which aggregate approximately $2.0 billion. In addition, as Agreement. Interest on all borrowings is based upon several of January 30, 2002, the Company had fully executed leases alternative rates as stipulated in the Credit Agreement, for 44 stores planned to open in fiscal 2002. including a fixed rate plus LIBOR based rate. At December 29, 2001, the Company had $29.7 million in borrowings under Management regularly reviews and evaluates its liquidity and the Credit Agreement at an average interest rate of 3.1% capital needs. The Company experiences peak periods for its (see Note 7 to the Consolidated Financial Statements). The cash needs during the course of its fiscal year, with such Company believes that its interest rate risk is minimal as a peak periods generally expected during the second quarter hypothetical 10% increase or decrease in interest rates in and fourth quarter of the current fiscal year. As the the associated debt's variable rate would not materially Company's business continues to grow and its current store affect the Company's results of operations or cash flows. expansion plan implemented, such peak periods may require The Company does not use derivative financial instruments in increases in the amounts available under its credit facility its investment portfolio. from those currently existing and/or other debt or equity funding. The Company currently believes it would have access FOREIGN CURRENCY RISK to necessary additional debt and/or capital markets funding The Company enters into some purchase obligations outside of as such needs may require. Management currently believes the United States, which are predominately settled in U.S. that the Company's cash flows from operations, credit dollars and, therefore, the Company has only minimal extended by suppliers, its existing credit facilities, exposure to foreign currency exchange risks. The Company uncommitted lines of credit, and such other or additional does not hedge against foreign currency risks and believes debt or capital markets funding as it may seek to obtain, that foreign currency exchange risk is immaterial. will be sufficient to fund its expected capital expenditure, working capital and non-acquisition business expansion In addition, the Company operated 11 stores in Canada as of requirements for the foreseeable future. December 29, 2001. 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 of operations or cash flows.
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records free merchandise in cost of goods sold as required INFLATION AND SEASONALITY by the new EITF consensus. The Company does not believe that its operating results have been materially affected by inflation during the preceding In July 2001, the FASB issued SFAS No. 142, "Goodwill and three years. There can be no assurance, however, that the Intangible Assets" ("SFAS No. 142"), which supercedes APB Company's operating results will not be affected by Opinion No. 17, "Intangible Assets". SFAS No. 142 eliminated inflation in the future. the current requirement to amortize goodwill and intangible assets with indefinite useful lives, addresses the The Company's business is subject to substantial seasonal amortization of intangible assets with finite useful lives variations. Historically, the Company has realized a and addresses the impairment testing and recognition for significant portion of its net sales and net income for the goodwill and intangible assets. The Company is required to year during the third and fourth quarters. The Company's adopt SFAS No. 142 in fiscal 2002. As a result of adopting quarterly results of operations may also fluctuate SFAS No. 142, the Company will no longer amortize goodwill, significantly as a result of a variety of other factors, which was approximately $850,000 annually. including the timing of new store openings. The Company believes this is the general pattern associated with its In June 2001, the FASB issued SFAS No. 143, "Accounting for segment of the retail industry and expects this pattern will Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 continue in the future. Consequently, comparisons between addresses financial accounting and reporting for obligations quarters are not necessarily meaningful and the results for associated with the retirement of tangible long-lived assets any quarter are not necessarily indicative of future and the associated asset retirement costs. This statement results. requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which RECENT ACCOUNTING PRONOUNCEMENTS it is incurred if a reasonable estimate of fair value can be made. This statement is effective for the Company in fiscal The Company has adopted Statement of Financial Standards 2003. The Company already recognizes the fair value of a ("SFAS") No. 133, "Accounting for Derivative Instruments and liability for an asset retirement obligation in the period Hedging Activities" ("SFAS No. 133"). This statement was in which it is incurred. effective for the first quarter of fiscal years beginning after June 15, 2000. For the Company, implementation was In August 2001, the FASB issued SFAS No. 144, "Accounting required for the first quarter of fiscal 2001. The for the Impairment or Disposal of Long-Lived Assets" ("SFAS implementation of SFAS No. 133 did not have a significant No. 144"), which supersedes both FASB Statement No. 121, effect on the Company's results of operations or financial "Accounting for the Impairment of Long-Lived Assets and for position. Long-Lived Assets to Be Disposed Of" ("SFAS No. 121") and the accounting and reporting provisions of APB Opinion No. At a recent FASB Emerging Issues Task Force ("EITF") 30, "Reporting the Results of Operations-Reporting the meeting, a consensus was reached with respect to the issue Effects of Disposal of a Segment of a Business, and of "Accounting for Certain Sales Incentives," including Extraordinary, Unusual and Infrequently Occurring Events and point of sale coupons, rebates and free merchandise. The Transactions" ("APB No. 30") for the disposal of a segment consensus included a conclusion that the value of such sales of a business. The fundamental provisions in SFAS No. 121 incentives that result in a reduction of the price paid by for recognizing and measuring impairment losses on the customer should be netted against sales and not long-lived assets held for use and long-lived assets classified as a sales or marketing expense. In April 2001, the EITF delayed the effective date for this consensus to 2002. The Company already includes such sales incentives as a reduction of sales and
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to be disposed of by sales have been retained by SFAS No. management determines to close a store. Such estimates may 144. SFAS No. 144 also retains the basic provisions of APB be subject to change should actual results differ. No. 30 on how to present discontinued operations in the income statement and also broadens that presentation to include a component of an entity (rather than a segment of a FORWARD-LOOKING STATEMENTS business). An impairment assessment under SFAS No. 144 will no longer result in a write-down of goodwill. Instead, This annual report contains forward-looking statements goodwill will be evaluated for impairment under SFAS No. within the meaning of The Private Securities Litigation 142, Goodwill and Other Intangible Assets. Reform Act of 1995. The statements are made a number of times and may be identified by such forward-looking SFAS No. 144 is effective for the Company in fiscal 2002. terminology as "expect," "believe," "may," "will," "could", The Company does not expect the adoption of SFAS No. 144 for "intend," "plan," "target" and similar statements or long-lived assets held for use to have a material impact on variations of such terms. All of our "outlook" information the Company's financial statements as the impairment constitutes forward-looking information. All such assessment under SFAS No. 144 is predominately unchanged forward-looking statements are based on our current from SFAS No. 121. expectations, assumptions, estimates and projections about our Company and involve certain significant risks and CRITICAL ACCOUNTING POLICIES uncertainties, including levels of sales, store traffic, acceptance of product offerings and fashions, the success of The preparation of financial statements in conformity with our new business concepts and seasonal concepts, the success accounting principles generally accepted in the United of our new store openings, competitive pressures from other States of America requires management to make estimates and home furnishings retailers, the success of the Canadian assumptions that affect the reported amounts of assets and expansion, availability of suitable future store locations, liabilities and disclosure of contingent assets and schedule of store expansion and of planned closings, the liabilities at the date of the financial statements and the impact of the bankruptcies and consolidations in our reported amounts and timing of revenues and of expenses industry, the impact on consumer spending as a result of a during the reporting period. The Company's management slowing consumer economy and a highly promotional retail believes the following critical accounting policies, among environment. Actual results may differ materially from such others, involve significant estimates and judgments inherent forward-looking statements. These and other important risk in the preparation of the consolidated financial statements. factors are included in the "Risk Factors" section of the The Company estimates future sales returns, and when Company's Registration Statement on Form S-1 as filed with material, records a provision in the period that the related the Securities and Exchange Commission on May 29, 1997, and sales are recorded based on historical information. Should may be contained in subsequent reports filed with the actual returns differ from the Company's estimates, Securities and Exchange Commission. You are urged to revisions to estimated sales return may be required. The consider all such factors. In light of the uncertainty Company records estimated inventory shrink expense based inherent in such forward-looking statements, you should not upon historical experience between the dates of physical consider their inclusion to be a representation that such inventories. Although inventory shrink rates have not forward-looking matters will be achieved. The Company fluctuated significantly over the past several years, should assumes no obligation for updating any such forward-looking actual inventory shrink rates differ from the Company's statements to reflect actual results, changes in assumptions estimates, revisions to inventory shrink expense may be or changes in other factors affecting such forward-looking required. The Company records estimated store closure costs statements. in the period in which
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CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ==================================================================================================================================== DECEMBER 29, DECEMBER 30, JANUARY 1, FISCAL YEAR ENDED 2001 2000 2000 ==================================================================================================================================== NET SALES................................................. $1,823,803 $1,572,576 $1,300,632 Cost of sales, including buying and distribution costs..................................... 1,081,259 929,305 772,453 --------------------- --------------------- ------------------- GROSS PROFIT.............................................. 742,544 643,271 528,179 Selling, general and administrative expenses.............. 652,058 536,179 443,627 Restructuring and asset impairment charge................. 34,006 -- -- Litigation charge......................................... 4,000 -- -- --------------------- --------------------- ------------------- OPERATING PROFIT.......................................... 52,480 107,092 84,552 Interest income.................................... (27) (198) (368) Interest expense................................... 3,897 2,139 411 --------------------- --------------------- ------------------- Interest expense, net..................................... 3,870 1,941 43 --------------------- --------------------- ------------------- Income before income taxes................................ 48,610 105,151 84,509 Provision for income taxes................................ 18,861 40,214 32,457 --------------------- --------------------- ------------------- NET INCOME................................................ $ 29,749 $ 64,937 $ 52,052 ===================== ===================== =================== Per share of common stock: BASIC Net income................................................ $ 0.73 $ 1.63 $ 1.32 Weighted average shares outstanding....................... 40,508 39,785 39,339 DILUTED Net income................................................ $ 0.72 $ 1.60 $ 1.27 Weighted average shares outstanding....................... 41,193 40,712 40,907
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 30
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ==================================================================================================================================== DECEMBER 29, DECEMBER 30, 2001 2000 ==================================================================================================================================== ASSETS CURRENT ASSETS: Cash and cash equivalents................................................ $ 15,437 $ 38,524 Accounts receivable...................................................... 40,835 31,508 Inventories.............................................................. 492,307 437,258 Prepaid expenses and other current assets................................ 15,691 13,233 Current deferred taxes................................................... 23,524 12,127 -------------------- -------------------- TOTAL CURRENT ASSETS....................................................... 587,794 532,650 Property and equipment, net.............................................. 312,403 262,409 Goodwill, net of accumulated amortization of $9,064 at December 29, 2001 and $8,214 at December 30, 2000.................. 18,126 18,977 Deferred charges and other non-current assets, net....................... 9,116 7,521 -------------------- -------------------- TOTAL ASSETS................................................................... $ 927,439 $ 821,557 ==================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable......................................................... $ 180,840 $ 183,473 Accrued expenses and other current liabilities........................... 149,201 118,580 Short-term borrowings ................................................... 29,675 3,903 -------------------- -------------------- TOTAL CURRENT LIABILITIES.................................................. 359,716 305,956 Deferred income taxes and other long-term liabilities.................... 69,508 56,607 SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding........................................... -- -- Common stock, $0.01 par value; 135,000,000 shares authorized; 40,872,008 shares issued and 40,624,374 shares outstanding at December 29, 2001; 40,173,441 shares issued and 40,059,126 shares outstanding at December 30, 2000.............................................................. 409 402 Additional paid-in capital............................................... 245,234 231,547 Retained earnings........................................................ 259,935 230,186 Accumulated other comprehensive (loss) income ........................... (417) 289 Treasury stock, at cost; 247,634 shares at December 29, 2001 and 114,315 shares at December 30, 2000........................................... (6,946) (3,430) -------------------- -------------------- TOTAL SHAREHOLDERS' EQUITY................................................. 498,215 458,994 -------------------- -------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................... $ 927,439 $ 821,557 ==================== ====================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK ADDITIONAL FOREIGN CURRENCY ------------ PAID-IN RETAINED TRANSLATION SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT NUMBER OF SHARES) BALANCE AT DECEMBER 31, 1998.............. 39,037,948 $391 $211,378 $113,197 $ -- Net income................................ -- -- -- 52,052 -- Common stock issued under stock incentive plans........................ 463,978 5 9,373 -- -- Purchase of treasury stock................ (23,144) -- -- -- -- ------------------ ---------- -------------- -------------- ----------------- BALANCE AT JANUARY 1, 2000................ 39,478,782 396 220,751 165,249 -- Net income................................ -- -- -- 64,937 -- Currency translation adjustment........... -- -- -- -- 289 Comprehensive earnings............... Common stock issued under stock incentive plans........................ 618,182 6 10,796 -- -- Purchase of treasury stock................ (37,838) -- -- -- -- ------------------ ---------- -------------- -------------- ----------------- BALANCE AT DECEMBER 30, 2000.............. 40,059,126 402 231,547 230,186 289 Net income................................ -- -- -- 29,749 -- Currency translation adjustment........... -- -- -- -- (706) Comprehensive earnings............... Common stock issued under stock incentive plans........................ 698,567 7 13,687 -- -- Purchase of treasury stock................ (133,319) -- -- -- -- ------------------ ---------- -------------- -------------- ----------------- BALANCE AT DECEMBER 29, 2001.............. 40,624,374 $409 $245,234 $259,935 $(417) ================== ========== ============== ============== ================= ------------------------------------- TREASURY STOCK TOTAL ------------------------------------- BALANCE AT DECEMBER 31, 1998.............. $(1,390) $323,576 Net income................................ -- 52,052 Common stock issued under stock incentive plans........................ -- 9,378 Purchase of treasury stock................ (1,044) (1,044) ------------ --------------- BALANCE AT JANUARY 1, 2000................ (2,434) 383,962 Net income................................ -- 64,937 Currency translation adjustment........... -- 289 --------------- Comprehensive earnings............... 65,226 Common stock issued under stock incentive plans........................ -- 10,802 Purchase of treasury stock................ (996) (996) ------------ --------------- BALANCE AT DECEMBER 30, 2000.............. (3,430) 458,994 Net income................................ -- 29,749 Currency translation adjustment........... -- (706) --------------- Comprehensive earnings............... 29,043 Common stock issued under stock incentive plans........................ -- 13,694 Purchase of treasury stock................ (3,516) (3,516) ------------ --------------- BALANCE AT DECEMBER 29, 2001.............. $(6,946) $498,215 ============ ===============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 32
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) ---------------------------------------------------- DECEMBER 29, 2001 DECEMBER 30, JANUARY 1, FISCAL YEAR ENDED 2000 2000 ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.......................................... $ 29,749 $ 64,937 $ 52,052 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................... 40,113 32,432 26,521 Deferred income taxes............................. (6,025) 5,075 3,784 Loss on disposal of assets........................ 1,335 807 868 Federal tax benefit from common stock issued under stock incentive plans........... 3,671 4,480 4,669 Restructuring and asset impairment charge......... 37,837 -- -- Changes in assets and liabilities: (Increase) decrease in accounts receivable...... (9,364) (10,663) 1,978 Increase in inventories......................... (59,720) (94,450) (71,292) Increase in prepaid expenses and other current assets.............................. (1,532) (2,470) (1,551) Increase in deferred charges and other non-current assets................. (2,060) (2,489) (1,062) (Decrease) increase in accounts payable......... (2,510) 38,556 29,130 Increase in accrued expenses and other liabilities..................... 12,764 17,904 24,480 ----------------------- ---------------------- -------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES........... 44,258 54,119 69,577 ----------------------- ---------------------- -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment................. (100,028) (70,405) (70,129) ----------------------- ---------------------- -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock issued under stock incentive plans............................. 10,023 6,322 4,709 Purchase of treasury stock.......................... (3,516) (996) (1,044) Increase in short-term borrowings................... 26,182 3,857 -- ----------------------- ---------------------- -------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES........... 32,689 9,183 3,665 ----------------------- ---------------------- -------------------- Effect of exchange rate changes on cash and cash equivalents....................................... (6) (124) -- Net (decrease) increase in cash and cash equivalents (23,087) (7,227) 3,113 Cash and cash equivalents at beginning of year........................................... 38,524 45,751 42,638 ----------------------- ---------------------- -------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR............... $ 15,437 $ 38,524 $ 45,751 ======================= ====================== ==================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest (net of amounts capitalized)............... $ 4,059 $ 2,500 $ 747 Income taxes........................................ $ 23,514 $ 25,102 $ 20,889
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------ STORE OPENING AND CLOSING COSTS 1. BUSINESS New store opening costs are charged to expense as incurred. In the event a store is closed before its lease has expired, Linens 'n Things, Inc. and its subsidiaries (collectively the remaining lease obligation, less anticipated sublease the "Company") operate in one segment, the retail industry, rental income and asset impairment charges related to and had 343 stores in 43 states across the United States and improvements and fixtures and other miscellaneous closing four Provinces in Canada as of the fiscal year ended costs is provided for in the period in which management December 29, 2001. The Company's stores emphasize a broad determines to close a store. assortment of home textiles, housewares and home accessories, carrying both national brand and private label For fiscal 2001, the Company recorded a pre-tax goods. restructuring and asset impairment charge of $37.8 million related to the accelerated closing of 17 under-performing 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES stores (See Note 3 to the Consolidated Financial Statements). For fiscal 2000 and 1999, all expenditures BASIS OF PRESENTATION related to store closings had been made and therefore, there were no reserves for store closings at the end of fiscal The consolidated financial statements include those of 2000 or 1999. Linens 'n Things, Inc. and its wholly-owned subsidiaries. All significant inter-company balances and transactions have FINANCIAL INSTRUMENTS been eliminated. Cash and cash equivalents, accounts receivable, accounts FISCAL PERIODS payable and accrued expenses are reflected in the consolidated financial statements at carrying values which The Company utilizes a 52/53-week period ending on the approximate fair value due to the short-term nature of these Saturday nearest the last day of December. Accordingly, instruments. The carrying value of the Company's borrowings fiscal 2001, 2000 and 1999 were 52-week periods, which ended approximates the fair value based on the current rates on December 29, 2001, December 30, 2000 and January 1, 2000, available to the Company for similar instruments. respectively. CASH AND CASH EQUIVALENTS REVENUE RECOGNITION Cash equivalents are considered, in general, to be those The Company recognizes revenue at the time of sale of securities with maturities of three months or less when merchandise to its customers. Provisions for estimated purchased. future sales returns when material are recorded in the period that the related sales are recorded. The Company PROPERTY AND EQUIPMENT determines the amount of provision based on historical information. Sales discounts, coupons and other similar Property and equipment are stated at cost. Depreciation is incentives are recorded as a reduction of sales revenue in computed on a straight-line basis over the estimated useful the period when the related sales are recorded. lives of the assets (40 years for buildings and 5 to 15 years for furniture, fixtures and equipment). Capitalized INVENTORIES software costs are amortized on a straight-line basis over their estimated useful lives of 3 to 5 years, beginning in Inventories consist of finished goods merchandise purchased the year placed in service. Leasehold improvements are from domestic and foreign vendors and are carried at the amortized over the shorter of the related lease term or the lower of cost or market; cost is determined by the retail economic lives of the related assets. inventory method of accounting. Amounts are removed from inventory at the average cost method. Maintenance and repairs are charged directly to expense as incurred. Major renewals or replacements are capitalized DEFERRED RENT after making the necessary adjustments to the asset and accumulated depreciation accounts of the items renewed or The Company accrues for scheduled rent increases contained replaced. in its leases on a straight-line basis over the non-cancelable lease term.
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IMPAIRMENT OF LONG-LIVED ASSETS using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are Long-lived assets, including fixed assets and goodwill, are expected to be recovered or settled. The effect on deferred reviewed for impairment whenever events or changes in tax assets and liabilities of a change in statutory tax circumstances indicate that the carrying amount of an asset rates is recognized in income in the period that includes may not be recoverable. If events or changes in the enactment date. circumstances indicate that the carrying amount of an asset may not be recoverable, the Company estimates the STOCK BASED COMPENSATION undiscounted future cash flows to result from the use of the asset and its ultimate disposition. If the sum of the The Company grants stock options and restricted stock for a undiscounted cash flows is less than the carrying value, the fixed number of shares to employees. The exercise prices of Company recognizes an impairment loss, measured as the the stock options are equal to the fair market value of the amount by which the carrying value exceeds the fair value of underlying shares at the date of grant. The Company has the asset. Fair value would generally be determined by adopted the disclosure provisions of Statement of Financial market value. Assets to be disposed of are reported at the Accounting Standards No. 123 ("SFAS No. 123"), "Accounting lower of the carrying amount or fair value less costs to for Stock-Based Compensation". In accordance with the sell. provisions of SFAS No. 123, the Company accounts for stock option grants and restricted stock grants in accordance with DEFERRED CHARGES Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, the Deferred charges, principally beneficial leasehold costs, Company does not recognize compensation expense for stock are amortized on a straight-line basis, generally over the option grants and amortizes restricted stock grants at fair remaining life of the leasehold acquired. market value over specified vesting periods. GOODWILL EARNINGS PER SHARE Prior to fiscal 2002, the excess of acquisition costs over The Company presents earnings per share on a "basic" and the fair value of net assets acquired was amortized on a "diluted" basis. Basic earnings per share is computed by straight-line basis over 32 years. Beginning in fiscal 2002, dividing net income by the weighted- average number of the Company will adopt SFAS No. 142, "Goodwill and shares outstanding during the period. Diluted earnings per Intangible Assets" which no longer permits the amortization share is computed by dividing net income by the weighted of goodwill. average number of shares outstanding adjusted for dilutive common stock equivalents. COSTS OF SALES The calculation of basic and diluted earnings per share In addition to the cost of inventory sold, the Company ("EPS") for fiscal 2001, 2000 and 1999 is as follows (in includes its buying and distribution expenses in its cost of thousands, except per share amounts): sales. Buying expenses include all direct and indirect costs to procure merchandise. Distribution expenses include the FISCAL YEAR ENDED cost of operating the Company's distribution centers and ------------------------------------------------------------ freight expense related to transporting merchandise. 2001 2000 1999 ------------------------------------------------------------ ADVERTISING COSTS Net Income............ $29,749 $64,937 $52,052 ======== ========== ========== The Company expenses the production costs of advertising at Average Shares the commencement date of the advertisement. Advertising Outstanding: costs were $49.7 million, $39.6 million and $35.6 million Basic 40,508 39,785 39,339 for fiscal years 2001, 2000 and 1999, respectively. Effect of outstanding stock options and INCOME TAXES restricted stock grants 685 927 1,568 Deferred tax assets and liabilities are recognized for the -------- ---------- ---------- future tax consequences attributable to differences between Diluted............... 41,193 40,712 40,907 the financial statement carrying amounts of existing assets ======== ========== ========== and liabilities and their respective tax bases. Deferred tax Earnings per share assets and liabilities are measured Basic................ $.0.73 $ 1.63 $ 1.32 ======== ========== ========== Diluted.............. $.0.72 $ 1.60 $ 1.27 ======== ========== ========== Options for which the exercise price was greater than the average market price of common shares as of the fiscal years ended 2001, 2000 and 1999 were not included in the computation of diluted earnings per share. These consisted of options totaling 1,495,000 shares, 1,543,000 shares and 43,000 shares, respectively. Restricted stock grants excluded from the computation of diluted earnings
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per share due to the application of the treasury stock In connection with this initiative, the Company recorded a method were 13,000 shares , 20,000 shares and 3,000 shares pre-tax restructuring and asset impairment charge of $37.8 for fiscal years ended 2001, 2000 and 1999, respectively. million ($23.7 million after-tax) in the fourth quarter of fiscal 2001. Of the $37.8 million, $34.0 million is included USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS in restructuring and asset impairment charge and $3.8 million is recorded in cost of sales. The estimated The preparation of financial statements in conformity with after-tax cash portion, which will be paid in cash, is accounting principles generally accepted in the United approximately $15.2 million and the after-tax non-cash States of America requires management to make estimates and portion of the charge is approximately $8.5 million. assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and A pre-tax reserve of $20.5 million was established for liabilities at the date of the financial statements and the estimated lease commitments for stores to be closed. This reported amounts and timing of revenues and of expenses reserve is included in accrued expenses. The reserve during the reporting period. The Company's management considers estimated sublease income. All of the stores were believes the following critical accounting policies, among leased and as such, the Company will not be responsible for others, involve significant estimates and judgments inherent the disposal of property other than fixtures. A pre-tax in the preparation of the consolidated financial statements. reserve of $9.5 million has been recorded for fixed asset The Company estimates future sales returns and, when impairments for these stores. The fixed asset impairments material, records a provision in the period that the related represent fixtures and leasehold improvements. This charge sales are recorded based on historical information. Should was recorded as a reduction of property and equipment. actual returns differ from the Company's estimates, Additionally, a pre-tax reserve of $4.0 million has been revisions to estimated sales return may be required. The established for other estimated miscellaneous store closing Company records estimated inventory shrink expense based costs. A pre-tax reserve of $3.8 million was recorded in upon historical experience between the dates of physical cost of sales for estimated inventory markdowns below cost inventories. Although inventory shrink rates have not for the stores to be closed. fluctuated significantly over the past several years, should actual inventory shrink rates differ from the Company's estimates, revisions to inventory shrink expense may be 4. ACCOUNTS RECEIVABLE required. The Company records estimated store closure costs in the period in which management determines to close a FISCAL YEAR ENDED store. Such estimates may be subject to change should actual ACCOUNTS RECEIVABLE, CONSISTED OF results differ. THE FOLLOWING (IN THOUSANDS): 2001 2000 ------------------------------------------------------------- RECLASSIFICATIONS Credit card settlements due.......... $16,839 $ 9,489 Due from landlords and vendors....... 17,161 20,934 Certain reclassifications were made to the fiscal 2000 and Other................................ 6,835 1,085 1999 consolidated financial statements in order to conform ---------- ---------- to the fiscal 2001 presentation. $40,835 $31,508 ------------------------------------------------------------- 3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGE Due to the short-term nature and probability of collection, During the fourth quarter of fiscal 2001, the Company no allowance for doubtful accounts was deemed necessary as developed and committed to a strategic initiative designed of December 29, 2001 and December 30, 2000. to improve store performance and profitability. This initiative calls for the closing of 17 under-performing stores, which did not meet the Company's profit objectives. 5. PROPERTY AND EQUIPMENT These 17 stores generated sales of approximately $70 million in fiscal 2001, or less than 4% of total sales.These stores FISCAL YEAR ENDED are geographically dispersed and there are no concentrated PROPERTY AND EQUIPMENT CONSISTED market closings. The closing of these stores will enable the OF THE FOLLOWING (IN THOUSANDS): 2001 2000 Company to redeploy its financial, human and infrastructure ------------------------------------------------------------ resources to more productive stores. Land $ 430 $ 430 Building........................... 4,760 4,760 Furniture, fixtures and equipment.. 345,917 283,608 Leasehold improvements............. 96,154 83,480 Computer software.................. 11,317 9,905 ------------ ------------ 458,578 382,183 Less: Accumulated depreciation and amortization ............ 146,175 119,774 ------------ ------------ $ 312,403 $ 262,409 ------------------------------------------------------------
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6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 8. DEFERRED INCOME TAXES AND OTHER LONG-TERM FISCAL YEAR ENDED LIABILITIES ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES CONSISTED OF THE 2001 2000 ------------------------------------------------------------ FOLLOWING (IN THOUSANDS): DEFERRED INCOME TAXES AND OTHER FISCAL YEAR ENDED --------------------------------------------------------------- LONG-TERM LIABILITIES CONSISTED OF Restructuring reserve.................. $24,501 $ -- THE FOLLOWING (IN THOUSANDS): Other taxes payable.............. 24,296 18,383 Income taxes payable............. 19,029 22,403 2001 2000 Salaries and employee benefits... 15,522 16,834 ------------------------------------------------------------ Other............................ 65,853 60,960 Deferred income taxes............ $35,555 $30,198 ---------- ---------- Deferred rent.................... 23,336 18,988 $149,201 $118,580 Other............................ 10,617 7,421 -------------------------------------- ---------- -- ---------- ------- -------- $69,508 $56,607 Included in "other" are miscellaneous store operating and ------------------------------------------------------------ corporate office accrued expenses. 9. LEASES 7. SHORT-TERM BORROWING ARRANGEMENTS The Company has non-cancelable operating leases, primarily for retail stores, which expire through 2022. The leases The Company has available a $150 million senior revolving generally contain renewal options for periods ranging from 5 credit facility agreement (the "Credit Agreement") with to 15 years and require the Company to pay costs such as third party institutional lenders, expiring October 20, real estate taxes and common area maintenance. Contingent 2003. The Credit Agreement also allows for up to $40 million rentals are paid based on a percentage of gross sales. Net in borrowings from uncommitted lines of credit outside of rental expense for all operating leases was as follows (in the Credit Agreement. The Credit Agreement replaced the 1998 thousands): $90 million revolving line of credit, which allowed for up to $25 million in borrowings from uncommitted lines of FISCAL YEAR ENDED credit (the "1998 Credit Agreement"). Interest on all -------------------------------------------------------------- borrowings is determined based upon several alternative 2001 2000 1999 rates as stipulated in the Credit Agreement, including a -------------------------------------------------------------- fixed rate plus LIBOR based rate. The Credit Agreement Minimum rentals..... $158,614 $126,286 $102,612 contains certain financial covenants, including those Contingent rentals.. 184 151 212 relating to the maintenance of a minimum tangible net worth, ----------- ---------- ---------- a minimum fixed charge coverage ratio, and a maximum 158,798 126,437 102,824 leverage ratio. At the end of fiscal 2001, the Company was Less: sublease rentals 2,032 1,617 1,614 in compliance with the terms of the Credit Agreement. The ----------- ---------- ---------- Credit Agreement also contains a covenant that limits the $156,766 $124,820 $101,210 amount of cash dividends, pursuant to which the amount of cash dividends may not exceed the sum of $50 million plus on -------------------------------------------------------------- a cumulative basis an amount equal to 50% of the consolidated net income for each fiscal quarter, commencing At fiscal year end 2001, the future minimum rental payments with the fiscal quarter ending September 30, 2000. The required under operating leases and the future minimum Company has never paid cash dividends. At various times sublease rentals excluding lease obligations for closed throughout fiscal 2001 and 2000, the Company borrowed stores and stores planned to be closed were as follows (in against the Credit Agreement and the 1998 Credit Agreement thousands): for seasonal working capital needs. At the end of fiscal 2001, the Company had $29.7 million of borrowings at a FISCAL YEAR weighted average interest rate of 3.1%. At the end of fiscal ----------------------------------------------------------- 2000, the Company had $3.9 million of borrowings at a 2002 $ 165,610 weighted average interest rate of 7.5%. In addition, as of 2003 163,471 December 29, 2001 and December 30, 2000, the Company had 2004 159,964 $21.6 million and $22.3 million, respectively, of letters of 2005 156,534 credit outstanding, which were primarily used for 2006 154,837 merchandise purchases. The Company is not obligated under Thereafter................................ 1,234,837 any formal or informal compensating balance requirements. ------------- $ 2,035,253 ------------- Total future minimum sublease rentals..... $ 25,267 ------------- ----------------------------------------------------------- In addition, as of January 30, 2002, the Company had fully executed leases for 44 stores planned to open in fiscal 2002. 10. STOCK INCENTIVE PLANS The Company has adopted the 2000 Stock Award and Incentive Plan (the "2000 Plan") and the Broad-Based Equity Plan (collectively, the "Plans"). The 2000 Plan provides for
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the granting of options, restricted stock grants and other At fiscal year end 2001, 1,027,744 stock options were stock-based awards (collectively, "awards") to key employees outstanding under the Broad-Based Equity Plan. During fiscal and non-officer directors. The 2000 Plan replaces both the 2001, 506,921 stock options were granted, 2,387 stock Company's 1996 Incentive Compensation Plan (the "1996 Plan") options were exercised and 62,325 stock options were and the 1996 Non-Employee Directors' Stock Plan (the canceled, and 137,946 stock options were exercisable at "Directors' Plan"). Therefore, no future awards will be made fiscal year end 2001 under the Broad- Based Equity Plan. under the 1996 Plan and the Directors' Plan, although outstanding awards under the 1996 Plan and the Directors' The following tables summarize information about stock Plan will continue to be in effect. Under the 2000 Plan, an option transactions for the Plans, the 1996 Plan and the aggregate of 2,000,000 shares (plus any shares under Directors' Plan: outstanding awards under the 1996 Plan and the Directors' Plan which become available for further grants) is available WEIGHTED- for issuance of awards. Under the Broad-Based Equity Plan a NUMBER OF AVERAGE total of 4,000,000 shares are currently available for SHARES EXERCISE PRICE issuance of awards to regular full time employees (excluding =============================================================== all executive officers). Balance at December 31, 1998 2,981,833 $16.39 Stock options under the Plans are granted with exercise Options granted 785,450 $31.52 prices at the fair market value of the underlying shares at Options exercised 390,038 $10.10 the date of grant. The right to exercise options generally Options canceled 68,413 $18.48 commences one to five years after the grant date, and in all ----------- --------------- events, the options expire ten years after the grant date. Balance at January 1, 2000 3,308,832 $20.71 Restrictions on restricted stock grants lapse over vesting ----------- --------------- periods of up to five years. Restricted stock grants are considered outstanding as of the grant date for purposes of Options granted 1,097,060 $21.77 computing diluted EPS and are considered outstanding upon Options exercised 537,449 $10.13 vesting for purposes of computing basic EPS. Options canceled 75,401 $27.18 ----------- --------------- At fiscal year end 2001, 13,982 restricted stock grants were Balance at December 30, 2000 3,793,042 $22.43 outstanding under the 1996 Plan and the Directors' Plan. ----------- --------------- During fiscal 2001, 121,577 restricted stock grants were released, no restricted stock grants were awarded and no Options granted 1,211,579 $18.83 restricted stock grants were canceled under the 1996 Plan Options exercised 474,174 $9.17 and the Directors' Plan. Options canceled 107,814 $25.22 ----------- --------------- At fiscal year end 2001, 113,134 restricted stock grants Balance at December 29, 2001 4,422,633 $22.91 were outstanding under the 2000 Plan. During fiscal 2001, ----------- --------------- 12,660 restricted stock grants were released, 28,667 restricted stock grants were awarded and no restricted stock =============================================================== grants were canceled. Options Exercisable as of: January 1, 2000 1,055,448 $12.25 At fiscal year end 2001, 2,145,581 stock options were December 30, 2000 1,212,408 $14.35 outstanding under the 1996 Plan. During fiscal 2001, no December 29, 2001 1,480,783 $21.08 stock options were granted, 471,787 stock options were =============================================================== exercised and 44,339 stock options were canceled, and 1,168,287 stock options were exercisable at fiscal year end Options Outstanding 2001 under the 1996 Plan. At fiscal year end 2001, 54,800 ----------------------------------------------- stock options were outstanding under the Directors' Plan. WEIGHTED- During fiscal 2001, no stock options were granted, no stock AVERAGE options were exercised and no stock options were canceled, REMAINING and 48,800 stock options were exercisable at fiscal year end OUTSTANDING CONTRACTUAL WEIGHTED- 2001 under the Directors' Plan. RANGE OF AS OF LIFE AVERAGE EXERCISE PRICE DECEMBER 29, 2001 (IN YEARS) EXERCISE PRICE At fiscal year end 2001, 1,194,508 stock options were =============== =================== ============ ============== outstanding under the 2000 Plan. During fiscal 2001, 704,658 stock options were granted, no stock options were exercised $7.75 -$9.75 250,184 4.9 $7.83 and 1,150 stock options were canceled, and 125,750 stock $9.76 -$14.62 9,300 5.3 $12.16 options were exercisable at fiscal year end 2001 under the $14.63-$19.50 1,561,123 8.7 $18.42 2000 Plan. $19.51-$24.37 1,042,773 8.8 $21.55 $24.38-$29.25 79,709 6.2 $26.86 $29.26-$34.12 1,448,444 7.4 $30.83 $34.13-$39.00 10,350 7.9 $36.32 $39.01-$43.87 13,850 7.4 $39.82 $43.88-$48.75 6,900 7.3 $44.88 ------------------- ------------ ------------- TOTAL 4,422,633 8.0 $22.91 =================== ============ =============
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Options Exercisable The effects of applying SFAS No. 123 in this pro forma ------------------------------------ disclosure are not necessarily indicative of future amounts. OUTSTANDING AS 11. EMPLOYEE BENEFIT PLANS RANGE OF OF DECEMBER WEIGHTED-AVERAGE EXERCISE PRICE 29, 2001 EXERCISE PRICE The Company has a 401(k) savings plan. Company contributions ============== ================= ================== to the plan amounted to approximately $2.4 million, $2.2 million and $1.9 million for fiscal years 2001, 2000 and $7.75 -$9.75 250,184 $7.83 1999, respectively. $9.76 -$14.62 9,300 $12.16 $14.63-$19.50 454,239 $17.44 Effective July 1, 1999, the Company established a defined $19.51-$24.37 253,221 $21.44 benefit Supplemental Executive Retirement Plan ("SERP"). The $24.38-$29.25 41,609 $26.36 SERP, which in part is funded with the cash surrender values $29.26-$34.12 455,481 $30.76 of certain life insurance policies, provides eligible $34.13-$39.00 4,750 $36.74 executives with supplemental pension benefits, in addition $39.01-$43.87 7,500 $39.80 to amounts received under the Company's other retirement $43.88-$48.75 4,499 $44.87 plan. Under the terms of the SERP, upon termination of ----------------- ------------------ employment with the Company, eligible participants will be Total 1,480,783 $21.08 entitled to the benefit amount as defined under the SERP ================= ================== beginning at or after age 55. The Company recorded expenses related to the SERP of approximately $20,000 for fiscal The fair value of each stock option grant and restricted 2001, $34,000 for fiscal 2000 and $34,000 for fiscal 1999. stock grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following 12. INCOME TAXES assumptions for grants: Deferred income taxes reflect the net tax effects of FISCAL YEAR ENDED 2001 2000 1999 temporary differences between the carrying amounts of assets -------------------------------- -------- -------- -------- and liabilities for financial reporting purposes and the Expected life (years).......... 8.0 6.0 4.5 amounts used for income tax purposes. Significant components Expected volatility............ 49.9% 55.0% 45.0% of the Company's deferred tax assets and liabilities were as Risk-free interest rate........ 3.5% 5.1% 6.2% follows (in thousands): Expected dividend yield........ 0.0% 0.0% 0.0% Fiscal Year Ended 2001 2000 The weighted-average fair value of options granted as of ------------------------------------------------------------ December 29, 2001, December 30, 2000 and January 1, 2000 was DEFERRED TAX ASSETS: $13.85, $14.39 and $12.10, respectively. The Employee benefits.......... $ 6,955 $ 6,806 weighted-average fair value of restricted stock granted as Inventories................ 4,525 5,596 of December 29, 2001, December 30, 2000 and January 1, 2000 Lease termination costs.... 7,744 -- was $15.04, $14.47 and $13.19, respectively. Other...................... 4,612 2,720 ------------ ---------- The Company applies APB No. 25 and related interpretations TOTAL DEFERRED TAX ASSETS....... 23,836 15,122 in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized in DEFERRED TAX LIABILITIES: connection with stock options under these plans in the Property and equipment..... 35,867 33,193 accompanying consolidated financial statements. The ------------ ---------- compensation cost that has been charged against income for NET DEFERRED TAX LIABILITY...... $12,031 $18,071 its restricted stock grants was $3.6 million, $3.4 million ============ ========== and $2.0 million for fiscal years 2001, 2000 and 1999, respectively. Set forth below are the Company's net income At December 29, 2001 and December 30, 2000, the net deferred and net income per share presented "as reported" and as if tax liability was included in the Company's consolidated compensation cost had been recognized in accordance with the balance sheet as follows (in thousands): provisions of SFAS No. 123: 2001 2000 FISCAL YEAR ENDED ------------------------------------------------------------ ------------------------------------------------------------------ Current deferred taxes.......... $23,524 $ 12,127 (IN MILLIONS, EXCEPT PER SHARE DATA) 2001 2000 1999 Deferred income taxes........... (35,555) (30,198) ------------------------------------------------------------------ --------- ----------- NET INCOME: As reported....................... $29.7 $64.9 $52.1 NET DEFERRED TAX LIABILITY...... $12,031 $ 18,071 Pro forma......................... $23.3 $59.8 $49.3 ========= =========== NET INCOME PER SHARE OF COMMON STOCK: Based on the anticipated reversal of deferred tax Basic: liabilities and the Company's historical and current taxable As reported....................... $0.73 $1.63 $1.32 income, management believes it is more likely than not that Pro forma......................... $0.58 $1.50 $1.25 the Company will realize the deferred tax assets. Diluted: Accordingly, no As reported....................... $0.72 $1.60 $1.27 Pro forma......................... $0.57 $1.47 $1.20 ------------------------------------------------------------------
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valuation allowance against deferred tax assets is connection with this settlement. Payment of these amounts considered necessary. has been made in early fiscal 2002. The provision for income taxes comprised the following for: 14. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) FISCAL YEAR ENDED (IN --------------------------------------------------------------- THOUSANDS, (IN THOUSANDS): 2001 2000 1999 EXCEPT PER FIRST SECOND THIRD FOURTH FISCAL --------------------------------------------------------------- SHARE DATA) QUARTER QUARTER QUARTER QUARTER YEAR CURRENT: ------------------------------------------------------------------- U.S. Federal..... $21,726 $30,401 $25,449 NET SALES U.S. State....... 2,728 3,868 3,224 2001 .........$379,245 $387,715 $468,944 $587,899 $1,823,803 Non-U.S. ........ 432 871 -- 2000 .........$326,976 $339,655 $410,371 $495,574 $1,572,576 --------- ---------- --------- 24,886 35,140 28,673 GROSS PROFIT --------- ---------- --------- 2001 ......... 150,702 162,161 190,234 239,447 (3) 742,544 DEFERRED: 2000 ......... 128,301 139,683 166,086 209,201 643,271 U.S. Federal..... (5,917) 4,572 3,328 U.S. State....... (759) 570 456 NET INCOME Non-U.S. ........ 651 (68) -- 2001 ......... 4,693 2,109 (2) 14,705 8,242 (4) 29,749 --------- ---------- --------- 2000 ......... 5,055 6,947 18,406 34,529 64,937 (6,025) 5,074 3,784 --------- ---------- --------- NET INCOME PER TOTAL $18,861 $40,214 $32,457 SHARE ========= ========== ========= BASIC1 2001 .......... $ 0.12 $ 0.05 (2) $ 0.36 $ 0.20 (4) $ 0.73 --------------------------------------------------------------- 2000 .......... $ 0.13 $ 0.18 $ 0.46 $ 0.86 $ 1.63 The Company has not provided for Federal income tax on the DILUTED1 undistributed income of its foreign subsidiaries because the 2001 .......... $ 0.11 $ 0.05 (2) $ 0.36 $ 0.20 (4) $ 0.72 Company intends to permanently reinvest such income. 2000 .......... $ 0.13 $ 0.17 $ 0.45 $ 0.84 $ 1.60 The following is a reconciliation between the statutory ------------------------------------------------------------------- Federal income tax rate and the effective rate for: 1 NET INCOME PER SHARE AMOUNTS FOR EACH QUARTER ARE REQUIRED TO BE COMPUTED INDEPENDENTLY AND MAY NOT EQUAL THE AMOUNT FISCAL YEAR ENDED COMPUTED FOR THE FISCAL YEAR. --------------------------------------------------------------- 2 INCLUDES AFTER-TAX LITIGATION CHARGE OF $2.5 MILLION OR 2001 2000 1999 $0.06 PER SHARE ON A FULLY DILUTED BASIS. --------------------------------------------------------------- 3 INCLUDES PRE-TAX RESTRUCTURING CHARGE OF $3.8 MILLION RELATED TO Effective tax rate......... 38.8% 38.2% 38.4% ESTIMATED INVENTORY MARKDOWNS BELOW COST ASSOCIATED WITH THE State income taxes, net of ACCELERATED CLOSING OF 17 STORES. Federal benefit.......... (2.6) (2.7) (2.8) 4 INCLUDES AFTER-TAX RESTRUCTURING AND ASSET IMPAIRMENT CHARGE Goodwill................... (0.6) (0.3) (0.4) OF $23.7 MILLION OR $0.58 PER SHARE ON A FULLY DILUTED Other...................... (0.6) (0.2) (0.2) BASIS ASSOCIATED WITH THE ACCELERATED CLOSING OF 17 STORES. ---------- ---------- ---------- Statutory Federal income 15. MARKET INFORMATION (UNAUDITED) tax rate................. 35.0% 35.0% 35.0% The Company's common stock is listed on the New York Stock --------------------------------------------------------------- Exchange. Its trading symbol is LIN. The Company has not paid a dividend on its common stock. The high and low trading price of 13. COMMITMENTS AND CONTINGENCIES the Company's common stock for each quarter is as follows: The Company is involved in various claims and legal actions FOR FISCAL 2001 arising in the ordinary course of business. In the opinion HIGH LOW of management, with the exception of the matter discussed in ---- --- the next paragraph, the ultimate disposition of these First Quarter............................ $37.88 $24.81 matters will not have a material adverse effect on the Second Quarter........................... $32.76 $24.00 Company's consolidated financial position, results of Third Quarter............................ $28.16 $17.37 operations or liquidity. Fourth Quarter........................... $25.91 $17.72 The Company had been named as a defendant in California FOR FISCAL 2000 litigation in which the court certified the case as a class HIGH LOW action on behalf of certain managers of Company stores ---- --- located in California seeking overtime pay, together with First Quarter............................ $34.38 $17.94 class action claims on behalf of certain former employees Second Quarter........................... $35.94 $23.19 seeking accrued vacation pay. In the second quarter of Third Quarter............................ $36.38 $23.88 fiscal 2001, the Company recorded a pre-tax charge of $4.0 Fourth Quarter........................... $33.50 $20.00 million ($2.5 million after-tax) related to the settlement payments, attorneys' fees and estimated expenses of At fiscal year end 2001, there were 8,994 beneficial shareholders. administering the settlement. On October 24, 2001, the court gave preliminary approval to a settlement reached in the case. An order granting final approval of class action settlement was signed on December 19, 2001. The Company admitted no liability in
40 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING -------------------------------------------------------------------------------- The integrity and objectivity of the financial statements and related financial information in this report are the responsibility of the management of the Company. The financial statements have been prepared in conformity with generally accepted accounting principles and include, when necessary, the best estimates and judgments of management. The Company maintains a system of internal accounting controls designed to provide reasonable assurance, at appropriate cost, that assets are safeguarded, transactions are executed in accordance with management's authorization, and the accounting records provide a reasonable basis for the preparation of the financial statements. The system of internal accounting controls is continually reviewed by management and improved and modified as necessary in response to changing business conditions and recommendations of the Company's independent auditors. The Audit Committee of the Board of Directors, consisting solely of outside non-management directors, meets periodically with management and the independent auditors to review matters relating to the Company's financial reporting, the adequacy of internal accounting controls and the scope and results of audit work. The independent auditors have free access to the Audit Committee. KPMG LLP, certified public accountants, is engaged to audit the consolidated financial statements of the Company. Its Independent Auditors' Report, which is based on an audit made in conformity with generally accepted auditing standards, expresses an opinion as to the fair presentation of these financial statements. /s/ Norman Axelrod ------------------ Norman Axelrod Chairman and Chief Executive Officer /s/ William T. Giles -------------------- William T. Giles Senior Vice President, Chief Financial Officer January 30, 2002 41 INDEPENDENT AUDITORS' REPORT -------------------------------------------------------------------------------- To the Board of Directors and Shareholders Linens 'n Things, Inc. We have audited the accompanying consolidated balance sheets of Linens 'n Things, Inc. and Subsidiaries as of December 29, 2001 and December 30, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 29, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Linens 'n Things, Inc. and Subsidiaries as of December 29, 2001 and December 30, 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 29, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP ------------ KPMG LLP New York, New York January 30, 2002 42