-----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, LmtK3HLFd0U5mDSOpSB37eEBOqGruPJaCUHKLkdhH2O3e/H0SITYfidXc3uLj59X BVKH+gWizoL6j+gA4Jqpvg== 0001188112-05-001295.txt : 20050701 0001188112-05-001295.hdr.sgml : 20050701 20050701142506 ACCESSION NUMBER: 0001188112-05-001295 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041002 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: 05932477 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-6834b.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 October 2, 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 November 3, 2004: 45,177,493 1
INDEX PAGE NO. -------- EXPLANATORY STATEMENT 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks Ended October 2, 2004 (Restated) and October 4, 2003 (Restated) 4 Condensed Consolidated Balance Sheets as of October 2, 2004 (Restated), January 3, 2004 and October 4, 2003 (Restated) 5 Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 2, 2004 (Restated) and October 4, 2003 (Restated) 6 Notes to Condensed Consolidated Financial Statements 7 - 22 Report of Independent Registered Public Accounting Firm 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24 - 30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31 ITEM 4. CONTROLS AND PROCEDURES 32 PART II. OTHER INFORMATION ITEM 6. EXHIBITS 33 SIGNATURES 34
2 EXPLANATORY STATEMENT As previously disclosed in the Linens `n Things, Inc. (the "Company") Current Report on Form 8-K dated March 11, 2005, following a review of its lease accounting policies, the Company determined that it should restate its financial statements for all fiscal years presented in its Annual Report on Form 10-K for the period ended January 1, 2005, other than for the year ended January 1, 2005 ("fiscal 2004"), and for the first three quarters of fiscal 2004 and the four quarters of fiscal 2003. The Company filed its Annual Report on Form 10-K for the period ended January 1, 2005 on April 1, 2005. On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a clarification regarding lease accounting under generally accepted accounting principles in the United States of America ("GAAP"). As a result of this clarification, the Company reviewed its lease accounting practices and determined that its former methods of accounting for leases and landlord allowances were not consistent with the views expressed by the SEC. As a result, the Company has corrected the way it accounts for its leases and landlord allowances, specifically the accounting for straight-line rent expense and landlord allowances. In addition, the Company has also made other immaterial adjustments and reclassifications related to its trade payables program with General Electric Capital Corporation ("GECC") and its deferred compensation plan. The accompanying Condensed Consolidated Financial Statements have been restated from amounts previously reported to incorporate the effects of these corrections and reclassifications. This Amendment No. 1 on Form 10-Q/A ("Form 10-Q/A") to our Quarterly Report on Form 10-Q for the quarterly period ended October 2, 2004, initially filed with the SEC on November 12, 2004 (the "Original Filing"), is being filed to reflect the restatement of the Company's Condensed Consolidated Financial Statements for the thirteen week and thirty-nine week periods ended October 2, 2004 and October 4, 2003. For a more detailed description of this restatement, see Note 2, "Restatement of Financial Statements and Other Immaterial Adjustments and Reclassifications," to the accompanying Condensed Consolidated Financial Statements. For the convenience of the reader, this Form 10-Q/A sets forth the original Filing in its entirety. However, this Form 10-Q/A only amends and restates certain information in Items 1, 2 and 4 of Part I of the Original Filing, in each case solely as a result of and to reflect the restatement, and no other information in the Original Filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently dated certifications from the Company's Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as exhibits 31.1, 31.2 and 32, respectively. Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that occurred at a later date. Among other things, forward looking statements made in the Original Filing have not been revised to reflect events, results or developments that occurred or facts that became known to the Company after the date of the Original Filing (other than the restatement), and such forward looking statements should be read in their historical context. The Company has not amended and does not intend to amend its previously filed Annual Reports on Form 10-K or its Quarterly Reports on Form 10-Q for the periods affected by the restatement that ended prior to January 3, 2004. For this reason, the consolidated financial statements, auditors reports and related financial information for the affected periods contained in any other prior reports should no longer be relied upon. 3
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LINENS 'N THINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------- --------------------------- OCTOBER 2, OCTOBER 4, OCTOBER 2, OCTOBER 4, 2004 2003 2004 2003 (RESTATED) (RESTATED) (RESTATED) (RESTATED) ----------- ----------- ----------- ----------- NET SALES $ 654,196 $ 602,816 $ 1,785,745 $ 1,606,959 Cost of sales, including buying and distribution costs 385,090 360,064 1,062,717 955,950 ----------- ----------- ----------- ----------- GROSS PROFIT 269,106 242,752 723,028 651,009 Selling, general and administrative expenses 240,664 208,666 694,427 605,038 ----------- ----------- ----------- ----------- OPERATING PROFIT 28,442 34,086 28,601 45,971 Interest income (138) (20) (306) (90) Interest expense 788 1,033 2,760 3,041 ----------- ----------- ----------- ----------- Interest expense, net 650 1,013 2,454 2,951 ----------- ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 27,792 33,073 26,147 43,020 Provision for income taxes 10,617 12,635 9,987 16,436 ----------- ----------- ----------- ----------- NET INCOME $ 17,175 $ 20,438 $ 16,160 $ 26,584 =========== =========== =========== =========== BASIC EARNINGS PER SHARE $ 0.38 $ 0.46 $ 0.36 $ 0.60 =========== =========== =========== =========== FULLY DILUTED EARNINGS PER SHARE $ 0.38 $ 0.45 $ 0.35 $ 0.59 =========== =========== =========== =========== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
LINENS 'N THINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) OCTOBER 2, JANUARY 3, OCTOBER 4, 2004 2004 2003 ----------- ----------- ----------- (RESTATED) (RESTATED) (UNAUDITED) (AUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 54,460 $ 136,129 $ 22,731 Accounts receivable 26,494 29,531 24,725 Inventories 794,169 700,406 744,373 Prepaid expenses and other current assets 34,615 33,253 32,507 Current deferred taxes 472 1,295 -- ----------- ----------- ----------- TOTAL CURRENT ASSETS 910,210 900,614 824,336 Property and equipment, net of accumulated depreciation of $361,689, $304,612 and $289,388 at October 2, 2004, January 3, 2004 and October 4, 2003, respectively 568,606 542,191 543,425 Goodwill, net 18,126 18,126 18,126 Deferred charges and other noncurrent assets, net 7,709 6,525 6,368 ----------- ----------- ----------- TOTAL ASSETS $ 1,504,651 $ 1,467,456 $ 1,392,255 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 279,169 $ 250,142 $ 298,221 Accrued expenses and other current liabilities 140,038 176,194 132,185 Current deferred taxes 7,138 15,759 7,152 Short-term borrowings 560 -- 3,221 ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 426,905 442,095 440,779 Deferred income taxes and other long-term liabilities 315,539 287,984 273,808 ----------- ----------- ----------- TOTAL LIABILITIES 742,444 730,079 714,587 ----------- ----------- ----------- Shareholders' equity: Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding -- -- -- Common stock, $0.01 par value; 135,000,000 shares authorized; 45,403,722 shares issued and 45,145,761 shares outstanding at October 2, 2004; 45,052,255 shares issued and 44,793,619 shares outstanding at January 3, 2004; and 44,458,107 shares issued and 44,203,264 shares outstanding at October 4, 2003 454 450 444 Additional paid-in capital 370,749 362,483 349,321 Retained earnings 396,553 380,393 334,218 Accumulated other comprehensive income 1,817 1,391 927 Treasury stock, at cost; 257,961 shares at October 2, 2004, 258,636 shares at January 3, 2004 and 254,843 shares at October 4, 2003 (7,366) (7,340) (7,242) ----------- ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 762,207 737,377 677,668 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,504,651 $ 1,467,456 $ 1,392,255 =========== =========== =========== SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
LINENS 'N THINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) THIRTY-NINE WEEKS ENDED ------------------------- OCTOBER 2, OCTOBER 4, 2004 2003 (RESTATED) (RESTATED) --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 16,160 $ 26,584 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 60,023 52,797 Deferred income taxes 3,423 21,590 Loss on disposal of assets 1,357 772 Federal tax benefit from common stock issued under stock incentive plans 1,297 418 Changes in assets and liabilities: Decrease (increase) in accounts receivable 3,090 (130) Increase in inventories (92,578) (127,472) Increase in prepaid expenses and other current assets (1,397) (8,203) Increase in deferred charges and other noncurrent assets (1,539) (348) Increase in accounts payable 28,549 79,758 Decrease in accrued expenses and other liabilities (20,462) (18,061) --------- --------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,077) 27,705 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (86,916) (95,520) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock issued under stock incentive plans 6,974 2,651 Increase in short-term borrowings 532 1,070 Decrease in treasury stock (26) (33) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 7,480 3,688 --------- --------- Effect of exchange rate changes on cash and cash equivalents (156) 253 --------- --------- Net decrease in cash and cash equivalents (81,669) (63,874) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 136,129 86,605 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,460 $ 22,731 ========= ========= CASH PAID DURING THE YEAR FOR: Interest (net of amounts capitalized) $ 2,813 $ 3,324 Income taxes $ 11,214 $ 11,036 SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying Condensed Consolidated Financial Statements are unaudited. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of Linens 'n Things, Inc. and its subsidiaries (collectively the "Company") as of October 2, 2004 and October 4, 2003 and the results of operations for the respective thirteen and thirty-nine weeks then ended and cash flows for the thirty-nine weeks then ended. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Because of the seasonality of the specialty retailing business, operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's audited Consolidated Financial Statements for the fiscal year ended January 3, 2004, included in the Company's 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission (see Explanatory Statement and Note 2, "Restatement of Financial Statements and Other Immaterial Adjustments and Reclassifications," to the accompanying Condensed Consolidated Financial Statements). All significant intercompany accounts and transactions have been eliminated. Certain prior period vendor accounts receivable balances have been reclassified to accounts payable to conform with the current period presentation. These reclassifications decreased accounts receivable and accounts payable by equal amounts. 2. RESTATEMENT OF FINANCIAL STATEMENTS AND OTHER IMMATERIAL ADJUSTMENTS AND RECLASSIFICATIONS RESTATEMENT OF FINANCIAL STATEMENTS: On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a clarification regarding lease accounting under generally accepted accounting principles in the United States of America ("GAAP"). As a result of this clarification, the Company reviewed its lease accounting practices and determined that its former methods of accounting for leases and landlord allowances were not consistent with the views expressed by the SEC. As a result, the Company has restated its Consolidated Financial Statements for each of the fiscal years ended January 3, 2004 ("fiscal 2003") and January 4, 2003 ("fiscal 2002"), and the first three quarters of fiscal 2004 and the four quarters of fiscal 2003, set forth and contained in its fiscal 2004 Form 10-K. In addition, the Company restated its Condensed Consolidated Financial Statements for the first and second quarters of fiscal years 2004 and 2003, set forth and contained in Forms 10-Q/A (Amendment No. 1) filed with the SEC on April 19, 2005 and July 1, 2005 for the first quarter and second quarter, respectively. Historically, the Company had recognized rent expense commencing as of the store opening date as opposed to when the Company took possession of the leased property. The Company's landlords typically provide access to the leased property free-of-charge for a period of time before the store opening so that the Company can build out or fixture the store and stock it with merchandise. Based on its evaluation, the Company now includes this period in calculating straight-line rent expense and amortization of landlord allowances and lease acquisition fees. The Company has corrected its accounting to recognize rent and amortization expense on a straight-line basis over the expected lease term, including cancelable option periods in those instances where exercising such options is reasonably assured. Previously, the Company did not include these cancelable option periods in calculating straight-line rent expense and amortization expense for lease acquisition fees. 7 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D For new stores, the Company generally receives allowances from landlords for the construction of leasehold improvements. Historically, landlord allowances had been classified on the Condensed Consolidated Balance Sheets as a reduction of property and equipment and had been classified as a reduction in capital expenditures on the Condensed Consolidated Statements of Cash Flows. The Company now classifies landlord allowances as deferred rent credit reflected in long-term liabilities on the Condensed Consolidated Balance Sheets and as an operating activity on the Condensed Consolidated Statements of Cash Flows. This adjustment increased both property and equipment and other long-term liabilities on the Condensed Consolidated Balance Sheets by approximately $170.7 million as of October 2, 2004. As a result of the restatement pertaining to lease accounting, selling, general and administrative expenses ("SG&A") increased approximately $0.5 million and $0.9 million for the thirteen weeks ended October 2, 2004 and October 4, 2003, respectively, and approximately $3.0 million and $3.7 million for the thirty-nine weeks ended October 2, 2004 and October 4, 2003, respectively. Earnings per share on a fully diluted basis decreased by approximately $0.01 and $0.02 for the thirteen weeks ended October 2, 2004 and October 4, 2003, respectively. Earnings per share on a fully diluted basis decreased by approximately $0.04 and $0.05 for the thirty-nine weeks ending October 2, 2004 and October 4, 2003, respectively. The cumulative impact of the correction of accounting for leases decreased retained earnings, net of tax, by approximately $20.2 million as of January 4, 2003. OTHER IMMATERIAL ADJUSTMENTS AND RECLASSIFICATIONS: The Company maintains a trade payables arrangement with General Electric Capital Corporation ("GECC") under which GECC purchases the Company's payables at a discount directly from the Company's suppliers prior to the payables due date, thereby permitting a supplier to receive payment prior to the due date of the payable, with the Company sharing in part of the GECC discount. At October 2, 2004, January 3, 2004, and October 4, 2003, the Company owed approximately $67.4 million, $66.2 million, and $100.6 million, respectively, to GECC under this program, which was included in accounts payable. Either party may terminate the program for any reason upon 30 days prior written notice. The maximum amount permitted under the program was $95 million as of October 2, 2004. Certain prior period balances relating to this trade payables program with GECC have been adjusted and reclassified. Pursuant to the agreement with GECC any favorable economics realized by GECC for transactions under this program are shared with the Company. As a result of these adjustments, the Company now recognizes the gross discount earned as part of the program as a reduction of the cost of inventory in the Condensed Consolidated Balance Sheets and records the related portion of interest expense due GECC as interest expense in the Condensed Consolidated Statements of Operations. Prior to the fourth quarter of fiscal 2004, only the Company's share was reflected as a reduction of cost of sales in the Condensed Consolidated Statements of Operations. As a result of the adjustment and reclassification related to the GECC program, interest expense increased approximately $0.7 million and $0.8 million for the thirteen weeks ended October 2, 2004 and October 4, 2003, respectively, and approximately $2.3 million and $2.4 million for the thirty-nine weeks ended October 2, 2004 and October 4, 2003, respectively. Cost of sales decreased approximately $1.1 million and $0.8 million for the thirteen weeks ended October 2, 2004 and October 4, 2003, respectively, and approximately $2.1 million and $2.5 million for the thirty-nine weeks ended October 2, 2004 and October 4, 2003, respectively. Earnings per share on a fully diluted basis increased approximately $0.01 and was not impacted for the thirteen weeks ended October 2, 2004 and October 4, 2003, respectively. Earnings per share on a fully diluted basis was not impacted for each of the thirty-nine weeks ending October 2, 2004 and October 4, 2003, respectively. The cumulative impact of this adjustment decreased retained earnings, net of tax, by approximately $1.3 million as of January 4, 2003. Certain prior period balances relating to the Company's deferred compensation plan (the "Plan") have been reclassified. The related deferred compensation obligation, totaling $2.7 million at October 2, 2004, was reclassified to accrued expenses and other current liabilities from deferred income taxes and other long-term liabilities. In addition, the Plan's investment in shares of the Company's common stock totaling $0.7 million at October 2, 2004 was reclassified to treasury stock from other current assets. A summary of the effects of these changes on the Company's Condensed Consolidated Balance Sheet at October 2, 2004 and October 4, 2003, the Condensed Statements of Operations for the respective thirteen and thirty-nine weeks then ended, and the Condensed Statements of Cash Flows for the thirty-nine weeks then ended is as follows: 8
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Statement of Operations Thirteen Weeks Ended October 2, 2004 (In thousands, except per share amounts) (Restated) (Unaudited) - -------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ---------------------- Cost of sales $ 386,191 $(1,101)(B) $ 385,090 Gross profit 268,005 1,101 (B) 269,106 SG&A expenses 240,127 537 (A) 240,664 Operating profit 27,878 (537)(A) 28,442 1,101 (B) ----------------------- 564 ----------------------- Interest expense 136 652 (B) 788 Interest (income) expense, net (2) 652 (B) 650 Income before income taxes 27,880 (537)(A) 27,792 449 (B) ----------------------- (88) ----------------------- Provision for income taxes 10,650 (205)(A) 10,617 172 (B) ----------------------- (33) ----------------------- Net income 17,230 (332)(A) 17,175 277 (B) ----------------------- (55) ----------------------- Net income per share - basic $ 0.38 $(0.01)(A) $ 0.38 0.01 (B) ----------------------- -- ----------------------- Net income per share - fully diluted $ 0.38 $(0.01)(A) $ 0.38 0.01 (B) ----------------------- -- ----------------------- - -------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification
9
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Statement of Operations Thirteen Weeks Ended October 4, 2003 (In thousands, except per share amounts) (Restated) (Unaudited) - -------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Cost of sales $360,868 $ (804)(B) $360,064 Gross profit 241,948 804 (B) 242,752 SG&A expenses 207,764 902 (A) 208,666 Operating profit 34,184 (902)(A) 34,086 804 (B) ----------------------- (98) ----------------------- Interest expense 256 777 (B) 1,033 Interest expense, net 236 777 (B) 1,013 Income before income taxes 33,948 (902)(A) 33,073 27 (B) ----------------------- (875) ----------------------- Provision for income taxes 12,968 (343)(A) 12,635 10 (B) ----------------------- (333) ----------------------- Net income 20,980 (559)(A) 20,438 17 (B) ----------------------- (542) ----------------------- Net income per share - basic $ 0.47 $(0.01)(A) $ 0.46 -- (B) ----------------------- (0.01) ----------------------- Net income per share - fully diluted $ 0.47 $(0.02)(A) $ 0.45 -- (B) ----------------------- (0.02) ----------------------- - -------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification
10
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Thirty-Nine Weeks Ended Condensed Consolidated Statement of Operations October 2, 2004 (In thousands, except per share amounts) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Cost of sales $1,064,787 $(2,070) (B) $1,062,717 Gross profit 720,958 2,070 (B) 723,028 SG&A expenses 691,406 3,021 (A) 694,427 Operating profit 29,552 (3,021) (A) 28,601 2,070 (B) ----------------------- (951) ----------------------- Interest expense 508 2,252 (B) 2,760 Interest expense, net 202 2,252 (B) 2,454 Income before income taxes 29,350 (3,021) (A) 26,147 (182) (B) ----------------------- (3,203) ----------------------- Provision for income taxes 11,211 (1,155) (A) 9,987 (69) (B) ----------------------- (1,224) ----------------------- Net income 18,139 (1,866) (A) 16,160 (113) (B) ----------------------- (1,979) ----------------------- Net income per share - basic $ 0.40 $ (0.04) (A) $ 0.36 -- (B) ----------------------- (0.04) ----------------------- Net income per share - fully diluted $ 0.39 $ (0.04) (A) $ 0.35 -- (B) ----------------------- (0.04) ----------------------- - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification
11
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Thirty-Nine Weeks Ended Condensed Consolidated Statement of Operations October 4, 2003 (In thousands, except per share amounts) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Cost of sales $958,472 $(2,522) (B) $955,950 Gross profit 648,487 2,522 (B) 651,009 SG&A expenses 601,345 3,693 (A) 605,038 Operating profit 47,142 (3,693) (A) 45,971 2,522 (B) ----------------------- (1,171) ----------------------- Interest expense 690 2,351 (B) 3,041 Interest expense, net 600 2,351 (B) 2,951 Income before income taxes 46,542 (3,693) (A) 43,020 171 (B) ----------------------- (3,522) ----------------------- Provision for income taxes 17,780 (1,409) (A) 16,436 65 (B) ----------------------- (1,344) ----------------------- Net income 28,762 (2,284) (A) 26,584 106 (B) ----------------------- (2,178) ----------------------- Net income per share - basic $ 0.65 $(0.05) (A) $ 0.60 -- (B) ----------------------- (0.05) ----------------------- Net income per share - fully diluted $ 0.64 $(0.05) (A) $ 0.59 -- (B) ----------------------- (0.05) ----------------------- - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification
12
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Balance Sheet October 2, 2004 (In thousands) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Inventories $ 795,873 $ (1,704) (B) $ 794,169 Prepaid expenses and other current assets 35,331 (716) (D) 34,615 Total current assets 912,630 (1,704) (B) 910,210 (716) (D) ----------------------- (2,420) ----------------------- Property & equipment, net 397,947 170,659 (C) 568,606 Deferred charges and other non-current assets, net 12,318 (4,609) (A) 7,709 Total assets 1,341,021 (4,609) (A) 1,504,651 (1,704) (B) 170,659 (C) (716) (D) ----------------------- 163,630 ----------------------- Accrued expenses and other current liabilities 138,033 (650) (B) 140,038 2,655 (D) ----------------------- 2,005 ----------------------- Total current liabilities 424,900 (650) (B) 426,905 2,655 (D) ----------------------- 2,005 ----------------------- Deferred income taxes and other long-term liabilities 127,606 190,588 (A)& 315,539 (C) (2,655) (D) ----------------------- 187,933 ----------------------- Total liabilities 552,506 19,929 (A) 742,444 (650) (B) 170,659 (C) ----------------------- 189,938 ----------------------- - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification
13
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Balance Sheet October 2, 2004 (In thousands) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Retained earnings $422,145 $(24,538) (A) $396,553 (1,054) (B) ----------------------- (25,592) ----------------------- Treasury stock (6,650) (716) (D) (7,366) Total shareholders' equity 788,515 (24,538) (A) 762,207 (1,054) (B) (716) (D) ----------------------- (26,308) ----------------------- Total liabilities and shareholders' equity 1,341,021 (4,609) (A) 1,504,651 (1,704) (B) 170,659 (C) (716) (D) ----------------------- 163,630 ----------------------- - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification
14
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Balance Sheet October 4, 2003 (In thousands) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Inventories $ 746,310 $ (1,937) (B) $ 744,373 Prepaid expenses and other current assets 33,236 (729) (D) 32,507 Total current assets 827,002 (1,937) (B) 824,336 (729) (D) ----------------------- (2,666) ----------------------- Property & equipment, net 380,415 163,010 (C) 543,425 Deferred charges and other non-current assets, net 10,710 (4,342) (A) 6,368 Total assets 1,236,253 (4,342) (A) 1,392,255 (1,937) (B) 163,010 (C) (729) (D) ----------------------- 156,002 ----------------------- Accrued expenses and other current liabilities 130,053 (740) (B) 132,185 2,872 (D) ----------------------- 2,132 ----------------------- Total current liabilities 438,647 (740) (B) 440,779 2,872 (D) ----------------------- 2,132 ----------------------- Deferred income taxes and other long-term liabilities 95,484 181,196 (A)& 273,808 (C) (2,872) (D) ----------------------- 178,324 ----------------------- Total liabilities 534,131 18,186 (A) 714,587 (740) (B) 163,010 (C) ----------------------- 180,456 ----------------------- - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification
15
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Condensed Consolidated Balance Sheet October 4, 2003 (In thousands) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Retained earnings $357,943 $(22,528) (A) $334,218 (1,197) (B) ----------------------- (23,725) ----------------------- Treasury stock (6,513) (729) (D) (7,242) Total shareholders' equity 702,122 (22,528) (A) 677,668 (1,197) (B) (729) (D) ----------------------- (24,454) ----------------------- Total liabilities and shareholders' equity 1,236,253 (4,342) (A) 1,392,255 (1,937) (B) 163,010 (C) (729) (D) ----------------------- 156,002 ----------------------- - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification
16
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Thirty-Nine Weeks Ended Condensed Consolidated Statement of Cash Flows October 2, 2004 (In thousands) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Net cash used in operating activities $(22,438) $20,374 (C) $(2,077) (13) (D) ----------------------- 20,361 ----------------------- Additions to property and equipment (66,542) (20,374) (C) (86,916) Net cash provided by financing activities 7,467 13 (D) 7,480 Cash paid for interest 561 2,252 (B) 2,813 - --------------------------------------------------------------------------------------------------------------------------- Thirty-Nine Weeks Ended Condensed Consolidated Statement of Cash Flows October 4, 2003 (In thousands) (Restated) (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- As Previously Reported Adjustments* As Restated ------------------ ----------------------- ----------------------- Net cash provided by operating activities $ 2,203 $25,214 (C) $27,705 288 (D) ----------------------- 25,502 ----------------------- Additions to property and equipment (70,306) (25,214) (C) (95,520) Net cash provided by financing activities 3,976 (288) (D) 3,688 Cash paid for interest 973 2,351 (B) 3,324 - --------------------------------------------------------------------------------------------------------------------------- * A - lease accounting restatement B - GECC inventory discount adjustment and reclassification C - lease accounting restatement (landlord allowance adjustment only) D - deferred compensation plan reclassification The restatement also affects amounts disclosed in Notes 3, 5, and 7 to the accompanying Condensed Consolidated Financial Statements.
17 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D 3. EARNINGS PER SHARE The calculation of basic and fully diluted earnings per share ("EPS") is as follows:
PERIODS ENDED OCTOBER 2, 2004 (IN THOUSANDS, EXCEPT EPS) (RESTATED) ----------------------------------------------------------------------------------------- THIRTEEN WEEKS THIRTY-NINE WEEKS ----------------------------------------- ------------------------------------------- Net Net Income Shares EPS Income Shares EPS ----------- ------------ ---------- ------------ ----------- ------------ BASIC $17,175 45,122 $0.38 $16,160 45,036 $0.36 Effect of outstanding stock options and deferred stock grants -- 459 -- -- 884 (0.01) ----------- ------------ ---------- ------------ ----------- ------------ FULLY DILUTED $17,175 45,581 $0.38 $16,160 45,920 $0.35 =========== ============ ========== ============ =========== ============ PERIODS ENDED OCTOBER 4, 2003 (IN THOUSANDS, EXCEPT EPS) (RESTATED) ----------------------------------------------------------------------------------------- THIRTEEN WEEKS THIRTY-NINE WEEKS ----------------------------------------- ------------------------------------------- Net Net Income Shares EPS Income Shares EPS ----------- ------------ ---------- ------------ ----------- ------------ BASIC $20,438 44,185 $0.46 $26,584 44,121 $0.60 Effect of outstanding stock options and deferred stock grants -- 819 (0.01) -- 558 (0.01) ----------- ------------ ---------- ------------ ----------- ------------ FULLY DILUTED $20,438 45,004 $0.45 $26,584 44,679 $0.59 =========== ============ ========== ============ =========== ============
Options for which the exercise price was greater than the average market price of common shares for the periods ended October 2, 2004 and October 4, 2003 were not included in the computation of fully diluted earnings per share. These consisted of options totaling approximately 2,640,000 shares and 1,486,000 shares for the thirteen weeks and approximately 1,088,000 shares and 1,486,000 shares for the thirty-nine weeks ended October 2, 2004 and October 4, 2003, respectively. 18 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D 4. SHORT-TERM BORROWING ARRANGEMENTS In June 2002, the Company amended and extended its $150 million senior revolving credit facility agreement (the "Credit Agreement") with third party institutional lenders to expire April 20, 2005. The Credit Agreement allows for up to $40 million of borrowings from additional lines of credit outside of the Credit Agreement. As of October 2, 2004, the additional lines of credit include committed facilities of approximately $16 million that expire on December 31, 2004 and $12 million that expire on June 15, 2005 and are subject to periodic renewal arrangements. Interest on all borrowings is determined based upon several alternative rates, including a fixed margin above LIBOR. The Credit Agreement contains certain financial covenants, including those relating to the maintenance of a minimum tangible net worth, a minimum fixed charge coverage ratio, and a maximum leverage ratio. As of October 2, 2004, the Company was in compliance with its covenants under the Credit Agreement. The Credit Agreement limits, among other things, the amount of cash dividends the Company may pay. Under the Credit Agreement, the amount of dividends that the Company may pay may not exceed the sum of $25 million plus, on a cumulative basis, an amount equal to 50% of the consolidated net income for each fiscal quarter, commencing with the fiscal quarter ending March 30, 2002. The Company has never paid cash dividends and does not currently anticipate paying cash dividends in the future. The Company is required under the Credit Agreement to reduce the balance of outstanding domestic borrowings to zero for 30 consecutive days during each period beginning on December 1st of any fiscal year and ending on March 15th of the following fiscal year. At various times throughout 2004 and 2003, the Company borrowed against its Credit Agreement for seasonal working capital needs. As of October 2, 2004, the Company had no borrowings under the Credit Agreement and approximately $0.6 million in borrowings under the additional lines of credit at an interest rate of 4.75%. The Company also had $100.5 million of letters of credit outstanding as of October 2, 2004, which included standby letters of credit issued primarily under the Credit Agreement and import letters of credit used for merchandise purchases. The Company is not obligated under any formal or informal compensating balance requirements. 5. COMPREHENSIVE INCOME: Comprehensive income for the thirteen and thirty-nine weeks ended October 2, 2004 and October 4, 2003 is as follows (in thousands):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------------------ ----------------------------------- OCTOBER 2, OCTOBER 4, OCTOBER 2, OCTOBER 4, 2004 2003 2004 2003 (RESTATED) (RESTATED) (RESTATED) (RESTATED) ----------------- --------------- ----------------- --------------- Net income $17,175 $20,438 $16,160 $26,584 Other comprehensive income - foreign currency translation adjustment 728 8 426 1,313 ----------------- --------------- --------------- --------------- COMPREHENSIVE INCOME $17,903 $20,446 $16,586 $27,897 ================= =============== =============== ===============
6. 2001 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE In fiscal 2001, the Company developed and committed to a strategic initiative designed to improve store performance and profitability. This initiative called for the closing of certain under-performing stores, which did not meet the Company's profit objectives. In connection with this initiative, the Company recorded a pre-tax restructuring and asset impairment charge of $37.8 million ($23.7 million after-tax) in the fourth quarter of fiscal 2001. A pre-tax reserve of $20.5 million was established for estimated lease commitments for stores to be closed. This reserve is included in accrued expenses. The reserve considers estimated sublease income. Because all of the stores were leased the Company is not responsible for the disposal of property other than fixtures. A pre-tax writedown of $9.5 million was recorded as a reduction in property and equipment for fixed asset impairments for these stores. The fixed asset impairments represent fixtures and leasehold improvements. A pre-tax reserve of $4.0 million was established for other estimated miscellaneous store closing costs. Additionally, a pre-tax charge of $3.8 million was recorded in cost of sales for estimated inventory markdowns below cost for the stores to be closed. Certain components of the restructuring charge were based on estimates and may be subject to change in the future. The Company has closed all of the initially identified stores other than one store, which the Company decided to keep open and whose reserve was reversed, and one other store which is expected to be closed by early fiscal 2005. 19 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D The following table displays a roll forward of the activity and significant components of the 2001 restructuring and asset impairment charge and the reserves remaining as of October 2, 2004 ($ in millions):
REMAINING AT USAGE REMAINING AT 1/03/04 2004 10/02/04 (AUDITED) (UNAUDITED) (UNAUDITED) ----------------------- --------------------- ----------------------- CASH COMPONENTS: Lease commitments $15.6 $(6.2) $9.4 ----------------------- --------------------- ----------------------- TOTAL $15.6 $(6.2) $9.4 ======================= ===================== =======================
The 2004 usage primarily consists of payments for lease commitments. The 2004 activity also includes the reversal of estimated lease commitment costs of approximately $1.4 million as these reserves were not needed, offset by an increase to lease commitment costs by approximately $1.6 million due to changes in estimates based on current negotiations. The restructuring reserve balance is included in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet. 7. STOCK INCENTIVE PLANS In accordance with the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"), the Company elected not to adopt the fair value based method of accounting for its stock-based compensation plans, but continues to apply the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, the Company does not recognize compensation expense for stock option grants and amortizes restricted stock unit grants at fair market value over specified vesting periods in the accompanying Condensed Consolidated Financial Statements. The compensation cost that has been charged against income for restricted stock unit grants was $0.1 million and $0.2 million for the thirteen weeks ended October 2, 2004 and October 4, 2003, respectively, and $0.4 million and $0.7 million for the thirty-nine weeks ended October 2, 2004 and October 4, 2003, respectively. The Company has complied with the disclosure requirements of SFAS No. 148. Set forth below are the Company's net income and net income per share presented "as reported" and as if compensation cost had been recognized in accordance with the provisions of SFAS No. 148 for the thirteen and thirty-nine weeks ended October 2, 2004 and October 4, 2003: 20
LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D THIRTEEN WEEKS ENDING THIRTY-NINE WEEKS ENDING -------------------------------- --------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OCTOBER 2, OCTOBER 4, OCTOBER 2, OCTOBER 4, 2004 2003 2004 2003 (RESTATED) (RESTATED) (RESTATED) (RESTATED) - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME: As presented $17,175 $20,438 $16,160 $26,584 Add: stock-based employee compensation expense included in net income as presented, net of related tax effects 33 144 231 410 -------------------------------- --------------------------------- 17,208 20,582 16,391 26,994 Deduct: total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects 1,599 1,884 5,375 5,736 -------------------------------- --------------------------------- Pro forma $15,609 $18,698 $11,016 $21,258 ================================ ================================= NET INCOME PER SHARE OF COMMON STOCK: BASIC: As presented $ 0.38 $ 0.46 $ 0.36 $ 0.60 Pro forma 0.35 0.42 0.24 0.48 FULLY DILUTED: As presented $ 0.38 $ 0.45 $ 0.35 $ 0.59 Pro forma 0.34 0.42 0.24 0.48 - ------------------------------------------------------------------------------------------------------------------------------
8. GUARANTEES The Company has assigned property at a retail location in which the Company guarantees the payment of rent over the specified lease term in the event of non-performance. As of October 2, 2004, the maximum potential amount of future payments the Company could be required to make under such guarantee is approximately $0.9 million. 9. ACCOUNTS PAYABLE Included in accounts payable are amounts for gift card liabilities of $23.8 million, $27.5 million and $20.5 million as of October 2, 2004, January 3, 2004 and October 4, 2003, respectively. 21 LINENS 'N THINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D 10. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Emerging Issues Task Force ("EITF") issued EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of merchandise sold when recognized in the Company's Condensed Consolidated Statement of Operations. That presumption may be overcome when the consideration is either a reimbursement of specific, incremental and identifiable costs incurred to sell the vendor's products, or a payment for assets or services delivered to the vendor. EITF 02-16 was effective for contracts entered into or modified after December 31, 2002. This issue did not have a material impact on the Company's fiscal 2003 audited consolidated financial statements as substantially all of the Company's vendor contracts in effect during fiscal 2003 were entered into prior to December 31, 2002. Beginning in the first quarter of fiscal 2004, as vendor agreements are initiated or modified, the Company applies the method of accounting for vendor allowances pursuant to EITF 02-16. In connection with the implementation of EITF 02-16, the Company treats certain funds received from vendors as a reduction in the cost of inventory and, as a result, these funds are recognized as a reduction to cost of merchandise sold when the inventory is sold. Accordingly, certain funds received from vendors, which were historically reflected as a reduction of advertising expense in SG&A or cost of sales, are now treated as a reduction of cost of inventory. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS No. 148"). This statement amends SFAS No. 123 and provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used. For the thirteen and thirty-nine week periods ended October 2, 2004 and October 4, 2003, the Company accounted for stock options using the intrinsic value method prescribed under APB Opinion 25, and accordingly, the Company did not recognize compensation expense for stock options. The Company continues to account for stock-based compensation using APB Opinion No. 25 and has not adopted the recognition provisions of SFAS No. 123, as amended by SFAS No. 148. However, the Company has adopted the disclosure provisions and has included this information in Note 7 to the Company's Condensed Consolidated Financial Statements. 22 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Linens 'n Things, Inc.: We have reviewed the condensed consolidated balance sheets of Linens 'n Things, Inc. and Subsidiaries as of October 2, 2004 and October 4, 2003, and the related condensed consolidated statements of operations for the thirteen and thirty-nine week periods then ended and the related condensed consolidated statements of cash flows for the thirty-nine week periods ended October 2, 2004 and October 4, 2003. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Linens 'n Things, Inc. and Subsidiaries as of January 3, 2004 (presented herein) and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated March 31, 2005 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 3, 2004 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. As discussed in note 2 to the condensed consolidated financial statements, the accompanying condensed consolidated balance sheets as of October 2, 2004 and October 4, 2003, and the related condensed consolidated statements of operations for the thirteen and thirty-nine week periods then ended and the related condensed consolidated statements of cash flows for the thirty-nine week periods ended October 2, 2004 and October 4, 2003, have been restated. /s/ KPMG LLP KPMG LLP New York, New York November 4, 2004, except as to Note 2, which is as of June 30, 2005 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESTATEMENT The following discussion and analysis gives effect to the restatement as well as other immaterial adjustments and reclassifications discussed in Note 2 to the Condensed Consolidated Financial Statements. GENERAL Linens `n Things, Inc. (the "Company") is one of the leading national format specialty retailers. The Company's stores emphasize a broad assortment of home textiles, housewares and home accessories, carrying both national brands and private label goods. As of October 2, 2004, the Company operated 479 stores in 45 states and in five provinces across Canada. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts and timing of revenues and of expenses during the reporting periods. The Company's management believes the following critical accounting estimates involve significant estimates and judgments inherent in the preparation of the Condensed Consolidated Financial Statements. The Company bases these estimates on historical results and various other assumptions believed to be reasonable at the time. These critical accounting estimates are discussed in detail in our 2004 Annual Report on Form 10-K. Valuation of Inventory: Merchandise inventory is a significant portion of the Company's balance sheet, representing approximately 53% of total assets at October 2, 2004. Inventories are valued using the lower of cost or market value, determined by the retail inventory method ("RIM"). Under RIM, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio to the retail value of inventories. RIM is an averaging method that is used in the retail industry due to its practicality. The methodologies utilized by the Company in its application of RIM are consistent for all periods presented. Such methodologies include the development of the cost-to-retail ratios, the development of shrinkage reserves and the accounting for price changes. At any one time, inventories include items that have been written down to the Company's best estimate of their realizable value. Factors considered in estimating realizable value include the age of merchandise and anticipated demand. Actual realizable value could differ materially from this estimate based upon future customer demand or economic conditions. Sales Returns: The Company estimates future sales returns and records a provision in the period that the related sales are recorded based on historical return rates. Should actual returns differ from the Company's estimates, the Company may be required to revise estimated sales returns. Although these estimates have not varied materially from historical provisions, estimating sales returns requires management judgment as to changes in preferences and quality of products being sold, among other things; therefore, these estimates may vary materially in the future. The sales returns calculations are regularly compared with actual return experience. In preparing its financial statements as of October 2, 2004, January 3, 2004 and October 4, 2003, the Company's sales returns reserve was approximately $6.0 million, $6.2 million and $5.2 million, respectively. Impairment of Assets: With the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", the Company reviews goodwill for possible impairment at least annually. Impairment losses are recognized when the implied fair value of goodwill is less than its carrying value. The Company is also required to follow the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which superceded an earlier pronouncement on the same topic but retained many of its fundamental provisions. It also expanded the scope of discontinued operations to include more disposal transactions and impacted the presentation of future store closings, if any, by the Company. Under SFAS No. 144 the Company periodically evaluates long-lived assets other than goodwill for indicators of impairment. As of October 2, 2004, January 3, 2004 and October 4, 2003, the Company's net value for property and equipment was approximately $568.6 million, $542.2 million and $543.4 million, respectively, and goodwill was approximately $18.1 million on each of these dates. 24 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T Store Closure Costs: In fiscal 2001, the Company recorded a pre-tax restructuring and asset impairment charge of $37.8 million ($23.7 million after-tax) related to the closing of certain under-performing stores. As of October 2, 2004, January 3, 2004 and October 4, 2003, the Company had $9.4 million, $15.6 million and $17.3 million, respectively, remaining related to this reserve. The Company has closed all of the initially identified stores other than one store, which the Company decided to keep open and whose reserve was reversed, and one other store which is expected to be closed by early fiscal 2005. The Company has continued to negotiate and/or explore lease buyouts or sublease agreements for these stores. The activity in the thirty-nine week period ended October 2, 2004 includes the reversal of estimated lease commitment costs of approximately $1.4 million as these reserves were not needed, offset by an increase to lease commitment costs by approximately $1.6 million due to changes in estimates based on current negotiations. Final settlement of these reserves is predominantly a function of negotiations with unrelated third parties, and, as such, these estimates may be subject to change in the future. Self-Insurance: The Company purchases third party insurance for worker's compensation, medical, auto and general liability costs that exceed certain levels for each type of insurance program. However, the Company is responsible for the payment of claims under these insured excess limits. The Company establishes accruals for its insurance programs based on available claims data and historical trend and experience, as well as loss development factors prepared by third party actuaries. The accrued obligation for these self-insurance programs was approximately $14.8 million as of October 2, 2004, $13.5 million as of January 3, 2004 and $13.5 million as of October 4, 2003. Litigation: The Company records an estimated liability related to various claims and legal actions arising in the ordinary course of business, which is based on available information and advice from outside counsel where applicable. As additional information becomes available, the Company assesses the potential liability related to its pending claims and may adjust its estimates accordingly. RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED OCTOBER 2, 2004 COMPARED WITH THIRTEEN WEEKS ENDED OCTOBER 4, 2003 Results of operations for the thirteen weeks and thirty-nine weeks ended October 2, 2004 were impacted by an accounting change resulting from the implementation of the provisions of EITF 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), which states that cash consideration received from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of merchandise sold when recognized in the Company's Condensed Consolidated Statement of Operations. EITF 02-16 was effective for contracts entered into or modified after December 31, 2002. This issue did not have a material impact on the Company's fiscal 2003 audited Consolidated Financial Statements as substantially all of the Company's vendor contracts in effect during fiscal 2003 were entered into prior to December 31, 2002. Beginning in the first quarter of fiscal 2004, as vendor agreements were initiated or modified, the Company applied the method of accounting for vendor allowances pursuant to EITF 02-16. In connection with the implementation of EITF 02-16, the Company treats certain funds received from vendors as a reduction in the cost of inventory and, as a result, these funds are recognized as a reduction to cost of merchandise sold when the inventory is sold. Accordingly, certain funds received from vendors, which were historically reflected as a reduction of advertising expense in selling, general and administrative expenses or cost of sales, are now treated as a reduction of cost of inventory. The provisions of EITF 02-16 impacted the Company's results of operations for the thirteen weeks and thirty-nine weeks ended October 2, 2004 as follows (the "As Restated" amounts include the impact of EITF 02-16): 25
LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T THIRTEEN WEEKS THIRTY-NINE WEEKS ---------------------------------- -------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) AS EITF 02-16 EITF 02-16 AS ADJUSTMENT AS ADJUSTMENT RESTATED IMPACT RESTATED IMPACT ---------------------------------------------------------------------------------------------------------------- Net sales $654,196 $ -- $1,785,745 $ -- Cost of sales 385,090 7,634 1,062,717 4,082 ---------------------------------- -------------------------------- Gross profit 269,106 (7,634) 723,028 (4,082) SG&A 240,664 (11,430) 694,427 (22,393) ---------------------------------- -------------------------------- Operating profit 28,442 3,796 28,601 18,311 Interest expense, net 650 -- 2,454 -- ---------------------------------- -------------------------------- Income before provision for income taxes 27,792 3,796 26,147 18,311 Provision for income taxes 10,617 1,450 9,987 6,995 ---------------------------------- -------------------------------- Net income $ 17,175 $ 2,346 $ 16,160 $ 11,316 ================================== ================================ Earnings per share Basic $ 0.38 $ 0.05 $ 0.36 $ 0.25 Fully diluted $ 0.38 $ 0.05 $ 0.35 $ 0.25
EITF 02-16 had no impact on the Company's cash flows. Following the initial implementation impact, subsequent fiscal years will reflect vendor allowances on a consistent basis other than for any net changes in vendor allowances. The EITF 02-16 pre-tax adjustments of $3.8 million and $18.3 million for the thirteen weeks and thirty-nine weeks ended October 2, 2004, respectively, represent those allowances reflected as a reduction of the cost of inventory, which historically would have been treated as a reduction of cost of sales or SG&A. Beginning in fiscal 2004, due to the Company's changes to its vendor agreements and the requirements of EITF 02-16, the Company no longer records advertising allowances as a reduction to SG&A. The Company has allocated the EITF 02-16 pre-tax adjustment to SG&A based on the previous year ratio of vendor advertising allowances recorded within SG&A to sales. The remaining portion of the total EITF 02-16 pre-tax adjustment was allocated to cost of sales. Net sales for the thirteen weeks ended October 2, 2004 increased approximately 8.5% to $654.2 million, up from $602.8 million for the same period last year. The increase in net sales is primarily the result of new store openings since October 4, 2003. At October 2, 2004, the Company operated 479 stores, including 22 stores in Canada, as compared with 435 stores, including 17 stores in Canada, at October 4, 2003. Store square footage increased approximately 9.0% to 16.3 million at October 2, 2004 compared with 14.9 million at October 4, 2003. During the thirteen weeks ended October 2, 2004, the Company opened 8 stores and closed two stores as compared with opening 21 stores and closing one store during the same period last year. 26 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T Comparable net sales declined 0.5% for the thirteen weeks ended October 2, 2004 compared to an increase of 1.8% for the same period last year. Although the third quarter began well, overall sales performance became softer as the quarter progressed, primarily attributable to a decline in guest traffic. For the quarter, average transaction size increased slightly compared to the prior year. The Company estimates that the hurricanes that affected our stores in the Southeast also negatively impacted comparable net sales performance by approximately 0.5%. In addition to the cost of inventory sold, the Company includes its buying and distribution expenses in its cost of sales. Buying expenses include all direct and indirect costs to procure merchandise. Distribution expenses include the cost of operating the Company's distribution centers and freight expense related to transporting merchandise. Gross profit for the thirteen weeks ended October 2, 2004 was $269.1 million, or 41.1% of net sales, compared with $242.8 million, or 40.3% of net sales, for the same period last year. The EITF 02-16 adjustment impact was to increase gross profit by $7.6 million, or 1.1% of net sales, for the thirteen weeks ended October 2, 2004, accounting for most of the increase in gross profit as a percentage of net sales compared to the prior year. The increase in gross profit from the EITF 02-16 impact was offset by primarily higher markdowns, most of which occurred during the September clearance event. The Company's selling, general and administrative ("SG&A") expenses consist of store selling expenses, occupancy costs, advertising expenses and corporate office expenses. SG&A expenses for the thirteen weeks ended October 2, 2004 were $240.7 million, or 36.8% of net sales, compared with $208.7 million, or 34.6% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $11.4 million, or 1.7% of net sales, for the thirteen weeks ended October 2, 2004. In addition to the increase in SG&A from the EITF 02-16 impact, SG&A increased as a percentage of net sales primarily due to higher occupancy cost as a percentage of net sales. SG&A for the thirteen weeks ended October 4, 2003 also included advertising credits equaling 1.7% of net sales, which, as a part of the EITF 02-16 implementation, are no longer classified as an offset to SG&A in fiscal 2004. Operating profit for the thirteen weeks ended October 2, 2004 was $28.4 million, or 4.3% of net sales, compared with $34.1 million, or 5.7% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $3.8 million, or 0.6% of net sales, for the thirteen weeks ended October 2, 2004. Net interest expense for the thirteen weeks ended October 2, 2004 was approximately $0.6 million compared to $1.0 million during the same period last year. The decrease in net interest expense is mainly due to lower average borrowings as compared to the same period last year. The Company's income tax expense was $10.6 million for the thirteen weeks ended October 2, 2004, compared with $12.7 million for the same period last year. The EITF 02-16 adjustment impact was $1.5 million for the thirteen weeks ended October 2, 2004. The Company's effective tax rate was 38.2% for both the thirteen weeks ended October 2, 2004 and October 4, 2003. As a result of the factors described above, net income for the thirteen weeks ended October 2, 2004 was $17.2 million, or $0.38 per share on a fully diluted basis, compared with $20.4 million, or $0.45 per share on a fully diluted basis for the same period last year. The EITF 02-16 adjustment impact to net income was $2.3 million, or $0.05 per share on a fully diluted basis, for the thirteen weeks ended October 2, 2004. THIRTY-NINE WEEKS ENDED OCTOBER 2, 2004 COMPARED WITH THIRTY-NINE WEEKS ENDED OCTOBER 4, 2003 Net sales increased 11.1% to $1,785.7 million for the thirty-nine weeks ended October 2, 2004, up from $1,607.0 million for the same period last year, primarily as a result of new store openings since October 4, 2003. During the thirty-nine weeks ended October 2, 2004, the Company opened 41 stores and closed two stores compared with opening 53 stores and closing nine stores during the same period last year. Comparable net sales for the thirty-nine weeks ended October 2, 2004 increased 1.3% as compared with a decline of 0.3% for the same period last year. The increase in comparable net sales for the thirty-nine weeks ended October 2, 2004 is primarily due to an increase in guest traffic, primarily during the first quarter of 2004, and a slight increase in average transaction size. 27 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T Gross profit for the thirty-nine weeks ended October 2, 2004 was $723.0 million, or 40.5% of net sales, compared with $651.0 million, or 40.5% of net sales, for the same period last year. The EITF 02-16 adjustment impact was to increase gross profit by $4.1 million, or 0.2% of net sales, for the thirty-nine weeks ended October 2, 2004. The increase in gross profit from the EITF 02-16 impact was offset by a gross profit decline as a result of higher freight costs due, in part, to rising fuel prices. SG&A expenses for the thirty-nine weeks ended October 2, 2004 were $694.4 million, or 38.9% of net sales, compared with $605.0 million, or 37.6% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $22.4 million, or 1.2% of net sales, for the thirty-nine weeks ended October 2, 2004. The increase in SG&A as a percentage of net sales is primarily attributable to the impact of the EITF 02-16 adjustment. SG&A for the thirty-nine weeks ended October 4, 2003 also included advertising credits equaling 1.3% of net sales, which, as a part of the EITF 02-16 implementation, are no longer classified as an offset to SG&A in fiscal 2004. Operating profit for the thirty-nine weeks ended October 2, 2004 was $28.6 million, or 1.6% of net sales, compared with $46.0 million, or 2.9% of net sales, for the same period last year. The EITF 02-16 adjustment impact was $18.3 million, or 1.0% of net sales, for the thirty-nine weeks ended October 2, 2004. The Company incurred net interest expense of $2.4 million for the thirty-nine weeks ended October 2, 2004, compared with $3.0 million for the same period last year. The decrease in net interest expense is mainly due to lower average borrowings as compared to the same period last year. The Company's income tax expense for the thirty-nine weeks ended October 2, 2004 was $10.0 million compared with $16.4 million for the same period last year. The EITF 02-16 adjustment impact was $7.0 million for the thirty-nine weeks ended October 2, 2004. The Company's effective tax rate was 38.2% for both the thirty-nine weeks ended October 2, 2004 and October 4, 2003. As a result of the factors described above, net income for the thirty-nine weeks ended October 2, 2004 was $16.2 million, or $0.35 per share on a fully diluted basis, compared with $26.6 million, or $0.59 per share on a fully diluted basis for the same period last year. The EITF 02-16 adjustment impact to net income was $11.3 million, or $0.25 per share on a fully diluted basis, for the thirty-nine weeks ended October 2, 2004. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements are primarily for new store expenditures, new store inventory purchases and seasonal working capital. These requirements have been funded through a combination of internally generated cash flows from operations, credit extended by suppliers and short-term borrowings. In June 2002, the Company amended and extended its $150 million senior revolving credit facility agreement (the "Credit Agreement") with third party institutional lenders to expire April 20, 2005. The Credit Agreement allows for up to $40 million of borrowings from additional lines of credit outside of the Credit Agreement. As of October 2, 2004, the additional lines of credit include committed facilities of approximately $16 million that expire on December 31, 2004 and $12 million that expire on June 15, 2005 and are subject to periodic renewal arrangements. As of October 2, 2004, the Company was in compliance with its covenants under the Credit Agreement. As of October 2, 2004, the Company had no borrowings under the Credit Agreement and approximately $0.6 million in borrowings under the additional lines of credit at an interest rate of 4.75%. In accordance with the seasonal nature of the Company's business, the Company may from time to time borrow under its Credit Agreement and additional lines of credit, including during the fourth quarter. These borrowings are not currently expected to exceed $40 million in the aggregate for the fourth quarter, and are intended to be used as working capital and similar general corporate needs in the fourth quarter. The Company also had $100.5 million of letters of credit outstanding as of October 2, 2004, which included standby letters of credit issued primarily under the Credit Agreement and import letters of credit used for merchandise purchases. The Company is not obligated under any formal or informal compensating balance requirements. See Note 4 to the Condensed Consolidated Financial Statements. 28 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T The Company maintains a trade payables arrangement with General Electric Capital Corporation ("GECC") under which GECC purchases the Company's payables at a discount directly from the Company's suppliers prior to the payables due date, thereby permitting a supplier to receive payment prior to the due date of the payable, with the Company sharing in part of the GECC discount. At October 2, 2004, January 3, 2004, and October 4, 2003, the Company owed approximately $67.4 million, $66.2 million, and $100.6 million, respectively, to GECC under this program, which was included in accounts payable. Either party may terminate the program for any reason upon 30 days prior written notice. The maximum amount permitted under the program was $95 million as of October 2, 2004. Net cash used in operating activities for the thirty-nine weeks ended October 2, 2004 was $2.1 million compared with $27.7 million provided by operating activities for the same period last year. The increase in cash used between periods is primarily due to the timing of vendor payments. Net cash used in investing activities for the thirty-nine weeks ended October 2, 2004 was $86.9 million, compared with $95.5 million for the same period last year. The Company currently estimates capital expenditures will be approximately $114 million in fiscal 2004, primarily for an estimated 53 new stores for the year, maintenance of existing stores, and system enhancements. Net cash provided by financing activities for the thirty-nine weeks ended October 2, 2004 was $7.5 million compared with $3.7 million for the same period last year. The increase is due to greater proceeds from common stock issued under stock incentive plans. Management regularly reviews and evaluates its liquidity and capital needs. The Company experiences peak periods for its cash needs generally during the second quarter and fourth quarter of the fiscal year. As the Company's business continues to grow and its store expansion plans are implemented, such peak periods may require increases in the amounts available under its credit facilities from those currently existing and/or other debt or equity funding. Management currently believes that the Company's cash flows from operations, credit extended by suppliers, its access to existing and increased credit facilities and its uncommitted lines of credit will be sufficient to fund its expected capital expenditures, working capital and non-acquisition business expansion requirements for at least the next 12 to 18 months. INFLATION The Company does not believe that its operating results have been materially affected by inflation during the preceding three years. There can be no assurance, however, that the Company's operating results will not be affected by inflation in the future. SEASONALITY The Company's business is subject to substantial seasonal variations. Historically, the Company has realized a significant portion of its net sales and net income for the year during the third and fourth quarters. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings. The Company believes this is the general pattern associated with its segment of the retail industry and expects this pattern will continue in the future. Consequently, comparisons between quarters are not necessarily meaningful and the results for any quarter are not necessarily indicative of future results. 29 LINENS 'N THINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T FORWARD-LOOKING STATEMENTS The foregoing contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. The statements are made a number of times and may be identified by such forward-looking terminology as "expect," "believe," "may," "intend," "plan," "target," "outlook," "comfortable with" and similar terms or variations of such terms. All of our information and statements regarding our outlook for the future including future revenues, comparable sales performance, earnings and other future financial condition, impact, results and performance, constitutes forward-looking statements. All our forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company and involve certain significant risks and uncertainties, including levels of sales, store traffic, the results and success of our holiday selling season, acceptance of product offerings and fashions and our ability to anticipate and successfully respond to changing consumer tastes and preferences, our ability to anticipate and control our operating and selling expenses, the success of our new business concepts, seasonal concepts and new brands, the performance of our new stores, substantial competitive pressures from other home furnishings retailers, the success of the Canadian expansion, availability of suitable future store locations, schedule of store expansion and of planned closings, the impact of the bankruptcies and consolidations in our industry, unusual weather patterns, the impact on consumer spending as a result of the slower consumer economy, a highly promotional retail environment, any significant variations between actual amounts and the amounts estimated for those matters identified as our critical accounting estimates as well as other significant accounting estimates made in the preparation of our financial statements, the actual impact in fiscal 2004 of EITF 02-16 as discussed herein, any inability to timely satisfy, or any problems or issues arising in connection with, management's required Section 404 internal controls systems testing and evaluation or management's report thereon or our outside auditor's required testing or report on the adequacy of our internal controls, and our ability to successfully implement our strategic initiatives. If these or other risks or uncertainties materialize, or if our estimates or underlying assumptions prove inaccurate, actual results could differ materially from any future results, express or implied by our forward-looking statements. These and other important risk factors are included in the "Risk Factors" section of the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on June 18, 2002 and are contained in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. You are urged to consider all such factors. In light of the substantial uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a representation that such forward-looking matters will be achieved. The Company assumes no obligation for updating any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements, even if such results or changes make it clear that any projected results will not be realized. 30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company continuously evaluates the market risk associated with its financial instruments. Market risks relating to the Company's operations result primarily from changes in interest rates and foreign exchange rates. The Company does not engage in financial transactions for trading or speculative purposes. INTEREST RATE RISK The Company's financial instruments include cash and cash equivalents and short-term borrowings. The Company's obligations are short-term in nature and generally have less than a 30-day commitment. The Company is exposed to interest rate risks primarily through borrowings under the Credit Agreement and its uncommitted credit facilities. Interest on all borrowings is based upon several alternative rates as stipulated in the Credit Agreement, including a fixed margin above LIBOR. As of October 2, 2004, the Company had no borrowings under the Credit Agreement and approximately $0.6 million in borrowings under the additional lines of credit at an interest rate of 4.75% (see Note 4 to the Condensed Consolidated Financial Statements). The Company believes that its interest rate risk is minimal as a hypothetical 10% increase or decrease in interest rates in the associated debt's variable rate would not materially affect the Company's results from operations or cash flows. The Company does not use derivative financial instruments in its investment portfolio. FOREIGN CURRENCY RISK The Company enters into some purchase obligations outside of the United States, which are predominately settled in U.S. dollars, and therefore, the Company has only minimal exposure to foreign currency exchange risks. The Company does not hedge against foreign currency risks and believes that foreign currency exchange risk is immaterial. In addition, the Company operated 22 stores in Canada as of October 2, 2004. The Company believes its foreign currency translation risk is minimal, as a hypothetical 10% strengthening or weakening of the U.S. dollar relative to the Canadian dollar would not materially affect the Company's results from operations or cash flow. Since fiscal year end 2003, there have been no material changes in market risk exposures. 31 ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES On March 7, 2005, management and the Audit Committee discussed the issues regarding the Company's method of accounting for leases and landlord allowances with the Company's independent registered public accounting firm and determined that the Company's accounting for these items was not consistent with the views expressed by the SEC in a letter dated February 7, 2005. Accordingly, management and the Audit Committee concluded that the Company should restate its annual financial statements for fiscal years 2002 and 2003 presented in its fiscal 2004 Annual Report on Form 10-K, and its quarterly financial information for the four quarters of fiscal year 2003 and the first three quarters of fiscal year 2004. The restatement is further discussed in the "Explanatory Note" in the forepart of this Form 10-Q/A (Amendment No. 1) and in Note 2, "Restatement of Financial Statements and Other Immaterial Adjustments and Reclassifications," to the accompanying Condensed Consolidated Financial Statements. Public Company Accounting Oversight Board's Auditing Standard No. 2, AN AUDIT OF INTERNAL CONTROL OVER FINANCIAL REPORTING PERFORMED IN CONJUNCTION WITH AN AUDIT OF FINANCIAL STATEMENTS, provides that a restatement of previously issued financial statements is a strong indicator of the existence of a "material weakness" in the design or operation of internal control over financial reporting. Accordingly, management concluded that the control deficiency that resulted in the incorrect lease accounting represented a material weakness in internal control over financial reporting. In connection with the restatement referred to above, the Company's management, including its Chief Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report (October 2, 2004). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that as a result of the aforementioned material weakness related to lease accounting, the Company's disclosure controls and procedures were not effective, as of the end of the period covered by this Report (October 2, 2004), in ensuring that material information relating to Linens 'n Things, Inc., including its consolidated subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company has remediated the material weakness in the Company's internal control over financial reporting, subsequent to January 1, 2005, by implementing additional review procedures over the selection and monitoring of appropriate assumptions and factors affecting lease accounting practices. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the fiscal quarter to which this report relates, there were no changes in the Company's internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control over financial reporting. During the fourth quarter of 2004, as part of the Section 404 internal control assessment process, management determined that there was a material weakness in the design of controls over inventory existence due to the timing of its physical inventories and the cycle counting procedures over inventory that were in place. The Company remediated this control deficiency by the end of fiscal 2004 by enhancing its inventory cycle count procedures within the fourth quarter to confirm the existence of inventory. 32 PART II - OTHER INFORMATION ITEM 6. EXHIBITS EXHIBIT NUMBER DESCRIPTION 15 Acknowledgment of Independent Registered Public Accounting Firm. 31.1 Certification of Norman Axelrod, Chairman and Chief Executive Officer of the Company, Pursuant to Securities Exchange Act Rule 13a-14(a). 31.2 Certification of William T. Giles, Executive Vice President and Chief Financial Officer of the Company, Pursuant to Securities Exchange Act Rule 13a-14(a). 32 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002, by Norman Axelrod, Chairman and Chief Executive Officer of the Company, and William T. Giles, Executive Vice President and Chief Financial Officer of the Company. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to this Quarterly Report on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized. LINENS 'N THINGS, INC. DATED: July 1, 2005 BY: /s/ Norman Axelrod ----------------------- NAME: Norman Axelrod TITLE: Chairman and Chief Executive Officer DATED: July 1, 2005 BY: /s/ William T. Giles ----------------------- NAME: William T. Giles TITLE: Executive Vice President and Chief Financial Officer 34 EX-15 2 tex15-6834b.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 November 4, 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 35 EX-31.1 3 tex31_1-6834b.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 36 EX-31.2 4 tex31_2-6834b.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 37 EX-32 5 tex32-6834b.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 October 2, 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 38 -----END PRIVACY-ENHANCED MESSAGE-----