-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QTOaN9Pj5CVrfeiAfwVyX7BirlyQY4dhXhBr5GBKNkC7/2xhPK7PsRZAaQEp6Pwh DcC3WLAAlgT0RuCmKcgi1w== 0001188112-05-001294.txt : 20050701 0001188112-05-001294.hdr.sgml : 20050701 20050701142218 ACCESSION NUMBER: 0001188112-05-001294 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040703 FILED AS OF DATE: 20050701 DATE AS OF CHANGE: 20050701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINENS N THINGS INC CENTRAL INDEX KEY: 0001023052 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 223463939 STATE OF INCORPORATION: DE FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-12381 FILM NUMBER: 05932437 BUSINESS ADDRESS: STREET 1: 6 BRIGHTON RD CITY: CLIFTON STATE: NJ ZIP: 07015 BUSINESS PHONE: 9737781300 MAIL ADDRESS: STREET 1: 6 BRIGHTON RD CITY: CLIFTON STATE: NJ ZIP: 07015 10-Q/A 1 t10qa-6834a.txt 10-Q/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q/A (AMENDMENT NO. 1) QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED JULY 3, 2004 --------------------------------------- COMMISSION FILE NUMBER 1-12381 ------------------------------ LINENS 'N THINGS, INC. ---------------------- (Exact name of registrant as specified in its charter) Delaware 22-3463939 -------------------------------- -------------------------------- (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 6 Brighton Road, Clifton, New Jersey 07015 ------------------------------------------ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (973) 778-1300 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [|X|] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [|X|] No[ ] Number of shares outstanding as of August 3, 2004: 45,138,711 1
INDEX PAGE NO. EXPLANATORY STATEMENT 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Operations for the Thirteen and Twenty-Six Weeks Ended July 3, 2004 (Restated) and July 5, 2003 (Restated) 4 Condensed Consolidated Balance Sheets as of July 3, 2004 (Restated), January 3, 2004 and July 5, 2003 (Restated) 5 Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 3, 2004 (Restated) and July 5, 2003 (Restated) 6 Notes to Condensed Consolidated Financial Statements 7 - 22 Report of Independent Registered Public Accounting Firm 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24 - 31 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32 ITEM 4. CONTROLS AND PROCEDURES 33 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 34 SIGNATURES 35 2
EXPLANATORY STATEMENT As previously disclosed in the Linens `n Things, Inc. (the "Company") Current Report on Form 8-K dated March 11, 2005, following a review of its lease accounting policies, the Company determined that it should restate its financial statements for all fiscal years presented in its Annual Report on Form 10-K for the period ended January 1, 2005, other than for the year ended January 1, 2005 ("fiscal 2004"), and for the first three quarters of fiscal 2004 and the four quarters of fiscal 2003. The Company filed its Annual Report on Form 10-K for the period ended January 1, 2005 on April 1, 2005. On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a clarification regarding lease accounting under generally accepted accounting principles in the United States of America ("GAAP"). As a result of this clarification, the Company reviewed its lease accounting practices and determined that its former methods of accounting for leases and landlord allowances were not consistent with the views expressed by the SEC. As a result, the Company has corrected the way it accounts for its leases and landlord allowances, specifically the accounting for straight-line rent expense and landlord allowances. In addition, the Company has also made other immaterial adjustments and reclassifications related to its trade payables program with General Electric Capital Corporation ("GECC") and its deferred compensation plan. The accompanying Condensed Consolidated Financial Statements have been restated from amounts previously reported to incorporate the effects of these corrections and reclassifications. This Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to our Quarterly Report on Form 10-Q for the quarterly period ended July 3, 2004, initially filed with the SEC on August 6, 2004 (the "Original Filing"), is being filed to reflect the restatement of the Company's Condensed Consolidated Financial Statements for the thirteen week and twenty-six week periods ended July 3, 2004 and July 5, 2003. For a more detailed description of this restatement, see Note 2, "Restatement of Financial Statements and Other Immaterial Adjustments and Reclassifications," to the accompanying Condensed Consolidated Financial Statements. For the convenience of the reader, this Form 10-Q/A sets forth the original Filing in its entirety. However, this Form 10-Q/A only amends and restates certain information in Items 1, 2 and 4 of Part I of the Original Filing, in each case solely as a result of and to reflect the restatement, and no other information in the Original Filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently dated certifications from the Company's Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as exhibits 31.1, 31.2 and 32, respectively. Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that occurred at a later date. Among other things, forward looking statements made in the Original Filing have not been revised to reflect events, results or developments that occurred or facts that became known to the Company after the date of the Original Filing (other than the restatement), and such forward looking statements should be read in their historical context. The Company has not amended and does not intend to amend its previously filed Annual Reports on Form 10-K or its Quarterly Reports on Form 10-Q for the periods affected by the restatement that ended prior to January 3, 2004. For this reason, the consolidated financial statements, auditors reports and related financial information for the affected periods contained in any other prior reports should no longer be relied upon. 3
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LINENS 'N THINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED -------------------------------- --------------------------------- JULY 3, JULY 5, JULY 3, JULY 5, 2004 2003 2004 2003 (RESTATED) (RESTATED) (RESTATED) (RESTATED) -------------- -------------- -------------- -------------- NET SALES $578,749 $523,672 $1,131,549 $1,004,143 Cost of sales, including buying and distribution costs 346,073 309,668 677,627 595,886 -------------- -------------- -------------- -------------- GROSS PROFIT 232,676 214,004 453,922 408,257 Selling, general and administrative expenses 231,475 205,176 453,763 396,372 -------------- -------------- -------------- -------------- OPERATING PROFIT 1,201 8,828 159 11,885 Interest income (30) (14) (168) (70) Interest expense 1,075 1,092 1,972 2,008 -------------- -------------- -------------- -------------- Interest expense, net 1,045 1,078 1,804 1,938 -------------- -------------- -------------- -------------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 156 7,750 (1,645) 9,947 Provision (benefit) for income taxes 59 2,960 (630) 3,801 -------------- -------------- -------------- -------------- NET INCOME (LOSS) $ 97 $ 4,790 $ (1,015) $ 6,146 ============== ============== ============== ============== BASIC EARNINGS (LOSS) PER SHARE $ -- $ 0.11 $ (0.02) $ 0.14 ============== ============== ============== ============== FULLY DILUTED EARNINGS (LOSS) PER SHARE $ -- $ 0.11 $ (0.02) $ 0.14 ============== ============== ============== ============== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4
LINENS 'N THINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) JULY 3, JANUARY 3, JULY 5, 2004 2004 2003 --------------- -------------- --------------- (RESTATED) (RESTATED) (UNAUDITED) (AUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 18,990 $ 136,129 $ 9,446 Accounts receivable 27,490 29,531 28,013 Inventories 763,514 700,406 713,680 Prepaid expenses and other current assets 33,146 33,253 29,330 Current deferred taxes 404 1,295 -- --------------- -------------- --------------- TOTAL CURRENT ASSETS 843,544 900,614 780,469 Property and equipment, net of accumulated depreciation of $341,597, $304,612 and $271,335 at July 3, 2004, January 3, 2004 and July 5, 2003, respectively 559,676 542,191 534,250 Goodwill, net 18,126 18,126 18,126 Deferred charges and other noncurrent assets, net 7,916 6,525 6,338 --------------- -------------- --------------- TOTAL ASSETS $1,429,262 $1,467,456 $1,339,183 =============== ============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 238,142 $ 250,142 $ 268,593 Accrued expenses and other current liabilities 122,905 176,194 127,415 Current deferred taxes 11,282 15,759 8,676 Short-term borrowings 6,045 -- 16,874 --------------- -------------- --------------- TOTAL CURRENT LIABILITIES 378,374 442,095 421,558 Deferred income taxes and other long-term liabilities 306,685 287,984 262,068 --------------- -------------- --------------- TOTAL LIABILITIES 685,059 730,079 683,626 --------------- -------------- --------------- Shareholders' equity: Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding -- -- -- Common stock, $0.01 par value; 135,000,000 shares authorized; 45,371,540 shares issued and 45,118,658 shares outstanding at July 3, 2004; 45,052,255 shares issued and 44,793,619 shares outstanding at January 3, 2004; and 44,361,771 shares issued and 44,111,810 shares outstanding at July 5, 2003 454 450 444 Additional paid-in capital 370,520 362,483 347,538 Retained earnings 379,378 380,393 313,780 Accumulated other comprehensive income 1,089 1,391 919 Treasury stock, at cost; 252,882 shares at July 3, 2004, 258,636 shares at January 3, 2004 and 249,961 shares at July 5, 2003 (7,238) (7,340) (7,124) --------------- -------------- --------------- TOTAL SHAREHOLDERS' EQUITY 744,203 737,377 655,557 --------------- -------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,429,262 $1,467,456 $1,339,183 =============== ============== =============== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5
LINENS 'N THINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) TWENTY-SIX WEEKS ENDED ----------------------------------- JULY 3, JULY 5, 2004 2003 (RESTATED) (RESTATED) --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (1,015) $ 6,146 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 38,989 34,410 Deferred income taxes 4,392 16,903 Loss on disposal of assets 776 741 Federal tax benefit from common stock issued under stock incentive plans 1,279 (18) Changes in assets and liabilities: Decrease (increase) in accounts receivable 2,029 (3,411) Increase in inventories (63,925) (96,781) Decrease (increase) in prepaid expenses and other current assets 272 (4,223) Increase in deferred charges and other noncurrent assets (1,662) (201) (Decrease) increase in accounts payable (11,667) 50,164 Decrease in accrued expenses and other liabilities (41,880) (29,199) --------------- ---------------- NET CASH USED IN OPERATING ACTIVITIES (72,412) (25,469) --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (57,437) (68,015) --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock issued under stock incentive plans 6,762 1,305 Increase in short-term borrowings 6,011 14,690 Decrease in treasury stock 102 86 --------------- ---------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 12,875 16,081 --------------- ---------------- Effect of exchange rate changes on cash and cash equivalents (165) 244 --------------- ---------------- Net decrease in cash and cash equivalents (117,139) (77,159) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 136,129 86,605 --------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,990 $ 9,446 =============== ================ CASH PAID DURING THE YEAR FOR: Interest (net of amounts capitalized) $ 2,035 $ 2,107 Income taxes $ 10,726 $ 11,038 SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying Condensed Consolidated Financial Statements are unaudited. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of Linens 'n Things, Inc. and its subsidiaries (collectively the "Company") as of July 3, 2004 and July 5, 2003 and the results of operations for the respective thirteen and twenty-six weeks then ended and cash flows for the twenty-six weeks then ended. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Because of the seasonality of the specialty retailing business, operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's audited Consolidated Financial Statements for the fiscal year ended January 3, 2004, included in the Company's 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission (see Explanatory Statement and Note 2, "Restatement of Financial Statements and Other Immaterial Adjustments and Reclassifications," to the accompanying Condensed Consolidated Financial Statements). All significant intercompany accounts and transactions have been eliminated. Certain prior period expense items, which include inventory shrinkage, have been reclassified between cost of sales and selling, general and administrative expenses to conform with the current period presentation. These reclassifications increased cost of sales and decreased selling, general and administrative expenses by equal amounts with no impact on operating profit for any of the periods presented. Certain prior period vendor accounts receivable balances have been reclassified to accounts payable to conform with the current period presentation. These reclassifications decreased accounts receivable and accounts payable by equal amounts. 2. RESTATEMENT OF FINANCIAL STATEMENTS AND OTHER IMMATERIAL ADJUSTMENTS AND RECLASSIFICATIONS RESTATEMENT OF FINANCIAL STATEMENTS: On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a clarification regarding lease accounting under generally accepted accounting principles in the United States of America ("GAAP"). As a result of this clarification, the Company reviewed its lease accounting practices and determined that its former methods of accounting for leases and landlord allowances were not consistent with the views expressed by the SEC. As a result, the Company has restated its Consolidated Financial Statements for each of the fiscal years ended January 3, 2004 ("fiscal 2003") and January 4, 2003 ("fiscal 2002"), and the first three quarters of fiscal 2004 and the four quarters of fiscal 2003, set forth and contained in its fiscal 2004 Form 10-K. In addition, the Company restated its Condensed Consolidated Financial Statements for the first quarter of fiscal years 2004 and 2003, set forth and contained in its Form 10-Q/A (Amendment No. 1) filed with the SEC on April 19, 2005. Historically, the Company had recognized rent expense commencing as of the store opening date as opposed to when the Company took possession of the leased property. The Company's landlords typically provide access to the leased property free-of-charge for a period of time before the store opening so that the Company can build out or fixture the store and stock it with merchandise. Based on its evaluation, the Company now includes this period in calculating straight-line rent expense and amortization of landlord allowances and lease acquisition fees. The Company has corrected its accounting to recognize rent and amortization expense on a straight-line basis over the expected lease term, including cancelable option periods in those instances where exercising such options is reasonably assured. Previously, the Company did not include these cancelable option periods in calculating straight-line rent expense and amortization expense for lease acquisition fees. 7 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D For new stores, the Company generally receives allowances from landlords for the construction of leasehold improvements. Historically, landlord allowances had been classified on the Condensed Consolidated Balance Sheets as a reduction of property and equipment and had been classified as a reduction in capital expenditures on the Condensed Consolidated Statements of Cash Flows. The Company now classifies landlord allowances as deferred rent credit reflected in long-term liabilities on the Condensed Consolidated Balance Sheets and as an operating activity on the Condensed Consolidated Statements of Cash Flows. This adjustment increased both property and equipment and other long-term liabilities on the Condensed Consolidated Balance Sheets by approximately $168.8 million as of July 3, 2004. As a result of the restatement pertaining to lease accounting, selling, general and administrative expenses ("SG&A") increased approximately $0.6 million and $1.0 million for the thirteen weeks ended July 3, 2004 and July 5, 2003, respectively, and approximately $2.5 million and $2.8 million for the twenty-six weeks ended July 3, 2004 and July 5, 2003, respectively. Earnings per share on a fully diluted basis decreased by approximately $0.01 for each of the thirteen weeks ended July 3, 2004 and July 5, 2003, respectively. Earnings per share on a fully diluted basis decreased by approximately $0.03 and $0.04 for the twenty-six weeks ending July 3, 2004 and July 5, 2003, respectively. The cumulative impact of the correction of accounting for leases decreased retained earnings, net of tax, by approximately $20.2 million as of January 4, 2003. OTHER IMMATERIAL ADJUSTMENTS AND RECLASSIFICATIONS: The Company maintains a trade payables arrangement with General Electric Capital Corporation ("GECC") under which GECC purchases the Company's payables at a discount directly from the Company's suppliers prior to the payables due date, thereby permitting a supplier to receive payment prior to the due date of the payable, with the Company sharing in part of the GECC discount. At July 3, 2004, January 3, 2004, and July 5, 2003, the Company owed approximately $76.4 million, $66.2 million, and $91.3 million, respectively, to GECC under this program, which was included in accounts payable. Either party may terminate the program for any reason upon 30 days prior written notice. The maximum amount permitted under the program was $95 million as of July 3, 2004. Certain prior period balances relating to this trade payables program with GECC have been adjusted and reclassified. Pursuant to the agreement with GECC any favorable economics realized by GECC for transactions under this program are shared with the Company. As a result of these adjustments, the Company now recognizes the gross discount earned as part of the program as a reduction of the cost of inventory in the Condensed Consolidated Balance Sheets and records the related portion of interest expense due GECC as interest expense in the Condensed Consolidated Statements of Operations. Prior to the fourth quarter of fiscal 2004, only the Company's share was reflected as a reduction of cost of sales in the Condensed Consolidated Statements of Operations. As a result of the adjustment and reclassification related to the GECC program, interest expense increased approximately $0.9 million and $0.8 million for the thirteen weeks ended July 3, 2004 and July 5, 2003, respectively, and approximately $1.6 million for each of the twenty-six weeks ended July 3, 2004 and July 5, 2003, respectively. Cost of sales decreased approximately $0.2 million and $0.3 million for the thirteen weeks ended July 3, 2004 and July 5, 2003, respectively, and approximately $1.0 million and $1.7 million for the twenty-six weeks ended July 3, 2004 and July 5, 2003, respectively. Earnings per share on a fully diluted basis decreased by approximately $0.01 for each of the thirteen weeks ended July 3, 2004 and July 5, 2003, respectively. Earnings per share on a fully diluted basis decreased by approximately $0.01 and increased by approximately $0.01 for the twenty-six weeks ending July 3, 2004 and July 5, 2003, respectively. The cumulative impact of this adjustment decreased retained earnings, net of tax, by approximately $1.3 million as of January 4, 2003. Certain prior period balances relating to the Company's deferred compensation plan (the "Plan") have been reclassified. The related deferred compensation obligation, totaling $2.7 million at July 3, 2004, was reclassified to accrued expenses and other current liabilities from deferred income taxes and other long-term liabilities. In addition, the Plan's investment in shares of the Company's common stock totaling $0.6 million at July 3, 2004 was reclassified to treasury stock from other current assets. A summary of the effects of these changes on the Company's Condensed Consolidated Balance Sheet at July 3, 2004 and July 5, 2003, the Condensed Statements of Operations for the respective thirteen and twenty-six weeks then ended, and the Condensed Statements of Cash Flows for the twenty-six weeks then ended is as follows: 8
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Statement of Operations Thirteen Weeks Ended July 3, 2004 (In thousands, except per share amounts) (Restated) (Unaudited) - -------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated --------------- ---------------- ---------------- Cost of sales $346,250 $ (177) (B) $346,073 Gross profit 232,499 177 (B) 232,676 SG&A expenses 230,889 586 (A) 231,475 Operating profit 1,610 (586) (A) 1,201 177 (B) --------------- (409) --------------- Interest expense 218 857 (B) 1,075 Interest expense, net 188 857 (B) 1,045 Income before income taxes 1,422 (586) (A) 156 (680) (B) --------------- (1,266) --------------- Provision for income taxes 543 (224) (A) 59 (260) (B) --------------- (484) --------------- Net income 879 (362) (A) 97 (420) (B) --------------- (782) --------------- Net income per share - basic $ 0.02 $(0.01) (A) $ -- (0.01) (B) --------------- (0.02) --------------- Net income per share - fully diluted $ 0.02 $(0.01) (A) $ -- (0.01) (B) --------------- (0.02) --------------- - -------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification 9
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Statement of Operations Thirteen Weeks Ended July 5, 2003 (In thousands, except per share amounts) (Restated) (Unaudited) - -------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated --------------- ---------------- ---------------- Cost of sales $309,974 $ (306) (B) $309,668 Gross profit 213,698 306 (B) 214,004 SG&A expenses 204,180 996 (A) 205,176 Operating profit 9,518 (996) (A) 8,828 306 (B) --------------- (690) --------------- Interest expense 302 790 (B) 1,092 Interest expense, net 288 790 (B) 1,078 Income before income taxes 9,230 (996) (A) 7,750 (484) (B) --------------- (1,480) --------------- Provision for income taxes 3,526 (381) (A) 2,960 (185) (B) --------------- (566) --------------- Net income 5,704 (615) (A) 4,790 (299) (B) --------------- (914) --------------- Net income per share - basic $ 0.13 $(0.01) (A) $ 0.11 (0.01) (B) --------------- (0.02) --------------- Net income per share - fully diluted $ 0.13 $(0.01) (A) $ 0.11 (0.01) (B) --------------- (0.02) --------------- - -------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification 10
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Statement of Operations Twenty-Six Weeks Ended July 3, 2003 (In thousands, except per share amounts) (Restated) (Unaudited) - -------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated --------------- ---------------- ---------------- Cost of sales $678,596 $ (969) (B) $677,627 Gross profit 452,953 969 (B) 453,922 SG&A expenses 451,279 2,484 (A) 453,763 Operating profit 1,674 (2,484) (A) 159 969 (B) --------------- (1,515) --------------- Interest expense 372 1,600 (B) 1,972 Interest expense, net 204 1,600 (B) 1,804 Income (loss) before income taxes 1,470 (2,484) (A) (1,645) (631) (B) --------------- (3,115) --------------- Provision (benefit) for income taxes 561 (950) (A) (630) (241) (B) --------------- (1,191) --------------- Net income (loss) 909 (1,534) (A) (1,015) (390) (B) --------------- (1,924) --------------- Net income (loss) per share - basic $ 0.02 $ (0.03) (A) $ (0.02) (0.01) (B) --------------- (0.04) --------------- Net income (loss) per share - fully diluted $ 0.02 $ (0.03) (A) $ (0.02) (0.01) (B) --------------- (0.04) --------------- - -------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification 11
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Statement of Operations Twenty-Six Weeks Ended July 5, 2003 (In thousands, except per share amounts) (Restated) (Unaudited) - -------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated --------------- ---------------- ---------------- Cost of sales $597,604 $ (1,718) (B) $595,886 Gross profit 406,539 1,718 (B) 408,257 SG&A expenses 393,581 2,791 (A) 396,372 Operating profit 12,958 (2,791) (A) 11,885 1,718 (B) --------------- (1,073) --------------- Interest expense 434 1,574 (B) 2,008 Interest expense, net 364 1,574 (B) 1,938 Income before income taxes 12,594 (2,791) (A) 9,947 144 (B) --------------- (2,647) --------------- Provision for income taxes 4,812 (1,066) (A) 3,801 55 (B) --------------- (1,011) --------------- Net income 7,782 (1,725) (A) 6,146 89 (B) --------------- (1,636) --------------- Net income per share - basic $ 0.18 $ (0.04) (A) $ 0.14 -- (B) --------------- (0.04) --------------- Net income per share - fully diluted $ 0.17 $ (0.04) (A) $ 0.14 0.01 (B) --------------- (0.03) --------------- - -------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification 12
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Balance Sheet (In thousands) July 3, 2004 (Restated) (Unaudited) - -------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated --------------- ---------------- ---------------- Inventories $ 765,667 $ (2,153) (B) $ 763,514 Prepaid expenses and other current assets 33,734 (588) (D) 33,146 Total current assets 846,285 (2,153) (B) 843,544 (588) (D) --------------- (2,741) --------------- Property & equipment, net 390,892 168,784 (C) 559,676 Deferred charges and other non-current assets, net 12,408 (4,492) (A) 7,916 Total assets 1,267,711 (4,492) (A) 1,429,262 (2,153) (B) 168,784 (C) (588) (D) --------------- 161,551 --------------- Accrued expenses and other current liabilities 121,017 (822) (B) 122,905 2,710 (D) --------------- 1,888 --------------- Total current liabilities 376,486 (822) (B) 378,374 2,710 (D) --------------- 1,888 --------------- Deferred income taxes and other long-term liabilities 120,897 188,498 (A)& 306,685 (C) (2,710) (D) --------------- 185,788 --------------- Total liabilities 497,383 19,714 (A) 685,059 (822) (B) 168,784 (C) --------------- 187,676 --------------- - -------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification 13
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Balance Sheet (In thousands) July 3, 2004 (Restated) (Unaudited) - -------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated --------------- ---------------- ---------------- Retained earnings $ 404,915 $(24,206) (A) $ 379,378 (1,331) (B) --------------- (25,537) --------------- Treasury stock (6,650) (588) (D) (7,238) Total shareholders' equity 770,328 (24,206) (A) 744,203 (1,331) (B) (588) (D) --------------- (26,125) --------------- Total liabilities and shareholders' equity 1,267,711 (4,492) (A) 1,429,262 (2,153) (B) 168,784 (C) (588) (D) --------------- 161,551 --------------- - -------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification 14
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Balance Sheet (In thousands) July 5, 2003 (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Inventories $ 715,644 $ (1,964) (B) $ 713,680 Prepaid expenses and other current assets 29,940 (610) (D) 29,330 Total current assets 783,043 (1,964) (B) 780,469 (610) (D) ----------------------- (2,574) ----------------------- Property & equipment, net 376,006 158,244 (C) 534,250 Deferred charges and other non-current assets, net 10,765 (4,427) (A) 6,338 Total assets 1,187,940 (4,427) (A) 1,339,183 (1,964) (B) 158,244 (C) (610) (D) ----------------------- 151,243 ----------------------- Accrued expenses and other current liabilities 125,303 (750) (B) 127,415 2,862 (D) ----------------------- 2,112 ----------------------- Total current liabilities 419,446 (750) (B) 421,558 2,862 (D) ----------------------- 2,112 ----------------------- Deferred income taxes and other long-term liabilities 89,144 175,786 (A)& 262,068 (C) (2,862) (D) ----------------------- 172,924 ----------------------- Total liabilities 508,590 17,542 (A) 683,626 (750) (B) 158,244 (C) ----------------------- 175,036 ----------------------- - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification
15
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Balance Sheet (In thousands) July 5, 2003 (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Retained earnings $336,963 $(21,969) (A) $313,780 (1,214) (B) ----------------------- (23,183) ----------------------- Treasury stock (6,514) (610) (D) (7,124) Total shareholders' equity 679,350 (21,969) (A) 655,557 (1,214) (B) (610) (D) ----------------------- (23,793) ----------------------- Total liabilities and shareholders' equity 1,187,940 (4,427) (A) 1,339,183 (1,964) (B) 158,244 (C) (610) (D) ----------------------- 151,243 ----------------------- - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification
16
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Statement of Cash Flows Twenty-Six Weeks Ended July 3, 2004 (In thousands) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Net cash used in operating activities $(85,723) $13,452 (C) $(72,412) (141) (D) ----------------------- 13,311 ----------------------- Additions to property and equipment (43,985) (13,452) (C) (57,437) Net cash provided by financing activities 12,734 141 (D) 12,875 Cash paid for interest 435 1,600 (B) 2,035 - --------------------------------------------------------------------------------------------------------------------------- Condensed Consolidated Statement of Cash Flows Twenty-Six Weeks Ended July 5, 2003 (In thousands) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Net cash used in operating activities $(41,688) $16,050 (C) $(25,469) 169 (D) ----------------------- 16,219 ----------------------- Additions to property and equipment (51,965) (16,050) (C) (68,015) Net cash provided by financing activities 16,250 (169) (D) 16,081 Cash paid for interest 533 1,574 (B) 2,107 - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification The restatement also affects amounts disclosed in Notes 3, 5, and 7 to the accompanying Condensed Consolidated Financial Statements.
17 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D 3. EARNINGS PER SHARE The calculation of basic and fully diluted earnings (loss) per share ("EPS") is as follows:
PERIODS ENDED JULY 3, 2004 (IN THOUSANDS, EXCEPT EPS) (RESTATED) ----------------------------------------------------------------------------------------- THIRTEEN WEEKS TWENTY-SIX WEEKS ----------------------------------------- ------------------------------------------- Net Net Income Shares EPS Loss Shares EPS ----------- ------------ ---------- ------------ ----------- ------------ BASIC $97 45,089 $ -- $(1,015) 44,993 $(0.02) Effect of outstanding stock options and deferred stock grants -- 982 -- -- 1,096 -- ----------- ------------ ---------- ------------ ----------- ------------ FULLY DILUTED $97 46,071 $ -- $(1,015) 46,089 $(0.02) =========== ============ ========== ============ =========== ============ PERIODS ENDED JULY 5, 2003 (IN THOUSANDS, EXCEPT EPS) (RESTATED) ----------------------------------------------------------------------------------------- THIRTEEN WEEKS TWENTY-SIX WEEKS ----------------------------------------- ------------------------------------------- Net Net Income Shares EPS Income Shares EPS ----------- ------------ ---------- ------------ ----------- ------------ BASIC $4,790 44,099 $0.11 $6,146 44,089 $0.14 Effect of outstanding stock options and deferred stock grants -- 427 -- -- 426 -- ----------- ------------ ---------- ------------ ----------- ------------ FULLY DILUTED $4,790 44,526 $0.11 $6,146 44,515 $0.14 =========== ============ ========== ============ =========== ============
Options for which the exercise price was greater than the average market price of common shares for the periods ended July 3, 2004 and July 5, 2003 were not included in the computation of fully diluted earnings per share. These consisted of options totaling approximately 606,000 shares and 2,555,000 shares for the thirteen weeks and approximately 312,000 shares and 2,555,000 shares for the twenty-six weeks ended July 3, 2004 and July 5, 2003, respectively. 18 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D 4. SHORT-TERM BORROWING ARRANGEMENTS In June 2002, the Company amended and extended its $150 million senior revolving credit facility agreement (the "Credit Agreement") with third party institutional lenders to expire April 20, 2005. The Credit Agreement allows for up to $40 million of borrowings from additional lines of credit outside of the Credit Agreement. As of July 3, 2004, the additional lines of credit include committed facilities of approximately $15 million that expire on December 31, 2004 and $11 million that expire on June 15, 2005 and are subject to periodic renewal arrangements. Interest on all borrowings is determined based upon several alternative rates, including a fixed margin above LIBOR. The Credit Agreement contains certain financial covenants, including those relating to the maintenance of a minimum tangible net worth, a minimum fixed charge coverage ratio, and a maximum leverage ratio. As of July 3, 2004, the Company was in compliance with its covenants under the Credit Agreement. The Credit Agreement limits, among other things, the amount of cash dividends the Company may pay. Under the Credit Agreement, the amount of dividends that the Company may pay may not exceed the sum of $25 million plus, on a cumulative basis, an amount equal to 50% of the consolidated net income for each fiscal quarter, commencing with the fiscal quarter ending March 30, 2002. The Company has never paid cash dividends and does not currently anticipate paying cash dividends in the future. The Company is required under the Credit Agreement to reduce the balance of outstanding domestic borrowings to zero for 30 consecutive days during each period beginning on December 1st of any fiscal year and ending on March 15th of the following fiscal year. At various times throughout 2004 and 2003, the Company borrowed against its Credit Agreement for seasonal working capital needs. As of July 3, 2004, the Company had no borrowings under the Credit Agreement and approximately $6.0 million in borrowings under the additional lines of credit at a weighted average interest rate of 3.6%. The Company also had $71.2 million of letters of credit outstanding as of July 3, 2004, which included standby letters of credit issued primarily under the Credit Agreement and import letters of credit used for merchandise purchases. The Company is not obligated under any formal or informal compensating balance requirements. 5. COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) for the thirteen and twenty-six weeks ended July 3, 2004 and July 5, 2003 is as follows (in thousands):
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ------------------------------------ ------------------------------------ JULY 3, JULY 5, JULY 3, JULY 5, 2004 2003 2004 2003 (RESTATED) (RESTATED) (RESTATED) (RESTATED) ----------------- --------------- ----------------- --------------- Net income (loss) $ 97 $4,790 $(1,015) $6,146 Other comprehensive income (loss) - foreign currency translation adjustment (89) 825 (302) 1,305 ----------------- --------------- ----------------- --------------- COMPREHENSIVE INCOME (LOSS) $ 8 $5,615 $(1,317) $7,451 ================= =============== =============== ================
6. 2001 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE In fiscal 2001, the Company developed and committed to a strategic initiative designed to improve store performance and profitability. This initiative called for the closing of certain under-performing stores, which did not meet the Company's profit objectives. In connection with this initiative, the Company recorded a pre-tax restructuring and asset impairment charge of $37.8 million ($23.7 million after-tax) in the fourth quarter of fiscal 2001. A pre-tax reserve of $20.5 million was established for estimated lease commitments for stores to be closed. This reserve is included in accrued expenses. The reserve considers estimated sublease income. Because all of the stores were leased the Company is not responsible for the disposal of property other than fixtures. A pre-tax writedown of $9.5 million was recorded as a reduction in property and equipment for fixed asset impairments for these stores. The fixed asset impairments represent fixtures and leasehold improvements. A pre-tax reserve of $4.0 million was established for other estimated miscellaneous store closing costs. Additionally, a pre-tax charge of $3.8 million was recorded in cost of sales for estimated inventory markdowns below cost for the stores to be closed. Certain components of the restructuring charge were based on estimates and may be subject to change in the future. The Company has closed all of the initially identified store closures other than one store, whose reserve was reversed, and one store which is expected to be closed during fiscal 2004. 19 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D The following table displays a roll forward of the activity and significant components of the 2001 restructuring and asset impairment charge and the reserves remaining as of July 3, 2004 ($ in millions):
REMAINING AT USAGE REMAINING AT 1/03/04 2004 7/03/04 (AUDITED) (UNAUDITED) (UNAUDITED) ----------------------- --------------------- ----------------------- CASH COMPONENTS: Lease commitments $15.6 $(3.0) $12.6 ----------------------- --------------------- ----------------------- TOTAL $15.6 $(3.0) $12.6 ======================= ===================== =======================
The 2004 usage primarily consists of payments for lease commitments and miscellaneous store closing costs. The 2004 activity also includes the reversal of estimated lease commitment and other store closing costs of approximately $1.4 million as these reserves were not needed, offset by an increase to lease commitment costs by a like amount due to changes in estimates based on current negotiations. The restructuring reserve balance is included in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet. 7. STOCK INCENTIVE PLANS In accordance with the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"), the Company elected not to adopt the fair value based method of accounting for its stock-based compensation plans, but continues to apply the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, the Company does not recognize compensation expense for stock option grants and amortizes restricted stock unit grants at fair market value over specified vesting periods in the accompanying Condensed Consolidated Financial Statements. The compensation cost that has been charged against income for restricted stock unit grants was $0.2 million and $0.3 million for the thirteen weeks ended July 3, 2004 and July 5, 2003, respectively, and $0.3 million and $0.4 million for the twenty-six weeks ended July 3, 2004 and July 5, 2003, respectively. The Company has complied with the disclosure requirements of SFAS No. 148. Set forth below are the Company's net income (loss) and net income (loss) per share presented "as reported" and as if compensation cost had been recognized in accordance with the provisions of SFAS No. 148 for the thirteen and twenty-six weeks ended July 3, 2004 and July 5, 2003: 20 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
THIRTEEN WEEKS ENDING TWENTY-SIX WEEKS ENDING -------------------------------- --------------------------------- JULY 3, 2004 JULY 5, 2003 JULY 3, 2004 JULY 5, 2003 (IN THOUSANDS, EXCEPT PER SHARE DATA) (RESTATED) (RESTATED) (RESTATED) (RESTATED) - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS): As presented $ 97 $4,790 $(1,015) $6,146 Add: stock-based employee compensation expense included in net income (loss) as presented, net of related tax effects 101 205 198 266 -------------------------------- --------------------------------- 198 4,995 (817) 6,412 Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects 1,926 2,263 3,776 3,852 -------------------------------- --------------------------------- Pro forma $(1,728) $2,732 $(4,593) $2,560 ================================ ================================= NET INCOME (LOSS) PER SHARE OF COMMON STOCK: BASIC: As presented $ -- $ 0.11 $ (0.02) $ 0.14 Pro forma (0.04) 0.06 (0.10) 0.06 FULLY DILUTED: As presented $ -- $ 0.11 $ (0.02) $ 0.14 Pro forma (0.04) 0.06 (0.10) 0.06 - ------------------------------------------------------------------------------------------------------------------------------
8. GUARANTEES The Company has assigned property at a retail location in which the Company guarantees the payment of rent over the specified lease term in the event of non-performance. As of July 3, 2004, the maximum potential amount of future payments the Company could be required to make under such guarantee is approximately $1.0 million. 9. ACCOUNTS PAYABLE Included in accounts payable are amounts for gift card liabilities of $25.1 million, $27.5 million and $20.4 million as of July 3, 2004, January 3, 2004 and July 5, 2003, respectively. 21 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D 10. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Emerging Issues Task Force ("EITF") issued EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of merchandise sold when recognized in the Company's Condensed Consolidated Statement of Operations. That presumption may be overcome when the consideration is either a reimbursement of specific, incremental and identifiable costs incurred to sell the vendor's products, or a payment for assets or services delivered to the vendor. EITF 02-16 is effective for contracts entered into or modified after December 31, 2002. This issue did not have a material impact on the Company's fiscal 2003 audited consolidated financial statements as substantially all of the Company's vendor contracts in effect during fiscal 2003 were entered into prior to December 31, 2002. Beginning in the first quarter of fiscal 2004, as vendor agreements are initiated or modified, the Company applies the method of accounting for vendor allowances pursuant to EITF 02-16. In connection with the implementation of EITF 02-16, the Company treats certain funds received from vendors as a reduction in the cost of inventory and, as a result, these funds are recognized as a reduction to cost of merchandise sold when the inventory is sold. Accordingly, certain funds received from vendors, which were historically reflected as a reduction of advertising expense in SG&A or cost of sales, are now treated as a reduction of cost of inventory. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"). This statement amends SFAS No. 123 and provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used. For the thirteen and twenty-six week periods ended July 3, 2004 and July 5, 2003, the Company accounted for stock options using the intrinsic value method prescribed under APB Opinion 25, and accordingly, the Company did not recognize compensation expense for stock options. The Company continues to account for stock-based compensation using APB Opinion No. 25 and has not adopted the recognition provisions of SFAS No. 123, as amended by SFAS No. 148. However, the Company has adopted the disclosure provisions and has included this information in Note 7 to the Company's Condensed Consolidated Financial Statements. 22 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Linens 'n Things, Inc.: We have reviewed the condensed consolidated balance sheets of Linens 'n Things, Inc. and Subsidiaries as of July 3, 2004 and July 5, 2003, and the related condensed consolidated statements of operations for the thirteen and twenty-six week periods then ended and the related condensed consolidated statements of cash flows for the twenty-six week periods ended July 3, 2004 and July 5, 2003. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Linens 'n Things, Inc. and Subsidiaries as of January 3, 2004 (presented herein) and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated March 31, 2005 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 3, 2004 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. As discussed in note 2 to the condensed consolidated financial statements, the accompanying condensed consolidated balance sheets as of July 3, 2004 and July 5, 2003, and the related condensed consolidated statements of operations for the thirteen and twenty-six week periods then ended and the related condensed consolidated statements of cash flows for the twenty-six week periods ended July 3, 2004 and July 5, 2003, have been restated. /S/ KPMG LLP KPMG LLP New York, New York July 29, 2004, except as to Note 2, which is as of June 30, 2005 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESTATEMENT The following discussion and analysis gives effect to the restatement as well as other immaterial adjustments and reclassifications discussed in Note 2 to the Condensed Consolidated Financial Statements. GENERAL Linens `n Things, Inc. (the "Company") is one of the leading national format specialty retailers. The Company's stores emphasize a broad assortment of home textiles, housewares and home accessories, carrying both national brands and private label goods. As of July 3, 2004, the Company operated 473 stores in 45 states and in five provinces across Canada. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts and timing of revenues and of expenses during the reporting periods. The Company's management believes the following critical accounting estimates involve significant estimates and judgments inherent in the preparation of the Condensed Consolidated Financial Statements. The Company bases these estimates on historical results and various other assumptions believed to be reasonable at the time. These critical accounting estimates are discussed in detail in our 2004 Annual Report on Form 10-K. VALUATION OF INVENTORY: Merchandise inventory is a significant portion of the Company's balance sheet, representing approximately 53% of total assets at July 3, 2004. Inventories are valued using the lower of cost or market value, determined by the retail inventory method ("RIM"). Under RIM, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that is used in the retail industry due to its practicality. The methodologies utilized by the Company in its application of RIM are consistent for all periods presented. Such methodologies include the development of the cost-to-retail ratios, the development of shrinkage reserves and the accounting for price changes. At any one time, inventories include items that have been written down to the Company's best estimate of their realizable value. Factors considered in estimating realizable value include the age of merchandise and anticipated demand. Actual realizable value could differ materially from this estimate based upon future customer demand or economic conditions. SALES RETURNS: The Company estimates future sales returns and records a provision in the period that the related sales are recorded based on historical return rates. Should actual returns differ from the Company's estimates, the Company may be required to revise estimated sales returns. Although these estimates have not varied materially from historical provisions, estimating sales returns requires management judgment as to changes in preferences and quality of products being sold, among other things; therefore, these estimates may vary materially in the future. The sales returns calculations are regularly compared with actual return experience. In preparing its financial statements as of July 3, 2004, January 3, 2004 and July 5, 2003, the Company's sales returns reserve was approximately $5.8 million, $6.2 million and $4.7 million, respectively. IMPAIRMENT OF ASSETS: With the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", the Company reviews goodwill for possible impairment at least annually. Impairment losses are recognized when the implied fair value of goodwill is less than its carrying value. The Company is also required to follow the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which superceded an earlier pronouncement on the same topic but retained many of its fundamental provisions. It also expanded the scope of discontinued operations to include more disposal transactions and impacted the presentation of future store closings, if any, by the Company. Under SFAS No. 144 the Company periodically evaluates long-lived assets other than goodwill for indicators of impairment. As of July 3, 2004, January 3, 2004 and July 5, 2003, the Company's net value for property and equipment was approximately $559.7 million, $542.2 million and $534.2 million, respectively, and goodwill was approximately $18.1 million on each of the aforementioned dates. 24 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T STORE CLOSURE COSTS: In fiscal 2001, the Company recorded a pre-tax restructuring and asset impairment charge of $37.8 million ($23.7 million after-tax) related to the closing of certain under-performing stores. As of July 3, 2004, January 3, 2004 and July 5, 2003, the Company had $12.6 million, $15.6 million and $20.2 million, respectively, remaining related to this reserve. The Company has closed all of the initially identified stores other than one store, which the Company decided to keep open and whose reserve was reversed, and one other store which is expected to close during fiscal year 2004. The Company has continued to negotiate and/or explore lease buyouts or sublease agreements for these stores. The activity in the twenty-six week period ended July 3, 2004 includes the reversal of estimated lease commitment and other store closing costs of approximately $1.4 million as these reserves were not needed, offset by an increase to lease commitment costs by a like amount due to changes in estimates based on current negotiations. Final settlement of these reserves is predominantly a function of negotiations with unrelated third parties, and, as such, these estimates may be subject to change in the future. SELF-INSURANCE: The Company purchases third party insurance for worker's compensation, medical, auto and general liability costs that exceed certain levels for each type of insurance program. However, the Company is responsible for the payment of claims under these insured excess limits. The Company establishes accruals for its insurance programs based on available claims data and historical trend and experience, as well as loss development factors prepared by third party actuaries. The accrued obligation for these self-insurance programs was approximately $13.1 million as of July 3, 2004, $13.5 million as of January 3, 2004 and $9.4 million as of July 5, 2003. LITIGATION: The Company records an estimated liability related to various claims and legal actions arising in the ordinary course of business, which is based on available information and advice from outside counsel where applicable. As additional information becomes available, the Company assesses the potential liability related to its pending claims and may adjust its estimates accordingly. RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED JULY 3, 2004 COMPARED WITH THIRTEEN WEEKS ENDED JULY 5, 2003 Results of operations for the thirteen weeks and twenty-six weeks ended July 3, 2004 were impacted by an accounting change resulting from the implementation of the provisions of EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of merchandise sold when recognized in the Company's Condensed Consolidated Statement of Operations. EITF 02-16 is effective for contracts entered into or modified after December 31, 2002. This issue did not have a material impact on the Company's fiscal 2003 audited Consolidated Financial Statements as substantially all of the Company's vendor contracts in effect during fiscal 2003 were entered into prior to December 31, 2002. Beginning in the first quarter of fiscal 2004, as vendor agreements were initiated or modified, the Company applied the method of accounting for vendor allowances pursuant to EITF 02-16. In connection with the implementation of EITF 02-16, the Company treats certain funds received from vendors as a reduction in the cost of inventory and, as a result, these funds are recognized as a reduction to cost of merchandise sold when the inventory is sold. Accordingly, certain funds received from vendors, which were historically reflected as a reduction of advertising expense in selling, general and administrative expenses or cost of sales, are now treated as a reduction of cost of inventory. The provisions of EITF 02-16 impacted the Company's results of operations for the thirteen weeks and twenty-six weeks ended July 3, 2004 as follows (the "As Restated" amounts include the impact of EITF 02-16): 25 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
THIRTEEN WEEKS TWENTY-SIX WEEKS ---------------------------------- -------------------------------- EITF 02-16 EITF 02-16 AS ADJUSTMENT AS ADJUSTMENT (IN THOUSANDS, EXCEPT PER SHARE DATA) RESTATED IMPACT RESTATED IMPACT ---------------------------------------------------------------------------------------------------------------- Net sales $578,749 $ -- $1,131,549 $ -- Cost of sales 346,073 (3,411) 677,627 (3,552) ---------------------------------- -------------------------------- Gross profit 232,676 3,411 453,922 3,552 SG&A 231,475 (3,183) 453,763 (10,963) ---------------------------------- -------------------------------- Operating profit 1,201 6,594 159 14,515 Interest expense, net 1,045 -- 1,804 -- ---------------------------------- -------------------------------- Income (loss) before provision (benefit) for income taxes 156 6,594 (1,645) 14,515 Provision (benefit) for income taxes 59 2,519 (630) 5,544 ---------------------------------- -------------------------------- Net income (loss) $ 97 $ 4,075 $ (1,015) $ 8,971 ================================== ================================ Earnings (loss) per share Basic $ -- $ 0.09 $ (0.02) $ 0.20 Fully diluted $ -- $ 0.09 $ (0.02) $ 0.19
EITF 02-16 had no impact on the Company's cash flows. Following the initial implementation impact, subsequent fiscal years will reflect vendor allowances on a consistent basis other than for any net changes in vendor allowances. The EITF 02-16 pre-tax adjustments of $6.6 million and $14.5 million for the thirteen weeks and twenty-six weeks ended July 3, 2004, respectively, represents those allowances reflected as a reduction of the cost of inventory, which historically would have been treated as a reduction of cost of sales or SG&A. Beginning in fiscal 2004, due to the Company's changes to its vendor agreements and the requirements of EITF 02-16, the Company no longer records advertising allowances as a reduction to SG&A. The Company has allocated the EITF 02-16 pre-tax adjustment to SG&A based on the previous year ratio of vendor advertising allowances recorded within SG&A to sales. The remaining portion of the total EITF 02-16 pre-tax adjustment was allocated to cost of sales. Net sales for the thirteen weeks ended July 3, 2004 increased approximately 10.5% to $578.7 million, up from $523.7 million for the same period last year. The increase in net sales is primarily the result of new store openings since July 5, 2003. At July 3, 2004, the Company operated 473 stores, including 22 stores in Canada, as compared with 415 stores, including 16 stores in Canada, at July 5, 2003. Store square footage increased approximately 12% to 16.1 million at July 3, 2004 compared with 14.3 million at July 5, 2003. During the thirteen weeks ended July 3, 2004, the Company opened 12 stores and closed no stores as compared with opening 16 stores and closing one store during the same period last year. 26 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T Comparable net sales increased slightly compared to the same quarter last year. Comparable net sales increased 0.2% for the thirteen weeks ended July 3, 2004 compared to an increase of 0.1% for the same period last year. Overall, comparable net sales performance this quarter showed more variability than usual with positive comparable net sales in April and June offset by a softening in comparable net sales in May due to a decline in guest traffic. Overall average transaction size increased slightly which was offset by a decline in guest traffic. In addition to the cost of inventory sold, the Company includes its buying and distribution expenses in its cost of sales. Buying expenses include all direct and indirect costs to procure merchandise. Distribution expenses include the cost of operating the Company's distribution centers and freight expense related to transporting merchandise. Gross profit for the thirteen weeks ended July 3, 2004 was $232.7 million, or 40.2% of net sales, compared with $214.0 million, or 40.9% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $3.4 million, or 0.6% of net sales, for the thirteen weeks ended July 3, 2004, accounting for substantially all of the overall decline in gross profit as a percentage of net sales compared to the prior year. In addition to the decline in gross profit from the EITF 02-16 impact, gross profit declined because of higher freight costs due in part to rising fuel prices offset by a gross profit improvement due to better markdown management as well as slightly less promotional activity. The Company's selling, general and administrative ("SG&A") expenses consist of store selling expenses, occupancy costs, advertising expenses and corporate office expenses. SG&A expenses for the thirteen weeks ended July 3, 2004 were $231.5 million, or 40.0% of net sales, compared with $205.2 million, or 39.2% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $3.2 million, or 0.5% of net sales, for the thirteen weeks ended July 3, 2004. In addition to the increase in SG&A from the EITF 02-16 impact, SG&A increased as a percentage of net sales primarily due to an increase in occupancy cost which grew at a faster rate than sales, partially offset by store payroll and certain operating costs which grew at a slower rate than sales. SG&A for the thirteen weeks ended July 5, 2003 also included advertising credits equaling 0.5% of net sales which, as a part of the EITF 02-16 implementation, are no longer classified as an offset to SG&A in fiscal 2004. Operating profit for the thirteen weeks ended July 3, 2004 was $1.2 million, or 0.2% of net sales, compared with $8.8 million, or 1.7% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $6.6 million, or 1.1% of net sales, for the thirteen weeks ended July 3, 2004. Net interest expense for the thirteen weeks ended July 3, 2004 decreased to $1.0 million from $1.1 million during the same period last year. The decrease in net interest expense is mainly due to lower average borrowings based on the Company's positive cash flows since July 5, 2003. The Company's income tax expense was $0.1 million for the thirteen weeks ended July 3, 2004, compared with $2.9 million for the same period last year. The EITF 02-16 adjustment impact was $2.5 million for the thirteen weeks ended July 3, 2004. The Company's effective tax rate was 38.2% for both the thirteen weeks ended July 3, 2004 and July 5, 2003. As a result of the factors described above, net income for the thirteen weeks ended July 3, 2004 was $0.1 million, or zero earnings per share on a fully diluted basis, compared with $4.8 million, or $0.11 per share on a fully diluted basis for the same period last year. The EITF 02-16 adjustment impact was $4.1 million, or $0.09 per share on a fully diluted basis, for the thirteen weeks ended July 3, 2004. TWENTY-SIX WEEKS ENDED JULY 3, 2004 COMPARED WITH TWENTY-SIX WEEKS ENDED JULY 5, 2003 Net sales increased 12.7% to $1,131.5 million for the twenty-six weeks ended July 3, 2004, up from $1,004.1 million for the same period last year, primarily as a result of new store openings since July 5, 2003. During the twenty-six weeks ended July 3, 2004, the Company opened 33 stores and closed no stores compared with opening 32 stores and closing eight stores during the same period last year. Comparable net sales for the twenty-six weeks ended July 3, 2004 increased 2.3% as compared with a decline of 1.5% for the same period last year. The increase in comparable net sales for the twenty-six weeks ended July 3, 2004 is primarily due to an increase in guest traffic and average transaction size, primarily during the first quarter of 2004. 27 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T Gross profit for the twenty-six weeks ended July 3, 2004 was $453.9 million, or 40.1% of net sales, compared with $408.3 million, or 40.7% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $3.6 million, or 0.3% of net sales, for the twenty-six weeks ended July 3, 2004. In addition to the decline in gross profit from the EITF 02-16 impact, gross profit declined as a result of higher freight costs due in part to rising fuel prices partially offset by an improvement in the management of markdowns. SG&A expenses for the twenty-six weeks ended July 3, 2004 were $453.7 million, or 40.1% of net sales, compared with $396.4 million, or 39.5% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $10.9 million, or 1.0% of net sales, for the twenty-six weeks ended July 3, 2004. The increase in SG&A as a percentage of net sales is primarily attributable to the impact of the EITF 02-16 adjustment and occupancy costs which grew at a faster rate than sales, offset by store payroll and certain other operating costs which grew at a slower rate than sales. Operating profit for the twenty-six weeks ended July 3, 2004 was $0.2 million, or zero percent of net sales, compared with $11.9 million, or 1.2% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $14.5 million, or 1.3% of net sales, for the twenty-six weeks ended July 3, 2004. The Company incurred net interest expense of $1.8 million for the twenty-six weeks ended July 3, 2004, compared with $2.0 million for the same period last year. The decrease in net interest expense is mainly due to lower average borrowings based on the Company's positive cash flows since July 5, 2003. The Company's income tax benefit for the twenty-six weeks ended July 3, 2004 was $0.6 million compared with income tax expense of $3.8 million for the same period last year. The EITF 02-16 adjustment impact was $5.5 million for the twenty-six weeks ended July 3, 2004. The Company's effective tax rate was 38.2% for both the twenty-six weeks ended July 3, 2004 and July 5, 2003. As a result of the factors described above, net loss for the twenty-six weeks ended July 3, 2004 was $1.0 million, or $(0.02) per share on a fully diluted basis, compared with net income of $6.1 million, or $0.14 per share on a fully diluted basis for the same period last year. The EITF 02-16 adjustment impact was $9.0 million, or $0.19 per share on a fully diluted basis, for the twenty-six weeks ended July 3, 2004. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements are primarily for new store expenditures, new store inventory purchases and seasonal working capital. These requirements have been funded through a combination of internally generated cash flows from operations, credit extended by suppliers and short-term borrowings. In June 2002, the Company amended and extended its $150 million senior revolving credit facility agreement (the "Credit Agreement") with third party institutional lenders to expire April 20, 2005. The Credit Agreement allows for up to $40 million of borrowings from additional lines of credit outside of the Credit Agreement. As of July 3, 2004, the additional lines of credit include committed facilities of approximately $15 million that expire on December 31, 2004 and $11 million that expire on June 15, 2005 and are subject to periodic renewal arrangements. As of July 3, 2004, the Company was in compliance with its covenants under the Credit Agreement. As of July 3, 2004, the Company had no borrowings under the Credit Agreement and approximately $6.0 million in borrowings under the additional lines of credit at a weighted average interest rate of 3.6%. The Company also had $71.2 million of letters of credit outstanding as of July 3, 2004, which included standby letters of credit issued primarily under the Credit Agreement and import letters of credit used for merchandise purchases. The Company is not obligated under any formal or informal compensating balance requirements. See Note 4 to the Condensed Consolidated Financial Statements. The Company maintains a trade payables arrangement with General Electric Capital Corporation ("GECC") under which GECC purchases the Company's payables at a discount directly from the Company's suppliers prior to the payables due date, thereby permitting a supplier to receive payment prior to the due date of the payable, with the Company sharing in part of the GECC discount. At July 3, 2004, January 3, 2004, and July 5, 2003, the Company owed approximately $76.4 million, $66.2 million, and $91.3 million, respectively, to GECC under this program, which was included in accounts payable. Either party may terminate the program for any reason upon 30 days prior written notice. The maximum amount permitted under the program was $95 million as of July 3, 2004. 28 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T Net cash used in operating activities for the twenty-six weeks ended July 3, 2004 was $72.4 million compared with $25.5 million used in operating activities for the same period last year. The increase in cash used between periods is primarily due to the timing of vendor payments. Net cash used in investing activities for the twenty-six weeks ended July 3, 2004 was $57.4 million, compared with $68.0 million for the same period last year. The Company currently estimates capital expenditures will be approximately $107 million to $114 million in fiscal 2004, primarily for an estimated 50 new stores for the year, maintenance of existing stores, and system enhancements. Net cash provided by financing activities for the twenty-six weeks ended July 3, 2004 was $12.9 million compared with $16.1 million for the same period last year. The decrease is due to lower short-term borrowings partially offset by greater proceeds from common stock issued under stock incentive plans. Management regularly reviews and evaluates its liquidity and capital needs. The Company experiences peak periods for its cash needs generally during the second quarter and fourth quarter of the fiscal year. As the Company's business continues to grow and its current store expansion plan is implemented, such peak periods may require increases in the amounts available under its credit facilities from those currently existing and/or other debt or equity funding. Management currently believes that the Company's cash flows from operations, credit extended by suppliers, its access to credit facilities and its uncommitted lines of credit will be sufficient to fund its expected capital expenditures, working capital and non-acquisition business expansion requirements for at least the next 12 to 18 months. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Emerging Issues Task Force ("EITF") issued EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of merchandise sold when recognized in the Company's Condensed Consolidated Statement of Operations. That presumption may be overcome when the consideration is either a reimbursement of specific, incremental and identifiable costs incurred to sell the vendor's products, or a payment for assets or services delivered to the vendor. EITF 02-16 is effective for contracts entered into or modified after December 31, 2002. This issue did not have a material impact on the Company's fiscal 2003 audited consolidated financial statements as substantially all of the Company's vendor contracts in effect during fiscal 2003 were entered into prior to December 31, 2002. Beginning in the first quarter of fiscal 2004, as vendor agreements are initiated or modified, the Company applies the method of accounting for vendor allowances pursuant to EITF 02-16. In connection with the implementation of EITF 02-16, the Company treats certain funds received from vendors as a reduction in the cost of inventory and, as a result, these funds are recognized as a reduction to cost of merchandise sold when the inventory is sold. Accordingly, certain funds received from vendors, which were historically reflected as a reduction of advertising expense in SG&A or cost of sales, are now treated as a reduction of cost of inventory. With the adoption of EITF 02-16 all allowances are netted against cost of sales. Based on the Company's current evaluation, the estimated impact from the implementation of EITF 02-16 is expected to reduce fully diluted earnings per share on a non-cash basis by approximately $0.27 to $0.28 for fiscal 2004, as a result of delaying the recognition of vendor allowances until the related inventory is sold. The provisions of EITF 02-16 impacted the Company's results of operations by approximately $9.0 million, net of tax, or $0.19 per fully diluted share for the twenty-six weeks ended July 3, 2004. The Company currently expects SG&A on an annualized basis to increase by approximately 1.1% as a percent of net sales as a result of the implementation of EITF 02-16. EITF 02-16 had no impact on the Company's cash flows. Following the initial implementation impact, subsequent fiscal years will reflect vendor allowances on a consistent basis other than for any net changes in vendor allowances. 29 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"). This statement amends SFAS Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.123"), and provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used. For the thirteen and twenty-six week period ended July 3, 2004, the Company accounted for stock options using the intrinsic value method prescribed under APB Opinion 25, and accordingly, the Company did not recognize compensation expense for stock options. The Company continues to account for stock-based compensation using APB Opinion No. 25 and has not adopted the recognition provisions of SFAS No. 123, as amended by SFAS No. 148. However, the Company has adopted the disclosure provisions and has included this information in Note 7 to the Company's Condensed Consolidated Financial Statements. INFLATION The Company does not believe that its operating results have been materially affected by inflation during the preceding three years. There can be no assurance, however, that the Company's operating results will not be affected by inflation in the future. SEASONALITY The Company's business is subject to substantial seasonal variations. Historically, the Company has realized a significant portion of its net sales and net income for the year during the third and fourth quarters. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings. The Company believes this is the general pattern associated with its segment of the retail industry and expects this pattern will continue in the future. Consequently, comparisons between quarters are not necessarily meaningful and the results for any quarter are not necessarily indicative of future results. FORWARD-LOOKING STATEMENTS The foregoing contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. The statements are made a number of times and may be identified by such forward-looking terminology as "expect," "believe," "may," "intend," "plan," "target," "outlook," "comfortable with" and similar terms or variations of such terms. All of our information and statements regarding our outlook for the future including future revenues, comparable sales performance, earnings, EITF 02-16 impact, and other future financial condition, impact, results and performance, constitute forward-looking statements. All of our forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company and involve certain significant risks and uncertainties, including levels of sales, store traffic, acceptance of product offerings and fashions and our ability to anticipate and successfully respond to changing consumer tastes and preferences, the success of our new business concepts, seasonal concepts and new brands, the performance of our new stores, substantial competitive pressures from other home furnishings retailers, the success of our Canadian operations, availability of suitable future store locations, schedule of store expansion and of planned closings, the impact of the bankruptcies and consolidations in our industry, unusual weather patterns, the impact on consumer spending as a result of the slower consumer economy, a highly promotional retail environment, any significant variations between actual amounts and the amounts estimated for those matters identified as our critical accounting estimates as well as other significant accounting estimates made in the preparation of our financial statements, timing and actual amount of vendor allowances and the actual impact in fiscal 2004 of EITF 02-16, and our ability to successfully implement and achieve the expected productivity from our strategic and other store 30 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T initiatives. If these or other risks or uncertainties materialize, or if our estimates or underlying assumptions prove inaccurate, actual results could differ materially from any future results, express or implied by our forward-looking statements. These and other important risk factors are included in the "Risk Factors" section of the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on June 18, 2002 and are contained in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. You are urged to consider all such factors. In light of the 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. 31 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company continuously evaluates the market risk associated with its financial instruments. Market risks relating to the Company's operations result primarily from changes in interest rates and foreign exchange rates. The Company does not engage in financial transactions for trading or speculative purposes. INTEREST RATE RISK The Company's financial instruments include cash and cash equivalents and short-term borrowings. The Company's obligations are short-term in nature and generally have less than a 30-day commitment. The Company is exposed to interest rate risks primarily through borrowings under the Credit Agreement and its uncommitted credit facilities. Interest on all borrowings is based upon several alternative rates as stipulated in the Credit Agreement, including a fixed margin above LIBOR. As of July 3, 2004, the Company had no borrowings under the Credit Agreement and $6.0 million in borrowings under the additional lines of credit at a weighted average interest rate of 3.6% (see Note 4 to the Condensed Consolidated Financial Statements). The Company believes that its interest rate risk is minimal as a hypothetical 10% increase or decrease in interest rates in the associated debt's variable rate would not materially affect the Company's results from operations or cash flows. The Company does not use derivative financial instruments in its investment portfolio. FOREIGN CURRENCY RISK The Company enters into some purchase obligations outside of the United States, which are predominately settled in U.S. dollars, and therefore, the Company has only minimal exposure to foreign currency exchange risks. The Company does not hedge against foreign currency risks and believes that foreign currency exchange risk is immaterial. In addition, the Company operated 22 stores in Canada as of July 3, 2004. The Company believes its foreign currency translation risk is minimal, as a hypothetical 10% strengthening or weakening of the U.S. dollar relative to the Canadian dollar would not materially affect the Company's results from operations or cash flow. Since fiscal year end 2003, there have been no material changes in market risk exposures. 32 ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES On March 7, 2005, management and the Audit Committee discussed the issues regarding the Company's method of accounting for leases and landlord allowances with the Company's independent registered public accounting firm and determined that the Company's accounting for these items was not consistent with the views expressed by the SEC in a letter dated February 7, 2005. Accordingly, management and the Audit Committee concluded that the Company should restate its annual financial statements for fiscal years 2002 and 2003 presented in its fiscal 2004 Annual Report on Form 10-K, and its quarterly financial information for the four quarters of fiscal year 2003 and the first three quarters of fiscal year 2004. The restatement is further discussed in the "Explanatory Note" in the forepart of this Form 10-Q/A (Amendment No. 1) and in Note 2, "Restatement of Financial Statements and Other Immaterial Adjustments and Reclassifications," to the accompanying Condensed Consolidated Financial Statements. Public Company Accounting Oversight Board's Auditing Standard No. 2, AN AUDIT OF INTERNAL CONTROL OVER FINANCIAL REPORTING PERFORMED IN CONJUNCTION WITH AN AUDIT OF FINANCIAL STATEMENTS, provides that a restatement of previously issued financial statements is a strong indicator of the existence of a "material weakness" in the design or operation of internal control over financial reporting. Accordingly, management concluded that the control deficiency that resulted in the incorrect lease accounting represented a material weakness in internal control over financial reporting. In connection with the restatement referred to above, the Company's management, including its Chief Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report (July 3, 2004). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that as a result of the aforementioned material weakness related to lease accounting, the Company's disclosure controls and procedures were not effective, as of the end of the period covered by this Report (July 3, 2004), in ensuring that material information relating to Linens 'n Things, Inc., including its consolidated subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company has remediated the material weakness in the Company's internal control over financial reporting, subsequent to January 1, 2005, by implementing additional review procedures over the selection and monitoring of appropriate assumptions and factors affecting lease accounting practices. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the fiscal quarter to which this report relates, there were no changes in the Company's internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control over financial reporting. During the fourth quarter of 2004, as part of the Section 404 internal control assessment process, management determined that there was a material weakness in the design of controls over inventory existence due to the timing of its physical inventories and the cycle counting procedures over inventory that were in place. The Company remediated this control deficiency by the end of fiscal 2004 by enhancing its inventory cycle count procedures within the fourth quarter to confirm the existence of inventory. 33 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The shareholders of the company voted on two items at the Annual Meeting of Shareholders held on May 6, 2004: 1. To elect two directors for a three-year term 2. To consider and act upon a proposal to approve the adoption of the 2004 Stock Award and Incentive Plan The nominees for directors were elected based upon the following votes: VOTES NOMINEE VOTES FOR WITHHELD ----------------- -------------- --------------- Stanley P. 42,124,839 859,467 Goldstein Robert Kamerschen 41,748,850 1,235,456 The proposal to approve the 2004 Stock Award and Incentive Plan received the following votes: Votes for approval 26,459,583 Votes against 13,067,366 Abstentions 598,256 Broker non-votes 2,859,101 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 15 Acknowledgment of Independent Registered Public Accounting Firm. 31.1 Certification of Norman Axelrod, Chairman and Chief Executive Officer of the Company, Pursuant to Securities Exchange Act Rule 13a-14(a). 31.2 Certification of William T. Giles, Executive Vice President and Chief Financial Officer of the Company, Pursuant to Securities Exchange Act Rule 13a-14(a). 32 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002, by Norman Axelrod, Chairman and Chief Executive Officer of the Company, and William T. Giles, Executive Vice President and Chief Financial Officer of the Company. (b) REPORTS ON FORM 8-K The Company furnished the following reports on Form 8-K during the quarter for which this report on Form 10-Q is filed: The Company furnished a Current Report on Form 8-K dated April 20, 2004 in reference to a press release dated April 20, 2004 reporting the Company's sales and earnings results for the thirteen weeks ended April 3, 2004. The Company furnished a Current Report on Form 8-K dated June 25, 2004 regarding a change in certifying accountant for the Company's 401(k) Plan. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to this Quarterly Report on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized. LINENS 'N THINGS, INC. DATED: July 1, 2005 BY: /s/ Norman Axelrod ----------------- NAME: Norman Axelrod TITLE: Chairman and Chief Executive Officer DATED: July 1, 2005 BY: /s/ William T. Giles ------------------- NAME: William T. Giles TITLE: Executive Vice President and Chief Financial Officer 35 EX-15 2 tex15-6834a.txt EX-15 EXHIBIT 15 ACKNOWLEDGMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Linens 'n Things, Inc. Clifton, New Jersey Board of Directors: Re: Registration Statements Numbers 333-116719, 333-116720, 333-71903, 333-42874, 333-55803, 333-62982 and 333-62984 on Form S-8 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 29, 2004, except as to Note 2 which is as of June 30, 2005, related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an Independent Registered Public Accounting Firm or a report prepared or certified by an Independent Registered Public Accounting Firm within the meaning of sections 7 and 11 of the Securities Act of 1933. /s/ KPMG LLP KPMG LLP New York, New York July 1, 2005 36 EX-31.1 3 tex31_1-6834a.txt EX-31.1 EXHIBIT 31.1 CERTIFICATIONS I, Norman Axelrod, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q/A (Amendment No. 1) of Linens 'n Things, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: July 1, 2005 /s/ Norman Axelrod - ------------------ NORMAN AXELROD CHAIRMAN AND CHIEF EXECUTIVE OFFICER 37 EX-31.2 4 tex31_2-6834a.txt EX-31.2 EXHIBIT 31.2 CERTIFICATIONS I, William T. Giles, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q/A (Amendment No. 1) of Linens 'n Things, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: July 1, 2005 /s/ William T. Giles - -------------------- WILLIAM T. GILES EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 38 EX-32 5 tex32-6834a.txt EX-32 EXHIBIT 32 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this Quarterly Report on Form 10-Q/A (Amendment No. 1) of Linens 'n Things, Inc. (the "Company") for the quarterly period ended July 3, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Norman Axelrod, as Chief Executive Officer of the Company, and William T. Giles, as Chief Financial Officer, each hereby certifies, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Norman Axelrod - --------------------------------- NAME: Norman Axelrod TITLE: Chairman and Chief Executive Officer DATE: July 1, 2005 /s/ William T. Giles - --------------------------------- NAME: William T. Giles TITLE: Executive Vice President and Chief Financial Officer DATE: July 1, 2005 39 -----END PRIVACY-ENHANCED MESSAGE-----